<PAGE>


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

                                   FORM 10-KSB

(Mark One)

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

For the fiscal year ended December 31, 1999
                                       OR

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

For the transition period from ______________ to _____________

                         Commission file number: 0-19031

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

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

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

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

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

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

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

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



<PAGE>


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

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

The issuer's revenues for the fiscal year ended December 31, 1999 were
$4,344,730.

The number of shares outstanding of the issuer's Common Stock as of March 27,
2000 was 9,889,878 shares. The aggregate market value of the Common Stock
(6,013,121 shares) held by non-affiliates, based on the average of the bid and
asked prices ($0.15) of the common stock as of March 27, 2000 was $901,968.

Transactional Small Business Disclosure Format (Check one): Yes____ No_X_

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



                                      ii

<PAGE>


                                     PART I

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

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

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

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

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

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

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

    The Company's current business plan includes a strategy to expand as a
provider of dialysis services through the development 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. The Company also
intends to operate a medical school to train students 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 acquirors will have significantly
greater capital than the Company. In addition, financing for such acquisitions
or development may not be available to the Company on commercially reasonable
terms. In the event the Company cannot obtain the additional financing needed to
fulfill its acquisition and development strategy, the Company may be unable to
achieve its proposed expansion strategy. See "Risk Factors" and "Item 6 -
"Management's Discussion and Analysis or Plan of Operation."

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

END-STAGE RENAL DISEASE

    ESRD is the state of advanced renal impairment that is irreversible and
requires routine dialysis treatments or kidney transplantation to sustain life.
Qualified patients with ESRD have been entitled since 1972 to Medicare benefits
regardless of age or financial circumstances. According to figures published by
the Health Care Financing Administration ("HCFA"), the number of patients
requiring chronic dialysis services in the United States has increased at an 8%
compounded annual growth rate to approximately 257,000 patients as of March 1999
from 85,000 in 1985. It is estimated that the United States market for
outpatient and inpatient services to ESRD patients in 1998 exceeded $16 billion.

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

                                        2
<PAGE>

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

TREATMENT OPTIONS FOR END-STAGE RENAL DISEASE

    Treatment options for ESRD include hemodialysis, peritoneal dialysis and
kidney transplantation. ESRD patients are treated predominantly in outpatient
treatment facilities. HCFA estimates that, during 1997, 86.4% of the ESRD
patients in the United States were receiving hemodialysis treatment in
outpatient facilities, with the remaining patients being treated in the home
either through peritoneal dialysis (12.8%) or home hemodialysis (.8%).

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

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

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

QUALITY MANAGEMENT PROGRAM

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

                                        3
<PAGE>


UTILIZATION OF OPERATING CAPACITY

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

OPERATIONS
----------

LOCATION, CAPACITY AND USE OF FACILITIES

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

OPERATION OF FACILITIES

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

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

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

EQUIPMENT SUPPLY AGREEMENT

    The Company purchases a significant portion of the medical equipment to be
utilized in the Company's dialysis operations from a large medical supplier.

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

                                        4
<PAGE>


ANCILLARY SERVICES

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

PHYSICIAN RELATIONSHIPS

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

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

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

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

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

QUALITY ASSURANCE

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

    CLINICAL INFORMATION SYSTEMS. To support the quality management program and
in response to current payor demands for cost-effective health care treatments
with measurable outcomes, the Company utilizes a PC-based, networked clinical
information system that will provide the Company, managed care organizations and
other payors with detailed patient outcome reports and critical clinical
information.

                                        5
<PAGE>

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
                                         -----------------------
                                          1999            1998
                                         ------          ------

Medicare                                  40.9%           41.3%
Medicaid                                  23.3            23.2
Private/alternative payors                12.7            14.8
Hospital inpatient
 dialysis services                        23.1            20.7
                                         ------          ------

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

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

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

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

                                        6
<PAGE>


MEDICARE REIMBURSEMENT

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

    The Company receives reimbursement for outpatient dialysis services provided
to Medicare-eligible patients at rates that are currently between $118 and $138
per treatment, depending upon regional wage variations. The Medicare
reimbursement rate is subject to change by legislation and recommendations by
the Prospective Payment Assessment Commission ("PROPAC"). The Medicare ESRD
reimbursement rate was unchanged from commencement of the program in 1972 until
1983. From 1983 through December, 1990, numerous Congressional actions resulted
in net reduction of the average reimbursement rate from a fixed rate of $138 per
treatment in 1983 to $126 per treatment in 1990. In 1990, Congress increased the
ESRD reimbursement rate, effective January 1, 1991, resulting in an average ESRD
reimbursement rate of $126 per treatment. In 1990, Congress required that the
Department of Health and Human Services ("HHS") and PROPAC study dialysis costs
and reimbursement and make findings as to the appropriateness of ESRD
reimbursement rates. The reimbursement rate for outpatient dialysis services
increased by 1.2% to $139.39 for dialysis treatments furnished on or after
January 1, 2000. On June 1, 1989, the FDA approved the production and sale of
EPO, and HCFA approved Medicare reimbursement for the use of EPO by dialysis
patients.

    From June 1, 1989 through December 31, 1990, the Medicare ESRD program
reimbursed for EPO at the fixed rate of $40 per administration of EPO, in
addition to the dialysis facility's allowable composite rate for dosages of up
to 9,999 units per administration. For higher dosages, an additional $30 per EPO
administration was allowed. Effective January 1, 1991, the Medicare allowable
prescribed rate for EPO was changed to $11 per 1,000 units, rounded to the
nearest 100 units. Subsequently, legislation was enacted to reduce the Medicare
prescribed rate for EPO by $1 per 1,000 units after December 31, 1993. The
Office of the Inspector General of HHS recently recommended that Medicare
reimbursement for EPO be reduced from $10 to $9 per 1,000 units and HHS has
concurred with this recommendation. However, HHS has not determined whether it
will pursue this change through the rulemaking process. The President's fiscal
2000 budget includes this proposed reduction in EPO reimbursement. There can be
no assurance that the Company can maintain current operating margins in the
future for EPO administrations due to potential reimbursement decreases, or to
potential increases in product costs from its sole manufacturer.

MEDICAID REIMBURSEMENT

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

                                        7
<PAGE>

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

GENERAL

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

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

FRAUD AND ABUSE

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

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

                                        8
<PAGE>

    The conditions of participation in the Medicare ESRD program mandate that
treatment at a dialysis facility be "under the general supervision of a Director
who is a physician." Generally, the Medical Director must be board eligible or
board certified in internal medicine or pediatrics and have had at least 12
months of experience or training in the care of patients at ESRD facilities. The
Company has by written agreement engaged qualified physicians to serve as
Medical Directors for its facility. These Medical Directors, Victor Gura, M.D.
and Ronald P. Lang, M.D., are also affiliates of the Company. The Company may
also contract with one or more physicians to serve as Assistant or Associate
Medical Directors, or to direct specific programs, such as CAPD training, or to
provide Medical Director services for acute dialysis services provided to
hospitals. The compensation of the Medical Directors and other physicians under
contract may depend upon competitive factors in the local market, the
physician's professional qualifications and responsibilities and the size and
utilization of the facility or relevant program. Although the Company's Medical
Directors are affiliates of the Company, the Company believes that these
compensation arrangements are on terms no less favorable to the Company than
could have been obtained from comparable independent third parties. The
aggregate compensation of the Medical Directors and other physicians under
contract is fixed for periods of one year or more by written agreement. Because
in all cases, the Company's Medical Directors and the other physicians under
contract refer patients to the Company's facilities, the federal anti-kickback
statute may apply. The Company believes it is in material compliance with the
anti-kickback statute with respect to its arrangements with these physicians
under contract. Among the safe harbors promulgated by the Secretary of HHS is
one relevant to the Company's arrangements with its Medical Directors and the
other physicians under contract. That safe harbor, generally applicable to
personal services and management contracts, sets forth six requirements. None of
the Company's agreements with its Medical Directors or other physicians under
contract satisfy all of these elements. However, the Company believes that the
Company's agreements with its Medical Directors and other physicians under
contract satisfy the relevant safe harbor requirements.

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

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

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

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

                                        9
<PAGE>

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.

STARK II

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

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

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

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

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

                                       10
<PAGE>

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

MEDICARE

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

OTHER REGULATIONS

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

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

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

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

                                       11
<PAGE>

INSURANCE
---------

    The Company carries property and general liability insurance, professional
liability insurance and other insurance coverage in amounts deemed adequate by
management. However, there can be no assurance that any future claims will not
exceed applicable insurance coverage. Furthermore, no assurance can be given
that malpractice and other liability insurance will be available at a reasonable
cost or that the Company will be able to maintain adequate levels of malpractice
insurance and other liability insurance in the future. Physicians practicing at
the Company's facilities are required to maintain their own malpractice
insurance. However, the Company maintains coverage for the activities of its
Medical Directors (but not for their individual private medical practices).

EMPLOYEES
---------

    As of March 8, 2000, the Company had twenty-seven (27) full-time employees,
including one (1) executive, twenty-two (22) medical and four (4) administrative
personnel. Ron Berkowitz, the Company's Chief Financial Officer, resigned from
the Company on December 3, 1999.

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

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


                                  RISK FACTORS

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

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

                                       12

<PAGE>


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

    LACK OF PROFITABILITY AND EXPANSION STRATEGY. The Company generated a net
income of approximately $40,046 during the fiscal year ended December 31, 1999.
Further, as of December 31, 1999, the Company had an accumulated deficit of
approximately $1,905,299. The Company experienced income from operations during
the year ended December 31, 1999 of approximately $287,501. Profitable
operations will be necessary to sustain the business on an on-going basis unless
the Company obtains additional financing from external sources. There can be no
assurances that the Company will experience profitable operations or obtain
additional financing in the future. The Company's business strategy includes the
proposed expansion of the Company's business operations by acquisitions and
development of additional dialysis facilities and related health care service
business. There can be no assurance that the Company's expansion strategy will
create operating synergies with any proposed or development target or result in
profitable operations. See "Item 6 - Management's Discussion and Analysis or
Plan of Operation" and "Item 12 - Certain Relationships and Related
Transactions."

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

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

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

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

                                       13
<PAGE>

    CONTROL BY PRINCIPAL STOCKHOLDERS. Three of the Company's principal
stockholders, directors and executive officers of the Company and their
affiliates control the voting power of approximately 36.14% of the outstanding
Common Stock. As a result of such Common Stock ownership, such persons will be
in a position to exercise significant control with respect to the affairs of the
Company and the election of directors. See "Item 11 - Security Ownership of
Certain Beneficial Owners and Management."

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

    CERTAIN REGISTRATION RIGHTS. The Company has entered into various agreements
pursuant to which certain holders of the Company's outstanding Common Stock, who
are affiliates of the Company, have been granted the right, under various
circumstances, to have Common Stock that is currently outstanding registered for
sale in accordance with the registration requirements of the Securities Act upon
demand or "piggybacked" to a registration statement which may be filed by the
Company. Of the currently issued and outstanding Common Stock, 800,000 shares
may be the subject of future registration statements pursuant to the terms of
such agreements. In addition, currently outstanding options and warrants issued
to certain consultants and employees to purchase up to 2,071,995 shares of
Common Stock are either the subject of current registration statements or have
certain registration rights. Any such registration statement may have a material
adverse effect on the market price for the Company's Common Stock resulting from
the increased number of free trading shares of Common Stock in the market. There
can be no assurances that such registration rights will not be enforced or that
the enforcement of such registration rights will not have a material adverse
effect on the market price for the Common Stock. See "Item 12 - Certain
Relationships and Related Transactions."

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

    SHARES ELIGIBLE FOR FUTURE SALE; ISSUANCE OF ADDITIONAL SHARES. Future sales
of shares of Common Stock by the Company and its stockholders could adversely
affect the prevailing market price of the Common Stock. There are currently
6,013,121 shares of Common Stock which are free trading shares or are eligible
to have the restrictive legend removed pursuant to Rule 144(k) promulgated under
the Securities Act. Further, 800,000 shares may be the subject of future
registration statements pursuant to the terms of certain agreements between the
Company and certain of its stockholders. Sales of substantial amounts of Common
Stock in the public market, or the perception that such sales may occur, could
have a material adverse effect on the market price of the Common Stock. Pursuant
to its Certificate of Incorporation, the Company has the authority to issue
additional shares of Common Stock and Preferred Stock. The issuance of such
shares could result in the dilution of the voting power of the currently issued
and outstanding Common Stock. See "Item 5 - Market for Common Equity and Related
Stockholder Matters."

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

                                       14
<PAGE>

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

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

    DEPENDENCE ON MEDICARE, MEDICAID AND OTHER SOURCES OF REIMBURSEMENT. The
Company is reimbursed for dialysis services primarily at fixed rates established
in advance under the Medicare ESRD program. Under this program, once a patient
becomes eligible for Medicare reimbursement, Medicare is responsible for payment
of 80% of the composite rates determined by HCFA for dialysis treatments. Since
1972, qualified patients with ESRD have been entitled to Medicare benefit
regardless of age or financial circumstances. The Company estimates that
approximately 41% of its net operating revenues during its fiscal year ended
December 31, 1999 were funded by Medicare. Since 1983, numerous Congressional
actions have resulted in changes in the Medicare composite reimbursement rate
from a national average of $138 per treatment in 1983 to a low of $125 per
treatment on average in 1986 and to approximately $126 per treatment on average
at present. Although the HCFA increased the composite rate by 1.2% to $139.39
effective January 1, 2000, the Company is not able to predict whether future
rate changes will be made. Reductions in composite rates could have a material
adverse effect on the Company's revenues and net earnings. Furthermore,
increases in operating costs that are subject to inflation, such as labor and
supply costs, without a compensating increase in prescribed rates, may adversely
affect the Company's earnings in the future. The Company is also unable to
predict whether certain services, as to which the Company is currently
separately reimbursed, may in the future be included in the Medicare composite
rate. See "Business - Operations - Sources of Revenue Reimbursement" and
"Business - Operations - Medicare Reimbursement."

    Since June 1, 1989, the Medicare ESRD program has provided reimbursement for
the administration to dialysis patients of EPO. EPO is beneficial in the
treatment of anemia, a medical complication frequently experienced by dialysis
patients. Many of the Company's dialysis patients receive EPO. Revenues from EPO
(the substantial majority of which are reimbursed through Medicare and Medicaid
programs) were approximately $703,100, or 17% of medical service revenues, in
fiscal 1999. EPO reimbursement significantly affects the Company's net income.
Medicare reimbursement for EPO was reduced from $11 to $10 per 1,000 units for
services rendered after December 31, 1993. The Office of the Inspector General
of HHS recently recommended that Medicare reimbursement for EPO be reduced from
$10 to $9 per 1,000 units and HHS has concurred with this recommendation.
However, HHS has not determined whether it will pursue this change through the
rulemaking process. The President's fiscal 2000 budget includes this proposed
reduction in EPO reimbursement. EPO is produced by a single manufacturer, and
any interruption of supply or product cost increases could adversely affect the
Company's operations. See "Business - Operations - Medicare Reimbursement."

    The State of California, the only state in which the Company currently
operates dialysis facilities, provides Medicaid (or comparable) benefits to
qualified recipients to supplement their Medicare entitlement. The Company
estimates that approximately 23% of its net revenues during fiscal 1999 were
funded by Medicaid or comparable state programs. The Medicaid programs are
subject to statutory and regulatory changes, administrative ruling,
interpretations of policy and governmental funding restrictions, all of which
may have the effect of decreasing program payments, increasing costs or
modifying the way the Company operates its dialysis business. See "Business -
Operations - Medicaid Reimbursement."

    Approximately 36% of the Company's net revenues during fiscal 1999 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 17% of the
Company's net revenues in fiscal 1999), and termination of such third-party
agreements could have an adverse effect on the Company. See "Business -
Operations - Sources of Revenue Reimbursement."

                                       15
<PAGE>

    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 18 months to 30 months effective
for items and services provided on or after August 5, 1997. After this 30-month
period, Medicare becomes the primary coverage for patients, and the patient's
group health coverage generally pays applicable coinsurance payments and
deductibles.

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

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

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

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

                                       16
<PAGE>

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

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

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

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

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

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

                                       17
<PAGE>

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

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

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

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

    As of May 17, 1996, the Company acquired that certain real property (the
"Real Property") located at 6000 San Vicente Boulevard, Los Angeles, California,
for a purchase price of $2,055,000, as adjusted for certain credits to the
Company with respect to the purchase price. The Real Property includes the
improvement of a hospital facility. The Real Property is subject to three (3)
deeds of trust in the aggregate amount of $2,025,000. As of December 31, 1999,
the principal amount of this obligation was approximately $1,683,500. See "Item
6 - Management's Discussion and Analysis or Plan of Operation."

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

    The Company also has entered into a master lease agreement (the "Master
Lease") with Aegis for the Real Property at an annual rental rate of $1,000. The
Master Lease is subject to a written triple net lease dated January 16, 1980,
with Avalon Memorial Hospital ("Avalon") as the current tenant in possession.
The term of the lease with Avalon extends through December 31, 1999, with
options to extend the lease by Avalon for two (2) additional five (5) year
terms. By a letter dated June 20, 1999, Avalon Memorial Hospital exercised its
option to extend the lease on the property for an additional five (5) years
commencing January 1, 2000. The term of the Master Lease extends through May 31,
2026. However, the Master Lease may be terminated earlier upon the cancellation,
exoneration or release of any guarantees by Aegis or Mr. Barkai with respect to
loan obligations secured by the Real Property. In connection with the Agreement
to Perform Loan Covenants, Barkai has agreed that if the net rents arising from
the Real Property are paid to Aegis in an amount or amounts sufficient to pay
all amounts due under such loans as they became due, the Company will be excused
from its duty to Barkai of payment under such loans, but only to that extent.
Currently, the aggregate monthly amount due under such loans is approximately
$20,200 and the current monthly rental payment of Avalon is approximately
$22,642.

                                       18
<PAGE>


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

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

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

    On March 8, 2000, at the Company's Annual Meeting of Stockholders, the
Company's stockholders adopted the 1999 Employee Stock Option Plan, approved the
form of indemnification agreements between the Company and the members of the
Company's Board of Directors, ratified the appointment of Moss Adams LLP as
independent auditors for the Company, and elected the Board of Directors.


                                     PART II

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

    As of March 27, 2000 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 March 27, 2000, there were issued and outstanding
9,889,878 shares of Common Stock which are held by approximately 400
shareholders, and options and warrants to purchase 2,071,995 shares of Common
Stock, of which 1,891,995 are exercisable as of the date of this Report.
Further, the Company may issue warrants to purchase up to an additional 500,000
shares of Common Stock and may issue up to an additional 4,210,644 shares of
Common Stock to certain affiliates of the Company based on future financial
performance by the Company during the fiscal years ending December 31, 2000 to
2001. 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 Bulletin Board or in the "pink sheets"
maintained by the National Quotation Bureau, Inc. under the symbol "NQCI." The
Company's Common Stock has a very limited trading history.

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

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

YEAR ENDED DECEMBER 31, 1998

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


YEAR ENDED DECEMBER 31, 1999

1st Quarter                       15/64         1/8        17/64           5/32
2nd Quarter                       13/32        1/16          1/2           7/64
3rd Quarter                        5/16         1/8          3/8           5/32
4th Quarter                       11/64        3/32         7/32           7/64

                                       19
<PAGE>

    The bid and asked sales prices of the Common Stock, as traded in the
over-the-counter market, on March 27, 2000, were approximately $0.13 and $0.17,
respectively. These prices are based upon quotations between dealers, without
adjustments for retail mark-ups, mark-downs or commissions, and therefore may
not represent actual transactions.

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

    The transfer agent for the Company is Colonial Stock Transfer, 455 E. 400
South, Suite 100, Salt Lake City, Utah 84111, (801) 355-5740.

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

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

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

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

    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).

                                       20
<PAGE>

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

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

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

    OVERVIEW OF PRESENTATION. On May 11, 1996, the Company entered into an
Agreement for Exchange of Stock (the "Share Exchange Agreement") with LACD,
Victor Gura, M.D., Avraham H. Uncyk, M.D. and Ronald P. Lang, M.D., pursuant to
which the Company issued an aggregate of 4,234,128 shares of the Company's
Common Stock in exchange for 100% of the issued and outstanding shares of common
stock of LACD. In connection with the closing of the Share Exchange Agreement,
LACD became the principal operating subsidiary of the Company. On May 28, 1996,
the Company changed its name to "National Quality Care, Inc."

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

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

    RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31,
1998. Total income for the year ended December 31, 1999 increased approximately
11% to $4,344,730 from $3,931,576 for the year ended December 31, 1998. Medical
service revenue for the year ended December 31, 1999 increased approximately 11%
to $4,073,030 from $3,659,876 for the year ended December 31, 1998. This
increase primarily resulted from an increase in volume of outpatient treatments,
as well as inpatient services. In addition, the Company received rental income
of $271,700 during the years ended December 31, 1999 and December 31, 1998 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, 1999 decreased
modestly to $4,057,229 from $4,075,282 during the year ended December 31, 1998.
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, 1999 slightly
decreased to $2,768,996 from $2,789,784 during the year ended December 31, 1998.
This decrease is primarily due to the streamlining of the Company's operation,
which more than offset the rising usage of drugs and medication prescribed due
to the increase in patient volume.

                                       21
<PAGE>

    Selling, general and administrative expenses during the year ended December
31, 1999 decreased approximately 1.2% to $1,079,807 from $1,092,770 during the
year ended December 31, 1998. This decrease is primarily related to reduced
legal fees of approximately $31,600, which was offset by an increase in
administrative payroll of $15,200 due to the hiring of credit and collection
personnel.

    Depreciation and amortization during the years ended December 31, 1999 and
December 31, 1998 increased approximately 6% to $134,737 from $126,500. This
increase was primarily due to the recording of capitalized medical equipment
leases.

    Rental expenses during the year ended December 31, 1999 and 1998 increased
11% to $73,689 from $66,228 due to the increased property taxes of $7,461 per
year. See "Item 2. Description of Properties."

    Other expenses decreased 66% during the year ended December 31, 1999 to
$245,855 from $727,444 during the year ended December 31, 1998. This decrease in
other expenses between the respective years resulted primarily from: (i) a
valuation allowance of $499,000 on a note receivable from a significant
shareholder of the Company taken in 1998 relating to the sale of the Company's
business prior to the Share Exchange Agreement, (ii) an increase of $9,170 in
interest income, and (iii) an increase of $24,435 in interest expense, primarily
due to the recording of new capital leases in 1999.

    As a result of the foregoing, the Company generated net income of $40,046
during the year ended December 31, 1999, as compared to a net loss of $872,750
during the year ended December 31, 1998. Income from operations during the year
ended December 31, 1999 was $287,501 compared to a loss from operations of
$143,706 during the year ended December 31, 1998. This increase in income from
operations primarily resulted from increased inpatient and outpatient services
and from the streamlining of operations. Although the management believes that
the Company will continue to generate income from operations in 2000, based on
the results of operations in the year ending December 31, 1999 and the Company's
cost cutting program, there can be no assurance that the volume of inpatient and
outpatient services will continue to grow and the cost cutting program
implemented by the company will be successful in bringing down costs.

    As of December 31, 1999, the Company had net operating loss carryforwards
totaling approximately $5,000,000 and $700,000 for federal and state income tax
purposes, respectively, which are available to offset future federal taxable
income, if any, through 2019. 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, 1999, the ratio of current
assets to current liabilities was 0.61 to 1.00 compared to 0.53 to 1.00 at
December 31, 1998.

    The Company's cash flow needs for the year ended December 31, 1999 were
primarily provided from proceeds from operations. The Company had a working
capital deficit of approximately $627,500 at December 31, 1999. A note
receivable of $642,000 was written down to $143,000 on the Company's financial
statements and classified as a contra equity in December 31, 1998. The working
capital deficit at December 31, 1998 was approximately $683,000. Management
believes that, as of December 31, 1999, and for the foreseeable future, the
Company will be able to finance costs of current levels of operations from
revenues and loans currently in place.

    Cash and cash equivalents were $60,814 as of December 31, 1999, as compared
to $27,754 as of December 31, 1998. This increase was primarily attributable to
the repayment of note receivable from Medipace, an affiliate of two (2) of the
Company's four (4) directors and largest stockholders, and proceeds from the
exercise of stock options.

    As of December 31, 1999, the Company had borrowings in the aggregate amount
of $2,298,316 of which short-term borrowings accounted for $387,528. As of
December 31, 1998, the Company had total borrowings of $2,249,854, of which
short-term borrowings accounted for $202,075. The increase relates primarily to
the recording of new capital lease obligations with a balance of $95,259 at
December 31, 1999, and the conversion of a $212,166 accounts payable into a note
with a balance of $117,540 as of December 31, 1999.

                                       22
<PAGE>

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

    As of April 15, 1997, the obligors on the promissory notes assigned 630,206
of the shares of Common Stock to a third party, who executed a promissory note
payable to the Company in the principal amount of approximately $865,000,
bearing interest at the rate of 8% per annum, and due and payable on or before
February 23, 2000. Further, the assignee of the shares agreed to pay the
additional sum of approximately $135,000 on the due date of the $865,000
promissory note as additional consideration for the Company's agreement to
consent to the assignment of the 630,206 shares. The promissory notes executed
by the initial obligors were cancelled. Through December 31, 1997, the Company
received $76,800, including principal and accrued interest, on such obligations
through the liquidation of 60,000 of the pledged shares of Common Stock in 1997.
The Company did not receive any payment on the note in 1999 and 1998. The
obligations owing to the Company on these amounts by the assignee of shares are
secured by the 570,206 shares of Common Stock, which are currently held in
escrow. The Company has placed a valuation allowance of $719,000 on the note
receivable as of December 31, 1998, in part, due to the decrease in the market
price of the shares of Common Stock, which secure the repayment of the
obligation. No valuation allowance was made on the note receivable in 1999.
There can be no assurances that all amounts of the obligations will be recovered
from the liquidation of such shares or from other assets of the obligor. See
"Item 11- Security Ownership of Certain Beneficial Owners and Management" and
"Item 12 - Certain Relationships and Related Transactions."

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

    The Company has a demand note receivable from Medipace, an affiliate of the
Company's principal stockholders and two (2) of the Company directors and
executive officers, in the principal amount of $121,151, dated September 17,
1997, bearing interest at the rate of 8% per annum. As of December 31, 1999, the
principal and interest amount of the promissory note remaining payable was
$57,006. See "Item 12 - Certain Relationships and Related Transactions."

    In the second quarter of 1999, a lease receivable from Medipace, was entered
into, which reduced an existing note from the affiliate for a like amount. The
Company received $75,000 in consideration for a lease payable for the same
amount. Both leases are identical in terms. These leases are classified as
capital leases in accordance with Statement of Financial Accounting Standards
No. 13, "Accounting for Leases". For accounting purposes, the Company has
treated this transaction as a financing arrangement. Payments are due in
installments through March 2004. Medipace has defaulted on its payment to the
Company since October, 1999.

    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 a net income of $40,046 and an income from operations of $287,501 during the
year ended December 31, 1999. Prior to this, the Company has suffered recurring
losses and had a working capital deficit of approximately $627,500, at December
31, 1999. Although the Company experienced a significant improvement in income
from operations in 1999, as compared to 1998, profitable operations will be
necessary to sustain the business on an on-going basis, unless the Company
obtains additional financing from external sources. There can be no assurances
that the Company will experience profitable operations or obtain additional
financing in the future.

                                       23
<PAGE>

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

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

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

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

YEAR 2000

    The Company has developed plans to address issues related to the impact on
its computer systems for the Year 2000. The Company has established a task force
with representatives from its operating units and financial management.
Financial and operational systems have been assessed and plans have been
developed to address system modification requirements. The financial impact of
making the required system changes is not expected to be material to the
company's consolidated financial position, liquidity and results of operations.

    The accounting systems have been tested and are Year 2000 compliant. The
major suppliers of the Company's operations hardware and software equipment have
provided information that the systems and embedded technology are Year 2000
compliant. A majority of the Company's other vendors have also indicated that
their systems are Year 2000 compliant.

    The Company's business relies heavily upon its ability to obtain
reimbursement from third party payors, including Medicare, Medicaid and private
insurers. Presently, there have been no delays in the receipt of payments from
these third party payors.

    The Company has developed contingency plans to address Year 2000 issues
should they arise including (i) making certain that back-up power generators at
certain locations are in placed, (ii) ensuring that alternative sources are
available to supply the Company with key medical supplies, or making appropriate
alternative arrangements, and (iii) the Company will arrange for alternative
payment methods with any pricipal payor who is adversely affected by Year 2000
issues.

    While the Company has not experienced difficulties arising from Year 2000
issues, there can be no assurances that the Company may not encounter such
difficulties in the future.

                                       24
<PAGE>

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

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

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

    KPMG LLP was previously the principal accountants for the Company. By letter
dated December 2, 1999, KPMG LLP declined its appointment as principal
accountants for the Company.

    In connection with the audits of the two fiscal years ended December 31,
1998, and the subsequent interim period through December 2, 1999, there were no
disagreements with KPMG LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which
disagreements if not resolved to their satisfaction would have caused them to
make reference in connection with their opinion to the subject matter of the
disagreement.

    The audit reports of KPMG LLP on the consolidated financial statements of
the Company and subsidiaries as of and for the years ended December 31, 1997 and
1998, did not contain any adverse opinion or disclaimer of opinion, nor were
they qualified or modified as to uncertainty, audit scope, or accounting
principles.

    As of December 6, 1999, the Company engaged Moss Adams LLP, as the Company's
independent auditors to replace KPMG LLP, whose report with respect to the
Company's consolidated financial statements for the fiscal year ended December
31, 1998, has been included in this Report.


                                    PART III

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

    The response to this Item is to be contained in the Company's Proxy
Statement for the Company's 2000 Annual Meeting of Stockholders, to be filed
with the Commission, on or before April 30, 2000 (the "Proxy Statement"), or if
not filed by such date, in an amendment to this Report to be filed on or before
such date, under the caption of "Election of Directors," and is incorporated
herein by reference.

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

    The response to this Item is to be contained in the Company's Proxy
Statement, or if not filed by May 1, 2000, in an amendment to this Report to be
filed on or before such date under the caption "Compensation of Executive
Officers," and is incorporated herein by reference.

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

    The response to this Item is to be contained in the Company's Proxy
Statement, or if not filed by May 1, 2000, in an amendment to this Report to be
filed on or before such date under the caption "Security Ownership of Certain
Beneficial Owners and Management," and is incorporated herein by reference.

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

    The response to this Item is to be contained in the Company's Proxy
Statement, or if not filed by May 1, 2000, in an amendment to this Report to be
filed on or before such date under the caption "Certain Relationships and
Related Transactions," and is incorporated herein by reference.

                                       25

<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, 1999 and 1998, and the consolidated statements of
    operations, stockholders' equity and cash flows for the years then ended.

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

    The Company filed current report on Form 8-K on December 14, 1999 regarding
    the Company's change of independent certified public accountants.

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

    16.1   Letter RE Change in Certifying Accountant of KPMG LLP, dated
           December 2, 1999(1)
    23.1   Consent of Moss Adams LLP, dated April 13, 2000
    23.2   Consent of KPMG LLP, dated April 12, 2000
    27     Financial Data Schedule

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

(1) Filed as part of the Company's Current Report on Form 8-K dated December 14,
    1999.

                                       26
<PAGE>


                       DOCUMENTS INCORPORATED BY REFERENCE

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

    The Company incorporates by reference in this Report the following items to
be contained in the Proxy Statement, or if not filed by May 1, 2000, in an
amendment to this Report to be filed on or before such date under the captions
set forth below:

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


                                       27


<PAGE>


                                   SIGNATURES

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

                                                NATIONAL QUALITY CARE, INC.


     Dated:  April 13, 2000                     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:  April 13, 2000                     By:  /s/ Victor Gura, M.D.
                                                     ---------------------------
                                                     Victor Gura, M.D.
                                                     Chief Executive Officer,
                                                     Chief Financial Officer and
                                                     Director



     Dated:  April 13, 2000                     By:  /s/ Ronald P. Lang, M.D.
                                                     ---------------------------
                                                     Ronald P. Lang, M.D.
                                                     Director



     Dated:  April 13, 2000                     By:  /s/ Jose Spiwak, M.D.
                                                     ---------------------------
                                                     Jose Spiwak, M.D.
                                                     Director



     Dated:  April 13, 2000                     By:  /s/ Melinda McIntyre-Kolpin
                                                     ---------------------------
                                                     Melinda McIntyre-Kolpin
                                                     Director

                                       28


<PAGE>
                           NATIONAL QUALITY CARE, INC.

                          INDEPENDENT AUDITOR'S REPORT

                                       AND

                              FINANCIAL STATEMENTS

                           DECEMBER 31, 1998 AND 1999










<PAGE>


                          INDEPENDENT AUDITOR'S REPORT




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


We have audited the accompanying consolidated balance sheet of National Quality
Care, Inc. and subsidiary as of December 31, 1999 and the related consolidated
statements of operations, stockholders' equity and cash flows for the year 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 audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of National Quality
Care, Inc. and subsidiary as of December 31, 1999, and the consolidated results
of their operations and cash flows for the year then ended, in conformity with
generally accepted accounting principles.


/s/ Moss Adams LLP

MOSS ADAMS LLP


Los Angeles, California
March 14, 2000

                                       F-1

<PAGE>



                          INDEPENDENT AUDITORS' REPORT




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



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

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

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

/s/ KPMG LLP

KPMG LLP


Los Angeles, California
February 26, 1999

                                       F-2
<PAGE>


NATIONAL QUALITY CARE, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

DECEMBER 31,                                            1998          1999
--------------------------------------------------------------------------------
                                     ASSETS

CURRENT ASSETS
  Cash and cash equivalents                         $    27,754   $    60,814
  Accounts receivable, net of
   allowance for doubtful accounts
   of $170,000 in 1998 and $200,000
   in 1999                                              651,354       721,118
  Supplies inventory                                     54,539       101,702
  Other                                                  50,521       104,410
                                                    ------------  ------------
              Total current assets                      784,168       988,044

PROPERTY AND EQUIPMENT,  net                          2,713,800     2,601,096
DEPOSITS AND OTHER LONG-TERM ASSETS                      64,006        41,741
                                                    ------------  ------------
              Total assets                          $ 3,561,974   $ 3,630,881
                                                    ============  ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
  Accounts payable                                  $   998,561   $   922,206
  Accrued expenses                                      266,374       305,806
  Notes payable and current portion
   of long-term debt                                    202,075       387,528
                                                    ------------  ------------
              Total current liabilities               1,467,010     1,615,540

LONG-TERM DEBT, net of current portion                2,047,779     1,910,788
                                                    ------------  ------------
              Total liabilities                       3,514,789     3,526,328
                                                    ------------  ------------
STOCKHOLDERS' EQUITY
  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;
   9,814,878 and 9,889,878 shares
   in 1998 and 1999, respectively,
   issued and outstanding                                98,148        98,898
  Additional paid-in capital                          2,163,407     2,177,657
  Receivables from stockholders, net                   (269,025)     (266,703)
  Accumulated deficit                                (1,945,345)   (1,905,299)
                                                    ------------  ------------
              Total stockholders' equity                 47,185       104,553
                                                    ------------  ------------
              Total liabilities and stockholders'
               equity                               $ 3,561,974   $ 3,630,881
                                                    ============  ============


The accompanying notes are an integral part of thees financial statements

                                       F-3
<PAGE>


NATIONAL QUALITY CARE, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31,                                1998          1999
--------------------------------------------------------------------------------

INCOME
  Medical service revenue                           $ 3,659,876   $ 4,073,030
  Rental income                                         271,700       271,700
                                                    ------------  ------------
              Total income                            3,931,576     4,344,730

OPERATING EXPENSES
  Cost of medical services                            2,789,784     2,768,996
  Selling, general and administrative                 1,092,770     1,079,807
  Depreciation and amortization                         126,500       134,737
  Rental and other                                       66,228        73,689
                                                    ------------  ------------
              Total operating expenses                4,075,282     4,057,229
                                                    ------------  ------------
              Income (loss) from operations            (143,706)      287,501
                                                    ------------  ------------
OTHER INCOME (EXPENSE)
  Interest expense                                     (251,045)     (275,480)
  Valuation allowance on receivable from
   stockholder                                         (499,000)            -
  Interest income                                         9,613        18,783
  Other income, net                                      12,988        10,842
                                                    ------------  ------------
              Total other expense                      (727,444)     (245,855)
                                                    ------------  ------------
              Income (loss) before provision
               for income taxes                        (871,150)       41,646

PROVISION FOR INCOME TAX                                  1,600         1,600
                                                    ------------  ------------
NET INCOME (LOSS)                                   $  (872,750)  $    40,046
                                                    ============  ============

BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE    $     (0.09)  $         -
                                                    ============  ============
WEIGHTED AVERAGE SHARES OUTSTANDING (BASIC)           9,750,000     9,855,000
                                                    ============  ============
WEIGHTED AVERAGE SHARES OUTSTANDING (DILUTED)         9,750,000     9,929,000
                                                    ============  ============

The accompanying notes are an integral part of thees financial statements

                                       F-4
<PAGE>

<TABLE>

NATIONAL QUALITY CARE, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 1998 AND 1999
-----------------------------------------------------------------------------------------------------------------------------
<CAPTION>

                                        Common stock                             Receivables                        Total
                                ---------------------------       Paid-in          from          Accumulated    Stockholders'
                                   Shares          Amount         Capital       stockholders       Deficit         Equity
                                -------------   -------------   -------------   -------------   -------------   -------------
<S>                             <C>             <C>             <C>             <C>             <C>             <C>
BALANCE - DECEMBER 31, 1997        9,555,710    $     95,556    $  2,086,394    $   (116,622)   $ (1,072,595)   $    992,733

   Options issued and exercised:
     For services rendered           196,668           1,967          62,513               -               -          64,480
     For cash                         62,500             625          14,500               -               -          15,125

   Receivable from stockholder
     secured by stock                      -               -               -        (142,790)              -        (142,790)

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

   Net loss                                -               -               -               -        (872,750)       (872,750)
                                -------------   -------------   -------------   -------------   -------------   -------------
BALANCE - DECEMBER 31, 1998        9,814,878          98,148       2,163,407        (269,025)     (1,945,345)         47,185

   Options exercised                  75,000             750          14,250               -               -          15,000

   Changes in receivables
     from stockholders                     -               -               -           2,322               -           2,322

   Net income                              -               -               -               -          40,046          40,046
                                -------------   -------------   -------------   -------------   -------------   -------------
BALANCE - DECEMBER 31, 1999        9,889,878    $     98,898    $  2,177,657    $   (266,703)   $ (1,905,299)   $    104,553
                                =============   =============   =============   =============   =============   =============
</TABLE>

The accompanying notes are an integral part of these financial statements

                                       F-5
<PAGE>

NATIONAL QUALITY CARE, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31,                                1998          1999
--------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income (loss)                                 $  (872,750)  $    40,046
  Adjustments to reconcile net income (loss)
     to net cash provided (used) in operating
     activities:
     Depreciation and amortization                      171,024       179,361
     Issuance of common stock and stock options
     for services                                        64,480             -
     Allowance for doubtful accounts                          -        30,000
     Valuation allowance on note receivable             499,000             -
     Changes in assets and liabilities:
        Accounts receivable                            (310,857)      (99,764)
        Supplies inventory                               (7,815)      (47,163)
        Other assets                                    (35,924)      (46,334)
        Accounts payable                                403,179       151,185
        Accrued expenses                                 73,656        39,432
                                                    ------------  ------------
              Net cash provided (used) by
              operating activities                      (16,007)      246,763
                                                    ------------  ------------
CASH FLOWS FROM INVESTING ACTIVITIES
  Purchase of property and equipment                    (17,459)      (17,993)
  Changes in receivable from stockholder, net            (9,613)        2,322
                                                    ------------  ------------
              Net cash used by investing
              activities                                (27,072)      (15,671)
                                                    ------------  ------------
CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from short and long-term borrowings          150,000        75,000
  Repayment of short and long-term borrowings          (133,512)     (288,032)
  Proceeds from exercise of stock options                15,125        15,000
                                                    ------------  ------------
              Net cash provided (used) by
              financing activities                       31,613      (198,032)
                                                    ------------  ------------
NET INCREASE (DECREASE) IN CASH                         (11,466)       33,060

CASH, beginning of year                                  39,220        27,754
                                                    ------------  ------------
CASH, end of year                                   $    27,754        60,814
                                                    ============  ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid during the year for
    Interest                                        $   251,045   $   275,480
                                                    ============  ============
    Income taxes                                    $     1,600   $     1,600
                                                    ============  ============
SUPPLEMENTAL DISCLOSURE OF NONCASH
    INVESTING AND FINANCING ACTIVITIES:
  Equipment acquired under capital lease
  obligations                                       $   299,689   $    33,954
  Stock options granted in exchange for             ============  ============
  services rendered                                 $    64,480   $         -
  Accounts payable converted into long-term         ============  ============
  promissory note                                   $         -   $   227,539


The accompanying notes are an integral part of thees financial statements

                                      F-6
<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 two dialysis clinics
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.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         PRINCIPALS 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 purchased with an original maturity of
three months or less to be cash equivalents. The carrying amount of cash and
cash equivalents approximates their fair market value.

         BUILDING AND EQUIPMENT - Building 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 building 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 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. Accounts
receivable are shown net of contractual allowances and allowances for doubtful
accounts.

         LONG-TERM ASSETS - Included in long-term assets is approximately
$63,000 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.
During 1999 the Company wrote off approximately $8,400 related to the refinance
of this property, which has been included in amortization expenses. Total
amortization expense for the year ended December 31, 1998 and 1999 was $6,265
and $14,709, respectively.

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

                                       F-7
<PAGE>


NATIONAL QUALITY CARE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         REVENUE RECOGNITION (CONTINUED) - The Medicare and Medi-Cal programs,
which are the largest payors for services rendered by the Company, combined to
account for approximately 65% of the Company's net revenues for each of the
years ended December 31, 1998 and 1999. 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 and cash equivalents 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).

         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 generally accepted accounting principles 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 - The Company has elected not to adopt Statement of
Financial Accounting Standards (SFAS) 123, "Accounting for Stock-Based
Compensation" and 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.
The new standard allows the Company to continue to account for stock-based
compensation under APB 25, with disclosure of the effects of the new standard.
The proforma effect on income as if the Company had adopted SFAS 123 is
disclosed in Note 7.

                                      F-8
<PAGE>

NATIONAL QUALITY CARE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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

         EARNINGS PER SHARE - Earnings per share are based upon the weighted
average number of shares of common stock and common stock equivalents
outstanding. In 1998, the Company has not included the dilutive effect of
assumed conversions and exercises of stock options and warrants since the effect
of such an inclusion would be antidilutive. In 1999 the Company has included
761,000 of options and warrants in the calculation of dilutive earnings per
share. Common stock equivalents which are exercisable into 5,599,000 shares of
common stock at December 31, 1999 have been excluded because their effect would
be antidilutive in 1999. However, these instruments could potentially dilute
earnings per share in future years.

         NEW ACCOUNTING PRONOUNCEMENTS - During 1999, the Financial Accounting
Standards Board issued Statements of Financial Accounting Standard No. 135
("Rescission of FASB Statement No. 75 and Technical Corrections"), No. 136
("Transfers of Assets to a Not-for-Profit Organization or Charitable Trust That
Raises or Holds Contributions to Others"), and No. 137 ("Accounting for
Derivative Instruments and Hedging Activities"), which are effective for years
after 1999. Management believes these pronouncements will not have a material
effect on the Company's financial statements or disclosures.

NOTE 3 - PROPERTY AND EQUIPMENT

         Property and equipment and accumulated depreciation and amortization as
of December 31, 1998 and 1999 are:


                                                        1998          1999
                                                    ------------  ------------
  Land                                              $   855,897   $   855,897
  Building                                            1,338,710     1,338,710
  Medical equipment                                     803,484       612,764
  Office equipment, furniture and fixtures               58,228        65,795
  Leasehold improvements                                158,372       158,372
                                                    ------------  ------------
                                                      3,214,691     3,031,538
  Accumulated depreciation and amortization            (500,891)     (430,442)
                                                    ------------  ------------
                                                    $ 2,713,800   $ 2,601,096
                                                    ============  ============

                                      F-9
<PAGE>

NATIONAL QUALITY CARE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3 - PROPERTY AND EQUIPMENT (Continued)

         Depreciation and amortization expense on property and equipment for the
years ended December 31, 1998 and 1999 were $107,518 and $164,651, respectively
of which $44,624 is included in rental and other expense in the statement of
operations for the year ended December 31, 1999. Medical equipment includes
$471,140 and $505,084 of equipment under capital lease as of December 31, 1998
and 1999, with accumulated depreciation of $87,344 and $168,415, respectively.

         During 1999 the Company wrote off $235,100 of fully depreciated medical
equipment.

NOTE 4 - LEASE RECEIVABLE

         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 and an identical capital lease liability to the third party (See Note
8). The receivable is recorded in stockholder's equity in 1999.

         Minimum payments under the capital lease receivable is as follows:

                  2000                                $    38,130
                  2001                                     30,504
                  2002                                     30,504
                  2003                                     30,504
                  2004                                      2,542
                                                      ------------

         Total minimum payments                           132,184
         Amount representing interest at 36%              (65,277)
                                                      ------------

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


                                      F-10
<PAGE>

NATIONAL QUALITY CARE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

         Notes payable, long-term debt and capital lease obligations at December
31, 1998 and 1999 consist of the following:

<TABLE>
<CAPTION>

                                                                                   1998           1999
                                                                                ------------  ------------
         <S>                                                                    <C>           <C>

         Notes payable in monthly installments of $20,293 including
          interest at prime plus 2% (10.5% at December 31, 1999) per
          annum through May 2006 and May 2021, collateralized by land,
          building and equipment and assignment of a $2,000,000 in
          life insurance on and guaranteed by two majority stockholders         $ 1,717,069   $ 1,683,495

         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 (10% at December 31, 1999),
          final installment due on April 30, 2003, secured by accounts
          receivable and personal guarantees by two majority stockholders.           86,664        66,660

         Term loan, due on demand and if no demand is made due in
          installments of $2,003 plus interest at 1.5% over the banks prime
          rate (10% at December 31, 1999), outstanding principal of
          $27,303 is due April 30, 2000, secured by accounts receivable
          and personal guarantees by two majority stockholders.                      50,000        33,721

         Note payable, due in monthly installments of $858 including
          interest at 10%, balance due August 2000, secured by equipment.            15,751         6,616

         Note payable, due in monthly installments of $10,000 plus
          interest at 15%, balance due December 2000                                      -       117,540

         Capitalized lease obligation, monthly installments of $643,
          including interest at 13%, due October 31, 2002, collateralized by
          equipment                                                                  24,438        18,179

         Capitalized lease obligations, due in monthly
          installments of $3,488 including interest at 12%, due
          December 2000, collateralized by equipment                                124,109        95,612

         Capitalized lease obligation, due in monthly installments
          of $868 including interest at 10%, due May 2003,
          collateralized by equipment                                                     -        30,066

         Capitalized lease obligation, due in monthly installments
          of $2,542 including interest at 36%, due January 2004,
          collateralized by equipment                                                     -        65,192

         Capitalized lease obligations, due in monthly installments
          of $6,894 including interest at 15%, due December 2002,
          collateralized by equipment                                               231,823       181,235
                                                                                ------------  ------------
                                                                                  2,249,854     2,298,316
         Less current portion                                                      (202,075)     (387,528)
                                                                                ------------  ------------
         Long-term debt, net of current portion                                 $ 2,047,779   $ 1,910,788
                                                                                ============  ============
</TABLE>

                                      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)

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

                  2000                                $   274,465
                  2001                                     35,353
                  2002                                     39,250
                  2003                                     43,575
                  2004                                     48,378
                  Thereafter                            1,467,010
                                                      ------------
                                                      $ 1,908,031
                                                      ============

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

                  2000                                $   173,208
                  2001                                    196,008
                  2002                                    108,717
                  2003                                     34,844
                  2004                                      2,542
                                                      ------------

         Total minimum payments                           515,319
         Amount representing interest at 10% to 36%      (125,034)
                                                      ------------

         Present value of net minimum lease payments      390,285

         Current portion                                 (113,063)

                  Long-term portion                   $   277,222
                                                      ============



                                      F-12
<PAGE>


NATIONAL QUALITY CARE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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, 1998 and 1999,
the Company's deferred tax assets are comprised of the following items:

                                                        1998         1999
                                                    ------------  ------------
     DEFERRED TAX ASSETS
      Net operating loss carryforward               $ 1,714,000   $ 1,738,000
      Note receivable reserve                           288,000       288,000
      Intangible assets                                  59,000        34,000
      Other                                              54,000        80,000
                                                    ------------  ------------
                                                      2,115,000     2,140,000
      Valuation allowance                            (2,115,000)   (2,140,000)
                                                    ------------  ------------
     NET DEFERRED TAX ASSET                         $         -   $         -
                                                    ============  ============


         The valuation allowance of $2,115,000 and $2,140,000 at December 31,
1998 and 1999, respectively, represents increases of $335,600 and $25,000,
respectively, over the preceding year.

         The current income tax provision is made up of the following at
December 31,:

                                                        1998          1999
                                                    ------------  ------------
     Current tax provision
      Federal                                       $         -   $         -
      State                                               1,600         1,600
                                                    ------------  ------------
                                                          1,600         1,600
     Deferred tax benefit                              (335,600)      (25,000)
     Valuation allowance on deferred taxes              335,600        25,000
                                                    ------------  ------------
                                                        $ 1,600   $     1,600
                                                    ============  ============


                                      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, 1998 and 1999 are as follows:

                                                        1998          1999
                                                    ------------  ------------

         Computed "expected" tax expense (benefit)  $  (291,500)  $    14,300
         Increase (reduction) in income taxes
          resulting from:
           Change in valuation allowance                335,600        25,000
           State and local income taxes, net of
            Federal income tax effect                   (52,000)        2,400
           Adjustment to operating loss
            carryforwards                                     -       (37,900)
           Other, net                                     9,500        (2,200)
                                                    ------------  ------------
                                                    $     1,600   $     1,600
                                                    ============  ============

         At December 31, 1999, the Company has net operating loss carryforwards
for Federal and state income tax purposes of approximately $5,000,000 and
$700,000, respectively, which for Federal purposes are available to offset
future taxable income, if any, through 2019. The Federal net operating loss
carryforwards include $3,700,000 which are limited by IRC Section 382; however,
such annual limitations have not been determined.

NOTE 7 - STOCK-BASED COMPENSATION

         The Company has granted options and warrants to acquire stock under two
plans and various other grants made directly to certain parties for incentive
compensation and as compensation for services rendered. As of December 31, 1999,
approximately 4,293,000 shares of stock have been authorized for issuance under
these arrangements and substantially all instruments authorized have been
issued. The vesting requirements and the 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, with
the exception of 500,000 warrants, which are exercisable after the Company
reaches certain performance measures.

         In addition, options to acquire 4,210,644 shares of common stock, at an
exercise price of $3.50 per share, will be issued to certain stockholders in the
event the Company meets certain financial conditions based on the results of
operations of the Company during the fiscal years ending December 31, 1999 to
December 31, 2001. The shares will be issued in the event that the annual pretax
earnings from operations of the Company during any of the years ending December
31, 1999 to 2001 shall equal or exceed $2,000,000.

                                      F-14
<PAGE>

NATIONAL QUALITY CARE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 7 - STOCK-BASED COMPENSATION (continued)

         Activity in the Company's stock option and warrant arrangements is as
follows:

                                                      Outstanding Options
                                                -------------------------------
                                                    Number       Exercise Price
                                                --------------   --------------

         Balance, December 31, 1997                   843,000    $        2.45
         Granted                                    1,300,000    $        0.81
         Exercised                                   (259,000)   $        0.93
                                                --------------
         Balance, December 31, 1998                 1,884,000    $        1.52
         Granted                                      365,000    $        0.20
         Exercised and expired                       (100,000)   $        0.41
                                                --------------
         Balance, December 31, 1999                 2,149,000    $        1.39
                                                ==============

         The following summarizes information about stock options outstanding at
December 31, 1999:

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

   $ .18 - $ .99      1,310,000          4.1 years                  $ 0.56
   $1.00 - $3.50        839,000          2.8 years                  $ 2.68
                    ------------
                      2,149,000          3.6 years                  $ 1.39
                    ============

                                      F-15
<PAGE>

NATIONAL QUALITY CARE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 7 - STOCK-BASED COMPENSATION (continued)

         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:

                                                        1998          1999
                                                    ------------  ------------

         Net income (loss)
          As reported                               $  (872,750)  $    40,046
                                                    ============  ============
          Pro Forma                                 $  (874,000)  $   (15,867)

         Basic and diluted earnings per share
          As reported                               $      (.09)  $         -
                                                    ============  ============
          Pro Forma                                 $      (.09)  $         -
                                                    ============  ============


         The Company acquired services from nonemployees by granting stock-based
compensation and recognized compensation expense based on the fair value of
services rendered of $64,480 in 1998.

         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:

  December 31,      Risk-free                       Expected      Expected
                  interest rate    Expected life   volatility     dividends
  ------------    -------------    -------------   ----------     ---------

     1999               5%            5 years          99%            0%
     1998               6%          2.5 years         130%            0%


                                      F-16
<PAGE>

NATIONAL QUALITY CARE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 8 - RELATED PARTY TRANSACTIONS

         The Company has an 8% unsecured demand note receivable from a
stockholder due March 2000. During 1999 the Company transferred $75,000 of the
note receivable to a separate note in connection with a purchase and leaseback
transaction, which is further discussed in Note 4. No payments were received in
1998. The outstanding balance of $126,235 and $57,006 has been recorded as an
offset to stockholders' equity at December 31, 1998 and 1999, respectively.
Interest of $9,613 and $5,771 was accrued on the outstanding balance in 1998 and
1999, respectively. The separate $75,000 note created in this transaction earns
interest at 36%, which corresponds with the rate implicit in the Company's lease
obligation on the equipment. The December 31, 1999 balance of $66,907 is
recorded as an offset to stockholders' equity.

         The Company has two non-interest bearing notes resulting from the sale
of property and equipment to a former affiliate in 1996. The notes, secured by
570,000 shares of the Company's common stock, were due but not paid in February
1999. The notes were further extended through February 2000. The Company has
provided for a valuation allowance of $719,000 against the note. The note has
been recorded as an offset to stockholders' equity. In March 2000, the
shareholder was negotiating with the Company for a further extension on the note
through February 2001.


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:

                  2000                                $   234,701
                  2001                                    177,705
                  2002                                    166,645
                  2003                                    155,584
                  2004                                    155,584
                  Thereafter                              413,190
                                                      ------------
                                                      $ 1,303,409
                                                      ============

         Total rent expense, including equipment rentals, for the years ended
December 31, 1998 and 1999 amounted to approximately $235,000 and $256,000,
respectively.

                                      F-17
<PAGE>

NATIONAL QUALITY CARE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 9 - COMMITMENTS AND CONTINGENCIES (continued)


         LEASE AND SUBLEASE AGREEMENTS - 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 provides minimum rental income of $22,642
per month through 2005. Rental income exceeding the operating expenses and debt
service costs is held as a reserve deposit, while the Company is responsible for
any shortfall. The Company recognizes the rental income and expenses. The net
reserve deposit included in other assets was $34,299 and $64,095 at December 31,
1998 and 1999, 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 $3,623 and $2,669
for 1998 and 1999, 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, 1998 and 1999.



                                      F-18