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                       SECURITIES AND EXCHANGE COMMISSION
                              Washington D.C. 20549

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

                                    FORM 10-K

                Annual Report Pursuant to Section 13 or 15(d) of
                       The Securities Exchange Act of 1934

                      For the year ended December 31, 1998
                       Commission File Number: 34-0-20400

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

                       UNIVERSAL STANDARD HEALTHCARE, INC.
             (Exact name of Registrant as specified in its charter)

                MICHIGAN                             38-2986640
   (State or other jurisdiction of                   (I.R.S. Employer I.D. No.)
     incorporation or organization)

29200 NORTHWESTERN HIGHWAY, SUITE 300
SOUTHFIELD, MICHIGAN                                 48076
(Address of principal executive offices)             (Zip Code)

Registrant's telephone no. including area code:      (248) 386-5374

Securities registered pursuant to Section 12(b) 
of the Act:                                          NONE

Securities registered pursuant to Section 12(g) 
of the Act:                                          COMMON STOCK
                                                     8.25% CONVERTIBLE SUBOR-
                                                     DINATED DEBENTURES DUE 2006


Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                                               YES   X       NO     
                                                   -----        -----

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of Registrant's knowledge, in definitive
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proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.[ ]

The aggregate market value of the voting stock of the Registrant held by
non-affiliates (2,670,805 shares on March 26, 1999) was $1,169,812. For purposes
of this computation only, all directors, executive officers and owners of more
than 5% of the Registrant's voting stock are assumed to be affiliates.

Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock as of the latest practicable date: 9,164,842 shares of Common Stock
outstanding as of March 26, 1999.

DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's definitive
Proxy Statement pertaining to the 1999 Annual Meeting of Shareholders (the
"Proxy Statement") filed pursuant to Regulation 14A are incorporated herein by
reference into Part III.
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PART I

ITEM 1.  BUSINESS

GENERAL

         Universal Standard Healthcare, Inc. (the "Company"), through specialty
managed care programs (the "Managed Care Programs") offered by its subsidiaries,
provides clinical laboratory testing services, home medical services, and
diagnostic imaging to employer, employer group -, union - and
government-sponsored health care benefit plans and other groups for a fixed
payment per participating employee or retiree ("capitated rate"). All services
are provided by the Company under arrangements through contracting agreements
with qualified providers.

BACKGROUND

         The Company was incorporated in Michigan in 1990 to acquire the
business of the Company's predecessor, MML, Inc. (the "Predecessor"), and the
stock of T.P.A., Inc. In the first half of 1992, the Company acquired clinical
laboratory businesses based in Mid- and Northern Lower Michigan. The Company
changed its name from Universal Standard Medical Laboratories, Inc. to Universal
Standard Healthcare, Inc. in August 1997.

         On August 4, 1998, the Company sold its clinical laboratory customer
list and certain tangible assets relating to its clinical laboratory business to
Laboratory Corporation of America Holdings ("LabCorp") as part of its
divestiture of its clinical laboratory operations (the "Asset Sale"). The
Company has ceased all clinical laboratory operations. Accordingly, its clinical
laboratory business, previously conducted under the name Universal Diagnostics,
is being reported as a discontinued operation.

         In March 1999, the Company presented an out of court restructuring plan
to the creditors of Universal Diagnostics, the holders of its 8.25% Convertible
Subordinated Debentures, due February 1, 2006 (the "Debentures") and its
principal bank lender. The Company believes that completion of an out of court
restructuring will result in a greater benefit to the creditors of its former
clinical laboratory business and holders of the Debentures. See "Item 1.
Business-Work Out Strategy" and "Business - Risk Factors".

         References herein to the Company mean the Company, the Predecessor and
their respective consolidated subsidiaries.

BUSINESS STRATEGY

         The Company's business strategy is to become a national leader in the
development and delivery of innovative health care management programs. The
Company has implemented a business strategy designed to leverage its expertise
in the managed care area to expand its business


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and become a national competitor in the managed care industry. This strategy
includes the development of new managed care products, such as the home medical
services program and the imaging services program introduced in 1997. New
programs will be offered to existing customers, as well as a means of attracting
new customers. In addition, the Company has expanded its business geographically
through the establishment of managed care sales offices in Ohio, Delaware and
Florida and intends to establish additional offices or affiliates in 1999.

         The foregoing statements regarding the Company's business strategy and
programs implemented in connection with such business strategy may be "forward
looking statements" within the meaning of the Securities Exchange Act of 1934.
The ability of the Company to successfully execute the strategies set forth
above involves a number of uncertainties, including, but not limited to, the
ability of the Company to develop new managed care products, the level of
interest that existing and potential new customers may have in managed care
products offered by the Company, the ability of the Company to identify and
satisfy market needs, the impact on the Company of recent and continuing changes
in the health care industry, the competitive nature of the laboratory and
managed care industries, and other factors listed under "Item 1. Business-Risk
Factors".

WORK OUT STRATEGY

         On March 19, 1999, the Company proposed an out-of-court restructuring
plan (the "Work Out Strategy") at a meeting (the "Creditors' Meeting") of the
creditors of its former laboratory operation and the holders of its outstanding
8.25% Convertible Subordinated Debentures (collectively, the "Unsecured
Creditors"). The proposed Work Out Strategy contemplates that the Unsecured
Creditors will be paid a percentage of the debts owed to them over the next few
years. Under the Work Out Strategy, the holders of the Debentures will maintain
their existing right under the terms of the Debentures to convert the Debentures
and accrued interest thereon into Common Stock at a conversion price of $4.375
per share.

         At the Creditors' Meeting, the Unsecured Creditors elected a committee
of seven creditors (the "Creditors' Committee") to represent the interests of
the Unsecured Creditors. The Creditors' Committee has retained counsel to assist
it in its negotiations with the Company. While many of the Unsecured Creditors
have been cooperative with the Company to date, there can be no assurance that
the Company will be able to negotiate an acceptable Work Out Strategy with the
Creditors' Committee or that a sufficient number of such Unsecured Creditors
will accept the Work Out Strategy so that it can be successfully implemented by
the Company. A number of Unsecured Creditors have initiated legal action (or
have threatened to do so) if the amounts due to them are not paid in full.

         The Company is also negotiating with its principal bank lender to
restructure its existing obligations to the bank, which includes outstanding
indebtedness of $583,000 at March 25, 1999, letters of credit totaling $3.5
million and an equipment lease in the amount of $700,000. The proposed
restructuring contemplates the repayment of the outstanding indebtedness and
cash

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collateralization of the other bank obligations over time through the sale of
laboratory assets, collection of accounts receivable and from operating cash
flow.

         If an acceptable Work Out Strategy is not accepted by a sufficient
number of Unsecured Creditors and the Company's principal bank lender, the
Company may be compelled to seek protection under the federal Bankruptcy Code.
See "Item 1. Business-Risk Factors - Defaults Under Indebtedness; Uncertainties
Inherent in Work Out Strategy."


MANAGED CARE PROGRAMS

         OVERVIEW. Since 1985, the Company has offered Managed Care Programs for
large employers, union-sponsored and government-sponsored health care benefit
plans, as well as HMOs and PPOs and other groups. Under its Managed Care
Programs, in exchange for a capitated rate, the Company's subsidiaries are
required to provide, or to coordinate the provision of, substantially all of the
services specified in the Managed Care Program contract to all Covered Persons.

         The Company's managed care subsidiaries design, develop and implement
innovative health care solutions for its customers. The Company's expertise in
network management, information processing, and utilization compliance are a few
of its core competencies. The customers obtain significant health care savings,
which have been sustainable in subsequent years, while improving the quality of
the health care provided to its employees. The Company's Managed Care
subsidiaries perform risk management and administrative functions and pay the
providers, retaining a portion of the annual capitated fees.

         Depending on the Managed Care Program involved, services currently
offered include any one or more of the following ordered by physicians for
Covered Persons: non-hospital clinical laboratory testing, durable medical
equipment, respiratory therapy and orthotic and prosthetic appliances ("Home
Medical Services") and outpatient diagnostic imaging services. The Company
arranges, through contracting agreements with other qualified providers, to
provide the required services. The Company currently has 31 Managed Care Program
contracts, eight of which began in 1998, covering approximately 1 million
Covered Persons located in all 50 states. A "Covered Person" is a person who is
entitled to benefits under a specific Managed Care Program Contract. Individuals
participating in more than one Managed Care Program are treated as a separate
Covered Person under each program.

         The Company's Managed Care Programs are designed to permit customers to
reduce costs while maintaining the quality and availability of the specialty
health care services offered by the Company. The Company's Managed Care Programs
are also designed to lessen physicians' incentive to order unnecessary health
care services. The Managed Care Programs implemented to date have resulted in
first-year plan costs which were at least 20% lower than the plan sponsor's
projected costs for that year and the Company has generally been able to sustain
the savings for the plan sponsor in

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subsequent years. The Company's Managed Care Programs are also designed so that
Covered Persons can continue to use the physicians of their choice.

         CUSTOMERS. The principal customers for which the Company has
established Managed Care Programs are large employers, union-sponsored and
government-sponsored health care benefit plans, as well as HMOs and PPOs.
Although many of the Company's new Managed Care Programs are with groups not
affiliated with the automobile industry, during 1996, 1997 and 1998, a majority
of the Company's Managed Care Program revenues were derived from contracts with
unions and companies affiliated with the automobile industry. In 1998, revenues
derived from contracts with three automotive customers accounted for virtually
all of these automobile industry-related Managed Care Program revenues. A
decrease in the number of employees and retirees under these programs,
downsizing in the automobile industry or an adverse change in the Company's
relationships with the employers and unions with whom it has Managed Care
Programs could have a material adverse effect on the Company's business,
financial condition, including working capital, and results of operations.
During 1998, managed care programs with Ford Motor Company ("Ford") accounted
for 27% of its consolidated net revenues, Chrysler Corporation ("Chrysler")
accounted for 19% of its consolidated net revenues and General Motors
Corporation ("General Motors") accounted for 28% of its consolidated net
revenues. The General Motors contract terminated on October 31, 1998. See "Item
1. Business - Risk Factors - Dependence on Key Managed Care Customers."

         SERVICES PROVIDED. The Company offers three services under its Managed
Care Programs: laboratory services, home medical services and diagnostic imaging
services. However, most of the Company's managed care revenues are generated
from its laboratory services programs.

         LABORATORY SERVICES. The Company's laboratory services Managed Care
Program covers generally all non-hospital clinical laboratory services ordered
by physicians for Covered Persons on a "carve-out" basis, i.e., independent from
the other health care benefits and programs provided by the employer or group
for the Covered Persons. Under this program, the Company is paid a fixed monthly
payment by the customer. The fixed monthly payments established by the Company
are generally guaranteed by the Company for two years, while the contracts
governing the Managed Care Programs are generally renewable on an annual basis
and terminable by the customer upon 30 or 60 days prior written notice
(depending on the program).

         The Company contracts on a discounted fee-for-service basis with
third-party clinical laboratories to provide all laboratory services to covered
Persons. The Company entered into a Laboratory Services Agreement with LabCorp
effective as of August 3, 1998. Under the terms of the five-year agreement,
LabCorp is the preferred provider of clinical laboratory services for the
Company's managed care customers. Generally, in those circumstances where
LabCorp does not wish to provide services or does not have sufficient
facilities, or where customers or existing contracts require other providers, or
where the Company had an existing contract with a provider at August 3, 1998,
the Company may contract with other laboratory providers. The Company pays
LabCorp on a fixed fee-for-service basis. The Laboratory Services Agreement may
be terminated by either party for material breach by the other party upon thirty
days prior written notice. See "Item

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1. Business - Risk Factors - Dependence on Managed Care Contractors" for a
discussion of certain allegations by LabCorp that the Company has breached the
Laboratory Services Agreement.

         The Company contracts with providers other than LabCorp are generally
terminable by either party on short notice. See "Item 1. Business - Risk Factors
- Dependence on Managed Care Contractors" for a discussion of the impact on the
Company of a termination by LabCorp or the Company's other clinical laboratory
providers of their contracts.

         HOME MEDICAL SERVICES. The Company's home medical services ("HMS")
program provides all durable medical equipment (such as hospital beds,
wheelchairs and canes), respirator therapy, infusion, orthotic and prosthetic
appliances and related supplies at a prepaid, capitated rate.

         The Company contracts with third parties to provide services under its
HMS agreements. The contracts for durable medical equipment and supplies under
these programs are generally on a capitated basis and generally run for the term
of the program contract. Currently, other providers under these programs provide
services on a discounted fee-for-service basis and their arrangements are
generally terminable by either party on short notice.

         The Company's Managed Care Subsidiary in Michigan (the "Michigan
Managed Care Subsidiary") is the nationwide administrator and utilization
control coordinator of Ford Motor Company's and the United Auto Workers' HMS
program for employees enrolled in the traditional health plan (the "Ford HMS
Program"). The multi-year contract became effective June 1, 1995 and covers
approximately 225,000 Ford hourly workers, non-Medicare retirees and their
dependents in 50 states. The fixed monthly fee established by the Company for
the Ford HMS Program is guaranteed by the Company through March 1, 2000, while
the program is terminable by Ford upon 30 days prior written notice. This HMS
program resulted in first-year annual employer expenditures for these services
which were at least 30% less than the plan sponsor's projected costs for that
year. The Company is required to indemnify Ford under the Ford HMS program for
any expenses incurred by Ford in replacing the HMS program in the event that
Ford cancels such a program due to the Company's or any of its contractors'
non-performance. The Company's obligations under the Ford HMS program are
secured by a $1.8 million letter of credit. See "Item 1 Business - Risk Factors
Dependence on Managed Care Contracts" for a discussion of certain risks
associated with the Company's Home Medical Services Programs.

         The Company has four additional HMS programs currently in effect. These
programs are generally terminable by the customer upon short notice.

         DIAGNOSTIC IMAGING SERVICES. The Company also has a Managed Care
Program providing outpatient diagnostic imaging services at a prepaid, capitated
rate. The Company has contracted with a third party to assist in the
establishment of a network of radiologists and radiology clinics to provide
diagnostic imaging services and assist the Company in managing this network.
Network providers are paid on a discounted fee-for-service basis and their
arrangements are generally terminable by either party on short notice.

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SALES AND MARKETING

         As of December 31, 1998, the Company employed 11 sales and service
representatives to market the Managed Care Programs primarily to large
employer-, employer group-, union- and government-sponsored health care benefit
plans, HMOs, PPOs, health care alliances and other groups. The establishment of
a Managed Care Program for a large employer or other group often requires the
involvement of multiple departments within the employer or group, as well as
participation of that company's unions. As a result, Managed Care Programs may
take six months to a year or more to negotiate and implement.

         The Company also markets its Managed Care Programs through other
managers of health care benefits. The Company has a Teaming Agreement with a
manager of healthcare benefits to sell the Company's Managed Care Programs with
programs offered by the manager of health care benefits. The teaming arrangement
allows the health care benefit manager to offer broader programs providing
greater potential savings for potential customers. Under the Teaming Agreement,
the Company's programs are offered and sold through the sales and marketing
networks of this manager, permitting the Company to reach a broader group of
potential customers.

         The Company and LabCorp entered into a Co-Marketing Agreement, dated as
of August 3, 1998 (the "Co-Marketing Agreement"), for the purpose of
coordinating and complementing their marketing and sales efforts to new and
existing managed care customers and to utilize each company's expertise and
resources in such efforts. The Co-Marketing Agreement further provides that in
the event of the termination of the Co-Marketing Agreement or in certain cases,
the occurrence of other events, the Company will pay to LabCorp the Co-Marketing
Termination Fee. The Co-Marketing Termination Fee is calculated as set forth in
the Co-Marketing Agreement, but cannot exceed $4,250,000. If LabCorp terminates
the Co-Marketing Agreement, the Co-Marketing Termination Fee is not payable
until August 1, 2000. If the Co-Marketing Termination Fee does not become
payable by November 30, 2000, the Company's obligation to pay such fee expires.
The Company's obligation to LabCorp for the Co-Marketing Termination Fee is
secured by a security interest in all of the Company's assets and the assets of
its wholly-owned subsidiary Universal HealthCare of Delaware, Inc. ("Universal
Delaware"), other than the capital stock of certain regulated companies owned by
Universal Delaware. LabCorp has agreed to subordinate the Company's obligation
to LabCorp for the Co-Marketing Termination Fee and LabCorp's security interest
in certain assets of the Company to certain debt of the Company and the assets
securing such debt. In the event the Co-Marketing Termination Fee is paid, the
Company will have the right to purchase 1,416,667 shares for Common Stock owned
by LabCorp for $0.50 per share, as provided in the Stock Purchase Agreement (the
"Special Call Right').

COMPETITION

         The Company competes on the basis of price, service and its experience.
The Company believes its experience, reputation and long-standing relationships
offer it a competitive advantage

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with respect to maintaining its existing Managed Care Programs and establishing
new Managed Care Programs. The Company is experiencing increased competition
with regard to its Managed Care Programs from insurance companies, HMOs, PPOs,
third-party administrators and other managed health care companies which offer
similar programs. However, such similar programs generally have not had the
capability to handle in- and out-of-network claims. Nevertheless, these other
programs can cause pricing pressure on the Company's programs. See "Item 1.
Business - Risk Factors Competition."

         In addition to competition for customers, the Company faces increasing
competition for obtaining the services of qualified personnel. These personnel
are difficult to recruit and retain, and there can be no assurance that the
Company will be successful in attracting and retaining these employees. See
"Item 1. Business - Risk Factors - Dependence on Senior Management."

GOVERNMENT REGULATION

         The Company's operations are subject to governmental regulations at the
federal, state and local levels.

         MANAGED CARE REGULATION. The Company's Managed Care Programs require
that the Company and the Managed Care Subsidiaries be licensed under various
laws in certain states in which they operate.

         The Michigan Managed Care Subsidiary is licensed as an Alternative
Health Care Financing and Delivery System ("AFDS") by the Insurance Bureau of
the Michigan Department of Consumer and Industry Services (the "Michigan
Insurance Bureau") and the Michigan Department of Community Health pursuant to
the Michigan Health Maintenance Organization Act (the "HMO Act"). The AFDS
license and the HMO Act specify terms and conditions with which the Michigan
Managed Care Subsidiary must comply in order to retain its AFDS license,
including certain financial requirements.

         The HMO Act requires that the Michigan Managed Care Subsidiary
maintain: (i) a net worth of $500,000; (ii) a deposit of $500,000 (consisting of
cash or securities, as defined in the HMO Act and the Michigan Insurance Code)
with the state treasurer or with a federally or state chartered financial
institution held solely for the benefit of Covered Persons in the event of
insolvency of the Michigan Managed Care Subsidiary; (iii) working capital of
$250,000 or such greater amount as the State of Michigan Insurance Bureau may,
in the future, deem to be adequate for the Michigan Managed Care Subsidiary, and
(iv) a minimum deposit of 5% of the Michigan Managed Care Subsidiary's annual
subscription income (consisting of cash or securities) with the state treasurer
or with a federally or state chartered financial institution held solely for the
benefit of Covered Persons in the event of insolvency of the Michigan Managed
Care Subsidiary. The minimum deposit described in (iv) is subject to a maximum
of $500,000, if the Michigan Managed Care Subsidiary has a positive net worth,
or $1,000,000, if the Michigan Managed Care Subsidiary has a negative net worth.

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         The Michigan Insurance Bureau has responsibility under the HMO Act for
ensuring that the Michigan Managed Care Subsidiary is financially and
actuarially sound and has adequate working capital and statutory deposits and
reserves. The HMO Act grants to the Michigan Insurance Bureau discretion to
establish additional financial reserve requirements and to impose restrictions
on the distribution of funds from the Michigan Managed Care Subsidiary. The
Michigan Insurance Bureau requires the Michigan Managed Care Subsidiary to file
quarterly and annual reports detailing all transactions, including cash
disbursements, with its affiliates.

         The Michigan Managed Care Subsidiary is permitted to make cash
distributions to the Company out of such subsidiary's earned surplus, to the
extent such distributions do not cause the subsidiary to fail to satisfy the
minimum net worth, working capital and other reserve requirements of the
Michigan Insurance Bureau or the Michigan Insurance Bureau has not otherwise
limited such distributions. The Michigan Insurance Bureau has restricted the
amount of distributions that the Michigan Managed Care Subsidiary may make to
the Company. See "Item 7. Management's Discussion and Analysis-Liquidity and
Capital Resources."

         The other states in which the Company's other Managed Care subsidiaries
have Managed Care Programs regulate such subsidiaries to varying degrees and, in
some instances, require licenses. Loss of these licenses could result in the
Company being prohibited from continuing to offer its Managed Care Programs in
one or more states. The Company's Managed Care subsidiary in Ohio is also
subject to certain reporting requirements, reserve requirements and limitations
on cash distributions. As the Company expands its Managed Care Programs into
other states, it may experience similar requirements or limitations in certain
of those states as well.

         If the Company were not able to derive adequate levels of cash from its
Managed Care Subsidiaries, it is possible that the Company would not have
sufficient cash available to fund its working capital needs and debt service
requirements.

         THIRD-PARTY REIMBURSEMENT REGULATION. Medicare and Medicaid
reimbursements accounted for a significant portion of the Company's net revenues
from its former clinical laboratory operations. The Company is subject to audits
and retroactive audit adjustments for Medicare and Medicaid payments. The
Company has from time to time experienced these audits by third-party payors
and, from time to time, has been required to return monies paid to it by such
payors. The Company has not yet received final determination notices or decision
letters relating to an audit conducted by one of its largest third-party payors.

         The Company's liquidity may be affected by how promptly the Company is
reimbursed by Medicare, Medicaid and other third-party payors for its former
clinical laboratory operations. The Company from time to time has experienced a
slowdown in payments from such third-party payors.


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         ANTI-FRAUD AND ABUSE REGULATION; MEDICARE AND MEDICAID REIMBURSEMENT.
Although the Company currently does not participate in Medicare or Medicaid for
its managed care business, it could participate in such programs in the future.
In addition, in the Company's former laboratory division did participate in
Medicare and Medicaid.

         The Medicare and Medicaid Patient and Program Protection Act of 1987,
as amended, and various other federal and state statutes (the "Fraud and Abuse
Statutes") prohibit health care providers, including managed care companies,
from soliciting, offering, paying, receiving or accepting any remuneration as an
inducement for the referral or the arrangement of referral of patients, items or
services for which payment is made in whole or in part under the Medicare or
Medicaid and other private and government third-party payor programs.
Contravention of the Fraud and Abuse Statutes is a criminal and civil violation
and can subject the health care provider and persons acting on behalf of the
health care provider to significant fines, penalties, imprisonment and exclusion
from the Medicare and Medicaid and other third-party payor programs.

         The Fraud and Abuse Statutes also prohibit bribes and kickbacks in
connection with the furnishing of goods or services under Medicare or Medicaid
or other third-party payor programs and prohibit offers of rebates or other
benefits to persons, items or services to the Company. The Company is also
subject to other federal and state statutes that impose civil and criminal
penalties for claims upon federal or state authorities for payment or
reimbursement for services, or any related statements made to induce payment, if
such claims or statements are found to be false, misleading or otherwise
fraudulent.

         The Company may be excluded from participation in Medicare and Medicaid
for a variety of reasons. These reasons include, among others, revocation or
suspension of any of its health care licenses, suspension under a state health
care program or any federal government program (whether or not related to health
care), submission of false or fraudulent claims or related statements to
authorities engaging in kickbacks or other prohibited activities, failure to
provide necessary information to regulatory authorities or to comply with
administrative orders, or violation of federal or state health care laws
applicable. Exclusion also can occur if the Company, or any of its officers,
directors, agents, managing employees or any person with a five percent or
greater share of ownership or control is convicted of certain criminal offenses
related to healthcare laws. Violation of these laws by the Company could result
in the Company being prohibited from contracting for Medicare or Medicaid
reimbursed services. Currently, the Company has no Managed Care contracts that
provide for it to receive Medicare or Medicaid reimbursements.

         ENVIRONMENTAL REGULATION. While the Company operated a clinical
laboratories, it was subject to certain laws relating to protection of the
environment and public safety and health, including federal and state laws
governing the containment, storage, decontamination and disposal of certain
defined medical wastes and hazardous wastes.

         SAFETY AND HEALTH REGULATION. Pursuant to the Federal Occupational
Safety and Health Act and the Michigan Occupational Safety and Health Act,
laboratories have a general duty to provide

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a workplace for employees that is safe from hazard. The United States
Occupational Safety and Health Administration ("OSHA") has issued rules relevant
to certain hazards that are found in the laboratory. In addition, OSHA has
promulgated regulations specifically applicable to occupational exposures to
blood borne pathogens in the workplace. These regulations currently require
evaluation of potential workplace exposures, employee training and development
of an exposure control plan, and include engineering and workplace controls,
workplace practices, and the offering of certain vaccinations to applicable
employees. The Company was previously subject to these requirements when it
operated clinical laboratories and could be subject to penalties in excess of
the value of the services rendered for any prior non-compliance or false
certification of compliance.

         COMPLIANCE PROGRAM. Because of evolving interpretations of regulations
and the national debate over health care, compliance with all Medicare, Medicaid
and other government-established rules and regulations has become a significant
concern throughout the health care industry. The Company has begun to implement
a compliance program. The objective of the program is to develop aggressive and
reliable compliance safeguards. Emphasis is placed on developing training
programs for personnel intended to assure the strict implementation and
observance of all applicable rules and regulations. Further, in-depth reviews of
procedures, personnel and facilities are conducted to assure regulatory
compliance throughout the Company. The Company's current compliance plan
appoints a compliance officer, provides for the establishment of a Compliance
Committee of the Board of Directors and requires periodic reporting of
compliance operations by management to the compliance officer who will report
directly to the Board of Directors. Such sharpened focus on regulatory standards
and procedures will continue to be a priority for the Company in the future.

         GENERAL. The laws and regulations affecting the health care industry
change frequently. There can be no assurance that changes to such laws and
regulations will not have a material adverse effect on the Company's business,
financial condition, including working capital, and results of operations. In
addition, legislation may be introduced in Congress or by one or more state
legislatures to reform certain facets of the health care delivery system. The
Company cannot predict whether any of these possible proposals will become law
or the effect such legislation would have on the Company. In addition, even
consideration of reform proposals can have an adverse effect on the Company's
Managed Care Programs because the Company believes health care plan sponsors are
less willing to consider changes in their plans when they think the government
will mandate the types of benefits that must be provided or the method of
delivery of benefits. The Company cannot predict which, if any, health care
reform proposals will be adopted or, if adopted, their effect on the Company's
business.

         The Company's failure to comply with any of the above-described laws,
regulations, restrictions or licenses could subject the Company to fines and
penalties, exclusion from Medicare and Medicaid, loss of licenses and approvals
and compliance orders or other remedies which could have a material adverse
effect on the Company's business, financial condition, including working
capital, and results of operations.



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EMPLOYEES

         As of December 31, 1998, the Company had approximately 83 employees,
approximately 81 of whom were full-time employees. In February , 1997 the
Company entered into an agreement with a professional employer organization
("PEO"), the result of which is that substantially all of the Company's
personnel are now leased from the PEO. None of the Company's personnel are
represented by a labor union or are subject to a collective bargaining agreement
and the Company has never experienced a work stoppage as a result of its
personnel relations.

RISK FACTORS

IN ADDITION TO THE OTHER INFORMATION IN THIS ANNUAL REPORT ON FORM
10-K, THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN
EVALUATING THE COMPANY AND ITS BUSINESS.

         RECENT LOSSES. The Company has reported a net loss for each of the last
three fiscal years principally due to its discontinued laboratory operations.
The Company has ceased all of its laboratory operations and so does not expect
continuing losses in the magnitude it has previously reported.

         The Company's independent certified public accountants' audit opinion
on the 1998 consolidated financial statements included an uncertainty paragraph
which stated, in part that the Company's financial results "...raise substantial
doubt about the Company's ability to continue as a going concern."

         The Company's continuing operations consist of its Managed Care
Programs. Although the Company expects to eventually become profitable, it
expects to continue to report net losses in the short term and there can be no
assurance that the Company will become profitable. The foregoing statement is a
"forward looking statement" within the meaning of the Securities Act of 1933.
The ability of the Company to become profitable is subject to a number of
uncertainties, including those described in the following "Risk Factors."

         DEFAULTS UNDER INDEBTEDNESS; UNCERTAINTIES INHERENT IN WORK OUT
STRATEGY. The Company has defaulted in the payment of interest on its 8.25%
Convertible Subordinated Debentures due February 1, 2006 (the "Debentures"). 
From time to time, the Company may be in default under its loan agreement with
its principal bank lender. In addition, the Company has defaulted in its payment
obligations to certain creditors of the Company's former clinical laboratory
division, Universal Diagnostics.

         The Company has proposed the Work Out Strategy to creditors of its
former laboratory operation and the holders of its outstanding Debentures
described under "Item 1 Business - Business Strategy." The proposed Work Out
Strategy provides for these creditors to receive payments of only a portion of
the amount due to them, payable over the next few years. There can be no
assurance that the Company will be able to negotiate an acceptable Work Out
Strategy with its creditors and holders of Debentures or that a sufficient
number of such creditors and holders of Debentures will accept the Work Out
Strategy to permit it to be successfully implemented. A number of these
creditors have initiated legal action or have threatened to do so if the amounts
due to them are not paid in full. The Company is also negotiating a
restructuring of the obligations due to its principal bank lender. If the Work
Out Strategy is not accepted by the Company's creditors and holders of
Debentures and

                                       12

<PAGE>   14



its principal lender, the Company may be forced to seek the protections offered
by the federal Bankruptcy Code.

         LOSS OF NASDAQ LISTING. The Company's Common Stock is expected to be
delisted from Nasdaq and is not expected to be traded on an established trading
market. It is not expected that the Company will satisfy the requirements of any
established trading market, including Nasdaq, for the listing of its Common
Stock in the near term. Accordingly, trading of the Common Stock will be more
difficult than in the past and trading information concerning the Common Stock
will not be as readily available as in the past. It is also possible that
certain institutional investors will no longer be able or willing to hold the
Common Stock and may attempt to sell the Common Stock in the open market or
otherwise. In addition, it will be difficult for the Company to attract market
makers and analysts to trade in or report on the Common Stock. Any of the
foregoing events could have a further negative impact on the public trading
prices of the Common Stock.

         FACTORS ADVERSELY AFFECTING THE COMPANY'S OPERATING CASH; RESTRICTIONS
ON CASH DISTRIBUTIONS FROM MANAGED CARE SUBSIDIARIES. There can be no assurance
that the Company will be able to generate operating cash flow or to receive cash
distributions from its Managed Care Subsidiaries (as defined below) to the
extent required to fund the Company's operating cash flow needs, including those
resulting from the winding up of the Company's discontinued operations and those
required to fund the Work Out Strategy. In the event that the Company is not
able to generate cash to the extent required to fund the Company's operations
from the sources described below, the Company will have to consider obtaining
additional financing or disposing of assets relating to its managed care
business. There can be no assurance that the Company will be able to derive
sufficient cash from such sources to support its continued operation.

         The Company conducts its managed care programs ("Managed Care
Programs") through subsidiaries ("Managed Care Subsidiaries") which are required
to be licensed in certain states, including the state of Michigan, and must
comply with applicable state regulations as a condition to continued licensure.
Such regulations include requirements relating to maintaining minimum levels of
net worth, working capital and cash reserves and limitations on distributions by
the Managed Care Subsidiaries to the Company. From time to time, the Managed
Care Subsidiaries may not be able to make cash distributions to the Company at
levels required to fully fund the Company's operating cash flow needs without
violating applicable regulatory requirements. The Company's Managed Care
Subsidiary operating in the State of Michigan (the "Michigan Managed Care
Subsidiary") is subject to regulation by the Michigan Insurance Bureau ("MIB").
The Company's Michigan Managed Care Subsidiary proposes to enter into an
agreement with the MIB agreeing not to engage in certain transactions which
result in the transfer of cash to affiliates without 30 days prior notice to the
MIB and provided that the MIB does not disapprove such transactions within such
30 day period. As a result, future cash transfers from the Michigan Managed Care
Subsidiary to the Company are likely to be limited to payments for services
rendered and dividends payable from the Michigan Managed Care Subsidiary's
earned surplus, which is more limited than cash transfers made in the past.


                                       13

<PAGE>   15



         Other factors that could adversely affect the Company's operating cash
include uncertainties inherent in the Company's efforts to successfully complete
the Work Out Strategy; intense competition in the managed care business,
particularly from larger, better capitalized companies; dependence of the
Company on third parties to provide services under its managed care programs;
uncertainties due to the fact that the Company's programs are generally
terminable by the customer on short notice and many of the Company's service
arrangements are terminable on short notice; periodic disputes between the
Company and its primary clinical laboratory provider, LabCorp, and related
threats by LabCorp to terminate the existing Laboratory Services Agreement for
alleged breaches by the Company; the impact of the highly regulated nature of
the managed care business on the Company's continuing operations; the cost and
the ability of the Company to continue to satisfy increasing regulatory
requirements relating to the managed care business; the long sales cycle
involved in the managed care business; the dependence of the Company on a
limited number of large customers for its revenue and growth, most of whom are
involved in the automotive industry; the ability of the Company to develop new
managed care products; the level of interest that existing and potential new
customers have in managed care products offered by the Company; the ability of
the Company to identify and satisfy market needs; potential increases in
operating costs resulting from the failure of the Company's principal suppliers
to become year 2000 compliant; and economic conditions in the health care and
automotive industries in general.

         COMPETITION. With respect to its Managed Care Programs, the Company
competes on the basis of price, service and its experience in providing this
type of health care program. The Company believes its experience, reputation and
long-standing relationships offer it a competitive advantage with respect to
maintaining its existing Managed Care Programs and establishing new Managed Care
Programs. The Company is experiencing increased competition with regard to its
Managed Care Programs from insurance companies, HMOs, PPOs, third-party
administrators and other managed health care companies which offer similar
programs. In particular, the Company is facing aggressive pricing of these
programs by its principal competitors. There can be no assurance that
competition in existing or new markets will not have a material adverse effect
on the Company's business, financial condition, including working capital, and
results of operations.

         DEPENDENCE ON MANAGED CARE PROGRAMS. The Company's Managed Care
Programs represent the source of all of the Company's ongoing net revenues.
Under the Managed Care Programs, in exchange for a capitated rate, the Company
is required to provide, or to coordinate the provision of, substantially all of
the services specified in the Managed Care Program contract to all Covered
Persons. Depending on the Managed Care Program involved, those services
currently include any one or more of the following ordered by physicians for
Covered Persons: non-hospital clinical laboratory tests, durable medical
equipment, respiratory therapy and orthotic and prosthetic appliances (devices
supporting joints or muscles or artificially replacing body parts) and
outpatient diagnostic imaging services. Therefore, the Company's revenues under
these programs are fixed and its costs depend on the extent to which its
services are used by Covered Persons. There can be no assurance that higher than
anticipated utilization rates over an extended period of time will not cause the
expenses associated with the Managed Care Programs to exceed net revenues, which
would have a material adverse effect on the Company's business, financial
condition, including working capital, and results of operations. The fixed
monthly payments established by the Company generally are guaranteed by the
Company for two years, while the contracts governing the Managed Care

                                       14

<PAGE>   16
 
Programs are generally renewable on an annual basis and are terminable upon 30
or 60 days written notice by the customer. There can be no assurance that the
Company will not lose a significant Managed Care Program, which could have a
material adverse effect on the Company's business, financial condition,
including working capital, and results of operations.

         DEPENDENCE ON MANAGED CARE CONTRACTORS. For the Company's laboratory
Managed Care Programs, the Company contracts on a discounted fee-for-service
basis with independent clinical laboratories. LabCorp is the Company's Preferred
Laboratory Provider pursuant to a Laboratory Services Agreement with a five year
term ending August 3, 2003.  LabCorp has claimed that the Company has breached
the Laboratory Services Agreement by contracting with certain other laboratory
providers and by failing to make payments in a timely fashion in accordance with
the terms of the Agreement and has terminated the agreement effective March 30,
1999. The Company does not believe it has breached the Laboratory Services
Agreement and has so advised LabCorp. In addition, the Company believes that
LabCorp has breached the Laboratory Services Agreement. Discussions between the
Company and LabCorp regarding these matters are ongoing. LabCorp is unwilling to
perform services under this contract after April 13, 1999, requiring the
Company to locate another national clinical laboratory or a group of smaller
laboratories throughout the country to provide such services on short notice
and, potentially, at a significantly greater cost. While the Company believes 
it can replace LabCorp's services without a significant increase in cost, there
can be no assurance to that effect. The foregoing statement is a "forward
looking statement" within the meaning of the Securities Act of 1933. The ability
of the Company to replace the services of its principal laboratory provider
involves a number of uncertainties, including, but not limited to the impact
that the Company's current financial difficulties will have on the willingness
of other laboratory providers, particularly the larger national or regional
providers, to do business with the Company, the possibility that such providers
will charge increased fees or require up-front payments or deposits or other
financial accommodations as a condition to doing business with the Company and
the willingness of the Company's customers to accept services from another
laboratory or group of laboratories. In addition, there are a limited number of
national and regional laboratories. If more than one of these laboratories
refused to do business with the Company, the cost of providing services could
increase significantly and the access of the Company's Covered Persons to
required services could decrease significantly. As a result, the termination by
LabCorp of its contract may have a material adverse effect on the Company's
business, financial condition, including working capital, and results of
operations.

         The Company also contracts with other clinical laboratories. These
contracts are generally terminable on short notice. Because the Company does not
have long-term agreements with its other clinical laboratory providers, it may
be subject to increases in prices to provide services under these agreements,
which may adversely affect the Company's profitability.





                                       15

<PAGE>   17



         All services under the Company's home medical services ("HMS") and
diagnostic imaging Managed Care Programs are contracted to a small number of
providers. If a contractor did not or was not able to provide services, the
Company would be obligated to locate other providers to do so, potentially at a
significantly greater cost. The refusal of one of these contractors to
participate in future HMS or imaging programs could have a material adverse
effect on the Company's ability to offer these programs and on the Company's
costs of providing these programs. Although certain providers under the HMS
Programs provided services, others are paid on a discounted fee for service
basis. Because the Company does not have long-term agreements with these
providers, it may be subject to increases in prices to provide services, which
may adversely affect the Company's profitability.

         The Company is required to indemnify Ford Motor Company ("Ford") for
any expenses incurred by Ford in replacing the Ford HMS Program in the event
that Ford cancels such program due to the Company's or its contractor's
non-performance. The current providers under the HMS programs have not provided
similar indemnification to the Company. The Company's obligations under the Ford
HMS Program are secured by a $1.8 million letter of credit.

         DEPENDENCE ON KEY MANAGED CARE CUSTOMERS. Although many of the
Company's new Managed Care Programs are with groups not affiliated with the
automobile industry, a majority of the Company's Managed Care Program revenues
have been from contracts with companies and unions affiliated with the
automobile industry. A decrease in the number of employees and retirees under
these programs, downsizing in the automobile industry or an adverse change in
the Company's relationships with the employers and unions with whom it has
Managed Care Programs could have a material adverse effect on the Company's
business, financial condition, including working capital, and results of
operations. The loss of either one of the Company's two principal automotive
customers could have a material adverse effect on the Company's business,
financial condition, including working capital, and results of operations. In
addition, because of the relatively low costs of the services provided by the
Company in its Managed Care Programs (relative to total health care costs), the
market for the Company's Managed Care Programs is limited to sponsors of
significant size who are willing to administer the health care services offered
by the Company separately from their other health care benefits.

         DEPENDENCE UPON SENIOR MANAGEMENT. The Company's success depends upon
the continued services of certain members of its senior management. Competition
among managed care companies for qualified personnel is intense. The loss of the
services of certain members of senior management for any reason may have a
material adverse effect on the Company's business, financial condition,
including working capital, and results of operations.

         POSSIBLE ADVERSE EFFECTS OF GOVERNMENT REGULATION. The Company must
comply with various federal and state laws, regulations and restrictions
governing its Managed Care Programs, business practices such as referrals from
health care providers, and reimbursement for services.

         The Company's third-party payors relating to its previous clinical
laboratory business, including Medicare and Medicaid, from time to time conduct
audits and reviews of the Company's activities to determine compliance with
these laws, regulations and restrictions. In recent years,


                                       16

<PAGE>   18



these third-party and governmental payors have significantly expanded their
efforts to detect instances of non-compliance and related enforcement
activities. The Company has from time to time experienced compliance reviews,
including reviews of its billing practices, by its third-party payors and, from
time to time, has been required to return monies paid to it by such payors. The
Company has not yet received a final determination notice or decision letter
relating to an audit conducted by one of its largest third-party payors. Failure
to comply with these laws, regulations or restrictions could result in the
imposition of significant fines, civil and criminal penalties, third-party
liability, exclusion from Medicare and Medicaid, any of which could have a
material adverse effect on the Company's business, financial condition,
including working capital, and results of operations.

         The laws and regulations affecting the health care industry and third
party reimbursement change frequently. There can be no assurance that changes to
such laws and regulations will not have a material adverse effect on the
Company's business, financial condition, including working capital, and results
of operations. In addition, legislation may be introduced by Congress or by one
or more state legislators to reform certain facets of the health care delivery
system. The Company cannot predict whether any of these possible proposals will
become law or the effect such legislation would have on the Company. In
addition, even consideration of reform proposals can have an adverse effect on
the Company's Managed Care Programs because the Company believes health care
plan sponsors are less willing to consider changes in their plans when they
think the government will mandate the types of benefits that must be provided or
the method of delivery of benefits. The Company cannot predict which, if any,
health care reform proposals will be adopted or, if adopted, their effect on the
Company's business.

         LITIGATION AND LIMITS OF LIABILITY INSURANCE COVERAGE. The Company may
be subject to legal actions arising out of the performance of its laboratory
testing services prior to the Asset Sale. Damages assessed in connection with,
and the cost of defending, any legal actions could be substantial. The Company
maintained professional liability insurance and customary liability insurance
coverage during periods that the Company rendered laboratory services in types
and amounts that management believes are adequate in view of the risks
associated with the Company's operations. There can be no assurance that this
coverage will be sufficient. Furthermore, there can be no assurance that the
Company will have resources sufficient to satisfy any liability or litigation
expenses that may result from any uninsured or underinsured claims.

         CONTROL BY EXISTING SHAREHOLDERS. The Company's directors, executive
officers and their affiliates in the aggregate beneficially own a majority of
the outstanding shares of Common Stock. As a result, these shareholders as a
group are able, in effect, to determine the outcome of corporate actions
requiring shareholder approval, including the election of directors, and
otherwise control the business of the Company.






                                       17

<PAGE>   19



ITEM 2.  PROPERTIES

         On or about April 1, 1999, the Company will move its managed care
operations to a 16,000 square foot leased facility located in Southfield,
Michigan. The Company's lease is for a five-year term and is cancelable earlier
at the option of the landlord at the end of the first or third years of the
lease upon six months prior written notice.

         The Company has terminated its lease for its former 94,000 square foot
laboratory, headquarters and administrative offices located in Southfield,
Michigan effective March 30, 1999.

         Borrowings under the Company's credit facility with its principal
lender are collateralized by substantially all of the Company's assets, except
for assets of the Company's Managed Care subsidiaries.

         The Company's obligation to LabCorp for the Co-Marketing Termination
Fee is secured by a security interest in all of the Company's assets and the
assets of its wholly-owned subsidiary Universal Healthcare of Delaware, Inc.
("Universal Delaware"), other than the capital stock of certain regulated
companies owned by Universal Delaware. LabCorp has agreed to subordinate the
Company's obligation to LabCorp for the Co-Marketing Termination Fee and
LabCorp's security interest in certain assets of the Company to certain debt of
the Company and the assets securing such debt. See "Item 1. Business - Sales and
Marketing."

ITEM 3.  LEGAL PROCEEDINGS

         The Company was a defendant in a suit filed by Ivonyx , Inc. against
Universal Standard Healthcare of Michigan, Inc., a subsidiary of the Company
(the "Michigan Managed Care Subsidiary"), in Oakland County Circuit Court,
Michigan on February 19, 1997, and amended March 13, 1998. In January, 1999, the
Company settled the suit with Ivonyx, with the Company paying Ivonyx $35,000.
Ivonyx was a subcontractor under the Company's HMS Program with Ford Motor
Company, providing respiratory therapy, home infusion services and orthotic and
prosthetic appliances ("O & P") pursuant to a Primary Provider Agreement with
the Michigan Managed Care Subsidiary. The suit alleged that the Michigan Managed
Care Subsidiary breached the Primary Provider Agreement by not paying Ivonyx
amounts it alleged were due under such agreement for services rendered by Ivonyx
and included claims for quantum meruit and unjust enrichment. The Michigan
Managed Care Subsidiary filed a counterclaim against Ivonyx claiming Ivonyx
breached the Primary Provider Agreement by failing to enter into a subcontract
with an O & P provider and failing to pay amounts owing to the Michigan Managed
Care Subsidiary. The Primary Provider Agreement with Ivonyx terminated in
February 1998.

         The Company is a defendant in a suit filed by FS Laboratory in Oakland
County Circuit Court, Michigan alleging that the Company owed FS Laboratory an
additional $500,000 in contingent payments in connection with the March 1994
acquisition by the Company of the assets of FS Laboratory. In the fall of 1998,
a judgment for $1.1 million (including accrued interest) was rendered against
the Company in favor of FS Laboratory. The Company has appealed the case to the
Michigan Court of Appeal and intends to vigorously pursue this appeal.


                                       18

<PAGE>   20



         The Company is a defendant in a suit filed by Huston Technology,
Inc.("Huston"), in Oakland County Circuit Court, Michigan on February 23, 1999.
Huston alleges that the Company failed to give Huston notice of the availability
of additional space in the Company's former headquarters building in breach of
Huston's sublease and allow Huston the opportunity to lease the space itself or
find a tenant for the space. Huston also alleges that the Company failed to pay
Huston a commission for subleasing space on the first and second floor of the
headquarters. Finally, Huston alleges that the Company failed to allow Huston to
supply it with goods and services as was contemplated by an amendment to the
Huston's sublease. Huston alleges damages in excess of $25,000. The Company
intends to vigorously defend this matter.


ITEM  4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
         Not applicable.





                                       19

<PAGE>   21



PART II


ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER 
         MATTERS

         The Company's Common Stock was traded on The Nasdaq National Market
under the symbol UHCI during 1997 and 1998. The Company expects the Common Stock
to be delisted from the Nasdaq National Market and does not expect the Common
Stock to be traded on an established trading market. The following table sets
forth for the periods indicated the high and low sales prices for the Common
Stock as reported on The Nasdaq National Market.

<TABLE>
<CAPTION>

1997                    High                              Low
                        ----                              --- 
<S>                     <C>                               <C>     
First Quarter           4 3/8                             2 7/8
Second Quarter          4 1/8                             2 3/4
Third Quarter           4                                 2 3/4
Fourth Quarter          3 3/4                             2

<CAPTION>

1998
<S>                     <C>                               <C>     
First Quarter           2 7/8                             1 1/2
Second Quarter          2 1/2                             1 1/2
Third Quarter           3 1/4                              15/16
Fourth Quarter          1 1/2                               5/8

</TABLE>

         As of March 26, 1999, there were approximately 129 record holders of
the Common Stock based upon the records of the Company's transfer agent.

         The Company did not pay any cash dividends on the Common Stock in 1997
or 1998, and it does not intend to pay any cash dividends on the Common Stock in
the foreseeable future. In addition, certain covenants in the Company's credit
facility and a certain Stock Purchase Agreement with LabCorp restrict the
Company's ability to pay cash dividends. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." The Company currently anticipates that it will retain all of
its earnings for use in the operation and expansion of its business.

ITEM 6.  SELECTED FINANCIAL DATA

          The selected financial information set forth below is derived from the
Company's audited consolidated financial statements and should be read in
conjunction with "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and with the consolidated financial
statements and notes thereto included elsewhere herein.




                                       20

<PAGE>   22

<TABLE>
<CAPTION>

                             YEAR ENDED DECEMBER 31
                                                        1998           1997           1996          1995           1994
                                                       -------        -------        -------       -------        -------
                                                                 (In thousands, except per share data)
<S>                                                    <C>            <C>            <C>           <C>            <C>    
RESULTS OF OPERATIONS DATA

Total Net Managed Care Revenue                         $25,538        $18,764        $17,522       $18,406        $15,451
                                                       -------        -------        -------       -------        -------
Income (loss) from continuing
operations before income tax expense                   (1,243)           (554)           882           997            765
                                                       -------        -------        -------       -------        -------
                                     

Income (loss) from continuing                          $ (0.23)       $ (0.10)       $  0.08       $  0.16        $  0.12
operations per share (basic and diluted)               -------        -------        -------       -------        -------

                                         

BALANCE SHEET DATA (1): (AT END OF
PERIOD)

Total assets                                             9,525         40,175         57,072        64,566         65,816
                                                       -------        -------        -------       -------        -------
Long-term obligations                                    5,077         20,108         19,013        12,443         13,669
(including redeemable stock)                           -------        -------        -------       -------        -------


OTHER DATA:

EBITDA(2)                                              $  (272)       $   253        $ 1,631       $ 2,375        $ 1,993
                                                       -------        -------        -------       -------        -------
EBITDA, excluding special charge (2)                   $  (272)       $ 1,543        $ 1,631       $ 2,375        $ 1,993
                                                       -------        -------        -------       -------        -------
EBITDA, excluding special charge and                   
General Motors contract (3)                            $ 1,002        $ 2,069        $ 1,631       $ 2,375        $ 1,993
                                                       -------        -------        -------       -------        -------

Net cash provided by operating                         $(4,132)           469            878         4,267          3,992
activities(4)                                          -------        -------        -------       -------        -------


Net cash used in investing activities                  $ 5,137        ($1,302)       ($1,604)      ($1,797)       ($1,644)
                                                       -------        -------       --------       -------        -------
Net cash provided by (used in) financing               
activities                                             $(1,701)         ($142)        $1,954       ($2,761)       ($2,156)
                                                       -------        -------       --------       -------        -------
</TABLE>

(1) The Company has paid no dividends on Common Stock during the periods
presented.






                                       21
<PAGE>   23



(2) EBITDA represents earnings (losses) before interest, taxes, depreciation,
amortization, other (income) expense, extraordinary item and acquisition expense
but after restructuring and special charge. EBITDA excluding special charge
represents earnings (losses) before interest, taxes, depreciation, amortization,
other (income) expense, extraordinary item, acquisition expense and special
charges of $1.3 million in 1997. The Company and managed care industry analysts
use EBITDA as a method of measuring and comparing the financial performance of
managed care companies, many of which were formed by combining with and
acquiring other managed care companies, because it eliminates the effects of
goodwill amortization and acquisition expenses on net income. EBITDA excluding
special charge is included in the table to permit a year to year comparison of
EBITDA data exclusive of those charges not expected to be recurring. Neither
EBITDA nor EBITDA excluding special charge should be considered as an
alternative to net income as an indicator of the Company's operating performance
or to cash flows as a measure of the Company's liquidity.

(3) EBITDA excluding special charge and General Motors contract represents
earnings (loss) before interest, taxes, depreciation, amortization, other
(income) expense, extraordinary item, acquisition expense, special charges of
$1.3 million in 1997 and losses on the General Motors administrative services
contract. EBITDA for 1997 was reduced by $526,000 in startup costs and
programming costs associated with the General Motors administrative services
contract. EBITDA for 1998 was reduced by a $1.3 million loss on the General
Motors contract. The General Motors contract was structured as an administrative
services contract and was not profitable as structured. The Company's typical
managed care program is capitated arrangement, which provides for claim expense
controls and utilization reduction.

(4) Net cash provided by operating activities is determined in accordance with
generally accepted accounting principles and is included in the Company's
Consolidated Statements of Cash Flows. The amount for each period is determined
by adjusting net income for the period for non-cash expense items, including
restructuring and special charge, depreciation and amortization, extraordinary
item and deferred income taxes, and for increases and decreases in asset and
liability items other than those relating to financing and investing activities.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

         The following discussion and analysis of financial results covers the
three years ended December 31, 1998. The following table sets forth, for the
periods indicated, the percentage of net revenue represented by items in the
statements of operations.



                                       22

<PAGE>   24
<TABLE>
<CAPTION>

                                                                                         YEAR END DECEMBER 31
                                                                                      1998         1997          1996
                                                                                     ------       ------        ------
<S>                                                                                  <C>          <C>           <C> 
NET MANAGED CARE REVENUE                                                                100%         100%          100%
                                                                                     ------       ------        ------

OPERATING EXPENSES:
         CLAIMS AND PROCESSING                                                           86           68            70
                                                                                                                          
         SELLING, GENERAL AND ADMINISTRATIVE                                             15           24            21
                                                                                                                            
         SPECIAL CHARGES                                                                  0            7             0
                                                                                                                          
         DEPRECIATION                                                                     2            2             2
                                                                                                                       
         AMORTIZATION                                                                     2            2             2
                                                                                     ------       ------        ------
         TOTAL OPERATING EXPENSES                                                      (105)        (103)           95
                                                                                     ------       ------        ------

OPERATING INCOME (LOSS)                                                                  (5)          (3)            5
                                                                                                                       
INTEREST EXPENSE                                                                          1            1             1
                                                                                                                        
OTHER INCOME, NET                                                                         0            0             0
                                                                                     ------       ------        ------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAX EXPENSE                       (6)          (4)            4
                                     
INCOME TAX EXPENSE                                                                        0            0             2
                                                                                     ------       ------        ------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS                                             (6)          (4)            3
                                                                                                                       
LOSS ON DISPOSAL OF LABORATORY DIVISION                                                 (55)        (107)          (47)
                                                                                                                         
LOSS FROM OPERATIONS OF LABORATORY DIVISION, NET OF APPLICABLE                          (61)           0             0
INCOME TAX BENEFIT                                                                   ------       ------        ------

NET LOSS                                                                              (122)%        (110)%         (44)%
                                                                                     ======       ======        ======

EBITDA*                                                                                (1.1%)        1.4%          9.3%
                 
EBITDA EXCLUDING SPECIAL CHARGE*                                                       (1.1%)        8.2%          9.3%
                                        
EBITDA EXCLUDING SPECIAL CHARGE AND GENERAL MOTORS                                      5.5%        11.0%          9.3%
                                                       
CONTRACT**
NET CASH PROVIDED BY OPERATING ACTIVITIES***                                          (16.2%)        2.5%          5.0%
</TABLE>
                                                  



                                       23
<PAGE>   25



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

*        EBITDA represents earnings (losses) from continuing operations before
         interest, taxes, depreciation, amortization, other (income) expense and
         extraordinary item, but after restructuring and special charge. EBITDA
         excluding special charge represents earnings (losses) before interest,
         taxes, depreciation, amortization, other (income) from continuing
         operations expense, extraordinary item and special charge. The Company
         and laboratory industry analysts use EBITDA as a method of measuring
         and comparing the financial performance of clinical laboratory
         companies, many of which were formed by combining with and acquiring
         other clinical laboratory companies, because it eliminates the effects
         of goodwill amortization and acquisition expenses on net income(loss).
         EBITDA excluding special charge is included in the table to permit a
         year to year comparison of EBITDA data exclusive of those charges not
         expected to be recurring. Neither EBITDA nor EBITDA excluding special
         charge should be considered as an alternative to net income as an
         indicator of the Company's operating performance or to cash flows as a
         measure of the Company's liquidity.


**       EBITDA excluding special charge and General Motors contract represents
         earnings (loss) from continuing operations before interest, taxes,
         depreciation, amortization, other (income) expense, extraordinary item,
         acquisition expense, special charges of $1.3 million in 1997 and costs
         and losses on the General Motors administrative services contract.
         EBITDA for 1997 was reduced by $526,000 in startup costs and
         programming costs associated with the General Motors administrative
         services contract. EBITDA for 1998 was reduced by a $1.3 million loss
         on the General Motors contract. The General Motors contract was
         structured as an administrative services contract and was not
         profitable as structured. The Company's typical managed care program is
         a capitated arrangement which provides for claim controls and capitated
         contracts which provides for claim expense controls and utilization
         reduction.

***      Net cash provided by operating activities is determined in accordance
         with generally accepted accounting principles and is included in the
         Company's Consolidated Statements of Cash Flows. The amount for each
         period is determined by adjusting net income for the period for
         non-cash expense items, including restructuring and special charge,
         depreciation and amortization, extraordinary item and deferred income
         taxes, and for increases and decreases in asset and liability items
         other than those relating to financing and investing activities.





                                       24
<PAGE>   26




         NET REVENUE. The Company's net revenue from continuing operations is
generated from managed care laboratory programs with major employers, union and
government benefit plans, and large purchasing organizations as a means of
controlling health care costs. In the Managed Care Programs, for a fixed monthly
payment, the Company is the designated provider of substantially all
non-hospital clinical laboratory testing which may be ordered by a Program
Member's physician of choice, home medical services (including durable medical
equipment, respiration therapy, infusion, orthotic and prosthetic appliances and
related supplies), and outpatient diagnostic imaging services.

         The Company's managed care revenues are not affected by seasonal
trends. Managed Care Programs with United Auto Workers ("UAW")/Ford Motor
Company, UAW/Chrysler Corporation ("Chrysler") and General Motors Corporation
("GM"), collectively, accounted for 61.6%, 73.2%, and 74% of managed care
revenue for 1996, 1997, and 1998, respectively. The increase in 1997 was due to
an expansion of Ford and Chrysler programs nationwide. The increase in 1998 was
due primarily to the GM Administrative Services Contract.

         Total net revenue from continuing operations totaled $17.5 million,
$18.8 million and $25.5 million for fiscal years 1996 and 1997, and 1998,
respectively. The $1.3 million revenue increase in 1997 is primarily due to the
expansion of existing programs on a national basis and new product line
revenues. The $6.7 million revenue increase in 1998 was due to the managed care
revenue from the administrative services contract with General Motors
Corporation which went into effect January 1, 1998. As previously announced, the
administrative services contract with GM was terminated on October 31, 1998.
Because of the losses incurred in start up costs, programming costs and
operating losses on this contract, totaling $1.3 million in 1998, its
termination is expected to result in the Company returning to historical
operating levels.

         CLAIMS AND PROCESSING EXPENSES. Claims and processing expenses were
$12.3 million, $12.8 million, and $22 million for fiscal years 1996, 1997 and
1998, respectively. As a percentage of net revenue, claims and processing
expenses decreased from 70% in 1996 to 68% in 1997 and increased to 86% in 1998.
These decreases in 1997 are primarily due to improved network compliance. These
increases in 1998 are primarily due to the $8.5 million in claims and processing
expenses associated with GM contract described above. The increases in 1998 were
also affected by costs associated with the introduction of the Company's
outpatient diagnostic imaging program and the conversion to a new state of the
art, year 2000 compliant, managed care computer system.

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for 1996 were $3.6 million, compared to $4.4 million for
1997, an increase of $0.8 million or 22%. Selling, general and administrative
expenses for 1998 were $3.8 million, a decrease of $0.6 million or 14%. The
increase in 1997 is principally due to additional sales and marketing and
customer service representatives. The decrease for 1998 reflects cost reduction
efforts in general and administrative expenses. As a percentage of net revenue,
selling, general and administrative expenses decreased from 21% for 1996 to 24%
for 1997 to 15% for 1998. The increase in 1997 is




                                       25

<PAGE>   27



primarily due to additional sales and marketing and customer service
representatives. These decreases in 1998 are primarily due to the Company's
increased net revenue from the GM contract.

         EBITDA. EBITDA was $1.6 million, or 9.3% of net revenue for 1996.
Earnings from continuing operations before interest, taxes, depreciation and
amortization ("EBITDA") was $253,000, or 1.4% of net revenue for 1997. EBITDA
excluding special charge and the GM contract was $2.1 million, or 11% of net
revenue for 1997. EBITDA was $(272,000) or (1.1)% of net revenue for 1998.
EBITDA excluding special charge and the GM contract was $1.0 million or 5.5% of
net revenue for 1998. The Company attributes the 1997 increases in EBITDA
excluding special charge and GM contract primarily to improved network
compliance. The Company attributes the 1998 decreases principally to the lower
profit margins associated with the GM contract and the costs of establishing new
programs and contracts, particularly the GM contract. The 1998 decreases in
EBITDA excluding special charge and GM contract are primarily due to costs
associated with the introduction of the Company's outpatient diagnostic imaging
program and the conversion to a new state of the art managed care computer
system.

         DEPRECIATION AND AMORTIZATION. Depreciation expenses increased in 1997
and 1998 due to new computer systems, including the Company's new managed care
claims processing system. Amortization expense, which relates primarily to the
Company's managed care customer list, remained fairly constant during 1996, 1997
and 1998.

         INTEREST EXPENSE. Interest expenses were $179,000, $196,000 and
$249,000 in 1996, 1997 and 1998, respectively. The increase in interest expense
in 1997 and 1998 reflects increased borrowings.

         INCOME TAXES. The effective income tax rates were (15.9)%, 0%, and 0%
for 1996, 1997, and 1998, respectively. The effective tax rate is less than the
statutory rate in 1996 because, under applicable accounting rules, $2.1 million
of tax benefits relating to the 1996 loss could not be recorded in 1996. These
losses are treated as net operating loss carry forwards for accounting purposes
and may be used to offset future profits of the Company. In 1996, the Company
established a valuation allowance against the net deferred tax assets which
reduced deferred tax assets on the Company's consolidated balance sheet to zero.
The effective tax rate is 0% in 1997 and 1998 because, under applicable
accounting rules, the 1997 and 1998 losses could not be recorded. The 1997 and
1998 losses are treated as net operating loss carryforwards for accounting
purposes and may be used to offset future profits of the Company. See "Item 8.
Note 14 to Notes to Consolidated Financial Statements - Income Taxes and Loss
Carryforwards", for an explanation of the potential future tax benefit.

         DISCONTINUED OPERATIONS: LOSS FROM OPERATIONS OF LABORATORY DIVISION.
As a result of the Asset Sale and the Company's decision to divest its clinical
laboratory operations, these operations have been treated as discontinued
operations.

         The Company's net revenue from discontinued operations in 1997 was
$36.9 million, a decrease of $3.2 million or 7.8% from 1996. Net revenue from
discontinued operations was down primarily due to a 13% decline in patient
visits. This decline in patient visits is principally due to


                                       26

<PAGE>   28



the impact on the Company of previously announced reductions in unprofitable
accounts, the industry wide reductions in patient testing orders and attrition.
The decline in net revenue from discontinued operations is due to the patient
visit volume decrease offset by increases in revenue per patient visit resulting
from changes in payor and test mixes and reduction of unprofitable accounts.

         Net revenue from discontinued operations was $20.0 million in 1998,
compared to $36.9 million in 1997, a decrease of $16.9 million or 45.8%. These
declines are principally due to the discontinuation of laboratory operations on
August 4, 1998 and to a lesser extent a decline in fee-for-service patient
visits.

         OPERATING EXPENSES FROM DISCONTINUED OPERATIONS. Operating expenses
from discontinued operations were $43.2 million as compared to $38.3 million in
1997, a decrease of $4.9 million, or 11.3% from 1996. This decrease was
primarily the result of fewer patient visits.

         Operating expenses from discontinued operations was $32.5 million in
1998, a decrease of $5.8 million or 15.1% from 1997. These declines are
principally due to the discontinuation of the laboratory operations.

         Interest expense from discontinued operations was $1.6 million, $1.7
million and $1.6 million in 1996, 1997 and 1998, respectively. The increase in
1997 is due to increased borrowings. The decrease in 1998 is due to the
repayment of debt from the proceeds to the Asset Sale, partially offset by
increased borrowings prior to the Asset Sale.

         The Company does not expect revenues from discontinued operations 
in future periods. Costs associated with the discontinued laboratory
operations, including additional real property and equipment lease payments have
been estimated in the Company's 1998 financial statements and reserved
accordingly. However, future periods' financial statements may reflect
adjustments to these items which have been estimated at December 31, 1998.

         DISCONTINUED OPERATIONS: LOSS ON DISPOSAL OF LABORATORY DIVISION. The
loss on disposal of laboratory division was $15.6 million. This amount includes
the loss on the assets sold to LabCorp, the subsequent loss recorded on the
write-down of assets (goodwill, property and equipment), related to the
discontinued operations, lease termination costs, employee severance and other
expenses incurred during the phase-out period between August and December 1998.
As of December 31, 1998, assets of the Company's discontinued clinical
laboratory operations consisted solely of accounts receivable. See "Item 8. Note
3 and Note 7 to Notes to Consolidated Financial Statements."

         SPECIAL CHARGES. The Company previously recorded special charges of
approximately $18.8 million and $5.3 million in 1997 and 1996, respectively. The
1997 special charge included an impairment to intangible assets (primarily
goodwill) of approximately $14 million, with the remaining amount of the charge
related to various re-engineering, restructuring and non-recurring items. The
1996 special charge related primarily to re-engineering, facility and
employee-related expenses.




                                       27

<PAGE>   29



         With the exception of the $1.3 million indemnification amount in 1997
described below, the 1997 and 1996 special charge amounts have been included in
the loss from operations of the laboratory division on the accompanying
statements of operations.

         During 1997, the Company recorded a special charge of $1.3 million
related to indemnification made by the Company to shareholders of a previously
acquired company that involved a settlement prior years' tax matters. This
amount (which included interest) is reflected in the 1997 statement of
operations, as part of the Company's continuing operations.

LIQUIDITY AND CAPITAL RESOURCES

         The Company has incurred net losses of $31.2 million, $20.7 million,
and $7.8 million in 1998, 1997 and 1996, respectively. Additionally, the Company
has negative working capital of $25.9 million and a capital deficit of $23.6
million at December 31, 1998. The Company's laboratory services division was
responsible for losses of approximately $29.7 million, $20.0 million and $8.2
million in 1998, 1997, and 1996, respectively. After attempting to restructure
and thereby improve laboratory services operations during the past several
years, the Company decided to sell that division during 1998.

         On August 4, 1998, the Company received proceeds from the Asset Sale of
$9.0 million and $4.25 million in proceeds from the sale of Common Stock and a
transition period six-month rental payment of $1.8 million. These proceeds were
used to pay $11.4 million in bank debt, as well as closing costs and accounts
payable.

         The Company has recorded a liability at December 31, 1998 of
approximately $20.6 million related to laboratory-related liabilities and other
obligations the Company is attempting to restructure, including (a) the $11.6
million in outstanding Debentures, (b) costs related to commitments under lease
agreements and (c) various other obligations incurred by the clinical laboratory
division.

         The Company's working capital ratio decreased to .08 to 1 at December
31, 1998 from .8 to 1 at December 31, 1997. These decreases resulted primarily
from the losses associated with the Asset Sale and a decline in the liquidation
value of assets associated with the discontinued laboratory division. The
remainder of the working capital deficit results principally from the use by the
Company of the operating cash flows from its managed care subsidiaries to fund
the losses associated with the discontinued clinical laboratory operations. The
Company is not currently using managed care operating cash flows to pay
liabilities of the discontinued laboratory operations.

         Included in cash and cash equivalents at December 31, 1998 is $500,000
in cash deposits of one of the Company's wholly owned managed care subsidiaries,
which is generally permitted to make distributions to the Company only out of
the subsidiary's earned surplus and to the extent certain other regulatory
requirements are satisfied.



                                       28

<PAGE>   30



         At December 31, 1998, the Company had a credit facility consisting of a
$1.1 million litigation letter of credit, $2.4 million of managed care letters
of credit, a $700,000 capital lease and a new revolving credit facility in the
amount of $983,000. In January 1999, the bank terminated the Company's right to
borrow additional amounts under the new revolving credit facility and has
required the Company to use the proceeds from the collection of its laboratory
accounts receivables and the sale of its laboratory assets to pay amounts due
under such revolving credit facility. At March 25, 1999, the outstanding balance
of such revolving credit facility was $583,000. The interest rate on the
revolving line is at 1% above the bank's prime rate. The Company is required to
deposit the proceeds from all future sales of assets in a cash collateral
account with the bank, up to the amount due to the bank under the credit
facility.

         The credit facility is collateralized by substantially all of the
assets of the Company and its subsidiaries (including the stock of the Company's
Managed Care Subsidiaries), except for the assets of the Company's Managed Care
Subsidiaries.

         The Company is currently negotiating with its principal bank lender to
restructure its existing credit facility. The proposed restructuring
contemplates the repayment of the outstanding indebtedness and cash
collateralization of its other bank obligations over time through the sale of
laboratory assets, collection of accounts receivable and from operating cash
flow of the Company.

         The Company has defaulted on the February 1, 1999 payment of interest
on its Debentures. From time to time, the Company may be in default under its
loan agreement with its principal bank lender. In addition, the Company has
defaulted in its payment obligations to certain creditors of the Company's
former clinical laboratory division, Universal Diagnostics.

         The Company has proposed the Work Out Strategy to creditors of its
former laboratory operation and the holders of its outstanding Debentures. The
proposed Work Out Strategy provides for these creditors to receive payments of
only a portion of the amount due to them, payable over the next few years from
the Company's operating cash flow. The holders of the Debentures have been
offered a similar arrangement and also have the right under the terms of the
Debentures to convert the Debentures and accrued interest into Common Stock at a
conversion price of $4.375 per share. There can be no assurance that the Company
will be able to negotiate an acceptable Work Out Strategy with its creditors and
holders of Debentures or that a sufficient number of such creditors and holders
of Debentures will accept the Work Out Strategy to permit it to be successfully
implemented. A number of these creditors have initiated legal action or have
threatened to do so if the amounts due to them are not paid in full.





                                       29
<PAGE>   31



         If the Work Out Strategy is not accepted by the Company's creditors,
holders of Debentures and the Company's principal lender, the Company may be
forced to seek the protections offered by the federal Bankruptcy Code.

         The Company expects to incur capital expenditures during 1999 of
approximately $.5 million for computer systems enhancements designed to increase
operational efficiencies.

         The Company expects its managed care subsidiaries, including the
Michigan Managed Care Subsidiary, to generate sufficient operating cash to fund
their current operations and planned expansion and make limited distributions to
the Company. The foregoing statement may be a "forward looking statement" within
the meaning of the Securities Exchange Act of 1934. The ability of the Company
to generate operating cash is subject to a number of uncertainties described
below. From time to time the Company's regulated managed care subsidiaries may
not be able to make cash distributions to the Company at levels required to fund
the Company's operating cash flow needs without violating applicable regulatory
requirements. The Company's Michigan Managed Care Subsidiary proposes to enter
into an agreement with the Michigan Insurance Bureau agreeing not to engage in
certain transactions which result in the transfer of cash to affiliates without
30 days prior notice to the MIB and provided that the MIB does not disapprove
such transactions within such 30 day period. As a result, future cash transfers
from the Michigan Managed Care Subsidiary to the Company are likely to be
limited to payments for services rendered and dividends payable from the
Michigan Managed Care Subsidiary's earned surplus, which is more limited than
cash transfers made in the past. In addition, the Company is engaged in
negotiations with LabCorp, the Company's principal clinical laboratory provider,
regarding a payment plan for the payment by the Company of LabCorp's ongoing and
past claims for laboratory services. The Company's ability to generate
sufficient cash to fund its cash flow needs is dependent upon the successful
completion of those negotiations.

         The Company expects to fund its ongoing working capital needs and the
Work Out Strategy from its operating cash flow, including distributions from its
managed care subsidiaries as described above, the collection of its accounts
receivable and proceeds from the sale of its clinical laboratory equipment and
capitalized leases. The Company is also considering the issuance of debt or the
sale of additional equity as a means of generating additional cash to support
the Company's operations, satisfy its debt service requirements and fund
expansion of its managed care operations. The foregoing statements may be
"forward looking statements' within the meaning of the Securities Exchange Act
of 1934. The Company's ability to sell certain assets and to raise additional
debt or equity financing is subject to a number of uncertainties, including the
limited demand for clinical laboratory equipment, and the price interested
parties may be willing to offer for such equipment, the Company's current
financial position and recent operating results, the financial condition of
other parties in the industry and the current economic condition of the health
care industry in general.

         Factors that could adversely affect the Company's operating cash
include uncertainties inherent in the Company's efforts to successfully complete
the Work Out Strategy; intense competition in the managed care business,
particularly from larger, better capitalized companies; dependence of the
Company on third parties to provide services under its managed care programs;


                                       30

<PAGE>   32



uncertainties due to the fact that the Company's programs are generally
terminable by the customer on short notice and many of the Company's service
arrangements are terminable on short notice; periodic disputes between the
Company and its primarily clinical laboratory provider, LabCorp, and related
threats by LabCorp to terminate the existing Laboratory Services Agreement for
alleged breaches by the Company; the impact of the highly regulated nature of
the managed care business on the Company's continuing operations; the cost and
the ability of the Company to continue to satisfy increasing regulatory
requirements relating to the managed care business; the long sales cycle
involved in the managed care business; the dependence of the Company on a
limited number of large customers for its revenue and growth, most of whom are
involved in the automotive industry; the ability of the Company to develop new
managed care products; the level of interest that existing and potential new
customers have in managed care products offered by the Company; the ability of
the Company to identify and satisfy market needs; potential increases in
operating costs resulting from the failure of the Company's principal suppliers
to become year 2000 compliant; and economic conditions in the health care and
automotive industries in general. See "Item 1-Business-Risk Factors."

         In the event that the Company is not able to generate cash to the
extent required to fund the Company's operations from the sources described
above, the Company will have to consider disposition of assets relating to its
managed care business.

         The Company has from time to time experienced compliance reviews,
including reviews of its billing practices, by its third-party payors. The
Company has not yet received a final determination notice from a compliance
review conducted by one of its largest third-party payors. The ultimate effect,
if any, of these compliance reviews cannot be determined at this time and no
liability has been accrued by the Company.

YEAR 2000 READINESS DISCLOSURE. 

         These materials contain certain information regarding Year 2000
readiness which constitute a "Year 2000 Readiness Disclosure" as defined in the
Year 2000 Readiness Disclosure Act.

         The year 2000 issue is the result of computer programs and
microprocessors using two digits rather than four to define the applicable year
(the "Year 2000 Issue"). Such programs or microprocessors may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in
system failures or miscalculations leading to disruptions in the Company's
activities and operations. If the Company or third parties with which it has a
significant relationship fail to make necessary modifications, conversions and
contingency plans on a timely basis, the Year 2000 Issue could have a material
adverse effect on the Company's business, financial condition and results of
operations. However, the effect cannot be quantified at this time because the
Company cannot accurately estimate the magnitude, duration or ultimate impact of
noncompliance by vendors and other third parties. The Company believes that its
competitors face a similar risk. Although the risk is not presently
quantifiable, the disclosure below is intended to summarize the Company's
actions to minimize its risk from the Year 2000 Issue. Programs that will
operate in the year 2000 unaffected by the change in year from 1999 to 2000 are
referred to herein as "year 2000 compliant."




                                       31

<PAGE>   33



         The Company began addressing the Year 2000 issue in June 1997. It
identified three general categories of systems that require attention: (1)
information technology ("IT") systems, (2) non-IT systems, such as climate
control systems, telephone systems and security systems, which may contain
embedded date-sensitive microprocessors, and (3) IT and non-IT systems of third
parties.

         The Company currently has three major IT systems: its managed care
computer software, its accounting software and its internal personal computer
system and related software. The managed care software, which was purchased and
installed in late 1997, is used for client billings and operates from the
Company's personal computer network. The Company has forward-date tested the
system and believes that the managed care software is year 2000 compliant. The
Company's accounting software, which was recently purchased and installed before
the end of December 1998, will operate from the Company's personal computer
network. The vendor of the software has represented to the Company that the
software is year 2000 compliant. The software will be tested to verify
compliance and, in the event of a breach of the representation, the Company
would expect to avail itself of its legal remedies. The Company's personal
computer system otherwise operates using "shrink wrapped" software (such as
Microsoft Windows NT, Microsoft Word and Excel). To the extent any of the
programs used by the personal computer system are not year 2000 compliant, the
Company believes that year 2000 compliant upgrades are or will be readily
available for purchase. The Company intends to test the hardware components of
its personal computer system for the year 2000 compliance during 1999 and
expects any disruption due to the Year 2000 Issue with respect to the hardware
or software used by its personal computer system to be minimal.

         The Company's major non-IT system is its telephone system. Testing of
the telephone system is complete and replacement equipment will be purchased in
the first half of 1999 to remediate the portion of the system which was not year
2000 compliant. Testing of the upgraded equipment is expected to be completed by
June 1999. The Company intends to assess, in the second quarter of 1999, the
year 2000 compliance of its new headquarters facility and related non-IT
embedded systems and will determine at that time the need for and cost of
remediation.

         The Company has relationships with, and is to varying degrees dependent
upon, various third parties that provide funds, information, goods and services
to the Company. These include the Company's bank lender, utility providers and
other vendors, such as LabCorp, with whom it subcontracts to provide services
under its managed care contracts. The Company is attempting, through informal
contacts, to assess the compliance of these third parties. These vendors have
been giving the Company updates on their progress. The year 2000 compliance of
the systems of these third parties is outside the Company's control. There can
be no assurance that any of these third parties will not experience a systems
failure due to the Year 2000 Issue.

         Because the Company expects that the systems within its control will be
year 2000 compliant before the end of 1999, the Company believes that the most
reasonably likely worst case scenario is a compliance failure by one or more of
the third parties described above. Such a failure would likely have an effect on
the Company's business, financial condition and results of operations. The
magnitude of that effect, however, cannot be quantified at this time because of
variables such as the type and importance of the third party, the possible
effect on the Company's operations and the Company's ability to respond. Thus,
there can be no assurance that there will not be a material


                                       32

<PAGE>   34



adverse effect on the Company if such third parties do not remediate their
systems in a timely manner and in a way that is compatible with the Company's
systems.

         As a result, the Company will develop contingency plans that assume
some estimated level of noncompliance by, or business disruption to, these third
parties. The Company intends to have contingency plans developed by June 30,
1999 for third parties determined to be at high risk of noncompliance or
business disruption or whose noncompliance or disruption could materially affect
the Company. The contingency plans will be developed on a case-by-case basis,
and may include alternative vendors that can assure year 2000 compliance.
Judgments regarding contingency plans are subject to many uncertainties and
there can be no assurance that the Company will correctly anticipate the level,
impact or duration of noncompliance or that its contingency plans will be
sufficient to mitigate the impact of any noncompliance. Some material adverse
effect to the Company may result despite such contingency plans.

         To date, the Company has expended approximately $915,000 to remediate
year 2000 problems, principally to replace its managed care and accounting
software. Replacement of the managed care claim processing system, represents
$850,000 of this expenditure. These costs have been expensed or capitalized in
the period incurred. The Company estimates total year 2000 remediation costs at
less than $1 million, with the remaining costs to be incurred over the next
three quarters. Estimates of time, cost and risks are based on currently
available information. Developments that could affect estimates include, without
limitation, the availability of trained personnel, the ability to locate and
correct all noncompliant systems, cooperation and remediation success of third
parties material to the Company, and the ability to correctly anticipate risks
and implement suitable contingency plans in the event of system failures at the
Company or third parties.

         The foregoing discussion of the Year 2000 Issue contains various
"forward looking statements", within the meaning of the Securities Exchange Act
of 1934, and are subject to uncertainties which are described in the foregoing
discussion.

RECENT ACCOUNTING PRONOUNCEMENTS

         Statement of Position (SOP) 98-5, "Reporting on the Cost of Start-Up
Activities", was issued in April 1998 and SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities", was issued in June 1998. These statements
are effective in 1999 and 2000, respectively, and are not expected to have a
material impact on the consolidated financial statements.




                                       33
<PAGE>   35



ITEM  7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.      

           Not applicable.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

           UNIVERSAL STANDARD HEALTHCARE, INC.

           INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
           FINANCIAL STATEMENT SCHEDULE

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


REPORT OF INDEPENDENT ACCOUNTANTS

FINANCIAL STATEMENTS

         Consolidated Balance Sheet at December 31, 1998 and 1997
         Consolidated Statements of Operations for the years ended 
                  December 31, 1998, 1997 and 1996
         Consolidated Statements of Stockholders' Equity (Capital Deficit) for
                  the years ended December 31, 1998, 1997 and 1996
         Consolidated Statements of Cash Flows for the years ended
                  December 31, 1998, 1997 and 1996

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

All other schedules are omitted because they are not applicable or are not
required, or the information is included in the respective statements or notes
thereto.



                                       34

<PAGE>   36
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



To the Board of Directors and Stockholders of
Universal Standard Healthcare, Inc.

We have audited the accompanying consolidated balance sheets of Universal
Standard Healthcare, Inc. and its subsidiaries as of December 31, 1998 and 1997
and the related consolidated statements of operations, stockholders' equity
(capital deficit) and cash flows for each of the three years in the period ended
December 31, 1998. We have also audited the schedule listed in the accompanying
index. These financial statements and the schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and the schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Universal Standard
Healthcare, Inc. and its subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the consolidated financial
statements, the Company has incurred net losses for each of the past three
years. In addition, current liabilities exceed current assets by $25.9 million,
and total liabilities exceed total assets by $19.2 million as of December 31,
1998. These factors, and the related matters discussed in Note 2 to the
financial statements, raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.






                                                                BDO SEIDMAN, LLP

Troy, Michigan
March 25, 1999


                                       35
<PAGE>   37

                                             UNIVERSAL STANDARD HEALTHCARE, INC.

                                                     CONSOLIDATED BALANCE SHEETS
                                                                  (IN THOUSANDS)



================================================================================



<TABLE>
<CAPTION>
December 31,                                           1998             1997
------------------------------------------------------------------------------
<S>                                                <C>              <C>       

ASSETS (Notes 9 and 10)

CURRENT ASSETS
  Cash and cash equivalents (Note 4)               $      556       $    1,252
  Accounts receivable                                     824            8,488
  Inventory                                                 -              894
  Prepaid expenses and other                              348              526
  Assets of discontinued operations (Note 3)              425                -
------------------------------------------------------------------------------

TOTAL CURRENT ASSETS                                    2,153           11,160

PROPERTY AND EQUIPMENT, net (Note 5)                    2,660            8,780

INTANGIBLE ASSETS, net (Note 1)                         3,561           18,713

OTHER ASSETS (Note 6)                                   1,151            1,522
------------------------------------------------------------------------------

                                                   $    9,525       $   40,175
==============================================================================
</TABLE>

                  See accompanying notes to consolidated financial statements.


                                       36
<PAGE>   38
                                             UNIVERSAL STANDARD HEALTHCARE, INC.

                                                     CONSOLIDATED BALANCE SHEETS
                                                                  (IN THOUSANDS)



================================================================================



<TABLE>
<CAPTION>
December 31,                                                 1998       1997
------------------------------------------------------------------------------
<S>                                                       <C>         <C>

LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)

CURRENT LIABILITIES
  Accounts payable                                        $    631    $  6,360
  Accrued claims                                             3,857       2,673
  Accrued compensation and benefits                            295       1,213
  Other accruals (Note 8)                                    1,613       2,594
  Laboratory-related and other liabilities (Note 7)         20,562           -
  Current portion of long-term debt (Note 9)                 1,139       1,039
------------------------------------------------------------------------------

TOTAL CURRENT LIABILITIES                                   28,097      13,879

LONG-TERM DEBT, net of current portion (Note 9)                678      20,108
------------------------------------------------------------------------------

TOTAL LIABILITIES                                           28,775      33,987
------------------------------------------------------------------------------

REDEEMABLE COMMON STOCK (Note 10)                            4,399           -
------------------------------------------------------------------------------

STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
  Common stock, no par; 20,000,000 shares authorized;
    7,110,774 and 6,560,774 shares issued and out-
    standing at December 31, 1998 and 1997, respectively    34,247      32,889
  Paid-in-capital                                              129           -
  Deficit                                                  (58,025)    (26,701)
------------------------------------------------------------------------------

TOTAL STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)               (23,649)      6,188
------------------------------------------------------------------------------

                                                          $  9,525    $ 40,175
==============================================================================
</TABLE>
                  See accompanying notes to consolidated financial statements.



                                       37
<PAGE>   39
                                             UNIVERSAL STANDARD HEALTHCARE, INC.

                                           CONSOLIDATED STATEMENTS OF OPERATIONS
                                        (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)



================================================================================



<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Year Ended December 31,                                             1998        1997        1996
------------------------------------------------------------------------------------------------
<S>                            <C>                              <C>         <C>         <C>     
NET MANAGED CARE REVENUE (Note 11)                              $ 25,538    $ 18,764    $ 17,522
------------------------------------------------------------------------------------------------

OPERATING EXPENSES
  Claims and processing                                           21,970      12,781      12,276
  Selling, general and administrative                              3,840       4,440       3,615
  Special charges (Notes 8 and 12)                                  --         1,290        --
  Depreciation                                                       587         438         410
  Amortization                                                       384         369         339
------------------------------------------------------------------------------------------------

TOTAL OPERATING EXPENSES                                          26,781      19,318      16,640
------------------------------------------------------------------------------------------------

OPERATING INCOME (LOSS)                                           (1,243)       (554)        882

OTHER INCOME (EXPENSE)
  Interest expense                                                  (249)       (196)       (179)
  Other income, net                                                   45          75          68
------------------------------------------------------------------------------------------------

INCOME (LOSS) FROM CONTINUING OPERATIONS
  BEFORE INCOME TAX EXPENSE                                       (1,447)       (675)        771

INCOME TAX EXPENSE (Note 14)                                        --          --          (275)
------------------------------------------------------------------------------------------------

NET INCOME (LOSS) FROM CONTINUING OPERATIONS                      (1,447)       (675)        496

DISCONTINUED OPERATIONS (Note 3)
  Loss on disposal of laboratory division                        (15,574)       --          --
  Loss from operations of laboratory division, net of
    applicable income tax benefit of $1,742 in 1996 (Note 14)    (14,154)    (20,001)     (8,247)
------------------------------------------------------------------------------------------------

NET LOSS                                                        $(31,175)   $(20,676)   $ (7,751)
================================================================================================

EARNINGS (LOSS) PER COMMON SHARE (Basic and Diluted)
  From continuing operations                                    $   (.23)   $   (.10)   $    .08
  From discontinued operations                                     (4.34)      (3.05)      (1.28)
------------------------------------------------------------------------------------------------

                                                                $  (4.57)   $  (3.15)   $  (1.20)
================================================================================================
</TABLE>

                    See accompanying notes to consolidated financial statements.


                                       38
<PAGE>   40
                                             UNIVERSAL STANDARD HEALTHCARE, INC.

               CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
                                                                  (IN THOUSANDS)



================================================================================



<TABLE>
<CAPTION>
Year Ended December 31,                                       1998        1997         1996
-------------------------------------------------------------------------------------------

<S>                                                       <C>         <C>          <C>     
COMMON STOCK, at beginning of year                        $ 32,889    $ 32,864     $ 32,242
  Stock issued to investors                                  1,250           -            -
  Stock issued in exchange for services                        108           -            -
  Stock issued for employee stock purchase plan                  -          25          225
  Stock issued for conversion of debenture debt                  -           -          397
-------------------------------------------------------------------------------------------


COMMON STOCK, at end of year                              $ 34,247    $ 32,889     $ 32,864
-------------------------------------------------------------------------------------------


PAID-IN-CAPITAL, at beginning of year                     $      -    $      -     $      -
  Stock warrants granted                                       129           -            -
-------------------------------------------------------------------------------------------


PAID-IN-CAPITAL, at end of year                           $    129    $      -     $      -
-------------------------------------------------------------------------------------------


RETAINED EARNINGS (DEFICIT), at beginning of year         $(26,701)   $ (6,025)    $  1,726
  Net loss for the year                                    (31,175)    (20,676)      (7,751)
  Increase in redeemable common stock                         (149)          -            -
-------------------------------------------------------------------------------------------


RETAINED EARNINGS (DEFICIT), at end of year               $(58,025)   $(26,701)    $ (6,025)
-------------------------------------------------------------------------------------------


TOTAL STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)              $(23,649)   $  6,188     $ 26,839
-------------------------------------------------------------------------------------------
</TABLE>

                    See accompanying notes to consolidated financial statements.


                                       39
<PAGE>   41
                                             UNIVERSAL STANDARD HEALTHCARE, INC.

                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                                  (IN THOUSANDS)



================================================================================



<TABLE>
<CAPTION>
Year Ended December 31,                                         1998        1997       1996
-------------------------------------------------------------------------------------------
<S>                                                        <C>         <C>         <C>

CASH FLOWS FROM OPERATING ACTIVITIES
  Net loss                                                 $(31,175)   $(20,676)   $ (7,751)
  Adjustments to reconcile net loss to net cash
    provided by (used in) continuing operations
      Loss on disposal of laboratory division                15,574        --          --
      Loss from discontinued operations                      14,154      20,001       8,247
      Special charge                                           --         1,290        --
      Depreciation and amortization                             971         807         749
      Deferred income taxes and other                          --          --        (1,099)
  (Increase) decrease in
    Accounts receivable, net                                   (548)        (13)        256
    Prepaid expenses and other                                 (241)     (1,259)        250
    Other assets                                               --           (20)        (15)
  Increase (decrease) in
    Accounts payable                                         (2,980)      2,012      (1,391)
    Accrued liabilities                                       1,440       1,151      (1,595)
    Other liabilities                                          --          --          (534)
-------------------------------------------------------------------------------------------

  Net cash provided by (used in) continuing operations       (2,805)      3,293      (2,883)

  Net cash provided by (used in) discontinued operations     (1,327)     (2,824)      3,761
-------------------------------------------------------------------------------------------

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES          (4,132)        469         878
-------------------------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES
  Proceeds from sale of laboratory division                   7,000        --          --
  Purchase of property and equipment                         (1,813)     (1,227)     (1,596)
  Other-net                                                     (50)        (75)         (8)
-------------------------------------------------------------------------------------------


NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES           5,137      (1,302)     (1,604)
-------------------------------------------------------------------------------------------


CASH FLOWS FROM FINANCING ACTIVITIES
  Net borrowings (payments) on revolving line-of-credit      (6,216)      1,724       1,000
  Proceeds from issuance of redeemable common stock           4,250        --          --
  Proceeds from issuance of stock to investors                1,250        --          --
  Payments on long-term debt                                 (1,104)     (1,569)    (10,204)
  Proceeds from issuance of long-term debt                      176        --          --
  Payment of financing costs                                    (57)       (322)     (1,034)
  Issuance of common stock for employee purchase plan          --            25         225
  Proceeds from convertible debenture                          --          --        12,000
  Other-net                                                    --          --           (33)
-------------------------------------------------------------------------------------------


NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES          (1,701)       (142)      1,954
-------------------------------------------------------------------------------------------


NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS           (696)       (975)      1,228
CASH AND CASH EQUIVALENTS, beginning of year                  1,252       2,227         999
-------------------------------------------------------------------------------------------


CASH AND CASH EQUIVALENTS, end of year                     $    556    $  1,252    $  2,227
===========================================================================================
</TABLE>

                    See accompanying notes to consolidated financial statements.


                                       40
<PAGE>   42
                                             UNIVERSAL STANDARD HEALTHCARE, INC.

                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                                  (IN THOUSANDS)



================================================================================



<TABLE>
<CAPTION>
Year Ended December 31,                                         1998     1997     1996
--------------------------------------------------------------------------------------
<S>                                                          <C>      <C>      <C>    

SUPPLEMENTAL CASH FLOW INFORMATION
  Cash paid for interest                                     $ 1,905  $ 1,806  $ 1,513
  Cash paid for income taxes                                       -        -        -
--------------------------------------------------------------------------------------

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
  AND FINANCING ACTIVITIES
    Reduction of proceeds on sale of laboratory
      division in exchange for a reduction in
      accounts payable and accrued claims                    $ 2,000  $     -  $     -
    Capital lease obligations                                    748      436    1,345
    Issuance of common stock and warrants for services           237        -        -
    Increase in redeemable common stock                          149        -        -
    Conversion of debentures to common stock                       -        -      397
======================================================================================
</TABLE>

                    See accompanying notes to consolidated financial statements.


                                       41
<PAGE>   43
                                             UNIVERSAL STANDARD HEALTHCARE, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



================================================================================



1.  SUMMARY OF          NATURE OF OPERATIONS
    SIGNIFICANT
    ACCOUNTING          Universal Standard Healthcare, Inc. (the "Company"),
    POLICIES            through its specialty managed care programs (the
                        "Managed Care Programs") offered by its subsidiaries,
                        provides clinical laboratory testing services, home
                        medical services and diagnostic imaging services to
                        employer, employer group, union and government-sponsored
                        health care benefit plans and other groups for a fixed
                        payment per participating employee or retiree
                        ("capitated rate"). All services are provided by the
                        Company under arrangements through contracting
                        agreements with qualified providers.

                        The Company previously provided clinical laboratory
                        testing on a traditional fee-for-service basis through
                        its clinical laboratory operations division. The
                        laboratory services division was sold in August 1998
                        (see Note 3).

                        PRINCIPLES OF CONSOLIDATION

                        The consolidated financial statements include the
                        accounts of the Company and its wholly-owned
                        subsidiaries. All significant intercompany accounts and
                        transactions are eliminated.

                        REVENUE RECOGNITION

                        Revenue from Managed Care Programs is recognized monthly
                        when billed or when due under the terms of the related
                        contracts. The Company's accounts receivable generally
                        represent no more than one month's revenue yet to be
                        collected; no allowance for possible losses on accounts
                        receivable was considered necessary at December 31, 1998
                        or 1997.

                        PROPERTY AND EQUIPMENT

                        Property and equipment are stated at cost. Major
                        improvements and replacements are capitalized while
                        ordinary maintenance and repairs are expensed. Property
                        and equipment are depreciated over their estimated
                        useful lives, using the straight-line method. Estimated
                        useful lives are as follows: furniture and fixtures - 7
                        years; machinery and equipment - 5 - 7 years;
                        transportation equipment - 2 years; and computer
                        equipment - 3 - 7 years.


                                       42
<PAGE>   44
                                             UNIVERSAL STANDARD HEALTHCARE, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




================================================================================



                        INTANGIBLE ASSETS

                        Intangible assets primarily consist of customer lists
                        related to the Company's Managed Care Programs which are
                        amortized using the straight-line method over a period
                        of 20 years. Accumulated amortization totaled
                        approximately $4.5 million and $4.2 million at December
                        31, 1998 and 1997, respectively.

                        VALUATION OF LONG-LIVED ASSETS

                        Long-lived assets (such as intangibles and property and
                        equipment) are evaluated for impairment when events or
                        changes in circumstances indicate that the carrying
                        amount of the assets may not be recoverable through the
                        estimated undiscounted future cash flows from the use of
                        these assets. The factors considered by management in
                        performing this assessment include current operating
                        results, business prospects, market trends, competitive
                        activities and other economic factors. When any such
                        impairment exists, the related assets are written down
                        to fair value.

                        ACCRUED CLAIMS

                        The Company accrues the cost of external provider claims
                        expense in the period when the services are provided,
                        based in part on estimated claims expense incurred but
                        not yet reported to the Company.

                        INCOME TAXES

                        Income taxes are calculated using the liability method
                        specified by Statement of Financial Accounting Standards
                        No. 109, "Accounting for Income Taxes".

                        FAIR VALUE OF FINANCIAL INSTRUMENTS

                        Due to the short-term nature of the Company's financial
                        instruments, other than debt, fair values are not
                        materially different from their carrying values. Based
                        on the borrowing rates currently available to the
                        Company, the carrying value of debt approximates fair
                        value.

                        CASH FLOWS

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


                                       43
<PAGE>   45
                                             UNIVERSAL STANDARD HEALTHCARE, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




================================================================================



                        LOSS PER SHARE

                        Loss per share has been computed by dividing net loss by
                        the weighted average number of shares of common stock
                        outstanding, excluding redeemable shares (see Note 10).
                        The per share amounts reflected in the consolidated
                        statements of operations are presented in accordance
                        with Statement of Financial Accounting Standards (SFAS)
                        No. 128 "Earnings per Share"; the amounts of the
                        Company's "basic" and "diluted" earnings per share (as
                        defined in SFAS No. 128) are the same.

                        The following table presents the earnings (loss) per 
                        share calculations:

<TABLE>
<CAPTION>
                        Year Ended December 31,                               1998       1997       1996 
                        -------------------------------------------------------------------------------- 
                        <S>                                              <C>        <C>        <C>       
                                                                                                         
                        NUMERATOR FOR BASIC AND DILUTED                                                  
                         EARNINGS (LOSS) PER SHARE                                                       
                          Net income (loss) from continuing operations   $ (1,447)  $   (675)  $    496  
                          Increase in redeemable common stock                (149)      --         --    
                        -------------------------------------------------------------------------------- 
                                                                                                         
                        ADJUSTED NET INCOME (LOSS) FROM                                                  
                          CONTINUING OPERATIONS                            (1,596)      (675)       496  
                                                                                                         
                        Loss from discontinued operations                 (29,728)   (20,001)    (8,247) 
                        -------------------------------------------------------------------------------- 
                                                                                                         
                        ADJUSTED NET LOSS                                $(31,324)  $(20,676)  $ (7,751) 
                        ================================================================================ 
                                                                                                         
                        DENOMINATOR FOR BASIC AND DILUTED EARNINGS                                       
                          (LOSS) PER SHARE - WEIGHTED AVERAGE COMMON                                     
                          SHARES OUTSTANDING                                6,856      6,557      6,462  
                        ================================================================================ 
                                                                                                         
                        EARNINGS (LOSS) PER SHARE (BASIC AND DILUTED)                                    
                          From continuing operations                     $   (.23)  $   (.10)  $    .08  
                          From discontinued operations                      (4.34)     (3.05)     (1.28) 
                        -------------------------------------------------------------------------------- 
                                                                                                         
                                                                         $  (4.57)  $  (3.15)  $  (1.20) 
                        ================================================================================ 
</TABLE>

                        STOCK-BASED COMPENSATION

                        The Company uses the intrinsic value method to account
                        for stock-based compensation.


                                       44
<PAGE>   46
                                             UNIVERSAL STANDARD HEALTHCARE, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




================================================================================



                        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 reported amounts of assets and liabilities and
                        disclosure of contingent assets and liabilities at the
                        date of the financial statements and the reported
                        amounts of revenues and expenses during the reporting
                        period. Actual results could differ from those
                        estimates.

                        COMPREHENSIVE INCOME

                        On January 1, 1998, the Company adopted SFAS No. 130,
                        "Reporting Comprehensive Income", which establishes
                        standards for the reporting and display of comprehensive
                        income, its components and accumulated balances.
                        Comprehensive income is defined to include all changes
                        in equity except those resulting from investments by
                        owners and distributions to owners. Among other
                        disclosures, SFAS 130 requires that all items that are
                        required to be recognized under current accounting
                        standards as components of comprehensive income be
                        reported in a financial statement that is displayed with
                        the same prominence as other financial statements. For
                        the year ended December 31, 1998, comprehensive income
                        for the Company did not differ from net income.

                        RECENT ACCOUNTING PRONOUNCEMENTS

                        Statement of Position (SOP) 98-5, "Reporting on the Cost
                        of Start-Up Activities", was issued in April 1998 and
                        SFAS 133, "Accounting for Derivative Instruments and
                        Hedging Activities", was issued in June 1998. These
                        statements are effective in 1999 and 2000, respectively,
                        and are not expected to have a material impact on the
                        consolidated financial statements.

2.  FINANCIAL RESULTS   The Company has incurred net losses of $31.2 million,
    AND LIQUIDITY       $20.7 million, and $7.8 million in 1998, 1997 and 1996,
                        respectively. Additionally, the Company has negative
                        working capital of $25.9 million, and its total
                        liabilities exceed total assets by $19.2 million at
                        December 31, 1998. The Company's laboratory services
                        division was responsible for losses of approximately
                        $29.7 million, $20.0 million and $8.2 million in 1998,
                        1997, and 1996, respectively. After attempting to
                        restructure and thereby improve laboratory services
                        operations during the past several years, the Company
                        decided to sell the assets of this division during 1998;
                        the sale occurred in August 1998 (see Note 3). The
                        accompanying balance sheet reflects a liability at
                        December 31, 1998 of approximately $20.6 million related
                        to laboratory-related liabilities and other obligations
                        the Company is attempting to restructure, including 


                                       45
<PAGE>   47
                                             UNIVERSAL STANDARD HEALTHCARE, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




================================================================================



                        (a) the $11.6 million subordinated debentures, (b) costs
                        related to commitments under lease agreements and (c)
                        various other obligations incurred by the laboratory
                        division (see Note 7).

                        The Company's continuation as a going concern is
                        dependent upon its ability to generate sufficient cash
                        flow to meet its obligations on a timely basis,
                        restructure its indebtedness, obtain additional
                        financing and ultimately to attain profitability. The
                        Company is engaged in ongoing discussions with its
                        debenture holders and major creditors in order to
                        restructure existing debt (see Note 7), and is also
                        continuing to seek outside financing to support and
                        expand its continuing operations. If these discussions
                        result in the infusion of capital into the Company
                        and/or significant reductions in the Company's existing
                        liabilities, management believes that its continuing
                        managed care operations will provide positive cash flow
                        in 1999 and in subsequent years. However, there can be
                        no assurance the Company will be able to obtain
                        additional financing, or will be able to negotiate an
                        acceptable arrangement with its creditors and the
                        holders of the debentures. If the Company's proposed
                        arrangements to restructure its obligations to the
                        creditors and debenture holders are not accepted, the
                        Company may be forced to seek protection offered by the
                        federal Bankruptcy Code.

                        Management believes that, despite the financial
                        difficulties and funding uncertainties that it faces,
                        the Company has a plan that, if successful, can
                        significantly improve the Company's financial condition.
                        The support of the Company's vendors, debenture holders,
                        customers, lenders, stockholders and employees will
                        continue to be key to the Company's future success.

3.    DISCONTINUED      In August 1998, the Company sold certain assets related 
      OPERATIONS        to its clinical laboratory operations, including        
                        customer lists, inventories and other tangible assets
                        related to its laboratory business, to Laboratory
                        Corporation of America Holdings ("LabCorp") for $9
                        million (the "Asset Sale") as part of its divestiture of
                        its clinical laboratory operations division.
                        Accordingly, this division is being reported as a
                        discontinued operation in the accompanying financial
                        statements.

                        The operating results of the Company's clinical
                        laboratory division have been segregated from the
                        continuing operations and reported separately, net of
                        applicable income tax benefits, in the accompanying
                        consolidated statements of operations. The assets as of
                        December 31, 1998 and cash flow of the clinical
                        laboratory division for the year then ended have been
                        segmented and reported separately in the accompanying
                        consolidated balance sheets and consolidated statements
                        of cash flows.


                                       46
<PAGE>   48
                                             UNIVERSAL STANDARD HEALTHCARE, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




================================================================================



                        The results of operations from the Company's
                        discontinued clinical laboratory operations included in
                        the Company's consolidated statements of operations for
                        each of the years ended December 31, 1998, 1997 and 1996
                        are summarized below (in thousands):

<TABLE>
<CAPTION>
                        Years Ending December 31,             1998       1997         1996 
                        ------------------------------------------------------------------ 
                        <S>                              <C>         <C>         <C>       
                                                                                           
                        DISCONTINUED OPERATIONS                                            
                         Net revenue                     $ 19,909    $ 36,867    $ 40,042  
                         Operating expenses, excluding                                     
                          special charges                 (32,508)    (37,613)    (43,166) 
                         Special charges (Note 12)           --       (17,552)     (5,255) 
                         Interest expense                  (1,555)     (1,703)     (1,610) 
                         Income tax benefit                  --          --         1,742  
                        ------------------------------------------------------------------ 
                                                                                           
                        LOSS FROM DISCONTINUED                                             
                         LABORATORY OPERATIONS           $(14,154)   $(20,001)   $ (8,247) 
                        ================================================================== 
</TABLE>

                        Interest expense was allocated to discontinued
                        laboratory operations based on the ratio of net assets
                        of the discontinued laboratory operations to
                        consolidated net assets plus consolidated debt
                        (excluding debt that could be directly allocated).

                        The Company's loss on the disposal of the clinical
                        laboratory operations was approximately $15.6 million;
                        this amount includes the loss on the assets sold to
                        LabCorp, the subsequent loss recorded on the write-down
                        of assets (primarily property and equipment and
                        intangibles) related to the discontinued operations, and
                        lease termination costs, employee severance and other
                        expenses incurred during the phase-out period between
                        August and December 1998. As of December 31, 1998,
                        assets of the Company's discontinued clinical laboratory
                        operations consisted solely of accounts receivable and
                        totalled approximately $425,000.

4.    RESTRICTED CASH   The Company is required to maintain a $500,000 cash 
                        balance in accordance with state requirements for the
                        managed care programs. The cash balance is included in
                        cash equivalents on the accompanying balance sheets at
                        December 31, 1998 and 1997.


                                       47
<PAGE>   49
                                             UNIVERSAL STANDARD HEALTHCARE, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



5.  PROPERTY AND        Property and equipment is as follows (in thousands):
    EQUIPMENT                                                               

<TABLE>
<CAPTION>
                        December 31,                                       1998       1997 
                        ------------------------------------------------------------------ 
                                                                                           
                        <S>                                              <C>       <C>     
                        Computer equipment                               $ 3,830   $ 7,791 
                        Furniture and fixtures                               313     1,528 
                        Transportation equipment                             109       404 
                        Machinery and equipment                              102     6,774 
                        Leasehold improvements                              --       2,589 
                        ------------------------------------------------------------------ 
                                                                                           
                                                                                           
                                                                           4,354    19,086 
                        Less accumulated depreciation and amortization     1,694    10,306 
                        ------------------------------------------------------------------ 
                                                                                           
                                                                                           
                        PROPERTY AND EQUIPMENT, NET                      $ 2,660   $ 8,780 
                        ================================================================== 
</TABLE>                


6.  OTHER ASSETS        Other assets consist of the following (in thousands):

<TABLE>
<CAPTION>
                        December 31,                                            1998      1997   
                        ------------------------------------------------------------------------ 
                                                                                                 
                        <S>                                                   <C>        <C>     
                        Financing costs (primarily convertible debentures)    $ 1,196    $ 1,491 
                        Other                                                     292        335 
                        ------------------------------------------------------------------------ 
                                                                                                 
                                                                                                 
                                                                                                 
                                                                                1,488      1,826 
                        Less accumulated amortization                            (337)      (304)
                        ------------------------------------------------------------------------ 
                                                                                                 
                                                                                                 
                                                                              $ 1,151    $ 1,522 
                        ======================================================================== 
                        </TABLE>
 
                        The deferred financing costs are being amortized on a
                        straight-line basis over the term of the related
                        financing agreement.


                                       48
<PAGE>   50
                                             UNIVERSAL STANDARD HEALTHCARE, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




================================================================================



7.  LIABILITY           As described in Note 2, the Company has reported a net
    RESTRUCTURING       loss in each of the past three fiscal years due
    PLAN                primarily to its discontinued laboratory operations.
                        There are significant liabilities reflected on the
                        accompanying December 31, 1998 balance sheet which the
                        Company hopes to restructure. In addition, there are
                        other liabilities related to discontinued operations
                        which the Company has recorded. These items are as
                        follows (in thousands):

<TABLE>
                        <S>                                                     <C>
                        Convertible subordinated debentures ($11,603 principal
                              and $398 accrued interest)                        $ 12,001
                        Accounts payable - trade                                   2,804
                        Operating lease commitments                                2,169
                        Obligations under capital leases                           1,331
                        ----------------------------------------------------------------

                        LIABILITIES TO BE RESTRUCTURED                            18,305

                        Litigation-Related Costs, Employee Severance
                         and Other Costs - Discontinued Operations                 2,257
                        ----------------------------------------------------------------

                        TOTAL                                                   $ 20,562
                        ================================================================
</TABLE>

                        The Company defaulted on the semi-annual interest
                        payment due February 1999 for the $11,603,000
                        convertible debentures outstanding (see Note 9) and this
                        amount, together with the related accrued interest, is
                        therefore considered a current liability. In addition,
                        the Company also has defaulted in the payment of other
                        obligations to certain trade creditors and lessors
                        related to the discontinued laboratory operations.

                        In March 1999, the Company proposed an out-of-court
                        restructuring plan to the holders of its debentures and
                        to certain other creditors. The plan proposes that these
                        debenture holders and creditors receive only a specified
                        portion of the amounts due, with payment to occur over
                        several years. No adjustments to the above amounts owed
                        by the Company have been recorded in the accompanying
                        financial statements, since the ultimate outcome of the
                        proposed restructuring plan cannot presently be
                        determined.


                                       49
<PAGE>   51
                                             UNIVERSAL STANDARD HEALTHCARE, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




================================================================================




8.  OTHER ACCRUALS      Other accruals consist of the following (in thousands):

<TABLE>
<CAPTION>
                        December 31,                                        1998     1997 
                        ----------------------------------------------------------------- 
                                                                                          
                        <S>                                               <C>      <C>    
                        Payable to Internal Revenue Service (see below)   $1,150   $1,290 
                        Accrued interest                                    --        499 
                        Other                                                463      805 
                        ----------------------------------------------------------------- 
                                                                                          
                        TOTAL                                             $1,613   $2,594 
                        ================================================================= 
</TABLE>                

                        During 1998, the Company entered into an agreement with
                        the Internal Revenue Service (IRS) to settle a dispute
                        relating to the Company's 1991-1994 federal tax returns.
                        The IRS originally proposed adjustments totalling
                        approximately $3.3 million relating to various
                        deductions claimed by the Company in these prior years,
                        primarily relating to laboratory operations. The
                        Company's settlement with the IRS resulted in a final
                        liability for these prior years of approximately
                        $150,000; interest of approximately $250,000 has also
                        been accrued relating to this settlement.

                        During 1997, the Company recorded a special charge of
                        $1,290,000 related to indemnification made by the
                        Company to shareholders of a company that was previously
                        acquired, that involved a settlement of prior years' tax
                        matters. This amount (which included interest) is
                        reflected in the accompanying 1997 statement of
                        operations, and was included with other accrued
                        liabilities at December 31, 1997. The remaining
                        liability of $750,000 at December 31, 1998 is included
                        in the above balance payable to the IRS.

9.  LONG-TERM DEBT      Long-term debt consists of the following (in thousands):

<TABLE>
<CAPTION>
                        December 31,                                    1998      1997
                        --------------------------------------------------------------
                        <S>                                          <C>       <C>
                        Revolving line-of-credit                     $   983   $ 7,199
                        Obligations under capital leases and other       834     2,345
                        Convertible subordinated debentures             --      11,603
                                                                               -------
                        TOTAL                                          1,817    21,147
                        Less current portion                           1,139     1,039
                        --------------------------------------------------------------
                                                                                      
                        LONG-TERM DEBT                               $   678 $  20,108
                        ==============================================================
</TABLE>


                                       50
<PAGE>   52
                                             UNIVERSAL STANDARD HEALTHCARE, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




================================================================================



                        As amended in January 1999, the Company has a credit
                        facility with a bank which includes a revolving
                        line-of-credit and $3.5 million in contingent
                        indebtedness owing under outstanding letters of credit.
                        Borrowing levels under the revolving line-of-credit were
                        based on specified formulas subject to the bank's
                        approval. The December 31, 1998 balance outstanding of
                        $983,000 was the maximum borrowing limit allowed by the
                        bank. Borrowings under the Company's credit facility are
                        collateralized by substantially all of the Company's
                        assets. The credit facility also requires the
                        maintenance of certain financial covenants; the Company
                        is currently not in compliance with these covenants.
                        Subsequent to year-end, the bank requested the $983,000
                        be paid in full, and the Company intends to do so during
                        1999. No further borrowings under this credit facility
                        are anticipated to be available in the future.

                        At December 31, 1997, $7,199,000 was payable to the bank
                        under a revolving line-of-credit agreement, which was
                        amended at various times during 1998.

                        The Company also leases equipment under capital leases
                        and has certain other miscellaneous indebtedness.
                        Obligations related to laboratory equipment comprise the
                        majority of the December 31, 1997 liability shown above;
                        these remaining obligations as of December 31, 1998 were
                        recorded as part of the laboratory-related liabilities
                        which were segregated for balance sheet purposes (see
                        Note 7). The above liability of $834,000 at December 31,
                        1998 relates only to the Company's continuing
                        operations. The Company's monthly payments for these
                        leases are approximately $22,000, including interest at
                        annual rates of 6-10%. Equipment held under capital
                        leases are included in property and equipment in the
                        accompanying balance sheets and total approximately
                        $650,000 and $3.0 million at December 31, 1998 and 1997,
                        respectively.

                        On February 20, 1996, the Company completed an offering
                        of $12,000,000 principal amount of 8.25% Convertible
                        Subordinated Debenture (the "Debentures") due February
                        1, 2006. Interest is payable semi-annually on each
                        February 1 and August 1, commencing August 1, 1996. The
                        debentures are convertible at any time prior to
                        maturity, unless previously redeemed or repurchased,
                        into shares of common stock of the Company at a
                        conversion price of $4.375 per share, subject to
                        adjustment in certain events. During 1996, $397,000 of
                        debentures were converted to common stock; no debentures
                        were converted during 1998 or 1997. The Company did not
                        make the required semi-annual interest payment which was
                        due February 1999 (see Note 7).

                        Required annual principal payments of long-term debt at
                        December 31, 1998 during the next five years are as
                        follows (in thousands): 1999 - $1,139; 2000 - $265; 2001
                        - $192; 2002 - $170 and 2003 - $51.


                                       51
<PAGE>   53
                                             UNIVERSAL STANDARD HEALTHCARE, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




================================================================================



10.  REDEEMABLE         On August 3, 1998, the Company sold 1,416,667 shares of 
     COMMON STOCK       its common stock (the "Purchased Shares") to LabCorp for
     AND LABCORP        $4,250,000 in cash (the "Stock Sale Agreement"). Based  
     TRANSACTIONS       on certain conditions contained in the Stock Sale       
                        Agreement and the Co-Marketing Agreement discussed      
                        below, this amount has been classified separately on the
                        accompanying consolidated balance sheet as redeemable   
                        common stock.

                        The Company and LabCorp entered into a Co-Marketing
                        Agreement, dated as of August 3, 1998 (the "Co-Marketing
                        Agreement"), for the purpose of coordinating and
                        complementing their marketing and sales efforts to new
                        and existing managed care customers and to utilize each
                        company's expertise and resources in such efforts. The
                        Co-Marketing Agreement further provides that in the
                        event of its termination, or in certain cases discussed
                        below, the Company will pay to LabCorp a Co-Marketing
                        Termination Fee ("Termination Fee") $4,250,000, less
                        amounts (as defined) if LabCorp has sold any of the
                        Purchased Shares. The Company's obligation to pay the
                        Termination Fee shall terminate July 31, 2000 (unless it
                        is waived at an earlier date by LabCorp), if the
                        Company's average closing stock price, as reported on
                        the applicable stock exchange, for the last five
                        business days of July 2000 is greater than $3.50 ("Stock
                        Price Covenant"). If, after satisfying the Stock Price
                        Covenant, LabCorp is unable to sell the Purchased Shares
                        before October 31, 2000, the Termination Fee shall be
                        reinstated. In the event the Termination Fee is paid,
                        the Company has the right to purchase the Purchased
                        Shares owned by LabCorp for $.50 per share.
                        Additionally, if, after satisfying the stock price
                        covenant, LabCorp sells the Purchased Shares between
                        August 2000 and October 2000, the Company must pay
                        Labcorp the amount by which $3.50 per share exceeds the
                        net proceeds from the sales of such shares. The
                        Company's obligation to LabCorp for the Termination Fee
                        is secured by a security interest in all of the
                        Company's assets and the assets of its wholly-owned
                        subsidiary Universal Standard Healthcare of Delaware,
                        Inc. ("Universal Delaware"), other than the capital
                        stock of certain regulated companies owned by Universal
                        Delaware. The Company's obligation to LabCorp for the
                        Termination Fee and LabCorp's security interest in
                        certain assets of the Company is subordinated to certain
                        debt of the Company and the assets securing such debt.

                        During 1998, the redeemable common stock balance was
                        increased by approximately $149,000 to reflect the
                        systematic accretion of such balance to the July 2000
                        mandatory redemption amount of $3.50 share, or
                        approximately $5.0 million in total. The redeemable
                        common stock balance was approximately $4.4 million at
                        December 31, 1998.



                                       52
<PAGE>   54
                                             UNIVERSAL STANDARD HEALTHCARE, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




================================================================================



                        Claims expense recorded by the Company for services
                        provided by LabCorp (which is one of the Company's
                        qualified providers for clinical laboratory testing
                        services) totaled approximately $1.3 million for the
                        period from August 1998 to December 31, 1998.

11.  NET MANAGED        The Company has entered into fixed monthly fee  
     CARE REVENUE       agreements with automotive companies, union and 
                        government benefit plans, and other entities to provide
                        laboratory services and home medical services. Managed
                        Care expenses are recognized in the period in which the
                        service is rendered. Ford Motor Company and Chrysler
                        Corporation accounted for 46%, 73% and 62% of Net
                        Managed Care revenue for 1998, 1997 and 1996,
                        respectively.

                        In January 1998, the Company initiated a National
                        Laboratory Program with General Motors Corporation. This
                        program, which generated approximately $7.2 million in
                        revenues (28% of Net Managed Care revenues), was
                        terminated in October 1998.

12.  SPECIAL CHARGES    The Company previously recorded special charges of
                        approximately $18.8 million and $5.3 million in 1997 and
                        1996, respectively. The 1997 special charge included an
                        impairment to intangible assets (primarily goodwill) of
                        approximately $14 million, with the remaining amount of
                        the charge related to various re-engineering,
                        restructuring and non-recurring items. The 1996 special
                        charge related primarily to re-engineering, facility and
                        employee-related expenses.

                        With the exception of the $1,290,000 indemnification
                        amount in 1997 described in Note 8, the 1997 and 1996
                        special charge amounts have been included in the loss
                        from operations of the laboratory division on the
                        accompanying statements of operations.

13.  OPERATING LEASES   As part of its laboratory operations, the Company leased
                        its laboratory and warehouse facilities, patient service
                        center facilities and certain transportation and
                        laboratory equipment under operating lease agreements.
                        In addition, the Company continues to lease its main
                        office facilities. Rent expenses for operating leases
                        were as follows (in thousands): $1,432 for 1998, $1,437
                        for 1997, and $1,856 for 1996.


                                       53
<PAGE>   55
                                             UNIVERSAL STANDARD HEALTHCARE, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




================================================================================



                        The Company has recorded a liability of approximately
                        $2.2 million at December 31, 1998 relating to existing
                        lease commitments for the discontinued laboratory
                        operations (see Note 7). The Company's operating lease
                        commitments for its continuing operations relate
                        primarily to its main office facilities; future minimum
                        rental payments are as follows (in thousands):

<TABLE>
<CAPTION>
                        Year Ending December 31,
                        --------------------------------------------------------
                        <S>                                                <C>  
                        1999                                               $ 272
                        2000                                                 369
                        2001                                                 377
                        2002                                                 385
                        2003                                                 393
                        Thereafter                                            99
                        --------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>

14.  INCOME TAXES       The income tax benefits consists of (in thousands):
     AND LOSS
     CARRYFORWARDS      Years Ended December 31,       1998      1997      1996
                        -------------------------------------------------------
                        <S>                          <C>       <C>      <C>
                        Current                      $    -    $    -   $  (345)

                        Deferred                          -         -    (1,122)
                        -------------------------------------------------------

                                                     $    -    $    -   $(1,467)
                        =======================================================
</TABLE>

                        Deferred income tax assets and liabilities are as
                        follows (in thousands):

<TABLE>
<CAPTION>
                        December 31,                             1998      1997
                        --------------------------------------------------------
                        <S>                                  <C>        <C>
                        DEFERRED TAX ASSETS
                          Net operating loss carryforward    $ 14,766   $  8,564
                          Accruals                              1,494        507
                          Other, net                              284        379
                        --------------------------------------------------------

                        TOTAL DEFERRED TAX ASSETS              16,544      9,450
                        ========================================================
</TABLE>


                                       54
<PAGE>   56
                                             UNIVERSAL STANDARD HEALTHCARE, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




================================================================================



<TABLE>
<CAPTION>
                        December 31,                        1998            1997
                        --------------------------------------------------------
                        <S>                              <C>             <C>
                        DEFERRED TAX LIABILITIES
                         Property and equipment              260             867
                         Intangible assets                   224             746
                         Other, net                            -             304
                        --------------------------------------------------------

                        TOTAL DEFERRED TAX LIABILITIES       484           1,917
                        --------------------------------------------------------

                        Net deferred taxes                16,060           7,533
                        Less valuation allowance         (16,060)         (7,533)
                        --------------------------------------------------------

                        ADJUSTED DEFERRED TAXES         $      -         $     -
                        ========================================================
</TABLE>

                        The Company established a 100% valuation allowance
                        against the net deferred tax assets in 1998 and 1997,
                        based on uncertainty surrounding the expected
                        realization of this asset.

                        A reconciliation of the statutory federal income tax
                        rate to the effective rate is as follows:

<TABLE>
<CAPTION>
                        Years Ended December 31,           1998     1997     1996
                        ----------------------------------------------------------
                        <S>                               <C>      <C>      <C>
                        Statutory rate (benefit)          (34.0)%  (34.0)%  (34.0)%
                        Valuation allowance adjustment     27.4     26.1     23.2
                        Non-deductible intangibles          5.4      5.8      1.2
                        Other                               1.2      2.1     (6.3)
                        ----------------------------------------------------------

                        EFFECTIVE RATE                   -0-%     -0-%      (15.9)%
                        ==========================================================
</TABLE>

                        The Company has a net operating loss carryforward of
                        approximately $43 million, a portion of which is subject
                        to capital loss limitations. The available carryforward
                        period for these losses expires at various dates between
                        2011 and 2018.


                                       55
<PAGE>   57
                                             UNIVERSAL STANDARD HEALTHCARE, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




================================================================================



15.  STOCK OPTIONS      A total of 2,100,000 shares of common stock are reserved
                        for issuance under the 1992 Stock Option Plan and
                        Directors Stock Option Plan (the "Plans"). The exercise
                        price of the options granted under the Plans must equal
                        at least the fair market value of the Company's common
                        stock on the date of the grant. The options granted
                        under the Plans generally vest annually at 25% or
                        33-1/3% on each of the successive anniversaries of the
                        grant date, and expire ten years after the grant date.

                        The Company has adopted the disclosure-only provisions
                        of SFAS No. 123 "Accounting for Stock-Based
                        Compensation". Accordingly, no compensation cost has
                        been recognized for the Plans. If the Company had
                        elected to recognize compensation cost based on the fair
                        value of the options granted at grant date as prescribed
                        by SFAS No. 123, net loss and loss per share amounts
                        would have been the pro forma amounts indicated below in
                        thousands (except per share amounts):

<TABLE>
<CAPTION>
                                                              1998          1997         1996
                        -----------------------------------------------------------------------
                        <S>                                 <C>          <C>          <C>
                        Net loss - as reported              $ (31,175)   $ (20,676)   $ (7,751)
                        Net loss - pro forma                  (31,571)     (21,140)     (8,251)
                        Net loss per share - as reported        (4.57)       (3.15)      (1.20)
                        Net loss per share - pro forma          (4.63)       (3.22)      (1.28)
                        -----------------------------------------------------------------------
</TABLE>

                        The fair value of each option grant is estimated on the
                        date of the grant using the Black-Scholes option-pricing
                        model with the following weighted-average assumptions
                        used for 1998, 1997 and 1996, respectively: dividend
                        yield of 0% for all years; expected volatility of 74%,
                        65% and 60%; risk-free interest rate of 5.9%, 6.0% and
                        5.6% and expected lives of 4.0 years, 4.0 years and 2.5
                        years.

                        The effects of applying SFAS No. 123 in the above pro
                        forma disclosure are not necessarily indicative of
                        future amounts. SFAS No. 123 does not apply to options
                        granted prior to 1995, and the Company anticipates that
                        options will be granted in future years.


                                       56
<PAGE>   58
                                             UNIVERSAL STANDARD HEALTHCARE, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




================================================================================



                        A summary of the status of the Company's stock options
                        is as follows:

<TABLE>
<CAPTION>
                                                                        Weighted-Average 
                                                                Shares    Exercise Price 
                        ---------------------------------------------------------------- 
                                                                                         
                        <S>                    <C>            <C>              <C>       
                        Outstanding at January 1, 1996        828,523          $    6.64 
                        Granted                               735,200               3.77 
                        Expired                              (128,000)            (11.93)
                        ---------------------------------------------------------------- 
                                                                                         
                        Outstanding at December 31, 1996    1,435,723               4.70 
                        Granted                               283,600               3.47 
                        Expired                              (411,000)              3.87 
                        ---------------------------------------------------------------- 
                                                                                         
                        Outstanding at December 31, 1997    1,308,323               3.99 
                        Granted                               779,000               2.26 
                        Expired                              (493,600)              3.70 
                        ---------------------------------------------------------------- 
                                                                                         
                        OUTSTANDING AT DECEMBER 31, 1998    1,593,723               3.17 
                        ================================================================ 
</TABLE>

                        The weighted-average grant date fair value of options
                        during 1998, 1997 and 1996 was approximately $1.34,
                        $1.88 and $1.24, respectively.

                        Options exercisable at year-end, together with the
                        weighted-average exercise price, are summarized as
                        follows:

<TABLE>
<CAPTION>
                              1998             1997             1996
                        --------------    --------------    --------------
                         Shares  Price     Shares  Price     Shares  Price
                        ---------------------------------------------------
                        <S>      <C>      <C>      <C>      <C>      <C>
                        642,623  $ 2.66   664,623  $ 5.07   456,523  $5.52
                        ===================================================
</TABLE>


                                       57
<PAGE>   59
                                             UNIVERSAL STANDARD HEALTHCARE, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



================================================================================



                        The following tables summarize information regarding
                        stock options outstanding and exercisable at December
                        31, 1998:

<TABLE>
<CAPTION>
                                                   Options Outstanding
                                          -------------------------------------
                           Range of                       Weighted Average       Weighted Average
                        Exercise Prices   Number     Remaining Contractual Life  Exercisable Price
                        ----------------------------------------------------------------------------
                        <S>       <C>     <C>               <C>                               <C>
                        $ 1.90 -  2.75    593,000           9 years                           $ 2.26
                        $ 2.82 -  3.36    399,691           6 years                             3.22
                        $ 3.61 -  4.95    446,032           7 years                             3.97
                        $ 5.47 -  5.60    120,000           7 years                             5.57
                        $10.00 - 11.74     35,000           4 years                            10.75
                        ----------------------------------------------------------------------------
                                        1,593,723           7 years                          $  3.17
                        ============================================================================
</TABLE>

<TABLE>
<CAPTION>
                                              Options Exercisable   
                                           -------------------------
                           Range of                 Weighted Average
                        Exercise Prices    Number   Exercise Price  
                        --------------------------------------------
                        <S>               <C>               <C>     
                        $ 1.90 -  2.75          -           $     - 
                        $ 2.82 -  3.36    284,357              3.19 
                        $ 3.61 -  4.95    240,766              4.13 
                        $ 5.47 -  5.60     82,500              5.58 
                        $10.00 - 11.74     85,000             10.75 
                        --------------------------------------------
                                          642,623           $  2.66 
                        ============================================
</TABLE>


                        In addition to the above, the Company has warrants
                        outstanding that entitles the holders to purchase
                        183,117 shares of common stock at prices ranging from
                        $2.50 to $3.19 per share. The warrants, which may be
                        exercised at any time in whole or in part, expire in
                        2001 and 2002.


                                       58
<PAGE>   60
                                             UNIVERSAL STANDARD HEALTHCARE, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




================================================================================



16.  MATERIAL FOURTH    During the fourth quarter of fiscal 1998, the Company
     QUARTER            made adjustments which are material to the fourth
     ADJUSTMENTS        quarter results. These adjustments primarily relate to
                        the resolution of various estimates previously made in
                        the third quarter of 1998 involving the August 1998 sale
                        of laboratory operations, with the resultant write-down
                        of assets and recording of reserves related to the
                        discontinued operations recorded in the fourth quarter.
                        These adjustments include: (a) property and equipment
                        ($5.9 million) and intangible asset ($3.7 million)
                        write-downs to remove all laboratory-related items from
                        the Company's December 31, 1998 balance sheet, (b)
                        accounts receivable write-down ($3.9 million) to reduce
                        laboratory-related receivables to their estimated net
                        realizable value, (c) recording redeemable common stock
                        as indicated on the December 31, 1998 balance sheet
                        rather than as a component of stockholders' equity ($4.3
                        million), and (d) establishment of necessary reserves
                        related to leases, litigation, personnel and other
                        issues resulting from the discontinued laboratory
                        operations ($4.8 million). In addition to the
                        adjustments for laboratory operations, fourth quarter
                        adjustments related to continuing operations of
                        approximately $1.4 million were necessary, primarily in
                        order to increase claims expense based on management's
                        updated estimates of year-to-date activity and results.

17.  COMMITMENTS        The Company has employment contracts with certain of its
     AND                officers for remaining terms of up to two years
     CONTINGENCIES      providing for compensation aggregating $900,000 at
                        December 31, 1998.

                        The Company is also a defendant and plaintiff in various
                        lawsuits. While it is not feasible to predict or
                        determine the outcome of any of these cases, it is the
                        Company's opinion that the outcome of this litigation
                        will have no material adverse effect on the accompanying
                        financial statements. The Company has recorded total
                        litigation-related reserves of approximately $1.7
                        million at December 31, 1998 (see Note 7) for several
                        lawsuits relating to the discontinued laboratory
                        operations; management believes these reserves are
                        adequate to cover future adverse judgments against the
                        Company with respect to these existing lawsuits.


                                       59
<PAGE>   61
                                             UNIVERSAL STANDARD HEALTHCARE, INC.

                                                                     SCHEDULE II
                                               VALUATION AND QUALIFYING ACCOUNTS
                                                                  (IN THOUSANDS)




================================================================================



<TABLE>
<CAPTION>
Column A                                  Column B         Column C - Additions            Column D       Column E
-------------------------------------------------------------------------------------------------------------------

                                           Balance     Charges to        Charges to       Additions        Balance
                                      at Beginning      Costs and    Other Accounts     (Deductions)        at End
Description                              of Period       Expenses          Describe     Describe (A)     of Period
-------------------------------------------------------------------------------------------------------------------

<S>                                 <C>                <C>           <C>                <C>             <C>
Allowance for contractual
  adjustments and doubtful
  accounts:

  Year Ended December 31:
    1998                            $       11,974     $    6,277    $            -     $   (18,251)    $      -0-
    1997                                     8,157          4,183                 -            (366)        11,974
    1996                                     9,239          4,141                 -          (5,223)         8,157
</TABLE>

-------------------------------------
(A) Write-offs charged to reserve


                                       60
<PAGE>   62
ITEM 9.    CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
           FINANCIAL DISCLOSURE

Not applicable.

PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

                  Information is contained under the captions "Nominees For
                  Election As Directors" and "Section 16(a) Beneficial Ownership
                  Reporting Compliance" in the Company's Proxy Statement and is
                  incorporated herein by reference.

ITEM 11.  EXECUTIVE COMPENSATION

                  Information is contained under the caption "Executive
                  Compensation" (excluding the Compensation Committee Report and
                  the stock performance graph) in the Company's Proxy Statement
                  and is incorporated herein by reference.

ITEM 12.  SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

                  Information is contained under the caption "Information on
                  Securities" in the Company's Proxy Statement and is
                  incorporated herein by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

                  Information is contained under the caption "Committee
                  Interlocks and Certain Transactions' in the Company's Proxy
                  Statement and is incorporated herein by reference.

PART IV


ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES 
          AND REPORTS ON FORM 8-K

(a)          (1)      A list of the financial statements required to be filed as
                      part of this Form 10-K is included under the heading 
                      "Item 8. Financial Statements and Supplementary Data" in 
                      this Form 10-K and incorporated herein by reference.


             (2)      The financial statement schedule required to be filed
                      as part of this Form 10- K is included under the
                      heading "Item 8. Financial Statements and
                      Supplementary Data" in this Form 10-K and
                      incorporated herein by reference. Such schedule is
                      filed with this Form 10-K.

             (3)      A list of the exhibits required to be filed as part
                      of this Form 10-K is included under the heading
                      "Exhibit Index" in this Form 10-K and incorporated
                      herein by reference. The list identifies each
                      management contract and compensatory plan or
                      arrangement required to be filed as an exhibit
                      hereto.

(b)          None.

(c)          See "Exhibit Index" in this Form 10-K for a description of the 
             exhibits filed with this Form 10-K.


                                       61

<PAGE>   63




                                   SIGNATURES

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

                              UNIVERSAL STANDARD HEALTHCARE, INC.


                              By: /s/ Eugene E. Jennings
                                 ------------------------------------------
                                 Eugene E. Jennings
                                 President and Chief Executive Officer


Dated:  March 30, 1999


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 indicated as of March 31, 1999.

/s/ Eugene E. Jennings
---------------------------------------      President, Chief Executive Officer 
Eugene E. Jennings                           and Director (principal executive 
                                             officer)


/s/ Alan S. Ker
---------------------------------------      Vice President, Finance, Chief 
Alan S. Ker                                  Financial Officer and Treasurer 
                                             (principal financial and accounting
                                             officer)

/s/ Eduardo Bohorquez, Ph.D.
---------------------------------------      Director
Eduardo Bohorquez, Ph.D.



/s/ Anthony A. Bonelli                      
---------------------------------------      Director
Anthony A. Bonelli



/s/ Robert P. DeCresce, M.D.
---------------------------------------      Director
Robert P. DeCresce, M.D.



/s/ Thomas R. Donahue
---------------------------------------      Director
Thomas R. Donahue



/s/ P. Thomas Hirsch
---------------------------------------      Director
P. Thomas Hirsch



                           
----------------------------------------     Director
Joseph J. Vadapalas




                                       62

<PAGE>   64



                                  EXHIBIT INDEX

EXHIBIT NO.            DESCRIPTION

2.1            Purchase Agreement between the Company and
               the Laboratory Corporation of American
               Holdings dated July 16, 1998, incorporated
               by reference from the Company's Current
               Report on Form 8-K dated July 21, 1998. The
               Registrant agrees to furnish supplementally
               a copy of any omitted schedule to the
               Securities and Exchange Commission upon
               request. (23)

3.1            Restated Articles of Incorporation of the Company, filed with the
               Michigan Department of Commerce - Corporation and Securities
               Bureau on October 2, 1992, as amended.  (23)

3.2            Bylaws of the Company, Amended and Restated August 25, 1997.
               (19)

4.1            Indenture, dated February 20, 1996, relating
               to 8.25% Convertible Subordinated Debentures
               due February 1, 2006, including form of
               Convertible Subordinated Debenture, table of
               contents and cross reference sheet. (12)

4.2            Revolving Credit and Loan Agreement dated April 30, 1997 between
               the Company and its subsidiaries and NBD Bank.  (17)

4.2(a)         Covenant Waiver Letter dated July 29, 1997 between NBD Bank and
               the Company and its subsidiaries. (18)

4.2(b)         Waiver of Loan Agreement Covenants between National Bank of
               Detroit and the Company dated November 5, 1997. (19)

4.2(c)         First Amendment to Revolving Credit and Loan Agreement between
               the Company and its subsidiaries and NBD Bank, dated September
               26, 1997.  (19)

4.2(d)         Second Amendment to Revolving Credit and Loan Agreement
               between the Company and its subsidiaries and NBD Bank, dated
               November 30, 1997.  (20)

4.2(e)         Third Amendment to Revolving Credit and Loan Agreement between
               the Company and its subsidiaries and NBD Bank, dated February 2,
               1998.  (20)




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<PAGE>   65



4.2(f)         Fourth Amendment to Revolving Credit and Loan Agreement
               between the Company and its subsidiaries and NBD Bank, dated
               March 12, 1998.  (20)

4.2(g)         Fifth Amendment to Revolving Credit and Loan Agreement dated
               June 5, 1998 between NBD Bank and the Company and its
               subsidiaries.  (22)

4.2(h)         Letter Agreement dated July 21, 1998 between NBD Bank and the
               Company and its subsidiaries.  (22)

4.2(i)         Sixth Amendment to Revolving Credit and Loan
               Agreement dated August 3, 1998 between NBD
               Bank and the Company and its subsidiaries.

4.2(j)         Letter Agreement, dated October 8, 1998, among NBD Bank, the
               Company, Universal Standard Healthcare of Michigan, Inc.,
               Universal Standard Healthcare of Ohio, Inc., Universal Standard
               Healthcare of Delaware, Inc., A/R Credit, Inc., and T.P.A., 
               Inc.  (23)

4.2(k)         Seventh Amendment to Revolving Credit and
               Loan Agreement dated January 4, 1998 between
               NBD Bank and the Company and its
               subsidiaries. (1)

4.2(l)         Eighth Amendment to Revolving Credit and
               Loan Agreement dated January 25, 1999
               between NBD Bank and the Company and its
               subsidiaries. (1)

               Other instruments, notes or extracts from
               agreements defining the rights of holders of
               long-term debt of the Company or its
               subsidiaries have not been filed because (i)
               in each case the total amount of long-term
               debt permitted thereunder does not exceed
               10% of the Company's consolidated assets,
               and (ii) the Company hereby agrees that it
               will furnish such instruments, notes and
               extracts to the Securities and Exchange
               Commission upon its request.


10.1           Agreement and Plan of Merger and Recapitalization dated as of
               August 31, 1992. (2)


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<PAGE>   66



10.2*          Employment Agreement dated June 28, 1991, by and between the
               Company and Perry C. McClung.   (2)

10.2(a)*       Form of Amendment to the McClung Employment Agreement.  (2)

10.2(b)*       Second Amendment dated as of September 1,
               1994 to Employment Agreement Dated as of
               June 28, 1991 between the Company and Perry
               C. McClung. (6)

10.2(c)*       Third Amendment dated as of September 30,
               1994 to Employment Agreement Dated as of
               June 28, 1991 between the Company and Perry
               C. McClung. (7)

10.2(d)*       Employment Agreement, dated June 28, 1996, by and between the
               Company and Perry C. McClung.  (13)

10.2(e)*       Employment Agreement between Universal
               Standard Medical Laboratories, Inc. and
               Perry C. McClung dated June 28, 1997.
               Portions of Attachment A to this Agreement
               were filed separately with the Commission
               pursuant to Rule 24b2 of the Securities
               Exchange Act of 1934 governing requests for
               confidential treatment of information. (19)

10.3*          Employment Agreement, dated July 30, 1991, by and among the
               Company and Alan S. Ker.  (2)

10.3(a)*       Form of Amendment to the Ker Employment Agreement. (2)

10.3(b)*       Fifth Amendment dated as of September 30, 1994 to Employment
               Agreement dated as of July 30, 1991 between the Company and Alan
               Ker.  (7)

10.3(c)*       Employment Agreement between Universal Standard Medical
               Laboratories, Inc. and Alan S. Ker dated August 4, 1997. (19)

10.4*          Employment Agreement dated as of March 12, 1996 between Eugene
               Jennings and the Company, with exhibits.  (12)

10.5*          1992 Stock Option Plan (as amended and restated August 25, 1997).
               (19)

10.5(a)*       1994 Performance Stock Option - Executive Officer.  (7)





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<PAGE>   67



10.5(b)*       Incentive Stock Option - Executive Officers, as amended.  (12)

10.5(c)*       Incentive Stock Option Award Program.  (14)

10.5(d)*       First Amendment of 1994 Performance Stock Option - Executive
               Officers Agreement by and between Perry C. McClung and the
               Company.  (13)

10.5(e)        Stock Option Agreements by and between Perry
               C. McClung and the Company, dated November
               5, 1992, August 2, 1993, December 6, 1994
               and December 5, 1995 and related amendments
               thereto. (13)

10.5(f)        First Amendment to 1994 Performance Stock
               Option - Executive Officers Agreement by and
               between Alan S. Ker and the Company.
               (13)

10.5(g)        Stock Option Agreements by and between Alan
               S. Ker and the Company, Dated November 5,
               1992, August 2, 1993, December 6, 1994 and
               December 5, 1995 and related amendments
               thereto. (13)

10.5(h)*       Letter Agreement dated March 25, 1998, terminating 1994
               Performance Stock Option - Executive Officers Agreement dated
               December 6, 1994, between the Company and Alan S. Ker.  (22)

10.5(i)*       Incentive Stock Option - Executive Officers and Non-Qualified 
               Stock Option - Executive Officers, dated March 25, 1998 between 
               the Company and Alan S. Ker.  (22)

10.5(j)*       Incentive Stock Option - Executive Officers and Non-Qualified 
               Stock Option - Executive Officers, dated March 25, 1998 between 
               the Company and Imtiaz Sattaur.  (22)

10.5(k)*       Form of Incentive Stock Option Agreement - Executive Officer, as
               amended.   (21)

10.5(l)*       Form of Incentive Stock Option Agreement - Management, as
               amended.   (21)

10.5(m)*       Form of Incentive Stock Option Agreement - Directors, as amended.
               (21)

10.6*          Employee Stock Purchase Plan (as amended and restated August 25,
               1997).  (19)



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<PAGE>   68



10.6(a)*       First Amendment to Employee Stock Purchase Plan (as amended and
               restated August 25, 1997).  (1)

10.7           Stockholders Agreement dated June 28, 1991, by and among Elan
               Holdings Corp. and certain shareholders. (2)

10.8           Registration Rights Agreement among Elan Holdings Corp. and
               certain shareholders.  (2)

10.9           Stock Purchase Warrant dated June 18, 1992 granted to WestSphere
               Funding, Ltd.  (2)


10.10*         USML, Inc. Tax Deferred Savings Plan and Trust Agreement of the
               Company.  (2)

10.10(a)*      Amendment No. 1 to the Equitable Life Assurance Society of United
               States Defined contribution Plan and Trust Basic Plan document
               No. 03.  (16)

10.10(b)*      Second Amendment to the USML Tax Deferred Savings and Trust
               Plan.  (16)

10.10(c)*      Third Amendment to the USML Tax Deferred Savings Plan.  (16)

10.10(d)*      Fourth Amendment to the USML Tax Deferred Savings and Trust
               Agreement.  (16)

10.10(e)*      Fifth Amendment to the USML Tax Deferred Savings and Trust
               Agreement, effective August 4, 1997.  (19)

10.11          Form of Lease Agreement by and between WRJ
               Company, JWJ Company and the Company
               (formerly LCM/Universal Standard, Inc.)
               (2)

10.12          Lease Agreement dated as of November 18, 1994 between Jan-Jo
               Development Corporation and the Company. (7)

10.12(a)       First Amendment to Lease dated as of April 3, 1995, between 
               Jan-Jo Development Corporation and the Company.  (11)

10.12(b)       Second Amendment  to Lease, dated October 19, 1995, between Jan-
               Jo Development Corporation and the Company. (11)




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<PAGE>   69



10.12(c)       Third Amendment  to Lease, dated November 14, 1995, between Jan-
               Jo Development Corporation and the Company. (11)

10.12(d)       Acknowledgment Agreement to Lease, dated November 16, 1996,
               between Jan-Jo Development Corporation, the Company and Wispark
               Corporation. (11)

10.12(e)       Fourth Amendment to Lease, dated December 15, 1995, between Jan-
               Jo Development Corporation and the Company. (11)

10.13          Management Advisory and Consulting Services Agreement dated as
               of June 28, 1991 between WestSphere Capital Associates, L.P. and
               the Company. (2)

10.14          Non-Qualified Stock Option Agreement, dated May 31, 1992, with
               Alan Ker. (3)

10.15*         Non-Qualified Stock Option Agreement, dated February 13, 1992,
               with Robert DeCresce. (3)

10.16*         Non-Qualified Stock Option Agreement, dated June 24, 1992, with
               Anthony Bonelli. (3)

10.17*         Non-Qualified Stock Option Agreement, dated April 13, 1993, with
               Robert DeCresce, M.D. (5)

10.18*         Non-Qualified Stock Option Agreement, dated April 13, 1993, with
               Anthony Bonelli. (5)

10.19*         Directors Stock Option Plan (as amended and restated August 25,
               1997).  (19)

10.20*         Employment Agreement between Universal Standard Medical
               Laboratories, Inc. and Alan S. Ker dated August 4, 1998. (19)

10.21*         Employment Agreement between Universal Standard Medical
               Laboratories, Inc. and Perry C. McClung dated June 
               28, 1997. (19)**

10.22          Form of Executive Non-Competition and Restrictive Covenant
               Agreement. (19)

10.23*         Universal Standard Medical Laboratories, Inc. Agreement for
               Incentive Stock Option Award Program Incentive Stock Option
               Agreement for Alan Ker dated September 27, 1996. (19)



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<PAGE>   70



10.24*         Executive Form of Universal Standard Medical Laboratories, Inc.
               Agreement for Incentive Stock Option Award Program Incentive/
               NonQualified Stock Option Agreement for Alan Ker dated September
               27, 1996. (19)

10.25*         Universal Standard Medical Laboratories, Inc. Agreement for
               Incentive Stock Option Award Program Incentive Stock Option
               Agreement for Perry McClung dated May 14, 1997. (19)

10.26*         Employment Letter Agreement with Imtiaz Sattaur dated April 11,
               1997. (20)

10.27          Stock Purchase Agreement dated June 8, 1998 between The
               Kaufmann Fund, Inc. and the Company.  (22)

10.28          Warrant to Purchase 100,000 shares of Common Stock issued August
               3, 1998 to NBD by the Company.  (22)

10.29          Stock Purchase Agreement between the Company and Laboratory
               Corporation of America Holdings Dated July 16, 1998. 

10.30          Co-Marketing Agreement, dated as of August 3, 1998, between the
               Company and Laboratory Corporation of America Holdings.  (25)

10.31          Shareholders' Agreement, dated as of August 3, 1998, between the
               Company Laboratory Corporation of America Holdings.  (25)

10.32          Voting Agreement among the Company, Laboratory Corporation
               America Holdings, Anixter International, Inc., Signal Capital
               Corporation, Portfolio Investment Company Limited, Ltd and CLF,
               LP.  (25)

10.33          Laboratory Services Agreement, dated as of August 3, 1998,
               between the Company and Laboratory Corporation of America
               Holdings. Exhibit A to this Agreement was filed separately with
               the Commission pursuant to Rule 24b-2 of the Securities Exchange
               Act of 1934 governing requests for confidential treatment of
               information. (25)


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<PAGE>   71



10.34          Security Agreement dated as of August 3, 1998, among the company,
               Universal Standard Healthcare of Delaware, Inc. and Laboratory
               Corporation of America Holdings.  (25)

10.35          Sublease dated as of August 3, 1998, between the Company and
               Laboratory Corporation of America Holdings.  (25)

10.36          Transition Services Agreement dated as of August 3, 1998, between
               the Company and Laboratory Corporation of America Holdings.
               Portions of Schedule A to this Agreement were filed separately
               with the Commission pursuant to Rule 24b-2 of the Securities
               Exchange Act of 1934 governing requests for confidential
               treatment of information. (25)

10.37          Non-Compete Agreement, dated as of August 3, 1998, by the Company
               and all of its subsidiaries and affiliated companies for the
               benefit of Laboratory Corporation of America Holdings.  (25)

10.38          Universal Subordination Agreement, dated as of August 3, 1998,
               among the Company, Universal Standard Healthcare of Delaware,
               Inc. and Laboratory Corporation of America Holdings. (25)

10.39          Sublease Agreement, dated as of August 4, 1998, between the
               Company and Laboratory Corporation of America Holdings. (25)

10.40          Consent of Signal Capital Corp., dated July 30, 1998, to the
               Amendment to Stockholders Agreement dated as of June 28, 1991 by
               and among Universal Standard Equity, Ltd., WestSphere Capital
               Associates L.P., WestSphere Capital, Inc., WestSphere Funding II,
               L.P., Fleet National Bank, Signal Capital Corp., Marvin Eisner,
               MML, Inc., Robert Nowikowski, Barbara Pace, John Watkins, Perry
               McClung, Janney Montgomery Scott., Inc., Richard J. Berman,
               Marcus & Katz and Elan Holdings Corp. (25)



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<PAGE>   72



10.41          Consent of Portfolio Investment Company
               Limited, CLF, LTD. and CLF, L.P., dated July
               31, 1998, to the Amendment to Stockholders
               Agreement dated as of June 28, 1991 by and
               among Universal Standard Equity, Ltd.,
               WestSphere Capital Associates, L.P.,
               WestSphere Capital, Inc., WestSphere Funding
               II, L.P., Fleet National Bank, Signal
               Capital Corp., Marvin Eisner, MML, Inc.,
               Robert Nowikowski, Barbara Pace, John
               Watkins, Perry McClung, Janney Montgomery
               Scott, Inc., Richard J. Berman, Marcus &
               Katz and Elan Holdings Corp. (25)

21.1           Subsidiaries of the Company.  (20)

23.1           Consent of BDO Seidman, L.L.P.  (1)

27             Financial Data Schedule (EDGAR version only) (1)

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

*  Management contract or compensatory plan or arrangement.




                                       71
<PAGE>   73



(1)      Filed herewith.

(2)      Incorporated by reference from the Company's Registration Statement on
         Form S-1, No. 33- 49092, as amended.

(3)      Incorporated by reference from the Company's 1992 Annual Report on 
         Form 10-K.

(4)      Incorporated by reference from the Company's Quarterly Report on Form
         10-Q for the Fiscal Quarter ended March 31, 1993.

(5)      Incorporated by reference from the Company's 1993 Annual Report on
         Form 10-K.

(6)      Incorporated by reference from the Company's Quarterly Report on Form
         10-Q for the Fiscal Quarter ended September 30, 1994.

(7)      Incorporated by reference from the Company's 1994 Annual Report on 
         Form 10-K.

(10)     Incorporated by reference from the Company's Quarterly Report on Form
         10-Q for the Fiscal Quarter ended September 30, 1995.

(11)     Incorporated by reference from the Company's Registration Statement on
         Form S-2, No. 33- 80187, as amended.

(12)     Incorporated by reference from the Company's 1995 Annual Report on 
         Form 10-K.

(13)     Incorporated by reference from the Company's Quarterly Report on Form
         10-Q for the Fiscal Quarter ended June 30, 1996.

(14)     Incorporated by reference from the Company's Quarterly Report on Form
         10-Q for the Fiscal Quarter ended September 30, 1996.

(15)     Incorporated by reference from the Company's Current Report on Form 8-K
         filed January 4, 1997.

(16)     Incorporated by reference from the Company's 1996 Annual Report on 
         Form 10-K.

(17)     Incorporated by reference from the Company's Quarterly Report on Form
         10-Q for the Fiscal Quarter ended March 31, 1997.

(18)     Incorporated by reference from the Company's Quarterly Report on Form
         10-Q for the Fiscal Quarter ended June 30, 1997.

(19)     Incorporated by reference from the Company's Quarterly Report on Form
         10-Q for the Fiscal Quarter ended September 30, 1997.



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<PAGE>   74



(20)     Incorporated by reference from the Company's 1997 Annual Report 
         Form 10-K.

(21)     Incorporated by reference from the Company's Quarterly Report on Form
         10-Q for the Fiscal Quarter ended March 31, 1998.

(22)     Incorporated by reference from the Company's Quarterly Report on Form
         10-Q for the Fiscal Quarter ended June 30, 1998.

(23)     Incorporated by reference from the Company's Quarterly Report on Form
         10-Q for the Fiscal Quarter ended September 30, 1998.

(24)     Incorporated by reference from the Company's Current Report on Form 8-K
         dated July 21, 1998.

(25)     Incorporated by reference from the Company's Current Report on Form 8-K
         dated August 19, 1998.






                                       73