MEDCARE TECHNOLOGIES INC, 10KSB/A, 1998-06-23

MEDCARE TECHNOLOGIES INC
10KSB/A, 1998-06-23
SPECIALTY OUTPATIENT FACILITIES, NEC

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

FORM 10-KSB/A

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

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

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

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

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

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

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

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

<PAGE>

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

TABLE OF CONTENTS

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

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

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

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

<PAGE>

PART I

ITEM 1. BUSINESS

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

THE COMPANY
SUMMARY OF BUSINESS

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

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

<PAGE>

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

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

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

DESCRIPTION OF BUSINESS

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

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

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

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

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

<PAGE>

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

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

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

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

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

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

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

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

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

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

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

<PAGE>

Urge Incontinence

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

Stress Incontinence

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

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

Reflex Incontinence

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

Functional Incontinence

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

Mixed Incontinence

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

Other Relevant Definitions

Electromyography (EMG)

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

<PAGE>

Biofeedback

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

Biofeedback using Surface Electromyography (sEMG)

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

Various Behavioral Programs

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

Behavioral Strategies and Home Programs

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

Bladder Disorders Secondary to Neurological Disorders

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

Urinary Urgency and Frequency

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

Hyperactive or Dyssynergic Sphincters

Discoordination of the bladder and the urinary sphincters.

Urinalysis and Culture

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

<PAGE>

Bladder Ultrasound

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

Urodynamics

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

Electrical Stimulation

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

Vaginal Cones

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

Anorectal Manometry

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

Rectal Balloons

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

Bowel Dysfunction

Fecal Incontinence

The involuntary loss of stool.

Disordered Defecation

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

Bowel Disorders Secondary to Neurologic Disorders

Stroke, Spina Bifida, Multiple Sclerosis, etc.

<PAGE>

Other Colon Rectal Disorders

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

Pelvic Floor Disorders

Levator Ani Syndrome

Pain and/or spasm of the levator ani muscle.

Perineal Descent Syndrome

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

Spastic Floor Syndrome

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

Pelvic Floor Muscle Exercises

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

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

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

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

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

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

<PAGE>

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

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

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

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

7. Reduce incontinence and symptoms of urgency and frequency.

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

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

The following disorders respond to this treatment:

Urinary Dysfunction

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

Bowel Dysfunction

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

<PAGE>

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

Pelvic Floor Disorders

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

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

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

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

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

<PAGE>

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

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

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

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

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

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

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

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

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

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

<PAGE>

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

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

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

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

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

<PAGE>

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

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

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

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

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

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

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

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

<PAGE>

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

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

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

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

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

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

Medcare's Obligations

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

<PAGE>

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

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

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

The Practice's Obligations

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

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

<PAGE>

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

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

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

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

Financial Arrangements

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

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

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

<PAGE>

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

Term and Termination

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

Confidentiality

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

Insurance

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

<PAGE>

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

Governmental Regulation Issues Concerning the Program Management Agreement

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

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

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

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

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

<PAGE>

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

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

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

Competitive Treatment Options for UI

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

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

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

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

<PAGE>

of concern.

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

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

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

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

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

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

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

<PAGE>

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

Employees
- ---------

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

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

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

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

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

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

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

<PAGE>

point the Company acquired the MedCare program for treating incontinence.

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

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

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

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

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

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

<PAGE>

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

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

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

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

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

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

<PAGE>

Conversion, where X is determined as follows:

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

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

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

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

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

<PAGE>

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

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

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

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

RISK FACTORS

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

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

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

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

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

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

<PAGE>

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

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

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

Dividends
- ---------

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

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

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

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

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

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

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

<PAGE>

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

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

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

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

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

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

<PAGE>

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

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

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

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

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

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

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

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

<PAGE>

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

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

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

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

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

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

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

<PAGE>

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

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

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

EXECUTIVE OFFICERS

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

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

<PAGE>

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

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

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

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

<PAGE>

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

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

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

ITEM 2: PROPERTIES

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

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

<PAGE>

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

ITEM 3: LEGAL PROCEEDINGS

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

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

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

<PAGE>

PART II

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

(a) Market Information

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

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

(b) Holders

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

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

ITEM 6: SELECTED FINANCIAL DATA

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

<PAGE>

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

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

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

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

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

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

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

OVERVIEW

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

<PAGE>

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

RESULTS OF OPERATIONS

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

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

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

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

<PAGE>

Company.

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

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

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

<PAGE>

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

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

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

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

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

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

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

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

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

<PAGE>

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

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

ITEM 8: FINANCIAL STATEMENTS

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

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

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

PART III

ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

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

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

<PAGE>

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

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

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

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

<PAGE>

system.

ITEM 11: EXECUTIVE COMPENSATION

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

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

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

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

<PAGE>

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

Michael Blue 1997 - 0 - - 0 - 75,000 - 0 - - 0 -
Medical Director 1996 - 0 - - 0 - 40,000 - 0 - - 0
1995 - 0 - - 0 - - 0 - - 0 - - 0 -

Kundan S. Rayat 1997 - 0 - - 0 - - 0 - - 0 - - 0 -
Secretary,Treasurer 1996 - 0 - - 0 - - 0 - - 0 - - 0 -
Director 1995 - 0 - - 0 - - 0 - - 0 - - 0 -

Jake Jacobo 1997 - 0 - - 0 - 40,000 - 0 - - 0 -
Director 1996 - 0 - - 0 - - 0 - - 0 - - 0 -
1995 - 0 - - 0 - - 0 - - 0 - - 0 -
</TABLE>

STOCK OPTIONS

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

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

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

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

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

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

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

<PAGE>

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

ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

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

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

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

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

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

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

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

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

<PAGE>

ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

PART IV

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

(a) (1) Financial Statements: Page

Report of Independent Public Accountants F-1

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

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

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

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

Notes to Financial Statements F-18

(a) (2) Exhibits

The following exhibits are referenced or included in this report:

Articles of Incorporation
By-Laws

(b) Reports on 8-K

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

SIGNATURES

<PAGE>

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

MEDCARE TECHNOLOGIES, INC.

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

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

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

<PAGE>

C O N T E N T S

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

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

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

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

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

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

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

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

<PAGE>

INDEPENDENT AUDITORS' REPORT

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

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

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

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

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

F-1
<PAGE>

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

ASSETS

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

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

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

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

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

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

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

LIABILITIES AND STOCKHOLDERS'
EQUITY

Current Liabilities

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

Notes Payable - Related Parties 1,000 25,000

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

Stockholders' Equity

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

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

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

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

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

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

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

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

Other Income (Expense)

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

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

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

F-4
<PAGE>

Loss from Operations of
Business Segment Disposed
of 0.00 0.00

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

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

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

Loss from Operations of
Business Segment Disposed of 0.00 0.00

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

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

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

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

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

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

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

F-6
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

</TABLE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

</TABLE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Cash Flows from Financing Activities

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Total Assets $ 12,558

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

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

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

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

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

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

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

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

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

F-19

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

I. Leases
------

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

F-24
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,440,791
<SECURITIES> 0
<RECEIVABLES> 47,286
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,551,890
<PP&E> 50,868
<DEPRECIATION> 17,342
<TOTAL-ASSETS> 3,586,416
<CURRENT-LIABILITIES> 16,796
<BONDS> 0
0
41
<COMMON> 6,992
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,586,416
<SALES> 0
<TOTAL-REVENUES> 91,802
<CGS> 0
<TOTAL-COSTS> 1,515,459
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,423,657)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,293,230)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)

</TABLE>