SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                  ------------

                                   FORM 10-KSB
          (Mark one)

          [X] Annual report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended July 31, 1997

                                       OR

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

                           Commission File No. 0-22367

                            HEALTHCARE CAPITAL CORP.
                 (Name of small business issuer in its charter)

              Alberta, Canada                       Not Applicable
    (State or other jurisdiction of                 (I.R.S. employer
      incorporation or organization)                 identification no.)

    111 S.W. Fifth Avenue, Suite 2390
           Portland, Oregon                         97204
    (Address of principal executive offices)        (Zip code)

                                 (503) 225-9152
                (Issuer's telephone number, including area code)

       Securities registered under Section 12(b) of the Exchange Act: None
         Securities registered under Section 12(g) of the Exchange Act:

                   Common Shares, without nominal or par value

          Check  whether  the issuer:  (1) has filed all reports  required to be
filed by Section 13 or 15(d) of the  Securities  Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports),  and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No ----

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

          State  the  issuer's   revenues  for  its  most  recent  fiscal  year:
$13,462,000.

          State the aggregate  market value of the voting and non-voting  common
equity held by  non-affiliates  of the registrant,  computed by reference to the
price at which the common equity was sold, or the average bid and asked price of
such common equity, as of October 1, 1997: $24,088,027.

          State the number of shares outstanding of each of the issuer's classes
of common  equity:  Common  Shares,  without  nominal or par  value,  27,259,517
shares, as of October 20, 1997.

          Transitional Small Business Disclosure Format:  Yes-----    No  [X]   

                      Documents Incorporated by Reference:

          Portions of the  issuer's  Management  Information  Circular and Proxy
Statement dated October 29, 1997, are incorporated by reference into Part III of
this Form 10-KSB.



<PAGE>


<TABLE>
                                                  TABLE OF CONTENTS
                                                                                                        PAGE

                                                       PART I

<S>  <C>                                                                                                  <C>
ITEM 1.  Description of Business.......................................................................... 1

ITEM 2.  Description of Property.......................................................................... 8

ITEM 3.  Legal Proceedings................................................................................ 8

ITEM 4.  Submission of Matters to a Vote of Security Holders.............................................. 8

                                              PART II

ITEM 5.  Market for Common Equity and Related Stockholder Matters ........................................ 9

ITEM 6.  Management's Discussion and Analysis or Plan of Operation........................................14

ITEM 7.  Financial Statements.............................................................................19

ITEM 8.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............60

                                             PART III

ITEM 9.  Directors, Executive Officers, Promoters, and Control Persons; Compliance with Section 16(a)
         of the Exchange Act .............................................................................60

ITEM 10. Executive Compensation...........................................................................61

ITEM 11. Security Ownership of Certain Beneficial Owners and Management...................................61

ITEM 12. Certain Relationships and Related Transactions...................................................61

ITEM 13. Exhibits, List and Reports on Form 8-K...........................................................61
</TABLE>

FORWARD-LOOKING STATEMENTS
--------------------------

Statements  in this  report,  to the  extent  they are not  based on  historical
events, are  forward-looking  statements.  Forward-looking  statements  include,
without limitation,  statements containing the words "believes,"  "anticipates,"
"intends," "expects," and words of similar import.  Investors are cautioned that
forward-looking  statements  involve known and unknown risks,  uncertainties and
other factors that may cause the actual results, performance, or achievements of
HealthCare  Capital Corp. (the "Company") to be materially  different from those
described herein. Factors that may result in such variance, in addition to those
accompanying  the  forward-looking  statements,  include  economic trends in the
Company's  market  areas,  the  ability of the  Company to manage its growth and
integrate new acquisitions into its network of hearing care clinics, development
of new or  improved  medical  or  surgical  treatments  for  hearing  loss or of
technological  advances in hearing  instruments,  changes in the  application or
interpretation of applicable  governmental laws and regulations,  the ability of
the Company to complete additional acquisitions of hearing care clinics on terms
favorable  to the  Company,  the degree of  consolidation  in the  hearing  care
industry,   the  Company's   success  in  attracting  and  retaining   qualified
audiologists  and  staff to  operate  its  hearing  care  clinics,  product  and
professional  liability  claims  brought  against  the  Company  that exceed its
insurance coverage,  and the availability of and costs associated with potential
sources of  financing.  Given these  uncertainties,  prospective  investors  are
cautioned not to place undue reliance on such  forward-looking  statements.  The
Company  disclaims  any  obligation  to update any such  factors or to  publicly
announce the result of any  revisions to any of the  forward-looking  statements
contained herein to reflect future events or developments.

                                       i
<PAGE>


                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS.

OVERVIEW

         HealthCare  Capital Corp.  (the "Company") was  incorporated  under the
laws of the Province of Alberta,  Canada,  in July 1993,  under the name "575035
Alberta  Ltd." The  Company  changed its name to  HealthCare  Capital  Corp.  in
October 1994,  when it acquired  nine hearing care clinics in British  Columbia.
The Company did not begin  operating in the United States until it purchased two
hearing care clinics near Santa Maria, California,  in July 1996. From August 1,
1996, to September  30, 1997,  the Company  acquired 40 additional  hearing care
clinics - 24 in Southern California, eight in Illinois, five in Michigan, one in
Indiana, one in North Dakota, and one in New Mexico.

         The Company,  through its primary operating  subsidiaries  Sonus-Canada
Ltd.,  a  British  Columbia  corporation,  and  Sonus-USA,  Inc.,  a  Washington
corporation  ("Sonus-USA"),  currently owns and operates a network of 52 hearing
care  clinics in the United  States  and  Western  Canada.  In  September  1997,
Sonus-USA and  Sonus-Canada  Ltd.  changed their names from  HealthCare  Hearing
Clinics,  Inc., and HC HealthCare  Hearing Clinics Ltd.,  respectively.  Clinics
owned by the Company  are located  primarily  in the  metropolitan  areas of Los
Angeles,   California;  San  Diego,  California;   Chicago,  Illinois;  Lansing,
Michigan;  Albuquerque,  New Mexico;  Vancouver,  British Columbia; and Calgary,
Alberta.  The Company  intends to expand its network of hearing  care clinics by
acquiring clinics in its existing as well as new geographic markets.

         Each  of the  Company's  hearing  care  clinics  provides  its  hearing
impaired  patients  with a full range of  audiological  products  and  services.
During the fiscal year ended July 31, 1997,  approximately  86% of the Company's
revenues  were  derived  from  product  sales,  including  hearing  instruments,
batteries,  and accessories,  while the remaining 14% of the Company's  revenues
were derived from  audiological  services.  Substantially  all of the  Company's
hearing  care  clinics  are staffed by  audiologists.  The  Company's  operating
strategy is to provide  patients  with high quality and  cost-effective  hearing
care while at the same time  increasing its operating  margins by attracting and
retaining patients, recruiting qualified and productive audiologists,  achieving
economies of scale and administrative efficiencies, and pursuing large group and
managed care  contracts.  The Company  believes  that it is well  positioned  to
provide retail hearing rehabilitative services to consumers while simultaneously
serving the diagnostic needs of referring  physicians and meeting the access and
cost concerns of managed care providers and insurance companies.

         Unless  otherwise  noted  herein,  all dollar  amounts are expressed in
United  States  dollars and, if converted  from Canadian  dollars,  have been so
converted  using the spot exchange  rate on the date  indicated as quoted by the
Federal Reserve Bank of New York for the New York Interbank Market.

INDUSTRY BACKGROUND

         Professionals  and  Clinics.  Hearing  instruments  may be dispensed by
either a dispensing  audiologist  or a hearing  instrument  specialist  ("HIS").
Although  both  audiologists  and  HISs  may be  licensed  to  dispense  hearing
instruments,  audiologists have advanced training in audiology and hold either a
masters or Ph.D. degree.

         Overall,  dispensing audiologists are much younger than HISs. The March
1997 issue of The Hearing Review,  a hearing  industry trade journal,  indicates
that approximately 27% of HISs in the U.S. are at least 61 years of age, 37% are
51-60 years of age, 25% are 41-50 years of age and only 11% are age 40 or under,
compared to 8%, 19%, 43% and 30%, respectively, for dispensing audiologists. The
Company   believes  that  many  HISs  are  facing   retirement  with  no  formal
"exit-strategy," a situation that creates an attractive  investment  opportunity
for the Company.


                                       1
<PAGE>

         The typical hearing care practice wields little  purchasing  power with
manufacturers, and must spread overhead over a relatively small revenue base. In
addition,  a typical  hearing care practice  often has  insufficient  capital to
purchase new  technologies  and lacks the systems and size  necessary to develop
economies  of  scale.  As  a  result,   the  Company  believes  that  dispensing
audiologists  and  HISs  will  find it  increasingly  attractive  to sell  their
practices to or affiliate with larger organizations, such as the Company.

         Another  factor  that may  favor  the  consolidation  of  hearing  care
practices is managed care. As managed care becomes more pervasive,  hearing care
professionals  will have an even  greater  need for the  information  resources,
management  expertise,  economies  of scale,  and access to  managed  care group
contracts  that larger  organizations  such as the Company may be better able to
provide. However, managed care is not presently a large part of the hearing care
market and  hearing  care  products  and  services  are likely to continue to be
provided predominantly on a private pay basis for the next several years.

         Notwithstanding  the factors  favoring  consolidation  of hearing  care
practices,  there are currently only a few multiple clinic networks operating in
more than one state or  province in the United  States or Canada  with  combined
annual revenues in excess of $5 million.

         Hearing  Impaired   Population.   According  to  the  1996  edition  of
Communication  Facts,   published  by  the  American   Speech-Language   Hearing
Association, the number of persons in the United States who have hearing loss is
estimated to be  approximately 28 million and the percentage of individuals with
a hearing loss relative to the general population is approximately 2 percent for
those under 18 years of age, 5 percent for those between 18 and 44 years of age,
14  percent  for those  between  45 and 64 years of age,  23  percent  for those
between 65 and 74 years of age and 32 percent for those over 75 years of age. In
addition,  the American  Tinnitus  Association  estimates that  approximately 12
million American adults have tinnitus (a ringing  sensation in the ears) that is
severe enough to seek medical help.

         The  Company  believes  that the widely  recognized  demographic  trend
toward an aging population will increase the demand for hearing instrument sales
and audiological  services and that the demand for hearing  instruments that are
less visible and for newer and superior hearing instrument  technology,  such as
digital and  programmable  hearing  instruments,  will also contribute to market
growth.  In addition,  the Company believes that some individuals  forgo hearing
care  because  of the  stigma of aging  that can be  associated  with  wearing a
hearing  instrument and that the demand for hearing instrument sales and hearing
care  services can be increased by marketing  and  education  designed to reduce
that stigma.

         Hearing Health Care Industry Segments. The hearing health care industry
serving  patients  with  hearing  and balance  disorders  is  comprised  of four
distinct service segments:

         o        hearing rehabilitation services,  including the evaluation and
                  rehabilitation   of  persons  with  hearing   impairments   by
                  assessing     communicative     impairment    and    providing
                  amplification;
         o        advanced    audio-diagnostic    services,     including    the
                  neuro-audiologic   evaluation  and  non-medical  diagnosis  of
                  hearing and balance disorders;
         o        industrial and preventative  audiological services,  including
                  noise level measurements,  dosimetry,  and hearing screenings;
                  and
         o        otolaryngologic services,  including surgery and other medical
                  treatment.

The Company's  clinics primarily provide hearing  rehabilitation  services.  The
Company has one facility,  the Rockyview  Hearing and Balance  Clinic located in
Calgary,  Alberta,  that  provides  advanced  audio-diagnostic  services and one
clinic, located in San Diego, California, that provides evaluation and treatment
for patients with tinnitus.

         Hearing   rehabilitation    services   include   the   assessment   and
rehabilitation  of persons with hearing  impairments  through the use of hearing
instruments and counseling.  Rehabilitation  services,  including  amplification
systems, are provided by audiologists and HISs. The services offered include the
diagnostic


                                       2
<PAGE>


audiological testing,  fitting and dispensing of hearing instruments,  follow-up
rehabilitative  assistance,  the sale of hearing instrument  batteries,  hearing
instrument repairs,  and the sale of swim plugs, custom ear plugs, and assistive
listening devices.

         Advanced   audio-diagnostic   services   include  the   assessment  and
non-medical  treatment of vestibular and balance disorders and the evaluation of
patients with specific symptoms of an auditory or vestibular disorder, including
hearing loss,  tinnitus,  and balance problems.  In order to make a differential
diagnosis of hearing disorders,  an ear, nose and throat physician may employ or
refer patients to an audiologist to conduct special  diagnostic hearing tests to
differentiate between conductive, sensory, and neural pathology. If the cause of
the hearing loss is a medical  disorder in either the nervous system (neural) or
the middle ear  (conductive),  the physician  proceeds  with medical  treatment.
However,  if a non-treatable  conductive or sensory loss is found, the physician
will generally refer the patient to an audiologist for rehabilitation.

GROWTH STRATEGY

         The Company's  growth strategy is to expand its operations  through the
selective  acquisition  of hearing  clinics  located in  existing as well as new
geographic  markets.  The Company  believes  that the  fragmented  nature of the
hearing  care  industry,  the  absence  of  industry-wide   standards,  and  the
inexperience  and limited  capital  resources of many  hearing  care  providers,
combine to provide an opportunity to build an expanding  network of hearing care
clinics devoted to providing  high-quality hearing health care services.  Due to
the contacts of management  with  audiologists  in the industry,  the Company is
frequently  presented with  opportunities to acquire hearing care clinics.  From
August 1, 1996,  to September  30, 1997,  the Company  acquired 40 clinics,  all
located in the United States.

         The  Company  plans to expand its network of clinics in each new market
by initially  targeting for  acquisition a significant  hearing care practice in
order to secure a solid  foundation  upon which to build a  regional  network of
audiology practices. The Company will then seek to acquire additional individual
or group  practices  in  order  to  realize  economies  of scale in  management,
marketing, and administration, and hopes that its initial purchase in the region
will attract other practitioners interested in selling their businesses.

         The Company looks at the following  factors before acquiring clinics in
a particular  geographic  market:  (a)  population  size and  distribution;  (b)
audiology  practice  density,  saturation  and  average  group  size;  (c) local
competitors;  (d) level of managed care penetration;  and (e) local industry and
economy. In acquiring particular clinics within a geographic market, the Company
seeks clinics with the following  characteristics:  (a) an  established  patient
base drawing from a substantial metropolitan population; (b) significant revenue
and profitability prior to acquisition;  (c) above-average  potential to enhance
clinic profitability after acquisition;  and (d) if a clinic has an audiologist,
a willingness by the audiologist to enter into an employment  agreement with the
Company in order to retain  continuity in patient service and  relationships and
maintain the identity of the clinic in the community where it is located.

         Prior to acquiring a hearing care  clinic,  the Company  conducts a due
diligence  investigation of the clinic's  operations that includes an analytical
review of the clinic's financial  statements,  tax returns,  and other operating
data, a review of patient  files on a random  sample  basis,  a review of credit
reports,  contracts, bank deposits, and other documents and information that the
Company deems significant,  and the preparation of financial projections.  Based
on the information  collected and analyzed during the due diligence review,  the
Company determines an appropriate purchase price for the acquisition.

         The  Company  generally  uses cash,  common  stock,  promissory  notes,
assumption of debt, or a combination of the foregoing to fund acquisitions.  The
amount  paid for each  practice  varies on a  case-by-case  basis  according  to
historical revenues,  projected earnings after integration into the Company, and
transaction structure. In connection with each acquisition, the Company acquires
substantially  all of the assets of the  practice,  including  its  audiological
equipment and supplies,  office lease and improvements,  receivables and patient
files.


                                       3
<PAGE>


         At the time a practice is acquired, the audiologist associated with the
practice  typically  becomes an  employee  of the  Company  and  enters  into an
employment  agreement  with the Company  with an initial term of three years and
annual  renewals  thereafter.   The  employment  agreement  usually  includes  a
three-year  noncompete  provision  following  termination of employment.  If the
office of a retiring  HIS is  acquired,  a six- to 12-month  transition  plan is
usually negotiated with the HIS.

         There can be no  assurance  that the  Company  will be able to complete
acquisitions consistent with its expansion plans, that such acquisitions will be
on  terms  favorable  to the  Company,  or  that  the  Company  will  be able to
successfully  integrate  the hearing  care  clinics  that it  acquires  into its
business.  Successful  integration will be dependent upon maintaining  payor and
customer  relationships and converting the management information systems of the
clinics the Company  acquires to the Company's  systems.  Significant  expansion
could place a strain on the Company's  managerial and other  resources and could
necessitate  the  hiring  of a  number  of  new  managerial  and  administrative
personnel.  Unforeseen  problems with future  acquisitions  or failure to manage
expansion  effectively  may have a  material  adverse  effect  on the  business,
financial condition, and results of operations of the Company.

OPERATING STRATEGY

         The Company's  operating  strategy is to provide its patients with high
quality and cost effective  hearing care products and services while at the same
time  increasing  its operating  margins by attracting  and retaining  patients,
recruiting qualified and productive  audiologists,  achieving economies of scale
and  administrative  efficiencies,  and  pursuing  large group and managed  care
contracts.

         Attracting  and  Retaining  Patients.  The Company seeks to attract new
patients and retain existing patients at each clinic by providing  patients with
friendly, comprehensive, and cost-effective hearing care at convenient times and
locations. In addition, by educating patients about hearing health issues and by
providing quality service during office visits and consistent  patient follow-up
and  support,  the Company  hopes to foster  patient  loyalty and  increase  the
likelihood of obtaining referrals and repeat visits for examinations and product
purchases.

         Recruiting Qualified and Productive Audiologists. Audiologists employed
by the Company are primarily responsible for clinic profitability as well as for
attracting and retaining customers. The Company seeks to employ audiologists who
share the Company's goal of delivering high-quality hearing care service and who
are also  dedicated to expanding  and  enhancing  their  practices.  The Company
believes that it can offer  significant  benefits to  audiologists  by providing
assistance  in  administrative  tasks  associated  with  operating  an audiology
practice,  thereby  allowing  them to focus on serving  patients and  increasing
productivity. The Company also believes that its size and structure enable it to
offer financial resources for practice development and enhancement that solo and
small group practitioners find difficult to obtain  independently.  However, the
Company recruits  audiologists  from a limited pool of available  applicants.  A
failure  to  attract  and retain  qualified  audiologists  would have a material
adverse effect on the business,  financial condition,  and results of operations
of the Company.

         Achieving  Economies of Scale and  Administrative  Efficiencies.  A key
operating strategy of the Company is to achieve increased economies of scale and
administrative efficiencies at each of its clinics. When a clinic is acquired by
the Company, it immediately has available to it terms and discounts with hearing
instrument  manufacturers  that  are  generally  more  favorable  than it  could
negotiate independently.  In addition, the Company believes that by centralizing
certain  management and  administrative  functions  such as marketing,  billing,
collections,  human resources, risk management,  payroll, and general accounting
services, the profitability of a clinic can be improved by spreading the cost of
such  functions over a larger revenue base. The Company has developed an on-line
management  information system to link each clinic with the Company's  corporate
headquarters  in order to provide  management  with the  ability to collect  and
analyze clinic data, control overhead expenses,  allow detailed budgeting at the
clinic level, and permit effective resource management.


                                       4
<PAGE>


         Pursue  Large Group and Managed  Care  Contracts.  Although the Company
intends to continue to aggressively pursue private-payor  business because it is
presently more pervasive and profitable than managed care business,  the Company
believes  that by providing  comprehensive  geographic  coverage in a particular
market, it will be strongly positioned to offer group hearing care plans in that
market.  Managed care arrangements  typically shift some of the economic risk of
providing  patient care from the person who pays for the care to the provider of
the care by  capping  fees,  requiring  reduced  fees,  or  paying a set fee per
patient  irrespective of the amount of care  delivered.  With respect to hearing
care, such limits could result in reduced  payments for services or restrictions
on the types of services for which  reimbursement  is available or the frequency
of  replacements  or upgrades of equipment.  At the present  time,  managed care
penetration  of the hearing  care market is limited.  However,  if managed  care
begins to play a larger  role in  hearing  care,  the  Company  plans to develop
information  systems  to  improve  productivity,  manage  complex  reimbursement
methodologies,  measure patient satisfaction and outcomes of care, and integrate
information from multiple sources.

         Many third-party insurers impose restrictions in their health insurance
policies on the  frequency  with which  hearing  instruments  may be upgraded or
replaced on a reimbursable  basis.  Such  restrictions have a negative impact
on hearing instrument sales volume. There can be no guarantee that such insurers
will not implement  other policy  restrictions in the future in order to further
minimize reimbursement for hearing care. Such restrictions could have a material
adverse effect on the Company's business,  financial  condition,  and results of
operations.

CLINIC STAFFING AND FACILITIES

         Typically,  each  Company  hearing  clinic is staffed with at least one
audiologist and one patient care coordinator,  who handles reception,  clerical,
and most bookkeeping functions. At October 1, 1997, the Company employed a total
of 93  audiologists.  Where volume  warrants,  a clinic may also be staffed with
additional  audiologists and patient care coordinators.  An audiologist employed
by the Company has a masters or Ph.D.  degree in audiology.  The  audiologist is
licensed by the appropriate  state or province to dispense  hearing  instruments
and is a member of the Canadian Association of Speech/Language  Pathologists and
Audiologists or the American Speech-Language Hearing Association.

         Each of the  Company's  hearing  clinics  operates in leased space that
ranges in size from 800 to 3,000 square feet depending on patient volume and the
extent of services  provided by the clinic.  Clinics  generally have a reception
seating area, a reception work and filing area, an office for the audiologist, a
laboratory  for hearing  instrument  repairs  and  modifications,  a  technology
demonstration  room and an evaluation room. A properly  equipped office offering
only hearing  rehabilitation  services requires  equipment that costs $50,000 to
$75,000.  The cost of equipment for a clinic offering advanced  audio-diagnostic
services is much greater and ranges from $225,000 to $250,000.

PRODUCTS AND SUPPLIERS

         The hearing  instrument  manufacturing  industry is highly  competitive
with   approximately  40  manufacturers   serving  the  worldwide  market.   Few
manufacturers offer significant product  differentiation.  The Company currently
purchases hearing instruments from a number of manufacturers based upon criteria
that include  quality,  price,  and service.  Over time, the Company  intends to
reduce the number of manufacturers from whom it purchases hearing instruments in
order to achieve greater volume discounts.  In addition to hearing  instruments,
the  Company's  clinics  also  offer a  limited  selection  of  other  assistive
listening devices and hearing instrument accessories.


                                       5
<PAGE>


MARKETING

         The  Company's  marketing  program is designed to help its hearing care
clinics retain existing  patients and expand the services they receive,  attract
new patients, and develop contracts to serve large groups of patients.

         The Company believes that patient  satisfaction is the key to retaining
and  expanding  services to existing  patients.  The Company also  believes that
delivering  comfortable,  high quality  hearing care at times and locations that
are convenient for the patient will motivate patients to return to the Company's
clinics for their future  hearing care needs.  Educating  patients about hearing
health,  prescribing only necessary  hearing enhancing  products,  ensuring that
each  patient  leaves  a clinic  with a  future  visit  already  scheduled,  and
maintaining  consistent  patient  follow-up  and support are key elements of the
Company's plan to build patient loyalty and patronage.

         After a patient has obtained a hearing instrument, ongoing revenues are
generated from battery purchases and routine maintenance of the instruments. The
Company  believes that repeat  revenues are  attributable  to the length of time
that a  clinic  has  been  established  and  the  effectiveness  of its  patient
retention programs.

         The Company  believes that the same aspects of the  Company's  approach
that earn the loyalty of current  patients will also generate new patients.  The
Company's  new  patient  marketing  programs  are  designed  to help the Company
generate  referrals  from  physicians  and  existing  patients  and increase the
Company's  visibility  in the  community.  The  Company  seeks  to  foster  such
visibility  by  developing  marketing  materials  and  information  sources that
communicate the Company's  philosophy of high quality  patient-oriented  hearing
care.

         The Company's large group marketing  approach is designed to enable the
Company to develop contacts with self-insured employers and with health plans in
the  metropolitan  areas it serves and  emphasizes the  convenience,  quality of
care, and wide range of services offered by the Company.  The economies of scale
available to the Company may also allow health plans and self-insured  employers
served by the  Company to reduce  administrative  burdens  they might  otherwise
face. The Company  believes that it is well  positioned to respond to challenges
presented by the growth of managed care arrangements as they arise.

COMPETITION

         The hearing  care  industry  in the United  States and Canada is highly
fragmented  and intensely  competitive.  Many of the Company's  competitors  are
small  retailers  that  focus  primarily  on the  sale of  hearing  instruments.
However,  the Company also competes with other  networks of hearing care clinics
and with large  distributors  of hearing  instruments  such as Bausch & Lomb,  a
hearing instrument manufacturer that distributes its products through a national
network of over 1,000  franchised  stores (Miracle Ear), and Beltone  Electronic
Corp., a privately-owned  hearing  instrument  manufacturer that distributes its
products   primarily  through  its  nationwide   network  of  approximately  600
franchised  dealers.  These competitors are in many cases better known and owned
by companies having far greater  financial and other resources than the Company.
There is no  assurance  that one or more of these  competitors  will not seek to
compete  directly  in the  markets  targeted  by the  Company,  nor is there any
assurance that the largely fragmented hearing care market cannot be successfully
consolidated by other companies or through the  establishment of  co-operatives,
alliances, confederations or the like.

REGULATION

         The sale of hearing  instrument  devices is  regulated  at the  federal
level in the United  States by the United  States  Food and Drug  Administration
("FDA"),  which has been  granted  broad  authority to regulate the hearing care
industry. Under federal law, hearing instruments may only be sold to individuals


                                       6
<PAGE>


who have first obtained a medical evaluation from a licensed physician, although
a fully  informed  adult may waive a medical  evaluation  in certain  instances.
Regulations  promulgated  by the FDA also presently  require that  dispensers of
hearing  instruments  provide  customers  with certain  warning  statements  and
notices in connection  with the sale of hearing  instruments and that such sales
be made in compliance with certain labeling requirements.

         Most  states in the United  States and many  provinces  in Canada  have
established  formal  licensing  procedures  that  require the  certification  of
audiologists   and/or  HISs.   Although  the  extent  of  regulation  varies  by
jurisdiction, almost all states and provinces engage in some degree of oversight
of the  industry.  The Company  operates its hearing  care  clinics  through its
wholly owned  subsidiaries,  Sonus-USA and  Sonus-Canada  Ltd. These  subsidiary
corporations  employ  licensed  audiologists  who  offer and  perform  audiology
services on behalf of the Company.

         In certain states in the United States,  business  corporations such as
Sonus-USA  may not be  authorized  to employ  audiologists  and offer  audiology
services.  For example,  in California,  where the Company  operates 26 clinics,
although the  performance  of audiology  services by  professional  corporations
owned solely by licensed  audiologists is expressly  authorized under California
law, it is unclear whether general business  corporations  such as Sonus-USA may
employ  licensed  audiologists  to  perform  audiology  services.  However,  the
California  Department  of Consumer  Affairs has  indicated by  memorandum  that
speech-language pathologists, which are regulated under statutes and regulations
similar to those  governing  audiologists,  may  practice in a general  business
corporation and that a general business corporation may provide  speech-language
pathology services through licensed speech pathologists.  In Illinois, where the
Company has seven  hearing  care  clinics,  it is also unclear  whether  general
business  corporations  may employ licensed  audiologists  to perform  audiology
services. Under Illinois law, only professional corporations and individuals are
authorized to obtain licenses to practice audiology.

         The laws and  regulations  governing  the  practice  of  audiology  are
enforced by regulatory agencies with broad discretion. If the Company were found
to be in  violation  of such laws and  regulations  in one or more  states,  the
consequences  could  include  the  imposition  of fines and  penalties  upon the
Company and its  audiologists as well as the issuance of orders  prohibiting the
Company from operating its clinics under its present  structure.  In that event,
among the solutions the Company might consider would be the restructuring of all
or a portion  of its  operations  in a manner  similar  to that used by  certain
medical  and  dental  clinic  networks.  Under  such a  structure,  professional
corporations  owned by licensed  audiologists would contract with the Company to
perform   professional   services  and  the  Company  would  contract  with  the
professional corporations to provide management services.

        No assurance can be given that the Company's  activities  will be found
to be in compliance with laws and regulations  governing the corporate  practice
of audiology or, if its activities are not in compliance,  that the  operational
structure of the Company can be modified to permit compliance.  In addition,  no
assurance  can be given  that other  states or  provinces  in which the  Company
presently  operates will not enact  prohibitions  on the  corporate  practice of
audiology or that the  regulatory  framework of certain  jurisdictions  will not
limit the  ability  of the  Company  to expand  into such  jurisdictions  if the
Company  is unable to  modify  its  operational  structure  to comply  with such
prohibitions or to conform with such regulatory  framework.  Additional laws and
regulations  may be adopted in the future at the  federal,  state,  or  province
level  that  could have a material  adverse  effect on the  business,  financial
condition, and results of operations of the Company.

         A small percentage of the revenues of the hearing care clinics operated
by the Company comes from Medicare and Medicaid programs.  Federal law prohibits
the offer,  payment,  solicitation  or receipt  of any form of  remuneration  in
return  for, or in order to induce,  (i) the  referral of a Medicare or Medicaid
patient,  (ii)  the  furnishing  or  arranging  for the  furnishing  of items or
services reimbursable under Medicare or Medicaid programs or (iii) the purchase,
lease or order of any item or service  reimbursable  under


                                       7
<PAGE>


Medicare or Medicaid.  Noncompliance with the federal anti-kickback  legislation
can result in  exclusion  from  Medicare  and  Medicaid  programs  and civil and
criminal penalties.

PRODUCT AND PROFESSIONAL LIABILITY; PRODUCT RETURNS

         In the ordinary  course of its business,  the Company may be subject to
product and  professional  liability  claims alleging the failure of, or adverse
effects  claimed to have been caused by,  products sold or services  provided by
the Company. The Company maintains insurance against such claims at a level that
the Company believes is adequate.  A customer may return a hearing instrument to
the Company  and obtain a full refund up to 30 days after the date of  purchase.
Some of the  Company's  clinics offer a 60-day refund  period.  In general,  the
Company can return  hearing  instruments  returned by customers  within 30 to 60
days to the  manufacturer  for a full  refund.  The Company  maintains a reserve
based on estimated  returns to account for returns that cannot be passed through
to the manufacturers and must be absorbed by the Company.

EMPLOYEES

         At October 1, 1997,  the Company  had 163  full-time  and 47  part-time
employees,  of  which 93 were  practicing  audiologists.  None of the  Company's
employees are  represented  by a labor union.  Management  believes it maintains
good relationships with its employees.

ITEM 2.  DESCRIPTION OF PROPERTY

         The Company's  principal executive offices are located in approximately
3,000 square feet of leased office space in downtown Portland, Oregon. The lease
covering  such space  expires in August 1999 and  provides for an annual rent of
$57,072.  Each of the Company's  hearing  clinics  operates in leased space that
ranges in size from 800 to 3,000 square feet.  All of the  locations  are leased
for one to six-year  terms  pursuant to  generally  non-cancelable  leases (with
renewal  options in some cases).  The aggregate  committed  rental expense as of
July 31,  1997,  for the  subsequent  five-year  period  is  approximately  $2.1
million.

ITEM 3. LEGAL PROCEEDINGS

         None.

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

         Not applicable.



                                        8
<PAGE>


                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

PRICE RANGE OF COMMON SHARES

         The Company's common shares ("Common Shares") are traded on The Alberta
Stock Exchange (the "ASE"). The following table sets forth the reported high and
low sales prices in Canadian and United States  dollars for the Common Shares on
the ASE for the periods indicated:

<TABLE>
<CAPTION>
                                                          CANADIAN $                 UNITED STATES $(1)
FISCAL YEAR                PERIOD                    HIGH            LOW            HIGH            LOW
<S>                      <C>                         <C>             <C>            <C>            <C> 
1996                     First Quarter               0.30            0.14           0.22           0.11
                         Second Quarter              0.70            0.28           0.51           0.21
                         Third Quarter               4.00            0.62           2.95           0.45
                         Fourth Quarter              4.00            2.00           2.94           1.45
1997                     First Quarter               2.85            2.00           2.08           1.46
                         Second Quarter              2.58            1.86           1.89           1.40
                         Third Quarter               2.45            1.25           1.79           0.89
                         Fourth Quarter              1.97            1.25           1.42           0.90
</TABLE>


(1) The high and low sales prices were  converted to United States dollars as of
the date of sale.

         As of October  1,  1997,  there were 94 holders of record of the Common
Shares.

CANADIAN FEDERAL INCOME TAX

         The following is a summary of the principal Canadian federal income tax
considerations  pursuant to the Income Tax Act (Canada)  (the "Tax Act") and the
regulations  thereunder  generally  applicable  to a holder of Common Shares and
who,  for  purposes of the Tax Act,  holds such shares as capital  property  and
deals at arm's  length  with  the  Company.  Generally,  Common  Shares  will be
considered to be capital  property to a holder provided the holder does not hold
the Common  Shares in the course of carrying on a business  and has not acquired
the shares in one or more  transactions  considered  to be an  adventure  in the
nature of trade.  Special rules apply to non-resident  insurers that carry on an
insurance business in Canada and elsewhere.

         This summary is based upon the provisions of the Tax Act in force as of
the date  hereof,  all  specific  proposals  to amend the Tax Act that have been
publicly announced prior to the date hereof (the "Proposed  Amendments") and the
Company's  understanding of the current published  administrative  and assessing
policies and practices of Revenue Canada, Customs, Excise and Taxation ("Revenue
Canada"). For the purposes of this summary, it has been assumed that the Tax Act
will be amended as proposed,  although no assurance can be given in this regard.
This summary is not exhaustive of all possible  federal income tax  consequences
and, except for the Proposed Amendments,  does not anticipate any changes in the
law, whether by legislative,  governmental or judicial  decision or action,  nor
does it take into account provincial, territorial or foreign tax considerations,
which may differ  significantly from those discussed herein. This summary is not
applicable to holders who are traders or dealers in securities, a holder that is
a  "financial  institution"  as  defined  in the  Tax Act  for  purposes  of the
mark-to-market  rules,  or to a  holder  of an  interest  which  would be a "tax
shelter investment" as defined in the Proposed Amendments.

         THIS SUMMARY IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, AND
SHOULD NOT BE  CONSTRUED TO BE,  LEGAL OR TAX ADVICE TO ANY  PARTICULAR  HOLDER.
ACCORDINGLY,  HOLDERS SHOULD CONSULT THEIR  INDEPENDENT  TAX ADVISERS FOR ADVICE
WITH  RESPECT  TO THE  INCOME  TAX  CONSEQUENCES  RELEVANT  TO THEIR  PARTICULAR
CIRCUMSTANCES.


                                       9
<PAGE>


         The  following  applies to holders  who are not  resident in Canada for
purposes  of the Tax Act and who do not use or hold and are not deemed to use or
hold their  Common  Shares in, or in the course of,  carrying  on a business  in
Canada.

         Dispositions  of Common  Shares.  A  non-resident  holder will,  upon a
disposition or deemed  disposition of Common Shares,  not be subject to taxation
in Canada on any gain realized on the disposition unless the shares are "taxable
Canadian  property"  for the  purposes  of the Tax Act and no relief is afforded
under an applicable tax  convention  between Canada and the country of residence
of the holder. Since the Common Shares are listed on a prescribed stock exchange
for the purposes of the Tax Act,  Common  Shares held by a  non-resident  holder
will generally not be "taxable Canadian property" unless, at any time during the
five-year period immediately preceding the disposition, the non-resident holder,
persons with whom the non-resident  holder did not deal at arm's length,  or the
non-resident  holder  together  with  such  persons,  owned or had the  right to
acquire  25% or more of the  issued  shares of any class of the  capital  of the
Company.  Any  interest  in shares  or  options  in  respect  of shares  will be
considered to be the  equivalent of ownership of such shares for purposes of the
definition of taxable Canadian property.

         Subject to the comments set out below in respect of the  application of
the Canada-United States Income Tax Convention,  1980 (the "Convention") to U.S.
resident  holders,  non-residents  of Canada  whose shares  constitute  "taxable
Canadian  property"  will be  subject to  taxation  thereon on the same basis as
Canadian  residents  unless  otherwise  exempted by an applicable tax convention
between Canada and the country of residence of the holder.

         Pursuant  to the  Convention,  shareholders  of the  Company  that  are
residents in the U.S. for the purposes of the  Convention and whose shares might
otherwise be "taxable Canadian property" may be exempt from Canadian taxation in
respect of any gains on the  disposition  of the  Common  Shares,  provided  the
principal  value of the Company is not  derived  from real  property  located in
Canada at the time of disposition.

         Non-resident  holders  who might hold their  Common  Shares as "taxable
Canadian  property"  should  consult  their own tax advisers with respect to the
income tax consequences of a disposition of their Common Shares.

         Non-resident  holders  whose  shares are  repurchased  by the  Company,
except in respect of certain  purchases  made by the Company in the open market,
will be deemed to have  received  the payment of a dividend by the Company in an
amount equal to the excess paid over the paid-up capital of the Common Shares so
purchased.  Such deemed dividend will be excluded from the holder's  proceeds of
disposition of such Common Shares for the purposes of computing any capital gain
or loss but will be  subject to  Canadian  non-resident  withholding  tax in the
manner described below under "--Dividends."

         Dividends. Dividends received by a non-resident holder of Common Shares
will be subject  to  Canadian  withholding  tax at the rate of 25% of the amount
thereof  unless the rate is reduced under the  provisions  of an applicable  tax
convention  between  Canada and the  country of  residence  of the  holder.  The
provisions  of the  Convention  generally  reduce  the  rate to 15%.  A  further
reduction to 5% under the  Convention  will be  available if the  recipient is a
company that owns at least 10% of the voting shares of the Company.

INVESTMENT CANADA ACT

         The  Investment  Canada Act (the "ICA")  prohibits the  acquisition  of
control of a Canadian  business by non-Canadians  without review and approval of
the Investment  Review Division of Industry Canada,  the agency that administers
the ICA,  unless such  acquisition is exempt from review under the provisions of
the ICA. The Investment  Review  Division of Industry Canada must be notified of
such exempt  acquisitions.  The ICA covers  acquisitions of control of corporate
enterprises,  whether by purchase of assets,  shares or


                                       10
<PAGE>


"voting interests" of an entity that controls,  directly or indirectly,  another
entity carrying on a Canadian business.

         Apart  from the ICA,  there  are no other  limitations  on the right of
non-resident  or foreign owners to hold or vote  securities  imposed by Canadian
law or the Company's  Articles of  Incorporation.  There are no other decrees or
regulations  in Canada that restrict the export or import of capital,  including
foreign exchange controls, or that affect the remittance of dividends,  interest
or other  payments  to  non-resident  holders  of the Common  Shares,  except as
discussed elsewhere herein.

SALES OF UNREGISTERED SECURITIES DURING FISCAL 1997

         During the fiscal year ended July 31, 1997, the Company sold securities
without  registration  under the  Securities Act of 1933 (the "1933 Act") in the
transactions and in reliance on the exemptions described below.

         The Company  completed a warrant  offering that  consisted of a private
placement in Canada of 810,000  special  warrants  consummated in September 1996
and a private  placement  in the United  States of  4,149,000  special  warrants
consummated in December 1996. Such special warrants are collectively referred to
herein as the "September Special Warrants." The aggregate offering price for the
September  Special  Warrants  was  $1,012,500  for  those  sold  in  Canada  and
$5,186,250  for those sold in the United States.  Each of the September  Special
Warrants  placed in the United States  entitled the holder to acquire one Common
Share and one purchase warrant to purchase one additional Common Share for $2.00
per share.  Each of the September Special Warrants placed in Canada entitled the
holder to acquire  1.1 Common  Shares and a  purchase  warrant to  purchase  1.1
additional  Common Shares for $2.00 per share.  The September  Special  Warrants
issued to U.S. holders were sold through two placement agents to the individuals
and  entities  set forth  below.  The private  placement  to U.S.  investors  of
September  Special  Warrants  was made in reliance on Rule 506 of  Regulation  D
under the 1933 Act.  All of the U.S.  investors  were  accredited  investors  as
defined in Rule 501 of Regulation D under the 1933 Act.

         C.M. Oliver & Company Limited (the "Canadian Agent") acted as agent for
the Company in connection with the offering of the September Special Warrants in
Canada.   The  Canadian  Agent  received  34,000   September   Special  Warrants
exercisable  for  one  Common  Share  and a  purchase  warrant  to  purchase  an
additional  Common  Share for $2.00 per share in partial  payment of its selling
commission  and was granted an option to acquire 81,000  purchase  warrants (the
"Agent's Option"), each exercisable for one Common Share at a price of $1.25 per
share.  The  warrants  are  subject  to certain  rights of the  Company to force
exercise or cancellation of the Agent's Option.

         Sunrise  Securities  Corporation  ("Sunrise")  and  Dallas  Research  &
Trading, Inc. ("Dallas Research"), served as placement agents in connection with
the placement of the September  Special  Warrants in the United States.  Sunrise
and Dallas Research each received a selling commission equal to 9 percent of the
gross proceeds in the form of September Special Warrants,  or a total of 373,410
September  Special  Warrants.  Dallas  Research also received  20,000  September
Special Warrants in payment of its corporate finance fee. Such September Special
Warrants are exercisable for one Common Share and a purchase warrant to purchase
one additional Common Share for $2.00 per share. In addition, Sunrise and Dallas
Research  received an option to acquire 214,900 and 200,000  purchase  warrants,
respectively,  with each warrant  exercisable for one Common Share at a price of
$1.25 per share.  The warrants  are subject to certain  rights of the Company to
force the exercise or cancellation of the warrants.


                                       11
<PAGE>


The purchasers of the September Special Warrants were as follows:

                                  UNITED STATES
     PURCHASER                                        NUMBER OF SPECIAL
                                                      WARRANTS ISSUED

     Baron & Darlene Cass "Family Foundation"                   20,000
     A. Baron Cass III "Childrens Trust"                        80,000
     A. Baron Cass III                                         300,000
     William J. Reik III                                        40,000
     Philip H. Mabry                                            20,000
     Marcus R. Mutz                                             40,000
     James T. Mathis                                             5,000
     Barton J. Cohen                                            80,000
     Barton J. Cohen "Family Foundation"                        20,000
     The Curran Companies, Inc.                                100,000
     Michael D. & Lisbeth H. Bickford                           40,000
     Gary B. Downey                                              8,000
     Howard Kaplan                                              40,000
     Leonard M. Riggs Jr., M.D.                                 66,667
     Peggy A. Riggs                                             33,333
     John L. Strauss                                           400,000
     Howard E. Rachofsky                                       400,000
     John C. Stinson                                            25,000
     Alan R. Kanuk                                              36,000
     Paul Lappetito                                             10,000
     William Collins                                            75,000
     Mark W. Hill                                               50,000
     Hill A. Feinberg                                           20,000
     Alfa Life Insurance Co.                                   200,000
     Alfa Mutual Insurance Co.                                 300,000
     Alfa Mutual Fire Insurance Co.                            300,000
     John W. Holley Grantor Trust                              120,000
     Barbara Wilson and John W. Holley                          28,000
     Barbara Holley Art V Trust                                 20,000
     Barbara Holley Art VII Trust                               48,000
     Rainbow Trading Partners, Ltd.                             80,000
     Rainbow Trading Venture Partners, L.P.                     88,000
     Stanford C. Finney, Jr.                                    80,000
     Jerome Gabbert                                             24,000
     John Lemak                                                 40,000
     James P. Judge                                             40,000
     Charles McKnight                                            8,000
     Gail King                                                  20,000
     Netta Sue King McNight                                      8,000
     Netta Sue King Q-Tip Trust                                 20,000
     Andrea P. Thau Profit Sharing Plan                          8,000
     Andrea Thau Money Purchase Plan                             4,000
     John R. Lieberman                                           4,000
     Donald J. Aho                                               8,000
     Marvin Kigler                                               4,000


                                       12
<PAGE>


     PURCHASER                                        NUMBER OF SPECIAL
                                                      WARRANTS ISSUED

     Stephen Rutledge                                            5,000
     Eli Jacobson                                               32,000
     David Stone                                                80,000
     State Capital Partners                                     40,000
     Christine Ferrer                                           80,000
     Theodore Friedman                                          40,000
     Gross Foundation Inc.                                     200,000
     Howard Milstein                                            80,000
     Edward Milstein                                            80,000
     Paul Scharfer                                              20,000
     Joe Pretlow                                                20,000
     Derek Caldwell                                             40,000
     Aspen Limited Partnership                                  71,000
                                                             ---------
                                                             4,149,000
                                                            ==========


                                     CANADA
     PURCHASER                                        NUMBER OF SPECIAL
                                                      WARRANTS ISSUED

     Sharon Woodward                                            60,000
     Tom Kay RRSP                                               60,000
     Kathleen Margaret Kay                                      60,000
     Sandy Pascuzzi                                             60,000
     John B. Lansdell                                           60,000
     Carl Vandenbrink                                           60,000
     230666 Alberta Ltd.                                        60,000
     Denise Nobert                                              60,000
     Clint Stewart                                              60,000
     Fulton Park                                                90,000
     Jim Bresett                                                60,000
     523905 B.C. Ltd.                                          120,000
                                                              --------
                                                               810,000
                                                              ========

COMMON SHARES ISSUED IN ACQUISITIONS

         On June 6, 1997,  the Company  issued  141,844 Common Shares to the two
owners of Hearing Improvement Center,  Inc., in connection with its acquisition.
On December 6, 1996,  the Company  issued  408,000  Common Shares to Deborah Law
Cross in connection with the acquisition of Hearing Dynamics. In connection with
the acquisition of certain hearing care clinics on October 31, 1996, the Company
issued promissory notes in the aggregate  principal amount of $2,600,000 to four
affiliates of Hearing Health Services,  Inc. The notes are due October 31, 1997,
and are convertible  into Common Shares at $1.30 principal  amount per share. On
October  1, 1996,  the  Company  issued  1,217,268  Common  Shares to Gregory J.
Frazer,  253,091 Common Shares to Carissa Bennett,  and 919,177 Common Shares to
Jami  Tanihana as  consideration  for the  acquisition  of certain  hearing care
clinics  located in Southern  California.  The Company  relied on the  exemption
provided by Section 4(2) of the 1933 Act with respect to the  securities  issued
in the above acquisitions.


                                       13
<PAGE>


EMPLOYEE STOCK OPTIONS

         In  reliance  on Rule 701 under the 1933 Act,  during the  fiscal  year
ended July 31, 1997, the Company  granted  options for a total of 600,000 Common
Shares at an option price of $1.30 per share to certain employees, officers, and
directors under the Company's Stock Option Plan (the "1993 Plan").  In addition,
the Company granted a total of 1,242,000  options (of which 325,000 options were
subsequently  canceled)  exercisable  at prices  ranging from $1.12 to $1.50 per
share to 12 United States residents who are officers or employees of the Company
pursuant  to its Stock  Award Plan  adopted  in 1996 (the  "1996  Plan") and has
relied on Rule 701 to exempt these option  grants.  During the fiscal year ended
July 31, 1997, the Company issued a total of 775,000 Common Shares upon exercise
of stock  options  granted  pursuant to the 1993 Plan for an aggregate  exercise
price of approximately  $316,000.  No Common Shares have been issued pursuant to
the exercise of options granted under the 1996 Plan.

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

OVERVIEW

         During the past  fiscal  year,  the Company  has  achieved  significant
growth in revenues, primarily due to the acquisition and operation of additional
hearing  care  clinics.  For the fiscal  year ended July 31,  1997,  the Company
generated  total revenues of $13.5  million.  As of July 31, 1997, the Company's
cumulative deficit was $2.1 million and its total shareholders'  equity was $8.8
million.  For the fiscal year ended July 31,  1997,  the Company  incurred a net
loss of $1.7 million.

RECENT ACQUISITIONS

         On August 1, 1996, Sonus-USA acquired the assets of Santa Maria Hearing
Associates.  Consideration  for  acquisition  of the single clinic  consisted of
$50,000 in cash paid at closing and $25,000 for a covenant not to compete  which
was paid on January 5, 1997. The intangible  assets  recorded in the acquisition
of the single  clinic,  including  the  covenant  not to  compete,  amounted  to
$76,000.

         On October 1, 1996,  Hearing Care Associates Group ("HCA"),  consisting
of 11 hearing  care  clinics  located in Los  Angeles,  California,  merged with
Sonus-USA.  The consideration  paid by the Company consisted of $314,724 in cash
and 2,389,536  shares of Common Stock, of which 597,384 shares are being held by
the Company pending satisfaction of a purchase price contingency.  An additional
$350,861 in cash was paid for covenants not to compete.  The  intangible  assets
recorded in the transaction, including the covenants not to compete, amounted to
$2,831,000.

         On October  31,  1996,  Sonus-USA  acquired  the assets of the  Midwest
Division of Hearing Health Services,  Inc. (the "Midwest Division"),  consisting
of 14 hearing  care  clinics  located in the  Chicago,  Illinois,  and  Lansing,
Michigan  metropolitan areas. The consideration paid by the Company consisted of
a subordinated convertible note in the principal amount of $2,600,000,  which is
convertible  into 2,000,000  shares of Common Stock at $1.30 per share,  and the
assumption  of certain  liabilities  in the amount of $360,000.  The  intangible
assets  recorded  in the  transaction,  including  a  covenant  not to  compete,
amounted to $2,379,000.

         On December 6, 1996, Sonus-USA completed a merger with Hearing Dynamics
("HD"),  which operated four hearing care clinics in the San Diego,  California,
area.  Cash in the amount of $102,600  and 408,000  shares of Common  Stock were
exchanged for all of the issued and outstanding  shares of HD in connection with
the merger.  An additional  $25,000 was paid to the seller for a covenant not to
compete.  The  intangible  assets  recorded in the  transaction,  including  the
covenant not to compete, amounted to $840,000.

         On December  17,  1996,  Sonus-USA  acquired all of the common stock of
FHC, Inc. ("FHC").  Consideration for acquisition of the single clinic consisted
of cash in the amount of  $150,000,  the  issuance of a  promissory  note in the
amount of $150,000 and the assumption and repayment of $100,000 in FHC


                                       14
<PAGE>


corporate  debt. An  additional  $112,000 was paid to the sellers for a covenant
not to compete.  The intangible  assets recorded in the  transaction,  including
covenants not to compete, amounted to $472,000.

         On January 9, 1997,  Sonus-USA  purchased all of the outstanding shares
of  Hearing  Care  Associates-Los  Angeles,  Inc.,  for total  consideration  of
$301,000.  An additional  $112,500 was paid to the sellers for a covenant not to
compete. The intangible assets recorded in the acquisition of the single clinic,
including the covenant not to compete, amounted to $466,000.

         On February 28, 1997,  Sonus-USA acquired all of the outstanding shares
of Hearing Care  Associates-Arcadia,  Inc.,  for $410,338 in cash. An additional
$130,170 was paid to the sellers for a covenant not to compete.  The  intangible
assets recorded in the acquisition of the single clinic,  including the covenant
not to compete, amounted to $404,000.

         On March 6, 1997,  Sonus-USA  acquired all of the outstanding shares of
Hearing Care  Associates-Sherman  Oaks, Inc., for $26,568 in cash. An additional
$33,783 was paid to the sellers for a covenant  not to compete.  The  intangible
assets recorded in the acquisition of the single clinic,  including the covenant
not to compete, amounted to $103,000.

         On March 14, 1997,  Sonus-USA acquired all of the outstanding shares of
Auditory  Vestibular  Center,  Inc.,  for total  consideration  of  $84,306.  An
additional  $28,580 was paid to the sellers for a covenant  not to compete.  The
intangible  assets recorded in the  acquisition of the single clinic,  including
the covenant not to compete, amounted to $67,000.

         On April 8, 1997,  Sonus-USA  acquired all of the outstanding shares of
Hearing Care  Associates  -Lancaster,  Inc., for $136,751 in cash. An additional
$61,877 was paid to the sellers for a covenant  not to compete.  The  intangible
assets recorded in the acquisition of the single clinic,  including the covenant
not to compete, amounted to $140,000.

         On June 6,  1997,  Sonus-USA  acquired  all the  outstanding  shares of
Hearing Improvement Center, Inc., a California corporation operating two hearing
care clinics,  in exchange for $500,000 in cash, 141,844 shares of Common Stock,
a two-year  promissory note in the amount of $132,624 payable in equal quarterly
installments  including  interest at 6% per annum,  and a three-year  promissory
note in the amount of $282,036 with accrued interest at the rate of 6% per annum
payable  at the end of the first  year and the  balance  of the note,  including
interest,  payable in equal monthly  installments  over the  remaining  term. An
additional  $50,000 was paid to the sellers for  covenants  not to compete.  The
intangible  assets  recorded in the  acquisition  of the two clinics,  including
covenants not to compete, amounted to $1,108,000.

         On July 8, 1997,  Sonus-USA  acquired for cash certain assets of Dakota
Hearing Aid Service for $40,000 in cash. An  additional  $10,000 was paid to the
seller for a covenant  not to compete.  The  intangible  assets  recorded in the
acquisition , including the covenant not to compete, amounted to $31,000.

         On August 27, 1997,  Sonus-USA  acquired all the outstanding  shares of
Hearing Care Associates-Santa  Monica, Inc., for $258,268 in cash. An additional
$114,135  was paid to the sellers to enter into  covenants  not to compete.  The
intangible assets recorded in the acquisition of the clinic, including covenants
not to compete, amounted to $260,000.

         As of July 31, 1997, the Company had recorded  $9,921,000 in intangible
assets, including $955,000 in covenants not to compete, which represented 58% of
the Company's  total assets.  The  amortization  of the  unamortized  balance of
$9,519,000 at July 31, 1997 will result in an annual non-cash charge to earnings
of approximately  $490,000 in each of the next 20 years. If all of the covenants
not to  compete  referred  to above were  currently  in  effect,  an  additional
non-cash charge to earnings of approximately $229,000 in each of the current and
next two fiscal years would also be incurred.

         The following  discussion  of the results of  operations  and financial
condition  of the  Company  should  be read in  conjunction  with the  Company's
audited  consolidated  financial  statements and the notes thereto  contained in
Item 7 of this Form 10-KSB.


                                       15
<PAGE>


RESULTS OF OPERATIONS

Year Ended July 31, 1997, Compared to Year Ended July 31, 1996

         Accounts  Receivable   Turnover.   The  Company's  accounts  receivable
turnover  increased  to 74 days for the fiscal  year ended July 31, 1997 from 61
days in the prior  fiscal  year.  The  Company's  accounts  receivable  balances
consisted  primarily of insurance  proceeds to be received from managed care and
third party insurance providers.

         Revenues.  Total revenues for the fiscal year ended July 31, 1997, were
$13,462,000,  representing  a 463% increase over revenues of $2,389,000  for the
prior fiscal year. Of this  increase,  $10,015,000  was  attributable  to the 39
clinics acquired during fiscal 1997. Product sales revenues were $11,627,000 for
the 1997 fiscal year, up 395% from the $2,345,000 for fiscal 1996.  Audiological
service revenues increased from $44,000, or 2% of total revenues in fiscal 1996,
to $1,835,000, or 14% of total revenues, for the 1997 fiscal year. Substantially
all of the  clinics  acquired  in the United  States  separately  charge for the
performance of audiological services when a hearing instrument is purchased. The
Company's  policy in the past was to waive the fee if a hearing  instrument  was
purchased.

         Gross Profit on Product Sales. Product gross profit for the fiscal year
ended July 31, 1997, was $6,617,000  compared to $1,328,000 for the prior fiscal
year. Gross profit  percentage was 58% for both fiscal 1997 and fiscal 1996. The
Company  expects its gross  profit  percentage  to improve in fiscal 1998 due to
higher volume discounts and improved product sales management.

         Operating  Expenses.  Operating expenses for the fiscal year ended July
31, 1997,  were  $10,185,000,  representing  an increase of 419% over  operating
expenses of  $1,961,000  for the prior  fiscal year.  As a  percentage  of total
revenues, operating expenses decreased to 76% for the fiscal year ended July 31,
1997, from 82% for fiscal 1996, primarily due to fixed costs being spread over a
larger revenue base.

LIQUIDITY AND CASH RESERVES

         During September 1996, the Company issued 810,000 special warrants in a
private  placement  in  Canada  at a  price  of  $1.25  for  gross  proceeds  of
$1,012,500. In December 1996, the Company issued 4,149,000 special warrants in a
private placement in the United States at a price of $1.25 for gross proceeds of
$5,186,250.  Each special  warrant  issued in Canada  entitled the holder to 1.1
shares of Common Stock and a share purchase warrant to acquire an additional 1.1
shares  of Common  Stock at a price of $2.00 per  share.  Each  special  warrant
issued in the United States entitled the holder to one share of Common Stock and
a share purchase  warrant to acquire one  additional  share of Common Stock at a
price of $2.00 per share. The share purchase warrants expire on August 31, 1998.
However, if the closing bid for the Common Stock is in excess of $3.00 per share
for a period of 20  consecutive  trading  days (as  traded on the ASE or another
more senior North American stock  exchange),  the Company has the option upon 45
days' prior written notice to the holders to force the exercise or  cancellation
of the share purchase warrants. The actual uses of the proceeds of the September
and December 1996 private placements are as follows (in thousands):

                  Working capital                        $1,500
                  Capital expenditures                      600
                  Acquisitions                            3,400
                  Offering and registration costs           700
                                                        -------
                                                         $6,200
                                                        =======

         During the fiscal year ended July 31,  1997,  the  Company  acquired 39
hearing care clinics located in California,  Illinois,  Michigan, New Mexico and
North Dakota.  The acquisitions  were funded  primarily  through the issuance of
Common Stock valued at $3.3 million,  the issuance of  convertible  subordinated


                                       16
<PAGE>


notes in an aggregate principal amount of $2.6 million, the issuance of $565,000
in promissory notes, cash payments totaling $2.1 million,  and the assumption of
debt totaling $460,000. Consideration paid for covenants not to compete amounted
to $955,000.

         During the fiscal year ended July 31, 1996,  the Company  acquired four
hearing  care  clinics in Canada  and two  clinics  in the  United  States.  The
acquisitions  were funded  through the  issuance  of a  convertible  note in the
amount of  $127,000,  the  issuance  of $77,000 in  promissory  notes,  and cash
payments  totaling  $196,000.  Consideration  paid for  covenants not to compete
amounted to $15,000.

         Sonus-Canada Ltd., the Company's Canadian operating  subsidiary,  has a
revolving  demand loan with the Royal Bank of Canada providing for borrowings up
to  $182,000  at July  31,1997.  As of July 31,  1997,  there  were no  advances
outstanding  against this line, compared to advances totaling $33,200 as of July
31, 1996.  Advances under the line of credit bear interest at 1% above the Royal
Bank of Canada prime rate, which was 4.75% at July 31, 1997.  Advances under the
revolving line of credit are secured by all the assets of Sonus-Canada  Ltd. and
are personally guaranteed by a shareholder.

         In July 1997, Sonus-USA obtained a $500,000 line of credit from Phonak,
Inc.,  a hearing  instrument  manufacturer.  The line of credit is  secured by a
portion of Sonus-USA's  accounts  receivable,  is guaranteed by the Company, and
bears  interest at the prime rate on a fully  floating  basis.  Debt  service is
interest only payable monthly until July 16, 1998, when all amounts  outstanding
under  the  line of  credit  will be due.  At July 31,  1997,  no  amounts  were
outstanding under the line of credit.

         During  fiscal 1997,  the Company  expended  approximately  $800,000 to
develop a management  information  system to link each clinic with the Company's
headquarters.  Approximately  $500,000 of this amount was financed by means of a
four-year capital lease, requiring payments of approximately $10,000 per month.

         The Company believes that its existing cash balances, amounts available
under its revolving lines of credit, and cash from operations will be sufficient
to fund its existing  operations.  However,  to execute its  long-term  business
strategy,  the Company will require  additional  funding in order to acquire new
clinics and to expand into other geographic  markets.  The Company plans to fund
its long-term  liquidity  needs by a combination of the following  methods:  (i)
obtaining  lease financing for significant  capital  expenditures;  (ii) issuing
debt; (iii) raising additional privately placed equity; and (iv) the exercise of
outstanding share purchase  warrants.  In the event the Company ultimately fails
to  consummate  any of the foregoing  strategies,  the Company will be unable to
continue  to  pursue  its  acquisition   strategy,   necessitating   significant
reductions in administrative personnel in order to reduce expenses. There can be
no  assurance  that any such  financing  alternatives  will be  available to the
Company or will be available on terms acceptable to the Company.

SHARES HELD IN ESCROW

         At October 21, 1997, 4,250,000 Common Shares (the "Escrow Shares") were
held in escrow in accordance with an escrow agreement dated October 7, 1994. All
of the Escrow  Shares are held by officers and  directors  of the  Company.  The
escrow  agreement  provides  that (i) one Common Share will be released for each
$0.08  (converted  from  Canadian  dollars  at  October  1,  1997) of cash  flow
generated  by the  Company,  (ii) the release  shall only be made  pursuant to a
written application to The Alberta Stock Exchange,  and (iii) the maximum number
of shares to be released in any year to a shareholder is limited to one-third of
the original number of shares held in escrow on behalf of such shareholder.  For
purposes of the escrow  agreement,  "cash flow" is defined as the  Company's net
income  as  shown  on  the  Company's   audited   financial   statements,   plus
depreciation,  depletion,  deferred  taxes,  and  amortization  of goodwill  and
research and  development  costs.  The Escrow Shares have been  accounted for as
presently  issued and  outstanding  shares for balance  sheet  purposes  but are
considered to be "contingent shares" and have been excluded from the computation
of net loss per Common Share. If the Escrow Shares are released  pursuant


                                       17
<PAGE>


to the terms of the  escrow  agreement,  the fair value of such  shares  will be
required to be  recognized  by the Company as  compensation  expense  during the
period in which such shares are released.

NEW ACCOUNTING PRONOUNCEMENTS

         In February 1997,  the Financial  Accounting  Standards  Board ("FASB")
issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share." SFAS No. 128  supersedes  APB Opinion No. 15,  "Earnings  Per Share" and
specifies  the  computation,   presentation,  and  disclosure  requirements  for
earnings  per share  ("EPS") for  entities  with  publicly  held common stock or
potential  common  stock.  It replaces  the  presentation  of primary EPS with a
presentation  of basic EPS and fully  diluted EPS with diluted  EPS.  Basic EPS,
unlike  primary  EPS,  excludes  dilution  and is computed  by  dividing  income
available to common shareholders by the weighted average number of common shares
outstanding  for the period.  Diluted EPS reflects the  potential  dilution that
could  occur  if  securities  or other  contracts  to issue  common  stock  were
exercised or  converted  into common stock or resulted in the issuance of common
stock that  would  then share in the  earnings  of the  entity.  Diluted  EPS is
computed  similarly to fully  diluted EPS under APB Opinion No. 15. SFAS No. 128
is effective for financial statements for both interim and annual periods ending
after December 15, 1997. The Company will adopt SFAS No. 128 at January 31, 1998
for the  quarter  then  ended.  All prior  period EPS data will be  restated  to
conform with SFAS No. 128. The Company does not expect this  statement to have a
significant impact on its EPS calculations.

         In June 1997,  the FASB issued SFAS No. 130,  "Reporting  Comprehensive
Income," which established  requirements for disclosure of comprehensive income.
The  objective  of SFAS No. 130 is to report all  changes in equity  that result
from  transactions  and  economic  events other than  transactions  with owners.
Comprehensive  income is the total of net income and all other non-owner changes
in equity.  The Company does not anticipate any  significant  impact on reported
results of operations  due to the adoption of SFAS No. 130. The Company plans to
adopt SFAS No. 130 at January 31,  1998,  for the quarter then ended and at that
time earlier financial statements will be reclassified for comparative purposes.

         In June 1997, the FASB issued SFAS No. 131,  "Disclosure about Segments
of an  Enterprise  and  Related  Information,"  which  changes  the way  segment
information  is reported for public  companies and requires  those  companies to
report   selected   segment   information  in  interim   financial   reports  to
shareholders.  The Statement is effective for  financial  statements  for fiscal
years beginning after December 15, 1997. The Statement was only recently issued,
and  although the Company has not fully  determined  its  complete  impact,  the
Company does not foresee any material  change due to adoption of this  statement
on its financial  presentation to shareholders.  The Company plans to adopt SFAS
No. 131 at January 31, 1998, for the quarter then ended and at that time earlier
financial statements will be reclassified for comparative purposes if necessary.


                                       18
<PAGE>


ITEM 7. FINANCIAL STATEMENTS


              REPORT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS



TO THE BOARD OF DIRECTORS
HEALTHCARE CAPITAL CORP.:


         We  have  audited  the  accompanying   consolidated  balance  sheet  of
HealthCare  Capital Corp. and  subsidiaries as of July 31, 1997, and the related
consolidated statements of operations,  shareholders' equity, and cash flows for
the  year  then  ended.   These  consolidated   financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

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

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
HealthCare  Capital  Corp.  and  subsidiaries  as of  July  31,  1997,  and  the
consolidated  results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.




                                        /s/ KPMG Peat Marwick LLP



Portland, Oregon
October 24, 1997




                                       19
<PAGE>


                                AUDITORS' REPORT



To the Shareholders of
HealthCare Capital Corp.

We have audited the consolidated  balance sheet of HealthCare  Capital Corp. and
subsidiaries  as of July 31, 1996, and the related  statements of operations and
retained earnings  (deficit),  cash flows and shareholders'  equity for the year
then ended.  These consolidated  financial  statements are the responsibility of
the company's  management.  Our responsibility is to express an opinion on these
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 an audit to obtain  reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the results of the  consolidated  financial
position of HealthCare  Capital Corp. and  subsidiaries as of July 31, 1996, and
the consolidated results of their operations,  and their cash flows for the year
then ended in  accordance  with  generally  accepted  accounting  principles  as
adopted in the United States of America.



                                        /s/ Shikaze Ralston
                                            Chartered Accountants

Vancouver, Canada
October 24, 1996


                                       20
<PAGE>


                            HEALTHCARE CAPITAL CORP.
                           CONSOLIDATED BALANCE SHEET
                        (in thousands, except share data)

                                                           July 31,
                                                             1997
                                                         -----------

                                     ASSETS
Current assets:
   Cash and cash equivalents                                 $ 1,099
   Accounts receivable, net of allowance
     for doubtful accounts and contractual
     write downs of $361                                       2,514
   Other receivables                                             314
   Inventory                                                     425
   Prepaid expenses                                              260
                                                             -------
            Total current assets                               4,612
Property and equipment, net                                    2,277
Other assets                                                     136
Goodwill and covenants not to compete, net                     9,519
                                                             -------
                                                             $16,544
                                                             =======

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
   Bank loans and short-term notes payable                   $    59
   Accounts payable and accrued liabilities                    3,395
   Convertible notes payable                                   2,600
   Capital lease obligation, current portion                     101
   Long term debt, current portion                               357
                                                             -------
            Total current liabilities                          6,512
Capital lease obligation, non-current portion                    305
Long term debt, non-current portion                              765
Convertible notes payable                                        127
                                                             -------
            Total liabilities                                  7,709

Commitments and contingencies

Shareholders' equity:
   Common stock, no par value per share,
     unlimited number of shares authorized,
     27,138,288 shares issued and outstanding                 11,131
   Notes receivable from shareholders                           (124)
   Accumulated deficit                                        (2,117)
   Treasury stock, 19,800 shares at cost                         (33)
   Cumulative translation adjustment                             (22)
                                                             -------
            Total shareholders' equity                         8,835
                                                             -------
                                                             $16,544
                                                             =======


          See accompanying notes to consolidated financial statements.


                                       21
<PAGE>


                            HEALTHCARE CAPITAL CORP.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (in thousands, except per share data)


                                       Years ended July 31,
                                      -----------------------
                                        1997           1996
                                      --------        -------
Net revenues                          $13,462         $ 2,389
                                      -------         -------

Costs and expenses:
  Cost of products sold                 5,010           1,017
  Clinical expenses                     5,985           1,197
  General and administrative expenses   3,410             639
  Depreciation and amortization           790             125
                                      -------         -------
Total costs and expenses               15,195           2,978
                                      -------         -------
Loss from operations                   (1,733)           (589)

Other income (expense):
  Interest income                          76               8
  Interest expense                        (47)              -
  Other, net                                3               -
                                      -------         -------
Net loss                              $(1,701)        $  (581)
                                      =======         =======

Weighted average outstanding shares    20,049          10,598
                                      =======         =======
Net loss per share                    $ (0.08)        $ (0.05)
                                      =======         =======


          See accompanying notes to consolidated financial statements.


                                       22
<PAGE>

                            HEALTHCARE CAPITAL CORP.
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                        (in thousands, except share data)

<TABLE>
<CAPTION>
                                                 Shareholder             Cumulative                  Total
                                       Common      Notes    Accumulated  Translation Treasury    Shareholders'
                                       Stock     Receivable    Deficit   Adjustment    Stock         Equity
                                    ----------  ------------ ---------- ------------ ---------- -------------
<S>                                 <C>            <C>       <C>         <C>         <C>           <C>   
BALANCE AT JULY 31, 1995            $     175      $   --    $    165    $     (2)   $     --      $  338

   Issuance of 3,000,000 shares of
    common stock under private
    placement (net proceeds)              416          --          --          --          --         416
   Exercise of stock options for
    600,000 shares of common              102          --          --          --          --         102
    stock
   Issuance of 872,000 shares of
    common stock upon conversion
    of Company's promissory note          160          --          --          --          --         160
   Issuance of 1,905,748 shares of
    common stock under private
    placement (net proceeds)            1,072          --          --          --          --       1,072
   Translation adjustment                  --          --          --           5          --           5
   Net loss                                --          --        (581)         --          --        (581)
                                      -------     -------     -------     -------     -------     -------
BALANCE AT JULY 31, 1996                1,925          --        (416)          3          --       1,512

   Issuance of 112,800 shares of
    common stock in connection
    with receipt of tax credit             38          --          --          --          --          38
   Exercise of stock options for
    775,000 shares of
    common stock                          316        (124)         --          --          --         192
   Issuance of 2,939,380 shares of
    common stock in connection
    with acquisitions                   3,291          --          --          --          --       3,291
   Issuance of 5,467,410 shares of
    common stock under private
    placement (net proceeds)            5,529          --          --          --          --       5,529
   Exercise of warrants for
    35,750 shares of common                32          --          --          --          --          32
    stock
   Repurchase of 19,800 shares of
    treasury stock                         --          --          --          --         (33)        (33)
   Translation adjustment                  --          --          --         (25)         --         (25)
   Net loss                                --          --      (1,701)         --          --      (1,701)
                                      -------     -------     -------     -------     -------     -------
BALANCE AT JULY 31, 1997            $  11,131     $  (124)    $(2,117)    $   (22)    $   (33)    $ 8,835
                                      =======     =======     =======     =======     =======     =======
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       23
<PAGE>


                            HEALTHCARE CAPITAL CORP.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
<TABLE>
<CAPTION>
                                                                              Years ended July 31,
                                                                           ---------------------------
                                                                             1997               1996
                                                                           ---------            ------
Cash flows from operating activities:
<S>                                                                        <C>                  <C>
    Net loss                                                               $(1,701)             $ (581)
    Adjustments  to  reconcile  net  loss to net  cash
    provided  by  (used  in) operating activities:
       Provision for bad debt expense                                           47                  --
       Depreciation and amortization                                           790                 125
    Changes in non-cash working capital:
       Accounts receivable                                                  (2,158)                 (7)
       Other receivables                                                      (314)                 --
       Inventory                                                              (281)                (16)
       Prepaid expenses                                                       (219)                (25)
       Income taxes recoverable                                                  9                  14
       Accounts payable and accrued liabilities                              2,932                  45
       Deferred purchase discounts                                              --                 (23)
                                                                           -------              ------
          Net cash used in operating activities                               (895)               (468)
                                                                           -------              ------  
Cash flows from investing activities:
    Purchase of property and equipment                                      (1,941)               (293)
    Deferred acquisition costs, net                                            132                (268)
    Net cash paid on business acquisitions                                  (3,389)               (238)
                                                                           -------              ------
          Net cash used in investing activities                             (5,198)               (799)
                                                                           -------              ------
Cash flows from financing activities:
    Net proceeds (repayments) of long term debt
       and capital lease obligations                                         1,382                (101)
    Deferred financing costs, net                                               42                 (42)
    Advances (repayments) of bank loans and short-term notes payable            26                 (75)
    Advances from (repayments to) shareholders                                (124)               (235)
    Issuance (redemption) of convertible notes                                  --                 (33)
    Issuance of common stock for cash,
       net of costs                                                          5,915               1,750
    Acquisition of treasury stock                                              (33)                 --
                                                                           -------              ------
          Net cash provided by financing activities                          7,208               1,264
                                                                           -------              ------
Net increase (decrease) in cash and cash equivalents                         1,115                  (3)

Effect on cash and cash equivalents of changes in foreign translation rate     (27)                 (2)
Cash and cash equivalents at the beginning of the year                          11                  16
                                                                           -------              ------
Cash and cash equivalents at the end of the year                           $ 1,099              $   11
                                                                           =======              ======

Required supplemental disclosures:
    Interest paid during year                                              $    41               $  14
    Non-cash financing activities:
       Issuance of long-term debt in acquisitions                          $ 1,025               $ 206
       Issuance of convertible notes in acquisitions                       $ 2,600               $  --
       Issuance of common stock in acquisitions                            $ 3,291               $  --

</TABLE>


     See accompanying notes to consolidated financial statements.


                                       24
<PAGE>
                            HEALTHCARE CAPITAL CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JULY 31, 1997

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Description of Company
         ----------------------

         HealthCare  Capital Corp. doing business as Sonus (the  "Company"),  an
Alberta,  Canada  corporation,   through  its  primary  operating  subsidiaries,
Sonus-Canada  Ltd.  (formerly HC HealthCare  Hearing  Clinics  Ltd.),  a British
Columbia,  Canada corporation,  and Sonus-USA, Inc. (formerly HealthCare Hearing
Clinics, Inc.), a Washington corporation,  currently owns and operates a network
of 52 hearing care clinics in the United States and Western Canada.  The clinics
are located primarily in the metropolitan areas of Los Angeles,  California; San
Diego,  California;  Chicago,  Illinois;  Lansing,  Michigan;  Albuquerque,  New
Mexico; Vancouver, British Columbia; and Calgary, Alberta. Each of the Company's
hearing care clinics provides its hearing impaired patients with a full range of
audiological products and services. The Company intends to expand its network of
hearing  care  clinics by  acquiring  clinics in its  existing,  as well as new,
geographic markets.

         Principles of Consolidation
         ---------------------------

         The  consolidated  financial  statements  include the Company's  wholly
owned subsidiaries.  All significant intercompany accounts have been eliminated.
The  functional  currency of all of the  Company's  Canadian  operations  is the
Canadian dollar while the functional  currency of the Company's U.S.  operations
is the U.S.  dollar.  In  accordance  with  Statement  of  Financial  Accounting
Standards  No.  52,  "Foreign  Currency  Translation",  assets  and  liabilities
recorded in Canadian  dollars are  remeasured  at current  rates in existence on
July 31,  1997.  Exchange  gains and  losses  from  remeasurement  of assets and
liabilities  recorded in Canadian  dollars are treated as  unrealized  gains and
losses and reported as a separate component of stockholders' equity.

         Revenue Recognition
         -------------------

         Revenues from the sale of hearing instrument products are recognized at
the time of delivery.  Revenues  from the  provision of hearing care  diagnostic
services are recognized at the time that such services are performed. As of July
31, 1997 and 1996, net revenues consisted of the following (in thousands):

                                                 1997              1996
                                                 ----              ----

         Product revenue                      $  11,627          $   2,345
         Service revenue                          1,835                 44
                                              ---------          ---------
                                              $  13,462          $   2,389
                                              =========          =========

         Income Taxes
         ------------

         The Company  accounts  for income  taxes under the asset and  liability
method.  Under  the  asset  and  liability  method,   deferred  tax  assets  and
liabilities  are  recognized  for the future tax  consequences  attributable  to
differences  between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards.  Deferred tax assets and  liabilities  are measured using enacted
tax rates  expected  to apply to  taxable  income  in the  years in which  those
temporary  differences  are expected to be  recovered or settled.  The effect on
deferred tax


                                       25
<PAGE>
                            HEALTHCARE CAPITAL CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JULY 31, 1997

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

assets and  liabilities  of a change in tax rates is recognized in income in the
period that includes the enactment date.

         Cash and Cash Equivalents
         -------------------------

         Cash equivalents consist of short-term,  highly liquid investments with
original maturities of 90 days or less.

         Inventory
         ---------

         Inventories  are stated at the lower of cost  (first in,  first out) or
net realizable value.

         Property and Equipment
         ----------------------

         Property and equipment are recorded at cost and depreciated as follows:

         Professional equipment       20% declining balance
         Office equipment             30% declining balance
         Automotive equipment         30% declining balance
         Leasehold improvements       Straight line over five years
         Computer equipment           30% declining balance

         In the year of acquisition,  depreciation is calculated at one-half the
above noted rates. Property and equipment purchased under capitalized leases are
amortized over the shorter of the lease term or their estimated  useful life and
such depreciation is included with depreciation expense.  Property and equipment
at July 31, 1997 consists of the following (in thousands):

         Professional equipment                           $     930
         Office equipment                                       481
         Automotive equipment                                    16
         Leasehold improvements                                 405
         Computer equipment                                   1,144
                                                          ---------
                                                              2,976
         Less accumulated depreciation                         (699)
                                                          ---------
                                                          $   2,277
                                                          =========

         Advertising Expenses
         --------------------

         The Company defers its  advertising  costs until the  advertisement  is
actually run, at which time the full expense is recognized. Deferred advertising
costs  were  $89,000  and $0 for  the  years  ended  July  31,  1997  and  1996,
respectively.  Advertising expense was $786,000 and $207,000 for the years ended
July 31, 1997 and 1996, respectively.


                                       26
<PAGE>
                            HEALTHCARE CAPITAL CORP.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JULY 31, 1997

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         Goodwill and Covenants not to Compete
         -------------------------------------

         The  unallocated  purchase  costs in excess of the net assets  acquired
(goodwill)  is being  amortized on the  straight-line  basis over twenty  years.
Non-compete agreements are amortized on the straight-line basis upon termination
of the contracted employee for any reason. Goodwill and covenants not to compete
as of July 31, 1997 are as follows (in thousands):

         Goodwill                                         $   8,966
         Covenants not to compete                               955
         Less:  accumulated amortization                       (402)
                                                          ---------
                                                          $   9,519
                                                          =========

         The Company  assesses the  recoverability  of this intangible  asset by
determining  whether the amortization of the goodwill balance over its remaining
life can be  recovered  through  discounted  projected  future cash flows of the
acquired  businesses  from which the  goodwill  arose.  Amortization  charged to
operations  was $364,000 and $17,000 for the years ended July 31, 1997 and 1996,
respectively.

         Deferred Acquisition and Financing Costs
         ----------------------------------------

         Costs  related to the  acquisition  of clinics are deferred  and,  upon
successful completion of acquisitions,  are allocated to the assets acquired and
are  subject  to the  accounting  policies  outlined  above.  Costs  related  to
potential  acquisitions  that are  unsuccessful  are  expensed in the periods in
which it is determined  that such  acquisitions  are unlikely to be consummated.
Costs  related  to issuing  shares are  deferred  and upon the  issuance  of the
related shares, are applied to reduce the net proceeds of the issue.

         Earnings Per Share
         ------------------

         Earnings  per share is based on the weighted  average  number of common
shares  outstanding  in each period.  Common share  equivalents  represented  by
convertible debt and contingent  shares held in escrow have not been included in
the calculation of earnings per share as the effect would be anti-dilutive.

         Concentrations of Credit Risk
         -----------------------------

         Financial  instruments,   which  potentially  subject  the  Company  to
concentration of credit risk, consist principally of cash and trade receivables.
The Company  places its cash with high credit  quality  institutions.  At times,
such amounts may be in excess of the FDIC insurance limits.  The Company's trade
accounts  receivable  are  derived  from  numerous  private  payers,   insurance
carriers,    health   maintenance   organizations   and   government   agencies.
Concentration  of credit risk relating to trade  accounts  receivable is limited
due to the diversity and number of patients and payers.

         Fair Value of Financial Instruments
         -----------------------------------

         The  carrying  value  of  financial  instruments  such as cash and cash
equivalents,  trade  receivables,  notes  receivable,  trade  payables and notes
payable, approximate their fair value.


                                       27
<PAGE>
                            HEALTHCARE CAPITAL CORP.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JULY 31, 1997

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         Use of Estimates
         ----------------

         Management   of  the  Company  has  made  a  number  of  estimates  and
assumptions  relating  to the  reporting  of  assets  and  liabilities  and  the
disclosure  of contingent  assets and  liabilities  to prepare  these  financial
statements in conformity with generally accepted accounting  principles.  Actual
results could differ from those estimates.

         Reclassifications
         -----------------

         Certain amounts in the 1996 financial statements have been reclassified
in order to conform to the 1997 presentation.

NOTE 2.  ACQUISITIONS

         During the fiscal year ended July 31,  1997,  the Company  purchased 39
hearing care clinics based in the United States in 12 separate transactions.  In
each transaction,  the acquisitions were accounted for as purchase transactions.
The acquired assets and liabilities were recorded at their estimated fair values
at the date of acquisition, and the unallocated excess purchase price (goodwill)
is being  amortized  on a  straight  line basis  over 20 years.  Purchase  price
adjustments  may arise in the event working capital on the closing date deviates
from  the  minimum  working  capital  requirement   specified  in  the  purchase
agreement.  The operating  results of each acquired clinic have been included in
the consolidated statements of operations from each respective acquisition date.

        Certain  acquisitions  have been structured  using the Company's  common
shares or debt  convertible into the Company's common shares as a portion of the
consideration of the  transaction.  The valuation of the Company's common shares
given in  consideration  is based on the market  price for a  reasonable  period
before and after the date the terms of an acquisition  are agreed to,  announced
and approved by regulatory authorities.

         Santa Maria Hearing Associates
         ------------------------------

        On August 1, 1996,  Sonus-USA,  Inc. acquired for cash certain assets of
Santa Maria Hearing  Associates at a cost of $50,000.  The seller entered into a
three year covenant not to compete with  Sonus-USA,  Inc. for  consideration  of
$25,000 which was paid on January 5, 1997.

         Hearing Care Associates Group
         -----------------------------

         On October 1, 1996,  Sonus-USA,  Inc.  completed  the merger of Hearing
Care Associates -Northridge, Inc., Hearing Care Associates - Glendora, Inc., and
Hearing Care Associates - Glendale,  Inc.  (collectively "HCA") through a merger
of these HCA  corporations at a cost of $2,704,260.  As  consideration  for this
merger,  the Company paid cash of $314,724 and issued 2,389,536 common shares of
the Company at a price of $1.00 per share.  For cash  consideration  of $314,724
paid on closing plus $36,137 paid on November 1, 1996, the sellers  entered into
covenants  not to compete for a period of three  years  after  their  employment
terminates.


                                       28
<PAGE>
                            HEALTHCARE CAPITAL CORP.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JULY 31, 1997

NOTE 2.  ACQUISITIONS (CONTINUED)

         Hearing Health Services, Inc.
         -----------------------------

         On October 31, 1996, Sonus-USA, Inc. purchased substantially all of the
assets of the Midwest  Division of Hearing  Health  Services,  Inc. at a cost of
$2,960,000.  Consideration  for this  acquisition  was in the form of a  secured
$2,600,000  convertible  note payable due October 31, 1997 and  assumption  of a
$360,000 note payable.  The former note is  convertible  into  2,000,000  common
shares of the Company at a rate of $1.30 per share.

         Hearing Dynamics
         ----------------

         On December 6, 1996,  Sonus-USA,  Inc.  merged  with  Hearing  Dynamics
("HD"),  a California  corporation.  The merger of HD into  Sonus-USA,  Inc. was
consummated  as a tax-free  merger  whereby  common  shares of the Company  were
exchanged for all the issued and outstanding shares of HD at a cost of $804,360.
Consideration for this acquisition was $102,600 cash paid on closing and 408,000
common  shares of the Company  issued at a price of $1.72 per share.  A total of
118,000  shares  are  subject  to  restrictions   on  sale  or  transfer.   Such
restrictions will lapse as to one-third of such shares on November 30 in each of
1997,  1998,  and 1999. In addition,  80,000 of the shares are being held by the
Company  (the  "Contingent  Shares").  If for any of the three  years  ending on
November  30,  1997,  1998 or 1999,  the  income of HD before  interest,  taxes,
depreciation and amortization  and after a corporate  overhead  allocation falls
below 20% of the net  revenues  of the  business  for such year,  the seller may
elect to pay the Company $1.00 or cancel one Contingent  Share for each $1.00 of
shortfall.  A  Contingent  Share is also  required  to be  canceled  or a dollar
retained for each $1.72 of long-term  liabilities of the business as of the date
of closing of the acquisition and for each $1.72 of net accounts receivable that
remains  uncollected  after a specified time period.  For cash  consideration of
$25,000 paid on closing, the seller entered into a covenant not to compete for a
period of one year after employment terminates.

         FHC, Inc.
         ---------

         On December 17, 1996,  Sonus-USA,  Inc. acquired all of the outstanding
shares  of  FHC,  Inc.,  a  New  Mexico  corporation,  at a  cost  of  $400,000.
Consideration  for this  acquisition  was  $250,000  cash paid on closing  and a
three-year promissory note of $150,000 bearing interest at 6 1/2% per annum. For
consideration  of $112,233  payable over a three-year  period,  the sellers also
entered into  covenants not to compete for a period of three years from the date
of closing.

         Hearing Care Associates - Los Angeles, Inc.
         -------------------------------------------

         On January 9, 1997,  Sonus-USA,  Inc.  purchased all of the outstanding
shares of Hearing Care Associates - Los Angeles, Inc. for total consideration of
$301,000. For cash consideration of $112,500, the sellers entered into covenants
not to compete for a period of three years after employment terminates.

         Hearing Care Associates - Arcadia, Inc.
         ---------------------------------------

         On February 28, 1997, Sonus-USA,  Inc. purchased all of the outstanding
shares of Hearing  Care  Associates - Arcadia,  Inc. at a cost of $410,338  cash
paid on closing.  For cash  consideration of $130,170,  the sellers entered into
covenants  not  to  compete  for  a  period  of  three  years  after  employment
terminates.


                                       29
<PAGE>
                            HEALTHCARE CAPITAL CORP.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JULY 31, 1997

NOTE 2.  ACQUISITIONS (CONTINUED)

         Hearing Care Associates - Sherman Oaks, Inc.
         --------------------------------------------

         On March 6, 1997,  Sonus-USA,  Inc.  purchased  all of the  outstanding
shares of Hearing Care Associates - Sherman Oaks, Inc. at a cost of $26,568 cash
paid on closing.  For cash  consideration  of $33,783,  the sellers entered into
covenants  not  to  compete  for  a  period  of  three  years  after  employment
terminates.

         Auditory Vestibular Center, Inc.
         --------------------------------

         On March 14, 1997,  Sonus-USA,  Inc.  purchased all of the  outstanding
shares of Auditory  Vestibular Center,  Inc. for total consideration of $84,306.
For cash  consideration  of $28,580,  the sellers  entered into covenants not to
compete for a period of three years after employment terminates.

         Hearing Care Associates - Lancaster, Inc.
         -----------------------------------------

         On April 8, 1997,  Sonus-USA,  Inc.  purchased  all of the  outstanding
shares of Hearing Care Associates - Lancaster,  Inc. for total  consideration of
$136,751.  For cash consideration of $61,877, the sellers entered into covenants
not to compete for a period of three years after employment terminates.

         Hearing Improvement Center, Inc.
         --------------------------------

         On June 6,  1997,  Sonus-USA,  Inc.  purchased  all of the  outstanding
shares of Hearing  Improvement  Center,  Inc. for consideration of $500,000 cash
paid on closing, 141,844 common shares of the Company issued at a price of $1.41
per share,  a two-year  promissory  note in the  amount of  $132,624  payable in
quarterly  installments  including  interest  at 6% per annum  and a  three-year
promissory note in the amount of $282,036 with accrued  interest at a rate of 6%
per annum  payable  at the end of the first  year and the  balance  of the note,
including  interest,  payable in equal monthly  installments  over the remaining
term. For cash consideration of $50,000,  the sellers entered into covenants not
to compete for a period of three years after employment terminates.

         Dakota Hearing Aid Service
         --------------------------

         On July 8, 1997,  Sonus-USA,  Inc.  acquired for cash certain assets of
Dakota  Hearing  Aid  Service at a cost of $40,000.  The seller  entered  into a
three-year  covenant not to compete with Sonus-USA,  Inc. for cash consideration
of $10,000.

NOTE 3.  FINANCING ARRANGEMENTS

         Bank Loan
         ---------

         Sonus-Canada  Ltd.  maintains  a revolving  bank  demand  loan  bearing
interest at the bank's  prime rate plus 1% per annum  (5.75% at July 31,  1997),
secured by a general  security  agreement  covering  all assets of  Sonus-Canada
Ltd.,  the  postponement  of claim by the  shareholders  and the  guarantee of a
shareholder.  The loan provides for a maximum credit limit of $182,000.  At July
31, 1997, no amounts were outstanding under the loan.


                                       30
<PAGE>
                            HEALTHCARE CAPITAL CORP.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JULY 31, 1997

NOTE 3.  FINANCING ARRANGEMENTS (CONTINUED)

         Line of Credit
         --------------

         In July 1997,  Sonus-USA,  Inc. obtained a $500,000 line of credit from
Phonak, Inc., a hearing instrument  manufacturer.  The line of credit is secured
by a portion of  Sonus-USA,  Inc.'s  accounts  receivable,  is guaranteed by the
Company,  and bears interest at the prime rate on a fully floating  basis.  Debt
service is interest only,  payable monthly until July 16, 1998, when all amounts
outstanding  under the line of credit will be due. At July 31, 1997,  no amounts
were outstanding under the line of credit.

         Short-term Notes Payable
         ------------------------

         Sonus-USA,  Inc. and  Sonus-Canada  Ltd. have entered into  short-term,
non-interest  bearing notes with certain hearing instrument  manufacturers.  The
outstanding balance of the notes as of July 31, 1997 was $59,000.

NOTE 4.  LONG-TERM DEBT

         Long-term debt consists of the following at July 31, 1997 (in thousands
except for installment amounts):

         Secured  bank loan payable in  installments  of $726 per
         month plus  interest  calculated  at the bank prime rate
         plus 1-1/2% per annum                                         $      7

         Equipment  loan  from  a  supplier.  The  loan  requires
         fifty-two equal  installments every four weeks of $2,124
         including  interest  calculated  at the  rate of 10% per
         annum                                                               75

         Unsecured note payable in annual installments of $50,000
         plus interest calculated at 6.5% per annum,  maturing on
         December 17, 1999                                                  150

         Unsecured,   non-interest   bearing   note   payable  in
         quarterly  installments of $9,352,  maturing on December
         31, 1999                                                            94

         Equipment loans from suppliers,  with maturities ranging
         from  October,  1999  to  December,   2018  and  monthly
         payments, including interest at rates ranging from 0% to
         9% per annum aggregating $3,165                                     82

         Unsecured note payable in monthly installments of $1,357
         including  interest  calculated  at the  rate  of 8% per
         annum, maturing on February 1, 1999                                 23

         Note  payable  requiring  monthly  installments  of $351
         including interest calculated at 18% per annum, maturing
         on April 15, 2002                                                   13

         Note payable  requiring  payment of accrued  interest of
         $17,395  on  June  6,  1998,  and  monthly  installments
         thereafter of $12,500 including  interest  calculated at
         6% per annum  compounded  monthly,  maturing  on June 6,
         2000                                                               282

         Note payable requiring quarterly installments of $17,716
         including interest calculated at 6% per annum,  maturing
         on June 6, 1999                                                    133

         Secured note payable requiring  monthly  installments of
         $1,000  including  interest  calculated at 6% per annum,
         maturing February 1, 1999                                           23


                                       31
<PAGE>
                            HEALTHCARE CAPITAL CORP.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JULY 31, 1997

NOTE 4.  LONG-TERM DEBT (CONTINUED)

         Note payable  requiring annual  installments of $120,000
         plus interest  calculated  at 6% per annum,  maturing on
         July 1, 1999

                                                                            240
                                                                    -----------
                                                                          1,122
         Less current portion
                                                                           (357)
                                                                    -----------
                                                                    $       765
                                                                    ===========

         The maturities of long-term debt are as follows (in thousands):  1998 -
$357; 1999 - $459; 2000 - $237; 2001 - $11; 2002 - $4; thereafter $54.

NOTE 5.  CAPITAL LEASES

         The following is a schedule by year of future  minimum  lease  payments
under  capital  leases  together with the present value of the net minimum lease
payments as of July 31, 1997 (in thousands):

         1998                                                       $       132
         1999                                                               127
         2000                                                               126
         2001                                                                88
                                                                   ------------
         Total minimum lease payments                                       473
         Less:  amount representing interest                                (67)
                                                                   ------------
         Present value of minimum lease payments                            406
         Less current portion                                              (101)
                                                                   ------------
                                                                   $        305
                                                                   ============

         Total assets under capitalized  leases at July 31, 1997, were $305,000,
net of accumulated depreciation of $131,000.

NOTE 6.  CONVERTIBLE NOTES PAYABLE

         Convertible notes payable consist of the following at July 31, 1997 (in
thousands except for per share amounts):

         Non-interest  bearing  note due on  demand;  convertible
         into common shares of the Company at a rate of $1.00 per
         share                                                     $        127

         Non-interest   bearing   note  due  October  31,   1997;
         convertible  into common shares of the Company at a rate
         of $1.30 per share                                               2,600
                                                                    -----------
                                                                    $     2,727
                                                                    ===========


                                       32
<PAGE>
                            HEALTHCARE CAPITAL CORP.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JULY 31, 1997

NOTE 7.  SHAREHOLDERS' EQUITY

         Common Stock
         ------------

         On February 28, 1996, the Company issued 1,700,000  special warrants at
a price of $0.74 for gross proceeds of $1,250,690. The special warrants provided
for the  conversion of each  February  special  warrant to 1.1 units.  Each unit
consisted  of one common  share and one share  purchase  warrant.  The  February
special  warrants were converted into common shares at no additional cost to the
holder on February 28, 1997. Each share purchase warrant represents the right to
purchase one common share at a price of $1.10 until  expiration  on February 28,
1998.

         A  private   placement  in  Canada  of  810,000  special  warrants  was
consummated  by the Company in  September  1996 and a private  placement  in the
United States of 4,149,000  special  warrants was  consummated by the Company in
December  1996.  Such  special  warrants  are  collectively  referred  to as the
September  special  warrants.  The  aggregate  offering  price for the September
special  warrants was  $1,012,500  for those sold in Canada and  $5,186,250  for
those sold in the United States.  Each of the September  special warrants placed
in Canada  entitled  the  holder to  receive  1.1  common  shares  and 1.1 share
purchase warrants,  with each such warrant exercisable for one common share at a
price of $2.00 per share.  Each of the September  special warrants placed in the
United  States  entitled the holder  thereof to receive one common share and one
share  purchase  warrant to purchase an  additional  common  share for $2.00 per
share.

         In connection  with the offering of the September  special  warrants in
Canada,  the Company's  placement  agent (the Canadian Agent) received a selling
commission  consisting of $48,625 in cash and 34,000 September  special warrants
exercisable  for one common share and one share purchase  warrant to purchase an
additional common share for $2.00 per share and was granted an option to acquire
81,000 share purchase warrants, each exercisable for one common share at a price
of $1.25 per share.  The Canadian Agent also received a $61,987  syndication fee
and a $37,097 corporate finance fee.

         In connection with the placement of the September  special  warrants in
the United  States,  the Company's two placement  agents (the U.S.  Agents) each
received a selling  commission  equal to 9 percent of the gross  proceeds in the
form of September  special  warrants,  or a total of 373,410  September  special
warrants. One of the U.S. Agents also received 20,000 September special warrants
in payment of its corporate  finance fee. Such  September  special  warrants are
exercisable  for one common share and a share  purchase  warrant to purchase one
additional  common  share for $2.00 per  share.  In  addition,  the U.S.  Agents
received  an option to acquire  214,900  and 200,000  share  purchase  warrants,
respectively,  with each warrant  exercisable for one common share at a price of
$1.25 per share.  All of the share  purchase  warrants  issued in  September  or
December of 1996 are subject to certain  rights of the Company to force exercise
or cancellation.

         A total of 5,250,000 outstanding shares were held in escrow at July 31,
1997. All such shares are registered in the shareholders'  respective names with
all  voting  rights  attached  and  exercisable  by  the  respective  registered
shareholder.  The escrowed  shares are  restricted  as to  transferability.  The
release of 1,000,000 shares was subject to lapse of time provisions;  the shares
were released on October 21, 1997. The release of the remaining 4,250,000 shares
is subject to the following provisions:

        o   One  share  will be  released  for  each  $0.08  of  cash  flow
            generated by the Company;

        o   Release shall only be made pursuant to a written application to
            The Alberta Stock Exchange; and


                                       33
<PAGE>
                            HEALTHCARE CAPITAL CORP.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JULY 31, 1997

NOTE 7.  SHAREHOLDERS' EQUITY (CONTINUED)

        o   The  maximum  number of shares to be  released in any year to a
            shareholder shall be one-third of the original number of shares
            held in escrow on behalf of such shareholder.

         Stock Option Plans
         ------------------

         The Company has two stock  option  plans,  the Stock Option Plan ("1993
Plan") and the Stock Award Plan ("1996 Plan")  pursuant to which the Company may
grant  to  officers,   directors,   employees  and  consultants   incentive  and
non-qualified  options to purchase up to 10% of the  outstanding  common  shares
under the 1993  Plan and up to  3,000,000  common  shares  under the 1996  Plan,
subject to applicable regulatory limits. The 1996 Plan is subject to shareholder
approval at the Company's  1997 annual  meeting.  The exercise  price of options
granted under the plans may not be less than 75% of the fair market value of the
Company's common shares at the date of grant (100% for  tax-qualified  incentive
stock  options).  Options  become  exercisable  at the date of grant or in equal
annual  installments  over a period of one to four years from the date of grant.
The options generally expire five years after the date of grant.

      The 1996 Plan also provides for the granting of stock appreciation rights,
restricted units,  performance awards and other stock-based  awards. The Company
had no such awards or rights outstanding at July 31, 1997 or 1996.

The activity during the years ended July 31, 1997 and 1996 was as follows:

                                   1997                        1996
                         --------------------------  --------------------------
                                        Weighted-                   Weighted-
                                         Average                     Average
                          Options       Exercise       Options       Exercise
                                         Price                        Price
                         ----------   ------------   ---------      ----------
Outstanding - beginning  1,700,000           $0.83     450,000           $0.28
of year
     Granted             1,842,000           $1.37   1,850,000           $0.79
     Exercised            (775,000)          $0.41    (600,000)          $0.17
     Canceled             (325,000)          $1.50           -           $   -
                         ---------    ------------   ---------      ----------
Outstanding - end of     2,442,000           $1.28   1,700,000           $0.83
year                     ==========   =============  =========      ==========
Exercisable at end of      887,500           $1.19
year
Weighted-average fair
value of options granted
during the year                              $0.89                       $1.23


                                       34
<PAGE>
                            HEALTHCARE CAPITAL CORP.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JULY 31, 1997

NOTE 7.  SHAREHOLDERS' EQUITY (CONTINUED)

The following table summarizes  information  about stock options  outstanding at
July 31, 1997:

                        Options Outstanding              Options Exercisable
               --------------------------------------  -------------------------
                              Weighted-
                  Number       Average    Weighted-      Number      Weighted -
  Range of     Outstanding    Remaining    Average     Exercisable    Average
  Exercise        as of       Contractual  Exercise       as of       Exercise
   Prices     July 31, 1997      Life       Price     July 31, 1997     Price
-------------- -------------  ----------- -----------  ------------  -----------
  $0.05 -- $0.20     50,000         2.66       $0.18        50,000        $0.18
  $0.25 -- $0.30    300,000         3.39       $0.28       300,000        $0.28
  $0.70 -- $0.75    125,000         3.55       $0.72        87,500        $0.72
  $1.10 -- $1.15    250,000         4.77       $1.12           -          $  -
  $1.25 -- $1.35    600,000         4.18       $1.30           -          $  -
  $1.40 -- $1.50    667,000         4.49       $1.46           -          $  -
  $1.95 -- $2.10    450,000         3.57       $2.00       450,000        $2.00
----------------- ---------   ----------  ----------   -----------   -----------

  $0.05 -- $2.10  2,442,000         4.05       $1.28       887,500        $1.19
                  =========                                =======

         The  Company  accounts  for  stock  option  grants in  accordance  with
Accounting  Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to
Employees." Accordingly,  no compensation cost has been recognized for its stock
option grants. Pro forma information  regarding net income (loss) and net income
(loss) per share is required under Statement of Financial  Accounting  Standards
No. 123,  "Accounting  for Stock-Based  Compensation"  ("SFAS 123") and has been
determined  as if the Company had  accounted  for all 1997 and 1996 stock option
grants based on the fair value method. The pro forma information presented below
is not  representative  of the effect  stock  options will have on pro forma net
income (loss) or net income (loss) per share for future years.

      The fair  value of each  option  grant is  estimated  on the date of grant
using the Black-Scholes  multiple  option-pricing  model. The following weighted
average  assumptions were used for grants in 1997 and 1996:  risk-free  interest
rates of 5.94% and 6.43%,  respectively,  an expected  option life of 4.92 years
and 4.24 years,  respectively,  expected volatility of 96% and dividend yield of
zero.

      The Black-Scholes  method is one of many models used to calculate the fair
value of options that are freely tradable,  fully  transferable and that have no
vesting restrictions.  These models also require highly subjective  assumptions,
including future stock price volatility and expected time until exercise,  which
greatly affect the calculated values.


                                       35
<PAGE>
                            HEALTHCARE CAPITAL CORP.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JULY 31, 1997

NOTE 7.  SHAREHOLDERS' EQUITY (CONTINUED)

         Had compensation cost for these plans been determined based on the fair
value of awards at the grant date,  as  prescribed  by SFAS 123, net loss or net
loss per share would have been as follows:

                                                         1997      1996
                                                       --------  --------
                                                       (in thousands, except
                                                          per share data)
      Net loss applicable to common shareholders:
         As reported                                  $(1,701)    $(581)
         Pro forma (1)                                $(2,121)  $(1,172)
      Net loss per share:
         As reported                                   $(0.08)   $(0.05)
         Pro forma (1)                                 $(0.11)   $(0.11)

--------------------------
(1) SFAS 123 applies to awards granted in fiscal years that begin after December
    15, 1994. Consequently,  the effects of applying SFAS 123 shown here are not
    likely  to be  representative  of the  effects  in  future  years due to the
    exclusion  of awards  granted  in prior  years but  vesting  (and  therefore
    expensed) in 1996 and 1997.

NOTE 8.  INCOME TAXES

         HealthCare  Capital Corp. and its Canadian  subsidiaries  file separate
corporate income tax returns on a stand-alone basis in Canada.  Sonus-USA,  Inc.
files separate corporate income tax returns in the United States.

         There was no  provision  for income  taxes for the years ended July 31,
1997 and 1996 as the Company incurred net operating losses.

         The components of temporary  differences  that give rise to significant
portions of deferred  income  taxes at July 31, 1997 and 1996 are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                                1997               1996
                                                                ----               ----
<S>                                                        <C>                 <C>     
         Deferred tax assets:
         Net operating losses carried forward              $      39           $    344
         Allowance for doubtful accounts                          44                 --
         Other                                                    --                 24
                                                           ---------           --------
                                                                 883                368
         Deferred tax liabilities:
         Goodwill and start-up costs                             (54)                --
         Other                                                    --                (21)
                                                           ---------           --------
                                                                 829                347
         Less valuation allowance                               (829)              (347)
                                                           ---------          ---------
                                                          $       --         $       --
                                                          ==========         ==========
</TABLE>


                                       36
<PAGE>
                            HEALTHCARE CAPITAL CORP.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JULY 31, 1997


         A  reconciliation  of the  Company's  expected  tax  expense  using the
statutory income tax rate to the actual effective rate is as follows:

                                                           1997         1996
                                                           ----         ----

         Tax benefit at statutory rate                      (34)%       (34)%
         Adjustment for higher Canadian tax rate             --         (11)
         Capitalized costs deducted for tax purposes         --          (6)
         Expenses not deductible for tax purposes             5          10
         Change in valuation allowance                       29          41
                                                             --          --
         Tax rate per financial statements                   --%         --%
                                                            ====        ====

         At July 31,  1997,  the  Company had  approximate  net  operating  loss
carryforwards for tax purposes which, if not utilized, expire in the years ended
as follows (in thousands):

                                                   UNITED
                               CANADA              STATES                TOTAL
                               ------              ------                -----

         2001            $         18           $      --            $      18
         2002                      35                  --                   35
         2003                     711                  --                  711
         2004                      45                  --                   45
         2011                      --                 303                  303
         2012                      --                 906                  906
                          -----------           ---------            ---------
                          $       809           $   1,209            $   2,018
                          ===========           =========            =========

NOTE 9.  RELATED PARTY TRANSACTIONS

         William DeJong is a partner in the Calgary,  Alberta law firm of Ballem
MacInnes  and is a  director  of the  Company.  Total  fees,  disbursements  and
government  sales tax paid to Ballem  MacInnes by the Company for legal services
as of July 31, 1997 and 1996 were $168,000 and $37,000,  respectively (converted
from Canadian dollars at July 31, 1997 and 1996).

      In  connection  with the  acquisition  of the Midwest  Division of Hearing
Health Services, Inc., Sonus-USA,  Inc. assumed a promissory note with a balance
of $360,000 payable to Kathy Foltner, an officer of the Company.  The promissory
note is payable in equal annual installments of $120,000 beginning July 1, 1997,
and bears interest at 6% per annum.

      Gregory J. Frazer,  Ph.D.,  an officer and director of the Company,  was a
shareholder in certain  Hearing Care Associates  corporations  which the Company
acquired during the year ended July 31, 1997.  Total  consideration  paid to Mr.
Frazer  and  his  wife  in  connection   with  the   acquisitions   and  related
noncompetition  agreements  totaled $933,000 in cash and 1,470,359 common shares
of the Company at a price of $1.00 per share.

      Brandon M.  Dawson,  an officer  and  director of the  Company,  exercised
options for 250,000  shares of Common Stock at $0.27 per share  (converted  from
Canadian dollars at May 8, 1997). In connection with such exercise,  the Company
loaned Mr. Dawson  $67,500 to pay the aggregate  exercise  price of the options.
The loan is secured by the stock  underlying  the  exercise  of the  options and
accrues  interest at 10% per annum.  Gene K.  Balzer,  Ph.D.,  a director of the
Company,  exercised  options  for  200,000  common  shares


                                       37
<PAGE>
                            HEALTHCARE CAPITAL CORP.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JULY 31, 1997

NOTE 9.  RELATED PARTY TRANSACTIONS (CONTINUED)

at $0.28 per  share  (converted  from  Canadian  dollars  at May 19,  1997).  In
connection with such exercise,  the Company loaned Mr. Balzer $56,000 to pay the
aggregate  exercise  price of the  options.  The loan is  secured  by the  stock
underlying the exercise of the options and accrues interest at 10% per annum.

NOTE 10.  401(K) PLAN

         The Company sponsors a 401(k) plan for all employees who have satisfied
minimum  service and age  requirements.  Employees  may  contribute up to 20% of
their   compensation   to  the  plan.   The  Company  does  not  match  employee
contributions.

NOTE 11.  COMMITMENTS AND CONTINGENCIES

         Operating Leases
         ----------------

         The following is a schedule by year of future  minimum  lease  payments
for non-cancelable operating leases at July 31, 1997 (in thousands):

         1998                                                  $   658
         1999                                                      531
         2000                                                      468
         2001                                                      229
         2002                                                      107
         Thereafter                                                146
                                                               -------
         Total minimum lease payments                          $ 2,139
                                                               =======

         Rental expense under operating leases was $810,000 and $208,000 for the
years ended July 31, 1997 and 1996, respectively.

         Insurance
         ---------

         In the normal course of business, the Company may become a defendant or
plaintiff in various lawsuits. Although a successful claim for which the Company
is not fully  insured could have a material  effect on the  Company's  financial
condition,  management  is of the opinion that it maintains  insurance at levels
sufficient to insure itself against the normal risk of operations.

NOTE 12.  SUBSEQUENT EVENTS

        On August 27, 1997,  Sonus-USA,  Inc.  purchased all of the  outstanding
shares of Hearing  Care  Associates - Santa  Monica,  Inc. at a cost of $258,268
cash paid on closing.  For cash  consideration of $114,135,  the sellers entered
into  covenants  not to compete  for a period of three  years  after  employment
terminates.

NOTE 13.  CANADIAN VERSUS U.S. GAAP

        As of July 31, 1997 and 1996, there were no material differences between
Canadian generally accepted accounting principles ("GAAP") and U.S. GAAP.


                                       38
<PAGE>
                            HEALTHCARE CAPITAL CORP.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  JULY 31, 1997


NOTE 14.  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

         The  following is a tabulation of the  unaudited  quarterly  results of
operations  for the year ended  July 31,  1997 (in  thousands,  except per share
data):

<TABLE>
<CAPTION>
                                                              Quarter ended
                                    ------------------------------------------------------------
                                      October             January         April           July
                                       1996                 1997           1997           1997
                                       ----                 ----           ----           ----

<S>                                  <C>                  <C>         <C>           <C>        
Net revenue                          $  1,268             $ 2,933     $    4,355    $     4,906
Operating loss                           (299)               (672)          (444)          (318)
Net loss                                 (298)               (649)          (432)          (322)

Earnings before interest,
   depreciation and amortization (1)     (247)               (454)          (251)             9

Net loss per share                   $  (0.02)            $ (0.03)   $     (0.02)   $     (0.01)

</TABLE>
-----------------
(1) Earnings before interest,  depreciation and amortization is provided because
    it is a measure commonly used by acquisition  companies.  It is presented to
    enhance an  understanding  of the  Company's  operating  results  and is not
    intended to represent cash flow or results of operations in accordance  with
    generally accepted accounting principles for the periods indicated.


                                       39
<PAGE>


PRO FORMA FINANCIAL INFORMATION

         The "HealthCare  Combined"  column set forth in the unaudited pro forma
condensed  combined  statement of  operations  for the year ended July 31, 1997,
assumes that the acquisition of the Hearing Care Associates  Group on October 1,
1996, and the  acquisition of the Midwest  Division of Hearing Health  Services,
Inc. on October 31, 1996 (the  "Acquisitions"),  had occurred on August 1, 1996.
The  unaudited  pro forma  combined  financial  information  includes all of the
operations of the 25 clinics acquired in the Acquisitions.

         The unaudited pro forma condensed  combined  financial  information set
forth below is not necessarily  indicative of the Company's  combined  financial
position or the results of operations  that actually  would have occurred if the
transactions had been  consummated on such dates. In addition,  such information
is not intended to be a projection of results of operations that may be obtained
by the  Company  in the  future.  The  unaudited  pro forma  combined  financial
information  should  be read in  conjunction  with  the  Company's  consolidated
financial  statements  and related  notes  thereto  included  elsewhere  in this
report.

         UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
                        FOR THE YEAR ENDED JULY 31, 1997

<TABLE>
<CAPTION>
                                                    ACQUIRED    PRO FORMA   HEALTHCARE
                                       HEALTHCARE  CLINICS(B)  ADJUSTMENTS   COMBINED
                                          (in thousands, except per share amounts)
<S>                                    <C>          <C>         <C>           <C>
Net revenues                           $ 13,462     $  1,565                  $ 15,027

Costs and expenses:
  Product cost of sales                   5,010          517                     5,527
  Operational expenses                    9,395        1,265    (c)  (276)      10,384
  Depreciation and                          790           53    (a)    52          895
                                       --------     --------     --------     --------
    amortization
    Total operating expenses             15,195        1,835         (224)      16,806
                                       --------     --------     --------     --------
    Loss from operations                 (1,733)        (270)         224       (1,779)
Other income                                 32            8            -           40
                                       --------     --------     --------     --------
Loss before income taxes                 (1,701)        (262)         224       (1,739)
Income tax expense                            -          (31)           -          (31)
                                       --------     --------     --------     --------
Net loss                               $ (1,701)    $   (231)    $    224     $ (1,708)
                                       ========     ========     ========     ========

Pro forma:
Net loss per common share                                                     $  (0.08)
                                                                              ========
Weighted average number of
  shares outstanding
                                                                                20,455
                                                                              ========
</TABLE>

                                       40
<PAGE>


           NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION

(1)      BASIS OF PRESENTATION

         The "HealthCare  Combined"  column set forth in the unaudited pro forma
condensed  combined  statements of operations  for the year ended July 31, 1997,
gives effect to the Acquisitions as if such  transactions had occurred on August
1, 1996.

(2)      PRO FORMA ADJUSTMENTS

         (a)      To record amortization of goodwill for the Acquisitions in the
                  amount of $52,000 for the year ended July 31, 1997,  as if the
                  Acquisitions had occurred on August 1, 1996.

         (b)      Reflects the  historical  operations  of the acquired  clinics
                  prior to their acquisition by the Company.

         (c)      To record the elimination of non-recurring acquisition bonuses
                  in the  amount  of  $276,000  paid  to  certain  employees  of
                  acquired clinics immediately prior to the closing date.

ACQUISITIONS (FOR PERIODS FROM AUGUST 1, 1996 TO DATE OF ACQUISITION)

                             HEARING CARE MIDWEST DIVISION
                           AUGUST 1, 1996   AUGUST 1, 1996
                                  THROUGH          THROUGH
                            SEPTEMBER 30,      OCTOBER 31,
                                     1996            1996          TOTAL
                                     ----            ----          -----
                                            (in thousands)
STATEMENT OF
OPERATIONS DATA:
Net patient service revenues       $ 789              $ 776         $1,565

Costs and expenses:
  Product cost of sales              248                269            517
  Operational expenses               697                568          1,265
  Depreciation and amortization       20                 33             53
                                   -----              -----         ------
    Total operating expenses         965                870          1,835
                                   -----              -----         ------
    Loss from operations            (176)               (94)          (270)
Other income, net                      8                  -              8
                                   -----              -----         ------
Net loss before income taxes        (168)               (94)          (262)
Income tax benefit                     -                (31)           (31)
                                   -----              -----         ------
Net loss                           $(168)             $ (63)        $ (231)
                                   =====              =====         ======



                                       41
<PAGE>


                          INDEPENDENT AUDITORS' REPORT




To the Shareholders and Board of Directors
HealthCare Capital Corp.:


     We have audited the  accompanying  balance sheet of Hearing Care Associates
Group  as  of  July  31,  1996,  and  the  related   statements  of  operations,
stockholders' equity (deficit),  and cash flows for each of the years in the two
years then ended.  These  financial  statements  are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audit.

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

     In our opinion,  the financial statements referred to above present fairly,
in all material  respects,  the  financial  position of Hearing Care  Associates
Group as of July 31, 1996,  and the results of its operations and its cash flows
for each of the  years in the two year  period  then  ended in  conformity  with
generally accepted accounting principles.




                                        /s/ KPMG Peat Marwick LLP

Portland, Oregon
February 14, 1997




                                       42
<PAGE>


                          HEARING CARE ASSOCIATES GROUP

                                  Balance Sheet

                                  July 31, 1996


                                                   ASSETS

Current assets:

<TABLE>
<CAPTION>
<S>                                                                                             <C>         
    Cash and cash equivalents                                                                   $    243,167
    Trade accounts receivable, net of allowance for doubtful accounts of $22,130                     711,028
    Related party receivable                                                                          97,372
    Prepaid expenses and other current assets                                                         22,013
                                                                                                 -----------
       Total current assets                                                                        1,073,580
Equipment and fixtures, net                                                                          209,717
Intangible assets, at cost, less accumulated amortization                                            163,387
Deferred taxes                                                                                        20,600
Other assets, net                                                                                      9,678
                                                                                                 -----------
       Total assets                                                                             $  1,476,962
                                                                                                 ===========

                                   LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
    Accounts payable                                                                            $    575,362
    Notes payable                                                                                    106,438
    Related party payable                                                                            437,512
    Accrued payroll and related costs                                                                141,175
    Other accrued expenses and current liabilities                                                   261,719
                                                                                                 -----------
       Total current liabilities                                                                   1,522,206

Stockholders' equity (deficit):
    Common stock; authorized 24,000 shares; issued and outstanding 2,600 shares                       70,000
    Accumulated deficit                                                                             (115,244)
                                                                                                 -----------
       Total stockholders' deficit                                                                   (45,244)
                                                                                                 -----------
                                                                                                $  1,476,962
                                                                                                ============
</TABLE>

                See accompanying notes to financial statements.


                                       43
<PAGE>


                          HEARING CARE ASSOCIATES GROUP

                            Statements of Operations

                       Years ended July 31, 1996 and 1995


<TABLE>
<CAPTION>
                                                     1996                    1995
                                                     ----                    ----
<S>                                             <C>                      <C>          
Product sales                                   $   3,480,056            $   2,740,612
Product cost of sales                               1,393,554                  659,941
                                                 ------------             ------------
                                                    2,086,502                2,080,671
Net patient service revenue                           673,115                  513,129
Expenses:
    Selling expenses                                2,949,340                2,147,185
    General and administrative expenses               320,763                  151,433
                                                 ------------             ------------
                                                    3,270,103                2,298,618
                                                 ------------             ------------
        (Loss) income from operations                (510,486)                 295,182
    Other income (expense) net                         11,727                   (9,817)
        (Loss) income before income taxes            (498,759)                 285,365
                                                -------------            -------------
    Income tax (benefit) expense                      (22,900)                 108,883
                                                -------------            -------------
        Net (loss) income                      $     (475,859)          $      176,482
                                                =============            =============
</TABLE>


                 See accompanying notes to financial statements.



                                       44
<PAGE>


                          HEARING CARE ASSOCIATES GROUP

                  Statements of Stockholders' Equity (Deficit)

                       Years ended July 31, 1996 and 1995




<TABLE>
<CAPTION>
                                                                                              Total
                                                                                           Stockholders'
                                        Common Stock                      Accumulated         Equity
                                           Shares          Par Value         Deficit        (Deficit)
                                           ------          ---------         -------        ---------

<S>                                    <C>              <C>              <C>               <C>         
Balances at July 31, 1994                      2,600    $      70,000    $      184,133    $    254,133
Net income                                         -                -           176,482         176,482
                                       -------------    -------------    --------------    ------------
Balances at July 31, 1995                      2,600           70,000          360,615          430,615
Net loss                                           -                -         (475,859)        (475,859)
                                       -------------    -------------    -------------     ------------
Balances at July 31, 1996                      2,600    $      70,000    $    (115,244)    $    (45,244)
                                       =============    =============    =============     ============
</TABLE>


                See accompanying notes to financial statements.




                                       45
<PAGE>


                          HEARING CARE ASSOCIATES GROUP
                            Statements of Cash Flows
                       Years ended July 31, 1996 and 1995


<TABLE>
<CAPTION>
                                                                                1996                    1995
                                                                                ----                    ----
<S>                                                                        <C>                      <C>          
Cash flows from operating activities:
    Net (loss) income                                                      $   (475,859)            $     176,482
    Adjustments to reconcile net (loss) income to
    net cash provided by (used in) operations:
        Depreciation and amortization                                            68,091                    61,422
        Deferred income taxes                                                    54,000                   (34,178)
        Changes in current assets and liabilities:
            Increase in accounts receivable                                    (147,794)                 (358,299)
            Decrease (increase) in notes receivable - related party              57,067                   (20,131)
            (Increase) decrease in prepaid
                expenses and other current assets                               (37,548)                   13,568
            Increase in accounts payable                                        173,483                    56,197
            Increase in accrued expenses and
                other current liabilities                                       223,671                    71,144
                                                                           ------------             -------------
                Net cash used in operating activities                           (84,889)                  (33,795)
                                                                           ------------             -------------
Cash flows from investing activities:
    Purchases of equipment and fixtures                                         (66,597)                  (17,313)
    Acquisition of intangible assets                                            (17,493)                   (3,245)
                                                                           ------------             -------------
                Net cash used in investing activities                           (84,090)                  (20,558)
                                                                           ------------             -------------
Cash flows from financing activities:
    Net proceeds from related parties                                           248,578                  255,095
    Repayments on notes payable                                                 (85,176)                 (71,800)
                                                                           ------------             ------------
                Net cash provided by financing activities                       163,402                  183,295
                                                                           ------------             ------------
                Net increase (decrease) in cash and
                   cash equivalents                                              (5,577)                 128,942
Cash and cash equivalents at beginning of year                                  248,744                  119,802
                                                                           ------------             ------------
Cash and cash equivalents at end of year                                   $    243,167             $    248,744
                                                                           ============             ============
Supplemental disclosures of cash flow information:
    Interest paid                                                          $     21,104             $     13,349
                                                                           ============             ============
    Income taxes paid                                                      $          0             $    143,061
                                                                           ============             ============
</TABLE>


                See accompanying notes to financial statements.


                                       46
<PAGE>


                          HEARING CARE ASSOCIATES GROUP

                          NOTES TO FINANCIAL STATEMENTS

                                  JULY 31, 1996


(1) ORGANIZATION AND OPERATIONS

    Hearing Care Associates  Group (the "Company")  consists of three California
    corporations:  Hearing Care  Associates  -  Northridge,  Inc.,  Hearing Care
    Associates - Glendale,  Inc., and Hearing Care  Associates - Glendora,  Inc.
    The Company  provides hearing  rehabilitation  services through a network of
    eleven clinics located in the Los Angeles, California, metropolitan area.

    The accompanying  financial  statements  reflect the combined  operations of
    these three corporations.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    (a) CASH AND CASH EQUIVALENTS

    For purposes of reporting cash flows, cash and cash equivalents include cash
    on hand and short-term  investments  with original  maturities of 90 days or
    less.

    (b) NET REVENUES

    Revenues from the sale of hearing instrument  products are recognized at the
    time of delivery.  Revenues  from the  provision of hearing care  diagnostic
    services are recognized at the time that such services are performed.

    (c) EQUIPMENT AND FIXTURES

    Equipment and fixtures are stated at cost less accumulated  depreciation and
    amortization. Additions and betterments are capitalized, and maintenance and
    repairs are charged to current  operations  as incurred.  The cost of assets
    retired or otherwise  disposed of and the related  accumulated  depreciation
    and amortization are removed from the accounts, and the gain or loss on such
    dispositions is reflected in current  operations.  Amortization of leasehold
    improvements is provided on an accelerated  basis over the term of the lease
    or estimated useful lives of the assets,  whichever is less. Depreciation is
    provided on an accelerated basis. Estimated useful lives of the assets are:

        Professional equipment                               7 - 10 years
        Furniture and fixtures                               7 - 10 years
        Office equipment                                      5 - 7 years
        Leasehold improvements                                    7 years

    (d) INCOME TAXES

    The Company accounts for income taxes under the asset and liability  method.
    Under the asset and liability  method,  deferred tax assets and  liabilities
    are recognized for the future tax  consequences  attributable to differences
    between the  financial  statement  carrying  amounts of existing  assets and
    liabilities and their respective tax bases and operating loss and tax credit
    carryforwards.  Deferred  tax  assets and  liabilities  are  measured  using
    enacted tax rates  expected to apply to taxable income in the years in which
    those  temporary  differences  are expected to be recovered or settled.  The
    effect on deferred  tax assets and  liabilities  of a change in tax rates is
    recognized in income in the period that includes the enactment date.


                                       47
<PAGE>
                          HEARING CARE ASSOCIATES GROUP

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                                 JULY 31, 1996

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

    (e) INTANGIBLE ASSETS

    Intangible  assets  consist of  non-compete  agreements,  purchased  patient
    listings  and  goodwill  (the  cost in excess of net  assets  acquired  in a
    purchase transaction).  Goodwill and patient listings are being amortized on
    a straight-line basis over 15 years. Non-compete agreements are amortized on
    a straight-line basis over the life of the contract.

    (f) CONCENTRATIONS OF CREDIT RISK

    Financial   instruments,   which   potentially   subject   the   Company  to
    concentration  of  credit  risk,  consist  principally  of  cash  and  trade
    receivables.   The  Company   places  its  cash  with  high  credit  quality
    institutions.  At times such amounts may be in excess of the FDIC  insurance
    limits.  The Company's  trade accounts  receivable are derived from numerous
    private payors,  insurance  carriers,  health maintenance  organizations and
    government agencies. Concentration of credit risk relating to trade accounts
    receivable  is  limited  due to the  diversity  and number of  patients  and
    payors.

    (g) FAIR VALUE OF FINANCIAL INSTRUMENTS

    The  carrying  value  of  financial   instruments  such  as  cash  and  cash
    equivalents,  trade receivables,  notes receivable, trade payables and notes
    payable, approximate their fair value.

    (h) USE OF ESTIMATES

    Management  of the Company has made a number of  estimates  and  assumptions
    relating to the reporting of assets and  liabilities  and the  disclosure of
    contingent  assets and liabilities to prepare these financial  statements in
    conformity with generally accepted accounting principles.
    Actual results could differ from those estimates.

(3) EQUIPMENT AND FIXTURES

    Equipment and fixtures consist of the following at July 31, 1996:

        Professional equipment                          $    254,431
        Office equipment                                     193,736
        Furniture and fixtures                               143,921
        Leasehold improvements                                76,627
                                                        ------------

                                                             668,715

        Less accumulated depreciation                        458,998
                                                        ------------

                                                        $    209,717
                                                        ============

    Depreciation  expense  for fiscal  1996 and 1995 was  $57,172  and  $49,236,
respectively.


                                       48
<PAGE>
                          HEARING CARE ASSOCIATES GROUP

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                                 JULY 31, 1996

(4) NOTES PAYABLE

         Equipment loans payable to supplier.  The loans are
         due April  15,  1998,  and  require  total  monthly
         installments   of   $2,000,    including   interest
         calculated at the rate of 9 percent per annum.              $   106,438
                                                                     ===========

(5) INCOME TAXES

    The components of the 1996 and 1995 provision (benefit) for income taxes are
    as follows:


                                              Year Ended July 31
                                       ------------------------------
                                            1996            1995
                                       -------------    -------------

         Current:
            Federal                    $     (76,900)   $     120,449
            State                                  0           22,612
                                       -------------    -------------
                                             (76,900)         143,061
                                       -------------    -------------
         Deferred:
            Federal                           45,465          (28,776)
            State                              8,535           (5,402)
                                       -------------    -------------
                                              54,000          (34,178)
                                       -------------    -------------
              Total                    $     (22,900)   $     108,883
                                       =============    =============


    At July 31, 1995,  the  difference  between the total income tax expense and
    the income tax expense computed using the statutory  federal income tax rate
    was due primarily to state tax expense,  net of federal tax benefit. At July
    31, 1996, the difference between the total income tax benefit and the income
    tax benefit  computed  using the statutory  federal  income tax rate was due
    primarily  to  state  tax  benefit,  net of  federal  effect,  as well as an
    increase in the valuation allowance.

    The net deferred tax asset of $20,600 at July 31, 1996,  consists  primarily
    of net operating loss  carryovers and  differences  resulting from using the
    cash method of accounting  for income tax purposes.  No valuation  allowance
    was  deemed  necessary  at July  31,  1995.  An  increase  in the  valuation
    allowance during the year resulted in a valuation allowance at July 31, 1996
    of approximately $156,000.

    At July 31, 1996,  the Company has a net  operating  loss  carryforward  for
    federal income tax purposes of approximately $274,000.


                                       49
<PAGE>
                          HEARING CARE ASSOCIATES GROUP

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                                 JULY 31, 1996


(6) OPERATING LEASES

       The Company leases offices and equipment  under  noncancelable  operating
       leases which require future minimum annual rentals as follows:

         Year ending July 31:
           1997                                 $     241,139
           1998                                       207,000
           1999                                       208,908
           2000                                       212,731
           2001                                       216,665
           Thereafter                                 376,956
                                                -------------
                                                $   1,463,399
                                                =============

       Certain of the leases  contain  renewal  options and  escalation  clauses
       which require  payments of additional  rent to the extent of increases in
       related  operating  costs.  Rent  expense  for  fiscal  1996 and 1995 was
       $208,868 and $236,293, respectively.

(7) RELATED PARTY TRANSACTIONS

       The Company  receives  advances to fund operations from  stockholders who
       are also employees and officers of the Company.  The balance due to these
       stockholders is $437,512 at July 31, 1996. Employees who are stockholders
       have also received periodic  advances from the Company.  The total amount
       due to the Company from these  employees is $97,372 at July 31, 1996, all
       of which is due within the next fiscal year.

(8) SUBSEQUENT EVENT

       As of October 1, 1996,  the Company was  acquired by  HealthCare  Hearing
       Clinics, Inc., a Washington corporation and a wholly-owned  subsidiary of
       HealthCare  Capital Corp., a corporation  organized under the laws of the
       province of Alberta, Canada.

       As of  September  30,  1996,  the  Company  declared  a bonus to a clinic
       manager  in the  amount  of  $236,000.  The bonus  was  payable  upon the
       completion  of the  acquisition  of the  Company  by  HealthCare  Hearing
       Clinics, Inc.


                                       50
<PAGE>




                          INDEPENDENT AUDITORS' REPORT




To the Shareholders and Board of Directors
HealthCare Capital Corp.:


We have  audited  the  accompanying  balance  sheet of the  Midwest  Division of
Hearing  Health  Services,  Inc. dba Sonus as of June 30, 1996,  and the related
statements of operations and accumulated earnings and cash flows for each of the
years  in  the  two  years  then  ended.  These  financial  statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audit.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of the Midwest Division of Hearing
Health  Services,  Inc.  dba Sonus as of June 30,  1996,  and the results of its
operations  and cash  flows  for each of the years in the two year  period  then
ended in conformity with generally accepted accounting principles.



                                       /s/ KPMG Peat Marwick LLP

Portland, Oregon
January 16, 1997



                                       51
<PAGE>


                         THE MIDWEST DIVISION OF HEARING

                         HEALTH SERVICES, INC. dba SONUS

                                 BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                             July 31,                October 31,
                                                                               1996                     1996
                                                                           -------------            -------------
                                                                                                     (Unaudited)
                                     ASSETS
Current Assets
<S>                                                                        <C>                      <C>          
    Cash and cash equivalents                                              $     139,396            $     108,240
    Trade accounts receivable, net of allowance
        for doubtful accounts of $57,297                                         313,614                  301,567
    Accounts receivable - other                                                      965                      512
    Inventory                                                                     62,619                   43,161
    Prepaid expenses and other current assets                                     11,049                   35,808
                                                                           -------------            -------------
            Total current assets                                                 527,643                  489,288
Equipment and fixtures, net                                                      389,523                  364,879
Deferred taxes                                                                    39,179                   39,179
Other assets, net                                                                 25,628                   24,212
                                                                           -------------            -------------
                                                                                 454,330                  428,270
                                                                           -------------            -------------
            Total assets                                                   $     981,973            $     917,558
                                                                           =============            =============


                        LIABILITIES AND RETAINED EARNINGS

Current liabilities:
    Accounts payable                                                       $     221,399            $     224,238
    Accrued payroll and related costs                                            127,164                  101,433
    Patient deposits                                                              23,927                   36,330
    Other accrued expenses                                                        23,538                   27,937
    Capital lease obligations                                                      8,875                    1,775
                                                                           -------------            -------------
            Total current liabilities                                            404,903                  391,713
Related party payable                                                            277,923                  279,126
                                                                           -------------            -------------
            Total liabilities                                                    682,826                  670,839
                                                                           -------------            -------------
Retained earnings                                                                299,147                  246,719
                                                                           -------------            -------------
            Total liabilities and retained earnings                        $     981,973            $     917,558
                                                                           =============            =============
</TABLE>


                See accompanying notes to financial statements.


                                       52
<PAGE>


                         THE MIDWEST DIVISION OF HEARING

                         HEALTH SERVICES, INC. dba SONUS

                STATEMENTS OF OPERATIONS AND ACCUMULATED EARNINGS




<TABLE>
<CAPTION>
                                                                                    Four Months
                                              Years Ended June 30                Ended October 31
                                       ------------------------------    ------------------------------
                                            1996            1995              1996             1995
                                       -------------    -------------    --------------    ------------
                                                                                    (Unaudited)

<S>                                    <C>              <C>              <C>               <C>         
Product sales                          $   2,983,955    $   2,878,986    $      930,926    $  1,147,596
Product cost of sales                        934,038        1,031,409           337,488         355,090
                                       -------------    -------------    --------------    ------------
                                           2,049,917        1,847,577           593,438         792,506
Net patient service revenue                  478,702          463,383           174,913         166,412

Expenses:
   Selling expenses                        1,981,736        1,827,201           709,106         687,539
   General and administrative
     expenses                                424,943          356,999           142,957         126,731
                                       -------------    -------------    --------------    ------------
                                           2,406,679        2,184,200           852,063         814,270
                                       -------------    -------------    --------------    ------------
     Income (loss) from operations           121,940          126,760          (83,712)         144,648
                                       -------------    -------------    -------------     ------------
   Interest income                             1,593                -               485               -
                                       -------------    -------------    --------------    ------------
                                               1,593                -               485               -
                                       -------------    -------------    --------------    ------------
     Net income (loss) before
        income taxes                         123,533          126,760          (83,227)         144,648
                                       -------------    -------------    -------------     ------------
Income tax expense (benefit)                  47,687           41,024          (30,799)          57,298
                                       -------------    -------------    -------------     ------------
Net income (loss)                             75,846           85,736          (52,428)          87,350
Accumulated earnings,
    beginning of period                      223,301          137,565           299,147         223,301
                                       -------------    -------------    --------------    ------------
Accumulated earnings, end of period    $     299,147    $     223,301    $      246,719    $    310,651
                                       =============    =============    ==============    ============
</TABLE>



                See accompanying notes to financial statements.



                                       53
<PAGE>


                         THE MIDWEST DIVISION OF HEARING

                         HEALTH SERVICES, INC. dba SONUS

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                              Four Months
                                                              Years Ended June 30           Ended October 31
                                                            -----------------------     -----------------------
                                                              1996           1995          1996          1995
                                                            ---------     ---------     ---------     ---------
                                                                                               (Unaudited)
Cash flows from operating activities:
<S>                                                         <C>           <C>           <C>           <C>      
   Net income (loss)                                        $  75,846     $  85,736     $ (52,428)    $  87,350
   Adjustments to reconcile net income
     (loss) to net cash provided by
     (used in) operations:
       Depreciation                                           108,430        90,677        41,200        16,218
       Deferred taxes                                         (13,471)        7,226             -             -
       Changes in current assets and liabilities:
       (Increase) decrease in accounts receivable             (18,170)     (199,543)       12,047        53,717
       Decrease (increase) in inventory                        49,179        (9,676)       19,458        46,672
       Decrease (increase) in prepaids and
         other assets                                          11,302       (27,126)      (22,890)        1,144
       (Decrease) increase in accounts payable                (80,598)       94,897         2,839      (117,433)
       Increase (decrease) in accrued liabilities              15,918        (2,906)      (25,731)       (3,536)
       (Decrease) increase in patient deposits                (20,926)       18,439        12,403         8,897
       (Decrease) increase in other liabilities                (1,037)       58,974       (26,400)       43,115
                                                            ---------     ---------     ---------     ---------

         Net cash provided by (used in)
           operating activities                               126,473       116,698       (39,502)      136,144
                                                            ---------     ---------     ---------     ---------

Cash flows from investing activities:
   Purchases of equipment and fixtures                       (103,853)     (202,904)      (16,556)      (41,243)
                                                            ---------     ---------     ---------     ---------

         Net cash used in investing activities               (103,853)     (202,904)      (16,556)      (41,243)
                                                            ---------     ---------     ---------     ---------

Cash flows from financing activities:
   Net payments on capital leases                             (24,556)            -        (7,100)      (10,356)
   Net (repayments to) proceeds from
     related parties                                           (6,188)      180,497        32,002       (19,799)
                                                            ---------     ---------     ---------     ---------

         Net cash (used in) provided by
           financing activities                               (30,744)      180,497        24,902       (30,155)
                                                            ---------     ---------     ---------     ---------
Net (decrease) increase in cash and
    cash equivalents                                           (8,124)       94,291       (31,156)       64,746
Cash and cash equivalents at
    beginning of period                                       147,520        53,229       139,396       147,520
Cash and cash equivalents at
   end of period                                            $ 139,396     $ 147,520     $ 108,240     $ 212,266
                                                            =========     =========     =========     =========
Supplemental disclosures of cash flow information:
     Interest paid                                          $   4,068     $  14,437     $     820     $   1,025
                                                            =========     =========     =========     =========
     Income taxes paid                                      $  61,158     $  33,798     $       0     $  57,298
                                                            =========     =========     =========     =========
Schedule of non cash investing and financing activities:
     Capital lease obligation                               $       -     $  33,431     $       -     $       -
                                                            =========     =========     =========     =========
</TABLE>

                 See accompanying notes to financial statements.


                                       54
<PAGE>


                         THE MIDWEST DIVISION OF HEARING

                         HEALTH SERVICES, INC. dba SONUS

                          NOTES TO FINANCIAL STATEMENTS


(1) ORGANIZATION AND OPERATIONS

     The  Midwest  Division  of Hearing  Health  Services,  Inc.  dba Sonus (the
     Company) consists of the Michigan and Illinois operations of Hearing Health
     Services,  Inc., a Delaware  corporation.  The Company provides diagnostic,
     rehabilitation  and preventative  hearing health care products and services
     to patients through 14 clinics located in Michigan and Illinois.

     The Michigan and  Illinois  operations  of Hearing  Health  Services,  Inc.
     operated under separate  management  independent  from other Hearing Health
     Services,  Inc., locations.  The accompanying  financial statements reflect
     all  significant  costs of operations  for the Midwest  Division of Hearing
     Health Services, Inc.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       (a)CASH AND CASH EQUIVALENTS

       For purposes of reporting cash flows,  cash and cash equivalents  include
       cash on-hand and short-term  investments  with original  maturities of 90
       days or less.

       (b)NET REVENUES

       Revenues from the sale of hearing  instrument  products are recognized at
       the  time of  delivery.  Revenues  from the  provision  of  hearing  care
       diagnostic  services are  recognized  at the time that such  services are
       performed.

       (c)INVENTORY

       Inventory  is stated at the lower of cost,  determined  on the  first-in,
       first-out  method,  or  market  value.   Inventory  consists  of  hearing
       instruments  and  batteries,  which have been  purchased from vendors for
       resale to customers.

       (d)EQUIPMENT AND FIXTURES

       Equipment and fixtures are stated at cost less  accumulated  depreciation
       and  amortization.   Additions  and  betterments  are  capitalized,   and
       maintenance  and repairs are charged to current  operations  as incurred.
       The cost of assets  retired  or  otherwise  disposed  of and the  related
       accumulated  depreciation and amortization are removed from the accounts,
       and  the  gain  or loss on such  dispositions  is  reflected  in  current
       operations.  Amortization  of leasehold  improvements  is provided on the
       straight-line method over the term of the lease or estimated useful lives
       of the  assets,  whichever  is  less.  Depreciation  is  provided  on the
       straight-line method. Estimated useful lives of the assets are:

       Professional equipment                                 7 years
       Furniture and fixtures                                 5 years
       Office equipment                                       5 years
       Leasehold improvements                             1 - 5 years


                                       55
<PAGE>


                         THE MIDWEST DIVISION OF HEARING

                         HEALTH SERVICES, INC. dba SONUS

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)



(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

       (e)INCOME TAXES

       The  Company  accounts  for income  taxes  under the asset and  liability
       method.  Under the asset and  liability  method,  deferred tax assets and
       liabilities are recognized for the future tax  consequences  attributable
       to  differences  between  the  financial  statement  carrying  amounts of
       existing  assets  and  liabilities  and  their  respective  tax bases and
       operating  loss and tax  credit  carryforwards.  Deferred  tax assets and
       liabilities  are measured  using  enacted tax rates  expected to apply to
       taxable  income in the years in which  those  temporary  differences  are
       expected to be  recovered  or settled.  The effect on deferred tax assets
       and  liabilities  of a change in tax rates is recognized in income in the
       period that includes the enactment date.


       (f) CONCENTRATIONS OF CREDIT RISK

       Financial   instruments,   which  potentially   subject  the  Company  to
       concentration  of  credit  risk,  consist  principally  of cash and trade
       receivables.  The  Company  places  its cash  with  high  credit  quality
       financial  institutions.  At times such  amounts  may be in excess of the
       FDIC  insurance  limits.  The Company's  trade  accounts  receivable  are
       derived  from  numerous  private  payors,   insurance  carriers,   health
       maintenance  organizations  and  government  agencies.  Concentration  of
       credit risk relating to trade  accounts  receivable is limited due to the
       diversity and number of patients and payors.

       (g)FAIR VALUE OF FINANCIAL INSTRUMENTS

       The  carrying  value  of  financial  instruments  such as cash  and  cash
       equivalents,   trade  receivables,  notes  payable  and  trade  payables,
       approximate their fair value.

       (h)USE OF ESTIMATES

       Management of the Company has made a number of estimates and  assumptions
       relating to the reporting of assets and liabilities and the disclosure of
       contingent  assets and liabilities to prepare these financial  statements
       in conformity  with  generally  accepted  accounting  principles.  Actual
       results could differ from those estimates.

       (i) INTERIM FINANCIAL STATEMENTS

       In the opinion of management,  the interim financial  statements  include
       all  adjustments,   consisting  only  of  normal  recurring  adjustments,
       necessary  for a fair  statement  of the results for the interim  periods
       presented.


                                       56
<PAGE>


                         THE MIDWEST DIVISION OF HEARING

                         HEALTH SERVICES, INC. dba SONUS

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)


(3) EQUIPMENT AND FIXTURES

    Equipment and fixtures consist of the following at June 30, 1996:

     Professional equipment                             $     329,453
     Office equipment                                         194,327
     Furniture and fixtures                                    74,445
     Leasehold improvements                                    64,480
                                                        -------------
                                                              662,705
     Less accumulated depreciation and amortization          (273,182)
                                                        $     389,523
                                                        =============

    Property  and  equipment at June 30, 1996  includes  assets  acquired  under
    capital leases of $23,402, net of accumulated depreciation of $10,029.

    Depreciation  expense  for  fiscal  years  1996 and 1995  was  $108,430  and
    $90,677, respectively.

(4) INCOME TAXES

    The Company is a division  of, and its  operations  are  included in the tax
    return for, Hearing Health  Services,  Inc. Income taxes on the accompanying
    financial  statements are provided on a stand-alone  basis as if the Company
    filed its own tax return.

    The components of the 1996 and 1995 provision (benefit) for income taxes are
    as follows:


                                                Year Ended June 30,
                                         ------------------------------
                                              1996             1995
                                         -------------     ------------

Current:
   Federal                               $      51,492     $     28,456
   State                                         9,666            5,342
                                         -------------     ------------

                                                61,158           33,798
                                         -------------     ------------
Deferred:
   Federal                                     (11,342)           6,083
   State                                        (2,129)           1,143
                                         -------------     ------------
                                               (13,471)           7,226
                                         -------------     ------------

     Total                               $      47,687     $     41,024
                                         =============     ============


                                       57
<PAGE>
                         THE MIDWEST DIVISION OF HEARING

                         HEALTH SERVICES, INC. dba SONUS

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(4) INCOME TAXES (CONTINUED)

The  difference  between the total income tax expense and the income tax expense
computed  using the statutory  federal  income tax rate for the years ended June
30, 1996 and 1995 is as follows:

                                            1996            1995
                                            ----            ----

   Computed tax expense at
     statutory rate                        34.0%           34.0%
   State tax expense, net of
     federal taxes                          4.0%            2.1%
   Nondeductible expenses                   0.6%            4.2%
                                            ---             ---

     Total                                  38.6%           40.3%
                                            ====            ====

The deferred  income tax asset of $39,179 at June 30, 1996 relates  primarily to
certain  reserves  not  currently  deductible  for tax  purposes.  No  valuation
allowance  was  deemed  necessary  and  there  was no  change  in the  valuation
allowance from the prior year. It is more likely than not that the entire amount
of the deferred  tax asset will be realized  due to the taxable  income from the
carryback availability in prior years.

(5)  LEASES

   (a) OPERATING LEASES

       The Company leases office and equipment  under  noncancellable  operating
       leases which require future minimum annual rentals as follows:

       Year ending June 30
          1997                                       $    171,811
          1998                                            152,483
          1999                                            101,023
          2000                                             54,387
          2001                                             50,156
          Thereafter                                       89,090
                                                     ------------
                                                     $    618,950
                                                     ============

       Certain of the leases  contain  renewal  options and  escalation  clauses
       which require  payments of additional  rent to the extent of increases in
       related  operating  costs.  Rent  expense  for  fiscal  1996 and 1995 was
       $195,369 and $194,821, respectively.

   (b) CAPITAL LEASES

       The Company leases certain  professional  equipment  under capital leases
       expiring  through 1996.  Future minimum lease payments related to capital
       leases at June 30, 1996 are as follows:

          Total minimum lease payments
            (payable in fiscal year 1997)            $      9,900
          Amounts representing interest                     1,025
                                                     ------------
          Present value of net minimum
            lease payments                           $      8,875
                                                     ============


                                       58
<PAGE>
                         THE MIDWEST DIVISION OF HEARING

                         HEALTH SERVICES, INC. dba SONUS

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)


(6)  RELATED PARTY TRANSACTIONS

     The Company receives advances to fund operations from related  partnerships
     managed by Foster  Management.  The  balance  due from the Company to these
     partnerships is $277,923 at June 30, 1996.

     The balance of the  related  party  payable  was not assumed by  HealthCare
     Hearing  Clinics,  Inc., in its  acquisition  of the Company  subsequent to
     year-end (see note 8).  Therefore,  the related  party  payable  balance is
     reflected  as  a  non-current  liability  on  the  accompanying   financial
     statements.

     The Company also leases  corporate  office space from a related party under
     an agreement  which expires in February,  2003.  Rent expense  recorded for
     fiscal 1996 was $12,528.

(7)  DEFINED CONTRIBUTION PLAN

     The Company  sponsors a defined  contribution  plan that provides  eligible
     employees  (employees that have been employed for 12 months from their date
     of hire) the opportunity to accumulate funds for their retirement. The plan
     does not require Company  contributions,  nor have any  contributions  been
     made by the Company for the years ended June 30, 1996 and 1995.

(8)  SUBSEQUENT EVENT

     As of October 31,  1996,  the Company was  acquired by  HealthCare  Hearing
     Clinics,  Inc., a Washington  corporation and a wholly-owned  subsidiary of
     HealthCare  Capital  Corp., a corporation  organized  under the laws of the
     Province of Alberta, Canada.



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<PAGE>


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

      Effective  December  20,  1996,  upon the  recommendation  of the board of
directors  and  approval by the  shareholders,  the Company  retained  KPMG Peat
Marwick LLP as its independent auditors,  replacing Shikaze Ralston. The Company
made the change in  independent  auditors  due to its  significant  and  growing
operations  in the  United  States  and its need to draw upon the  services  and
expertise of a large  international  accounting and auditing firm. The report of
Shikaze Ralston on the consolidated  financial statements of the Company for the
year  ended July 31,  1996  included  in this Form  10-KSB  does not  contain an
adverse opinion or disclaimer of opinion and is not qualified as to uncertainty,
audit scope, or accounting principles.  In addition, there were no disagreements
with  Shikaze  Ralston  on any matter of  accounting  principles  or  practices,
financial  statement   disclosure,   or  auditing  scope  or  procedure,   which
disagreements,  if not resolved to the  satisfaction of Shikaze  Ralston,  would
have caused them to make reference to the subject matter of the disagreements in
connection  with their report.  Before engaging KPMG Peat Marwick LLP as its new
independent certified public accountants,  the Company did not consult with them
regarding any matters related to the application of accounting  principles,  the
type of  audit  opinion  that  might  be  rendered  on the  Company's  financial
statements or any other such matters.




                                    PART III

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

      Information  with respect to the  directors of the Company and  compliance
with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein
by reference to the Company's  definitive  Management  Information  Circular and
Proxy Statement dated October 29, 1997 ("Proxy  Statement"),  under the headings
"Share  Ownership  By Principal  Shareholders  and  Management  - Section  16(a)
Beneficial Ownership Reporting Compliance" and " Election of Directors."

EXECUTIVE OFFICERS OF THE COMPANY

      Information with respect to each of the executive officers of the Company,
including  his or her age,  position with the Company,  and  principal  business
experience during the previous five years, is set forth below:

<TABLE>
<CAPTION>
           NAME                  AGE                 POSITION
<S>                              <C>          <C>                                                  
Brandon M. Dawson                29           President and Chief Executive Officer and Director
Gregory J. Frazer, Ph.D.         45           Vice President - Business Development and Director
Randall E. Drullinger            34           Vice President - Marketing
Edwin J. Kawasaki                39           Vice President - Finance and Chief Financial Officer
Kathy A. Foltner                 44           Vice President - Operations
</TABLE>

      BRANDON M. DAWSON.  Mr. Dawson has served as President and Chief Executive
Officer and as a director of the Company since December  1995.  From May 1992 to
December  1995,  he was director of U.S.  sales for Starkey  Laboratories,  Inc.
("Starkey"), a multi-national manufacturer,  distributor, and marketer of custom
"in-the-ear" hearing instruments and related hearing and diagnostic equipment.

      GREGORY  J.  FRAZER,  PH.D.  Mr.  Frazer has  served as Vice  President  -
Business  Development  and as a director of the Company since October 1996, when
the Company  acquired 11 audiology  based  hearing  clinics  which were among 22
clinics in Southern  California of which Mr. Frazer was part owner and operator.
The Company has since  acquired six of the remaining 11 clinics.  Mr. Frazer has
spent his entire  career as a hearing  care  professional  since  receiving  his
doctoral degree in audiology from Wayne State School of Medicine in 1981.

      RANDALL E.  DRULLINGER.  Mr.  Drullinger  has served as Vice  President  -
Marketing of the Company  since April 1996.  From August 1990 to April 1996,  he
was director of financial management services at Starkey.


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<PAGE>


      EDWIN J. KAWASAKI.  Mr. Kawasaki has served as Vice President - Finance of
the Company since August 1996. Mr. Kawasaki was a principal of Stafford  Capital
Corp.,  an investment  buy-out firm, from September 1995 to July 1996, and was a
senior vice president at Peregrine Holdings Ltd., an investment banking boutique
firm,  from  January  1994 to  September  1995.  From  1987 to 1993,  he was the
controller  of Lewis  and  Clark  College.  Prior to 1987,  Mr.  Kawasaki  was a
supervising senior accountant with KPMG Peat Marwick LLP.

      KATHY A. FOLTNER. Ms. Foltner was appointed Vice President - Operations of
the Company in November 1996, when the Company acquired substantially all of the
assets of the Midwest  Division of Hearing  Health  Services,  Inc. Ms.  Foltner
served as vice president of Hearing Health  Services,  Inc.,  since January 1995
and as  director of its  Michigan  operations  from July 1994 to December  1994.
Prior to July 1994, Ms. Foltner was the owner and president of  Audio-Vestibular
Testing Center, Inc.

ITEM 10. EXECUTIVE COMPENSATION

      The required  information is incorporated herein by reference to the Proxy
Statement under the heading "Executive Compensation."

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The required  information is incorporated herein by reference to the Proxy
Statement  under the heading  "Share  Ownership  By Principal  Shareholders  and
Management."

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The required  information is incorporated herein by reference to the Proxy
Statement under the heading "Interests of Insiders in Material Transactions."

ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K

      (a) Exhibits are listed in the Exhibit Index  beginning on page 63 of this
report. Each management contract or compensatory plan or arrangement required to
be filed as an exhibit to this  report is marked with an asterisk in the Exhibit
Index.

      (b)  Reports on Form 8-K. No reports on Form 8-K were filed by the Company
during the fiscal year ended July 31, 1997.



                                       61
<PAGE>


                                   SIGNATURES

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

Date:  October 29, 1997              HEALTHCARE CAPITAL CORP.

                                      By /s/ Brandon M. Dawson
                                         Brandon M. Dawson
                                         President and Chief Executive Officer

         In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following  persons on behalf of the  registrant  and in
the capacities indicated as of October 29, 1997.

Signature                                     Title

PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR:

/s/ Brandon M. Dawson
<TABLE>
<S>                                        <C>
Brandon M. Dawson                             President and Chief Executive Officer and
                                              Director
</TABLE>


PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:

/s/ Edwin J. Kawasaki
Edwin J. Kawasaki                             Vice President-Finance


OTHER DIRECTORS:

*GENE K. BALZER, Ph.D.                        Director

*WILLIAM DeJONG                               Director

*GREGORY J. FRAZER, Ph.D.                     Director

*DOUGLAS F. GOOD                              Director

*HUGH T. HORNIBROOK                           Director

*/s/ Edwin J. Kawasaki
Edwin J. Kawasaki, as attorney-in-fact



                                       62
<PAGE>


                                  EXHIBIT INDEX

EXHIBIT                      DESCRIPTION OF EXHIBIT

3.1       Articles of Incorporation of the Company. Incorporated by reference to
          Exhibit 3.1 to the Company's Registration Statement on Form SB-2 (File
          No. 333-23137) (the "SB-2").

3.2       Bylaws of the Company.

10.1      Form of agreement for purchase of special share  purchase  warrants in
          connection  with Exhibit  10.2.  Incorporated  by reference to Exhibit
          10.1 to the SB-2.

10.2      Special  Warrant  Indenture  between  the  Company  and The R-M  Trust
          Company dated February 28, 1996.  Incorporated by reference to Exhibit
          10.2 to the SB-2.

10.3      Warrant  Indenture between the Company and The R-M Trust Company dated
          February  28, 1996.  Incorporated  by reference to Exhibit 10.3 to the
          SB-2.

10.4      Form of agreement  for  purchase of special  share  purchase  warrants
          (British  Columbia,  Alberta and Offshore) in connection  with Exhibit
          10.6. Incorporated by reference to Exhibit 10.4 to the SB-2.

10.5      Form of agreement  for  purchase of special  share  purchase  warrants
          (United  States) in  connection  with Exhibit  10.6.  Incorporated  by
          reference to Exhibit 10.5 to the SB-2.

10.6      Special  Warrant  Indenture  between  the  Company  and The R-M  Trust
          Company  dated   September  17,  1996   ("September   Special  Warrant
          Indenture"). Incorporated by reference to Exhibit 10.6 to the SB-2.

10.7      Supplemental   Indenture  to  September  Special  Warrant   Indenture.
          Incorporated by reference to Exhibit 10.7 to the SB-2.

10.8      Second Supplemental  Indenture to September Special Warrant Indenture.
          Incorporated by reference to Exhibit 10.8 to the SB-2.

10.9      Warrant  Indenture between the Company and The R-M Trust Company dated
          September 17, 1996 ("September  Warrant  Indenture").  Incorporated by
          reference to Exhibit 10.9 to the SB-2.

10.10     Supplemental Indenture to September Warrant Indenture. Incorporated by
          reference to Exhibit 10.10 to the SB-2.

10.11     Sponsorship  Agreement  between the Company and C.M.  Oliver & Company
          Limited  dated March 13,  1996.  Incorporated  by reference to Exhibit
          10.11 to the SB-2.

10.12     Escrow  Agreement  dated October 7, 1994,  among the Company,  The R-M
          Trust  Company,  Marilyn  E.  Marshall,  Douglas  F.  Good,  and Trudy
          McCaffery. Incorporated by reference to Exhibit 10.13 to the SB-2.

10.13     Agency Agreement dated as of August 22, 1996,  between the Company and
          C.M.  Oliver & Company  Limited.  Incorporated by reference to Exhibit
          10.16 to the SB-2.

10.14     U.S.  Placement  Agreement  dated as of October 14, 1996,  between the
          Company and Dallas Research & Trading,  Inc. Incorporated by reference
          to Exhibit 10.17 to the SB-2.

10.15     U.S.  Placement  Agreement  dated as of October 14, 1996,  between the
          Company and Sunrise Securities Corporation.  Incorporated by reference
          to Exhibit 10.18 to the SB-2.


                                       63
<PAGE>


10.16     Stock  Purchase  and Sale  Agreement  dated as of February  28,  1997,
          between  Gregory J. Frazer and Laurie Van  Duivenbode  and  Sonus-USA,
          Inc.  (formerly  HealthCare  Hearing Clinics,  Inc.).  Incorporated by
          reference to Exhibit 10.19 to the SB-2.

10.17     Merger  Agreement  dated as of  October 1,  1996,  among the  Company,
          Hearing    Care     Associates-Glendale,     Inc.,     Hearing    Care
          Associates-Glendora,  Inc.,  and Hearing  Care  Associates-Northridge,
          Inc.,  and Gregory J.  Frazer,  Carissa  Bennett,  and Jami  Tanihana.
          Incorporated by reference to Exhibit 10.20 to the SB-2.

10.18     Asset Purchase  Agreement  effective as of October 31, 1996, among the
          Company,  Sonus-USA,  Inc.,  and Hearing  Health  Services,  Inc., and
          Audio-Vestibular   Testing  Center,   Inc.  (the  "SONUS  Agreement").
          Incorporated by reference to Exhibit 10.21 to the SB-2.

10.19     Stock  Purchase and Sale  Agreement  dated as of December 17, 1996, by
          and  between  certain  selling   shareholders   and  Sonus-USA,   Inc.
          Incorporated by reference to Exhibit 10.23 to the SB-2.

10.20     Stock Purchase and Sale Agreement  dated as of January 9, 1997, by and
          between  Gregory J. Frazer and Stephen  Martinez and  Sonus-USA,  Inc.
          Incorporated by reference to Exhibit 10.24 to the SB-2.

10.21     Form of Convertible Subordinated Note relating to the SONUS Agreement.
          Incorporated by reference to Exhibit 10.25 to the SB-2.

*10.22    1993 Stock Option Plan.  Incorporated by reference to Exhibit 10.26 to
          the SB-2.

*10.23    Second  Amended and Restated  Stock Award Plan  effective  October 15,
          1997.

*10.24    Employment  Agreement dated October 1, 1996, between Sonus-USA,  Inc.,
          and Gregory J.  Frazer,  Ph.D.  Incorporated  by  reference to Exhibit
          10.28 to the SB-2.

*10.25    Employment  Agreement dated as of November 1, 1996, among the Company,
          Sonus-USA,  Inc., and Kathy A. Foltner.  Incorporated  by reference to
          Exhibit 10.29 to the SB-2.

*10.26    Terms of employment  between the Company and Edwin J.  Kawasaki  dated
          August 8, 1996.  Incorporated  by  reference  to Exhibit  10.30 to the
          SB-2.

10.27     Revolving Demand Loan Agreement between  Fraserview Hearing and Speech
          Clinics  Ltd  and  Royal  Bank  of  Canada,  dated  August  21,  1995.
          Incorporated by reference to Exhibit 10.31 to the SB-2.

10.28     Revolving Demand Loan Agreement  between  Sonus-Canada  Ltd. and Royal
          Bank of Canada, dated February 12, 1997.  Incorporated by reference to
          Exhibit 10.32 to the SB-2.

*10.29    Consulting  Agreement  effective  as of January 1, 1997,  between  the
          Company and Hugh T.  Hornibrook.  Incorporated by reference to Exhibit
          10.33 to the SB-2.

10.30     Stock Purchase and Sale Agreement  dated as of March 6, 1997,  between
          Gregory J. Frazer,  Alfred S. Gaston and Sonus-USA,  Inc. Incorporated
          by reference to Exhibit 10.34 to the SB-2.

10.31     Stock Purchase and Sale  Agreement  dated as of March 14, 1997, by and
          between  Gregory J. Frazer,  David N.  Jenkins,  and Jami Tanihana and
          Sonus-USA,  Inc.  Incorporated  by reference  to Exhibit  10.35 to the
          SB-2.

10.32     Stock  Purchase and Sale  Agreement  dated as of April 6, 1997, by and
          between  Susan  Diaz,   Gregory  J.  Frazer,  and  Jami  Tanihana  and
          Sonus-USA,  Inc.  Incorporated  by reference  to Exhibit  10.36 to the
          SB-2.


                                       64
<PAGE>


10.33     Equipment Lease  Agreement dated as of April 1, 1997,  between Siemens
          Hearing  Instruments,   Inc.,  and  Sonus-USA,  Inc.  Incorporated  by
          reference to Exhibit 10.37 to the SB-2.

10.34     Loan and Security Agreement between Phonak, Inc. and Sonus-USA,  Inc.,
          and related Guaranty between the Company and Phonak,  Inc., each dated
          July 16,  1997.  Incorporated  by  reference  to  Exhibit  10.1 to the
          Company's  Quarterly Report on Form 10-QSB for the quarter ended April
          30, 1997.

10.35     Stock Purchase Agreement dated August 27, 1997, by and between Carissa
          D. Bennett, Gregory J. Frazer, and Evelyn L. Gong and Sonus-USA, Inc.

*10.36    Promissory  Note of Brandon M. Dawson  dated May 8, 1997,  and related
          Pledge  Agreement  between the Company and Brandon M. Dawson dated May
          8, 1997.

*10.37    Promissory  Note of Gene K. Balzer,  Ph.D.,  dated May 19,  1997,  and
          related  Pledge  Agreement  between the  Company  and Gene K.  Balzer,
          Ph.D., dated May 19, 1997.

16        Letter of Shikaze Ralston, Chartered Accountants,  regarding change in
          certifying accountant.

21        The subsidiaries of the Company.

24        Power of attorney of certain officers and directors.

27        Financial Data Schedule.
------------------------------------

*Management contract or compensatory plan or arrangement.


                                       65