SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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


                                   FORM 10-KSB

   [X] Annual report under Section 13 or 15(d) of the Securities Exchange Act
                 of 1934 For the fiscal year ended: May 31, 1998

       [ ] Transition report under Section 13 or 15(d) of the Securities
         Exchange Act of 1934 For the transition period from ________ to
                                    ________.

                         Commission File Number: 0-16206

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


                         OAK TREE MEDICAL SYSTEMS, INC.
                         ------------------------------
             (Exact name of Registrant as specified in its charter)

           DELAWARE                                   02-0401674
           --------                                   ----------
  (State or other jurisdiction                     (I.R.S. Employer
of incorporation or organization)                 Identification No.)

                        163-03 HORACE HARDING EXPRESSWAY
                            FLUSHING, NEW YORK 11365
                                 (718) 460-8400
               (Address, including zip code, and telephone number,
                 including area code, of Registrant's principal
                               executive offices)

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

           Securities registered pursuant to Section 12(g) of the Act:
                     Common Stock, par value $0.01 per share
                                (Title of Class)

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


Check  whether  the  Registrant  (1) filed all  reports  required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the  Registrant was required to file such reports),  and (2)
has been subject to such filing  requirements  for the past 90 days.  
Yes: |X|    No: |_|

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

The Registrant's revenues for its most recent fiscal year: $2,258,186.

The number of shares of Common Stock, par value $0.01 per share,  outstanding as
of August 26, 1998: 5,152,859.

The  aggregate  market value of voting and  non-voting  Common Stock  (4,469,484
shares) held by non-affiliates computed by reference to the closing price of the
Common Stock as of August 26, 1998: $11,313,381.

Transactional Small Business Disclosure Format:  Yes: |_|  No: |X|


<PAGE>

                                     PART I

ITEM 1.  BUSINESS

         Oak Tree Medical Systems, Inc., a Delaware corporation (the "Company"),
was  incorporated  in  Delaware  on  May  27,  1986,  as Oak  Tree  Construction
Computers,  Inc. From 1986 through 1990,  the Company was engaged in the sale of
computer  systems  for  the  construction   industry.  For  a  number  of  years
thereafter,  the Company was inactive.  The Company changed its name to Oak Tree
Medical  Systems,  Inc. in August 1994. Since January 1995, the Company has been
engaged in the business of operating and managing  physical therapy care centers
and related medical practices.  Currently,  the Company,  through its subsidiary
Oak Tree Medical  Management,  Inc.,  operates two New York City based  physical
therapy care centers.  Prior to April 1997,  the Company also had  operations in
Florida.  Unless otherwise  indicated by the text,  reference herein to the term
"Company" will be deemed to refer to Oak Tree Medical Systems,  Inc. and all its
subsidiaries.

Medical Business

         The  primary  focus of the  Company to date has been the  provision  of
physical therapy and related rehabilitative  services.  Physical therapy aids in
the  restoration  of patients who have been disabled by injury or disease or are
recovering  from  surgery.  The  Company's  physical  therapy care centers offer
preventive,  rehabilitative and pre- and  post-operative  care for neuromuscular
and musculoskeletal  injury.  These may include a variety of  orthopedic-related
disorders,  sports- related injuries,  neurologically  related  injuries,  motor
vehicle injuries and work-related injuries.

         Patients  are  primarily  referred  to  the  Company's   rehabilitation
facilities by physicians. Licensed physical therapists evaluate each patient and
develop a program of  rehabilitation  to achieve  the  patient's  rehabilitation
goals.  Treatments may include  traction,  ultrasound,  electrical  stimulation,
therapeutic  exercise,  heat  treatment and  hydrotherapy.  Patients are usually
treated  for one hour per day,  three days per week over a period of two to five
weeks. Where appropriate,  patients are provided post treatment home maintenance
and exercise programs.

         The  Company's  clinics  offer  specific  programs for injured  workers
compensation  patients.  Each  clinic  first  evaluates  the  worker's  physical
condition  and capacity to perform the  requirements  of his or her  employment.
This evaluation may be used by insurers to estimate the extent of rehabilitation
treatment or as a basis for  settlement of disability  claims.  Thereafter,  the
clinic will prescribe and implement a course of "work conditioning" (hardening),
which includes graduated exercise and work stimulation therapies.

         The Company  believes  that  purchasers  and  providers  of health care
services  such  as  employers,   insurance   companies  and  health  maintenance
organizations  who are seeking to save on traditional  health care services view
physical therapy and rehabilitation  services as cost-effective in that they may
prevent  short-term  disabilities  from  becoming  chronic  conditions,  and may
accelerate recovery from surgery and neuromuscular and musculoskeletal injuries.
In addition,  changes in both public and private health insurance  reimbursement
have encouraged early hospital discharge,  another trend which promotes the need
for outpatient physical therapy


                                      - 2 -

<PAGE>

services.  Also,  the aging of the U.S.  population  has  increased  demand  for
rehabilitation programs to treat chronic conditions of the elderly.

         The  Company's  strategy has been to take  advantage of these trends by
acquiring and  integrating a network of health care  practices,  particularly in
the greater New York  metropolitan  area. The Company  believes that  attractive
acquisition opportunities exist in its industry because of health care's current
cost  containment  economics,  laws  that bar  health  care  practitioners  from
referring to entities in which they have an  ownership  interest and the general
sense of insecurity  among health care  practitioners  resulting  from the great
amount  of  change  being  experienced  by  the  profession.  New  reimbursement
schedules  and  conventions  have put  particular  pressure  on the  traditional
private practice of medicine and allied health care services.  Government health
programs,  private insurers and health  maintenance type  organizations  have in
many cases reduced payments to health care  professionals and in some cases have
substituted  capitation  or fixed  reimbursement  for the  traditional  "fee for
service" payments.

         In this environment, the importance of conducting health care practices
in an  efficient  and  cost-effective  manner  has  increased.  By  centralizing
non-medical activities, such as administration,  accounting, billing, marketing,
procurement  and human  resources,  health care providers can reduce unit costs,
enhance  efficiencies  and  promote  profitability.  Centralized  management  of
medical practices also facilitates identification,  negotiation and consummation
of advantageous contractual relationships with health maintenance organizations,
preferred provider organizations,  hospitals,  nursing homes, school systems and
similar  institutions.  Referrals and contract work from such  organizations and
institutions  may be  essential  to the  long-term  viability  of  providers  of
outpatient rehabilitative services.

Existing Facilities

         In October  1996,  the Company  acquired the  management  and assets of
three New York  City  based  physical  therapy  care  centers  for an  aggregate
purchase  price of  $900,000  (in cash and  assumed  debt) and 10,000  shares of
Common Stock (with a guaranteed  value of not less than $100,000 and issuable in
October 1998).  Included in the  acquisition was a contract for the provision of
physical  therapy  services to a county  hospital in  Westchester,  New York. In
connection  with  the  acquisition,   the  Company  entered  into  a  three-year
employment  agreement  with the  seller  of the  clinics,  a  licensed  physical
therapist, who served as the director of operations of the New York City clinics
and Chief Operating Officer of the Company until February 1998. The Company also
assumed three leases for the physical  therapy care centers.  In July 1998,  the
Company sold  substantially  all of the equipment  and  operations of two of the
three  facilities it acquired in 1996 to a subsidiary of SMR  Management  Corp.,
Nesconset Sports, Inc. ("Nesconset  Sports"),  because the cash flows from these
facilities were  insufficient to support their  operations.  The aggregate sales
price was $375,000 in cash,  of which  $365,000 was used to repay certain of the
Company's lease obligations. The purchaser assumed the outstanding leases.

         In July 1997,  the Company  acquired  the  management  and assets of an
additional  center  in New York  City for a  purchase  price  of  $400,000.  The
purchase  price may be reduced by $100,000  if the final  audit of the  acquired
center shows that it did not attain a certain level of billings as of the end of
July 1998, which


                                      - 3 -

<PAGE>

the Company expects was not attained.  In connection with the  acquisition,  the
Company  entered into a lease for the acquired  center  through August 2003, and
the seller entered into a four-year  noncompetition  agreement. In addition, the
seller entered into a six-month consulting agreement with the Company continuing
thereafter on a  month-to-month  basis, at $150,000 per annum.  The Company also
entered into a six-month  consulting  agreement  with the physical  therapy care
center  administrator,  a relative of the  seller,  continuing  thereafter  on a
month-to-month basis, at $50,000 per annum.

         In  compliance  with the laws of the State of New York,  all  treatment
related  activities  at the Company's New York City clinics are conducted by Oak
Tree  Medical  Practice,   P.C.  ("Oak  Tree  P.C."),  an  independently   owned
professional corporation.  The Company has entered into agreements with Oak Tree
P.C. pursuant to which the Company provides to Oak Tree P.C. all  administrative
and  management  services and leases to Oak Tree P.C.  facilities and equipment.
Because of the significant  influence and control  exercised by the Company over
Oak Tree P.C.  (other than with  respect to patient  treatment),  the  financial
results of Oak Tree P.C. are consolidated with those of the Company.

Acquisition and Rescission

         In December 1996, the Company  acquired certain assets of four physical
therapy care centers and a management  company located in Long Island,  New York
for an aggregate  purchase  price of $650,000 and 132,190 shares of Common Stock
of the Company, plus other consideration.

         Effective  February 28, 1997, the Company rescinded the acquisition and
the former  sellers  returned all stock and notes issued to them in the original
transaction. In addition, the former sellers agreed to pay the Company $448,935,
representing the cash purchase price of the original transaction, the net amount
expended by the Company on the  facilities  for the period from December 1996 to
February  1997, and the purchase price of 12,000 shares of Common Stock acquired
by the former  sellers  for  $15,000.  Of this  amount,  $50,000 was paid at the
closing,  $25,000  was paid in May 1997 and the  balance  was to be paid over an
18-month   period.   In  December   1997,   the  Company  agreed  to  the  early
extinguishment  of the remaining  amount owed by the former sellers and received
$325,000 in full  settlement.  The Company  remained  obligated  to issue 14,286
shares of Common  Stock to the  landlord of one of the  acquired  facilities  in
satisfaction  of  certain  pre-existing   obligations.   Although  the  original
acquisition  of the Long  Island  clinics  was  consistent  with  the  Company's
strategy of focusing its  operations  in the New York area,  the cash flows from
these  facilities to the Company were  insufficient to support the operations of
these facilities by the Company.

Sales of Florida Centers

         Following the Company's October 1996 acquisition of three New York City
based  physical  therapy  care centers and the hospital  service  contract,  the
Company  determined to shift its geographic  focus from North Florida to the New
York City area. Consistent with this approach, in February 1997 the Company sold
substantially  all of the assets and  operations of its clinics in  Jacksonville
and Orange Park, Florida. The Jacksonville assets were held by the


                                      - 4 -

<PAGE>

Company's Acorn CORF I, Inc.  subsidiary and the Orange Park assets were held by
the Company's Riverside CORF, Inc. subsidiary. In addition, the Company sold all
the shares of Oak Tree  Receivables,  Inc. ("OT  Receivables"),  a  wholly-owned
subsidiary  of the  Company,  which  helped  finance the  operations  of the two
facilities  by buying  certain of their  receivables  and financing the purchase
through a receivables funding facility which used the receivables as collateral.
The aggregate  sales price was $200,000,  consisting of $100,000 in cash paid at
closing  and a note in the amount of  $100,000  payable in two  installments  in
April and May 1997. Neither  installment has been paid and, as collection is not
probable,  the Company has  established  a reserve in the amount of the note. In
connection  with the sale of the North Florida  centers,  the purchaser  assumed
$86,150 of accounts payable and the balance of the obligation of the receivables
funding facility in the amount of $1,812,500. In exchange for the consent of the
lender of the patient care receivables funding facility,  the Company pledged as
collateral  to the  lender  additional  accounts  receivable  in the  amount  of
$700,000.  The  Company  also  terminated  the  employment  agreement  with  the
facilities'  medical  director,  was given back  400,000  shares of Common Stock
which had been  issued  in  connection  with the  Company's  acquisition  of the
facilities in 1995 and was relieved  from its  obligation to issue an additional
145,000 shares of Common Stock.

         Continuing  the  divestiture  of its  Florida  operations,  the Company
disposed of its remaining  North  Florida  facility,  located in St.  Augustine,
Florida,  in April 1997. The sales price was $25,000 in cash,  with $15,000 paid
at closing and $10,000 paid in April and May 1997.

Proposed Acquisition

         In  September  1997,  the  Company  entered  into a letter  of  intent,
subsequently amended in December 1997, for the acquisition of the management and
assets of approximately 30 medical  practices and MRI facilities  located in the
greater New York metropolitan  area.  Collectively,  the centers had revenues of
approximately  $70  million  and  estimated  earnings  before  interest,  taxes,
depreciation  and  amortization  of  approximately  $23 million in calendar year
1997. The Company intends to finance the proposed  acquisition  through issuance
of debt and equity securities of the Company, which, if consummated, will result
in a  substantial  change to the  Company's  current debt and equity  structure.
There can be no assurance, however, that the Company will successfully negotiate
a definitive  written  agreement or meet its  obligations of raising  capital to
complete the acquisition or that all the other  conditions to the closing of the
transaction will be met.

Marketing

         Because physicians are the primary source of referrals to the Company's
clinics,  the  clinics  individually  focus  their  marketing  efforts  on local
orthopedic  surgeons,   neurosurgeons,   physiatrists,   occupational   medicine
practitioners,  and general  practitioners.  On a corporate  level,  the Company
seeks to establish referral relationships with health maintenance organizations,
preferred  provider  organizations,  industry and case  managers,  and insurance
companies.  The  Company  is also  pursuing  contractual  relationships  for the
provision of rehabilitative services with medical institutions, schools, nursing
homes and home health care companies.


                                      - 5 -

<PAGE>

Government Regulation

         The  health  care  industry  is  subject to  extensive  and  increasing
federal,  state and local  regulation.  The Company is also  subject to laws and
regulations relating to business  corporations  generally.  The Company believes
its operations are in material  compliance with  applicable  law.  Nevertheless,
because of the  complexity  of the statutes and  regulations  in the health care
area,   many  of  which  have  not  been  subject  to  judicial  or   regulatory
interpretation,  there  can  be no  assurance  that  aspects  of  the  Company's
operations will not be subject to legal or administrative  challenge.  Also, the
health care regulatory  environment has been in the past, and is likely to be in
the future, subject to substantial and ongoing change. Accordingly, there can be
no  assurance  that future  changes in the law will not  restrict  or  otherwise
adversely affect the Company's business.

         The laws of a number of states,  including New York where the Company's
clinics are located,  prohibit a  corporation  from engaging in the provision of
health care,  including physical therapy, or from exercising direct control over
professionals  engaged in the health care field.  The Company  believes that its
ownership  of physical  therapy care  centers and the  provision  of  equipment,
location,  managerial,  administrative  and non-medical  support services to the
clinics does not constitute the corporate  practice of physical  therapy,  since
licensed physical therapists exercise complete control over the provision of all
physical  therapy  services.  Nevertheless,  there can be no assurance  that the
statutes  prohibiting the corporate  practice of physical  therapy services will
not be  construed or modified in the future to prohibit  the  operations  of the
Company as they are presently being conducted.

         There also exist federal and state statutes that impose civil sanctions
and substantial criminal penalties on health care providers that fraudulently or
wrongfully  bill  governmental  and other  third-party  payors for  health  care
services.  The federal statute prohibiting false billing permits private persons
to bring a civil action in the name of the United States to remedy violations of
the statute. The Company believes that it is in compliance with these fraudulent
billing  statutes.  However,  billing for health care  services is technical and
complex, and there can be no assurance that the Company's billing practices will
not be challenged or scrutinized by government authorities.

Competition

         The health care industry generally and the physical therapy business in
particular   are   highly   competitive.   In   addition   to   corporate-owned,
physician-owned and other private physical therapy clinics, the Company competes
with the  physical  therapy  departments  of  hospitals  and  area  chiropractic
practices.  The competitive factors in the physical therapy business are quality
of care, cost,  treatment outcomes,  convenience of location and ability to meet
the needs of referral and payor  sources.  Certain of the Company's  competitors
may have  substantially  greater financial,  marketing,  developmental and other
resources  than the  Company.  Both  larger  and  smaller  competitors  may have
individual   facilities  with  greater  treatment   resources  than  individual,
competing  facilities operated by the Company.  Also, the industry is subject to
continuous changes regarding the provision of services and the selection of care
providers, and


                                      - 6 -

<PAGE>

certain competitors may be more successful than the Company in adapting to these
changes in a timely and effective manner.

Investment in Gold Ore

         In May 1993, the Company  acquired  50,000 tons of gold ore from Nevada
Minerals  Corporation in exchange for the issuance of 1,350,000 shares of Common
Stock.  The  ore was  appraised  as  having  a  $5,000,000  value.  The  Company
subsequently  formed  a  wholly-owned   subsidiary,   Aurum  Mining  Corporation
("Aurum"),  with the  gold ore as its only  asset.  In June  1995,  the  Company
exchanged  the stock of Aurum  for  6,000,000  shares of common  stock of Accord
Futronics Corp.  ("Accord"),  an unaffiliated  privately-held company with other
mining related  assets.  The Company had the right to receive a royalty of 12.5%
of the net mining income from processing of the gold ore transferred to Accord.

         In November 1997, the Company  returned the 6,000,000  shares of common
stock of Accord in exchange for 100% of the common  stock of Aurum.  At the time
of the return of the Accord stock,  Accord had neither commenced nor anticipated
commencing mining operations,  and the Company desired to take action to realize
the value of the gold ore. Due to (i) the absence of current financial and other
information  for Accord,  as to both the subsidiary and the underlying gold ore,
(ii) the Company's lack of resources to commence mining, and (iii) the Company's
inability to sell the ore, the Company  wrote down its  investment in the ore by
$3,000,000,  based on its experience  marketing the ore, as of May 31, 1998. The
Company  intends to continue its attempt to sell the gold ore and  anticipates a
sale in the near  future,  although  there can be no  assurance  that it will be
successful in doing so.

Employees

         As of May 31,  1998,  the Company  had 30  full-time  employees  and 13
part-time  employees.  The Company also hires  independent  consultants  for its
medical service operations from time to time and at May 31, 1998, employed three
persons under consulting arrangements.


ITEM  2. PROPERTIES

         The Company's  headquarters office is temporarily located in one of its
formerly-owned  physical  therapy care centers  located at 163-03 Horace Harding
Expressway,  Flushing,  New York 11365. The Company is currently searching for a
more permanent office space.

         Set forth below is certain information  concerning the Company's leased
facilities for its rehabilitative and medical service operations, as of July 31,
1998. The Company believes these facilities are adequate for its operations.


                                      - 7 -

<PAGE>


                              SQUARE            MONTHLY         EXPIRATION
LOCATION                      FOOTAGE            RENT            OF LEASE
1725 Tenbroeck Avenue          2,200             $2,480          11/30/01
Bronx, New York

130 William Street             2,850             $3,978           8/31/03
New York, New York


ITEM 3.  LEGAL PROCEEDINGS

         Medbrook  Corporation v. Ronald W. Dennie,  M.D. and 1st Coast Physical
Medicine  Associates,  Inc., Case No.  95-4524-CA (4th Judicial  Circuit,  Duval
County,  Florida).  Plaintiffs in this action sued 1st Coast  Physical  Medicine
Associates, Inc., the former owner of the Jacksonville, Florida physical therapy
care centers,  and Dr. Ronald W. Dennie, the medical manager of the Jacksonville
operations,  alleging  that Dr.  Dennie was in  violation  of a covenant  not to
compete  with  Medbrook  Corporation  ("Medbrook").  Medbrook  had  managed  the
Jacksonville  operations  prior  to their  sale to the  Company  by Dr.  Dennie.
Plaintiff  sought  damages  and  injunctive  relief.  The matter was  settled in
December 1997 without material effect on the Company.

         Westcap  Corporation  v. Oak Tree  Medical  Systems,  Inc.,  Index  No.
604059/97  (Supreme  Court of the  State of New York,  County  of New York,  New
York).  A former  consultant of the Company filed an action  against the Company
alleging  breach of contract and other claims.  The plaintiff  sought $50,000 in
monetary  damages and warrants to acquire  250,000  shares of Common  Stock.  In
December 1997, the Company settled the matter by agreeing to issue 23,000 shares
of Common Stock to the  plaintiff  (and, if a certain stock value is not met, an
additional 2,500 shares of Common Stock) and a cash payment of $3,000.

         Irwin Bosh Stack and Irene Stack v. Oak Tree Medical Systems,  Inc. and
Henry  Dubbin,  Case No.  97-17996 CA 13 (11th  Judicial  Circuit,  Dade County,
Florida).  In August  1997,  a  stockholder,  the wife of the  Company's  former
Chairman  of the  Board of  Directors,  filed a  lawsuit  against  the  Company,
alleging  unreasonable  restraint  on the  alienability  of her shares of Common
Stock of the  Company  and  breach of  fiduciary  duty on the part of Mr.  Henry
Dubbin. The plaintiff is seeking  unspecified  compensatory and punitive damages
and injunctive relief.

         U.S.  Consultancy,  Inc. and FYM, Inc. v. Henry Dubbin,  Burton Dubbin,
Fred Singer,  William  Kedersha,  Michael  Gerber,  Ellis Group,  Inc.,  Liberty
International, Inc., NFC (Service) Ltd. and Oak Tree Medical Systems, Inc., C.A.
No.  15994  (Court of  Chancery  of the State of  Delaware,  New Castle  County,
Delaware). Plaintiffs filed an action on October 20, 1997, alleging, among other
things,  (i) the  Company's  failure to hold an annual  meeting of  stockholders
within the time  prescribed by Section 211 of Delaware  General  Corporation Law
(the "DGCL") and (ii) breach of fiduciary  duties by current and former officers
and  directors  of the  Company in (a)  issuing  shares of Common  Stock for the
purpose of  entrenchment,  (b) rejecting  potential  investment and  acquisition
opportunities for personal reasons, (c) engaging


                                      - 8 -

<PAGE>

in  self-dealing  and  wasteful  transactions,  (d)  failing to file  annual and
quarterly reports with the Securities and Exchange  Commission,  and (e) issuing
unregistered  stock of the Company.  Plaintiffs  sought,  among other things, an
order  compelling  the  Company  to  hold an  annual  meeting  of  stockholders,
rescission  of all  issuances  of shares of Common  Stock and options to certain
individuals pursuant to Form S-8 registration statements filed in June 1997, and
unspecified damages. Plaintiffs also sought to inspect certain books and records
of the company pursuant to Section 220 of the DGCL.

         In May 1998,  these two related matters were settled,  subject to court
approval,  requiring the Company to pay $170,000,  with $120,000 in cash payable
immediately  and $25,000 in cash payable on each of August 1, 1998 and September
1, 1999. In addition,  the Company  issued a two-year  option to acquire  60,000
shares of Common Stock at $1.59 per share in exchange for consulting services.


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

         The Company held its Annual Meeting of  Stockholders  on March 9, 1998.
The matter submitted to a vote of the Company's stockholders was the election of
two directors of the Company's Board of Directors.

         The Company's  stockholders  elected  Messrs.  Henry Dubbin and Fred L.
Singer to the Company's Board of Directors, to hold office until the next annual
meeting of stockholders and until their  respective  successors are duly elected
and qualified. The results of the voting were as follows:

         Mr. Henry Dubbin

         Voted for..............................................2,659,449
         Voted against..........................................    2,250
         Authority withheld.....................................       38
         Abstained..............................................        0
         Broker non-votes.......................................        0

         Mr. Fred L. Singer

         Voted for..............................................2,659,699
         Voted against..........................................    2,000
         Authority withheld.....................................       38
         Abstained..............................................        0
         Broker non-votes.......................................        0


                                      - 9 -

<PAGE>

                                     PART II

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

         The Company's Common Stock is currently traded in the  over-the-counter
market on the OTC  Electronic  Bulletin  Board of the  National  Association  of
Securities Dealers (the "NASD").  The following table sets forth, for the fiscal
quarters indicated,  high and low closing bid prices for the Common Stock in the
over-the-counter  market as reported by the NASD. The information below reflects
inter-dealer prices,  without retail mark-up,  mark-down or commission,  and may
not necessarily represent actual transactions.
<TABLE>
<CAPTION>

                                                                   Low Bid             High Bid
<S>                                                                  <C>                  <C>
Fiscal Quarter Ended May 31, 1997:
        First Quarter................................              $4.625               $7.750
        Second Quarter...............................               4.000                7.875
        Third Quarter................................               3.000                5.500
        Fourth Quarter...............................               0.875                2.563


Fiscal Quarter Ended May 31, 1998:
        First Quarter................................              $2.125               $4.469
        Second Quarter...............................               1.875                4.641
        Third Quarter................................               1.750                2.938
        Fourth Quarter...............................               1.063                2.406
</TABLE>


        As of August 26, 1998, there were approximately 133 holders of record of
the Company's  Common Stock.  The closing bid and asked prices for the Company's
Common Stock on August 26, 1998, was $2.531 and $2.563, respectively.

        The Company has not paid any cash dividends on its Common Stock to date,
and the payment of cash dividends in the foreseeable  future is not contemplated
by the  Company.  The  future  dividend  policy  will  depend  on the  Company's
earnings,   capital  requirements,   financial  condition,   and  other  factors
considered relevant to the Company's ability to pay dividends.

Recent Sales of Unregistered Securities

         A. In December  1996,  the Company  issued ten year  options to acquire
375,000 shares of Common Stock to William  Kedersha,  the Company's former Chief
Executive Officer.  These options had an exercise price of $1.6875 per share and
were to vest upon the earliest to occur of the Company's  achievement of certain
financial  benchmarks,  the five year anniversary of the issuance of the options
or a change of control (as defined). In September 1997, the Company entered into
a settlement  agreement with Mr.  Kedersha,  whereby the Company  terminated his
employment,  cancelled such options and issued to Mr.  Kedersha 22,500 shares of
Common Stock.


                                     - 10 -

<PAGE>

         B. In December  1996,  the Company  granted ten year options to acquire
375,000 shares of Common Stock to Burton Dubbin, the son of Mr. Henry Dubbin, in
exchange for consulting services. These options had an exercise price of $1.6875
per  share  and were to vest  upon  the  earlier  to occur of (i) the  Company's
achievement of certain financial  benchmarks,  (ii) the five year anniversary of
the issuance of the options and Mr.  Burton  Dubbin  being an employee  with the
Company or (iii) a change of control (as  defined).  Mr. Burton Dubbin became an
employee  of the  Company in April  1997.  In August  1997,  Mr.  Burton  Dubbin
terminated  his  employment  with  the  Company  and  entered  into  a  two-year
consulting  agreement  at a fee of $150,000 per annum,  plus  125,000  shares of
Common Stock, of which 25,000 shares were immediately  issuable and 5,000 shares
are issuable  monthly (in an aggregate  amount not to exceed 100,000 shares) for
the duration of Mr. Burton Dubbin's service with the Company.  In addition,  the
Company  amended  the terms of the  options,  making  such  options  immediately
exercisable  and extending the expiration  date until August 2007. As of May 31,
1998,  125,000  shares of Common  Stock have been issued to Mr.  Burton  Dubbin,
which shares are being held in escrow.

         C. In April 1997,  the Company  issued options to acquire 20,000 shares
of Common Stock to Fred L. Singer, a director and Vice President of the Company.
The options are immediately  exercisable and have an exercise price of $1.00 per
share. In January 1998, Mr. Singer exercised  options to acquire 5,000 shares of
Common Stock. The remaining options expire on April 16, 1999.

         D. In April and May 1997, the Company entered into three agreements for
financial consulting services. Under the first of these agreements,  the Company
agreed to issue to a  consultant  50,000  shares of Common  Stock and options to
acquire an  additional  200,000  shares at exercise  prices of between $2.50 and
$4.25. The second agreement  provides for the issuance to a consultant of 75,000
shares of Common  Stock and options to acquire an  additional  75,000  shares at
exercise  prices of between  $4.50 and  $5.00.  Under the third  agreement,  the
Company  agreed to issue to a  consultant  50,000  shares  of  Common  Stock and
options to acquire an additional  250,000  shares at prices of between $2.00 and
$4.75.  During the fiscal year ended May 31,  1998,  options for 110,250  shares
were at prices  ranging  from $2.00 to $3.00 per share,  and  options to acquire
143,750 and 75,000  shares were  extended to December  31, 1998 and February 29,
1999, respectively, in exchange for consulting services valued at $10,000.

         E. In May 1997, the Company issued options to acquire 350,000 shares of
Common  Stock to Gary  Danziger,  the  former  Chief  Operating  Officer  of the
Company. The options had an exercise price of $1.00 per share and were to expire
on October 1, 1998. In February  1998,  Mr.  Danziger  terminated his employment
with the Company and agreed to terminate  these options and his right to receive
50,000 shares of Common Stock in exchange for $60,000 in cash. In addition,  the
Company  forgave  outstanding  net loans owed by Mr.  Danziger  in the amount of
$34,924.

         F. During the fiscal year ended May 31, 1998,  the Company issued 6,539
shares of Common  Stock to Kramer,  Levin,  Naftalis  & Frankel,  counsel of the
Company,  in  consideration  of legal  services.  These shares were valued at an
average price of $2.50 per share.


                                     - 11 -

<PAGE>

         G. In July 1998,  the Company  agreed to issue 400,000 shares of Common
Stock in a private  placement to "accredited  investors" at an offering price of
$2.30 per share, with net proceeds to the Company of $1.09 per share. The shares
are currently being held in escrow. Signature Equities Agency, G.m.b.H served as
placement agent in connection with the offering.

         The  issuance  set forth above were issued  pursuant to Section 4(2) of
the Securities Act of 1933, as amended (the  "Securities  Act"), as transactions
by an issuer not involving any public offering, and, alternatively,  in the case
of employee options, on a no-sale theory.

Sales of Equity Securities Pursuant to Regulation S

         On January 29,  1998,  the  Company  closed an  offshore  placement  of
1,500,000 shares of Common Stock for an aggregate  purchase price of $3,324,025.
The Company  incurred  expenses  of  $1,600,868  and  received  net  proceeds of
$1,723,157.  Signature  Equities Agency,  G.m.b.H,  served as placement agent in
connection with the offering.

         The placement was a private transaction not involving a public offering
and was exempt from the registration  provisions of the Securities Act, pursuant
to Section 4(2)  thereof,  and pursuant to  Regulation S  promulgated  under the
Securities Act.


ITEM  6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

General

         The  Company is engaged  in the  business  of  operating  and  managing
physical therapy care centers.  The Company currently operates two facilities in
New York City.

         In December 1996, the Company acquired four Long Island, New York based
physical therapy care centers. This acquisition was rescinded in March 1997.

         In February 1997,  the Company sold the assets and certain  liabilities
of two physical  therapy care  facilities  and related  rehabilitative  medicine
practices  located in  Jacksonville  and Orange Park,  Florida,  together with a
related  comprehensive  outpatient  rehabilitation  facility (CORF) license.  In
connection  with  the  sale  of  these  facilities,  the  Company  also  sold  a
wholly-owned financing subsidiary, effectively terminating its obligations under
a  receivables  funding  facility.  In April 1997,  the Company  disposed of its
physical therapy care center in St. Augustine, Florida, completing its exit from
the North Florida area in order to focus its operations in the Northeast.

         In July 1998,  the  Company  sold  substantially  all of the assets and
operations of its facilities located in Flushing and Upper Manhattan,  New York,
due to insufficient cash flows from such facilities.

         In  September  1997,  the  Company  entered  into a letter  of  intent,
subsequently  amended in  December  1997,  to acquire  approximately  30 medical
practices and MRI facilities in the greater New York metropolitan  area, subject
to raising the capital necessary for the acquisitions and other conditions.


                                     - 12 -

<PAGE>

Results of Operations

         1998 Fiscal Year Compared to 1997 Fiscal Year

         Patient  revenues  decreased by 32.5% from  $3,344,559 to $2,258,186 in
the fiscal year ended May 31, 1998 ("Fiscal 1998") compared with the fiscal year
ended May 31, 1997  ("Fiscal  1997").  The  decrease in revenues  was  primarily
attributable  to the sale of the Company's  North  Florida  facilities in Fiscal
1997, offset in part by a full year of revenues from the Company's New York City
clinics  acquired in Fiscal 1997.  Revenues from the four Long Island,  New York
clinics  acquired in December 1996,  whose purchase was rescinded by the Company
effective  February 28, 1997,  were not included in the  Company's  revenues for
Fiscal 1997.

         Total  expenses  increased by 12.4% to $7,315,751  for Fiscal 1998 from
$6,510,448 for Fiscal 1997,  primarily due to the  $3,000,000  write-down of the
gold ore, from  $4,994,213 to  $1,994,213.  On the other hand,  costs of patient
services,  selling,  general  and  administrative  expenses,   depreciation  and
amortization and interest expense (recurring  operating  expenses)  decreased by
21.1% from $5,733,391 to $4,524,335.  Costs of patient services, as a percentage
of patient revenues, decreased from 56.1% in Fiscal 1997 to 52.1% in Fiscal 1998
primarily  because of a decrease in the  provision for  contractual  allowances.
Selling,  general and administrative expenses decreased 11.6% from $3,283,010 in
Fiscal 1997 to  $2,903,263  in Fiscal  1998,  primarily  due to decreases in the
provision for bad debts, the  compensation of executive  officers and the travel
expenses of executives  between the Company's New York and Florida facilities in
Fiscal 1998. The decrease was partially offset by increased legal and accounting
expenses during Fiscal 1998 due to the settlement of certain  litigation matters
and  the   preparation  of  reports  filed  with  the  Securities  and  Exchange
Commission.  Interest  expense  decreased  57.7% from $403,724 in Fiscal 1997 to
$170,700 in Fiscal 1998 due to a refinancing  and lower interest  rates.  During
Fiscal 1997, the Company also  recognized a loss in connection  with the sale of
the North Florida  facilities  and the  rescission of the Long Island,  New York
facilities,  of $777,054,  while recognizing a gain of $208,584 on similar items
in Fiscal 1998.  Total expenses as a percentage of revenues  increased to 324.0%
for Fiscal 1998 from 194.7% for Fiscal 1997 as a result of these factors and the
decrease in revenues for these periods.

         Income  taxes for  Fiscal  1998 and 1997 are not  representative  of an
effective tax rate. For Fiscal 1998 and 1997,  deferred income tax benefits have
been reduced by  increases  in the  allowance  for the  realization  of deferred
income tax assets of $2,000,000 and $610,000, respectively,  because, as of both
May 31, 1998 and 1997,  it was more likely than not that the deferred tax assets
would not be realized.  The deferred tax assets result primarily from impairment
of the gold ore and net  operating  loss  carryforwards  and the Company may not
generate  sufficient future taxable income for their utilization.  As of May 31,
1998 and 1997, net operating loss  carryforwards  of $3,500,000 and  $1,800,000,
respectively, increased due to the increases in taxable losses for each year.

         The above factors  contributed  to a net loss of $5,057,565  ($1.49 per
share) for Fiscal 1998 compared with a net loss of $2,554,212  ($0.99 per share)
for Fiscal 1997.


                                     - 13 -

<PAGE>

         1997 Fiscal Year Compared to 1996 Fiscal Year

         Patient  revenues for Fiscal 1997 decreased by 28.3% to $3,344,559 from
$4,663,792 for the fiscal year ended May 31, 1996 ("Fiscal 1996").  The decrease
in revenues was  attributable to the disposition in Fiscal 1997 of the Company's
North Florida facilities,  as well as a fall off in revenues at these facilities
during that year,  offset in part by revenues  from the  Company's New York City
clinics acquired in October 1996.  Revenues from the four Long Island,  New York
clinics  acquired in December 1996,  whose purchase was rescinded by the Company
effective  February 28, 1997,  are not  included in the  Company's  revenues for
Fiscal 1997.

         Total  expenses  increased by 99.8% from  $3,257,931 for Fiscal 1996 to
$6,510,448 for Fiscal 1997. The increase in expenses was due to higher operation
expenses  incurred  in the New  York  City  facilities  and  costs  incurred  in
connection with the disposition of the North Florida facilities.  Total expenses
include costs of patient services, selling, general and administrative expenses,
losses  on  sales  and  rescission,   interest  expenses  and  depreciation  and
amortization  expenses.  Costs of patient  services as a  percentage  of patient
revenues  increased  from 41% in Fiscal 1996 to 56.1% in Fiscal 1997  because of
the  Company's  discontinuation  of  operations  in North Florida and the higher
costs of  doing  business  in New  York.  Selling,  general  and  administrative
expenses  increased to $3,283,010 in Fiscal 1997 from $1,035,782 in Fiscal 1996.
Selling, general and administrative expenses for Fiscal 1997 included allowances
and write-offs of uncollectible  accounts receivable,  compensation of executive
officers and travel  expenses of  executives  between the Company's New York and
Florida  facilities.  The increase was also  attributable to expenses related to
the improvement of the Company's  financial  controls and accounting system, and
increased legal and accounting  expenses during Fiscal 1997 primarily due to the
transactional  activities of the Company  during the fiscal year, the settlement
of certain litigation matters and preparation of reports filed with the SEC. The
Company  recognized  interest  costs of  $403,724  in Fiscal 1997 as compared to
$130,920 in Fiscal 1996.  Interest  increased  during Fiscal 1997 as a result of
higher interest rates on the Company's bank  borrowings and increased  financing
expenses associated with the receivables  funding facility.  During Fiscal 1997,
the Company  also  recognized  a loss in  connection  with the sale of the North
Florida  facilities and the rescission of the Long Island,  New York facilities,
of $777,054. Total expenses as a percentage of revenues increased from 69.9% for
Fiscal  1996 to 194.7%  for  Fiscal  1997 as a result of these  factors  and the
decrease in revenues for these periods.

         Income  tax  (benefit)  expenses  for Fiscal  1997 and  Fiscal  1996 of
($546,677) and $346,770,  respectively,  are not  representative of an effective
tax rate. For Fiscal 1997,  the deferred  income tax benefit has been reduced by
an increase in the allowance for the  realization of deferred  income tax assets
of $610,000,  because,  as of May 31, 1997,  it is more likely than not that the
deferred  tax assets  would not be  realized  as they  relate  primarily  to net
operating loss carryforwards and the Company may not generate  sufficient future
taxable income for their  utilization.  As of May 31, 1996,  there were less net
operating  loss  carryforwards  as  compared  to Fiscal  1997,  and the  Company
utilized  these net  operating  losses as a  reduction  of  deferred  income tax
payable.  For  Fiscal  1996,  the  income tax  expense  has been  reduced by the
reversal of an overaccrual of prior year's taxes of $230,655.


                                     - 14 -

<PAGE>

         The above factors  contributed  to a net loss of $2,554,212  for Fiscal
1997, compared with net income of $1,059,091 for the Fiscal 1996.

Liquidity and Capital Resources

         In the past,  the  Company  has funded its  capital  requirements  from
operating  cash flow,  loans  against its accounts  receivable,  sales of equity
securities and the issuance of equity securities in exchange for assets acquired
and services  rendered.  During Fiscal 1997,  the Company  undertook a number of
actions to consolidate its geographic  focus, and with other actions  undertaken
during Fiscal 1998, the Company hopes to attract new investment  capital,  which
the Company believes will be necessary to sustain its ongoing  operations and to
facilitate  growth.  The Company  continues  to explore  opportunities  to raise
private equity capital and, in conjunction therewith,  to provide credit support
for the Company's  operations and potential  acquisitions.  Although the Company
has  in  the  past  been  and  continues  to be in  discussions  with  potential
investors,  there can be no assurance that its efforts to raise any  substantial
amount of private  capital will be successful.  Any  substantial  private equity
investment  in the  Company  will  result in voting  dilution  of the  Company's
existing stockholders and could also result in economic dilution. If the Company
is unable to obtain new  capital,  the  Company  will be unable to carry out its
strategy of growth through acquisitions and the long-term ability of the Company
to continue its operations may be in doubt.

         Following  the  Company's  acquisition  of three  New York  City  based
physical  therapy  care  centers,  together  with a  hospital  contract  for the
provision of physical therapy services, in October 1996, the Company shifted its
geographic  focus from North Florida to the New York City area.  Consistent with
this  approach,  in February  1997,  the Company sold  substantially  all of the
assets  and  assigned   certain   liabilities   of  the  physical   therapy  and
rehabilitation  care centers and related medical  practices in Jacksonville  and
Orange Park,  Florida,  together with all of the shares of OT Receivables.  (See
Item 1. Business.  Sales of Florida  Centers.) The purchase  price  consisted of
$200,000  in cash,  with  $100,000  paid at closing  and a note in the amount of
$100,000 payable in two installments in April and May 1997. As collection of the
note is not  probable,  the  Company has  provided a reserve  against the amount
owed.  In connection  with the sale of OT  Receivables,  the Company  pledged as
collateral  to the lender  under the  receivables  funding  facility  additional
accounts  receivable in the amount of $700,000.  The Company will be entitled to
receive 40% of any collections on the  receivables  transferred to the lender in
excess of the amount owed under the receivables  funding  facility.  The Company
currently does not anticipate  any such excess.  In connection  with the sale of
the  two  North  Florida  facilities,  the  Company  terminated  the  employment
agreement with the facilities'  medical  director,  received a return of 400,000
shares of the Company's Common Stock that had been issued in connection with the
acquisition of the Company's  North Florida  facilities in 1995 and was relieved
of its obligation to issue an additional 145,000 shares of common stock incurred
in connection with such acquisition.

         Continuing the divestiture of its Florida operations,  the Company sold
its remaining North Florida facility located in St. Augustine,  Florida in April
1997. The sale price for this facility was $25,000 in cash, with $15,000 paid at
the closing, $5,000 paid on April 26, 1997 and $5,000 paid on May 29, 1997.


                                     - 15 -

<PAGE>

         Effective  February 28, 1997, the Company  rescinded its acquisition of
four Long Island, New York based physical therapy care centers,  together with a
related management  company.  (See Item 1. Business.  Acquisition and Recision.)
The acquisition of these businesses had been made in December 1996. In unwinding
the transaction,  the former sellers returned all shares of Company common stock
and  promissory  notes issued to them in  connection  with the  acquisition.  In
addition,  the former sellers agreed to pay the Company  $448,935,  representing
the cash portion of the purchase price in the original  transaction  and the net
amount expended by the Company on the Long Island  facilities since the December
1996  acquisition.  Of this amount,  $50,000 was paid at closing and $25,000 was
paid in May 1997. The remaining  amount was to be paid over an 18-month  period.
In December  1997,  the Company  received  $325,000  in full  settlement  of the
outstanding amount owed by the former sellers. Although the original acquisition
of the Long  Island  clinics  was  consistent  with the  Company's  strategy  of
focusing  its  operations  in the New  York  area,  the  cash  flow  from  these
facilities to the Company was  insufficient  to support the  operations of these
facilities  by the Company at that time.  The results of  operations of the Long
Island  facilities  have  not  been  reflected  in  the  consolidated  financial
statements.

         A  significant  portion of the revenues of the Company are for services
that are paid by third party payors, including insurance companies and Medicare.
As is typical in the health care industry,  the Company  receives  payment after
services are  rendered.  Such payment is based,  in part,  on  established  cost
reimbursement  principles  and is subject to audit and  retroactive  adjustment.
While  waiting for payment from third party  payors,  the Company is required to
fund its expenses from internal and, to the extent available, external financing
sources.

         In April 1997,  the Company  agreed to issue  300,000  shares of Common
Stock to a private  investor at a price of $.67 per share.  Proceeds of the sale
of the shares have been used for working  capital.  Also, in April and May 1997,
the Company  entered into three  agreements for financial  consulting  services.
Under the first of these agreements, the Company agreed to issue to a consultant
50,000  shares of Common  Stock and  options to acquire  an  additional  200,000
shares at  exercise  prices of  between  $2.50 and $4.25.  The second  agreement
provides for the issuance to a consultant  of 75,000  shares of Common Stock and
options to acquire an  additional  75,000  shares at exercise  prices of between
$4.50 and $5.00.  Under the third  agreement,  the Company  agreed to issue to a
consultant  50,000  shares of Common Stock and options to acquire an  additional
250,000 shares at prices of between $2.00 and $4.75. During Fiscal 1998, options
for  110,250  shares,  at prices  ranging  from $2.00 to $3.00 per  share,  were
exercised.

         In September  1996,  the Company  entered into a loan  agreement with a
bank for a line of credit of $200,000 and a term loan in the amount of $400,000.
The loan had  interest  at the  lender's  prime rate plus one  percent and had a
maturity  date of March  31,  1998.  The line of  credit  and the term loan were
collateralized by the accounts  receivable and fixed assets of the New York City
physical therapy care centers.  The Company paid off the line of credit and term
loans in September 1997.

         In March 1997, the Company  purchased  physical therapy equipment which
were subject to existing operating leases for an aggregate cost of $250,230. The
Company then sold the


                                     - 16 -

<PAGE>

equipment  and other fixed assets with a net book value of $239,862 for $450,230
and  leased  such  equipment  and  assets  back for a period of five  years with
monthly  payments of $11,226.  In August 1997, the Company sold the equipment of
the New York City physical therapy center acquired in July 1997 for $171,335 and
leased it back for a period of five years with monthly payments of $4,215.

         In September  1997, the Company  entered into a financing  agreement to
borrow on all of its existing and future patient care  receivables  for the next
two years.  Under the  agreement,  the  financing  company  will  advance to the
Company 75% of under 180-day,  eligible receivables (as defined). At the initial
closing, the Company paid an origination fee of $17,457, and, upon each advance,
the Company  will pay a discount  equal to prime plus 5% per annum.  The Company
has assigned and will continue to assign  substantially all of these receivables
to the finance  company.  The Company  used the initial  proceeds to pay off the
bank term loans.

         In May 1993, the Company  acquired  50,000 tons of gold ore from Nevada
Minerals  Corporation in exchange for the issuance of 1,350,000 shares of Common
Stock. (See Item 1. Business.  Investment in Gold Ore.) The ore was appraised as
having a value of  $5,000,000.  The Company  subsequently  formed a wholly-owned
subsidiary,  Aurum,  with  the gold ore as its only  asset.  In June  1995,  the
Company  exchanged  the stock of Aurum for  6,000,000  shares of common stock of
Accord.  The  Company  had the right to  receive  a royalty  of 12.5% of the net
mining  proceeds  from the  processing  of the ore  transferred  to  Accord.  In
November  1997,  the Company  returned the  6,000,000  shares of common stock of
Accord in exchange for 100% of Aurum,  because  Accord had not commenced and did
not anticipate  commencing  mining  operations  and the Company  desired to take
action to realize the value of the gold ore.

         As of May 31,  1998,  the  Company  (i) has  been  unsuccessful  in its
attempts  to sell  the gold ore and  (ii)  does not have the  capability  or the
resources to commence the mining of the gold ore. For these reasons,  and due to
the absence of current financial and other  information for Accord,  the Company
has written down the value of its investment in the gold ore by $3,000,000 (from
$4,994,214 to  $1,994,214).  The Company intends to continue its attempt to sell
the gold ore and anticipates a sale in the near future, although there can be no
assurance that it will be successful in doing so.

         On January 29,  1998,  the  Company  closed an  offshore  placement  of
1,500,000 shares of Common Stock for an aggregate  purchase price of $3,324,025.
The Company  incurred  expenses  of  $1,600,868  and  received  net  proceeds of
$1,723,157.

         On July 16, 1998, the Company sold  substantially all the equipment and
operations of two physical therapy centers in exchange for $375,000 in cash. The
Company also  incurred a brokerage  fee of 10% of the sales  price.  Proceeds of
$365,000 were used to repay certain lease obligations.

         In September 1997, the Company entered into a letter of intent, amended
in December  1997,  to acquire the assets and  operations  of  approximately  30
medical  practices  and  MRI  facilities.   (See  Item  1.  Business.   Proposed
Acquisition.)


                                     - 17 -

<PAGE>

         As of May 31, 1998, negative working capital decreased from $394,499 to
$26,008 as a result of improving the cash flows of the facilities, resolving all
pending  legal  matters  and  selling  Common  Stock.  Upon  the sale of the two
facilities  in July 1998,  it is  anticipated  the working  capital  will become
positive and continue to improve.

Year 2000

         The Company has assessed its financial  accounting and reporting system
and it is fully Year 2000 compliant.  The Company's  patient  receivable  system
will be assessed in the near  future,  after  taking into  account the  proposed
acquisition,  but the Company does not anticipate that it will incur significant
expenses or be  required  to make  significant  investment  in computer  systems
improvements to become Year 2000  compliant.  However,  any problems  associated
with the  compliance  of the  Company,  managed care  organizations,  government
agencies or  providers  could have a material  adverse  effect on the  Company's
business,  results of operations  land  financial  condition.  Accordingly,  the
Company plans to devote the necessary  resources to resolve all significant Year
2000 issues in a timely manner.

Forward Looking Statements

         Certain  statements in this report set forth  management's  intentions,
plans, beliefs, expectations or predictions of the future based on current facts
and analyses.  Actual results may differ materially from those indicated in such
statements.  Additional  information on factors that may affect the business and
financial  results  of the  Company  can be found in the  other  filings  of the
Company with the Securities and Exchange Commission.


ITEM 7.  FINANCIAL STATEMENTS

         The  financial  statements  and  information  required  by  Item  7 are
included in the Index shown at Item 13.


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

         (a) Simon Krowitz Bolin & Associates,  P.A. ("Simon Krowitz") served as
the  independent  auditors  from  January  4, 1996 to April 29,  1997 and as the
independent  auditors of the  Company  for the fiscal  year ended May 31,  1996.
Effective April 29, 1997,  Simon Krowitz  resigned as the Company's  independent
auditors.  The report of Simon Krowitz on the Company's financial statements for
the fiscal year ended May 31, 1996 contained no adverse opinion or disclaimer of
opinion and was not  qualified  or modified  as to  uncertainty,  audit scope or
accounting  principle.  In connection with the audit of the Company's  financial
statements  for the fiscal year ended May 31, 1996 and through  April 29,  1997,
there were no disagreements between the Company and Simon Krowitz on any matters
of accounting  principles  or  practices,  financial  statement  disclosure,  or
auditing scope or procedure.


                                     - 18 -

<PAGE>

         (b)  Effective  June 6, 1997,  the Company  appointed  Most  Horowitz &
Company, LLP, as its independent auditors


                                    PART III

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

         The directors and executive officers of the Company and their positions
at August 26, 1998 were as follows:

   Name                      Age                   Position

   Henry Dubbin               83                   President and Director
   Fred L. Singer             65                   Vice President and Director

         HENRY DUBBIN has been  President of the Company  since April 1997 and a
director of the Company since May 1993.  From May 1993 to April 1997,  Mr. Henry
Dubbin served as Vice  Chairman of the Board and Vice  President of the Company.
Mr. Henry Dubbin currently is the President of Nevada Minerals Corporation. From
1955 to 1992,  Mr. Henry Dubbin  worked with  Canaveral  International,  Inc., a
diversified  public  company,  from which he retired after being Chairman of the
Board of the Company.

         FRED L. SINGER has served as a member of the Board of  Directors  since
April 1997 and as Vice  President of the Company since August 1997.  Since 1963,
Mr.  Singer has served as director,  producer and  cinematographer  for Coronado
Productions, a/k/a Coronado Studios, a video production company.

         Gary Danziger served as Chief  Operating  Officer and Vice President of
the Company  from April 1997 to February  1998,  and as a member of the Board of
Directors from July 1997 to February 1998.

         Burton Dubbin, the son of Mr. Henry Dubbin,  resigned as Vice President
of the Company in August  1997.  Mr.  Burton  Dubbin was Vice  President  of the
Company from April 1997.

         Directors may be elected by the  stockholders at an annual meeting or a
special  meeting  called  for that  purpose  (or in the case of a  vacancy,  are
appointed  by the  directors  then in  office)  to serve  until the next  annual
meeting, until their successors are elected and qualified or until their removal
or resignation. Officers serve at the discretion of the Board of Directors.

Section 16(a) Beneficial Ownership Reporting Compliance

         Section  16(a) of the  Securities  and Exchange Act of 1934, as amended
(the "Exchange Act"), requires the Company's officers, directors and persons who
beneficially own more than


                                     - 19 -

<PAGE>

10%  of  a  registered   class  of  the  Company's   equity   securities   ("10%
stockholders")  to file reports of ownership  and changes in ownership  with the
Securities and Exchange  Commission.  Officers,  directors and 10%  stockholders
also are required to furnish the Company with copies of all Section  16(a) forms
they file.  Based solely on its review of the copies of such forms  furnished to
it,  during the past  fiscal  year,  the  Company is of the belief that all such
reports were filed on a timely  basis,  except as follows:  (a) Mr. Henry Dubbin
did not file a Form 4 on a timely basis to report his  disposition  of shares of
Common Stock of the Company;  and (b) Mr. Fred Singer did not file a Form 4 on a
timely basis to report his acquisition of shares of Common Stock of the Company.


ITEM 10. EXECUTIVE COMPENSATION

         Summary Compensation Table. The following table sets forth compensation
earned,  whether paid or deferred,  by the Company's Chief Executive Officer and
its other most highly  compensated  executive  officers who earned over $100,000
during the fiscal year ended May 31, 1998  (collectively,  the "named  executive
officers")  for services  rendered in all  capacities to the Company  during the
fiscal years ended May 31, 1996, 1997 and 1998.
<TABLE>
<CAPTION>
===================================================================================================================================
                                                   SUMMARY COMPENSATION TABLE
-----------------------------------------------------------------------------------------------------------------------------------
                                                                      ANNUAL                       LONG-TERM COMPENSATION
                                                                   COMPENSATION
                                                        ---------------------------------------------------------------------------
                                                                               OTHER                                 COMMON
                                                                               ANNUAL          RESTRICTED             STOCK
                                               FISCAL                         COMPEN-             STOCK            UNDERLYING
NAME AND PRINCIPAL POSITION                     YEAR          SALARY           SATION           AWARD(S)             OPTIONS
<S>                                              <C>            <C>             <C>                <C>                  <C>
-----------------------------------------------------------------------------------------------------------------------------------
Henry Dubbin                                    1996           -0-              -0-                -0-                 -0-
President                                       1997         $15,414            -0-                -0-                 -0-
                                                1998          32,000            -0-                -0-                 -0-
-----------------------------------------------------------------------------------------------------------------------------------
Gary Danziger(1)                                1997         $120,641         $100,000             -0-               350,000
Chief Operating Officer                         1998         $143,333           -0-                -0-                 -0-
-----------------------------------------------------------------------------------------------------------------------------------
Fred L. Singer                                  1997           -0-              -0-                -0-               20,000
Vice President                                  1998          16,000            -0-                -0-                 -0-
===================================================================================================================================
</TABLE>
(1)      Includes deferred compensation of $100,000 as of May 31, 1997, pursuant
         to Mr. Danziger's  amended employment  agreement with the Company.  Mr.
         Danziger's employment  agreement,  deferred compensation and options to
         acquire  350,000  shares  of  Common  Stock  were  terminated  upon his
         resignation from the Company in February 1998.

         Option Grants.  The Company did not make any stock option grants to the
named executive officers during the last fiscal year.

         Aggregated  Option  Exercises and Fiscal  Year-End  Option Values.  The
following table sets forth certain information relating to the exercise of stock
options during the fiscal year


                                     - 20 -

<PAGE>

ended  May 31,  1998 for each of the named  executive  officers  and the  fiscal
year-end value of the unexercised options held by the named executive officers.
<TABLE>
<CAPTION>
===================================================================================================================================
                        AGGREGATED OPTIONS EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTIONS VALUES
-----------------------------------------------------------------------------------------------------------------------------------

                              SHARES                                                                  VALUE OF UNEXERCISED IN-
                           ACQUIRED ON          VALUE             # OF UNEXERCISED OPTIONS           THE-MONEY OPTIONS AT FISCAL
                             EXERCISE          REALIZED              AT FISCAL YEAR END                     YEAR END (1)
-----------------------------------------------------------------------------------------------------------------------------------
NAME                                                           EXERCISABLE      UNEXERCISABLE      EXERCISABLE       UNEXERCISABLE
<S>                            <C>                <C>              <C>               <C>                <C>                <C>
-----------------------------------------------------------------------------------------------------------------------------------
Henry Dubbin                    0                 $0               250,000            0               $42,969                 $0
-----------------------------------------------------------------------------------------------------------------------------------
Fred L. Singer                5,000             $5,000              15,000            0               $17,578                 $0
===================================================================================================================================
</TABLE>
(1)      Value is calculated on the basis of the  difference  between the option
         exercise  price and the  average  of the bid and asked  prices  for the
         Common Stock at May 29, 1998 as quoted on the over-the-counter  market,
         multiplied by the number of shares underlying the option.

Employment Agreements

         The Company has an employment  agreement with Henry Dubbin,  as amended
September  1997,  expiring on  September 1, 1998 and  providing  for a salary of
$50,000  per year.  For  fiscal  1994,  salary  due Mr.  Dubbin in the amount of
$54,375 was  converted  into a note,  which was  subsequently  cancelled  by Mr.
Dubbin. In January 1995, in consideration of past services,  the Company granted
to Mr. Dubbin options to acquire 250,000 shares of Common Stock,  exercisable at
$2.00 per share until January 1, 1999. Mr. Dubbin waived his salary for the 1995
and 1996 fiscal years.

         Gary Danziger had a three-year  employment  agreement with the Company,
as amended in July 1997,  expiring  in October  1999 which  provided  for (i) an
annual salary of $260,000, (ii) deferred compensation for the year ended May 31,
1997 of either  $100,000  or 50,000  shares,  (iii)  incentive  bonuses of up to
$30,000 per quarter,  (iv) options to acquire  350,000  shares of Common  Stock,
exercisable  at $1.00 per share until  October 1, 1998,  (v) a loan  facility of
$350,000,  payable in three years from the date of  borrowing  at interest of 7%
per  annum  and  (vi)  severance  equal  to 200% or 100%  of  annual  salary  if
terminated during twelve months ended September 30, 1998 or 1999,  respectively.
In February 1998, Mr.  Danziger  resigned all positions with the Company and his
employment  agreement  was  terminated,  including  his right to receive  50,000
shares of Common Stock (which was recorded as deferred compensation of $100,000)
and his  options to  acquire  350,000  shares of Common  Stock in  exchange  for
$60,000 in cash. In addition, the Company forgave outstanding net loans to Mr.
Danziger in the amount of $34,924.

1994 Performance Equity Plan

         In February 1994, the Company adopted the 1994 Performance  Equity Plan
("1994 Plan") covering  600,000 shares of the Company's Common Stock pursuant to
which  officers,  directors,  key employees and  consultants  of the Company are
eligible to receive incentive or


                                     - 21 -

<PAGE>

non-qualified stock options, stock appreciation rights, restricted stock awards,
deferred stock, stock reload options and other stock based awards. The 1994 Plan
will  terminate at such time no further awards may be granted under the plan and
awards granted are no longer outstanding, provided that incentive options may be
granted only until February 16, 2004. The 1994 Plan is administered by the Board
of  Directors,  which  determines  the selection of  participants,  allotment of
shares,  price, and other conditions of purchase of awards and administration of
the 1994 Plan.

         As of August 26, 1998, no options under the 1994 Plan were outstanding.

Non-Plan Options

         As of August 26, 1998, the Company had outstanding  non-plan options to
purchase an aggregate of 986,500 shares of Common Stock. The outstanding options
granted to current and former  officers and  directors of the Company are as set
forth below.
<TABLE>
<CAPTION>

                                    Number of
Name                                Option Shares             Exercise Price            Expiration Date
<S>                                      <C>                        <C>                       <C>
Henry Dubbin                             250,000                    $2.00               January 1, 1999
Fred L. Singer                            15,000                    $1.00                April 16, 1999
</TABLE>

Expenses and Meetings

         All officers and directors are reimbursed for any expenses  incurred on
behalf of the Company.  Directors,  other than Company officers,  are reimbursed
for expenses  pertaining to  attendance  at meetings of the  Company's  Board of
Directors, including travel, lodging and meals.

Indemnification of Officers and Directors

         Under the Bylaws of the Company,  officers and directors of the Company
and former  officers  and  directors  are entitled to  indemnification  from the
Company  to the full  extent  permitted  by law.  The  Company's  Bylaws and the
Delaware General Corporation Act generally provide for such  indemnification for
claims  arising out of the acts or omissions of Company  directors  and officers
(and certain other persons) in their capacity as such,  undertaken in good faith
and in a manner  reasonably  believed  to be in,  or not  opposed  to,  the best
interests  of  the  Company  and,  with  respect  to  any  criminal   action  or
proceedings, had no reasonable cause to believe that such conduct was unlawful.


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The  following  table sets forth certain  information  as of August 26,
1998 with respect to (i) those persons known to the Company to beneficially  own
more than 5% of the Company's  Common Stock,  (ii) each director of the Company,
(iii) each named executive officer, and


                                     - 22 -

<PAGE>

(iv) all  directors  and  executive  officers  of the  Company  as a group.  The
information is determined in accordance  with Rule 13d-3  promulgated  under the
Securities  Exchange Act. Except as indicated below, the beneficial  owners have
sole voting and dispositive power with respect to the shares beneficially owned.
<TABLE>
<CAPTION>

                                                AMOUNT AND NATURE OF            PERCENT
BENEFICIAL OWNER                                BENEFICIAL OWNERSHIP            OF CLASS
<S>                                                      <C>                      <C>
Henry Dubbin(1)                                        928,375                    17.2%
10155 Collins Avenue, Suite 607
Bar Harbor, FL  33154

Nevada Minerals Corporation                            678,375                    13.2%
10155 Collins Avenue, Suite 607
Bar Harbor, FL  33154

Fred L. Singer(2)                                       20,000                      *
9240 West Bay Harbor Dr., Apt. 3-C
Bay Harbor Islands, FL  33154

All officers and directors as a group                  948,375                    17.5%
(2 persons)(3)
</TABLE>
-------------------------------
* Less than 1%.

(1)      Includes  (i)  678,375  shares of Common  Stock that Mr.  Henry  Dubbin
         beneficially owns through Nevada Minerals Corporation, a corporation of
         which he is the majority  stockholder  and president,  and (ii) 250,000
         shares of Common Stock subject to currently exercisable options.

(2)      Includes   15,000   shares  of  Common  Stock   subject  to  currently
         exercisable options.

(3)      Includes   265,000   shares  of  Common  Stock  subject  to  currently
         exercisable  options and 678,375 shares of Common Stock held by Nevada
         Minerals Corporation.

Change in Control

         In  September  1997,  the  Company  entered  into a letter of intent to
acquire certain  companies whose assets consist  primarily of  approximately  30
medical   practices  and  MRI  facilities   located  in  the  greater  New  York
metropolitan  area.  The letter of intent was further  amended in December 1997.
Collectively,  the  centers  had  revenues  of  approximately  $70  million  and
estimated  earnings before  interest,  taxes,  depreciation  and amortization of
approximately  $23 million in calendar year 1997. The Company intends to finance
the proposed  acquisition  through issuance of debt and equity securities of the
Company,  which,  if  consummated,  will result in a  substantial  change to the
Company's current debt and equity structure. There can be no assurance, however,
that the Company will successfully  negotiate a definitive written agreement for
the purchase of these  facilities or meet its  obligations of raising capital to
complete the acquisition or that all the other conditions to closing will be met
by any of the parties to the transaction.


                                     - 23 -

<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         On May 28,  1993,  the  Company  acquired  50,000 tons of gold ore from
Nevada Minerals  Corporation in exchange for the issuance of 1,350,000 shares of
restricted  Common  Stock.  The gold ore was  appraised  as having a  $5,000,000
value.  On June 28, 1994,  the Company formed a wholly owned  subsidiary,  Aurum
Mining  Corporation,  with the gold ore as its only asset.  On June 21, 1995, an
agreement was signed between the Company and Accord whereby 100% of the stock of
Aurum was exchanged for 6,000,000  shares of common stock of Accord.  Accord was
to pay the  Company a royalty  equal to 12.5% of the net  mining  income for the
productive life of the property.  On November 15, 1997, the Company returned the
6,000,000  shares of common  stock of Accord in exchange  for 100% of the common
stock of Aurum.

         In November 1996, Mr. Fred L. Singer produced a marketing video for the
Company and received $25,000 in compensation.

         On December 3, 1996, the Company granted an option to purchase  375,000
shares of Common Stock to Burton Dubbin, Mr. Henry Dubbin's son, in exchange for
consulting  services.  The  option  was  exercisable  at $1.69 per  share  until
December  2006.  Mr.  Burton  Dubbin  became an employee of the Company in April
1997. In August 1997,  Mr.  Burton Dubbin  terminated  his  employment  with the
Company and entered into a consulting  agreement  for a period of two years at a
fee of $150,000  per year,  plus  125,000  shares of Common  Stock,  with 25,000
shares issued  immediately  and 5,000 shares issued  monthly.  In addition,  the
option to acquire 375,000 shares of Common Stock has been amended to provide for
immediate exercisability and extension until August 2007.


                                     PART IV

ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM S-K

          The  following  documents  are filed as part of this Annual  Report on
Form 10-KSB.
<TABLE>
<CAPTION>
(a)       Financial Statements:                                                                                Page
<S>            <C>                                                                                              <C>
          Independent Auditor's Report consolidated financial statements
          for the years ended May 31, 1998 and 1997.......................................................      F-1

          Consolidated Balance Sheet as of May 31, 1998 and 1997...........................................     F-2

          Consolidated Statement of Operations for the years ended
          May 31, 1998 and 1997 ...........................................................................     F-4

          Consolidated Statement of Stockholders' Equity for the years ended
          May 31, 1998 and 1997 ...........................................................................     F-5

          Consolidated Statement of Cash Flows for the years ended


                                     - 24 -

<PAGE>

          May 31, 1998 and 1997............................................................................     F-6

          Notes to Consolidated Financial Statements.......................................................     F-8
</TABLE>

(b)       Reports on Form 8-K.

          None.

(c)       The following  documents are filed as exhibits to this Annual Report 
          on Form 10-KSB.

3.1       Certificate of Incorporation, as amended.  Incorporated by reference 
          from  Registration  Statement  on  Form  S-18 -  Commission  File  No.
          33-8166B, August 20, 1986.

3.2       Amendments  to  Certificate  of  Incorporation  dated  August 1, 1994.
          Incorporated  by reference  from  Exhibit 3.2 of the Annual  Report on
          Form 10-KSB for the fiscal year ended May 31, 1995.

3.3       By-Laws. Incorporated by reference from Registration Statement on Form
          S-18 - Commission File No. 33-8166B, August 20, 1986.

4.1       Form of Common Stock Certificate.  Incorporated by reference from Form
          10-KSB for the fiscal year ended May 31, 1994.

4.2       Term Loan  Agreement,  dated  September  30,  1996,  between  Oak Tree
          Medical Management,  Inc. and First Union National Bank.  Incorporated
          by reference from Quarterly Report on Form 10-Q for the fiscal quarter
          ended August 31, 1996.

4.3       Security Agreement, dated September 30, 1996, between Oak Tree Medical
          Management,  Inc.  and First  Union  National  Bank.  Incorporated  by
          reference  from  Quarterly  Report on Form 10-Q for the fiscal quarter
          ended August 31, 1996.

4.4       Promissory  Note,  dated September 30, 1996,  between Oak Tree Medical
          Management,  Inc.  and First  Union  National  Bank.  Incorporated  by
          reference  from  Quarterly  Report on Form 10-Q for the fiscal quarter
          ended August 31, 1996.

4.5       Unconditional  Guaranty,  dated September 30, 1996, among  Registrant,
          Oak Tree  Medical  Management,  Inc.  and First Union  National  Bank.
          Incorporated  by reference from Quarterly  Report on Form 10-Q for the
          fiscal quarter ended August 31, 1996.

4.6       Purchase  Agreement,  dated July 23,  1997,  between Oak Tree  Medical
          Practice, P.C. and PFS VI, Inc. Incorporated by reference from Exhibit
          4.7 of the Annual  Report on form 10-KSB for the fiscal year ended May
          31, 1997 (the "1997 Form 10-KSB").

10.1      Form of 1994 Equity  Performance Plan.  Incorporated by reference from
          Information Statement dated July 11, 1994.


                                     - 25 -

<PAGE>

10.2      Form of Employment  Agreement with Mr. Henry Dubbin.  Incorporated  by
          reference from Form 10-KSB for the Fiscal Year Ended May 31, 1994.

10.3      Agreement  of Sale,  dated  October  1, 1996,  among Oak Tree  Medical
          Management,  Inc. and Orthopedic & Sports Therapy  Services of Queens,
          L.P. and Parkside of Queens, Inc.  Incorporated by reference from Form
          10-Q filed for the fiscal quarter ended August 31, 1996.

10.4      Agreement  of  Sale,  dated  October  1,  1996,  between  New  Medical
          Practice,   P.C.  and  Parkside   Physical  Therapy   Services,   P.C.
          Incorporated  by reference from Form 10-Q filed for the fiscal quarter
          ended August 31, 1996.

10.5      Agreement  of Sale,  dated  October  1, 1996,  among Oak Tree  Medical
          Management,   Inc.  Gary  Danziger  and  PTSR,  Inc.  Incorporated  by
          reference from Form 10-Q filed for the fiscal quarter ended August 31,
          1996.

10.6      Employment Agreement, dated as of October 1, 1996, between New Medical
          Practice,  P.C. and Gary  Danziger.  Incorporated  by  reference  from
          Exhibit 10.12 of the 1997 Form 10-KSB.

10.7      Executive Employment Agreement,  dated as of December 3, 1996, between
          Registrant and William  Kedersha.  Incorporated by reference from Form
          10-QSB filed for the fiscal quarter ended November 30, 1996.

10.8      Stock  Option  Agreement,  dated  as  of  December  3,  1996,  between
          Registrant  and Burton  Dubbin.  Incorporated  by reference  from Form
          10-QSB filed for the fiscal quarter ended November 30, 1996.

10.9      Consulting Agreement,  dated as of August 29, 1997, between Registrant
          and Burton Dubbin. Incorporated by reference from Exhibit 10.18 of the
          1997 Form 10-KSB.

10.10     Purchase  Agreement,  dated as of February 6, 1997, among  Registrant,
          Acorn CORF I, Inc.,  Riverside  CORF,  Inc.  and MB Data  Corporation.
          Incorporated by reference from Form 8-K filed on February 27, 1997.

10.11     Letter  Agreement of Rescission,  dated March 19, 1997,  from Oak Tree
          Medical  Management,  Inc. to James  O'Neill,  Mark  Gentile and Maple
          Health Inc.  Incorporated by reference from Form 8-K filed on April 3,
          1997.

10.12     Agreement  of Sale,  dated July 16,  1997,  between  Oak Tree  Medical
          Practice,  P.C. and Peter B. Saadeh,  M.D.  Incorporated  by reference
          from Exhibit 10.17 of the 1997 Form 10-KSB.

10.13     Agreement  of  Sale,  dated  July 16,  1998,  among  Oak Tree  Medical
          Management,  Inc.,  Oak Tree  Medical  Practice,  P.C.  and  Nesconset
          Sports, Inc.


                                     - 26 -

<PAGE>

21        Subsidiaries:

          Acorn CORF, Inc.                                             Florida
          Acorn CORF I, Inc.                                           Nevada
          Aurum Mining Corporation                                     Nevada
          Oak Tree Financial Services, Inc.                            Florida
          Oak Tree Medical Management, Inc.                            New York
          Riverside CORF, Inc.                                         Florida

27        Financial Data Schedule.


                                     - 27 -

<PAGE>

                         OAK TREE MEDICAL SYSTEMS, INC.
                                AND SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS
                        YEARS ENDED MAY 31, 1998 AND 1997



                                      INDEX



INDEPENDENT AUDITORS' REPORT F-1

CONSOLIDATED FINANCIAL STATEMENTS

   CONSOLIDATED BALANCE SHEET                           F-2 - F-3

   CONSOLIDATED STATEMENT OF OPERATIONS                    F-4

   CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY          F-5

   CONSOLIDATED STATEMENT OF CASH FLOWS                 F-6 - F-7

   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS           F-8 - F-21


                                     - 28 -

<PAGE>

Board of Directors
Oak Tree Medical Systems, Inc.
Flushing, New York


                          INDEPENDENT AUDITORS' REPORT

         We have audited the accompanying consolidated balance sheet of Oak Tree
Medical  Systems,  Inc. and  Subsidiaries  as of May 31, 1998 and 1997,  and the
related  consolidated  statements of operations,  stockholders'  equity and cash
flows for the years then ended. These consolidated  financial statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

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

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Oak Tree Medical Systems, Inc. and Subsidiaries as of May 31, 1998 and 1997, and
the consolidated  results of its operations and its consolidated  cash flows for
the  years  then  ended  in  conformity  with  generally   accepted   accounting
principles.

/s/ MOST HOROWITZ & COMPANY, LLP

New York, New York
August 7, 1998


                                     - 29 -

<PAGE>

                         OAK TREE MEDICAL SYSTEMS, INC.
                                AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET
                              MAY 31, 1998 AND 1997


                                     ASSETS

<TABLE>
<CAPTION>

                                                              1998                       1997
                                                              ----                       ----
<S>                                                              <C>                      <C>
CURRENT ASSETS
  Cash (Note 17)                                               $  455,391                 $  125,919
  Patient care receivables (net of
    allowance for contractual allowances
    and doubtful accounts of $642,000
    in 1998 and $860,123 in 1997)
    (Notes 4 and 6)                                               788,121                    848,269
  Other current assets                                            107,403                    141,622
  Note receivable - current
    portion (Note 14)                                                                        264,401
                                                           --------------                -----------

         TOTAL CURRENT ASSETS                                   1,350,915                  1,380,211

INVESTMENT IN GOLD ORE AND AFFILIATED
  COMPANY (Note 7)                                              1,994,214                  4,994,214
FIXED ASSETS (Note 8)                                             502,339                    507,163
DEFERRED ACQUISITION COSTS (Note 19)                               98,804
OTHER ASSETS                                                       97,740                     80,666
GOODWILL (Note 3)                                                 226,888                     37,141
NOTE RECEIVABLE (Note 14)                                                                    109,534
                                                           --------------                -----------

         TOTAL ASSETS                                          $4,270,900                 $7,108,929
                                                               ==========                 ==========
</TABLE>


                                   (CONTINUED)

                        See notes to financial statements

                                       F-2

<PAGE>

                         OAK TREE MEDICAL SYSTEMS, INC.
                                AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET
                              MAY 31, 1998 AND 1997

                                   (CONTINUED)

                      LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>

                                                                                              1998                         1997
                                                                                              ----                         ----
<S>                                                                                            <C>                          <C>
CURRENT LIABILITIES
  Notes payable (Notes 6 and 9)                                                          $   334,769                    $  197,305
  Accounts payable and accrued expenses                                                      844,726                     1,024,615
  Current portion of capitalized lease
    obligations (Note 11)                                                                    130,572                       158,345
  Current portion of long-term
    debt (Note 10)                                                                            66,856                       294,445
  Deferred compensation                                                                                                    100,000
                                                                                         ------------                    ----------

         TOTAL CURRENT LIABILITIES                                                         1,376,923                     1,774,710

LONG-TERM DEBT (NOTE 10)                                                                     208,201                        92,667
CAPITALIZED LEASE OBLIGATIONS (Note 11)                                                      458,414                       348,226
ACCOUNTS PAYABLE                                                                              61,551
                                                                                        ------------                    -----------

         TOTAL LIABILITIES                                                                 2,105,089                     2,215,603
                                                                                         -----------                    -----------

COMMITMENTS AND CONTINGENCIES
  (Notes 3 and 13)
STOCKHOLDERS' EQUITY (NOTE 5) Common stock, $.01 par value; authorized:
    25,000,000 shares; issued and outstanding:
    4,657,753 shares, as of May 31, 1998,
    and 2,888,144 shares, as of May 31, 1997                                                  46,577                        28,881
  Additional paid-in capital                                                              12,140,841                     9,772,472
  Deficit                                                                                (9,784,203)                   (4,726,638)
  Less: prepaid consulting and stock
    subscription receivable                                                                (237,404)                     (181,389)
                                                                                        ------------                   -----------

         TOTAL STOCKHOLDERS' EQUITY                                                        2,165,811                     4,893,326
                                                                                         -----------                    ----------

         TOTAL LIABILITIES AND
         STOCKHOLDERS' EQUITY                                                             $4,270,900                    $7,108,929
                                                                                          ==========                    ==========
</TABLE>


                        See notes to financial statements

                                       F-3

<PAGE>

                         OAK TREE MEDICAL SYSTEMS, INC.
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF OPERATIONS
                        YEARS ENDED MAY 31, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                     1998                          1997
                                                                     ----                          ----
<S>                                                                  <C>                           <C>
REVENUE
  Patient services (Note 6)                                       $2,258,186                    $3,344,559
                                                                  ----------                    ----------

EXPENSES
  Costs of patient services                                        1,177,005                     1,875,770
  Selling, general and administrative
    (Note 13)                                                      2,903,263                     3,283,010
  Depreciation and amortization                                      273,367                       170,890
  Interest - net                                                     170,700                       403,724
  Writedown of investment in gold
    ore (Note 7)                                                   3,000,000
  (Gains) losses on sales and rescission
    (Notes 4, 13 and 14)                                           (208,584)                       777,054
                                                                -----------                    -----------

         TOTAL EXPENSES                                            7,315,751                     6,510,448
                                                                  ----------                   -----------

      LOSS BEFORE INCOME TAXES
        AND EXTRAORDINARY INCOME                                ( 5,057,565)                  ( 3,165,889)

INCOME TAX BENEFIT (NOTE 12)                                                                       546,677
                                                              --------------                   -----------

      LOSS BEFORE EXTRAORDINARY INCOME                          ( 5,057,565)                  ( 2,619,212)

CANCELLATION OF INDEBTEDNESS (NOTE 16)                                                              65,000
                                                              --------------                  ------------

         NET INCOME                                             ($5,057,565)                  ($2,554,212)
                                                                 ==========                    ==========

LOSS PER COMMON SHARE
  Before extraordinary income                                        ($1.49)                       ($1.02)
  Extraordinary income                                                                                .03
                                                                    --------                       ------

NET LOSS PER COMMON SHARE                                            ($1.49)                      ($ .99)
                                                                       =====                       ===== 


WEIGHTED AVERAGE NUMBER OF COMMON
  SHARES OUTSTANDING                                               3,389,574                     2,575,361
                                                                   =========                     =========
</TABLE>

                        See notes to financial statements


                                       F-4

<PAGE>

                         OAK TREE MEDICAL SYSTEMS, INC.
                                AND SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                        YEARS ENDED MAY 31, 1998 AND 1997

<TABLE>
<CAPTION>

                                                                                                      Additional           
                                                                        Common Stock                  Paid-in              
                                                                 Shares              Amount           Capital     
<S>                                                              <C>                  <C>               <C>
Balance - June 1, 1996                                         2,619,869             $26,199         $ 9,766,573        

Sales of common stock                                            325,333               3,253             251,747        

Issuance of common stock upon
  acquisition                                                     54,237                 542             399,458        

Reacquisition of shares upon sale of
  Florida                                                      (400,000)             (4,000)         (1,068,000)        

Issuance of common stock on acquisition
  and rescission                                                  14,286                 143              99,857        

Exercise of options                                               50,000                 500              24,500        

Issuance of shares for services                                  224,419               2,244             298,337        

Amortization of prepaid consulting                                                                                      

Net loss for year ending May 31, 1997                                                                                   
                                                           -------------          ----------       ---------------      

     Balance - May 31, 1997                                    2,888,144              28,881           9,772,472        

Sales of common stock (net of expenses
  of $1,600,868)                                               1,500,000              15,000           1,708,157        

Issuance of shares for services, etc.                            154,359               1,544             394,364        

Exercises of options                                             115,250               1,152             265,848        

Amortization of prepaid consulting                                                                                      

Net income for year ending May 31, 1998                                                                                 
                                                           -------------          ----------       ---------------      

     Balance - May 31, 1998                                    4,657,753             $46,577         $12,140,841        
                                                               =========             =======         ===========        
</TABLE>

<TABLE>
<CAPTION>
                                                                                    Prepaid
                                                                                    Consulting
                                                                                    and Stock                   Total
                                                                                    Subscription            Stockholders'
                                                              Deficit               Receivable                  Equity
<S>                                                              <C>                    <C>                        <C>
Balance - June 1, 1996                                       ($ 1,984,426)                                     $7,808,346

Sales of common stock                                                                                             255,000

Issuance of common stock upon
  acquisition                                                                                                     400,000

Reacquisition of shares upon sale of
  Florida                                                    (    188,000)                                    (1,260,000)

Issuance of common stock on acquisition
  and rescission                                                                                                  100,000

Exercise of options                                                                    ($25,000)

Issuance of shares for services                                                        (170,750)                  129,831

Amortization of prepaid consulting                                                        14,361                   14,361

Net loss for year ending May 31, 1997                        (  2,554,212)                                   ( 2,554,212)
                                                              -----------           ------------              -----------

     Balance - May 31, 1997                                  (  4,726,638)             (181,389)                4,893,326

Sales of common stock (net of expenses
  of $1,600,868)                                                                                                1,723,157

Issuance of shares for services, etc.                                                  (339,844)                   56,064

Exercises of options                                                                                              267,000

Amortization of prepaid consulting                                                       283,829                  283,829

Net income for year ending May 31, 1998                      (  5,057,565)                                   ( 5,057,565)
                                                              -----------           ------------              -----------

     Balance - May 31, 1998                                   ($9,784,203)            ($237,404)               $2,165,811
                                                               ==========           ----========              -==========

</TABLE>

                        See notes to financial statements

                                       F-5

<PAGE>

                                          OAK TREE MEDICAL SYSTEMS, INC.
                                                 AND SUBSIDIARIES

                                       CONSOLIDATED STATEMENT OF CASH FLOWS
                                         YEARS ENDED MAY 31, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                                             1998                        1997
                                                                                             ----                        ----
<S>                                                                                        <C>                           <C>
OPERATING ACTIVITIES
  Net loss                                                                              ($5,057,565)                 ($2,554,212)
  Adjustments to reconcile net loss to net cash
    used in operating activities
      Write-down of investment in gold ore                                                 3,000,000
      Depreciation and amortization                                                          560,397                      464,943
      Bad debts                                                                               65,935                    1,390,276
      Common stock issued for services, etc.                                                  56,064                      128,081
      (Gains) losses on sales and rescission                                               (208,584)                      777,054
      Gain on termination of employment agreement                                            (5,076)
      Deferred compensation                                                                                               100,000
      Equity in loss on investment                                                                                          5,786
      Capitalization of deferred interest
        and other financing fees                                                                                        (662,500)
      Deferred income taxes                                                                                             (558,782)
      Cancellation of indebtedness                                                                                       (65,000)
      Increase (decrease) in cash from
        Patient care receivables                                                              17,150                  (1,780,591)
        Other current assets                                                                   (705)                     (68,001)
        Other assets                                                                         (5,260)                      (4,531)
        Accounts payable and accrued expenses                                                 20,371                      762,245
        Deferred compensation                                                               (60,000)
                                                                                        -----------                   -----------

        NET CASH USED IN OPERATING ACTIVITIES                                           ( 1,617,273)                 ( 2,065,232)
                                                                                         ----------                   ----------

INVESTING ACTIVITIES
  Collections of note receivable                                                             325,000                       85,000
  Proceeds from sales of fixed assets                                                        171,335                      450,230
  Acquisition  (net of notes  payable of $300,000 in 1998 and  $189,000 in 1997,
    respectively, and accounts payable of $65,000 and common stock issued
    stock issued of $400,000 in 1997)                                                      (100,000)                    (436,911)
  Expenses on proposed acquisition                                                          (98,804)
  Purchases of fixed assets (net of capitalized lease
    obligations of $190,610 in 1998 and $466,444 in 1997)                                   (50,824)                    (275,293)
  Proceeds from sales of Florida centers
    (net of expenses of $13,451)                                                                                          101,549
  Advances on rescission                                                                                                (412,506)
  Expenses of rescission                                                                                                  (5,866)
                                                                                      --------------                ------------

        NET CASH PROVIDED BY (USED IN)
           INVESTING ACTIVITIES                                                              246,707                    (493,797)
                                                                                         -----------                 -----------
</TABLE>


                                   (CONTINUED)

                        See notes to financial statements

                                       F-6

<PAGE>

                         OAK TREE MEDICAL SYSTEMS, INC.
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                        YEARS ENDED MAY 31, 1998 AND 1997

                                   (CONTINUED)



<TABLE>
<CAPTION>

                                                                                            1998                       1997
                                                                                            ----                       ----
<S>                                                                                           <C>                       <C>
FINANCING ACTIVITIES
  Proceeds from issuance of common stock                                                    $1,990,157                $  241,750
  Proceeds of notes payable                                                                    334,769                 2,561,261
  Payments of long-term debt                                                                 (319,388)                 (421,134)
  Payment of note payable                                                                    (197,305)                   (2,695)
  Payments of capitalized lease obligations                                                  (108,195)                  (21,570)
  Proceeds of long-term debt                                                                                             450,000
  Proceeds of note payable - bank                                                                                        200,000
  Payments of notes payable - other                                                                                    (614,979)
                                                                                           -----------               -----------

       NET CASH PROVIDED BY
         FINANCING ACTIVITIES                                                               1,700,038                 2,392,633
                                                                                           ----------                ----------

       NET INCREASE (DECREASE) IN CASH                                                        329,472                 (166,396)

CASH - Beginning of year                                                                      125,919                   292,315
                                                                                          -----------               -----------

CASH - END OF YEAR                                                                         $  455,391                $  125,919
                                                                                           ==========                ==========



SUPPLEMENTAL DISCLOSURES OF CASH FLOW
  INFORMATION
     Interest paid                                                                         $  202,288                $  394,559
                                                                                           ==========                ==========


</TABLE>

NONCASH TRANSACTION
  The Company  exchanged their investment in affiliated  company for 100% of the
    outstanding stock of a subsidiary (Note 7).


                        See notes to financial statements

                                       F-7

<PAGE>


                         OAK TREE MEDICAL SYSTEMS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




1.       NATURE OF OPERATIONS

         Oak Tree Medical  Systems,  Inc.  and  Subsidiaries  (Company)  operate
physical therapy care centers primarily in New York (Note 3).


2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Financial Statements

         The consolidated  financial statements include the accounts of Oak Tree
Medical  Systems,  Inc. and its  wholly-owned  subsidiaries and Oak Tree Medical
Practice,  P.C., a professional practice entity over which the Company exercises
significant  influence  and  control.  All  material  intercompany  balances and
transactions have been eliminated.

         Use of Estimates

         The preparation of consolidated financial statements in conformity with
generally accepted  accounting  principles requires management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosure of contingent  assets and liabilities at the date of the consolidated
financial  statements and the reported  amounts of revenues and expenses  during
the reporting period. Actual results could differ from those estimates.

         Investment In Affiliated Company

         Investment in affiliated Company was reported on the equity method.

         Fixed Assets

         Physical  therapy  equipment and office  equipment  and furniture  were
stated at cost and are being  depreciated on the  straight-line  method over the
estimated useful lives of the assets of five years.  Leasehold improvements were
stated  at cost and are  being  amortized  over the  terms of the  leases or the
estimated useful lives of the assets of seven years, whichever is less.

         Goodwill

         Goodwill  resulting from  acquisitions of established  physical therapy
care  centers  represents  costs in excess of net assets  acquired  and is being
amortized on a  straight-line  basis over twenty  years.  Annually,  the Company
evaluates goodwill for impairment by comparing estimated  discounted future cash
flows to net book value.


                                       F-8

<PAGE>

         Patient Service Revenue

         Patient  service  revenue is reported at the estimated  net  realizable
amounts from patients, third-party payers and others for services rendered.

         Stock Based Compensation

         Stock  based  compensation  to  employees  and  nonemployees  has  been
recorded on the fair value method.

         Income Taxes

         Deferred  income  taxes have been  provided for  temporary  differences
between  consolidated  financial  statement and income tax reporting,  resulting
primarily  from the use of the cash basis method for income tax purposes and net
operating loss carryforwards.

         Earnings Per Share

         Earnings per share was computed based on the weighted average number of
common shares outstanding during the year.

         The Company adopted FASB Statement No. 128, "Earnings Per Share," which
changed the  calculations  and  disclosures  of earnings  per share for the year
ended May 31, 1998, without a material effect.


3.       ACQUISITIONS

         On  October 1, 1996,  the  Company  acquired  the  operations  of three
physical therapy care centers and a hospital service contract located  primarily
in New York City for $900,000,  payable:  (a) $400,000 in cash,  (b) $100,000 by
the assumption of a note payable (Note 10) and (c) the issuance of 54,237 shares
of common  stock to a creditor  of the  seller.  In  addition,  the seller  will
receive  10,000 shares of common stock  issuable on October 1, 1998, but no less
than a fair value of $100,000 (Note 13).

         In connection with the acquisition,  the Company  incurred  expenses of
$101,911,  including a finder's fee of $90,000 to a company in which the wife of
the former  chief  executive  officer of the Company is an owner,  and which was
agreed to prior to employment by the Company.  The finder's fee was paid $25,000
in cash and the balance was due in a note payable due on January 15, 1998,  with
interest at 12.5%, per annum (Note 16).

         In addition, the Company assumed three leases for physical therapy care
centers (Note 13).


                                       F-9

<PAGE>

         The results of operations of the acquired physical therapy care centers
have been included in the  consolidated  statement of operations from October 1,
1996, the date of the acquisition.  The acquisition was recorded on the purchase
method and the total  purchase  price,  including  related costs (and net of the
imputed  interest  of $11,000 on the due to seller)  was  allocated  to the fair
values of the assets acquired and the excess to goodwill, as follows:

  Patient care receivables (net of
    allowance for doubtful accounts)             $  750,000
  Supplies                                            5,000
  Physical therapy equipment                        261,689
  Deposits                                           35,800
  Goodwill                                           38,422
                                                 ----------
                                                 $1,090,911


         On July 16, 1997, the Company  acquired an additional  physical therapy
care center in New York City for a purchase price of $400,000,  payable $100,000
in cash,  which  was paid at  closing,  and a note of  $300,000  (Note  10).  In
addition,  the seller, a physician,  has entered into a noncompete agreement for
four  years.  If the  acquired  physical  therapy  care  center does not achieve
certain billings, which, as of August 7, 1998, does not appear to have been met,
the purchase price may be reduced by $100,000.

         In connection  with the  acquisition,  the Company  entered into a: (1)
lease for the center (Note 13), (2)  consulting  agreement with the seller for a
six month period and then on a month-to-month basis, at $150,000, per annum, and
(3) consulting agreement with the physical therapy care center administrator,  a
relative of the  seller,  for a  six-month  period and then on a  month-to-month
basis, at $50,000, per annum.

         The results of operations of the acquired  physical therapy care center
has been  included in the  consolidated  statement of  operations  from July 16,
1997, the date of the acquisition.  The acquisition was recorded on the purchase
method and the total  purchase  price was  allocated  to the fair  values of the
assets acquired and the excess to goodwill, as follows:

  Physical therapy equipment                      $171,335
  Office furniture and equipment                     3,665
  Covenant not-to-compete                           25,000
  Goodwill                                         200,000
                                                  --------
                                                  $400,000



4.       SALES OF FLORIDA CENTERS

         On February 12, 1997,  certain  subsidiaries sold  substantially all of
the assets and operations of the physical  therapy care centers in  Jacksonville
and Orange  Park,  Florida.  In addition,  the Company sold all the  outstanding
shares of another subsidiary which held the receivables of the two centers,  and
was the debtor under the patient care receivables funding facility (Note 6).

         In exchange for the assets and subsidiary  sold,  the Company  received
$100,000 in cash and a note in the amount of $100,000 and the purchaser  assumed
$86,150 of accounts payable and a note payable


                                      F-10

<PAGE>

of  $1,812,500.  In exchange  for the consent of the lender of the patient  care
receivables funding facility,  the Company transferred to the lender $700,000 of
additional patient care receivables.

         In addition, the Company reacquired 400,000 shares of common stock from
an employee, valued at $3.15, per share, and then retired the shares.

         In April 1997, the Company sold its physical therapy care center in St.
Augustine, Florida, for $25,000 in cash, completing its exit from Florida.

         During  the year  ended May 31,  1998,  the  Company  wrote-off  unpaid
accounts  payables of $138,709 and  uncollected  accounts  receivable of $25,998
related to the sold Florida physical therapy care centers.

         A summary of the aggregate loss on the sales of the Florida  centers is
as follows:

    Reacquisition of common stock                                $1,260,000
    Purchase prices                                                 225,000
    Assumption of note payable                                    1,812,500
    Cancellation of obligation to
      issue shares of common stock                                  349,765
    Assumption of accounts payable                                   86,150
    Costs of assets sold                                        (2,958,623)
    Additional allowance for
      doubtful patient care receivables                           (967,500)
    Write-off of deferred interest and
      other financing fees (Note 6)                               (386,458)
    Allowance for collection of
      note receivable                                             (100,000)
    Expenses of sales                                              (13,451)
                                                               -----------

        Loss on sales                                          ($  692,617)
                                                                ==========



5.       COMMON STOCK

         Issuance of Common Stock

         Through May 31, 1998 and 1997, the Company issued an aggregate of 6,359
and 26,919 shares, respectively, of common stock in exchange for legal services.
The  shares  were  valued at an average  prices of $2.50 and  $3.66,  per share,
respectively.

         On September 3, 1997, the Company  entered into a settlement  agreement
with its former chief executive officer and issued 22,500 shares of common stock
and, as of May 31, 1997, recorded the shares of common stock at $29,531.

         On January 29, 1998,  the Company  completed an off-shore  offering for
the sale of 1,500,000 shares of common stock for an aggregate  purchase price of
approximately  $3,324,025 and incurred expenses of $1,600,868 in connection with
the offering.


                                      F-11

<PAGE>

         Public Relations Consulting Agreements

         In April and May 1997, the Company entered into three public  relations
consulting  agreements,  two for a  period  of one year  and the  other  through
December 31, 1997,  in exchange  for an aggregate  compensation  of: (a) 175,000
shares of common stock for an aggregate  purchase  price of $1,750,  (b) $3,000,
per month,  for one year and (c)  options to  acquire  525,000  shares of common
stock. The options are exercisable at $2 to $5, per share,  through December 31,
1997,  as extended.  The shares were recorded at $.75 to $1.69,  per share.  The
aggregate  consulting  fees of  $170,750  have  been  capitalized  and are being
amortized over the terms of the agreements.

         During the year  ended May 31,  1998,  options  for  110,250  shares of
common  stock were  exercised at prices  ranging  from $2 to $3, per share,  and
options to acquire  143,750 and 75,000 shares were extended to December 31, 1998
and February 29, 1999, respectively,  in exchange for consulting services valued
at $10,000.

         Options

         On December 31, 1996, the Company  granted  options to purchase  17,500
shares of common stock in exchange for legal services, exercisable at $1.75, per
share, through May 1, 2001.

         In April 1997, the Company granted options to purchase 20,000 shares of
common stock to a director,  exercisable  at $1, per share,  through April 1999.
During the year  ended May 31,  1998,  options to  purchase  5,000  shares  were
exercised.

         In April 1997, a related  party  exercised  options to purchase  50,000
shares of common stock at $.50, per share, in exchange for a note receivable due
on April 15, 1999,  with  interest at 8.5%,  per annum.  These  options had been
acquired from Accord (Note 7).

         The value of all options  issued by the Company have been assumed to be
immaterial.

         For the years ended May 31,  1998 and 1997,  a summary of the status of
stock options were as follows:

<TABLE>
<CAPTION>

                                                   1998                                            1997
                              ------------------------------------------------  --------------------------------------------
                                                                Weighted                                      Weighted
                                                                Average                                       Average
                                        Number of               Exercise                Number of             Exercise
                                          Shares                 Price                   Shares                Price
<S>                                      <C>    <C>    <C>    <C>
Outstanding - beginning
  of year                                1,542,500               $2.24                    515,000               $2.20

Granted                                     60,000               $1.59                  1,662,500               $2.15
Exercised                                (115,250)               $2.32                   (50,000)               $ .50
Forfeited                                (350,000)               $1.00                  (585,000)               $2.11
Expired                                  (201,000)               $3.84                  
                                       ----------                                       ---------               

Outstanding - end of
  year                                     936,250               $2.30                  1,542,500               $2.24
                                       ===========                                      =========

</TABLE>

                                      F-12

<PAGE>


         As of May 31,  1998,  all options were  exercisable  and, as of May 31,
1997,  options to purchase  1,167,500  shares of common stock were  exercisable,
with a weighted average exercise price of $2.41, per share.

         Stock Option Plan

         In  addition,  the Company has a  Performance  Equity Plan (Plan) under
which it may grant incentive and non-qualified stock options, stock appreciation
rights,  restricted stock awards, deferred stock, stock reload options and other
stock based awards to purchase up to 600,000 shares of common stock to officers,
directors, key employees and consultants.  The Company may not grant any options
with a purchase price less than fair market value of common stock as of the date
of the grant.  Through  May 31,  1998,  the  Company had not granted any options
under the Plan.

         Reserved Shares

         As of May 31, 1998,  the Company has reserved the  following  shares of
common stock:

     Options                                   936,250
     Plan                                      600,000
                                             ---------

                                             1,536,250
                                             =========



6.       PATIENT CARE RECEIVABLES

         In September 1996, the Company  refinanced  their existing patient care
receivable  agreement,   whereby   approximately   $2,613,000  of  patient  care
receivables  were provided as collateral  for a loan of $1,912,500  (Note 4). In
the event that the lender  collects funds in excess of the original  $1,912,500,
such excess  shall be refunded  to the  Company,  less  collection  charges.  As
collection of any amounts are not probable,  the Company has  written-off  these
patient care  receivables.  Upon  closing,  the Company paid  interest and other
financing fees of $662,500 (Note 4).

         In September  1997, the Company  entered into a financing  agreement to
borrow on all existing and future patient care  receivables  for a period of two
years.  Under the agreement,  the Company may borrow up to 75% of under 180 day,
eligible patient care receivables,  as defined.  Upon each advance,  the Company
will pay a discount  equal to 5% above the prime  rate,  per  annum,  subject to
adjustment, and, at the initial closing, paid an origination fee of $17,457. The
Company is required to assign  substantially all patient care receivables to the
finance company. As of May 31, 1998, the interest rate was 13%, per annum.

         In  connection  with  the  financing  the  consultant   (Note  15)  has
guaranteed  up to  $225,000  of such  financing  and the  Company  has agreed to
indemnify the consultant against any such losses.

         On September 10, 1997,  $441,749 of proceeds  from the initial  advance
was used to pay off the notes payable - bank (Note 9).


                                      F-13

<PAGE>

7.       INVESTMENT IN GOLD ORE AND AFFILIATED COMPANY

         As of May 31,  1998,  investment  in gold ore and, as of May 31,  1997,
investment in affiliated company consisted of:

                                                    1998                1997
                                                    ----                ----

  Investment in gold ore                        $4,994,214
  Allowance for impairment                    ( 3,000,000)
  Investment in affiliated company                                 $5,000,000
  Equity in loss                                                      (5,786)
                                             --------------       ------------

                                                $1,994,214         $4,994,214
                                             =============        ============


         In June 1995,  the  Company  exchanged  100% of the  common  stock of a
subsidiary,  which only  owned an  interest  in gold ore  (which was  previously
acquired  for  common  stock of the  Company,  with a value of  $5,000,000)  for
6,000,000   shares  of  common  stock  of  Accord   Futronics  Corp.   (Accord),
approximately  30%,  and  was to pay the  Company  a  royalty  of  12.5%  of net
production income from processing the ore. No gain or loss was recognized on the
exchange.

         On November 15, 1997,  the Company  returned  the  6,000,000  shares of
common  stock  to  Accord  in  exchange  for  100% of the  common  stock  of the
subsidiary.  Accord had not yet commenced  mining nor anticipated  commencing in
the near  future  and the  Company  desired  to  commence  such  mining or other
provision for the gold. No gain or loss was recognized on the exchange.

         As of May 31, 1998, the Company:  (1) has  unsuccessfully  attempted to
obtain financial and other  information  from Accord,  as to both the subsidiary
and the underlying gold ore; (2) has  unsuccessfully  attempted to sell the gold
ore, (3) does not have the  resources to commence the mining of the gold ore and
(4) the Company's focus in medical and related areas, and therefore, the Company
has  provided  a write  down for  impairment  of the  investment  in gold ore of
$3,000,000,  resulting  in a carrying  value  based on recent  discussions  with
potential buyers.

         As  of  May  31,  1996,  the  latest  date  available,   the  unaudited
consolidated condensed financial statements of Accord were:


                                  BALANCE SHEET

    CASH, CASH EQUIVALENTS, AND
       MARKETABLE SECURITIES                           $ 1,365,591
    INVESTMENT IN GOLD RESERVES                         42,875,000
    OTHER ASSETS                                         1,115,122
                                                       -----------

             TOTAL ASSETS                              $45,355,713
                                                       ===========


                                      F-14

<PAGE>


    LIABILITIES                                               NONE
    SHAREHOLDERS' EQUITY                               $45,355,713
                                                       -----------
             TOTAL LIABILITIES AND
                STOCKHOLDERS' EQUITY                   $45,355,713
                                                       ===========

                             STATEMENT OF OPERATIONS

    REVENUES                                              $195,007
    EXPENSES                                            ( 214,294)
                                                       -----------

             NET LOSS                                   ($ 19,287)
                                                       ===========


8.       FIXED ASSETS

         As of May 31, 1998 and 1997, fixed assets consisted of the following:

                                                 1998                    1997
                                                 ----                    ----

    Physical therapy equipment
     (Notes 11 and 19)                         $687,366               $499,437
    Office equipment and furniture               56,509                 40,258
    Leasehold improvements                       40,919
                                               --------               --------

                                                784,794                539,695

    Less: accumulated depreciation
        and amortization                        282,455                 32,532
                                               --------               --------

                                               $502,339               $507,163
                                               ========               ========


         As of May 31, 1998 and 1997,  fixed assets included  capitalized  lease
assets of $705,243 and $514,632, respectively.

         For the year  ended May 31,  1998 and 1997,  depreciation  expense  was
$257,903 and $123,503, respectively.


9.       NOTE PAYABLE - BANK

         On September 30, 1996, the Company entered into a loan agreement with a
bank for a line of credit of $200,000 and a term loan of $400,000 (Note 10). The
term loan was payable in equal monthly installments of $22,222, plus interest at
1% above the prime rate,  per annum,  through March 31, 1998.  The term loan and
line of credit  loan  were  collateralized  by the  accounts  receivable,  fixed
assets, etc. of the New York City physical therapy care centers. The proceeds of
the term loan were used in connection with the New York City  acquisition  (Note
3).

         On September 10, 1997,  the line of credit and term loans were paid-off
(Note 6).


                                      F-15

<PAGE>

10.      LONG-TERM DEBT

      As of May 31, 1998 and 1997, long-term debt consisted of the following:

                                                    1998                 1997
                                                    ----                 ----

       Note payable in equal quarterly
         installments of $18,348,
         including interest at 8%,
         per annum (a) (Note 3)                   $275,057

       Note payable to bank (Note 9)                                   $244,445

       Due to former officer
         (Notes 3 and 13)                                                92,667

       Note payable assumed, paid in
         November 1997, (Note 3)                                         50,000
                                                ----------             --------

                                                   275,057              387,112

       Less: current portion                        66,856              294,445
                                                ----------             --------

                                                  $208,201             $ 92,667
                                                ==========             ========



       (a)  Collateralized by all the assets acquired.


11.      CAPITALIZED LEASE OBLIGATIONS

         Obligations  under the  capitalized  leases and the related assets were
recorded at the lower of the present value of the minimum lease  obligations  or
the fair value of the assets.  The implicit interest rates on the capital leases
were approximately 11% to 17%, per annum.

         In  March  1997,  the  Company  purchased  primarily  physical  therapy
equipment which were subject to existing  operating leases for an aggregate cost
of  $250,230.  This  equipment  and other fixed  assets with a net book value of
$239,862 were then sold for $450,230 and leased back for a period of five years.
The leaseback has been accounted for as a capitalized lease. The loss of $39,862
realized on the sale and leaseback has been deferred and is being amortized over
the term of the lease.  In July,  1998,  the Company  paid-off or assigned these
leases in  connection  with the sale of certain  physical  therapy  care centers
(Note 19).

         In  August  1997,  the  Company  sold the  physical  therapy  equipment
acquired in August 1997 (Note 3) for $171,335 and leased back the  equipment for
a period of five years.



                                      F-16

<PAGE>

         As  of  May  31,  1998,  the  aggregate  future  minimum  annual  lease
obligations under the capital leases were as follows:

            Years Ended
              May 31,

              1999                                          $198,650
              2000                                           190,149
              2001                                           185,292
              2002                                           158,537
              2003                                            16,831
                                                            --------

   Total minimum lease obligations                           749,459

   Less: amount representing interest                        160,473
                                                            --------
   Present value of minimum lease
     obligations                                             588,986

   Less: current portion of capitalized
     lease obligations                                       130,572
                                                            --------
                                                            $458,414
                                                            ========


12.   INCOME TAXES

      For the year ended May 31,  1997,  income tax benefit  consisted of the
following:

          Current:    State                       ($ 12,105)
                                                    --------

          Deferred:   Federal                        458,782
                      State                          100,000
                                                    --------
                                                     558,782
                                                    --------
                                                    $546,677
                                                    ========

         For the years  ended May 31,  1998 and 1997,  the tax effects of timing
differences which gave rise to deferred income taxes were as follows:

                                               1998                   1997
                                               ----                   ----

       Allowance for impairment
         of gold ore                        $1,324,000
       Net operating loss
         carryforwards                         776,000            $  100,000
       Cash basis                            (100,000)             1,068,782
       Less valuation allowance            (2,000,000)              (610,000)
                                           ----------             ----------
                                                 None             $  558,782
                                           ==========             ==========


                                      F-17

<PAGE>

         As of May 31,  1998 and 1997,  the tax  effects  of the  components  of
deferred income tax payable were as follows:

                                                   1998                 1997
                                                   ----                 ----

       Allowance for impairment
         of gold ore                            $1,324,000
       Net operating loss
         carryforwards                           1,376,000             $600,000
       Cash basis                                                       100,000
       Less valuation allowance               ( 2,700,000)           ( 700,000)
                                              -----------             ---------
                                                     None                  None
                                              ===========             =========

         The following is a  reconciliation  of income taxes computed at the 34%
statutory rate to the provision for income taxes:

                                                    1998                 1997
                                                    ----                 ----

       Tax at statutory rate                       $1,720,000        $1,060,000
       State income tax                               280,000            87,895
       Valuation allowance                        (2,000,000)         (610,000)
       Other                                                              8,782
                                               --------------      ------------
                                                        None          $ 546,677
                                               ==============       ===========


         As of May 31, 1998, realization of the Company's deferred tax assets of
$2,700,000,  resulting  primarily from  impairment of gold ore and net operating
loss carryforwards,  is not considered more likely than not, and accordingly,  a
valuation allowance of $2,700,000 has been established.

         As of May 31, 1998, the Company had net operating loss carryforwards of
approximately  $3,500,000  to reduce future  Federal  taxable  income,  expiring
through May 31,  2013.  As a result of a prior change in control of ownership of
the Company,  utilization of  approximately  $70,000 of these net operating loss
carryforwards,  expiring  through May 31,  2006,  are  limited to  approximately
$26,000, per year.


13.      COMMITMENTS AND CONTINGENCIES

         Leases

         The Company is committed  under  noncancellable  leases for centers and
office space through  November 2003,  requiring  minimum rents,  plus additional
rent for increases in real estate taxes and operating expenses.


                                      F-18

<PAGE>

         As of May 31, 1998, the future minimum  aggregate annual payments under
these leases,  exclusive of those physical  therapy care centers sold (Note 19),
were as follows:

     Years Ending
        May 31,

        1999                                       $ 78,092
        2000                                         79,304
        2001                                         84,839
        2002                                         70,172
        2003                                         53,438
     Thereafter                                      13,359
                                                   --------
                                                   $379,204
                                                   ========

         For the years ended May 31, 1998 and 1997,  rent  expense was  $352,876
and $382,954, respectively.

         Employment Agreement

         In February 1998, the Company's  chief operating  officer  resigned and
his employment  agreement was terminated,  including his right to receive 50,000
shares of common stock (which was recorded as deferred compensation of $100,000)
and options to acquire 350,000 shares of common stock in exchange for $60,000 in
cash and the Company forgave outstanding net loans receivable of $34,924.

         The  Company  also  assigned a hospital  contract  in  exchange  for an
obligation to issue 10,000 shares of common stock (Note 3),  resulting in a gain
of $95,873.

         Litigation

         On  September  1,  1995,  a former  owner of a center  filed a  lawsuit
against a subsidiary  (Note 4) asserting:  (1) breach of contract for failure to
pay amounts due under management  service  contracts,  (2) breach of contract by
improper termination of those contracts and (3) breach of a noncompete agreement
by the physician who was the former sole  stockholder  of the subsidiary and was
the Company's chief medical officer. Commencing April 30, 1994, and through May,
1995, the former owner provided  management  services for certain  operations of
the subsidiary. In December 1997, the matter was settled without material effect
on the  Company.  During  the year  ended May 31,  1998,  the  Company  credited
operations  approximately  $52,000 for an unused  provision for  settlement  and
legal fees.

         During the year ended May 31, 1998, the Company and a former consultant
settled a matter  requiring  the Company to issue 23,000  shares of common stock
and pay $3,000 in cash. During the year ended May 31, 1998, the Company credited
operations  approximately  $64,000 for an unused  provision for  settlement  and
legal fees.

         In  August  1997,  the wife of a former  chairman  of the  board of the
Company  commenced an action,  as a  stockholder,  against the Company  alleging
unreasonable  restraint on the transferability of certain shares of common stock
of the Company  and for breach of  fiduciary  duty on the part of the  Company's
chairman and is seeking unspecified damages and relief.

         In October 1997, a related  action was  commenced  against the Company,
certain current and former directors,  officers and consultants alleging,  among
other things, breach of fiduciary duties and


                                      F-19

<PAGE>

seeks,  among other things,  the rescission of the issuance of certain shares of
common stock and related options to acquire shares of common stock.

         In May 1998,  these two related matters were settled,  subject to court
approval,  requiring  the  Company to pay  $170,000,  payable  $120,000 in cash,
$25,000 in cash on August 1,  1998,  $25,000 in cash on  September  1, 1999.  In
addition,  the Company issued an option to acquire 60,000 shares of common stock
at  $1.59,  per  share,  for a period of two years in  exchange  for  consulting
services.

         For  the  year  ended  May  31,  1998,  the  aggregate  settlements  of
litigation were $164,500.

         Insurance

         Upon the  sales of the  Company's  physical  therapy  care  centers  in
Florida  (Note  4),  the  Company  has  self-insured  for  medical   malpractice
liabilities,  if any.  Through August 7, 1998, the Company has not been notified
of any claims for  malpractice.  The Company is unable to estimate if there will
be or the amounts of any claims.


14.      ACQUISITION AND RESCISSION

         On December  11,  1996,  the Company  acquired  certain  assets of four
physical  therapy care centers and a management  company located in Long Island,
New York for an  aggregate  purchase  price of $650,000  and  132,190  shares of
common stock of the Company,  plus other  consideration.  In connection with the
acquisition,  the Company  incurred a finder's  fee equal to 10% of the purchase
price to a related company (Note 3).

         Effective  February 28, 1997, the Company rescinded the acquisition and
the sellers returned all stock and notes originally issued to them. The payments
of the purchase  price and the net revenues and expenses of these  centers,  for
the period from December 11, 1996 to February 28, 1997, were converted to a note
receivable of $448,935,  including  $15,000 for the purchase of 12,000 shares of
common stock.  The note was  collectable  $50,000 at closing,  $25,000 on May 5,
1997 and the balance in eighteen  equal monthly  installments,  with interest at
10%, per annum. In addition, the finder's fee was also canceled.

         In addition, the Company was required to pay a landlord $100,000, which
was  settled  by the  issuance  of  14,286  shares  of  common  stock.  Upon the
rescission,  the Company  received  $21,429 from the seller as a repayment,  and
such amount was included in the note receivable.

         The results of operations of the Long Island  centers from December 11,
1996  through  February  28,  1997 have not been  included  in the  consolidated
statement of operations.

         The Company recognized a loss on the rescission of $84,437.

         On December 11, 1997, the Company received  $325,000 in full settlement
of the note receivable, resulting in a loss of $48,935.


15.      RELATED PARTY TRANSACTIONS

         Consulting Agreement

         On December 3, 1996, the Company granted an option to purchase  375,000
shares of common stock to a consultant  who is a relative of the chairman of the
board of the directors.  The option was exercisable at $1.69, per share, through
December 2006. The option was to become exercisable upon


                                      F-20

<PAGE>

the earlier of: (1) the Company meeting certain revenue and/or earnings criteria
or (2) five years and being an  employee  of the  Company.  In April  1997,  the
consultant became an employee of the Company.

         In August 1997,  the above  employee's  employment  terminated  and the
Company  entered into a consulting  agreement for a period of two years at a fee
of $150,000,  per year,  plus 125,000  shares of common stock,  issuable  25,000
shares  immediately  and 5,000 shares,  per month, as long as the consultant has
not been terminated,  as defined.  As of May 31, 1998,  125,000 shares have been
issued and are being held in  escrow.  In  addition,  the  option  agreement  to
purchase  375,000  shares  of common  stock  has been  amended  to  provide  for
immediate exercisability and an extension until August 2007.


16.      FORGIVENESS OF INDEBTEDNESS

         During the year ended May 31, 1997,  the related party (Note 3) forgave
the balance due on the finder's fee of $65,000.


17.      CONCENTRATION OF CASH

         From time to time,  the Company had cash in financial  institutions  in
excess of insured  limits.  In assessing its risk,  the  Company's  policy is to
maintain funds only with reputable financial institutions.


18.      RECLASSIFICATION

         Certain  1997  amounts  have  been  reclassified  to  conform  to  1998
classifications.


19.      SUBSEQUENT EVENTS

         Sale of Physical Therapy Centers

         On July 16, 1998, the Company sold  substantially all the equipment and
operations of two physical therapy centers in exchange for $375,000,  payable in
cash at closing.  The Company also  incurred a brokerage fee of 10% of the sales
price.  Proceeds of $365,000 were used to repay certain lease  obligations (Note
11).

         Proposed Acquisition

         In September  1997, as amended in December  1997,  the Company  entered
into a letter of intent to acquire the assets and operations of approximately 30
medical practices and MRI centers.

         Proposed Sale of Common Stock
         
         Subsequent to May 31, 1998, the Company issued 400,000 shares of Common
Stock, being held in escrow, to an underwriter for subsequent sale. 


                                      F-21

<PAGE>


                                   SIGNATURES

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

Dated:  August 28, 1998           OAK TREE MEDICAL SYSTEMS, INC.


                                  By:  /s/ HENRY DUBBIN
                                       -----------------------
                                       Henry Dubbin, President


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


Name                                     Title                        Date

 /s/ HENRY DUBBIN                   President and Director       August 28, 1998
---------------------------
Henry Dubbin


 /s/ FRED L. SINGER                 Vice President and Director  August 28, 1998
---------------------------
Fred L. Singer