On Nikki Biscoe's second birthday yesterday, the balloons had her name printed on them. She wore a party dress, and had punch and cake. But the two candles weren't lit -- because of the oxygen tank.

Everyone sang "happy birthday, dear Nikki," and she opened her presents -- two dolls, a music box, blocks, a record. She laughed with all the delight a 2-year-old can muster. But when Nikki laughs, you can't hear her -- because of the tracheostomy.

Tanya Nicole Biscoe's second birthday party was her second in a hospital. On her first, she was at the Children's Hospital National Medical Center and was still critically ill. Yesterday's party was in the Unit B Playroom of the Hospital for Sick Children.

Besides her family, who drove up from southern Maryland for the event, Nikki's doctors, nurses and therapists came to the party. One of her playmates, another patient, toddled around amiably, tubes and catheters dangling. Against the walls were ventilators, monitors and emergency life-support equipment, standing in mute witness to the real business here.

Nikki has something the doctors call "Ondine's curse," after the ill-fated mythical water nymph who fell in love with a human. She got it after a bout with encephalitis when she was 9 months old. What it means to Nikki is this: She stops breathing when she falls asleep.

She is actually a little better than she was last year, when she entered the hospital's relatively new respiratory unit, says Dr. Margaritia Jackson, a staff pediatrician. "She used to just flop over and go to sleep in the middle of doing anything. Now she's less likely to fall off with no warning, and even when she does sleep, she may breathe for about 15 minutes."

This development offers some hope that Nikki may get well. But no one knows when that might happen, or even if it might happen. Meanwhile, Nikki can never be out of sight of someone who knows what to do if she falls asleep. When she goes out, she wears a backpack that carries an ambubag, an apparatus that can be used manually to make her breathe for short periods. She has a tracheostomy, a hole created in her windpipe in which a tube is inserted through her neck.

Even so, Nikki's mother wants her to come home.

And as much as they love her -- she has become the darling of virtually the entire hospital -- the staff wants to see her go too, leaving the sterile ward for a loving home with no running water.

Michelle Dickerson is not married to Nikki's father, Tom Biscoe, although he is attentive and caring of Nikki, and he and Michelle consider themselves engaged. She still lives with her parents in Abell, Md. That is where she plans to take Nikki, assuming that Maryland Medicaid agrees to pay for the ventilator and related equipment under the terms of the so-called Katie Beckett waiver, and assuming that she can get Supplemental Security Income from the Social Security program for the disabled.

Right now Dickerson is wading through federal and state public assistance bureaucracies. Progress on getting the waiver -- a Maryland state program -- is being made, but the application for SSI has been rejected on the grounds, says hospital social worker Dorothy Clark, that "because Nikki would be on the ventilator only at night, that means she isn't totally disabled. Never mind that if she didn't have it she'd die. Never mind that if she was out playing and fell asleep and no one was there to see, she'd die . . . " Dickerson has filed for reconsideration.

The Medicaid waiver was prompted by President Reagan's 1981 intervention in the plight of then-4-year-old Katie Beckett, whose respirator dependency was costing about six times as much in the hospital as it would have at home. In Maryland there is now a special exemption for up to 50 children under this new program. "It is possible," says a spokeswoman at the Maryland Coordinating Center for Home and Community Care, "that Nikki Biscoe might be the first Maryland child under the program that grew out of the Katie Beckett case."

If all the approvals go through, Dickerson will take her daughter home to rural St. Mary's County along the banks of the Potomac River near St. Clement's Island, just as the river begins to widen into the Chesapeake Bay.

Technically the community is called Abell, but the folks nearby, some of them working on luxurious summer homes that are sprouting up on the river banks, call it "Dickersonville," because in a cluster of about 10 houses live Nikki's great-grandmother, "Mom" Betty Dickerson, the 84-year-old matriarch of the clan, and dozens of her grown children and grandchildren.

Mom Betty owned all the land, and parceled it out to her children, piece by piece, to keep them near. Devoutly religious, she also made room over the years for about 35 foster children, estimates Brenda Dickerson, one of Michelle's sisters.

"You'll know it," advised a local giving directions to a pair of lost visitors, "because there will be dozens of children running around."

In fact, only one child was in evidence that day, a nephew almost Nikki's age who chased after a pair of large dogs and clutched a box of Count Chocula cereal. But several of Michelle's sisters and sisters-in-law and aunts and cousins popped in and out of the house where her mother, Mary Louise Dickerson, lives and cares for her husband, an Army veteran whose emphysema requires constant attention and oxygen treatment.

The house is neat, but the roof is sagging a bit and there is no running water. No plumbing. No kitchen sink. No bathroom.

"The water is pure," says Brenda Dickerson. "Better than anywhere else."

There is electricity, however, more to the point when dealing with ventilator equipment.

"It has really been a kind of a learning experience for me," says Nancy Pietropaoli, a pediatrics nurse and the clinical coordinator and admissions-discharge planner at the Hospital for Sick Children, who is among several staffers who have made visits to the Dickerson home, a two-hour drive from the Northeast hospital. "You just can't think on the level of the perfect, average home. You have to see that the child can be safely cared for and that there is a loving family there.

"Working in the city all your life, you expect everything to be just so. But we've learned over the years that you can work around almost any environment if the family is interested in the child and willing to take care."

The 101-year-old Hospital for Sick Children once languished in the shadow of the more dramatically lifesaving Children's Hospital. For years little more than a place to house chronically ill or multiply handicapped children whose families were unable or unwilling to cope, it is now a modern and sophisticated facility for children who are no longer acutely ill, but who are too sick to go home.

Nikki is not alone in the respiratory unit. Most of the other youngsters are, ironically, victims of the high technology that made them survivors -- of premature birth, or very low birth weights, or of other potentially lethal problems that can beset the newborn.

In the effort to keep these babies alive, high oxygen pressure and breathing tubes damaged the delicate tissue of their immature lungs. The oxygen pressure caused a disorder called bronchopulmonary dysplasia. The tubes caused scarring.

The good news, says chief respiratory therapist Bill Tedrow, is that "these children, if we can get them to 2 or 3 years old on ventilators , can get better -- their lung tissue matures. Even better," he adds, "while five years ago they didn't even know what was causing these problems, now they're keeping the pressures down on the ventilators and using different tubes. I think the goal is that by sometime in the 1990s, it will cease to exist." There are an estimated 32,000 ventilator-dependent children nationwide.

Social worker Dorothy Clark, who jokes that her own children are sometimes envious of her relationship with "her babies" at the hospital, is probably closer to Michelle Dickerson and Nikki than any other staffer.

Dickerson, herself only 19 when Nikki was born, came to Washington for the first time after the critically ill Nikki was flown to Children's Hospital from the hospital in Leonardtown, Md. "It was the first time I'd ever been here," she recalled recently, "and I didn't know where my baby was."

By the time Nikki entered the Hospital for Sick Children, "Michelle was very standoffish," Clark remembers. "This was very understandable. When Nikki was at Children's, Michelle could only see her maybe once a week on the weekend, stay for a couple of hours and go home. So the mother-daughter bond was definitely not there.

"Plus Nikki had changed. She wasn't a 9-month-old baby anymore. She was just over a year, and a real little person. So Michelle had to get used to this being an entirely different child. It really took several months to get Michelle to spend time with Nikki, not just to sit in another room and watch everyone else take care of her."

"I was kinda scared at first," Dickerson admits. "She'd been here so long, I had to get used to her being mine again, and it scared me. Suppose I did something wrong and something happens to her, I kept thinking. And some of the nurses were okay, but some of them made me feel like Nikki wasn't really my daughter . . . "

"Now," says Clark, "Nikki cries when Michelle leaves the room. And she comes every Wednesday to spend the entire day and provide all her care -- learning how to clean or replace the trach, bathing her, playing with her, doing her hair, doing the whole thing of being a mother."

There are field trips at the Hospital for Sick Children. Clark, Pietropaoli and Unit B head nurse Barbara Moore took a group of youngsters, including Nikki, to see Santa Claus last winter and to the circus last month.

"All the children had respiratory needs," says Pietropaoli. "It took us so long to unload the van. I'm sure everybody at the P.G. Plaza thought we were crazy walking up and down the mall with all these oxygen tanks, but it's important that the kids get out and get involved."

Nikki gets speech therapy -- talking with a tracheostomy is not easy -- and play therapy, and is a member of a "breakfast club" in which several of the ambulatory children eat together and learn table manners and social behavior. Developmentally she is right where she should be -- "a terrible two," all agree.

She even gets pet therapy, to accustom her eventually to the big dogs that belong to the Dickerson community. She has playmates at the hospital, but, says Pietropaoli, "when you come down to it, a hospital is not the best environment to raise a child."