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

                                  FORM 10-KSB/A

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   For the Fiscal Year Ended December 31, 1997


                           MEDCARE TECHNOLOGIES, INC.
             (Exact name of registrant as specified in its charter)

DELAWARE                                                  87-0429962 B
--------                                                  ------------
(State or other jurisdiction of                           (I.R.S. Employer
incorporation or organization)                            Identification No.)

1515 West 22nd Street, Suite 1210, Oak Brook, Illinois    60523
------------------------------------------------------    -----
(Address of principal executive offices)                  (Zip Code)

Registrant's telephone number, including area code:       (800) 611-3388
                                                          --------------

Securities to be registered pursuant to Section 12(b) of the Act:  None
                                                                   ----

Securities to be registered pursuant
to Section 12(g) of the Act:                 Common Stock, $.001 par value
                                             -----------------------------

Indicate  by check  mark  whether  the  registrant:  (1) has filed  all  reports
required 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 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  the  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K ( X )

Aggregate market value of Common Stock, $0.001 par value, held by non-affiliates
of the  registrant  as of March 24, 1998:  $65,551,734.  Number of Common Stock,
$0.001 par value, outstanding as of February 17, 1998: 6,992,185.

DOCUMENTS INCORPORATED BY REFERENCE

Designated portions of the following document are incorporated by reference into
this report on From 10-K where indicated: NONE



<PAGE>



                         ANNUAL REPORT ON FORM 10-KSB/A
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997


                                TABLE OF CONTENTS


                                                                           Page
PART I
Item 1.   Business                                                         3
Item 2.   Properties                                                       14
Item 3.   Legal Proceedings                                                14
Item 4.   Submissions of Matters to a Vote of Security Holders             15

PART II
Item 5.   Market for the Registrants' Common Equity and Related            15
              Stockholder Matters
6.   Selected Financial Data                                               15
Item 7.   Management's Discussion and Analysis of Financial Condition      16
              and Results of Operations
Item 8.   Financial Statements                                             20
Item 9.   Changes in and Disagreements With Accountants on Accounting      20
              and Financial Disclosure

PART III
Item 10.  Directors and Executive Officers of the Registrant               20
Item 11.  Executive Compensation                                           22
Item 12.  Security Ownership of Certain Beneficial Owners and Management   24
Item 13.  Certain Relationships and Related Transactions                   24

PART IV
Item 14.  Exhibits, Financial Statement Schedules, and Reports             25
              on Form 8-K






<PAGE>



                                     PART I

ITEM 1.     BUSINESS

Except for the historical  information  contained herein, the discussion in this
Annual Report on Form10-KSB  contains  certain  forward-looking  statements that
involve risk and  uncertainties,  such as  statements  of the  Company's  plans,
objectives,  expectations and intentions. The cautionary statements made in this
document  should  be read as being  applicable  to all  related  forward-looking
statements  wherever they appear in this document.  The Company's actual results
could differ  materially  from those  discussed  here.  Factors that could cause
differences  include  those  discussed  below  in  "Risk  Factors",  as  well as
discussed elsewhere herein.

                                   THE COMPANY
                               SUMMARY OF BUSINESS

         The  Company,   formerly  known  as  Multi-Spectrum  Group,  Inc.,  was
incorporated  under the name Santa Lucia Funding,  Inc., in the State of Utah on
January 17, 1986, with an authorized  capital of 50,000,000 common shares with a
par  value of  $0.001  for the  purposes  of  raising  capital  in order to seek
business  opportunities  believed to hold  potential for profit.  On February 8,
1990, the Company adopted a plan of merger with  Multi-Spectrum  Group,  Inc., a
Delaware corporation,  and Santa Lucia Funding, Inc., a Utah corporation,  which
then changed its name to Multi-Spectrum  Group,  Inc. The outstanding  shares of
Multi-Spectrum  Group,  Inc.  were  converted  into common shares of Santa Lucia
Funding,  Inc.  at the  exchange  rate of 55,305  shares of Santa Lucia for each
common share of  Multi-Spectrum  then issued and outstanding.  In addition,  the
number of common shares  authorized was increased from 50,000,000 to 100,000,000
with the par value remaining at $0.001. On November 13, 1992, the Company issued
8,7722,800  shares of its Common  Stock to Group of Five,  Inc. in exchange  for
services rendered.
         The Company was inactive during the period from February 1990 to August
1995,  at which point the Company  acquired  the  MedCare  program for  treating
incontinence.

         On August 11, 1995,  a reverse  split of the common stock by a ratio of
one new for 1,200 old was effected, with the par value remaining at $0.001. This
reduced the total number of shares issued and  outstanding to 58,519.  On August
14,  1995,  the Company  acquired the rights to the MedCare  Program,  a urinary
incontinence procedure, in exchange for 2,000,000 shares of its common stock.
  On August 25, 1995, the Company approved an increase in the authorized capital
to 101,000,000  shares of stock,  comprised of 100,000,000  common shares with a
par value of $0.001 per share and 1,000,000 preferred shares with a par value of
$0.25 per share, and approved a name change to MedCare Technologies, Inc.

         On October 1, 1995,  the  Company's  wholly owned  subsidiary,  MedCare
Technologies  Corporation,  acquired 100% of Manon  Consulting Ltd., an Alberta,
Canada,  corporation,  for a nominal value from its owners,  Diane  Nunziato,  a
MedCare  Technologies,  Inc.  director,  and Philip  Tolley and Mel Tolley.  The
operations of Manon Consulting were terminated on December 31, 1996.



<PAGE>



         Narinder  Thouli,  a member  of the  Board of  Directors,  resigned  on
November  1,  1996.  He  resigned  for  personal  reasons  and did not  have any
disagreements  with the  Company.  On  October  4, 1996 a  migratory  merger was
completed changing the Company's domicile from Utah to Delaware.

         On July 8, 1997, Jeffrey Aronin joined the Company as its President and
Chief Operating Officer.  He was also elected a Director of the Company.  Harmel
S. Rayat,  the previous  president,  remains with the Company in the capacity of
Chief Executive Officer and Chairman of the Board.

     On September 17, 1997, Diane Nunziato resigned as a director of the Company
and Dr. Jake Jacobo joined the Company as a director.  Ms. Nunziato resigned for
personal reasons and did not have any disagreements with the Company.


                             DESCRIPTION OF BUSINESS

         MedCare  Technologies,  Inc. ("MedCare" or the "Company") has developed
The MedCare Program, a non-surgical,  non-drug,  non-invasive and cost effective
treatment program for urinary incontinence (UI), as well as pelvic pain, chronic
constipation, fecal incontinence, and disordered defecation. The MedCare Program
is a  multi-modality  program  based  primarily  on  behavioral  techniques  for
treatment.  These techniques include biofeedback using  electromyography  (EMG),
pelvic floor muscle exercises, and bladder and bowel retraining.  The program is
designed to activate and strengthen the various sensory response mechanisms that
maintain bladder and bowel control. The therapy is provided through computerized
instrumental  EMG  biofeedback and is based on operant  conditioning  strategies
whereby specific physiological responses are progressively shaped, strengthened,
and coordinated.

         Affecting an estimated 25 million  Americans,  urinary  incontinence is
the involuntary  loss of bladder  control and represents a significant  cause of
disability  and  dependence.  Incontinence  is one of the  most  prevalent,  yet
severely  unrecognized  problems in health care today1. And as society ages, the
physical,  emotional  and  financial  costs to those  suffering and the costs to
their  caregivers,  as well as the health care  system,  is expected to increase
dramatically.

         Despite the prevalence of  incontinence,  it is widely under  diagnosed
and under reported  primarily  because of the social stigma attached to UI. Many
individuals  are either too ashamed or too  embarrassed to report the problem to
their doctor or to a health care  professional2,  3. Instead,  a large number of
people prematurely turn to the use of absorbent materials and supportive aids



----------- 

1  Urinary  Incontinence  Guideline  Panel.  "Urinary  Incontinence  in  Adults:
Clinical  Practice  Guidelines.  AHCPR Pub 9-2-0038.  Rockville,  MD: Agency for
Health Care Policy & Research; PHS, HHS: March 1992.


<PAGE>



without having their condition properly diagnosed and treated. When sufferers do
inquire,  they  discover  that very few doctors are  knowledgeable  about UI. In
fact, so few medical  professionals  have the adequate  training to diagnose and
offer treatment  options that the U.S.  Department of Health and Human Services,
Agency for Health Care and Policy and Research, has recommended that information
about UI be included in the  curricula  of  undergraduate  and  graduate  health
professional schools.

Urinary Incontinence
--------------------

         In  March  1996,  the US.  Department  of  Health  and  Human  Services
published  a  Clinical   Practice   Guideline   which   estimated  that  urinary
incontinence affects approximately 13 million Americans (of which 85% are woman)
at an annual cost of $16 billion.  Because the incidence of  incontinence  is so
widely under reported and under diagnosed,  many industry observers believe that
the total number of sufferers is well over 25 million,  with  approximately  one
third of these individuals also experiencing problems with bowel control.

         While most people  associate the lack of bladder  control with very old
people,  urinary incontinence affects adults of all ages and crosses all social,
economic,  racial and gender  lines.  Ingrid  Nygaard,  Assistant  Professor  of
Obstetrics and Gynecology at the University of Iowa,  conducted a study with 144
female  exercisers  between  the  ages of 18 and 21.  An  amazing  28% of  these
relatively young individuals experienced urine loss at some point.

         The  psychosocial   impact  of  UI  imposes  a  tremendous   burden  on
individuals, their families and health care providers. Patients experience odor,
dampness,  discomfort,  depression,  withdrawal  from  daily  activities  and  a
significant quality of life problem. Social interaction with friends and family,
and  even  sexual  activity,  is  restricted  or  avoided  in  the  presence  of
incontinence. Many UI sufferers eventually confine themselves to a life of exile
in  their  own  homes.  The  U.S.  Department  of  Health  states  that  urinary
incontinence  is one of the major  reasons why people  institutionalize  elderly
family  members,  accounting for upwards of 50% of all  admissions  into nursing
homes.

         Incontinence is a symptom rather than a disease.  UI can be caused from
a variety of pathologic, anatomic and physiological factors including: Damage to
pelvic muscles from pregnancy;  spina bifida; spinal injury; bladder infections;
drug side effects;  multiple sclerosis;  Parkinson's disease;  stroke; diabetes;
age related changes in lower urinary tract;  obesity and surgery  (hysterectomy,
cesarean section or prostatectomy) that may damage the bladder or urinary tract.
For example, each year about 500,000 men undergo surgery for prostate cancer and
approximately   10%  of  these  patients  suffer  sphincter  damage  during  the
procedure, leading to incontinence.

Types of Incontinence
---------------------

         There are six types of UI: urge, stress, overflow,  reflex,  functional
and mixed.  Of these six, urge and stress  incontinence  account for over 90% of
all urinary incontinence.

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

2 Lagace,  EA, et al.  "Prevalence  and  severity  of  urinary  incontinence  in
ambulatory adults: an UPRNet study." J Fam Pract 35, 610-4: 1993 June.

3 Wallace,  K. "Female  pelvic floor  functions,  dysfunctions,  and  behavioral
approaches to  treatment."  Clinics in sports  medicine,  Vol 13, No 2, 459-481:
April 1994. Overflow Incontinence



<PAGE>

Urge Incontinence

         The  involuntary  loss of urine as a result  of an  abrupt  and  strong
desire to void. The detrusor  muscle,  which controls bladder  contractions,  is
irritated,  unstable and contracts erratically.  Individuals suffering from urge
incontinence have the urge to urinate but can not "hold it" until they reach the
bathroom. Urge incontinence is more common in older adults.

Stress Incontinence

     The involuntary loss of urine during coughing, sneezing, laughing, exercise
or other physical activity causes a sudden increase in intra-abdominal pressure.
Stress  incontinence is seen predominantly in women under 60 and is often caused
by a decrease in pelvic muscle  strength due to  childbirth,  surgery or reduced
hormones  associated with menopause.  Men often suffer from stress  incontinence
after prostate  surgery.  

         Overflow  incontinence  occurs when the  bladder  becomes too full as a
result  of  blockage  in the  lower  urinary  tract  or  injury.  This  type  of
incontinence may have a variety of symptoms, including constant dribbling and/or
frequency,  which is not improved by lying down. In men, it can be the result of
an enlarged prostate.

Reflex Incontinence

         Reflex  incontinence  is the loss of bladder  control  due to  impaired
nerve function.

Functional Incontinence

         Functional incontinence is caused by factors outside the urinary tract,
such as chronic impairments of physical and/or cognitive functioning.

Mixed Incontinence

         Mixed incontinence sufferers display more than one type of symptom. The
most  common  form of mixed  incontinence  is a  combination  of stress and urge
incontinence.

Other Relevant Definitions

Electromyography (EMG)

         The study of muscle activity via the measurement of electrical  signals
that muscles give off as they contract.


<PAGE>



Biofeedback

         The technique of making  unconscious  or involuntary  bodily  processes
(such  as  heartbeats  or brain  waves)  perceptible  to the  senses  (using  an
oscilloscope  or other device) in order to manipulate  them by conscious  mental
control.

Biofeedback using Surface Electromyography (sEMG)

         The pelvic  floor  muscles are  assessed  with EMG  surface  vaginal or
rectal  sensors.  The  abdominal  muscles  are also  assessed.  The  sensors are
connected to a computer which changes the information  into a signal that can be
seen on the computer  screen in the form of lines or graphs by the clinician and
patient.  The  information  received from the  biofeedback  is used to teach the
patient how to make fine adjustments in their muscle activity.

Various Behavioral Programs

         Such as  toileting  programs,  bladder and bowel  retraining  programs,
etc., to help establish a regular schedule for elimination or evacuation.

Behavioral Strategies and Home Programs

         Generalize  physiological  advancements  acquired within each treatment
session to the patient's life situation.

Bladder Disorders Secondary to Neurological Disorders

         Stroke, multiple sclerosis, incomplete spinal cord injury, etc.

Urinary Urgency and Frequency

         Feeling of constantly  having to urinate and/or urinating small amounts
of urine  numerous times  throughout  the day and/or night.  (Usually one or two
times an hour or more).



Hyperactive or Dyssynergic Sphincters

         Discoordination of the bladder and the urinary sphincters.

Urinalysis and Culture

         Used to check for abnormal ties and/or infection in the urine which can
contribute to urinary incontinence.


<PAGE>

Bladder Ultrasound

         Used to  assist  in  bladder  training  and in  assessing  how well the
bladder empties during voiding.

Urodynamics

         Neurologic  diagnostic  tool that measures the  transport,  storage and
elimination functions of the urinary tract.

Electrical Stimulation

         Application of electrical current to sacral and pudendal afferent nerve
fibers via anal and/or  intravaginal  electrodes to inhibit bladder  instability
and improve stiated sphincter and levator ani  contractility and efficiency.  It
can also help to identify the location of pelvic floor muscles.

Vaginal Cones

         Weighted cones placed in the vagina to help strengthen the pelvic floor
muscles.

Anorectal Manometry

         Insertion  of a  catheter  into  the  rectum  which is  connected  to a
computer to evaluate resting pressures,  squeeze pressures,  normal responses in
the rectum with rectal  distention and aid in pelvic floor muscle retraining and
defecation.

Rectal Balloons

         Inserted in the rectum to help increase sensation and aid in defecation
retraining.

Bowel Dysfunction

Fecal Incontinence

         The involuntary loss of stool.

Disordered Defecation

         Problems  evacuating  stool usually due to a non-relaxing  puborectalis
muscle and/or internal or external anal sphincters.

Bowel Disorders Secondary to Neurologic Disorders

         Stroke, Spina Bifida, Multiple Sclerosis, etc.




<PAGE>


Other Colon Rectal Disorders

         Imperforated Anus, Hirschbrung's Disease, Irritable Bowel Syndrom, etc.

Pelvic Floor Disorders

Levator Ani Syndrome

         Pain and/or spasm of the levator ani muscle.

Perineal Descent Syndrome

         The pelvic floor is anatomically  lower than normal usually due to weak
pelvic floor muscles.

Spastic Floor Syndrome

         Pain and spasm of the pelvic floor  muscles  usually due to weakness or
excessive tightness of the pelvic floor muscles.

Pelvic Floor Muscle Exercises

A series of exercises  used to help  increase  pelvic floor muscle  strength and
endurance.

Current Treatment Options and Their Limitations
-----------------------------------------------

         There are a number of treatment alternatives currently available in the
marketplace.  Most, however, are either inadequate,  too expensive, have adverse
side effects,  involve health risks,  have certain  limitations for UI or do not
enhance the  patient's  quality of life.  For the minority of UI sufferers  that
actually  seek  treatment,  gynaecologists,   urologists  and  urogynaecologists
usually  prescribe a program of therapy that  corresponds to the severity of the
condition and the physician's familiarity with available treatment methods.

The MedCare Program for Incontinence
------------------------------------

         The MedCare  Program is  individualized  for each  patient's  needs and
circumstances.  It focuses on their clinical,  cognitive, and residential status
to produce a comprehensive program for bladder and bowel disorder sufferers. The
MedCare  Program is a  multi-modality  program  based  primarily  on  behavioral
techniques for treatment. These techniques include biofeedback using EMG, pelvic
floor  muscle  exercises,  and  bladder  and bowel  retraining.  The  Program is
designed to activate and strengthen the various sensory response mechanisms that
maintain bladder and bowel control. The therapy is provided through computerized
instrumental  EMG  (electromyography)   biofeedback  and  is  based  on  operant
conditioning   strategies   whereby   specific   physiological   responses   are
progressively shaped,  strengthened,  and coordinated. All patients entering the
MedCare  Program  are  initially  evaluated  by a  physician  and a  biofeedback
clinician whose expertise is in bowel and bladder control.

     The  MedCare  Program  is  individualized  for  each  patient's  needs  and
circumstances. It


<PAGE>



focuses  on their  clinical,  cognitive,  and  residential  status to  produce a
comprehensive program for bladder and bowel disorder sufferers.  The fundamental
goals for the MedCare  Program,  as they  relate to bladder and bowel  function,
are:

     1.  Increase the strength and tone of the pelvic floor muscles that prevent
incontinence;  
     2. Augment the motor efficiency of the striated pelvic floor muscles;
     3.  Enhance  sensory-response  systems  that trigger  motor  activity  that
prevent or limit incontinence;
     4. Decrease abnormal motor substitutions that are ineffective in preventing
incontinence;

     5.  Reestablish  normal muscle  activity that may contribute to voiding and
defecation dysfunction;

     6. Provide patients with strategies that establish normal bowel and bladder
habits;

     7. Reduce incontinence and symptoms of urgency and frequency.

To reach these goals the MedCare  Program may use the  following  treatments  or
procedures:

1.       Biofeedback using EMG (electromyography);
2.       Bladder ultrasound;
3.       Aerodynamicist;
4.       Electrical stimulation of the pelvic floor muscles;
5.       Anorectal Manometry;
6.       Weighted vaginal cones;
7.       Rectal pressure balloons;
8.       Pelvic floor muscle exercises;
9.       Various behavioral programs for bladder and bowel re-training;
10.      Behavioral  strategies and  home programs which  generalize gains  made
         within each treatment session to the patient's life situation.

The following disorders respond to this treatment:

Urinary Dysfunction

1.       Stress incontinence;
2.       Urge incontinence;
3.       Mixed stress and urge incontinence;
4.       Bladder disorders secondary to neurologic disorders;
5.       Urinary frequency and urgency;
6.       Hyperactive or dyssynergic sphincters;
7.       Pelvic floor muscle strengthening prior to bladder suspension surgery;

Bowel Dysfunction

1.       Fecal incontinence, idiopathic, or due to  muscle or nerve  damage from
         obstetrical trauma, or surgery;
2.       Disordered  defecation  caused by  excessive  spasm or activity  of the
         pelvic floor muscles, i.e.


<PAGE>



         constipation, acquired megacolon;
3.       Bowel disorders secondary to neurologic  disorders,  i.e. CVA (stroke),
         incomplete spinal cord injury, multiple sclerosis, spina bifida, etc.;
4.       Hirschbrung's disease;
5.       Irritable bowel syndrome;
6.       Adjunct  to surgical  procedures such as muscle  transpositions, ostomy
         reversal surgeries, anal spincteroplasty, and imperforated anus;

Pelvic Floor Disorders

1.       Levator ani syndrome;
2.       Perineal descent syndrome;
3.       Spastic floor syndrome.

Admission to The MedCare Program
--------------------------------

         Admission  into The  MedCare's  Program is by a  physician's  order for
pelvic floor muscle strengthening or pelvic floor muscle spasm. The referral may
come  from a  physician  who  has  completely  evaluated  the  patient  and  has
determined that EMG biofeedback  therapy in conjunction with behavioral programs
is a reasonable  treatment  for the  patient.  The referral may also come from a
physician  who would like more  assessment  of the  patient.  In that case,  the
patient would be referred to the physician  working with  MedCare's  program for
evaluation to see if he or she is an appropriate  candidate for EMG  biofeedback
therapy. A patient can also self refer to the MedCare program, but must first be
evaluated by the  physician  working with  MedCare's  program to see if they are
appropriate.  The cost of the  MedCare  program  is  covered  by most  insurance
companies.

Course of Treatment
-------------------

         The MedCare Program begins by having the clinician  review the patients
medical  history.  The clinician then conducts an in depth verbal interview with
the patient regarding his or her bladder or bowel  dysfunction.  A patient diary
is then  given to the  patient  to fill out for a week at a time to better  keep
track of their  symptoms.  This diary is reviewed  each visit and helps to track
patient  progress  and  improvement.  The  patient  then  undergoes  a  physical
assessment which varies according to the patients disorder and symptoms.  In the
case of bladder  dysfunction the physical assessment may include EMG measures of
the pelvic floor showing baselines, maximum  contraction/relaxation,  and degree
of  maladaptive  abdominal  substitution  with  attempts at pelvic  floor muscle
contraction.  A bladder scan,  catheterization,  or  aerodynamicist  may also be
done.  These help to evaluate the patients post void residual  volumes,  bladder
compliance,  presence of uninhibited bladder contractions, and sensation related
to increasing levels of bladder  infusion.  In the case of bowel dysfunction the
physical assessment consists of EMG measures of the pelvic floor muscles showing
baselines,  maximum  contraction/relaxation,  degree  of  maladaptive  abdominal
substitution with attempts at pelvic floor muscle contractions,  and the ability
to relax with defecation  maneuvers.  Anal manometry,  may also be done, to show
the dynamic  characteristics of the pelvic floor,  coordination and synchrony of
the internal and external anal sphincters,  and sensation in response to varying
degrees of rectal distention.


<PAGE>



         After  the  evaluation  identifies  the  patients  dysfunctional  motor
patterns,  the MedCare treatment  program is then  individualized to include the
modalities that will be used and a home exercise  program.  At each  consecutive
treatment session the patient's progress is reviewed, new goals are set, and the
patient's  program  is  changed  to  accommodate  their  current  situation  and
symptoms.

Length of Treatment
-------------------

         Treatment  sessions  are  usually  one hour in  length,  one week apart
initially  with the inter  treatment  interval  increasing  thereafter  for most
ambulatory non neurological compromised  outpatients.  As a result most patients
will be seen over a three to four month  period  with an average of six to eight
treatment  sessions.  MedCare's program relies on patients  following a specific
individual home exercise program that is updated during each treatment  session.
However,  if the  patient's  condition  demands  more  intensive  therapy  (e.g.
neurologic  disorders,  cognitive  dysfunction,  pediatric patients),  or if the
patient's  ability to perform  the home  program is  compromised  the  treatment
sessions may need to be scheduled  more  frequently  and over a longer period of
time.

Contradictions to Treatment
---------------------------

         The  most  significant  contradictions  to  MedCare's  program  is  the
patient's lack of  motivation,  inability to follow  directions,  and failure to
remember  to do their home  exercise  program.  However,  since each  patient is
assessed  carefully  and followed  closely,  the  clinician can determine if the
patient  will  benefit  from  the  program.  If  the  patient  is  found  to  be
inappropriate  for therapy,  other methods of treatment  will be offered such as
regular toileting or adaptive equipment.  In addition,  the evaluating physician
may also  determine  contradictions  to therapy  such as  anatomic  obstruction,
severe descensus, prolapse, or severe neurologic disorder.

Effectiveness Of EMG Biofeedback
--------------------------------

         The value and  effectiveness of neuromuscular  reeducation  therapy and
behavioral  techniques  has been well  documented  by many notable and respected
researchers.  Studies in the various  application of biofeedback  (EMG) combined
with  behavioural  treatments,  similar  to those used in the  MedCare  Program,
report  a range  of 54% to 95%  improvement  in  incontinence  across  different
patient  groups.  The  researchers of one such study4 were able to obtain a mean
82%  reduction in stress  incontinence  and a range of 30% to 100%  reduction in
urge  incontinence.  With regard to fecal  incontinence with various age groups,
including  geriatric  patients and children  with spina bifida,  reports5,  6, 7
indicate a range of 66% to 77% using behavioural and neuromuscular  re-education
techniques.

         A  combined   analyses  of  22  articles  that  dealt  with  behavioral
techniques in community  dwelling  adults were  reviewed8 by a  subcommittee  of
behavioral experts and then by external reviewers.  The number of patients (both
male and female)  studied in the combined  analyses was 887, with an average age
of 53 years. The number of baseline incontinent episodes ranged from 4 to 21 per
week, per article,  with an overall average of 6 per week. Based on the weighted
combined data, the average percent  reduction in  incontinence  frequency at the
end of treatment was 64.6%, with a

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

4 Burgio, KL, Whitehead,  WE, & Engel, BT. "Urinary Incontinence in the Elderly:
bladder/sphincter biofeedback and toileting skills training." Annals of Internal
Medicine, 103, 507- 515: 1985.
5  Engel,  BT,  Nikoomanesh,  P &  Shuster,  MM.  "Operant  conditioning  in the
treatment of fecal  incontinence."  The New England  Journal of  Medicine,  290,
646-649: 1974.
6  Whitehead,  WE,  Burgio,  KL & Engel,  BT.  "Biofeedback  treatment  of fecal
incontinence in geriatric  patients." Journal of American Geriatric Society, 33,
320-324: 1985.
7 Wald, A. "Biofeedback for neurogenic fecal incontinence: rectal sensation is a
determinant of outcome." Journal of Pediatric Gastroenterology and Nutrition, 2,
302-306: 1983.
8  Urinary  Incontinence  Guideline  Panel.  "Urinary  Incontinence  in  Adults:
Clinical Practice  Guidelines." AHCPR Pub 9-2-00388.  Rockville,  MD: Agency for
Health Care Policy & Research; PHS, HHS: March 1992.

<PAGE>



95% confidence interval ranging from 58.8% to 70.4%.

         The Company has completed an informal,  unpublished study of its own in
which 18 subjects with stress,  urge or mixed  incontinence  were chosen.  There
were 3 males and 15 females, with an average age of 64.6 years and an average of
5.5 incontinent episodes per day. After the treatment program, only 2 out of the
18 displayed any symptoms of incontinence, representing an 89% success rate. The
Company plans to complete its first ever national multi-center clinical outcomes
study  on  the  use  of  conservative   therapy  in  the  treatment  of  urinary
incontinence.  The  results  of this study will be  independently  verified  and
published by leading researchers and investigators.

     Successful   application   of  behavioral   treatment   and   neuromuscular
re-education  therapy using biofeedback is highly dependent on the knowledge and
skill of the health care provider.  This very important  factor is the principle
reason for such a wide  percentage  range in the  studies  mentioned  above.  In
contrast, MedCare's protocols are in depth, standardized and comprehensive.  All
MedCare  trained  clinicians  receive  training in every aspect of the treatment
program,   including  familiarity  with  evaluation  techniques,   anatomic  and
physiologic   correlates  of  the  different   forms  and  symptoms  of  bladder
dysfunction,  instrumentation  and behavioral  principles that guide the MedCare
program for incontinence.

     At MedCare's  developmental clinic, a study of randomly selected volunteers
was conducted to rate the  effectiveness of the program.  Eighteen subjects with
stress,  urge or mixed  incontinence  were  chosen  with the  approval  of their
physicians.  There were three males and fifteen females,  with an average age of
64.6. The results of this study revealed a statistically  significant  reduction
in incontinent episodes in the randomly selected patient population.  Before the
treatment program began, the subjects had an average of 5.5 incontinent episodes
per day. After the treatment  program,  only 2 out of the 18 patients  displayed
any symptoms of  incontinence  --  representing  an 89% success rate. A 12 month
follow-up revealed no tendency for relapse.

         A study using a large patient  population  base was conducted by Cheryl
Aikey. Out of 200


<PAGE>



patients,  ranging  in age from 17 to 89 years of age,  the  study  revealed  an
overall  improvement  rate of 77%. The high  success rate of MedCare's  program,
along with ample positive clinical evidence from other independent  researchers,
supports the Company's  expectations  that a  conservative  approach in treating
incontinence will become the preferred  treatment choice of all sufferers in the
near future.  At present,  the only  hindrance to this  conversion  of treatment
modality (surgery,  drugs and diapers being the current modalities of choice) is
the ignorance of the patient population and the medical community -- few realize
that an alternative treatment program exists at the present time.

Expansion of The MedCare Program
--------------------------------

         The MedCare  Program is available  through the  practices of physicians
(urologist,  urogynecologist,  gastroenterologist,  and/or colon rectal surgeon)
either in a private office, clinic, or a hospital setting.

         For the  physician,  the  MedCare  Program  is a turn key  system  that
includes equipment,  trained personnel,  model policies and procedures,  billing
and  collections  assistance  and an  active  marketing  program  in each  local
community  where the Program is  available.  Inclusive of equipment and training
costs, each site is expected to cost around $20,000 to establish.

     As of March 6, 1998, the Company had  established  (as noted with an " * ")
or was in the  process of opening a total of twenty  four (24)  MedCare  Program
sites in the following cities:  Norman, OK* (Dr. Michael M. Blue),  Winter Park,
FL* (Dr. Jake Jacobo), Denver, CO* (Dr. Rueven Rosen), Raleigh, NC* (Dr. Richard
D. Kane),  Kankakee,  IL* (Dr. Joel Slutsky),  Kingwood, TX* (Dr. Robert Rosen),
Toledo,  OH* (Dr. Gregory  Haselhahn),  Lake Worth,  FL* (Dr. Mark  Lieberfarb),
Coral Springs,  FL* (Dr. Michael Lazzopina),  Phoenix,  AZ* (Dr. William Crisp),
Fremont,  CA* (Dr. Scott Kramer), New York, NY (Dr. Robert Gluck), New Rochelle,
NY (Dr. Larry Roberts), Roswell, GA (Dr. Omar Eubanks), Baltimore, MD (Dr. Marci
Roenneberg),  Stanford,  CT (Dr.  Jon  Waxberg),  West Orange,  NJ (Dr.  Yitzhak
Berger),  Clackamas,  OR (Dr. Herbert Tirjer),  Dallas,  TX (Dr. Brian Feagins),
Amherst,  OH  (Dr.  Steven  Leslie),   Columbus,   OH  (Dr.  Stephen  Richards),
Alexandria,  VA(Dr. A. Roger  Weiderhorn),  Albany,  NY (Dr. B. Orakondy),  Mine
Hill, NJ (Dr. Marc Colton),

Marketing of The MedCare Program
--------------------------------

         In a study  of 3,638  patients  over  age 20 who saw  their  physicians
during an 11 week  period,  43% of women and 11% of men (33%  overall)  reported
current  UI.  75%  of  these  patients  had  not  yet  informed  a  health  care
professional,  however,  more than a third  said they would see a  physician  if
treatment were available. In the meantime, many are prematurely drawn to the use
of  absorbent  products as a result of  extremely  effective  marketing by major
manufacturers,  such as Kimberly Clark,  Procter & Gamble and Johnson & Johnson,
thus allowing  millions of sufferers to hide their condition without anyone ever
discovering  their UI and resulting in an average sufferer waiting between 7 and
9 years before seeking help.

     This  study  reveals  the crux of the  problem:  a  significant  number  of
incontinence sufferers


<PAGE>



do  not  seek  medical  guidance  of  any  kind  either  because  they  are  too
embarrassed,  believe  their  condition  is a normal  part of  aging or  bearing
children or are not aware that a genuine  medical  treatment is available.  This
general  ignorance on the part of the patient is  compounded by the fact that so
few people in the medical community are knowledgeable.

         When an effort is made to educate and market to incontinence sufferers,
most are amazed at the significant  drawing power of simple  marketing and sales
programs.  For  example,  The New York Times  reported an incidence in which the
authors of "Staying Dry: A Practical Guide to Bladder  Control" (Dr.  Kathryn L.
Burgio,  K.  Lynette  Pearce  and Dr.  Angelo  J.  Lucco)  were  rejected  by 50
publishers  before Johns Hopkins Press accepted the  manuscript.  Within several
days of a mention of the book in an Ann Landers column,  Johns Hopkins Press was
flooded by over 20,000 letters. Within a matter of months, over 50,000 copies of
the book had been sold,  becoming the biggest selling book of its kind in such a
short period of time.

         MedCare's  marketing and sales strategy is designed to promote  general
awareness of  incontinence  and that an effective  treatment  program is readily
available.  The majority of the Company's  advertising  is directed  towards the
sufferer through a combination of brochures,  print ads, direct mail, radio, TV,
doctor  referrals,  seminars and general public relations within a defined area.
The Company's past experience with such marketing has been favorable, with print
and referrals being the best source of new patient flow.

         The Company  targets much of its  marketing  and  advertising  to those
individuals that are prime candidates,  namely women over the age of 35, men who
have undergone  prostate surgery,  nursing home residents,  new mothers,  female
athletes and current  incontinence  patients. A secondary audience for MedCare's
advertising  will be friends  and family and the  professional  audience,  which
includes    gynecologists/obstetricians,     general    practitioners,    family
practitioners,  geriatricians,  gastroenterologists,  nurse  practitioners,  and
nursing home  administrators.  Past experience  indicates that once an effective
marketing  program has been  launched,  continued  draw comes from word of mouth
referrals from patients and doctor referrals.

The Program Management Agreement
--------------------------------

         Each physician or practice ("the  Practice")  who  participates  in the
MedCare Program signs a Program Management  Agreement which defines the terms of
the Program by which the  physician is bound.  The  Practice is given  exclusive
authority  and  responsibility  for  professional   supervision  and  judgements
required in the diagnosis of patients with  Conditions  and in the selection and
performance of Procedures on the Practice's  patients.  MedCare provides various
support and administrative services and assistance in operating the Program, but
is  specifically  excluded  from  being a  provider  or  supplier  of medical or
professional services. The Practice also must give MedCare permission to use his
or her name,  address,  phone  number and type of  practice  in lists of MedCare
participants   and   in   written   and   verbal   communications   with   other
practicitioners.

Medcare's Obligations

     Equipment.  MedCare agrees to lease to the Practice the Program  Equipment,
which is


<PAGE>



selected,  installed  and  maintained  by MedCare and  available  for use by the
Practice  on a  full-time  basis as long as he or she is a member of the MedCare
Program. MedCare also assists the Practice in procuring all permits and licenses
necessary for the  installation  and  operation of the Program  Equipment or any
items thereof.  Medcare agrees,  furthermore,  to pay all fees,  taxes and other
charges that may be levied upon  MedCare's  ownership of the Program  Equipment,
although its failure to do so does not constitute a default under the agreement.
The physician pays all taxes and charges  associated with its use of the Program
Equipment.  The  Company  also does not have an  obligation  to  provide  new or
improved Equipment.

         Technologists.  The  Program  Management  Agreement  provides  for  the
leasing of employees by MedCare to the Practice who are licensed,  qualified and
trained to operate the Program Equipment under physician  supervision and assist
the  Practice in the  operation  of the  Program.  The Practice has the right to
approve or disprove of each Technologist  provided by MedCare and must supervise
all  activities  of  the  Technologist.  While  present  at  the  Location,  the
Technologist  is  considered  an employee of the  Practice and is subject to the
Practice's continued approval and works the hours assigned by the Practice.  The
Technologist's  salary and any other benefits,  however, are paid by MedCare. If
the Practice so desires,  the Company will require the  Technologist  to sign an
employment agreement with the Practice.

         Policies  and  Protocols.  MedCare  provides  the  Practice  with model
clinical and administrative  protocols necessary for the Program, subject to the
Practice's approval, in the form of a Policies and Procotols Manual. This manual
reflects  the  clinical  activities  and  methods in which the  Technologist  is
trained and  prepared to perform  under the  supervision  of the  Practice.  The
Practice,  however,  has the ultimate  responsibility for approving policies and
procedures applicable to the Program and the provision of Procedures to patients
of the Practice.  MedCare assumes responsibility for coordinating the Practice's
billing,  collection and other  reimbursement  services  related to the Program;
however,  the Practice is responsible  for performing all billing and collection
functions  and  all  billing  shall  be done in the  name of the  Practice.  The
Technologist  is responsible  for maintaining all patient data for reference and
development of case histories in a manner consistent with accepted standards and
the Practice's  policies and procedures.  MedCare will also provide the Practice
with training,  education and information  relative to the Program on an ongoing
basis.

The Practice's Obligations

         The Practice  agrees to engage MedCare on an exclusive basis as manager
of the  Practice's  programs for the diagnosis  and treatment of the  Conditions
using  behavioral  and  biofeedback  techniques.  The  Practice  is  required to
provide,  at its own expense, an area of sufficient space for the performance of
the  Procedures  and for the  Program  Equipment.  This  Location  must be in or
adjacent to the offices of the  Practice  and must be  available  on a full-time
basis for the  operation  of the  Program.  All  janitorial  and other  services
necessary for the cleaning and  maintenance  of the Location must be provided by
the  Practice.  The  Practice  must also  supply  all usual  office  and  clinic
supplies, furnishings and equipment.

     Program Equipment. The Practice must, at its own expense, provide utilities
for the


<PAGE>



installation  and ongoing  operation of the Program and the  Equipment.  MedCare
will provide information and specifications  regarding required  utilities.  The
Practice is not allowed to remove the  Equipment  from the Location  without the
prior  written  consent of MedCare  and must not subject  the  equipment  to any
levies, liens or encumbrances.

         Procedures.  For each Procedure  conducted as part of the Program,  the
Practice  shall  determine the  appropriate  intervention  and shall provide the
Technologist with information regarding the patient relevant to the Procedure to
be conducted.  The Practice shall be responsible for obtaining  informed consent
from the patient prior to the performance of any Procedures.  The Practice shall
be professionally responsible for, and shall supervise, all such Procedures. The
Practice  shall  also be  responsible  for the  administration  of other  tests,
treatments  and  procedures  not  provided  as part  of the  Program  as  deemed
necessary or appropriate by the Practice.

         Technologist.  The Practice agrees that the Technologist is an asset of
MedCare,  and  that  during  the  term of  this  Agreement,  and  for  one  year
thereafter,  no proposal of any  business  relationship  with the  Technologist,
other than pursuant to the Agreement,  shall be made, offered or accepted by the
Practice without MedCare's written consent.  Otherwise, the Practice may control
and direct the Technologist  assigned to the Practice by MedCare as a common-law
employee.

         Group Practice. If the Practice consists of two or more physicians,  it
is required to warrant that it meets the definition of a "Group  Practice" under
42 USC Section 1395nn and any applicable state laws.

Financial Arrangements

         The  Practice  agrees to pay  MedCare a  management  fee which shall be
invoiced  monthly  by  MedCare.  Fees not paid on time are  subject to a monthly
interest  charge of no more than 1-1/2  percent  multiplied  by all amounts past
due.  The  Management  fee is a total  amount  allocated  among  administration,
technologist,  billing, intellectual property and equipment costs. Prior to June
1, 1998,  MedCare's management fee was calculated as a percent of the practice's
charges for the MedCare  managed  activities of the practice.  Effective June 1,
1998, the management fee became a flat rate per encounter. The initial rate is a
fixed fee per encounter, with higher rates for certain specialized services.

         The  Company  does not make any  payments  to  physicians  who have the
MedCare Program in their offices. The start up costs are expenses related solely
to pay for equipment and computer and software  owned by the Company  ($16,000),
expenses  related for the recruitment  and training of the clinicians  ($5,000 -
$8,000),  and  miscellaneous   expenses  such  as  installation  of  telephones,
furniture  and supplies  ($4,000 - $6,000).  Since the  physician is required to
provide office space at no cost,  there are no fees, or ongoing fees paid to the
physician.  Shown below,  is an updated and revised  listing of average  monthly
expenses on a per site basis:

         Insurance                          $    650.00
         Ad Agency Labor Costs                       $    250.00
         News Paper Advertising                      $  2,000.00


<PAGE>



         Salary for Clinician               $  3,000.00
         Telephone                          $    200.00
         Local Physician Marketing                   $    350.00
         Office Supplies                             $      25.00
         Sales Rep Commission                        $      72.46
         Mileage Allowance - Travel                  $      15.00
         Total Average Monthly Exp:                  $  6,562.46

Term and Termination

         Each  Practice  Management  Agreement  is for a  period  of five  years
following  the  Effective  Date.  The term  may be  automatically  extended  for
additional  five year periods  following the expiration of the original term, or
following the expiration of each extension period thereafter,  unless either the
Practice  or  MedCare  notifies  the  other in  writing,  within  90 days of the
expiration  of  the  applicable  period,  of  its  intention  to  terminate  the
Agreement. MedCare may terminate for cause if the Practice fails to make payment
when due under this Agreement or any other Agreement with MedCare, provided that
payment  is not made  within  ten days  after  notice of such  failure  has been
delivered to the Practice. Either party may terminate the agreement if the other
files a petition in bankruptcy,  has a receiver,  trustee or other court officer
appointed, takes advantage of the insolvency laws of any jurisdiction,  makes an
assignment for the benefit of its creditors or is  voluntarily or  involuntarily
dissolved.  Furthermore, either party may request the renegotiation of the terms
of this  Agreement if any  legislative  or regulatory  change or  determination,
whether  federal or state,  would have a  significant  adverse  impact on either
party in connection with the performance of this Agreement.

Confidentiality

         The  Practice  is  prohibited   from   disclosing  or  discussing   any
Information with any person except the Practice's  representatives  for one year
after the Information has been initially disclosed to the Practice. The Practice
must use the Information solely in connection with the Program and the provision
of Procedures to its patients,  and is restricted  from using the Information in
any way that may be deemed detrimental to MedCare.  Upon the request of MedCare,
the Practice must promptly return all original  documents and all  reproductions
of information in the  possession of the Practice.  All derivative  documents in
the possession of the Practice  containing or reflecting any Information must be
destroyed  under the  supervision  of an authorized  officer of the Practice and
written  certificate  of the  destruction  must be  provided  to  MedCare by the
Practice.  For  the  course  of this  Agreement  and for  two  years  after  its
termination,  the Practice and its members, employees,  agents,  representatives
and affiliates are restricted from entering into any joint venture,  independent
contract or other business  relationship  with any MedCare employees without the
Company's express consent.

Insurance

         The  Practice  is  responsible  for all  professional  liability  risks
associated with the performance of the Procedures on its patients, including the
performance of Procedures by the Technologist under


<PAGE>



the  supervision of a physician  member of the Practice.  The Practice agrees to
maintain  professional  liability insurance of no less than $1,000,000 aggregate
liability  per policy year.  MedCare  agrees to maintain  comprehensive  general
liability  insurance  covering  MedCare's   responsibilities   pursuant  to  the
Agreement  with a limit of liability of no less than  $1,000,000  aggregate  per
policy  year,  as  well  as  worker's   comepnsation   insurance   covering  the
Technologist  and products  liability  insurance with a limit of liability of no
less than $1,000,000 aggregate per policy year.

Governmental Regulation Issues Concerning the Program Management Agreement

         Under the  Company's  Program  Management  Agreement,  MedCare is not a
provider of health care services.  MedCare merely supplies personnel,  equipment
and  proprietary  techniques  to  providers of health care.  The  physicians  or
medical groups that contract with MedCare are the providers of services to their
own patients.  MedCare simply manages the incontinence treatment programs in the
physicians offices.

         This management model is analogous to the arrangements employed by many
other physician practice management companies, including PhyCor, MedPartners and
others.  In MedCare's care,  only part of the  physician's  practice is managed.
Such partial management  arrangements are utilized primarily in conjunction with
the  provision  of  ancillary  services  that  require  speacialized  personnel,
equipment,  procedures, etc. For example, many physician office laboratories and
imaging centers are operated under management agreements with organizations that
have  speacial  expertise  in  the  operation  of  such  services.   Like  these
speacialized  managers,  MedCare offers a global management  package,  including
equipment,  personnel,  policies,  procedures,  reimbursement  expertise,  etc.,
necessary to suport a physician's  practice in providing a  speacialized  health
care service.

         Under Stark II  legislation,  physicians are prohibited  from referring
Medicare or Medicaid eligible patients for designated health services to persons
or entities with which the physician has financial  relationship.  Stark II also
prohibits the  recipient of the referral from billing  Medicare for a designated
service furnished pursuant to a prohibited referral.  However, Stark II contains
several general exceptions to its referral  prohibitions The MedCare Program and
the  Program  Management  Agreement  are  designed to allow  medical  groups and
physicians  that  contract  for  MedCare's   management  services  to  meet  the
requirements  of Stark  II's  "In-Office  Exception".  Basically,  the  InOffice
Exception  allows a  physician  to  perform  and bill  for  designated  services
provided to the  physician's  own patients in conjunction  with the provision of
physician services

         However,  there are still referral  issues relevant to the operation of
an  incontinence   treatment  program  by  a  physician  or  medical  group.  In
particular,  these  self-referral  arrangements  are encompassed by the referral
prohibitions of the Stark II laws unless there is an applicable  exception.  The
MedCare  Program  and the Program  Management  Agreement  are  designed to allow
medical groups and physicians that contract for MedCare's management services to
meet the requirements of Stark II's "In-Office Exception".

         The specific features of the MedCare Program and the Program Management
Agreement  that  ensure that the  physician  or group  practice  comply with the
relevant Stark II requirements follows:



<PAGE>



1.       In the Program  Management  Agreement,  the  physician  represents  and
         warrants that if the practice consists of two or more physicians,  they
         meet the definition of a "group practice" for the purpose of Stark II;

2.       The Program Management  Agreement and the supporting  materials clearly
         state  that  the  physician  or group is the  responsible  provider  of
         incontinence  treatment services for all purposes  including  licensure
         and reimbursement.  The technician leased by the physician from MedCare
         serves  as  the  physician's   employee  and  works  under  the  direct
         supervision  of  the  physician.  The  physician  also  bills  for  the
         incontinence treatment services in the same manner as any other medical
         or ancilliary  services  provided by that physician or group  practice;
         and

3.       In order to contract  with MedCare for  management  of an  incontinence
         treatment program, a physician or group must secure a physical location
         that is part of, or adjacent  to the  physician's  or group  practice's
         existing office space.

Competitive Treatment Options for UI

         Some  currently  available  alternatives  for the  treatment of urinary
incontinence include:

         Absorbent Products and Diapers:  Similar to baby diapers, adult diapers
and pads capture  urine upon  leakage.  While the product has improved  over the
last few years, most users find the bulky size,  inconvenience,  lack of control
over urine flow, discomfort from wetness,  embarrassment over the appearance and
odor of urine and  ongoing  cash outlay to be major  disadvantages.  It has been
estimated that the typical UI sufferer in the United States spends between $1200
to $1500  annually on these types of products.  Retail sales of adult  absorbent
products  surpassed  $1.6  billion  last year  according  to  industry  sources,
compared to $496 million in 1987 and just $173 million in 1982. Early dependency
on absorbent  products is often a deterrent to continence by giving the wearer a
false sense of security and removes  their  motivation  to seek  evaluation  and
treatment.  When used  improperly,  absorbent  products may  contribute  to skin
breakdown  and  urinary  tract  infections.  As a  result,  meticulous  care and
frequent changes are required.

         Surgery: A variety of surgical  procedures are utilized more for stress
incontinence  than  urge  or  mixed  incontinence.   Surgeries  usually  involve
elevating  and  stabilizing  the urethra and the bladder  neck in order  prevent
hypermobility.  These  procedures  are delicate,  complicated  procedures  whose
success  depends on a number of factors,  including  the degree of the pathology
and the operating physician's  experience.  Accordingly,  outcomes are generally
varied.  Surgery is quite an  expensive  and  traumatic  procedure  requiring  a
hospital stay and several weeks of recovery time. A typical bladder  suspension,
for  example,  costs over  $10,000  to  perform.  An  estimated  60,000  bladder
suspension procedures are performed annually in America.

         Indwelling  Catheters:  An indwelling,  or Foley,  catheter is a closed
sterile system  inserted into the bladder  through the urethra in order to allow
for drainage of the bladder directly through a tube into a urine collection bag.
While the individual typically remains dry, most experience the inconvenience of
the long tube and collection bag. For continuous users, urinary tract infections
are


<PAGE>



of concern.

         Implanting  Devices and Injectable  Materials:  Implantation of foreign
materials into the body,  such as an artificial  sphincter,  are used relatively
infrequently due to the highly invasive and high  complication  rate as compared
with    other     procedures.     Injectables,     which    include    collagen,
polytetrafluoroethylene  and  other  materials,  are  inserted  into the  tissue
surrounding the urethral  sphincter using a small-gauge  hypodermic needle under
local  anaesthesia.  The injection of the material  increases muscle tone of the
sphincter by increasing bulk and offering greater resistance to urine flow.

         Periurethral  injections  generally  show promise when used in patients
suffering from specific anatomical defects,  principally  intrinsic  sphincteric
deficiency,  thus limiting its use to about 10% to 15% of the UI population.  In
addition  to the high  cost of such  injections,  around  $2,500,  there is some
degree of side effects.

     Electrical Stimulation:  Electrical stimulation involves the application of
a low level electric current to stimulate or inhibit the pelvic muscles or their
nerve supply.

         Mechanical Devices: Most mechanical devices, such as vaginal pessaries,
diaphragm  rings  and  other  inflatable  and  non-inflatable  devices,  work by
supporting the urethrovesical junction.  Despite their wide availability,  these
products have not gained wide acceptance among UI sufferers.  In addition to the
difficulty of properly  fitting  patients with these  devices,  other  potential
adverse side effects include vaginal discharge and tissue erosion.

         Drugs:  Drugs typically used for the treatment of  incontinence  act on
the nerve  receptors  associated  with the bladder  neurotransmitter  system and
generally alleviate the symptoms in part but are seldom curative. Drugs also may
cause adverse side effects,  often affecting the  cardiovascular and circulatory
systems,   along  with  the  possibility  of  urinary   retention  and  unwanted
interactions with other drugs.  Currently,  most drugs require  continual,  life
long usage in order to control urinary incontinence symptoms.

         "Ma & Pa" Clinics: At present, there are a number of small incontinence
clinics,  or ancillary  programs,  offered by doctors,  hospitals or therapists,
scattered  across North  America that use a combination  of currently  available
non-invasive  alternative treatment options to treat UI patients.  While most of
these  clinics  have limited  financial  strength  for  adequate  marketing  and
advertising  and  often  operate  a "ma and pa" type of  business,  the  Company
expects  better  financed and more  sophisticated  competition  to emerge in the
future.

         Ignorance  of  Sufferers  And  The  Medical  Community:   The  greatest
competition,  by far, comes from the ignorance of the marketplace. A significant
number of incontinence sufferers do not seek medical guidance of any kind either
because they are too embarrassed,  believe that their condition is a normal part
of aging or bearing  children or are not aware that a genuine medical  treatment
is  available.  Not only are UI  sufferers  ignorant  of the care and  treatment
options available for their condition, but so are a vast number of people in the
medical profession.  In fact, so few doctors are knowledgeable about UI that the
Agency for Health Care Policy and Research recommended that


<PAGE>



information  about UI be included in the curricula of undergraduate and graduate
health professional schools.

Employees
---------

         At December 31, 1997, the Company employed 17 full time persons.  As of
March 6, 1998,  the Company  employed 27 full time  persons.  To the best of the
Company's  knowledge,  none of the  Company's  officers or directors is bound by
restrictive covenants from prior employers.  None of the Company's employees are
represented by labor unions or other collective bargaining groups.

Year 2000 Issues
----------------

         All of the Company's computer systems, including hardware and software,
in both  corporate  and clinical use,  utilize the date format  specified in the
underlying  operating system of Windows 95 and, as a result, are fully Year 2000
compliant.  The Company's clinical software, the "Myoexerciser," can store dates
from year 0 to 9999. As a result,  the Company does not anticipate any Year 2000
issues to arise,  nor will there be any  expenses  required  in order to resolve
Year 2000 issues.

History of the Company
----------------------

         Except for the historical  information contained herein, the discussion
in this annual report contains certain  forward-looking  statements that involve
risk and  uncertainties,  including,  but not  limited  to,  product and service
demand  and   acceptance,   changes   in   technology,   changes  in   insurance
reimbursement,  economic  conditions,  the impact of  competition  and  pricing,
government  regulation,  and  other  risks  defined  in  this  document  and  in
statements filed from time to time with the Securities and Exchange  Commission.
The  cautionary  statements  made  in this  document  should  be  read as  being
applicable  to all related  forward-looking  statements  wherever they appear in
this document.  The Company's actual results could differ  materially from those
discussed here.

         The  Company,   formerly  known  as  Multi-Spectrum  Group,  Inc.,  was
incorporated  under the name Santa Lucia Funding,  Inc., in the State of Utah on
January 17, 1986, with an authorized  capital of 50,000,000 common shares with a
par  value of  $0.001  for the  purposes  of  raising  capital  in order to seek
business  opportunities  believed to hold  potential for profit.  On February 8,
1990, the Company adopted a plan of merger with  Multi-Spectrum  Group,  Inc., a
Delaware corporation, and Santa Lucia Funding, Inc., a Utah corporation,  merged
into Santa Lucia Funding, Inc., a Utah corporation,  which then changed its name
to Multi-Spectrum  Group, Inc. The outstanding  shares of Multi-Spectrum  Group,
Inc.  were  converted  into common  shares of Santa Lucia  Funding,  Inc. at the
exchange  rate of  55,305  shares  of  Santa  Lucia  for  each  common  share of
Multi-Spectrum  then issued and outstanding.  In addition,  the number of common
shares  authorized  was increased from  50,000,000 to  100,000,000  with the par
value remaining at $0.001.  On November 13, 1992, the Company issued  8,7722,800
shares of its Common  Stock to Group of Five,  Inc.  in  exchange  for  services
rendered.

     The Company was  inactive  during the period from  February  1990 to August
1995, at which


<PAGE>



point the Company acquired the MedCare program for treating incontinence.

         On August 11, 1995,  a reverse  split of the common stock by a ratio of
one new for 1,200 old was effected, with the par value remaining at $0.001. This
reduced the total number of shares issued and  outstanding to 58,519.  On August
14,  1995,  the Company  acquired the rights to the MedCare  Program,  a urinary
incontinence procedure, in exchange for 2,000,000 shares of its common stock.
  On August 25, 1995, the Company approved an increase in the authorized capital
to 101,000,000  shares of stock,  comprised of 100,000,000  common shares with a
par value of $0.0001 per share and 1,000,000  preferred  shares with a par value
of $0.25 per share, and approved a name change to MedCare Technologies, Inc.

         On August 15,  1995,  the  Company  authorized  in a Private  Placement
Memorandum, pursuant to Regulation D, Rule 504, offering 4,200,000 shares of its
common stock at a price of $0.15.  This offering was conducted in order to raise
money for further research and development on the MedCare Program and was broken
down as follows:  $300,000 for public  relations and  advertising,  $155,000 for
market  research  and   development,   $45,000  for   consulting,   $25,000  for
miscellaneous expenses and $75,000 as a cash reserve. On September 20, 1995, the
offering  was  completed  with all  shares  being  issued  for a total  value of
$630,000, less offering costs of $30,000.

         On October 1, 1995,  the  Company's  wholly owned  subsidiary,  MedCare
Technologies  Corporation,  acquired 100% of Manon  Consulting Ltd., an Alberta,
Canada,  corporation,  for a nominal value from its owners,  Diane Nunzianto,  a
MedCare  Technologies,  Inc.  director  and  Philip  Tolley and Mel  Tolley.  On
December  31, 1995,  the Company  issued  16,666  shares of its common stock for
$50,000 cash and 25,000  shares of its common  stock in exchange for  consulting
services  with a value of  $75,000.  The  operations  of Manon  Consulting  were
terminated on December 31, 1996.

         The Company offered for sale a Private Placement Memorandum pursuant to
Regulation  D, Rule 504 which was begun on June 20, 1996 and completed on August
15, 1996. This offering was for 50,000 shares of common stock at $4.75 per share
for a total offering of $237,500.  The proceeds from this offering were used for
equipment purchase, advertising and marketing, and working capital.

         The Company offered for sale a Private Placement Memorandum pursuant to
Regulation  D, Rule 504 which was begun on November  18, 1996 and  completed  on
December 24, 1996.  This offering was for 56,000 shares of common stock at $4.50
per share for a total offering of $252,000. The proceeds from this offering were
used for equipment purchases, advertising and marketing and working capital.

         Narinder  Thouli,  a member  of the  Board of  Directors,  resigned  on
November  1,  1996.  He  resigned  for  personal  reasons  and did not  have any
disagreements  with the  Company.  On  October  4, 1996 a  migratory  merger was
completed changing the Company's domicile from Utah to Delaware.

     During fiscal 1997, the Company issued three private  placement  memoranda.
On February


<PAGE>



1, 1997,  an offering was begun  pursuant to  Regulation D, Rule 506 for 176,000
shares of common  stock at $6.25 per share for a total  offering of  $1,100,000.
This  offering  was  completed on February 4, 1997.  The proceeds  were used for
working capital and expansion of the MedCare Program.

         The Company offered for sale a Private Placement Memorandum pursuant to
Regulation  D, Rule 506 on July 7, 1997 for  300,000  shares of common  stock at
$6.00 per share,  plus 300,000  warrants  exercisable at $6.00 per warrant until
July 7, 2002 for a total offering of $1,800,000.  This offering was completed on
July 30, 1997 and the  proceeds  used for working  capital and  expansion of the
MedCare Program.

         On June 20, 1997,  the Company  began  offering for sale a Regulation D
offering  under Rule 506. This offering was for the Series A Preferred  Stock of
the Company and was sold for $10,000 per share, in minimum  subscription amounts
of at least  ten  shares  ($100,000)  and  increments  of five  shares in excess
thereof.  The  total  offering  was for  three  hundred  shares  for a total  of
$3,000,000,  with a minimum offering of $1,650,000.  The offering closed on July
8, 1997 with the minimum offering placed. The Preferred Stock was accompanied by
warrants to purchase a number of shares of Common Stock of the Company  equal to
thirty-three  and  one-third  percent  (33-1/3%)  multiplied  by  the  aggregate
purchase price of the Subscriber's  Preferred Stock outstanding on each of nine,
twelve and fifteen months following the closing date of the offering, divided by
the Fixed  Conversion  Price as defined in the  Certificate of  Designation.  In
conjunction with this offering, an Escrow Agreement was entered into with Swartz
Investments  LLC, a Georgia limited  liability  company,  as Placement Agent and
with First Union National Bank of Georgia as Escrow Agent.

         At this time, the Company also filed a Certificate of Designation  with
the State of Delaware in conjunction  with this offering.  This  Certificate was
approved  on July 7,  1997 and  designates  1,000  shares of the  Company's  one
million shares of authorized  preferred  stock to be Series A stock.  This stock
has been assigned an issue price of $10,000 per share with an eight percent (8%)
per annum  accretion  rate.  The rank of this stock has been  assigned  as being
senior to all Common Stock of the  Company,  junior to any other class or series
of capital stock of the Company  hereafter created  specifically  ranking by its
terms senior to the Series A Preferred  Stock,  senior to any class or series of
capital stock of the Company hereafter  created not specifically  ranking by its
terms  senior  to or on par  with  any  Series A  Preferred  Stock  of  whatever
subdivision,  and on parity  with any class or  series of  capital  stock of the
Company hereafter created  specifically  ranking by its terms on parity with the
Series A Preferred Stock. No dividend rights have been granted to this stock.

         The conversion  terms outlined in the Certificate of Designation  state
that holders of the Series A Preferred Stock can convert their stock on or after
a period of no less than four  months from the  closing  date into Common  Stock
using the formula per share of Series A Preferred Stock:

                                           (.08)(N/365)(10,000) + 10,000
                                                 Conversion Price

The Conversion  Price is determined as the lesser of 115% of the average Closing
Bid Price for the five trading  days ending on June 6, 1997,  which is $7.346 or
X% of the average  Closing Bid Price of the Company's  Common Stock for the five
trading days immediately preceding the Date of


<PAGE>



Conversion, where X is determined as follows:

         # of months between Last Closing
         and Date of Conversion                               "X"
         ----------------------                               ---
         4-6 months                                  90%
         6 months-1 year                                      87.5%
         9 months, 1 day-12 months                            85%
         more than 12 months                         80%

         The Company  also has the right to redeem the Series A Preferred  Stock
upon receipt of Notice of Conversion at a rate of the Stated Value times 1.10 to
1.2 or may redeem the stock at its own  election at 115% to 130%,  depending  on
the length of time.

         The Placement  Agent and its employees  and  affiliates  were granted a
total of 165  Preferred  Stock  options  and  258,302  Common  Stock  options in
conjunction  with this offering.  These warrants have been issued  pursuant to a
Placement Agent  Agreement  between the Company and Swartz  Investments,  LLC, a
Georgia  limited  liability  company,  as  Placement  Agent.  According  to this
agreement,  the  Placement  Agent agreed to find  subscribers  for the Company's
Preferred  Stock Series A offering in exchange for a placement  fee of 5-1/2% of
the aggregate gross  subscription  proceeds of the offering,  a  non-accountable
expense allowance of 2% of the aggregate gross subscription proceeds,  and, if a
subscriber  exercises a preferred  warrant,  a fee  consisting  of 7-1/2% of the
aggregate  exercise  price, as defined in the Preferred  Warrant.  The Placement
Agent  Agreement  also grants to the Placement  Agent three sets of warrants (i)
warrants  to  purchase   stock  equal  to  7-1/2%  times  the  aggregate   gross
subscription  proceeds  divided by the Fixed Conversion Price (as defined in the
Certificate of  Disclosure),  (ii) warrants to purchase stock equal to 7-1/2% of
the number of  Conversion  Warrants  placed in the  offering  (as defined in the
Subscription  Agreement) and (iii) upon the exercise of a Preferred Warrant by a
Stockholder,  warrants to purchase  stock equal to 7-1/2% of the gross  proceeds
received by the Company upon the exercise of the  Preferred  Warrant  divided by
the Exercise  Price (as defined in the  Preferred  Warrant).  All three of these
warrants  are for a period of five years at a fixed  conversion  price of $7.346
per share,  as defined in the  Certificate  of Disclosure.  The Placement  Agent
Agreement also contains cashless exercise and reset provisions.

         On July 8, 1997, Jeffrey Aronin joined the Company as its President and
Chief Operating Officer.  He was also elected a Director of the Company.  Harmel
S. Rayat,  the previous  president,  remains with the Company in the capacity of
Chief Executive Officer and Chairman of the Board.

     On September 17, 1997, Diane Nunziato resigned as a director of the Company
and Dr. Jake Jacobo joined the Company as a director.  Ms. Nunziato resigned for
personal reasons and did not have any disagreements with the Company.

     On  November  7,  1997,  Mr.  Greg  Wujek  joined  the  Company as its Vice
President of Managed Care.

         The Company  has also issued  shares  pursuant to the  following  stock
option plans:


<PAGE>



         1995 Stock  Option  Plan  (500,000  shares  exercisable  at $3.00 until
         December 31, 2001) 

         1996 Stock Option Plan (300,000  shares exercisable at $4.50 until June
         20, 2001)

         1997 Stock Option  Plan (200,000 out of 500,000  shares  exercisable at
         $4.50 until November 18, 2001)

         1997 Stock Option Plan (300,000  out of 500,000  shares  exercisable at
         $6.50 until July 1, 2005)


                                  RISK FACTORS


No Market Studies
-----------------

         In  formulating  its  business  plan,  the  Company  has  relied on the
judgment of its  officers,  directors  and  consultants.  No formal  independent
market studies  concerning the demand for the Company's  proposed  services have
been conducted, nor are any planned. Certain of the Company's outstanding shares
and options are currently being registered for resale with the SEC on Form SB-2.
 The effect of the resale of the Securities has not been analyzed for its effect
on the operations of the Company,  the ability of the Company to obtain funds or
financing  or the  variations  in share  price  do to  additional  shares  being
available for resale.

Lack of Operating History
-------------------------

         Although the Company was  organized in 1986,  it did not become  active
until 1995 and has been  continually  developing  its  Program  since that time.
Since  the  Company  has  not  proven  the  essential   elements  of  profitable
operations, investors will be furnishing venture capital to the Company and will
bear the risk of complete  loss of their  investment  in the event the Company's
business  plan is  unsuccessful.  The Company  has only  limited  experience  in
managing  the  clinics  and is  expanding  its  operations  which may or may not
provide profits to the Company.  The Company has had no revenues in 1995 or 1996
and only $91,802 in 1997.  The Company has also not been  profitable,  having an
accumulated  loss of $1,169,693 in 1996,  which increased to an accumulated loss
of $2,544,727 in 1997.

Resale of Securities May Negatively Affect Funding Attempts
-----------------------------------------------------------

         Some of the Company's  securities  are currently  being  registered for
resale  with the SEC on Form  SB-2.  The  resale  of the  securities  may  cause
difficulty in the Company obtaining funding which may impede the operations in a
negative way.  This  registration  will result in up to 3,576,000  shares of the
Company's  Common  Stock being  introduced  into the market.  This will have the
effect of  causing a  dilution  of the share  price of the  Common  Stock.  This
dilution may cause various  potential funders and financiers to not consider the
Company or to cause the  Company to receive  less  favorable  funding due to the
dilution of the market value of the Company.  The Shares  registered  will cause
the  Company to receive  funds as a result of the  exercise  of the  options and
warrants at a price less than the current market price of the Common Stock. This
will result in downward  pressure on the price of the Common Stock. If the price
of the Common Stock is reduced some potential


<PAGE>



financiers  will  either  wait to see what  effect the  Shares  will have on the
market or offer funding at rates unacceptable to the Company.

Continued Control by Existing Management
----------------------------------------

         The  Company's  management  currently  owns  a  majority  stake  in the
Company's  outstanding  Common Stock. Many of the shares of Common Stock will be
issued  as a  result  of  the  exercise  of  the  Options,  Warrants  and  other
instruments  will provide that management will obtain  additional  shares in the
common  stock  of the  Company.  Accordingly,  new  shareholders  will  lack  an
effective  vote with respect to the election of  directors  and other  corporate
matters.

Dividends
---------

         The Company's Board of Directors presently intends to cause the Company
to follow a policy of retaining earnings,  if any, for the purpose of increasing
the net worth and reserves of the Company.  Therefore, there can be no assurance
that any holder of Common Stock will receive any cash,  stock or other dividends
on his shares of Common Stock.  Future  dividends on Common Stock,  if any, will
depend on future earnings,  financing  requirements and other factors. Since the
time of inception the Company has paid no dividends to shareholders.

Dependance on Executive Officers
--------------------------------

         The  Company  is highly  dependent  on the  services  of its  officers.
Attracting  and  retaining  qualified  personnel  is critical  to the  Company's
business  plan.  No  assurances  can be given that the  Company  will be able to
retain or attract  such  qualified  personnel  or agents,  or to  implement  its
business plan  successfully.  Should the Company be unable to attract and retain
the qualified personnel  necessary,  the ability of the Company to implement its
business plan successfully would be limited.

Dilution to Shareholders
------------------------

         The securities  currently held by investors will be subject to dilution
in  market  value as more  securities  are  available  for  trading.  If all the
securities, options, warrants and employee stock options were to be exercised it
would result in an  additional  3,576,000  shares being brought into the market.
These  shares will be free trading and will cause the market price of the shares
of common  stock of the  Company to  decrease.  The Company is in the process of
registering these securities for resale. This removes the protection afforded to
current  shareholders  under  Rule 144,  regarding  the  issuance  and resale of
restricted securities. Under that rule securities were required to be held for a
period of time and only resold under the provisions of the rule.

Nasdaq Eligibility and Maintenance
----------------------------------

     Under  the  current  rules  promulgated  by  the  Securities  and  Exchange
Commission (the "Commission"),  for NASDAQ SmallCap listing, a company must have
at least  $4,000,000  in total  assets,  at least  $2,000,000  in  stockholders'
equity, and a minimum bid price of $3.00 per share. For


<PAGE>



continued  listing, a company must maintain at least $2,000,000 in total assets,
at least $1,000,000 in stockholders' equity and a minimum bid price of $1.00 per
share.  The  Company's  Common  Stock is expected to be eligible  for listing on
Nasdaq SmallCap Market.  The Company is currently trading on the NASDAQ bulletin
board and has made  application  to be accepted  in the  SmallCap  Market.  This
application  was  amended  April 14,  1998 and it is hoped the  listing  will be
accepted.  If, at any time after  issuance,  the  Company's  Common Stock is not
listed on NASDAQ,  and no other exclusion from the definition of a "penny stock"
under the  Securities  and Exchange  Act of 1934,  as amended,  were  available,
transactions  in  the  Securities  would  become  subject  to  the  penny  stock
regulations   which   impose   additional   sales   practice   requirements   on
broker-dealers who sell securities.

         If, after  approval of the Small Cap  application,  the Company  should
experience  losses from  operations,  it may be unable to maintain the standards
for continued  listing and the listed  securities  could be subject to delisting
from  NASDAQ  Trading,  if any, in the listed  securities  would  thereafter  be
conducted  in  the  over-the-counter  market  on an  electronic  bulletin  board
established for securities  that do not meet the NASDAQ listing  requirements or
in what are commonly  referred to as the "pink sheets." As a result, an investor
may find it more difficult to dispose of, or to obtain accurate quotations as to
the price of, the Company's Securities.

Risk of Low Priced Stocks
-------------------------

         If the Company's  Securities  were  delisted from NASDAQ,  and no other
exclusion from the definition of a "penny stock" under applicable Securities and
Exchange Commission regulations were available, such Securities would be subject
to the penny stock rules that impose  additional sales practice  requirements on
broker-dealers  who sell such  securities  to  persons  other  than  established
customers and  accredited  investors  (generally  defined as investors  with net
worth in excess of $1,000,000 or annual income exceeding  $200,000,  or $300,000
together  with  a  spouse).   For  transactions  covered  by  these  rules,  the
broker-dealer must make a special suitability determination for the purchase and
must have received the purchaser's  written consent to the transaction  prior to
sale.

Adverse Effect of Shares Eligible for Future Sale
-------------------------------------------------

         Substantially all of the 6,992,185  outstanding  shares of Common Stock
of the Company are freely tradeable,  without  restriction or registration under
the  Securities  Act  (other  than  the  sale  volume  restrictions  of Rule 144
applicable  to  shares  held  beneficially  by  persons  who may be deemed to be
affiliates of the Company). The Company's Directors, Officers and family members
of the  Officers  and  Directors  are under no lockup  letters  or other form of
restriction  on the sale of their  securities.  Following the  registration  for
resale of certain of the Company's  securities,  an additional  3,576,000 shares
will be  available  for sale by the  affiliates  and other  persons.  This is an
estimate of the probable number of shares to be resold.  Under the terms of this
registration statement,  up to 3,576,000 shares may be resold,  depending on the
various  terms  and   agreements   in  place  and  the   occurrence  of  certain
contingencies.  Any sale of these securities could have a detrimental  effect on
existing shareholders.



<PAGE>



Protection of Proprietary Treatment Program
-------------------------------------------

         The Company's ability to compete and expand effectively will depend, in
part, on its ability to develop and maintain certain  proprietary aspects of its
treatment  program for  bladder  and bowel  incontinence  and its  business  and
marketing models and strategies. The Company relies on an unpatented proprietary
treatment  protocol  and  there  can  be  no  assurances  that  others  may  not
independently  develop the same or similar program or otherwise obtain access to
the Company's unpatented proprietary  protocols.  There can be no assurance that
any  confidentiality  agreements  between  the Company  and its  employees  will
provide meaningful protection for the Company's trade secrets, know-how or other
proprietary  information in the event of any  unauthorized  use or disclosure of
such trade secrets,  know-how or other  proprietary  information.  While certain
proprietary  aspects of  MedCare's  clinical and  business  protocols  remain an
important part of the business,  the Company believes its long term success as a
business  will depend  primarily  upon its high  quality  clinical  outcomes and
service, continued business development and marketing skills.

Reimbursement and Related Matters
---------------------------------

         In both the United States and elsewhere,  sales of health care products
and services are dependent,  in part, on the availability of reimbursement  from
third party  payors,  such as government  and private  insurance  plans.  In the
United States and in certain foreign  countries,  third-party  reimbursement  is
currently  generally  available  for  certain  procedures,  such as surgery  and
biofeedback training by EMG application,  and generally  unavailable for patient
management  products  such as  diapers,  pads,  and  urethral  plugs.  While the
Company's  treatment program is currently  covered by third party payers,  there
can be no assurances that such coverage will remain in effect in the future.

Regulation by Federal and State Government
------------------------------------------

         The business of the Company is heavily regulated at a federal and state
level. Legislation relating to the manner in which patients receive treatment is
being enacted on a continuous basis. This legislation may have a negative effect
on the way the Company  does  business in ways that cannot be  predicted  by the
Company.  This poses a serious  risk to the  viability  of the  programs  of the
Company and  whether or not the  Company  can do business in the future.  Should
legislation  be enacted  negative to the  programs of the Company it could cause
the business of the Company to terminate.

Regulation and Changes in Health Care Programs
----------------------------------------------

         Under the Practice Management  Agreement,  MedCare is not a provider of
health  care  services.   MedCare  merely  supplies  personnel,   equipment  and
proprietary  techniques to providers of health care.  The  physicians or medical
groups that  contract  with  MedCare are the  providers of services to their own
patients.  MedCare simply  manages the  incontinence  treatment  programs in the
physician  offices.  If properly  structured,  implemented  and operated,  these
arrangements should not create a referral relationship between the physician and
MedCare.  If a Practice  does not  properly  implement  and  operate the MedCare
Program, a referral relationship may be inadvertently created


<PAGE>



which could cause the business of the Company to be terminated.

Regulation and Referral Issues
------------------------------

         There  are  also  referral  issues  relevant  to  the  operation  of an
incontinence  treatment  program by a physician  or medical  group.  A physician
makes a  self-referral  when he or she  refers a patient  for  therapy  provided
through the physician's  incontinence  treatment program.  In particular,  these
self-referral  arrangements are encompassed by the referral  prohibitions of the
federal "Stark II" physician referral statute (42 U.S.C.  S.1395nn) unless there
is an  applicable  exception.  The MedCare  Program  and the Program  Management
Agreement are designed to allow medical groups and physicians  that contract for
MedCare's management services to meet that exception.  Again, if a Practice does
not properly implement and operate the MedCare Program, a referral  relationship
may be  inadvertently  created  which could cause the business of the Company to
terminate.  See "THE PROGRAM MANAGEMENT AGREEMENT -- GOVERNMENTAL REGULATION AND
THE PROGRAM MANAGEMENT AGREEMENT."

Going Concern Status
--------------------

         The  Company is a  development  stage  Company as defined in  Financial
Accounting   Standards   Board   Statement   No.  7.  The  Company  is  devoting
substantially  all of its present  efforts in  establishing  a new  business and
although  planned  principal  operations  have  commenced,  there  have  been no
significant  revenues.  Management's  plans  regarding  the matters  which raise
doubts about the Company's  ability to continue as a going concern are disclosed
in Note 1 to the financial  statements.  These factors raise  substantial  doubt
about its ability to continue as a going  concern.  The  consolidated  financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.

Nature and Amount of the Company's Securities
---------------------------------------------

     Under the  conversion  formulas  various  amounts of shares could be issued
depending  upon the price of the Company's  stock at the time of the exercise of
the options and warrants being  registered for resale as a part of the Company's
Form  SB-2.  The  formula  [[(.08)(N/365)(10,000)+10,000]  /  Conversion  Price]
provides  that the number of shares of Common  Stock  issuable  for one share of
preferred is variable and is dependent upon the Conversion Price (as defined). N
is the number of days from the Closing Date,  July 8, 1997.  The formula for the
Conversion  Price  provides  it will be the lesser of $7.346 or 80 to 90% of the
average bid price for the five days preceding the conversion.  If that price was
$1.00 it would result in every preferred share being exchanged for 13,500 shares
of Common Stock.  The following table indicates  various amounts of Common Stock
that would be issued assuming 80% or 90% as the X variable and variable  average
bid prices:


<PAGE>


<TABLE>
<CAPTION>
Ave Bid           X%                No of Shares of     Total Common            Total Common Assume
Price                               Common           Assume all exercised       all exercised and all
                                                                                Warrants exercised
<S>               <C>               <C>              <C>                        <C>
1                 80                13,500           2,227,500                  3,341,250
1                 90                12,000           1,980,000                  2,970,000
2.2786            80                5,924            977,573                    1,466,359
3                 80                4,500            742,500                    1,113,750
3                 90                4,000            660,000                    990,000
3.75              80                3,600            594,000                    891,000
3.75              90                3,200            528,000                    792,000
5                 80                2,700            445,500                    668,250
5                 90                2,400            396,000                    594,000
7                 80                1,929            318,285                    477427
7                 90                1,714            282,810                    424,215
</TABLE>

         The first column is a listing of the possible share price of the common
stock.  X% is to indicate  the  percentage,  highest  and lowest,  that could be
applied to the  conversion  price as  indicated in the  equation.  The number of
shares  of  common  stock  is the  result  of  the  application  of the  formula
[((.08)(N/365)(10,000)  +  10,000)/Conversion  Price].  The total common  column
assumes all  warrants and options are  exercised  and 165  preferred  shares are
exercised.  The final column assumes all preferred  options are exercised.  This
provides that the preferred options are exercised, no 9-12-15 month warrants are
available for the second group of preferred shares.

         The Common  Stock of the Company has a price range as  indicated  below
under  Price  Range of Common  Stock.  The price has not been below  $3.75 since
1995.  The Company  estimated the overage to be 529,650 and felt it was adequate
to cover a reduction in the share price.  The risk is that if the share price is
below the  $7.346,  additional  shares  may be  required  under the terms of the
conversion, as indicated in the table. As indicated in the table the share price
would have to go below $2.2786 before the amount of shares registered would have
to be  increased.  Management  believes the  registration  of  1,500,000  shares
provides  enough  overallotment  shares in the  event of  falling  share  price.
Furthermore, management has the ability to redeem these shares.

                               EXECUTIVE OFFICERS

Each executive  officer is elected to office by the Board of Directors and holds
the office until his successor is elected and qualified.  The executive officers
of the Company are:

HARMEL S. RAYAT (Age 37) Chief Executive  Officer and Chairman of the Board. Mr.
Rayat is one of the co-developers of the MedCare Program.  Mr. Rayat has been in
the venture  capital  industry  since 1981 and since  January  1993 has been the
president  of Hartford  Capital  Corporation,  a company  which  specializes  in
providing early stage funding and investment banking services to emerging growth
corporations.  From  January  1989  through  December  1992  Mr.  Rayat  was the
President and CEO of K.S.  Rayat & Company,  an  investment  banking and venture
capital  company,  where he was  responsible  for  research,  due  diligence and
investment strategy in early stage,  start-up venture capital investments.  From
April 1996 to the  present he has been  President  and CEO of  Hartford  Capital
Management,  Inc., an investment  management company where he is responsible for
researching  and making  direct  equity  investment  in emerging  growth  public
corporations. Mr. Rayat has been a director of the Company since September 1995,
President from June 1996 until


<PAGE>



June 1997 and is currently  Chief Executive  Officer and Chairman.  Mr. Rayat is
also a director  of  American  Alliance  Corporation,  a  non-reporting  company
trading on the NASDAQ OTC Bulletin Board.

JEFFREY S. ARONIN (Age 30) President and Chief Operating Officer,  Director. Mr.
Aronin has extensive  experience in the health care  industry,  with  particular
expertise in Corporate Development,  Sales Management, Health Care Marketing and
Managed Health Care. Mr. Aronin joined Carter  Wallace,  a major  pharmaceutical
firm, in May of 1989. At Carter  Wallace,  Mr. Aronin held many  positions as he
advanced  through  management in sales  marketing and managed care. In September
1995,  Mr.  Aronin  left  Carter  Wallace  to  join  American   Health  Products
Corporation,  where he ran the  Marketing  division and focused on Marketing and
Business  Development and made  significant  contributions  toward the growth of
AHPC's  business.  Mr. Aronin joined MedCare  Technologies  as its President and
Chief  Operating  Officer on July 8, 1997, at which time he also became a member
of the Board of  Directors of the  Company.  He holds a degree in marketing  and
financing, as well as an MBA in management.

VALERIE  BOELDT-UMBRIGHT (Age 32) Director of Clinical Services,  Director. Mrs.
Boeldt-Umbright  is a registered  nurse,  with a Bachelors of Science  degree in
community  health  education from Northern  Illinois  University.  With over two
years  of  actual  management  experience  in the  day-to-day  operation  of the
Incontinence Clinic in Chicago,  Mrs.  Boeldt-Umbright has supervised personnel,
dealt  with  insurance  and  reimbursement  matters,   marketing  and  physician
interaction and referrals.  She has instructed patients in biofeedback for their
pelvic  floor  muscles,  established  individualized  neuromuscular  reeducation
programs,  written new clinical  protocols and articles for  publication and has
worked as a member of a university  team to provide  excellent  care and medical
treatment for patients.  Ms.  Boeldt-Umbright  was a nurse insurance examiner in
the PMI Division of Equifax  Systems from October 1991 to September  1992.  From
June 1992 to July 1994 she was employed at the Premier  Rehabilitation Center of
Chicago,  where she established a nursing and health  education  program and was
the sole nurse  responsible  for  traumatic  brain injury and spinal cord injury
clients.  At this  facility  she  also  established  a  medication  program  and
bowel/bladder  programs,  monitored vital signs and dressing changes, and taught
inservices, training classes and health care classes for clients and staff. From
March 1994 to September 1996 Ms. Boeldt-Umbright was the Manager of Incontinence
Control  Services.  In this  position she handled all manager  responsibilities,
including  supervising  personnel,  insurance  claims,  marketing  and physician
interaction  and  referral,  wrote  articles  for  publication  and  assisted in
research.  She also  explained  biofeedback  for  incontinence  and  demonsrated
techniques to visiting physicians,  residents,  nurses and fellows.  Since March
1996, she has been a director of the Company and Director of Clinical  Services.
Her  responsibilities  include the continued  development  and refinement of the
MedCare  program  and ongoing  research,  training  of all  clinicians,  writing
treatment protocols, training physicians, teaching biofeedback for incontinence,
attending advanced conferences and writing articles.

KUNDAN S.  RAYAT  (Age 69)  Director/Secretary.  Mr.  Rayat has over 45 years of
experience as an  entrepreneur  and owner of a diverse  spectrum of  businesses,
ranging from automotive to heavy  construction,  on three different  continents.
Since  1985,  Mr.  Rayat has  primarily  devoted  his time to  venture  capital,
investing in numerous start up ventures, and provides seasoned senior


<PAGE>



management  advice to emerging market  companies as a consultant.  He has been a
principal of K.S.  Rayat & Company from January 1985 through the present,  where
he has been an  early  stage  venture  capital  investor  in  numerous  start-up
ventures and a consultant to emerging market corporations.  Mr. Rayat has been a
director  and the  secretary  of the  Company  since  August  1995 and  provides
seasoned  management  advise  on  such  matters  as  growth  strategy,  finance,
marketing  strategies  and  selection  of  personnel.  He is also a director  of
American Alliance Corporation, a non-reporting company trading on the NASDAQ OTC
Bulletin Board. He is the father of Harmel S. Rayat, president of the Company.

MICHAEL M. BLUE, M.D. Director. Dr. Blue is a Board-certified  urologist who has
practiced  general  urology  for twenty  years.  He is a member of the  American
Medical  Association,   Oklahoma  State  Medical   Association,   South  Central
Urological  Association and the American  Urological  Association.  Dr. Blue has
been a sole practitioner in private practice for the past twenty years. Dr. Blue
joined  the  Board  of  Directors  of the  Company  on  August  15,  1996 and is
responsible  for  supervising  and  continuing  the  development  of all medical
aspects of the MedCare program,  as well as interacting and answering  questions
from other doctors within the MedCare system.

JAKE JACOBO,  M.D. (Age 53) Director.  After completing his Residency in Urology
at the University of Iowa Hospitals and Clinics,  Dr. Jacobo  participated  as a
Clinical  Investigator  with  the  National  Prostatic  Cancer  Project  and the
National Bladder Cancer Project during 1975 and 1976. In July of 1977, he joined
Northern  Iowa  Urology  Associates  in  Waterloo,  Iowa and remained in private
practice  until 1989.  During his tenure with  Urology  Associates,  Dr.  Jacobo
initiated  the  Urodynamic  program  for  Covenant  Medical  Center  and in 1986
introduced Prostate  Ultrasonography for the diagnosis of prostate lesions, this
being the first Prostate  Ultrasound Program for the state of Iowa and started a
new  modality,  together with PSA testing,  for the early  diagnosis of prostate
cancer. In April of 1989, Dr. Jacobo started Urology Consultants in the Orlando,
Florida area.  Urology  Consultants has since expanded to five clinics and three
urologists,  and in 1997 Urology  Consultants  opened the first MedCare  Program
site in the state of  Florida.  Dr.  Jacobo  joined  the Board of  Directors  on
September 17, 1997.


ITEM 2:  PROPERTIES

         The  Company's  principal  office is located at 1515 West 22nd  Street,
Suite 1210, Oak Brook,  Illinois,  60521. This office is 2400 square feet and is
subleased for $4800 per month, plus operating expenses of approximately $400 per
month, for one year, with an option to renew every year for 5 years. The Company
also leases  1,500  square feet of office space  located in  Vancouver,  British
Columbia for $2,000 per month, plus operating expenses of approximately $200 per
month.  This space has been  leased for a period of one year,  with an option to
renew for a second year,  and is owned by one of the Company's  directors and by
the Chairman's wife.

         The  Company  does not  purchase  or lease  property  on  behalf of its
MedCare  Program  participants.  Instead,  the Company  typically  enters into a
"Practice Management  Agreement" ("PMA") with a physician,  usually a urologist,
urogynaecologist or gynaecologist in order to manage the incontinence portion of
their practice. The PMA calls for the Company to provide a trained


<PAGE>



clinician,  usually  a nurse,  electromyography  equipment  and a  comprehensive
marketing campaign that would include direct advertising,  print, speeches, etc.
The physician is required to provide a dedicated examining room, typically 10' x
10' or larger in size, at no charge and for the duration of the PMA, usually for
a five year  term.  Simply  stated,  the  Company's  advertising  and  marketing
attracts patients who suffer from urinary  incontinence,  who are then evaluated
by the physician, after which they are treated using the MedCare Program.


ITEM 3:  LEGAL PROCEEDINGS

(a)      The Company is not a party to any legal proceedings.
(b)      No material legal proceedings were terminated in the fourth quarter.


ITEM 4:     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were  submitted to a vote of the  Company's  stockholders  during the
year ended December 31, 1997.





<PAGE>



                            PART II

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

(a)     Market Information

The Company's  common stock trades on the NASD  Electronic  Bulletin Board under
the  symbol  MCAR.  The  following  table sets forth the high and low sale price
information as reported by America Online for the periods indicated:

                                            High              Low
         January-March 1997                 $8.25             $6.75
         April-June 1997                    $8.0625           $6.25
         July-September 1997                $9.25             $6.875
         October-December 1997              $8.125            $7.625

(b)     Holders

As of February 17, 1998, there were  approximately 255 stockholders of record of
the Company's Common Stock.

(c)     Dividend Policy

The  Company  has never  paid a  dividend  and does not  anticipate  paying  any
dividends in the  foreseeable  future.  It is the present policy of the Board of
Directors to retain the Company's  earnings,  if any, for the development of the
Company's business.


ITEM 6:  SELECTED FINANCIAL DATA

The following  table sets forth  selected  consolidated  financial  data for the
Company for the five years ended December 31, 1997:

<PAGE>

Consolidated Statements of Operations Data
Years Ended December 31, 1997
<TABLE>
<CAPTION>

                                    1997             1996              1995             1994         1993
<S>                                 <C>              <C>               <C>              <C>          <C>
Revenues                            $   91,802       $      0          $      0         $0           $0
Expenses
General and Admin                   1,515,459        452,037           689,713          0            0
Operating Loss                      (1,423,657)      (452,037)         (689,713)        0            0
Other Income
Interest Income                     119,146          2,801             0                0            0
Interest Expense                    (70,521)         0                 0                0            0
Loss from Discontinued
   Operations                       (4,489)          0                 0                0            0
Gain from Sale of Subsidiary        15,770           0                 0                0            0
Net Loss                            (1,363,751)      (449,236)         (689,713)        0            0
Net (Loss) Per Share                ($0.23)          ($0.08)           ($0.35)          -            -
</TABLE>


Consolidated Balance Sheet Data
Years Ended December 31, 1997
<TABLE>
<CAPTION>

                                    1997             1996              1995             1994         1993
<S>                                 <C>              <C>               <C>              <C>          <C>
Cash                                $3,440,791       $220,562          $44,443          $    0       $     0
Receivables & Prepaid               111,099          36,358            640              0            0
Other Assets                        34,526           17,698            50               50           50
Total Assets                        3,586,416        274,618           45,133           50           50

Total Current Liabilities           87,317           81,007            291              0            0
Accumulated Deficit                 (2,544,727)      (1,185,465)       (720,451)        (42,027)     (42,027)
Total  Liabilities and
Stockholder's Equity                3,586,416        275,618           45,133           50           50
</TABLE>


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

The  following  discussion  should  be read in  conjunction  with the  financial
statements  and notes thereto  included in Item 8 of this Form 10-K.  Except for
the  historical  information  contained  herein,  the  discussion in this Annual
Report on Form 10-K contains  certain  forward-looking  statements  that involve
risk and uncertainties,  such as statements of the Company's plans,  objectives,
expectations  and  intentions.  The cautionary  statements made in this document
should be read as being  applicable  to all related  forward-looking  statements
wherever they appear in this document. The Company's actual results could differ
materially  from those  discussed  here.  Factors  that could cause  differences
include those discussed below in "Risk Factors",  as well as discussed elsewhere
herein.

OVERVIEW

The Company  has  developed  The  MedCare  Program,  a  non-surgical,  non-drug,
non-invasive and cost effective treatment program for urinary  incontinence,  as
well as pelvic pain, chronic  constipation,  fecal incontinence,  and disordered
defecation.  The MedCare Program is a multi-modality  program based primarily on
behavioral techniques for treatment.  These techniques include biofeedback using
electromyography  (EMG),  pelvic floor muscle  exercises,  and bladder and bowel
re-training.  The program is designed to  activate  and  strengthen  the various
sensory-response mechanisms that maintain bladder and bowel control. The therapy
is provided through computerized instrumental  electromyography  biofeedback and
is based on  operant  conditioning  strategies  whereby  specific  physiological
responses are progressively shaped, strengthened, and coordinated. To date,


<PAGE>



MedCare has not received any significant  revenues due to the early stage nature
of the Company's business and has incurred ongoing operating losses due to costs
related to research,  business  development,  management and staff  recruitment,
establishing  training systems and providing  ongoing  training,  development of
advertising and marketing programs, and other costs associated with establishing
corporate  infrastructure  necessary  for  expanding  The  MedCare  Program on a
national  basis.   Although   planned   principal   operations  have  commenced,
substantial revenues have yet to be realized.

RESULTS OF OPERATIONS

The Company had revenues of $91,802,  $0 and $0 for the years ended December 31,
1997,  1996 and 1995.  During 1997, the majority of the Company's  revenues were
from three early stage MedCare Program sites,  and while the revenues  generated
were not  significant,  these  first few sites  provided  much of the  Company's
insight  with   regards  to   advertising,   marketing,   billing  and  business
development.  The  information  gathered  from these early  stage  developmental
centers is being used to establish additional MedCare sites, a few in late 1997,
but most of which are  expected  to open in 1998.  To date,  the Company has not
relied on any revenues for funding.  During the next several years,  the Company
expects to derive the majority of its potential revenues from the opening of new
MedCare  Program  centers in the United  States,  and  possibly  select  foreign
markets.

During  1997,  the Company  incurred  $1,515,459  in General and  Administrative
expenses,  an increase of 235% over 1996  expenses of $452,037,  and resulted in
$.23 per share  loss for the year ended  December  31,  1997,  versus a $.08 per
share loss for the year ended  December  31,  1996.  This  increase is primarily
attributable  to  costs  associated  with the  development  of  advertising  and
marketing programs,  public relations,  hiring and training expenses of clinical
and managerial  personnel,  travel,  legal and  accounting,  and ongoing general
operating  expenses.  Interest income was $119,146,  $2,801 and $0 for the years
ended December 31, 1997,  1996 and 1995,  respectively.  Interest  earned in the
future will be  dependent  on Company  funding  cycles and  prevailing  interest
rates.  There was no interest  expense  incurred on notes  payable of $1,000 and
$48,135  during the year ended  December 31, 1997 and December 31, 1996.  During
1997, the Company  accrued a total interest  payable of $70,521,  compared to $0
and $0 during 1996 and 1995, respectively, on its 8% Series A Preferred Shares.

The Company has incurred  start up costs from  January 1, 1995 to September  30,
1995 amounting to $542,706.  This total amount,  along with additional operating
expenses,  was charged to  operations  during the year ended  December 31, 1995,
resulting  in a total loss of $689,713 or $0.35 loss per share.  Total  expenses
decreased by 35% for the year ended December 31, 1996, resulting in a total loss
$449,236 or $0.08 per share.  This decrease in expenses  during 1996 compared to
1995 was a result of few clinical openings during the year,  limited  managerial
and personnel hiring expenses and limited advertising and marketing charges.

As of December 31, 1997,  the Company's  accumulated  deficit was  approximately
$2,544,727,  and as a result,  there has been no provision for income taxes. The
Company has net operating  losses that will expire beginning with the years 2002
through 2012,  in the amount of  $1,363,751,  $449,236,  $689,713 and $42,027 in
1997, 1996, 1995 and prior years, respectively, unless utilized by the


<PAGE>



Company.

LIQUIDITY AND CAPITAL RESOURCES

MedCare  Technologies  has financed its  operations  primarily  through  private
placements of Common Shares,  Preferred Shares and the exercise of Stock Options
totaling  $4,788,500,  less  offering  expenses of $123,750,  for the year ended
December 31,  1997,  and  $611,000  for the year ended  December  31,  1996.  At
December 31, 1997, the Company had a cash balance of  $3,440,791,  compared to a
cash balance of $220,562 at December 31, 1996.

The  Company's  future  funding  requirements  will depend on numerous  factors,
including the Company's ability to establish and operate  profitability  current
and  future  MedCare  Program  locations,   recruiting  and  training  qualified
management and clinical personnel, competing against any potential technological
advances in the treatment of urinary  incontinence and other  afflictions of the
pelvic floor area,  and the  Company's  ability to compete  against other better
capitalized  corporations who offer alternative or similar treatment options for
urinary incontinence and other afflictions of the pelvic floor area.

During fiscal 1997, the Company  issued three private  placement  memoranda.  On
February 1, 1997,  an offering was begun  pursuant to Regulation D, Rule 506 for
176,000  shares of common  stock at $6.25  per  share  for a total  offering  of
$1,100,000.  This offering was completed on February 4, 1997.  The proceeds were
used for working capital and expansion of the MedCare Program.

The  Company  offered  for  sale a  Private  Placement  Memorandum  pursuant  to
Regulation  D, Rule 506 on July 7, 1996 for  300,000  shares of common  stock at
$6.00 per share,  plus 300,000  warrants  exercisable at $6.00 per warrant until
July 7, 2002 for a total offering of $1,800,000.  This offering was completed on
July 30, 1997 and the  proceeds  used for working  capital and  expansion of the
MedCare Program.

On June 20, 1997,  the Company  began  offering for sale a Regulation D offering
under  Rule 506.  This  offering  was for the  Series A  Preferred  Stock of the
Company and was sold for $10,000 per share, in minimum  subscription  amounts of
at least ten shares  ($100,000) and increments of five shares in excess thereof.
The total offering was for three hundred shares for a total of $3,000,000,  with
a minimum  offering of $1,650,000.  The offering closed on July 8, 1997 with the
minimum  offering  placed.  The Preferred  Stock was  accompanied by warrants to
purchase a number of shares of Common Stock of the Company equal to thirty-three
and one-third  percent (33-1/3%)  multiplied by the aggregate  purchase price of
the Subscriber's Preferred Stock outstanding on each of nine, twelve and fifteen
months  following  the  closing  date  of the  offering,  divided  by the  Fixed
Conversion  Price as defined in the Certificate of  Designation.  In conjunction
with this offering, an Escrow Agreement was entered into with Swartz Investments
LLC, a Georgia  limited  liability  company,  as Placement  Agent and with First
Union National Bank of Georgia as Escrow Agent.

At that time, the Company also filed a Certificate of Designation with the State
of Delaware in conjunction with this offering.  This Certificate was approved on
July 7, 1997 and designates  1,000 shares of the Company's one million shares of
authorized preferred stock to be Series A stock. This


<PAGE>



stock has been  assigned  an issue  price of  $10,000  per  share  with an eight
percent (8%) per annum  accretion rate. The rank of this stock has been assigned
as being senior to all Common Stock of the Company, junior to any other class or
series of capital stock of the Company hereafter created specifically ranking by
its terms senior to the Series A Preferred Stock,  senior to any class or series
of capital stock of the Company  hereafter  created not specifically  ranking by
its terms  senior to or on par with any  Series A  Preferred  Stock of  whatever
subdivision,  and on parity  with any class or  series of  capital  stock of the
Company hereafter created  specifically  ranking by its terms on parity with the
Series A Preferred Stock. No dividend rights have been granted to this stock.

The  conversion  terms outlined in the  Certificate  of  Designation  state that
holders of the Series A Preferred  Stock can  convert  their stock on or after a
period of no less than four  months  from the  closing  date into  Common  Stock
usingthe formula per share of Series A Preferred Stock:

                                           (.08)(N/365)(10,000) + 10,000
                                                 Conversion Price

The Conversion  Price is determined as the lesser of 115% of the average Closing
Bid Price for the five trading  days ending on June 6, 1997,  which is $7.346 or
X% of the average  Closing Bid Price of the Company's  Common Stock for the five
trading days immediately preceding the Date of Conversion, where X is determined
as follows:

# of months between Last Closing
and Date of Conversion                               "X"
4-6 months                                           90%
6 months-1 year                                      87.5%
9 months, 1 day-12 months                            85%
more than 12 months                                  80%

The  Company  also has the right to redeem  the  Series A  Preferred  Stock upon
receipt of Notice of Conversion at a rate of the Stated Value times 1.10 to 1.20
or may redeem the stock at its own  election at 115% to 130%,  depending  on the
length of time.

Attached  as  exhibits  are  the   Certificate  of  Designation   and  Placement
Memorandum.

The placement agent and its employees and affiliates were granted a total of 165
preferred  options and 86,214 9-month  common stock  warrants,  86,214  12-month
common stock  warrants,  86,214 18-month common stock warrants and 33,692 swartz
employee common stock warrants in conjunction with this offering.

On July 8, 1997,  Mr.  Jeffrey  Aronin  joined the Company as its  President and
Chief  Operating  Officer.  He was also elected a Director of the  Company.  Mr.
Harmel S.  Rayat,  the  previous  President,  remains  with the  Company  in the
capacity of Chief Executive Officer and Chairman of the Board.

On September 17, 1997, Ms. Diane Nunziato  resigned as a director of the Company
and Dr. Jake


<PAGE>



Jacobo  joined the Company as a Director.  Ms.  Nunziato  resigned  for personal
reasons and did not have any disagreements with the Company.

On November 7, 1997,  Mr. Greg Wujek joined the Company as its Vice President of
Managed Care.

ITEM 8:  FINANCIAL STATEMENTS

The financial  statements and financial  statement schedules are incorporated by
reference in this report on pages F-1 through F-19.

ITEM 9:  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

During the most recent two fiscal years,  the Company's  independent  accountant
did not resign and was not dismissed,  and there were no disagreements with such
accountant  regarding  accounting and financial  disclosure  matters of the type
require to be reported herein.


                                    PART III

ITEM 10:  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Following is a list of that sets forth as of March 15, 1998 the names,  ages and
positions within the Company of all of the Executive Officers of the Company and
the Directors of the Company. Each such director has been nominated for election
at the  Company's  1997 Annual  Meeting,  which was held on June 17,  1997.  All
Directors  hold office until the next annual  meeting of  stockholders  or until
their  successors are elected.  Officers serve at the discretion of the Board of
Directors.

HARMEL S. RAYAT (37) Chief  Executive  Officer and  Chairman  of the Board.  Mr.
Rayat is one of the co-developers of the MedCare Program.  Mr. Rayat has been in
the venture  capital  industry  since 1981 and since  January  1993 has been the
president  of Hartford  Capital  Corporation,  a company  which  specializes  in
providing early stage funding and investment banking services to emerging growth
corporations.  From  January  1989  through  December  1992  Mr.  Rayat  was the
President and CEO of K.S.  Rayat & Company,  an  investment  banking and venture
capital  company,  where he was  responsible  for  research,  due  diligence and
investment strategy in early stage,  start-up venture capital investments.  From
April 1996 to the  present he has been  President  and CEO of  Hartford  Capital
Management,  Inc., an investment  management company where he is responsible for
researching  and making  direct  equity  investment  in emerging  growth  public
corporations. Mr. Rayat has been a director of the Company since September 1995,
President  from  June 1996  until  June 1997 and is  currently  Chief  Executive
Officer  and  Chairman.  Mr.  Rayat  is also a  director  of  American  Alliance
Corporation, a non-reporting company trading on the NASDAQ OTC Bulletin Board.


JEFFREY S. ARONIN (31) President,  Chief Operating  Officer,  and Director.  Mr.
Aronin has


<PAGE>



extensive  experience in the health care industry,  with particular expertise in
Corporate  Development,  Sales  Management,  Health Care  Marketing  and Managed
Health Care. Mr. Aronin joined Carter Wallace, a major  pharmaceutical  firm, in
May of 1989. At Carter  Wallace,  Mr. Aronin held many  positions as he advanced
through  management in sales  marketing and managed care. In September 1995, Mr.
Aronin left Carter Wallace to join American Health Products  Corporation,  where
he ran the Marketing division and focused on Marketing and Business  Development
and made significant  contributions  toward the growth of AHPC's  business.  Mr.
Aronin joined MedCare  Technologies as its President and Chief Operating Officer
on July 8, 1997, at which time he also became a member of the Board of Directors
of the Company. He holds a degree in marketing and financing,  as well as an MBA
in management.

VALERIE  BOELDT-UMBRIGHT (31) Vice President of Clinical Services, and Director.
Mrs.  Boeldt-Umbright is registered nurse, with a Bachelors of Science degree in
community  health  education from Northern  Illinois  University.  With over two
years  of  actual  management  experience  in the  day-to-day  operation  of the
Incontinence Clinic in Chicago,  Mrs.  Boeldt-Umbright has supervised personnel,
dealt  with  insurance  and  reimbursement  matters,   marketing  and  physician
interaction and referrals.  She has instructed patients in biofeedback for their
pelvic floor  muscles,  established  individualized  neuromuscular  re-education
programs,  written new clinical  protocols and articles for  publication and has
worked as a member of a university  team to provide  excellent  care and medical
treatment for patients.  Mrs.  Boeldt-Umbright was a nurse insurance examiner in
the PMI Division of Equifax  Systems from October 1991 to September  1992.  From
June 1992 to July 1994, she was employed at the Premier Rehabilitation Center of
Chicago,  where she established a nursing and health  education  program and was
the sole nurse  responsible  for  traumatic  brain injury and spinal cord injury
clients.  At this  facility  she  also  established  a  medication  program  and
bowel/bladder programs, and taught inservices,  training classes and health care
classes  for  clients  and  staff.  From  March  1994 to  September  1996,  Mrs.
Boeldt-Umbright  was the  Manager  of  Incontinence  Control  Services.  In this
position,  she  handled  all  manager  responsibilities,  including  supervising
personnel,  insurance claims,  marketing and physician interaction and referral,
wrote articles for publication and assisted in research.  Since March, 1996, she
has been a Director and Vice President of Clinical Services of Medcare.

KUNDAN S. RAYAT (69)  Secretary,  Treasurer and Director.  Mr. Rayat has over 45
years of  experience  as an  entrepreneur  and  owner of a diverse  spectrum  of
businesses,  ranging from automotive to heavy construction, on three continents.
Since  1985,  Mr.  Rayat has been a  principal  of K.S  Rayat & Company  and has
primarily  devoted his time to venture  capital  matters,  investing in numerous
start up ventures,  and providing seasoned  management advice to emerging market
companies.   He  has  been  a  Director  and   Secretary/Treasurer   of  MedCare
Technologies since August 1995.

MICHAEL M. BLUE, M.D. (53) Medical Director. Dr. Michael Blue is a member of the
American  Medical  Association,  Oklahoma  State  Medical  Association  and  the
American Urological Association. Dr. Blue is a board certified urologist who has
practiced  general  urology in private  practice for twenty years. He joined the
Board of Directors of Medcare in August 1996 and is responsible  for supervising
and continuing the development of all medical aspects of the MedCare Program, as
well as  interacting  and  answering  questions  from other  doctors  within the
MedCare


<PAGE>



system.

JAKE JACOBO,  M.D. (Age 53) Director.  After completing his Residency in Urology
at the University of Iowa Hospitals and Clinics,  Dr. Jacobo  participated  as a
Clinical  Investigator  with  the  National  Prostatic  Cancer  Project  and the
National Bladder Cancer Project during 1975 and 1976. In July of 1977, he joined
Northern  Iowa  Urology  Associates  in  Waterloo,  Iowa and remained in private
practice  until 1989.  During his tenure with  Urology  Associates,  Dr.  Jacobo
initiated  the  Urodynamic  program  for  Covenant  Medical  Center  and in 1986
introduced Prostate  Ultrasonography for the diagnosis of prostate lesions, this
being the first Prostate  Ultrasound Program for the state of Iowa and started a
new  modality,  together with PSA testing,  for the early  diagnosis of prostate
cancer. In April of 1989, Dr. Jacobo started Urology Consultants in the Orlando,
Florida area.  Urology  Consultants has since expanded to five clinics and three
urologists,  and in 1997 Urology  Consultants  opened the first MedCare  Program
site in the state of  Florida.  Dr.  Jacobo  joined  the Board of  Directors  on
September 17, 1997.

ITEM 11:  EXECUTIVE COMPENSATION

The following  tables shows, for the three years period ended December 31, 1997,
the cash compensation paid by the Company, as well as certain other compensation
paid or accrued for such year, to the Company's Chief Executive  Officer and the
Company's other executive officers.

Summary Compensation Table
<TABLE>
<CAPTION>
                                                         Long-Term
                         Annual Compensation         Compensation Awards

Name and                                       Securities Underlying
Principal Position  Year  Salary$   Bonus$     Stock      Options         Other
<S>                 <C>   <C>       <C>        <C>        <C>             <C>
Harmel S. Rayat     1997  40,000    - 0 -      - 0 -      - 0 -           - 0 -
Chairman, CEO       1996  - 0 -     - 0 -      - 0 -      160,000         - 0 -
& CFO               1995  2,500     - 0 -      - 0 -      150,000         - 0 -

Jeff Aronin         1997  46,433    - 0 -      - 0 -      500,000         3,000
President & COO     1996  - 0 -     - 0 -      - 0 -      - 0 -           - 0 -
                    1995  - 0 -     - 0 -      - 0 -      - 0 -           - 0 -
</TABLE>

<PAGE>

<TABLE>
<S>                 <C>   <C>       <C>       <C>         <C>             <C>
Valerie Boeldt-     1997  49,833    - 0 -      - 0 -      115,000         - 0 -
Umbright            1996  18,125    - 0 -      - 0 -      40,000          - 0 -
Clinical Director   1995  - 0 -     - 0 -      - 0 -      - 0 -           - 0 -
                              
Michael Blue        1997  - 0 -     - 0 -      75,000     - 0 -           - 0 -
Medical Director    1996  - 0 -     - 0 -      40,000     - 0 -           - 0  
                    1995  - 0 -     - 0 -      - 0 -      - 0 -           - 0 -

Kundan S. Rayat     1997  - 0 -     - 0 -      - 0 -      - 0 -           - 0 -
Secretary,Treasurer 1996  - 0 -     - 0 -      - 0 -      - 0 -           - 0 -
Director            1995  - 0 -     - 0 -      - 0 -      - 0 -           - 0 -
              
Jake Jacobo         1997  - 0 -     - 0 -      40,000     - 0 -           - 0 -
Director            1996  - 0 -     - 0 -      - 0 -      - 0 -           - 0 -
                    1995  - 0 -     - 0 -      - 0 -      - 0 -           - 0 - 
</TABLE>

STOCK OPTIONS

The  Company has  500,000  shares  reserved  under its 1998 Stock  Option  Plan,
290,000 of which are for issuance at $6.50 per share until July 1st,  2005.  The
1998 Stock Option Plan is subject to shareholder approval.  None of these shares
have  been  exercised.  These  optionees  are in the  name  of Mr.  Jeff  Aronin
(250,000) and Jake Jacobo (40,000).

OPTION HOLDINGS
<TABLE>
<CAPTION>
                                                   Value of unexercised options
                   Number of unexercised options   in-the- money
                   at fiscal year end              Options at fiscal year end(1)
Name               Exercisable    Unexercisable    Exercisable     Unexercisable
<S>                <C>            <C>              <C>             <C>

Harmel S. Rayat   310,000         -0-              $1,077,500      -0-
Chairman, CEO
& CFO          

Jeff Aronin       100,000         400,000          $75,000         $300,000 
President & COO

Valerie Boeldt-   155,000         -0-              $396,250        -0-
Umbright          
Clinical Director

Michael M. Blue   115,000         -0-              $286,250        -0-
Medical Director

Jake Jacobo       40,000          -0-              $30,000         -0-
Director
</TABLE>

<PAGE>




(1) Represents  the fair market value of the Company's  Common Stock on December
31, 1997 ($7.25 per share on the closing on the NASD Electronic  Bulletin Board)
minus the exercise price per share, of the in-the-money  options,  multiplied by
the number of shares subject to each option.

ITEM 12:  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

The following table sets forth,  as of March 15, 1998, the beneficial  ownership
of  the  Company's  Common  Stock  by  each  person  known  by  the  Company  to
beneficially  own more than 5% of the Company's  Common Stock  outstanding as of
such date and by the officers and directors of the Company as a group. Except as
otherwise indicated, all shares are owned directly.

<TABLE>
<CAPTION>

Person or Group                                      Number of Shares                   Percent
<S>                                                  <C>                                <C>
Harmel S. Rayat                                      2,310,000                          21.9%
216-1628 West First Avenue
Vancouver, B.C.  V6J 1G1 Canada

Michael Blue                                         119,000                            1.1%
500 East Robinson, Suite 800
Norman, Oklahoma  73071


Valerie Boeldt-Umbright                              155,000                            1.5%
1515 West 22nd Street
Oak Brook, Illinois 60523

Jeff Aronin                                          251,000                            2.4%
1515 West 22nd Street
Oak Brook, Illinois 60523

Queensway Financial Holdings Limited                 891,582                            8.4%
James Alexander Revocable Trust, Beneficial Owner (5.3%)
AIC Mutual Funds, Beneficial Owner (9.4%)
90 Adelaide Street West
Toronto, Ontario M5H 3V9 Canada

Matrix Capital Corp.                                 600,000                            5.7%
Eric Smith, President and sole shareholder
P.O. Box 69, Front Street
Grand Turk, Turks & Caicos Islands

Directors and Officers                               2,834,000                          26.9%
as a group (4 persons)
</TABLE>


<PAGE>




ITEM 13:  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company  rents office  space from one of the  Directors  and the  Chairman's
wife. The premises are rented at below market value.


                                     PART IV

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

(a)     (1)     Financial Statements:                                 Page

          Report of Independent Public Accountants                    F-1

          Balance Sheets as of December 31, 1997 and 1996             F-2

          Statement of Income for the Years ended
          December 31, 1997, 1996, 1995                               F-4

          Statements of Stockholders' Equity for the years ended
          December 31, 1996, 1995, 1994                               F-6

          Statement of Cash Flows for the years ended
          December 31, 1997, 1996, 1995                               F-16

          Notes to Financial Statements                               F-18

(a)       (2)     Exhibits

The following exhibits are referenced or included in this report:

          Articles of Incorporation
          By-Laws

(b)       Reports on 8-K

     On November 14, 1997 the Registrant  filed a report on Form 8-K to disclose
the  employment  contract  of  its  new  president,  Jeffrey  S.  Aronin  and  a
Certificate of Disclosure and subsequent Series A Preferred Stock Offering.


                                   SIGNATURES



<PAGE>


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


                                                  MEDCARE TECHNOLOGIES, INC.


                                                  /s/ Harmel S. Rayat
                                                  By Harmel S. Rayat, Chairman &
                                                  Chief Executive Officer



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


Signature                                    Title                     Date
/s/ Harmel S. Rayat                     Chairman and CEO               6/23/98


<PAGE>



<PAGE>

                        C O N T E N T S

Independent Auditors' Report  . . . . . . . . . . . . . . . . . . . . .     F-1

Consolidated Balance Sheet at December 31, 1997 and 1996. . . . . .     F-2 F-3

Consolidated Statement of Operations for the years ended
   December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . .    F-4 F-5

Consolidated Statement of Stockholders' Equity (Common)
   from Inception (January 17, 1986) Through December 31, 1997  . . . F-6 F-11

Consolidated Statement of Stockholders' Equity (Preferred)
   from Inception (January 17, 1986) Through December 31, 1997  . . . F-12 F-15

Consolidated Statement of Cash Flows for the years ended
   December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . .     F-16 F-17

Notes to the Consolidated Financial Statements . . . . . . . . . . .   F-18 F-26

All  schedules  are omitted  because  they are not  applicable  or the  required
information is shown in the financial statements or notes thereto.

<PAGE>

                  INDEPENDENT AUDITORS' REPORT

Board of Directors
MedCare Technologies, Inc. and
Subsidiaries
Oak Brook, Illinois 60521

We  have  audited  the  accompanying   consolidated  balance  sheet  of  MedCare
Technologies,   Inc.  and  Subsidiaries  (A  Development  Stage  Company),  (the
Company),  as of December  31,  1997 and 1996,  and the  related  statements  of
operations,  stockholders' equity and cash flows for the years then ended. These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audit.

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

In our  opinion,  the  financial  statements  present  fairly,  in all  material
respects,  the  financial  position of the Company at December 31, 1997 and 1996
and the results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.


Clancy  and Co., P.L.L.C.
Phoenix, Arizona
March 2, 1998

                                 F-1
<PAGE>

       MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
                 (ADevelopment   Stage  Company)   CONSOLIDATED   BALANCE  SHEET
                   DECEMBER 31, 1997 AND 1996


                               ASSETS

<TABLE>
<CAPTION>
                                                    1997              1996
<S>                                                 <C>               <C>

Current Assets
  Cash                                              $ 3,440,791       $ 219,775

  Accounts Receivable - Trade                            47,286           7,351
  Prepaid Expenses                                       63,813          29,117
                                                      ---------         -------
  Total Current Assets                                3,551,890         256,243


Property and Equipment
  Office Equipment                                       21,069           5,274
  Medical Equipment                                      29,799          11,953
                                                      ---------         -------
                                                        50,868           17,227
  Less Accumulated Depreciation                         17,342            7,796
                                                      ---------         -------
  Net Book Value                                        33,526            9,431

Other Assets
  Intangible Assets - The MedCare Program  (Note 3)      1,000            1,000
                                                      ---------         -------
  Total Other Assets                                     1,000            1,000
                                                      ---------         -------

Total  Assets                                       $3,586,416        $ 266,674
                                                    ===========       =========
</TABLE>

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

         MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
                 (ADevelopment   Stage  Company)   CONSOLIDATED   BALANCE  SHEET
                   DECEMBER 31, 1997 AND 1996


                 LIABILITIES AND STOCKHOLDERS'
                           EQUITY

<TABLE>
<CAPTION>
                                                     1997          1996
<S>                                                  <C>           <C>

Current Liabilities

  Accounts Payable and Other Accrued Liabilities     $   15,796    $  19,791

  Notes Payable - Related Parties                         1,000       25,000

  Notes Payable - Officers                                    0       12,500
                                                     ----------    ---------
  Total Current Liabilities                              16,796       57,291

Stockholders' Equity

  Preferred Stock: $.25 Par Value, Authorized
   1,000,000; Issued and Outstanding, 165
   Convertible Series A Shares at December 31,
   1997 and None at December 31, 1996                        41            0


  Common Stock: $0.001 Par Value,  Authorized
   100,000,000; Issued and Outstanding, 6,992,185
   Shares at December 31, 1997 and 6,445,185 at
   December 31, 1996                                      6,992        6,445

  Additional Paid In Capital                          6,107,314    1,372,631

  Loss Accumulated During The Development Stage      (2,544,727)  (1,169,693)
                                                     -----------  -----------
  Total Stockholders' Equity                          3,596,620      209,383
                                                     -----------  -----------
Total Liabilities and Stockholders' Equity          $ 3,586,416  $   266,674
                                                     ===========  ===========
</TABLE>

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

               MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
                      (A Development Stage Company)
                  CONSOLIDATED STATEMENT OF OPERATIONS
       FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995, AND
            FOR THE PERIOD FROM INCEPTION (JANUARY 17, 1986)
                        THROUGH DECEMBER 31, 1997

<TABLE>
<CAPTION>
                                                                    Loss
                                                                    Accumulated
                                                                    During The
                              Year ended   Year ended   Year ended  Development
                              December     December     December    Stage
                              31, 1997     31, 1996     31, 1995    (Unaudited)
<S>                           <C>          <C>          <C>         <C>
Revenues                      $   91,802   $       0    $        0  $    91,802

Expenses
  General and Administrative   1,515,459     452,037       689,713    2,699,236
                              ----------   ---------    ----------  ------------
Operating Loss                (1,423,657)   (452,037)     (689,713)  (2,607,434)

Other Income (Expense)


  Interest Income                119,146       2,801             0      121,947
  Loss From Discontinued
    Operations                    (4,489)          0             0       (4,489)
  Gain on Sale of Subsidiary      15,770                         0       15,770
                               ----------    -------       -------    ----------
  Total Other Income (Expense)   130,427       2,801                    133,228
                               ----------    -------       -------    ----------

Net  Loss                    $(1,293,230)  $(449,236)    $(689,713) $(2,474,206)
                             ============  ==========    ========== ============
</TABLE>

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

                                     F-4
<PAGE>

               MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
                     (A Development Stage Company)
                 CONSOLIDATED STATEMENT OF OPERATIONS
         FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995, AND
              FOR THE PERIOD FROM INCEPTION (JANUARY 17, 1986)
                        THROUGH DECEMBER 31, 1997

<TABLE>
<CAPTION>
                                                                    Loss
                                                                    Accumulated
                                                                    During The
                             Year ended   Year ended   Year ended   Development
                             December     December     December     Stage
                             31, 1997     31, 1996     31, 1995     (Unaudited)
<S>                          <C>          <C>          <C>          <C>
Primary Loss Per Common
   Share and Common Share
   Equivalents
  Loss from Continuing
   Operations                $    (0.19)  $   (0.08)   $    (0.35)  $   (0.43)

Loss from Operations of
  Business Segment Disposed
  of                               0.00                                  0.00

Gain on Disposal of Business
  Segment
Net Loss                     $    (0.19)  $   (0.08)   $    (0.35)  $   (0.35)
                             ===========  ==========   ===========  ==========

Number of Weighted Shares
 Outstanding - Primary         7,270,185   5,884,019     1,992,294   7,270,185
                             ===========  ==========   ===========  ==========

Fully Diluted Loss Per
  Common Share and Common
  Share Equivalents
Loss from Continuing
  Operations                 $    (0.19)  $   (0.08)   $    (0.35)  $    (0.36)
                             ===========  ==========   ===========  ===========

Loss from Operations of
Business Segment Disposed of       0.00                                   0.00

Gain on Disposal of Business
  Segment                          0.01                                   0.01
                             -----------                             ----------
Net Loss                     $    (0.18)  $   (0.08)   $    (0.35)  $    (0.35)
                             ===========  ==========   ===========  ===========

Number of Weighted Shares
  Outstanding - Fully Diluted  7,024,350   5,884,019     1,992,294    7,024,350
                             ===========  ==========   ===========  ===========
</TABLE>

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

                MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
                      (A Development Stage Company)
             CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
            FOR THE PERIOD FROM INCEPTION (JANUARY 17, 1986)
                        THROUGH DECEMBER 31, 1997
                              COMMON STOCK

<TABLE>
<CAPTION>
                                      Loss
                                   Accumulated
                                             Additional  During the
                      Common Stock           Paid In     Development
                     Shares       Amount     Capital     Stage       Total
<S>                  <C>          <C>        <C>         <C>         <C>
Balance, January
  17, 1986                   0    $      0   $           $           $         0

Issued to Officers
  and Directors at
  $.002 per share    2,500,000       2,500      2,500                      5,000
Issued Pursuant to
  Public Offering
  at $.01            3,645,000       3,645     32,805                     36,450
Cost of Offering                               (7,946)                   (7,946)
Net Loss from
  Inception on
  January 17, 1986
  Through December
  31, 1987                                                      (316)      (316)
                    ----------      -------    -------      ---------    -------
Balance,
  December 31, 1987  6,145,000       6,145     27,359           (316)     33,188
Escrow Fee for
  Public Offering                               (200)                      (200)
Net Loss Year Ended
  December 31, 1988                                           (1,030)    (1,030)
                     ---------      -------    -------      ---------    -------
Balance,
  December 31, 1988  6,145,000       6,145     27,159         (1,346)     31,958
Net Loss Year Ended
  December 31, 1989                                          (21,707)   (21,707)
                     ---------      -------    -------      ---------   --------
Balance,
  December 31, 1989  6,145,000       6,145     27,159        (23,053)     10,251
</TABLE>

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

                                     F-6
<PAGE>

                        MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
                               (A Development Stage Company)
                      CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                     FOR THE PERIOD FROM INCEPTION (JANUARY 17, 1986)
                                 THROUGH DECEMBER 31, 1997
                                       COMMON STOCK

<TABLE>
<CAPTION>
                                      Loss
                                   Accumulated
                                             Additional  During the
                      Common Stock           Paid In     Development
                     Shares       Amount     Capital     Stage       Total
<S>                  <C>          <C>        <C>         <C>         <C>

Issuance of Stock in Accordance with Plan of Merger with  Multi-Spectrum  Group,
  Inc.
  February 28, 1990  $55,305,000   $  55,305 $ (55,305)   $           $       0

Net Loss Year Ended
  December 31, 1990
  - Unaudited                                             (10,201)     (10,201)
                     ------------  --------- ----------   ---------   ----------

Balance,
  December 31, 1990  61,450,000       61,450   (28,146)   (33,254)           50

Net Loss Year Ended
  December 31, 1991
  - Unaudited                                                    0            0
                     ------------   --------- ----------  ----------   ---------

Balance,
  December 31, 1991  61,450,000       61,450   (28,146)   (33,254)           50

Issued to Group
  Five, Inc.
  November 13, 1992   8,772,800        8,773          0                    8773

Net Loss Year Ended
  December 31, 1992
   -  Unaudited                                            (8,773)      (8,773)

                      -----------    ---------- ---------  ----------   --------
Balance,
  December 31, 1992  70,222,800       70,223    (28,146)   (42,027)          50

Net Loss Year Ended
  December 31, 1993                                               0           0
                      -----------    ---------- ---------  ----------   --------
Balance,
  December 31, 1993  70,222,800       70,223    (28,146)   (42,027)          50
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                 F-7
<PAGE>

                        MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
                               (A Development Stage Company)
                      CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                     FOR THE PERIOD FROM INCEPTION (JANUARY 17, 1986)
                                 THROUGH DECEMBER 31, 1997
                                       COMMON STOCK

<TABLE>
<CAPTION>
                                      Loss
                                   Accumulated
                                             Additional  During the
                      Common Stock           Paid In     Development
                     Shares       Amount     Capital     Stage       Total
<S>                  <C>          <C>        <C>         <C>         <C>
Net Loss Year Ended
   December 31, 1994              $          $           $        0  $        0
                     -----------  ---------  ----------  ----------  ----------
Balance,
  December 31, 1994  70,222,800      70,223    (28,146)    (42,027)          50

Reverse Split 1200:1,
   August 11, 1995  (70,164,281)   (70,164)      70,164

Acquisition of
  MedCare UI
  System Assets
  August 4, 1995      2,000,000       2,000     (1,000)                   1,000

Issued Pursuant to
  a Public Offering
  at $.15 Per Share
  September 20, 1995  4,200,000       4,200     625,800                 630,000

Cost of Offering                               (30,000)                (30,000)

Issued for Cash
  at $3.00 Per
  Share, December
  31, 1995               16,666          17      49,983                  50,000

Issued for Services
  at $3.00 Per Share,
  December 31, 1995      25,000          25      74,975                  75,000

Net Loss Year Ended
  December 31, 1995                                        (689,713)  (689,713)
                      ----------   --------    --------   ----------  ----------
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                 F-8
<PAGE>

                        MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
                               (A Development Stage Company)
                      CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                     FOR THE PERIOD FROM INCEPTION (JANUARY 17, 1986)
                                 THROUGH DECEMBER 31, 1997
                                       COMMON STOCK

<TABLE>
<CAPTION>
                                      Loss
                                   Accumulated
                                             Additional  During the
                      Common Stock           Paid In     Development
                     Shares       Amount     Capital     Stage       Total
<S>                  <C>          <C>        <C>         <C>         <C>
Balance,
  December 31, 1995  6,300,185    $   6,301  $  761,776  $ (731,740) $   36,337

Issuance of
  Common Stock
  Under 1995 Stock
  Option Plan at
  $3.00 Per Share
  During 1996           36,000           36     107,964                 108,000

Issuance of Common
  Stock Under 1996
  Stock Option Plan
  at $4.50 Per Share
  During 1996            3,000            3      13,497                  13,500

Issuance of Common
  Stock Under Private
  Placement at $4.75 Per
  Share Dated
  June 22, 1996         50,000           50     237,450                 237,500

Issuance of Common
  Stock Under Private
  Placement at $4.50 Per
  Share Dated
  November 18, 1996     56,000           56     251,944                 252,000

Write Off of Excess of
  Liabilities over Assets
  on Purchase of Manon
  Consulting, Ltd.                                           11,283      11,283

Net Loss Year Ended
   December 31, 1996                                      (449,236)    (449,236)
                       -----------  --------  ----------- ---------    ---------
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                 F-9
<PAGE>

                        MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
                               (A Development Stage Company)
                      CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                     FOR THE PERIOD FROM INCEPTION (JANUARY 17, 1986)
                                 THROUGH DECEMBER 31, 1997
                                         COMMON STOCK

<TABLE>
<CAPTION>
                                      Loss
                                   Accumulated
                                             Additional  During the
                      Common Stock           Paid In     Development
                     Shares       Amount     Capital     Stage        Total
<S>                  <C>          <C>        <C>         <C>          <C>
Balance,
  December 31, 1996  6,445,185    $  6,445   $ 1,372,631 $(1,169,693) $  209,383

Recovery of Write
  Off Of Excess of
  Liabilities over
  Assets on Sale of
  Manon Consulting, Ltd.                                     (11,283)   (11,283)

Issuance of Common
  Stock Under 1996
  Stock Option  Plan at
  $4.50 Per Share through
  December 31, 1997     17,000          17       76,483                   76,500

Issuance of Common
  Stock Under 1995
  Stock Option Plan at
  $3.00 Per Share Through
  December 31, 1997     54,000          54      161,946                  162,000

Issuance of Common
  Stock Under a
  Private Placement
  Dated March 25, 1997 176,000         176    1,099,824                1,100,000

</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                 F-10
<PAGE>

                        MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
                               (A Development Stage Company)
                      CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                     FOR THE PERIOD FROM INCEPTION (JANUARY 17, 1986)
                                 THROUGH DECEMBER 31, 1997
                                         COMMON STOCK

<TABLE>
<CAPTION>
                                      Loss
                                   Accumulated
                                             Additional  During the
                      Common Stock           Paid In     Development
                     Shares       Amount     Capital     Stage       Total
<S>                  <C>          <C>        <C>         <C>         <C>
Issuance of
  Common Stock
  Under a Private
  Placement Dated
  July 7, 1997          300,000       300     1,799,700              1,800,000

Net Loss Year Ended
  December 31, 1997                                      (1,293,230) (1,392,320)
</TABLE>

  The accompanying notes are an integral part of these financial statements.
                                 F-11
<PAGE>

                MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
                      (A Development Stage Company)
             CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
            FOR THE PERIOD FROM INCEPTION (JANUARY 17, 1986)
                        THROUGH DECEMBER 31, 1997
                            PREFERRED STOCK

<TABLE>
<CAPTION>
                                      Loss
                                   Accumulated
                                             Additional  During the
                      Preferred Stock        Paid In     Development
                     Shares       Amount     Capital     Stage       Total
                       (Common and (Common and (Common and
                        Preferred) Preferred) Preferred)
<S>                  <C>          <C>        <C>         <C>         <C>
Balance, January
  17, 1986                   0    $      0   $           $           $         0

Net Loss from
  Inception on
  January 17, 1986
  Through December
  31, 1987                                                      (316)      (316)
                    ----------      -------    -------      ---------    -------
Balance,
  December 31, 1987          0            0      27,359         (316)     33,188

Net Loss Year Ended
  December 31, 1988                                           (1,030)    (1,030)
                     ---------      -------    -------      ---------    -------
Balance,
  December 31, 1988          0            0      27,159       (1,346)     31,958

Net Loss Year Ended
  December 31, 1989                                          (21,707)   (21,707)
                     ---------      -------    -------      ---------   --------
Balance,
  December 31, 1989          0            0      27,159      (23,053)    10,251

Net Loss Year Ended
  December 31, 1990
  - Unaudited                                                (10,201)   (10,201)
                     ---------      --------   ---------    ----------  --------

Balance,
  December 31, 1990          0            0     (28,146)     (33,254)         50

Net Loss Year Ended
  December 31, 1991
  - Unaudited                                                       0          0
                     ----------     ---------  ---------     ---------  --------
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                 F-12
<PAGE>

                        MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
                               (A Development Stage Company)
                      CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                     FOR THE PERIOD FROM INCEPTION (JANUARY 17, 1986)
                                 THROUGH DECEMBER 31, 1997
                                     PREFERRED STOCK

<TABLE>
<CAPTION>
                                      Loss
                                   Accumulated
                                             Additional  During the
                      Preferred Stock        Paid In     Development
                     Shares       Amount     Capital     Stage       Total
                       (Common and (Common and (Common and
                        Preferred) Preferred) Preferred)
<S>                  <C>          <C>        <C>         <C>         <C>

Balance,
  December 31, 1991           0   $     0      (28,146)  (33,254)            50

Net Loss Year Ended
  December 31, 1992
   -  Unaudited               0         0                 (8,773)       (8,773)

                    -----------   --------   ----------   --------   ----------
Balance,
  December 31, 1992           0         0      (28,146)  (42,027)            50

Net Loss Year Ended
  December 31, 1993                                             0             0
                    -----------   --------   ----------   --------   ----------
Balance,
  December 31, 1993           0         0      (28,146)  (42,027)            50
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                 F-13
<PAGE>

                        MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
                               (A Development Stage Company)
                      CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                     FOR THE PERIOD FROM INCEPTION (JANUARY 17, 1986)
                                 THROUGH DECEMBER 31, 1997
                                     PREFERRED STOCK

<TABLE>
<CAPTION>
                                      Loss
                                   Accumulated
                                             Additional  During the
                       Common Stock          Paid In     Development
                    Shares       Amount      Capital     Stage       Total
                    (Common and  (Common and (Common and (Common and (Common and
                    Preferred)   Preferred)  Preferred)  Preferred)  Preferred)
<S>                 <C>          <C>         <C>         <C>         <C>
Net Loss Year Ended
  December 31, 1994              $           $           $         0 $       0
                    ----------   ----------  ----------  ---------   ----------
Balance,
  December 31, 1994          0            0    (28,146)     (42,027)        50

Net Loss Year Ended
  December 31, 1995                                        (689,713)   (689,713)
                    ----------   ----------  ----------  ---------   -----------
Balance,
  December 31, 1995          0   $        0  $  761,776  $  (731,740) $   36,337

Write Off of Excess
  of Liabilities over
  Assets on Purchase
  of Manon Consulting, Ltd.                                    11,283     11,283

Net Loss  Year Ended
   December 31, 1996                                        (449,236)  (449,236)
                    ----------   ----------  ----------  ----------   ----------
Balance,
  December 31, 1996          0   $        0  $1,372,631  $(1,169,693) $  209,383

Recovery of Write
  Off Of Excess of
  Liabilities over
  Assets on Sale of
  Manon Consulting, Ltd.                                     (11,283)   (11,283)

Issuance of Preferred
 Stock Under a
  Private Placement
 Dated July 8, 1997        165          41   1,649,959                 1,650,000

Less cost of
  Private Placement                          (123,750)                 (123,750)

</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                 F-14
<PAGE>

                        MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
                               (A Development Stage Company)
                      CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                     FOR THE PERIOD FROM INCEPTION (JANUARY 17, 1986)
                                 THROUGH DECEMBER 31, 1997
                                      PREFERRED STOCK

<TABLE>
<CAPTION>
                                      Loss
                                   Accumulated
                                             Additional  During the
                       Preferred Stock       Paid In     Development
                     Shares       Amount     Capital     Stage       Total
<S>                  <C>          <C>        <C>         <C>         <C>
Periodic Imputed
 Cost of Preferred
 Stock Issued on
 July 8, 1997
 through December
 31, 1997                                    70,521         (70,521)           0

Net Loss Year Ended
  December 31, 1997                                      (1,293,230) (1,392,320)

</TABLE>
                                        TOTALS
<TABLE>
<CAPTION>
                                      Loss
                                                          Accumulated
                                              Additional  During the
           Preferred Stock    Common Stock    Paid In     Development
           Shares  Amount  Shares     Amount  Capital     Stage       Total
<S>        <C>     <C>     <C>        <C>     <C>         <C>         <C>
Balance,
December
31, 1997   165     $41     6,992,185  $6,992  $6,107,314  $2,544,727  $3,569,620
           ===     ====    =========  =====   ==========  ==========  ==========
</TABLE>

  The accompanying notes are an integral part of these financial statements.
                                      F-15
<PAGE>

               MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
                     (A Development Stage Company)
                  CONSOLIDATED STATEMENT OF CASH FLOWS
         FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
                 AND FROM (INCEPTION (JANUARY 17, 1986)
                        THROUGH DECEMBER 31, 1997

<TABLE>
<CAPTION>
                                                                   From
                                                                   Inception
                                                                   Through
                             Year ended   Year ended   Year ended  December
                             December     December     December    31, 1996
                             31, 1997     31, 1996     31, 1995    (Unaudited)
<S>                          <C>          <C>          <C>         <C>


Cash Flows from Operating
 Activities
  Net Loss                   ($1,363,751) $(449,236)   $ (689,713)  $(2,544,727)

Adjustments to Reconcile
 Net Loss to Net Cash
 Provided by Operating
 Activities

  Depreciation and Amortization     9,546      7,733            63        17,342

  Common Stock Issued for Services      0          0        75,000        83,773

  Net Assets of Manon
   Consulting, Ltd               (11,281)          0        10,757             0

  Changes in Assets and Liabilities
    (Increase) Decrease in Accounts
      Receivable                 (39,935)    (6,711)         (640)      (47,286)
    (Increase) Decrease in Prepaid
      Expenses                   (34,696)   (29,115)             0      (63,813)

    (Increase) Decrease in
      Organizational Costs              0         50          (57)             0

    Increase (Decrease) in Accounts
      Payable                     (3,995)     20,080           291        15,796


  Total Adjustments              (80,361)    (7,963)        85,414        76,333

Net Cash Used by Operating
 Activities                   (1,373,592)  (457,199)     (604,299)   (2,468,394)

Cash Flows from Investing Activities
  Purchase of Property and
   Equipment                     (33,642)   (15,969)       (1,258)      (50,869)

  Net Cash Flows from Investing
   Activities                    (33,642)   (15,969)       (1,258)      (50,869)
</TABLE>

      The accompanying notes are an integral part of these financial statements.
                                                 F-16
<PAGE>
                       MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
                            (A Development Stage Company)
                           CONSOLIDATED STATEMENT OF CASH FLOWS
                 FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
                          AND FROM (INCEPTION (JANUARY 17, 1986)
                                 THROUGH DECEMBER 31, 1997

<TABLE>
<CAPTION>
                                                                    From
                                                                    Inception
                                                                    Through
                              Year ended   Year ended   Year ended  December
                              December     December     December    31, 1996
                              31, 1997     31, 1996     31, 1995    (Unaudited)
<S>                           <C>          <C>          <C>         <C>

Cash Flows from Financing Activities

   Proceeds from Sale of
    Common Stock              3,138,500    611,000      680,000     4,470,950

   Proceeds from the Sale of
    Preferred Stock           1,650,000          0            0     1,650,000

   Offering Costs             (123,750)          0     (30,000)     (161,896)

   Advances (Repayments) Notes
    Payable                    (24,000)     25,000            0         1,000

   Advances (Repayements) To
    Officers                   (12,500)     12,500            0             0

Net Cash Provided by Financing
 Activities                   4,628,250    648,500      650,000     5,960,054

Increase (decrease) in Cash
 and Cash Equivalents         3,221,016    175,332       44,443     3,440,791

Cash and Cash Equivalents at
 Beginning of Period            219,775     44,443            0             0

Cash and Cash Equivalents at
 End of Period              $ 3,440,791  $ 219,775    $  44,443   $ 3,440,791

Supplemental Information
  Cash paid for:
  Interest                    $       0  $       0    $       0   $         0
  Income taxes                $       0  $       0    $       0   $         0

Noncash financing
  Intangible assets purchased
   with Common Stock          $       0  $       0    $   1,000   $     1,000
  Common Stock issued
   for Services               $       0  $       0    $  75,000   $    83,773
</TABLE>

 The accompanying notes are an integral part of these financial statements.
                                   F-17
<PAGE>

                         MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
                                (A Development Stage Company)
                              NOTES TO THE FINANCIAL STATEMENTS
                                  DECEMBER 31, 1997 AND 1996

NOTE 1 - ORGANIZATION
         ------------

MedCare  Technologies,  Inc. (The  Company),  formerly  known as  Multi-Spectrum
Group, Inc.,was ncorporated under the name Santa Lucia Funding,  Inc., under the
laws of the State of Utah on January 17,  1986,  with an  authorized  capital of
50,000,000  common  shares with a par value of $.001.  On February 8, 1990,  the
Company  adopted a plan of merger with  Multi-Spectrum  Group,  Inc., a Delaware
Corporation,  in which  Multi-Spectrum  Group,  Inc., would be dissolved and the
name of Santa Lucia Funding,  Inc.,  would be changed to  Multi-Spectrum  Group,
Inc. The Company authorized a reverse split of 1200:1 to be effective August 11,
1995.  On August 29, 1995,  the Company  approved an increase in the  authorized
capital to 101,000,000 of which 100,000,000  shares shall be Common Stock with a
par value of $.001 and  1,000,000  shares  shall be  Preferred  Stock with a par
value of $.25 per share,  and a name  change to MedCare  Technologies,  Inc.  On
August 1, 1996,  an  agreement  and plan of merger was entered  into between the
Company and MedCare  Technologies,  Inc.  (A Delaware  Corporation)  whereby the
state of  incorporation  was  changed to  Delaware  from the state of Utah.  The
effective  date of the  agreement is August 27, 1996,  the date  accepted by the
state of Delaware.  The Company was inactive during the year 1991,  issued stock
for prior years services during 1992, and was inactive during 1993 and 1994. The
Company had no  revenues  nor  incurred  any  operating  expenses  during  these
inactive periods, other than the transaction during 1992.

On November 13, 1992,  the Company  issued  8,772,800  shares of common stock to
Group  Five,  Inc.,  in  exchange  for  services  rendered at $.001 per share or
$8,773.

On August  11,  1995,  the  Stockholders  authorized  a reverse  split of 1200:1
reducing the outstanding common shares to 58,519.

On August 11, 1995,  the Company  purchased  100% of the  outstanding  shares of
Medcare Technologies, Corporation, a Nevada corporation that was incorporated on
April 26, 1995 for $1.00.  Medcare  Technologies,  Corporation was inactive from
the date of  incorporation  through  August  11,  1995,  the  date  the  Company
purchased it. Medcare Technologies,  Corporation is a wholly owned subsidiary of
the company.

On August 14, 1995, the Company  acquired the rights to The MedCare  Program,  a
urinary incontinence procedure in exchange for 2,000,000 shares of the Company's
common stock at $0.0005, for a total value of $1,000.

On September 20, 1995, the Company  authorized in a 504D Disclosure  Memorandum,
4,200,000 shares of its common stock at an offering price of $0.15. On September
20, 1995,  the offering was  completed  with all shares being issued for a total
value of $630,000, less offering costs of $30,000.

 The accompanying notes are an integral part of these financial statements.
                                    F-18
<PAGE>

NOTE 1 - ORGANIZATION (CONTINUED)
         ------------------------

On October 1, 1995,  the Company  purchased  100% of the  outstanding  shares of
Manon Consulting,  Ltd. Manon Consulting,  Ltd., is a wholly owned subsidiary of
the Company. Manon Consulting, Ltd., operates a clinic in Calgary, Canada.

The following is a condensed balance sheet of Manon Consulting, Ltd. at October
31, 1995:

          Total Assets                  $ 12,558

          Total Liabilities               23,841
          Total Capital
            Common Stock                       7
            Retained Earnings-A Deficit  (11,290)
                                         --------
          Total Liabilities and Capital $ 12,558
                                         ========

The Company paid $7 for the outstanding common stock and assumed liabilities in
excess of assets of $11,290.  The excess was charged to operations during 1995.
On January 1, 1997, the Company sold Manon Consulting, Ltd. and recorded a gain
on the sale of $15,770. See Note 8 - Discontinued Operations.

On December 31, 1995,  the Company  issued  16,666 shares of its common stock at
$3.00 per share or $50,000 cash.

On December 31, 1995,  the Company  issued  25,000 shares of its common stock in
exchange for consulting services at $3.00 per share or $75,000.

During 1996,  the Company  issued 36,000 shares of its common stock at $3.00 per
share under its 1995 Stock Option Plan, or $108,000.

During  1996,  the Company  issued 3,000 shares of its common stock at $4.50 per
share under its 1996 Stock Option Plan, or $13,500.

On June 22, 1996,  the Company issued 50,000 shares of its common stock at $4.75
per share in a 504D private place memorandum or $237,500.

On November 18, 1996,  the Company  issued  56,000 shares of its common stock at
$4.50 per share a 504D private placement memorandum or $252,000.

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

                                  F-19

                      MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
                            (A Development Stage Company)
                          NOTES TO THE FINANCIAL STATEMENTS
                              DECEMBER 31, 1997 AND 1996

NOTE 1 - ORGANIZATION (CONTINUED)
         ------------------------

During 1997, the Company issued 17,000 shares of common stock at $4.50 per share
under the 1996 Stock Option Plan or $76,500.

During 1997, the Company issued 54,000 shares of common stock at $3.00 per share
under the 1995 Stock Option Plan or $162,000.

On February 4, 1997,  the Company issued 176,000 shares of common stock at $6.25
per share under a private placement memorandum or $1,100,000.

On July 7, 1997,  the Company issued 300,000 shares of common stock at $6.00 per
share under a private placement memorandum dated June 20, 1997 or $1,800,000.

On July 8, 1997, the Company issued 165 shares of Preferred  Stock - Series A at
$10,000 per share or $1,650,000,  less offering costs of $123,750. The Preferred
Stock has conversion  features that allow for the conversion into 266,747 common
shares,  at a discount  range of 10% to 20% from June 20, 1997  through June 20,
1998.  Additionally,  the Company is recording the periodic  imputed cost of the
Preferred  Stock - Series A from the date of closing of the  offering  at 8% per
annum through December 31, 1997.

The  Company  is a  development  stage  company,  as  defined  in the  Financial
Accounting  Standards Board No. 7. The Company is devoting  substantially all of
its present  efforts in securing and  establishing a new business,  and although
planned principal operations have commenced, substantial revenues have yet to be
realized.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
         -------------------------------

A. Method of Accounting
   --------------------

The Company's  financial  statements  are prepared  using the accrual  method of
accounting.

B. Cash and Cash Equivalents
   -------------------------

The Company  considers  all highly  liquid debt  instruments  with a maturity of
three months or less to be cash and cash equivalents.


    The accompanying notes are an integral part of these financial statements.
                                      F-20
<PAGE>

                 MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
                         (A Development Stage Company)
                       NOTES TO THE FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
         -------------------------------------------

C. Principles of Consolidation
   ---------------------------

The accompanying  consolidated  financial statements include the accounts of the
Company and its wholly  owned  subsidiary,  Medcare  Technologies,  Corporation.
Intercompany transactions have been eliminated in consolidation.

D. Purchase Method
   ---------------

Investments  in companies  have been included in the financial  report using the
equity method of  accounting.  The Company's  wholly owned  subsidiary,  MedCare
Technologies,  Corporation is engaged in the business of medical  consulting and
management in the United States.

E. Deferred Charges
   ----------------

The Company has incurred  start up costs from January 1, 1995 through  September
30, 1995  amounting  to  $542,706.  The total  amount was charged to  operations
during the year ended December 31, 1995.

F. Property and Equipment
   ----------------------

Property and equipment,  stated at cost, is depreciated  under the straight-line
method over their estimated useful lives as follows:

               Office Equipment         3 to 5 years
               Medical Equipment        3 to 5 years

Depreciation charged to expense during 1997, 1996, and 1995 was $9,546,  $7,733,
and $63 respectively.

G. Income Taxes
   ------------

There has been no  provision  for income  taxes,  because of the losses that the
Company has  incurred to date.  The Company has net  operating  losses that will
expire, beginning with the years 2002 through 2012, in the amount of $1,293,230,
$449,236,   $689,713  and  $42,027  in  1997,   1996,   1995  and  prior  years,
respectively, unless utilized by the Company.

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

                                  F-21
<PAGE>
                       MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
                              (A Development Stage Company)
                            NOTES TO THE FINANCIAL STATEMENTS
                               DECEMBER 31, 1997 AND 1996

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
         -------------------------------------------

H. Earnings or (Loss) Per Share
   ----------------------------

Earnings or loss per share is computed  based on the weighted  average number of
common  shares and common  share  equivalents  outstanding.  Stock  options  are
included as common share equivalents using the treasury stock method. The number
of shares used in computing primary earnings (loss) per common share at December
31, 1997, 1996, and 1995 was 7,270,185, 5,884,019, and 1,992,294,  respectively.
The number of shares used in computing fully diluted  earnings (loss) per common
share at  December  31,  1997,  1996,  and 1995 was  7,024,350,  5,884,019,  and
1,992,294, respectively.

I. Leases
   ------

The Company's corporate offices are located at 608 South Washington,  Suite 101,
Naperville,  Ilinois 60523.  These offices are leased for a one year period with
the  option to renew for an  additional  year,  at a monthly  rate of $1,550 per
month.  The Company  currently has the use of a second  office of  approximately
1,500  square  feet of office  space,  the use of one board  room and all office
equipment,   including  a  computer,  a  postage  machine,  filing  cabinets,  a
photocopier  and  telephone  equipment.  The office space is owned by one of the
Company's  directors and the  Chairman's  wife. The offices are located at Suite
216 - 1628 West 1st Avenue,  Vancouver,  British Columbia,  Canada.  The monthly
rent is $2,000 per month. There is an option to renew for an additional year.

J. Medcare Program Sites
   ---------------------

Program sites are located in Norman,  Oklahoma,  Winter Park,  Florida;  Denver,
Colorado;  Raleigh,  North Carolina and Kankakee,  Illinois. New locations to be
opened since December 31, 1997,  include  Kingwood,  Texas;  Toledo,  Ohio; Lake
Worth, Florida; Coral Springs, Florida; Phoenix, Arizona; Freemont,  California;
New York,  New  York;  New  Rochelle,  New York;  Roswell,  Georgia;  Baltimore,
Maryland; Stanford, Connecticut; West Orange, New Jersey and Clackamas, Oregon.

K. Use of Estimates
   ----------------

Management uses estimates and assumptions in preparing  financial  statements in
accordance with generally accepted  accounting  principles.  Those estimates and
assumptions  affect  the  reported  amounts  of  assets  and  liabilities,   the
disclosure of

     The accompanying notes are an integral part of these financial statements.
                                     F-22
<PAGE>

                         MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
                                (A Development Stage Company)
                              NOTES TO THE FINANCIAL STATEMENTS
                                  DECEMBER 31, 1997 AND 1996

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
         -------------------------------------------

K. Use of Estimates (Continued)
   ----------------------------

contingent  assets and  liabilities,  and the reported  revenues  and  expenses.
Actual  results could vary from the estimates that were assumed in preparing the
financial statements.

L. Presentation
   ------------

Certain  accounts  from prior years have been  reclassified  to conform with the
current year's presentation.

M. Pending Accounting Pronouncements
   ---------------------------------

It is anticipated that current pending accounting  pronouncements  will not have
an adverse impact on the financial statements of the Company.

NOTE 3 - LONG-LIVED ASSETS - THE MEDCARE PROGRAM
         ---------------------------------------

On August 14, 1995, the Company  acquired the rights to The MedCare  Program,  a
urinary  incontinence  procedure in exchange for 2,000,000  shares of its common
stock.  The  transaction  was accounted  for in accordance  with the process for
valuation  of  intangible  assets  as  described  in  Statement  No.  17 of  the
Accounting  Principles  Board.  The Company has continued to further enhance The
MedCare  Program for the treatment of urinary  incontinence  that  significantly
reduces or  completely  eliminates  the  majority  of UI cases  using a nondrug,
nonsurgical   protocol  that  takes  into  account  the   clinical,   cognitive,
functional,  and  residential  status of the  patient.  The  Company  intends to
amortize the cost of the system over 15 years,  based on Management's  estimated
useful life of the protocol,  beginning with the first year in which  commercial
sales occur.  Management  reassesses  annually the estimated  useful life.  Such
amortization will result in charges against earnings of $66 per year for each of
the years.

NOTE 4 - NOTES PAYABLE-OFFICERS (RELATED PARTIES TRANSACTIONS)
         ------------------------------------------------------

An Officer of the Company loaned the Company $1,000,  which is due on demand and
with no interest rate currently applicable.

NOTE 5 - STOCK OPTIONS
         -------------

The  Company  has  issued  stock  options  to various  directors,  officers  and
employees.  The option prices are based on the fair market value of the stock at
the date of the grant.  The Company makes no charge to operations in relation to
option grants, unless the options

   The accompanying notes are an integral part of these financial statements.
                                     F-23
<PAGE>

                        MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
                               (A Development Stage Company)
                             NOTES TO THE FINANCIAL STATEMENTS
                                 DECEMBER 31, 1997 AND 1996

NOTE 5 - STOCK OPTIONS (CONTINUED)
         -------------------------

granted are less than fair  market,  then a charge to  operations  would be made
over the vesting period.  The Company's stock option  transactions for the years
ended December 31, 1997, 1996 and 1995 are summarized as follows:

<TABLE>
<CAPTION>
                                                  Number of         Option
                                                   Shares           Price
                                                  ---------         ------
<S>                                               <C>               <C>

Options outstanding and exercisable at
  December 31, 1995                               500,000           $3.00
Options granted in 1996                           300,000            4.50
Options exercised during 1996 under
  the 1995 Stock Option Plan                      (36,000)           3.00
Options exercised during 1996 under
  the 1996 Stock Option Plan                      (3,000)            4.50
                                                  -------
Options outstanding and exercisable
  at December 31, 1996                            761,000
Options granted in 1997                           200,000            4.50
Options granted in 1997                           300,000            6.50
Options exercised during 1997 under
  the 1995 Stock Option Plan                      (54,000)           3.00
Options exercised during 1997 under
  the 1996 Stock Option Plan                      (17,000)           4.50
                                                  --------
Options outstanding and exercisable
  at December 31, 1997                            1,190,000         $3.00-$6.50
                                                  =========
</TABLE>

The Company has  authorized  the 1998 Stock  Option  Plan and  reserved  500,000
shares of its common stock, of which 290,000 shares will be offered at $6.50 and
the  balance  of  210,000  shares  at a price  to be  determined,  for  issuance
thereunder subject to stockholder approval at the next annual meeting.

NOTE 6 - STOCK WARRANTS
         --------------

In July, 1997, the Company offered 300,000 shares of common stock at $6.00 each,
along with an additional  300,000 share  purchase  warrants at $6.00 each,  good
until July 7, 2002.

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

                                   F-24
<PAGE>

                     MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
                           (A Development Stage Company)
                        NOTES TO THE FINANCIAL STATEMENTS
                            DECEMBER 31, 1997 AND 1996

NOTE 7 - PREFERRED STOCK - SERIES A
         --------------------------

On June 20, 1997,  the Company  began  offering for sale a Regulation D offering
under  Rule 506.  This  offering  was for the  Series A  Preferred  Stock of the
Company and was sold for $10,000 per share, in minimum  subscription  amounts of
at lease  ten  shares  ($100,000)  and in  increments  of five  shares in excess
thereof.  The total offering was for  $3,000,000,  with a minimum of $1,650,000.
The  offering  closed on July 8,  1997 with the  minimum  offering  placed.  The
preferred  stock was  accompanied  by warrants to purchase a number of shares of
common  stock  of the  Company  equal  to 33 1/3%  multiplied  by the  aggregate
purchase price of the Subscriber's  preferred stock outstanding on each of nine,
twelve and fifteen months following the closing date of the offering, divided by
the Fixed Conversion Price as herein defined. The Series A Preferred Shareholder
shall be entitled to convert,  subject to the Company's right of redemption,  if
the  conversion  price is less  than the Fixed  Conversion  Price at the time of
receipt of a notice of conversion.  The conversion  price is equal to the lesser
of 115% of the average Closing Bid Price for five trading days ending on June 6,
1997, which is $7.346 (The Fixed Conversion  Price) or a discount,  ranging from
10% to 20% over a 12  months  period  beginning  July 8,  1997,  of the  average
Closing  Bid Price  for five  trading  days  immediately  preceding  the Date of
Conversion divided into the original purchase price of the preferred stock, plus
an 8% per annum  accretion  rate equal to the period  that has passed  since the
closing  date.  Assuming  that all the of the warrants  would be  exercised,  an
additional 266,747 shares of common would be issued.

NOTE 8 - DISCONTINUED OPERATIONS OF A BUSINESS SEGMENT
         ---------------------------------------------

On January 1, 1997,  the Company sold Manon  Consulting,  LTD at book value.  No
revenues or expenses are included in the consolidated  financial  statements for
the year ended  December 31, 1997 and 1996.  The statement of operations for the
years  ended  December  31,  1996 and 1995 have been  restated to remove the net
losses of $3,169 and $1,320,  respectively.  Gross  revenues for the years ended
December 31, 1996 and 1995 were $8,118 and $1,729.  The Company  reported a gain
on the transaction of $15,770.

The following is a condensed  balance sheet and statement of operations of Manon
Consulting, LTD, as of December 31, 1996 and 1995:

<TABLE>
<CAPTION>
                                                 1996               1995
<S>                                              <C>                <C>
Condensed Balance Sheet
   Current Assets                                $     787          $    533
   Equipment, Net                                    7,203            11,132
   Other Assets                                         64               138
                                                 ---------          --------
                                                 $   8,054          $ 11,803
                                                 =========          ========
</TABLE>

  The accompanying notes are an integral part of these financial statements.
                                   F-25
<PAGE>

NOTE 8 - DISCONTINUED OPERATIONS OF A BUSINESS SEGMENT (CONTINUED)
         ---------------------------------------------------------

<TABLE>
<CAPTION>
                                              1996               1995
<S>                                           <C>                <C>
Current Liabilities                           $  23,825          $   24,405
   Common Stock                                       7                   7
   Deficit                                      (15,778)            (12,609)
                                              ----------         -----------
                                              $   8,054          $   11,803
                                              ==========         ===========

   Revenues                                   $   8,118          $    1,729
   Expenses                                      11,287               3,049
                                              ----------         -----------
   Net Loss                                   $  (3,169)         $   (1,320)
                                              ==========         ===========
</TABLE>

NOTE 9 - SUBSEQUENT EVENTS
--------------------------

On January 5, 1998, 3 shares of preferred  stock were  converted to 4,851 shares
of common stock at $6.45131 per share.

On January 6, 1998, 3 shares of preferred  stock were  converted to 4,803 shares
of common stock at $6.51875 per share.

On February 16, 1998,  200,000  warrants to purchase common stock were exercised
at $6 per share, or $1,200,000.




  The accompanying notes are an integral part of these financial statements.
                                    F-26
<PAGE>