<PAGE>
 
                    U.S. SECURITIES AND EXCHANGE COMMISSION
                                        
                            Washington, D.C.  20549

                                  Form 10-KSB

[ X ]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
       ACT OF 1934 [Fee Required]
       For the fiscal year ended     July 31, 1997
                                     -------------

[   ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
       ACT OF 1934 [No Fee Required]

       For the transition period from                  to
                                      -----------------   --------------------

     Commission file number     1-14382
                                -------

                           SUNSTAR HEALTHCARE, INC.

                (Name of small business issuer in its charter)
--------------------------------------------------------------------------------

          DELAWARE                                       59-3361076
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation or organization

         300 International Parkway, Suite 230, Heathrow, Florida 32746
               (Address of principal executive offices/Zip Code)
                                 (407)304-1066
                          (Issuer's telephone number)
--------------------------------------------------------------------------------

        Securities registered under Section 12(b) of the Exchange Act:

     Title of each class        Name of each exchange on which registered
     -------------------        -----------------------------------------
     Common Stock               NASDAQ-Small-Cap Market and Boston
                                Stock Exchange

        Securities registered under Section 12(g) of the Exchange Act:

                                 Common Stock
                               (Title of class)

     Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the 90 past days.

     YES  X          NO    
         ---            ---

     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form,  and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this form 10-KSB.  [ ]

     State issuer's revenues for its most recent fiscal year   $4,728,536
                                                               ----------

     The aggregate market value of voting stock of the Registrant held by non-
affiliates of the Registrant on October 27, 1997, was $5,694,984 (based on the
average closing bid and asked prices of the Registrant's Common Stock on October
27, 1997 of $4.375 and $4.75 respectively).

<PAGE>
 
     As of September 30, 1997, 2,395,000 shares of the Registrant's Common Stock
                               ---------                                        
were issued and outstanding.



                      DOCUMENTS INCORPORATED BY REFERENCE

             Proxy Statement for the 1997 Annual Meeting  Part III

 Transitional Small Business Disclosure Format (check one):  YES      NO  X
                                                                 ---     ---
                                       
     _____________________________________________________________________
<PAGE>
 
                                    PART I

Item 1.  Business

     Sunstar Healthcare, Inc. (the "Company") was incorporated under the laws of
the State of Delaware in December 1995 by National Home Health Care Corp., a
publicly-held Delaware corporation ("National"), to hold the capital stock of
Brevard Medical Center, Inc. ("Brevard") (which had as its wholly-owned
subsidiary, Boro Medical Corp.) and First Health, Inc. ("First Health"), which
previously were direct, wholly-owned subsidiaries of National.  In January 1996,
National contributed to the Company all of the issued and outstanding shares of
capital stock of Brevard and First Health held by it, and Brevard and First
Health became direct, wholly-owned subsidiaries of the Company.

     On May 15, 1996, the Company completed an initial public offering (the
"Offering") pursuant to the Securities Act of 1933, as amended, which resulted
in the issuance of 1,300,000 shares of Common Stock, par value $.001 (the
"Common Stock").  The Offering yielded net proceeds to the Company of
$5,230,372.  On June 7, 1996, the underwriters in the Offering exercised their
over-allotment option in full to purchase additional shares of Common Stock,
resulting in the Company's sale of an additional 195,000 shares of Common Stock,
par value $.001, and realization of $853,125 in net proceeds.

     The Company is a managed health care company whose wholly-owned
subsidiaries, Brevard, First Health and SunStar Health Plan, Inc. ("SHP",
formerly known as Boro Medical Corp.) (hereinafter collectively referred to as
the "Company") provide primary health care services through seven primary care
centers located in central Florida and comprehensive health care benefits to
individuals, families, small and large employer groups in its service areas
through its Health Maintenance Organization ("HMO") contracts.  As of October
15, 1997 the Company was approved to offer its HMO products in Brevard, Orange,
Osceola, Seminole, Lake, Polk, Hernando, Volusia, Indian River, St. Lucie,
Marion, Citrus and Sumter Counties.  During the next eighteen months, the
Company  intends to expand its HMO target markets to include additional counties
in central, northern and southern Florida with the intention of providing HMO
products statewide. The Company will also seek to further serve the Medicare-
eligible population in such markets by offering comprehensive health care
coverage through a contract with the Health Care Financing Administration
("HCFA").

     The Company's HMO products provide comprehensive health care benefits to
enrollees, including ambulatory and inpatient physician services,
hospitalization, pharmacy, dental, optical, mental health, ancillary diagnostic
and therapeutic services.  In general, a fixed monthly enrollment fee covers all
HMO services, although the benefit plans require co-payments and/or deductibles
in addition to the basic enrollee premium.  Although a primary care physician
assumes overall responsibility for the coordination of care, the Company offers
its members access to its network of physicians without the need of a referral
from the members' primary care physician.

                                       1
<PAGE>
 
     The Company currently offers primary health care services through its
primary health care centers on a contractual and a fee-for-service basis. The
primary health care services are delivered by eleven board certified or board
eligible primary care physicians employed by the Company.  The Company's primary
health care operations consist primarily of medical treatment and care typically
furnished in a family practitioner's office.  The Company has provider
agreements with third-party payors, such as Humana Health Care Plans, CAC/United
Healthcare Plans of Florida, Inc. and Blue Cross Blue Shield of Florida, which
are health maintenance organizations operating in the State of Florida. Pursuant
to such agreements, the Company receives a fixed amount, or "capitated" fee, for
each participating enrollee per month, regardless of utilization.  The Company
also has a prepaid cost reimbursement contract with the Health Care Financing
Administration of the federal government ("HCFA"), pursuant to which the Company
also provides prescribed primary health care to Medicare beneficiaries who
enrolled directly with the Company prior to January 1, 1996.

     For the year ended July 31, 1997, medical services provided under the
Company's contracts with HCFA, capitation with outside HMOs, its own HMO
products, and on a fee-for-service basis accounted for approximately 38%, 34%,
2% and 25%, respectively, of the Company's revenues.

     The Company's objective is to continue to establish relationships with
qualified physicians, hospitals and other health care providers who are willing
to provide medical services to members of managed care organizations at a
reasonable cost. The Company believes that these efforts will enable it to
provide a variety of low-cost managed health care products to attract
individuals and employer groups willing to enroll in the Company's HMO.

     The Company's strategy and preliminary and future expansion plans may be
subject to change as a result of numerous factors, including progress or delays
in the Company's expansion efforts, changes in market conditions, new or
different opportunities which may become available to the Company in the future
and competitive conditions.

PRIMARY HEALTH CARE OPERATIONS.

     The Company currently employs eleven board certified or board eligible
primary care physicians. These family practitioners, pediatricians and general
internists are responsible for providing and coordinating health care services
to patients and are required to maintain local hospital admitting privileges in
order to provide continuity of medical care. The Company's physicians provide
medical services in accordance with quality assurance standards established by
the American Medical Association and are continually monitored in accordance
with the Company's quality improvement programs. The Company also employs one
family nurse practitioner in its primary care operations.

     The Company enters into a one-year employment agreement with each of its
employed physicians and other practitioners which is automatically renewable,
subject to early termination upon three months' prior written notice. The
agreements require physicians to devote their full

                                       2
<PAGE>
 
time to the Company's business , to obtain and maintain professional licenses
and include provisions which prohibit the employee from competing and soliciting
and from disclosing proprietary information. The agreements also provide for
guaranteed annual salaries plus incentive performance bonuses.  The Company
obtains and maintains professional malpractice insurance for each of its
physicians.

COMMERCIAL HEALTH MAINTENANCE ORGANIZATION ("HMO") OPERATIONS

     On February 24, 1997 the Company was granted a license to offer its HMO
products in its initial service area in Brevard County, Florida.  Concurrent
with the Company's objective to rapidly expand its network service areas, the
Company was approved by the State of Florida Agency for Health Care
Administration ("AHCA") on May 23, 1997 to expand its service area to include
Orange, Osceola and Seminole counties.  On September 2, 1997 the Company was
approved by AHCA to expand its service area to include Hernando, Lake, Polk and
Volusia counties. On October 3, 1997 the Company was approved by AHCA to expand
its service area to include Indian River, St. Lucie, Marion, Citrus and Sumter
counties.  As of October 15, 1997 the Company had over 2,000 physicians and 20
hospitals contracted to deliver services under the HMO and approximately 2,800
members enrolled in the Company's HMO products.

REVENUE SOURCES AND REIMBURSEMENT.

     The Company currently offers health care services on a contractual, pre-
paid and fee-for-service basis. The following table sets forth for the periods
indicated the approximate revenues and percentages of revenues derived from the
Company's various revenue sources.

<TABLE>
<CAPTION>
                                 For the Fiscal Years Ended July 31,
                                   1996                       1997
                        --------------------------  -------------------------
<S>                     <C>            <C>          <C>            <C>
HCFA                       $1,993,889        39.2%     $1,782,401       37.7%
Capitation Agreement        1,561,283        30.8%      1,595,112       33.7%
Fee-For-Service             1,393,892        27.4%      1,164,088       24.6%
Prepaid Health Clinic         131,786         2.6%        101,673        2.2%
HMO Products                        0         0.0%         85,262        1.8%
                           ----------                  ----------
                           $5,080,850       100.0%     $4,728,536      100.0%
</TABLE>
                                                                                
HCFA Agreement.
-------------- 

     The Company has a prepaid cost reimbursement contract with HCFA, pursuant
to which the Company provides prescribed primary care services to Medicare
beneficiaries who enrolled directly with the Company prior to January 1, 1996.
The Company currently provides medical services to approximately 2,400 Medicare
enrollees through its five primary care centers in Brevard county.  Medicare
enrollees pay a nominal annual enrollment fee without monthly premiums,
deductibles or copayments for medical services.  The Company may bill Medicare
patients for services not covered by the Company's agreement with HCFA.

                                       3
<PAGE>
 
     Pursuant to the terms of the agreement with HCFA, the Company is paid a
monthly premium in advance for each Medicare beneficiary enrolled by the
Company. Payments under the agreement are based on costs incurred in connection
with medical services and are subject to year-end adjustments. The Company is
subject to governmental audit to ensure the basis of medical costs incurred. To
date, no adjustments have been made under the HCFA contract and the Company has
never been subject to audit.

     The Company's agreement with HCFA is automatically renewable on a yearly
basis unless either party elects not to renew. HCFA may terminate the agreement
at any time in the event that the Company fails to perform its obligations under
the agreement or fails to comply with applicable laws and regulations or
undergoes a change of ownership. HCFA may audit the Company to determine the
quality of medical care and compliance by the Company under the terms of the
agreement and applicable law.

     Pursuant to recent amendments to the Social Security Act, effective January
1, 1996, the Company is prohibited from enrolling Medicare beneficiaries who are
not members of employer groups or unions under its agreement with HCFA until it
establishes Medicare HMO operations.  Such limitation may prevent the Company
from enrolling certain new Medicare beneficiaries and increasing revenues under
its contract with HCFA in the foreseeable future.

Agreements with Health Maintenance Organizations.
------------------------------------------------ 

     The Company also has provider agreements with several HMOs including Humana
Healthcare Plans, United Healthcare Corporation and Blue Cross Blue Shield of
Florida, pursuant to which the Company provides primary health care services for
approximately 7,600 HMO enrollees. Under such agreements, the Company generally
receives a fixed amount, or "capitated" fee, for each participating enrollee per
month, regardless of utilization. Under certain circumstances, the Company is
entitled to collect coinsurance obligations and deductibles from HMO enrollees,
and is entitled to bill enrollees for medical services not provided by contract.
Agreements with HMOs are generally short-term and contain short-term
cancellation provisions. On September 30, 1997, the Company received
notification that three of its provider agreements with Humana Health Care
Plans, an HMO ("Humana") will terminate effective November 30, 1997, and two
other provider agreements with Humana will terminate effective March 30, 1998.
Revenue from these agreements amounted to approximately $376,000 for the year
ended July 31, 1997.  It is estimated that revenue will decrease by $190,000 in
fiscal 1998 as a result of these terminations.  However, to mitigate such
decrease in revenue, the Company has entered into a provider agreement with
another HMO in the same market area anticipating that an indeterminate number of
former Humana members will enroll with the other HMO in order to retain the
primary care physicians they had through Humana.  See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity."

Fee-for-Service.
--------------- 

     The Company offers health care services on a fee-for-service basis,
pursuant to which the Company receives payments for medical services from
individuals, private insurance companies,

                                       4
<PAGE>
 
workers' compensation programs, municipalities, other self-insured groups and
government assistance programs such as Medicare and Medicaid.

     Medicare is a federally funded and administered program that provides
health care payments for most persons who are 65 years of age or older and
entitled to retirement benefits. Medicare payments are based on a standard fee
schedule used by HCFA. For the year ended July 31, 1997, the Company provided
medical services on a fee-for-service basis to Medicare beneficiaries through
its seven primary care facilities, which accounted for approximately 6% of the
Company's revenues.

     Medicaid is funded jointly by the federal and state governments and covers
indigent patients. The Company has entered into an agreement with the AHCA to
provide primary care services to Medicaid patients. The Company must accept
reimbursement from Medicaid as payment in full for medical services provided.
For the year ended July 31, 1997, the Company provided medical services to
Medicaid patients through its seven primary care centers which are qualified
under state law to receive reimbursement under federal and state Medicaid
guidelines. During such year, Medicaid services accounted for approximately 2%
of the Company's revenues.

Prepaid Health Clinic.
--------------------- 

     The Company has provided medical services to subscribers pursuant to a
prepaid health clinic license issued by the Florida Department of Insurance.
This license permits the Company to provide certain primary health care coverage
to individuals for a fixed monthly premium. For the year ended July 31, 1997,
through its five centers in Brevard County, the Company had approximately 400
subscribers participating in the prepaid health clinic operations.  As a
condition of the Company receiving its license to operate as an HMO, the Company
will no longer offer its prepaid health clinic product as of September 1, 1997.

COMPETITION.

     The managed health care industry is highly competitive. The Company's
primary care centers currently compete with other providers of primary health
care services, including primary care centers, regional hospitals and physician
practice groups. Many of such competitors offer a broader range of primary
health care services than the Company and have extensive relationships with
group specialty practices. The Company currently competes primarily on the basis
of reputation, quality of care and physician support.

     The managed health care industry has experienced significant changes in
recent years, primarily due to rising health care costs. Employer groups have
demanded a variety of health care options, such as traditional indemnity
insurance, HMOs, point of service plans and preferred provider options, offered
either through third parties or by self-funding. The Company's HMO operations
compete with providers of all of these products, including CAC/United Healthcare
Plans of Florida Inc., Humana Healthcare, Blue Cross/Blue Shield of Florida and
PCA Health Plan, most of which have substantially greater financial, management,
personnel and other resources than the Company. The Company also will be 
required to respond to various 

                                       5
<PAGE>
 
competitive factors affecting the health care industry generally, including new
medical technologies which may be introduced, general trends relating to demand
for health care services, regulatory, economic and political factors, changes in
patient demographics and competitive pricing strategies by health maintenance
organizations and other health care plans. The Company may be subject to
significant competition in any new geographic areas it may enter, with respect
to any products it may offer and with respect to any commercial and governmental
health care programs developed. There can be no assurance that the Company will
be able to compete successfully.

INSURANCE.

     The Company and its physicians may be exposed to potential professional
liability claims by patients as a result of the negligence or other acts of
physicians. Claims of this nature, if successful, could result in substantial
damage awards to claimants which may exceed the limits of any applicable
insurance coverage. The Company could become liable for the negligent acts of
physicians, as well as negligence in recruiting and selecting physicians. The
Company currently maintains malpractice liability insurance with limits of
$3,000,000 in the aggregate and $1,000,000 per occurrence and requires
physicians to maintain malpractice liability insurance in amounts which it deems
adequate for the types of medical services provided. There can be no assurance,
however, that such insurance will be sufficient to cover potential claims or
that adequate levels of coverage will be available in the future at a reasonable
cost. In the event of a partially or completely uninsured successful claim
against the Company, the Company's business and financial condition would be
materially adversely affected.

     In addition, the Company carries "stop-loss" reinsurance to reimburse it
for costs resulting from catastrophic injuries or illnesses to its HMO members.
Premiums for these policies are reported as medical expense and insurance
recoveries, if any, are recorded as a reduction of medical expenses.  Under the
excess loss reinsurance policies, recoveries are made for claims of each
enrollee or each covered dependent of each enrollee, on an annual basis, in
excess of the deductible established in the policy subject to certain
limitations. The deductible under the policy for commercial health care claims
is currently $50,000. There can be no assurance, however, that such insurance
will be sufficient to cover potential claims or that adequate levels of coverage
will be available in the future at a reasonable cost.

GOVERNMENT REGULATION.

     The health care industry and physician medical practices are subject to
extensive, stringent and frequently changing federal, state and local
regulation, which is interpreted by regulatory authorities with broad
discretion. The extensive regulatory framework applicable to physicians'
practices imposes significant compliance burdens and risks on the Company.

     Various federal and state laws regulate the relationship between providers
of health care services and physicians, including employment or service
contracts, and investment relationships. These laws include the fraud and abuse
provisions of the Medicare and Medicaid and similar state statutes ("fraud and 
abuse laws"), which prohibit the payment, receipt, solicitation or offering of 

                                       6
<PAGE>
 
any direct or indirect remuneration intended to induce the referral of Medicare
or Medicaid patients or for the ordering or providing of Medicare or Medicaid
covered services, items or equipment. Violations of these provisions may result
in civil and criminal penalties and/or exclusion from participation in the
Medicare and Medicaid programs and from state programs containing similar
provisions relating to referrals of privately insured patients. These laws have
been interpreted broadly to include the payment of anything of value to
influence the referral of Medicare or Medicaid business. These regulations set
forth certain "safe harbors," representing business relationships and payments
that can safely be undertaken without violation of the fraud and abuse laws.

     The "Stark" amendments of the Social Security Act provide, with certain
exceptions, that if a physician has a "financial interest" in an entity (which
may consist of either an ownership interest or a compensation arrangement), the
physician is prohibited from making a referral to the entity for the provision
of certain "designated health services" for which payment may be made by
Medicare or Medicaid. In April 1992, the State of Florida adopted the Patient
Self-Referral Act of 1992, which prohibits referrals for certain designated
health services by a health care provider to a facility in which such provider
has an ownership interest. This law prohibits any claim for payment for services
furnished pursuant to a prohibited referral, and requires a refund if an
unlawful payment was made. Florida legislation also imposes, with certain
exceptions, a cap on the fees charged by all providers of designated health
services.

     In addition, state laws, although varied, generally prohibit a commercial
enterprise, such as the Company, from engaging in the practice of medicine or
otherwise exercising control or influencing the medical judgments or decisions
of physicians, and prohibit physicians from "fee-splitting" with non-physicians.
Florida law does not currently contain such a prohibition.

     The federal government and the State of Florida have each enacted statutes
extensively regulating the activities of health maintenance organizations that
are applicable to the Company's operations. Among the areas regulated are the
scope of benefits required to be made available to members, the manner in which
member rates are structured, procedures for review of quality assurance,
enrollment requirements, composition of policy making bodies to assure member
representation, the interrelationship between health maintenance organizations
and their health care providers, licensure and financial condition. Under
federal regulations, services to members must be provided substantially on a
fixed prepaid basis, without regard to the actual degree of utilization of
services. Although premiums established by a health maintenance organization may
vary from account to account through composite rate factors and special
treatment of certain broad classes of enrollees, traditional experience rating
of accounts (i.e., setting premiums for a group account based on that group's
part use of health care services) is not permitted under federal regulations. In
Florida, health maintenance organizations must also comply with certain other
provisions of state health and insurance laws, including the licensing of
salespersons and maintenance of a minimum statutory net worth requirement
(liquid tangible assets less liabilities). The Company must file periodic
reports with, and will be subject to periodic review by, the federal and state
licensing authorities which regulate the Company.

                                       7
<PAGE>
 
     The Company believes, based on advice of counsel, that it is in compliance
with all federal, state and local laws, rules and regulations applicable to its
operations and has obtained all licenses necessary to conduct its business.
Amendments to existing statutes and regulations, adoption of new statutes and
regulations and the Company's expansion into new operations and jurisdictions
could require the Company to obtain additional licenses, modify its arrangements
with physicians or otherwise alter methods of operations at costs that could be
substantial. There can be no assurance that the Company will be able, for
financial or other reasons, to comply with applicable laws and regulations and
licensing requirements. Failure to comply with applicable laws and regulations
and licensing requirements would subject the Company and its physicians to civil
remedies, including significant fines, penalties, injunctions and expulsion from
participation in Medicare and Medicaid programs, as well as possible criminal
sanctions, which would have a material adverse effect on the Company.

     Several proposals have recently been made by federal and state government
officials that may lead to substantial health care reforms, including the
implementation of a government-directed national health care system and
stringent health care cost-containment measures. Adoption of such a system or
cost controls could further limit reimbursement for medical services. Past
congressional actions have resulted in changes in Medicare and Medicaid
reimbursement rates, and the Company believes that it is likely that Congress
will, over the next several years, substantially limit the growth of Medicare
and Medicaid expenditures. Significant uncertainty exists as to the status of
reimbursement and there can be no assurance that health care insurers and other
third-party payors will continue to cover certain medical services or reimburse
such services at current levels. Any significant reduction of health care
insurance coverage for medical services could have a material adverse effect on
the Company's business and prospects.

EMPLOYEES.

     The Company currently employs 95 persons, including 3 executive officers,
11 physicians, 1 nurse practitioner, 19 medical assistants and 61 other persons
engaged in operations management, administrative, and clerical capacities. None
of the Company's employees are represented by a union. The Company believes that
its employee relations are good.

                                       8
<PAGE>
 
ITEM 2.  PROPERTY.

     The Company occupies its primary care centers under third-party lease
agreements.  Its executive offices are currently on a month-to-month lease.  The
following table sets forth the location, approximate annual rent, use of each
location and expiration date of each lease:

<TABLE>
<CAPTION>
 
                     Approx.   Approx.                                Lease
     Location        SQ. FEET    RENT             USE            EXPIRATION DATE
-------------------  --------  --------  ---------------------  ------------------
<S>                  <C>       <C>       <C>                    <C>
 
Deltona, FL             2,500   $44,000  Primary Care Center    April 30, 1998
South Daytona, FL       2,200    30,000  Primary Care Center    October 31, 1997
Melbourne, FL           1,600    15,000  Administrative Office  Month to month
Melbourne, FL           2,900    50,000  Primary Care Center    September 30, 2000
Heathrow, FL(1)         6,200    54,000  Executive Office       Month-to-Month
Palm Bay, FL            3,800    40,000  Primary Care Center    December 31, 1999
Merritt Island, FL      2,680    29,000  Primary Care Center    December 31, 1999
Satellite Beach, FL     2,580    67,000  Primary Care Center    August 31, 2001
Titusville, FL          3,200    58,000  Primary Care Center    June 30, 1998
-----------------
</TABLE>
(1) In October 1997, the Company relocated its executive offices to Heathrow,
    Florida from its former leased offices in Longwood, Florida due to a fire
    that occurred on October 24, 1997 at the Longwood location during repairs
    being made to the roof by a roofing contractor.  Although certain of the
    Company's furniture and fixtures were damaged, the Company was able to
    continue uninterrupted operation of its business and relocate to new
    facilities.  The Company is currently negotiating a short-term lease for
    these new facilities.  For a period of the lesser of one year or until the
    Company relocates to permanent space, the Company's insurance carrier will
    cover lease payments that exceed the lease payments under the former lease
    for the Longwood facilities.  See "Management's Discussion and Analysis of
    Financial Condition and Results of Operations - Subsequent Event."

     Although the Company believes that its primary care centers are adequate
for its existing operations, the Company regularly evaluates the adequacy of
each primary care center.  Each lease which expires in fiscal 1998 contains a
renewal provision giving the Company the option to renew the subject lease. The
Company expects to renew, or find other suitable locations for, all leases which
will expire during fiscal 1998.

ITEM 3.  LEGAL PROCEEDINGS.

     There are no pending material legal proceedings to which the Company is a
party or to which any of its properties is subject.

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

     No matter was submitted to the Company's shareholders for approval during
the fourth quarter of the fiscal year covered by this report.

                                       9
<PAGE>
 
PART II

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

Market Information.
-------------------

     The Company's Common Stock is traded on the NASDAQ Small-Cap Market under
the symbol "SUNS".  The  following are the high and low closing bid prices as
provided by NASDAQ in the NASDAQ-Small Cap Market.

<TABLE>
<CAPTION>
                                1996                                         1997
                        ---------------------                       -----------------------
     Period Ended          High        Low        Quarter Ended        High         Low
     --------------------------------------------------------------------------------------
<S>                     <C>         <C>        <C>                  <C>          <C>
                                               October 31, 1996          5           3-1/4
                                               January 31, 1997          5-7/8       3
                                               April 30, 1997            7-1/4       3-3/4
July 31, 1996               8-1/2      4-3/8   July 31, 1997             6-1/2       3-3/4
</TABLE>


The quotations represent prices between dealers in securities, they do not
include retail mark-ups, mark-downs, or commissions, and do not necessarily
represent actual transactions.

Holders.
--------

     The approximate number of holders of record of the Company's Common Stock
at October 15, 1997 is 22.  However, the Company estimates that there were 1,149
beneficial holders of the Company's Common Stock as of that date.

Dividends.
----------

     No cash dividends have been declared by the Company.  The Company currently
anticipates that all of its earnings will be retained for development of the
Company's business, and does not anticipate paying any cash dividends in the
foreseeable future.  Future cash dividends, if any, will be at the discretion of
the Company's Board of Directors and will depend upon, among other things, the
Company's future operations and earnings, capital requirements and surplus,
general financial condition, contractual restrictions, and such other factors as
the Board of Directors may deem relevant.

                                       10
<PAGE>
 
ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

"FORWARD-LOOKING" INFORMATION

     This report on Form 10-KSB contains certain "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), which represent the Company's expectations and
beliefs, including, but not limited to statements concerning the Company's
expected growth.  The words "believe," "expect," "anticipate," "estimate,"
"project," and similar expressions identify forward looking statements, which
speak only as of the date such statement was made.  These statements by their
nature involve substantial risks and uncertainties, certain of which are beyond
the Company's control, and actual results may differ materially depending on a
variety of important factors, including the Company's ability to forge
satisfactory relationships with physician groups and provider networks and
enroll sufficient numbers of HMO members; sources for sufficient additional
capital to meet the Company's growth and operations; the failure to properly
manage growth and successfully integrate additional physician groups and
providers; changes in economic conditions; demand for the Company's products;
and, changes in the competitive and regulatory environment.  Future events and
actual results could differ materially from those expressed in, contemplated by,
or underlying any such forward-looking statements.

THE FOLLOWING ANALYSIS OF THE COMPANY'S FINANCIAL CONDITION AS OF JULY 31, 1997
AND THE COMPANY'S RESULTS OF OPERATIONS FOR THE YEARS ENDED JULY 31, 1996 AND
1997 SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S FINANCIAL STATEMENTS AND
NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT.

GENERAL.

    On February 24, 1997, SHP was awarded its HMO Certificate of Authority in
the State of Florida.  SHP accepted its first HMO members effective May 1, 1997
in its initial service area of Brevard County, Florida.  During the fiscal year
ended July 31, 1997 ("fiscal 1997"), SHP accelerated its plans to enter markets
that are under-served by managed health care.  Thus, SHP has rapidly expanded
and been approved by the State of Florida Agency for Health Care Administration
("AHCA") to offer its HMO products in Orange, Osceola, Seminole, Hernando, Lake,
Polk, Volusia, Indian River, St. Lucie, Marion, Citrus and Sumter Counties,
Florida.  As a result of this accelerated growth, development costs have also
been accelerated in the areas of advertising, marketing and materials, personnel
and related expenses.  SHP intends to continue this rapid expansion throughout
the State of Florida and has targeted more than forty additional counties for
its HMO products over the next eighteen months.  SHP has over 2,000 physicians
and 20 hospitals in its current service areas contracted under the HMO.  As of
October 1, 1997, the Company enrolled 2,800 members and has estimated annualized
HMO premium revenues of approximately $2,700,000.  The net loss for fiscal  1997
is consistent with management's expectations and estimates provided in the
Company's Offering statement with respect to the costs associated with the
attainment of SHP's HMO license and the related start-up and development costs
of an HMO.

                                       11
<PAGE>
 
GENERAL FINANCIAL INFORMATION.

<TABLE>
<CAPTION>
                                                    FISCAL YEAR ENDED JULY 31,
                                                      1996             1997
                                                    ----------       ----------
<S>                                                 <C>              <C>
Patient service revenue                             $                $ 4,728,536
Income (loss) from continuing operations              (222,468)       (1,631,165)
Income (loss) from continuing
 operations per common share                              (.15)(1)          (.68) 
Total Assets                                         7,499,487         6,370,849
Long term obligations                                   16,540           108,521
</TABLE>
_________________
(1)  Gives effect to weighted average Common Stock and weighted incremental
     shares relating to Common Stock equivalents (options granted and warrants
     exercised) at July 31, 1996.  (See sections entitled "Employment
     Agreements" and "Stock Option Plan".)

Results of Operations.
--------------------- 

Fiscal 1997 compared to year ended July 31, 1996 ("fiscal 1996").

     Patient service revenue declined by approximately $352,000 from $5,081,000
in fiscal 1996 to $4,729,000 in fiscal 1997.  This decrease is attributable to a
decline in revenues generated by the Company's primary care center operations of
$437,000, offset by an $85,000 increase in revenues derived from the Company's
HMO products, which commenced in the fourth quarter of fiscal 1997.  The
decrease in revenues from primary care center operations is the result of a
$230,000 decline in fee-for-service revenue, a $30,000 decrease in prepaid
health clinic revenue and a decrease in HCFA revenue of $211,000, offset
slightly by a $34,000 increase in capitation revenue.  Management believes that
the decline in fee-for-service revenue is a trend reflective of the shift within
the health care industry from fee-for-service based business toward managed
care.  Prepaid health clinic revenue decreased due to a decline in subscribers,
as SHP began phasing out this product as a result of SHP receiving its license
to operate as an HMO.  Effective September 1, 1997, SHP no longer offers its
prepaid health clinic product.  The decline in HCFA revenue is due to amendments
to the Social Security Act, effective January 1, 1996, which prohibits SHP from
enrolling Medicare beneficiaries who are not members of employer groups or
unions until it establishes Medicare HMO operations.  It is anticipated that a
Medicare risk contract will be filed with HCFA during the fiscal year ended July
31, 1998.  Although the Company had anticipated a loss of capitation revenues in
fiscal 1997 from fiscal 1996, these revenues increased slightly as a result of
changes in the Company's provider agreements with a certain HMO.  As a result 
of the 

                                       12
<PAGE>
 
changes, the Company realized higher reimbursement rates per enrollee, although
the actual number of enrollees declined.

     As a result of the Company achieving its objective of obtaining an HMO
Certificate of Authority on February 24, 1997 and commencing the enrollment of
its members effective May 1, 1997, the Company, for the first time, realized
$85,000 in HMO premium revenues in fiscal 1997.  The Company anticipates that
HMO premium revenues will rapidly increase over the next eighteen month period
as the Company will continue to implement its accelerated growth plan.  However,
there can be no assurance that such growth will occur as rapidly as the Company
expects.

     Costs of patient related services as a percentage of revenues increased
from 66% in fiscal 1996 to 72% in fiscal 1997.  This increase is attributable to
a decline in revenues that was not offset by a corresponding decline in patient
related costs.  As the costs to operate the Company's primary care centers are
relatively fixed, the decline in revenues decreased fiscal 1997 operating
margins.  In addition, the Company incurred new medical costs related to its HMO
products of $135,000.  These costs were directly attributable to the Company
establishing reserves for its small membership in its new HMO products.  The
Company anticipates that as HMO premium revenues increase, the amount of reserve
required as a percentage of HMO revenue will decrease.  However, there can be no
assurance that such revenue growth or a decline in reserves as a percentage of
revenue will occur as the Company expects.

     General and administrative expenses increased by $1,415,000 or 183% from
$1,705,000 in fiscal 1996 to $3,120,000 in fiscal 1997.  The increase is
primarily the result of an increase in salaries and related benefits of
approximately $625,000, an increase in professional and outsourcing fees of
$250,000, increased advertising expenses of $194,000, an increase in occupancy
and related costs of approximately $207,000 and an increase in HMO enrollment
materials and related costs of $139,000.  These expenses were primarily incurred
in connection with the Company's accelerated expansion into additional Florida
markets, the development of marketing materials and increased infrastructure and
personnel to effect the Company's transformation into an HMO.

     Compensation expense decreased from $211,000 in fiscal 1996 to $65,000 in
fiscal 1997 as the result of the granting of stock options related to certain
contractual agreements in fiscal 1996.

     Interest income increased $198,000 or 367% from $54,000 in fiscal 1996 to
$252,000 in fiscal 1997 as the result of the Company realizing $6,082,000 in
proceeds from its initial public stock offering in May 1996.

     The provision (benefit) for income taxes decreased from a provision of
$29,000 in fiscal 1996 to a (benefit) of $51,000 in fiscal 1997.  This result is
primarily attributable to the Company recording a current federal tax (benefit)
in fiscal 1997 as compared to a current federal tax provision in fiscal 1996.

                                       13
<PAGE>
 
     As a result of the foregoing, the net loss increased to $(1,631,000) in
fiscal 1997 from $(222,000) in fiscal 1996.

Financial Condition, Liquidity and Capital Resources.
-----------------------------------------------------

     At July 31, 1997, the Company had working capital of $4,225,000 as compared
to working capital of $5,898,000 at July 31, 1996.  The decline in working
capital from fiscal 1996 is attributable primarily to the development and
marketing costs incurred in order to transform SHP into an HMO.

     Net cash used by operating activities was $(1,226,000) for fiscal 1997, as
compared to net cash provided by operating activities of $300,000 for fiscal
1996.  The decline in cash flow from operating activities of $1,526,000 is
primarily attributable to the increased net loss of $1,409,000 in fiscal 1997
over fiscal 1996.

     Net cash used in investing activities for fiscal 1997 was approximately
$(180,000), primarily as a result of purchases of furniture, equipment and
leasehold improvements associated with the development of the Company's new
administrative offices and replacement of medical office equipment.  Net cash
used in investing activities in fiscal 1996 was $(285,000) and was the result of
a purchase of a $250,000 Certificate of Deposit to satisfy the Florida
Department of Insurance net worth requirement for the SHP's Company's Prepaid
Health Clinic license.

     Net cash used in financing activities for fiscal 1997 was $(62,000) as
compared to net cash provided by financing activities of $5,762,000 for fiscal
1996.  Cash used in financing activities in fiscal 1997 relates to principal
payments under capital lease obligations of $32,000 and a $30,000 adjustment to
the Offering proceeds realized in fiscal 1996.  Cash provided by financing
activities during fiscal 1996 primarily represents proceeds received from the
Offering of the Company's Common Stock on May 15, 1996.  As of September 30,
1997, proceeds from the Offering of approximately $1,542,000 have been used as
working capital to finance the HMO development effort.  An additional $291,000
of the Offering proceeds have been used to purchase furniture, equipment and
leasehold improvements.

     Humana Health Care Plans ("Humana"), an HMO, has seven service agreements
with the Company (five of which are with the Company's subsidiary, Brevard (the
"Humana/Brevard Agreements") and two of which are with the Company's subsidiary
First Health (the "Humana/First Health Agreements").  Humana has announced its
intention to terminate the five Humana/Brevard Agreements in fiscal 1998, three
of which will be terminated effective November 30, 1997 and two of which will be
terminated effective March 30, 1998.  Management estimates that, as a result of
these contract terminations, revenue will decrease by approximately $190,000 in
fiscal 1998.  However, management believes that upon Humana's termination of the
Humana/Brevard agreements, an indeterminate number of Humana members that are
currently being treated by Brevard physicians will change their coverage to
another HMO in the same market area and with whom Brevard has recently entered
into an agreement to provide primary health care services to such former Humana
members.   The Company anticipates that such an arrangement will afford the
Company the opportunity to recover revenue that would otherwise be

                                       14
<PAGE>
 
lost upon termination of the Humana/Brevard agreements since the Company
believes that an indeterminate number of former Humana members, desiring to
retain their physician-patient relationships,  will continue to seek treatment
from Brevard's primary care physicians.  However, in spite of the Company's
efforts to minimize the financial impact that may result from the termination of
the Humana/Brevard Agreements, there can be no assurance that the Company will
recover any amount of lost revenue resulting therefrom.

     Effective November 1, 1997, the method of payment under the two
Humana/First Health Agreements changed from capitation to a fee schedule.
Although management believes that there will be no significant adverse financial
impact on the Company as a result of this change, there can be no assurance that
an adverse impact will not result.

     During the next fiscal year, the Company's liquidity will be affected by
continued accelerated HMO development, marketing and operation.  As an HMO, SHP
is required to maintain a minimum capital surplus in an amount which is the
greater of $500,000 or 10% of total liabilities pursuant to Section 641 of the
Florida Insurance Code. At June 30, 1997, SHP's unaudited quarterly statutory
financial statements reflect an actual surplus of $3,246,000.  The Company's
cash balances are currently maintained as a cash equivalent of a Money Market
Trust Fund which invests in securities issued or guaranteed by the U.S. Treasury
and repurchase agreements relating to such securities.

     HMO development costs will continue to be incurred by SH in fiscal 1998 to
establish arrangements with physicians, hospitals, and other health care
providers as well as develop marketing materials and strategies necessary to
operate and maintain HMO operations in accordance with statutory requirements
(which shall include the costs of key employee's salaries and expenses).

     Although the Company is unable to predict with any degree of certainty the
effect on the Company of its proposed shift of business focus (e.g., from the
provision of primary care services under provider agreements to the
establishment of commercial HMO operations), it is possible that the Company's
HMO operations could result in increased competition with HMOs operating in the
State of Florida.  As a result of such competition, it is possible that certain
HMOs may terminate provider agreements with the Company, which could result in a
significant decline in revenues.  In addition, the Company's operating expenses
can be expected to increase significantly in connection with the Company's
proposed expansion, which will require the Company to make significant up-front
expenditures to further develop new provider relationships, either contractually
or otherwise, and pay salaries for additional personnel.  The Company
anticipates that it will make additional capital expenditures associated with,
among other things, furniture, leasehold improvements and office equipment.  The
Company expects to pay salaries for additional marketing, development and other
personnel to augment the Company's efforts to successfully manage anticipated
growth.  There can be no assurance that the foregoing factors will not adversely
affect the Company's future operating results.

     The Company conducted an initial public offering in May, 1996 to provide
funds for its expansion plans.  The net proceeds from such offering,
approximating $6,000,000, have been and

                                       15
<PAGE>
 
will continue to be used to implement such expansion.  The Company anticipates,
based on currently proposed plans and assumptions relating to its operations
(including the costs associated with, and the accelerated timetable for, its
proposed expansion), that remaining offering proceeds will be sufficient to
satisfy its net tangible asset requirements as governed by Nasdaq and other
equity requirements as governed by certain regulatory entities including,
without limitation, the Florida Department of Insurance, AHCA and HCFA into the
third quarter of fiscal 1998.  However, during fiscal 1998, the Company intends
to seek additional capital to further fund the HMO development and expansion and
continue to satisfy the aforesaid net tangible asset and equity requirements.
Such additional capital may be accomplished through equity or debt financings.
There can be no assurance that additional financing will be available to the
Company on acceptable terms, or at all.  To the extent that the Company's
available cash resources are insufficient to allow the Company to engage in
operations sufficient to generate meaningful revenues or achieve profitable
operations, the inability to obtain additional financing will have a material
adverse effect on the Company.  Additional equity financing may involve
substantial dilution to the interests of the Company's stockholders.

Subsequent Event.
---------------- 

     In October 1997, the Company relocated its offices to Heathrow, Florida
from its former leased offices in Longwood, Florida due to a fire that occurred
on October 24, 1997 at the Longwood location during repairs being made to the
roof by a roofing contractor.  The fire did not have a material effect on the
Company or its operations.  Although certain of the Company's furniture and
fixtures were damaged, the Company was able to replace same, relocate to new
facilities and continue uninterrupted operation of its business.  Although the
Company expects to enter into a short-term lease for its current Heathrow
facilities, the Company anticipates relocating its executive offices to another
office complex in Heathrow which is currently under construction with completion
anticipated in April 1998.  The space to be occupied and terms of the lease for
the premises under construction are currently being negotiated.  The Company's
insurance carrier will cover replacement costs for furniture and equipment, as
well as, for a period of one year, lease payments in excess of the lease
payments under the former lease for the Longwood facility.

ITEM 7.  FINANCIAL STATEMENTS.

     Filed as part of this report are audited financial statements for the years
ended July 31, 1996 and 1997 commencing at page F-1.

ITEM 8.  CHANGES IN ACCOUNTANTS.

     Richard A. Eisner & Company, LLP, was previously the principal accountant
for the Company.   On August 27, 1996, that firm's appointment as principal
accountant was terminated and KPMG Peat Marwick, LLP, was engaged as principal
accountant.  The decision to change accountants was approved by the Board of
Directors and ratified by the shareholders at the annual meeting of the
shareholders held on December 16, 1996.

                                       16
<PAGE>
 
     In connection with the audit of the fiscal year ended July 31, 1995 and the
subsequent interim period through August 27, 1996, there were no disagreements
with Richard A. Eisner & Company, LLP, on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedures,
which disagreements if not resolved to its satisfaction would have caused it to
make reference in connection with its opinion to the subject matter of the
disagreement.

     The audit report of Richard A. Eisner & Company, LLP, on the consolidated
financial statements of the Company and subsidiaries as of and for the year
ended July 31, 1995, did not contain any adverse opinion or disclaimer of
opinion, nor were they qualified or modified as to uncertainty, audit scope, or
accounting principles.


PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES.

     Information concerning the directors, executive officers and significant
employees of the Company is contained in the Company's Proxy Statement to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days after the close of the fiscal year ended July 31, 1997.  Such
information is hereby incorporated by reference.


ITEM 10.  EXECUTIVE COMPENSATION.


     Information concerning executive compensation is contained in the Company's
Proxy Statement to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A within 120 days after the close of the fiscal year ended July
31, 1997.  Such information is hereby incorporated by reference.


ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

          Information concerning the security ownership of certain beneficial
owners and management is contained in the Company's Proxy Statement to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A within
120 days after the close of the fiscal year ended July 31, 1997.  Such
information is hereby incorporated by reference.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

  Information concerning certain relationships and related transactions is
contained in the Company's Proxy Statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days after the close
of the fiscal year ended July 31, 1997.  Such information is hereby incorporated
by reference.

                                       17
<PAGE>
 
ITEM 13.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

     Filed as part of this 10-K annual report are audited financial statements
for the years ended July 31, 1996 and 1997.

     No reports on Form 8-K were filed during the last quarter of the fiscal
year ended July 31, 1997.

                                       18
<PAGE>
 
                   SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES

                       Consolidated Financial Statements

                                 July 31, 1997


                  (With Independent Auditors' Report Thereon)
<PAGE>
 
                   SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES

                                 July 31, 1997



                               Table of Contents
                               -----------------



<TABLE>
<CAPTION>
 
                                                            Page
                                                           -------
<S>                                                        <C>
 
Independent Auditors' Report                                 F-1
 
Consolidated Balance Sheet at July 31, 1997                  F-2
 
Consolidated Statements of Operations for the years 
ended July 31, 1996 and 1997                                 F-3
 
Consolidated Statement of Changes in Shareholders' 
Equity for the cumulative period from August 1, 1995 
to July 31, 1997                                             F-4
 
Consolidated Statements of Cash Flows for the years 
ended July 31, 1996 and 1997                                 F-5
 
Notes to Consolidated Financial Statements                   F-6 - 21
</TABLE>
<PAGE>
 
                          Independent Auditors' Report
                          ----------------------------



The Board of Directors
SunStar Healthcare, Inc.:

We have audited the accompanying consolidated balance sheet of SunStar
Healthcare, Inc. and Subsidiaries (the Company) as of July 31, 1997, and the
related consolidated statements of operations, changes in shareholders' equity,
and cash flows for each of the years in the two-year period ended July 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SunStar Healthcare,
Inc. as of July 31, 1997, and the results of its operations and its cash flows
for each of the years in the two-year period ended July 31, 1997, in conformity
with generally accepted accounting principles.



                                    /s/
                                    KPMG Peat Marwick LLP


Jacksonville, Florida
September 16, 1997

                                      F-1
<PAGE>
 
                   SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES

                           Consolidated Balance Sheet

                                 July 31, 1997
<TABLE>
<CAPTION>
 
 
               Assets                                                 1997
               ------                                             -----------
<S>                                                               <C>
Current assets:
  Cash and cash equivalents                                       $ 4,525,677
  Patients accounts receivable, less allowance for doubtful
     accounts of approximately $125,000                               161,685
  Due from Medicare                                                      -
  Prepaid expenses and other assets                                   298,235
  Deferred taxes (note 5)                                              53,000
  Other receivables                                                    66,813
                                                                  -----------
          Total current assets                                      5,105,410
 
Furniture, equipment and leasehold improvements, net (note 2)         443,587
Goodwill, net (note 3)                                                346,004
Restricted cash (note 8(c))                                           280,000
Deposits and other assets                                             148,848
Deferred taxes (note 5)                                                47,000
                                                                  -----------
       Total                                                        6,370,849
                                                                  ===========
 
          Liabilities and Shareholders' Equity
          ------------------------------------
Current liabilities:
  Accounts payable and accrued expenses                               560,360
  Medical claims payable                                               93,858
  Unearned premium - Medicare                                         131,035
  Unearned premium - HMO                                               59,213
  Capital lease obligations, current (note 4)                          36,226
       Total current liabilities                                      880,692
 
Capital lease obligations, noncurrent (note 4)                        108,521
                                                                  -----------
          Total liabilities                                           989,213
                                                                  -----------
 
Shareholders' equity (note 1(a), 6 and 8):
  Shareholder's net investment                                           -
  Preferred stock, par value $.001 per share, 1,000,000 shares
     authorized, no shares outstanding                                   -
  Common stock, par value $.001 per share, 10,000,000 shares
     authorized, 2,395,000 shares issued and outstanding                2,395
  Additional paid-in capital                                        7,163,800
  Unearned compensation from stock options                           (130,209)
  Accumulated deficit                                              (1,654,350)
                                                                  -----------
          Total shareholders' equity                                5,381,636
                                                                  -----------
 
Commitments and contingencies (note 8)
          Total liabilities and shareholders' equity              $ 6,370,849
                                                                  ===========
See accompanying notes to consolidated financial statements.
</TABLE>

                                      F-2
<PAGE>
 
                   SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES

                     Consolidated Statements of Operations

                   For the years ended July 31, 1996 and 1997


<TABLE>
<CAPTION>
 
 
                                          1996         1997
                                       -----------  -----------
<S>                                    <C>          <C>
 
Patient service revenue                $5,080,850    4,728,536
                                       ----------   ----------
 
Cost and expenses:
  Cost of patient related services      3,371,131    3,426,767
  General and administrative            1,704,748    3,119,787
  Compensation expense (note 8(b))        210,937       65,104
  Amortization of intangibles              42,333       51,143
                                       ----------   ----------
       Total operating expenses         5,329,149    6,662,801
                                       ----------   ----------
 
Income (loss) from operations            (248,299)  (1,934,265)
Interest income                            54,431      252,100
                                       ----------   ----------
 
Income (loss) before income taxes        (193,868)  (1,682,165)
Provision for income taxes (note 5)        28,600      (51,000)
                                       ----------   ----------
 
       Net income (loss)               $ (222,468)  (1,631,165)
                                       ==========   ==========

Net income (loss) per share 
 (note 1(d))                                $(.15)       $(.68)

Weighted average shares 
 outstanding (note 1(d))                1,478,269    2,395,000

</TABLE> 

See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>
 
                   SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES

           Consolidated Statement of Changes in Shareholders' Equity

                   For the years ended July 31, 1996 and 1997


<TABLE>
<CAPTION>
 
 
                                                                           Unearned
                                                                         Compensation
                                     Shareholders'           Additional      From
                                         Net        Common    Paid-in       Stock      Accumulated
                                      Investment    Stock     Capital      Options       Deficit        Total
                                    -------------   ------  ----------   ---------     -----------   -----------
<S>                                 <C>             <C>     <C>          <C>           <C>           <C>
Balance, July 31, 1995                 $1,036,946     -          -            -              -         1,036,946
 
Net loss                                 (199,283)    -          -            -            (23,185)     (222,468)
Net equity transactions with
  National Home Health
  Care Corp. (note 6)                    (131,163)                                                      (131,163)
Conversion of National Home
  Health Care Corp. net
  investment to
  common stock (note 1(b))               (706,500)     900     705,600        -              -              -
Issuance of stock (note 1(a))                -       1,495   6,082,002        -              -         6,083,497
Compensatory stock options
  granted (note 8 (b))                       -        -        406,250    (406,250)          -              -
Amortization of compensatory
  stock options (note 8 (b))                 -        -          -         210,937           -           210,937
                                    -------------   ------  -----------  ---------     -----------   -----------
Balance, July 31, 1996              $        -       2,395   7,193,852    (195,313)        (23,185)    6,977,749
 
Net loss                                     -        -          -            -         (1,631,165)   (1,631,165)
Stock issuance costs (note 1(a))             -        -        (30,052)       -              -           (30,052)
Amortization of compensatory
  stock options (note 8 (b))                 -        -          -          65,104           -            65,104
                                    -------------   ------  ----------   ---------     -----------   -----------
Balance, July 31, 1997              $                2,395   7,163,800    (130,209)     (1,654,350)    5,381,636
                                    =============    =====  ==========   =========     ===========   ===========
 
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>
 
                   SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
                     Consolidated Statements of Cash Flows
                   For the years ended July 31, 1996 and 1997
<TABLE>
<CAPTION>
 
                                                                      1996         1997
                                                                   ----------   ----------
<S>                                                                <C>          <C>
 
Cash flows from operating activities:
  Net loss                                                         $ (222,468)  (1,631,165)
  Adjustments to reconcile net loss to
   net cash provided by (used in) operating activities:
     Depreciation and amortization                                    132,592      163,543
     Provision for doubtful accounts                                  225,000       15,000
     Deferred taxes                                                   (27,700)     (37,400)
     Noncash compensation                                             210,937       65,104
     Operating expenses and income taxes
      funded by National Home Health Care, Corp.                      165,068
     Gain on the sale of fixed assets                                    -          (3,473)
     Changes in operating assets and liabilities:
       (Increase) in accounts receivable                             (196,832)     (61,942)
       (Increase) decrease in prepaid expenses and other assets      (226,647)    (129,970)
       (Increase) decrease in due from Medicare                       (38,448)      38,448
       Increase in accounts payable,
         accrued expenses and other liabilities                       119,215      230,827
       Increase in medical claims payable                                -          93,858
       Increase (decrease)  in unearned premium - Medicare            159,521      (28,486)
       Increase in unearned premium - HMO                                -          59,213
                                                                   ----------   ----------
          Net cash provided by (used in) operating activities         300,238   (1,226,443)
                                                                   ----------   ----------
 
Cash flows from investing activities:
  Purchase of furniture, equipment and
     leasehold improvements                                           (35,377)    (183,221)
  Proceeds from sale of furniture, equipment
     and leasehold improvements                                          -           3,473
  Purchase of certificate of deposit, restricted                     (250,000)        -
                                                                   ----------   ----------
       Net cash used in investing activities                         (285,377)    (179,748)
                                                                   ----------   ----------
 
Cash flows from financing activities:
  Principal payments under capital lease obligations                  (24,958)     (31,689)
  Initial public offering                                           6,083,497      (30,052)
  Shareholder distributions                                          (296,231)        -
                                                                   ----------   ----------
       Net cash provided by (used in) financing activities          5,762,308      (61,741)
                                                                   ----------   ----------
 
       Net increase (decrease) in cash and cash equivalents         5,777,169   (1,467,932)
 
Cash and cash equivalents, beginning of period                        216,440    5,993,609
                                                                   ----------   ----------
 
Cash and cash equivalents, end of period                            5,993,609    4,525,677
                                                                   ==========   ==========
 
Supplemental disclosure of cash flow information:
  Cash paid during the year for interest                           $    5,168       10,447
                                                                   ==========   ==========

Noncash investing and financing activities 
 (notes 1(a), 4, 6 and 8)
</TABLE> 

See accompanying notes to consolidated financial statements.

                                      F-5
<PAGE>
 
                   SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                 July 31, 1997



(1) Summary of Significant Accounting Policies
    ------------------------------------------

   (a)  Organization
        ------------

        SunStar Healthcare, Inc. (SunStar or the Company) was incorporated in
        December 1995 and issued 875,000 shares (prior to a stock split
        discussed below) of common stock. In January 1996, National Home Health
        Care Corp. (NHHC), then the sole shareholder of the Company, contributed
        to SunStar 100% of the outstanding capital stock of its wholly owned
        subsidiaries, First Health, Inc. (First Health) and Brevard Medical
        Center, Inc. (Brevard), which included 100% of the outstanding capital
        stock of Brevard's wholly owned subsidiary, SunStar Health Plan, Inc.
        (SHP) (formerly known as Boro Medical Corp.). The Company, First Health,
        Brevard and SHP collectively are referred to herein as SunStar.

        SunStar provides managed healthcare services pursuant to contractual
        arrangements, as well as on a fee-for-service basis, through its
        outpatient medical centers in central Florida. Throughout fiscal 1997,
        SunStar's management was active in developing and obtaining
        certification for its health maintenance organization (HMO) product. On
        February 24, 1997, SHP was issued a Certificate of Authority by the
        Insurance Department of the State of Florida to operate an HMO in
        various counties throughout Florida in accordance with the provisions of
        Chapter 641, Florida Statutes. Costs associated with the development of
        SunStar's HMO, including management salaries and benefits,
        administrative and other indirect costs have been reflected as general
        and administrative expense in the accompanying financial statements.

        SunStar is authorized to issue 10,000,000 shares of common stock, par
        value $.001 per share, and 1,000,000 shares of preferred stock, par
        value $.001 per share. The preferred stock may be issued in one or more
        series, the terms of which may be determined at the time of issuance by
        the Board of Directors. In April 1996, the Board of Directors approved a
        1.02857 for one stock split. As a result of the stock split, NHHC holds
        900,000 shares of the Company's common stock representing a 37.6%
        interest. All share amounts have been retroactively adjusted for all
        periods presented.

                                      F-6
<PAGE>
 
                   SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



(1) Summary of Significant Accounting Policies, continued
    -----------------------------------------------------

   (a)  Organization, continued
        -----------------------

        On May 15, 1996, the Company completed an initial public offering (the
        Offering), pursuant to which the Company sold 1,300,000 shares of
        previously unissued common stock, par value $.001. The Offering resulted
        in net proceeds to the Company of $5,230,372. On June 7, 1996, the
        underwriters in the Offering exercised their over-allotment option to
        purchase additional shares of common stock, pursuant to which the
        Company sold 195,000 shares of common stock, par value $.001, resulting
        in additional net proceeds to the Company of $853,125. During 1997, the
        Company paid $30,052 of additional stock issuance costs related to the
        Offering which has been reflected as a reduction of paid-in capital in
        the accompanying financial statements.

   (b)  Basis of Presentation
        ---------------------

        The formation of the Company has been accounted for as a reorganization.
        Accordingly, the financial statements have been prepared using NHHC's
        historical basis in the assets and liabilities of First Health and
        Brevard (the Predecessor), including goodwill and other intangibles
        recognized by NHHC in the acquisition of certain companies. All
        significant intercompany accounts have been eliminated.

        The 1996 financial statements reflect the results of operations and cash
        flows of the Company, from the date of its formation, and the
        Predecessor, as a component of NHHC, and may not be indicative of actual
        results of operations and financial position of the Company after the
        aforementioned reorganization. The 1997 financial statements reflect the
        results of operations, financial condition and cash flows of the Company
        after the reorganization.

        Shareholder's net investment represents NHHC's contribution of its net
        investment after giving effect to net income (loss) of SunStar, net
        equity transactions with NHHC (see note 6) and certain compensation
        charges (see note 8). Effective on May 15, 1996, the balance of this net
        investment was converted to common stock issued and additional paid-in
        capital (see note 1(a)). The Company separately presents retained
        earnings beginning on the effective date of the Offering. The 1996
        consolidated financial statements include no provision for interest on
        capital of NHHC used by the Company prior to the Offering.

                                      F-7
<PAGE>
 
                   SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(1) Summary of Significant Accounting Policies, continued
    -----------------------------------------------------

   (c)  Revenue Recognition
        -------------------

        The Company, through its out patient medical centers, recognized 
        fee-for-service revenues based on net realizable amounts due from
        patients and third-party payors at the time medical services are
        rendered and capitated fees for participating enrollees from HMO's
        during the month of coverage regardless of utilization. Premium revenue
        for prepaid health care under the Company's HMO is recognized as earned
        on a pro rata basis over the contract period.

        Health care costs relating to capitated fee arrangements from HMOs are
        recognized as services are provided. Reimbursement for the Company's
        participation under a federal third-party reimbursement contract is
        based on cost reimbursement principles and is subject to audit and
        retrospective adjustment. The accompanying consolidated financial
        statements reflect an estimated settlement for open-year cost reports
        subject to audit.

   (d)  Per Share Data
        --------------

        The Company has reflected in its calculations of earnings per share the
        900,000 shares issued by SunStar to NHHC as if such shares were
        considered to have been issued at the beginning of the respective
        period. Pursuant to the requirements of the Securities and Exchange
        Commission, common shares and common equivalent shares issued at prices
        below the initial public offering price during the 12 months immediately
        preceding the initial public offering have been included in the
        calculation of weighted average shares outstanding using the treasury
        stock method, as if they were outstanding for all periods presented
        whether they are antidilutive or not. Common stock equivalents, except
        as discussed above, are not included in the computation of net loss per
        share as their effect is antidilutive due to the Company's net losses
        attributable to common shares.

   (e)  Cash and Cash Equivalents
        -------------------------

        Cash and cash equivalents include short-term investments with original
        maturities of 90 days or less.

   (f) Furniture, Equipment and Leasehold Improvements
       -----------------------------------------------

        Furniture, equipment and leasehold improvements are stated at cost and
        depreciated over estimated useful lives of five to ten years on a
        straight-line basis.

                                      F-8
<PAGE>
 
                   SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



(1) Summary of Significant Accounting Policies, continued
    -----------------------------------------------------

   (g)  Goodwill
        --------

        Goodwill resulting from the purchase of certain physician practices is
        being amortized over periods of 5 to 20 years on a straight-line basis.
        Goodwill is evaluated periodically, on a site-by-site basis, and
        adjusted, if necessary, if events and circumstances indicate that an
        other than temporary decline in value below the current unamortized
        historical cost has occurred. Several factors are used to evaluate
        goodwill, including but not limited to: management's plans for future
        operations, recent operating results and projected undiscounted cash
        flows.

   (h)  Income Taxes
        ------------

        Prior to May 15, 1996, the Company's operations had been included in the
        consolidated income tax returns filed by NHHC. Accordingly, the
        provision for federal and state taxes and the related payments or
        refunds of tax were determined on a consolidated basis. Income tax
        expense in the accompanying financial statements had been estimated
        assuming the Company filed separate income tax returns. Related taxes
        payable for periods prior to May 15, 1996 are reflected as a
        contribution to capital by NHHC. SunStar will file separate tax returns
        to reflect results subsequent to May 15, 1996.

        Income taxes were accounted for under the asset and liability method.
        Deferred tax assets and liabilities are recognized for the future tax
        consequences attributable to differences between the financial statement
        carrying amounts of existing assets and liabilities and their respective
        tax bases and operating loss and tax credit carryforwards. Deferred tax
        assets and liabilities are measured using enacted tax rates expected to
        apply to taxable income in the years in which those temporary
        differences are expected to be recovered or settled. Deferred taxes
        result primarily from the use of accelerated depreciation for tax
        purposes and from reserves for uncollectible accounts receivable.

   (i)  Recently Issued Accounting Pronouncements
        -----------------------------------------

        In March 1995 and October 1995, the Financial Accounting Standards Board
        issued Statement of Financial Accounting Standards No. 121 (SFAS 121),
        "Accounting for the Impairment of Long Lived Assets and for Long Lived
        Assets to be Disposed of," and Statement of Financial Accounting
        Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation,"
        respectively. SFAS 121 and SFAS 123 are effective for the Company's
        fiscal year ended July 31, 1997.

                                      F-9
<PAGE>
 
                   SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(1) Summary of Significant Accounting Policies, continued
    -----------------------------------------------------

   (i)  Recently Issued Accounting Pronouncements, continued
        ----------------------------------------------------

        The Company's adoption of SFAS 121 during 1997 had no impact on the
        accompanying financial statements. The Company will continue to measure
        employee stock-based compensation in accordance with Accounting
        Principles Board Opinion No. 25, "Accounting for Stock Issued to
        Employees," using intrinsic values with appropriate disclosures under
        the fair value based method as required by SFAS 123.

        In February 1997, the Financial Accounting Standards Board issued
        Statement of Financial Accounting Standards No. 128 (SFAS 128) "Earnings
        Per Share." SFAS 128 will be effective for the Company's second quarter
        ended January 31, 1998. The Company believes adoption of SFAS 128 will
        not have a material impact on its financial statements.

   (j)  Use of Estimates
        ----------------

        The preparation of financial statements in conformity with generally
        accepted accounting principles requires management to make estimates and
        assumptions that affect the reported amounts of assets and liabilities
        at the date of the financial statements and the reported amounts of
        revenues and expenses during the reporting period. Actual results could
        differ from those estimates. Such estimates relate primarily to
        goodwill, depreciable assets, valuation reserves for accounts receivable
        and liabilities for incurred but not reported medical claims.

(2) Furniture, Equipment and Leasehold Improvements
    -----------------------------------------------

    Furniture, equipment and leasehold improvements at July 31, 1996 and 1997
    consist of the following:
<TABLE>
<CAPTION>
 
                                                  1997
                                              ------------
<S>                                           <C>
 
         Furniture, equipment and fixtures    $ 1,482,795
         Leasehold improvements                   311,016
                                              -----------
                                                1,793,811
         Less accumulated depreciation
           and amortization                    (1,350,224)
                                              -----------
 
              Net furniture, equipment and
                leasehold improvements        $   443,587
                                              ===========
</TABLE>

                                      F-10
<PAGE>
 
                   SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(2) Furniture, Equipment and Leasehold Improvements, continued
    ----------------------------------------------------------

    The net book value of furniture and equipment held under capital
    leases was approximately $187,000 at July 31, 1997.  Depreciation expense
    includes depreciation on assets held under capital leases.


(3) Goodwill
    --------

    Goodwill at July 31, 1997 consists of the following:


                                                    1997
                                                    ----

            Balance, beginning of period         $387,562
            Amortization                          (41,558)
                                                  ------- 
               Balance, end of period            $346,004
                                                 ========


(4) Capital Lease Obligations
    -------------------------

    At July 31, 1997, approximate future minimum lease payments under 
    capitalized lease obligations were as follows:
<TABLE>
<CAPTION>
 
            Year ended July 31                      Amount
            ------------------                     --------
<S>         <C>                                    <C>
            1998                                   $ 50,823
            1999                                     44,683
            2000                                     36,526
            2001                                     35,597
            2002                                     15,897
                                                   --------
               Total minimum lease payments         183,526
 
            Less amounts representing interest      (38,779)
 
            Less amounts due within one year        (36,226)
                                                   --------
 
            Amounts due after one year             $108,521
                                                   ========
</TABLE>
  During 1997, the Company acquired equipment under capital leases for $184,437.

                                      F-11
<PAGE>
 
                   SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



(5)  Income Taxes
     ------------

     The provision for income taxes for the years ended July 31, 1996 and 1997
     consists of:
<TABLE>
<CAPTION>
                                                                     1996        1997
                                                                   ---------  ----------
<S>                                                                <C>        <C>
         Current:
           Federal                                                 $ 50,300     (13,600)
           State                                                      6,000
                                                                   --------
                                                                     56,300     (13,600)
         Deferred tax benefit                                       (27,700)    (37,400)
                                                                   --------   ---------
           Total                                                   $ 28,600     (51,000)
                                                                   ========   =========
 
</TABLE> 
    Deferred tax assets at July 31, 1997 are as follows:
 
<TABLE> 
<CAPTION> 
                                                                                   1997
                                                                              ---------
 <S>                                                                          <C> 
         Deferred tax assets:
           Net operating loss carryforward                                    $ 605,000
           Accounts receivable reserves                                          45,800
           Furniture, equipment and leasehold improvements                       12,600
           Goodwill and other intangible asset                                   17,000
           Medical claims payable                                                15,200
           Stock option amortization                                            103,900
           Deferred Medicare                                                     49,300
                                                                              ---------
           Net deferred tax assets                                              848,800
           Less valuation allowance                                            (705,000)
                                                                              ---------
              Net deferred tax assets                                           143,800
 
         Deferred tax liabilities:
           HMO startup costs                                                    (38,000)
           Other assets                                                          (5,800)
                                                                              ---------
              Net deferred tax liabilities                                      (43,800)
                                                                              ---------
 
                Net deferred tax asset                                        $ 100,000
                                                                              =========
</TABLE>

                                      F-12
<PAGE>
 
                   SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



(5) Income Taxes, continued
    -----------------------

    The reconciliation of the statutory tax rate to the effective rate
    for the years ended July 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
 
                                                   1996       1997
                                                 ---------  ---------
<S>                                              <C>        <C>
      Federal statutory rate                     $(65,900)  (571,900)
      State taxes, net of federal tax benefit      (7,000)   (70,200)
      Change in valuation allowance                79,800    625,200
      Overaccrual of prior year taxes                -       (13,600)
      Other                                        21,700    (20,500)
                                                 --------   --------
                                                 $ 28,600    (51,000)
                                                 ========   ========
</TABLE>

    The difference between the tax provision provided for the year ended July
    31, 1997 and that expected from applying the U.S. statutory rate to loss
    from operations before taxes is primarily attributable to the Company
    recording a valuation allowance for deferred tax assets related to net
    operating loss (NOL) carryforwards and compensation charges for stock
    options to key employees which are not currently deductible for income
    taxes. The realization of the tax benefits related to these NOL
    carryforwards and stock options is dependent on future earnings and market
    conditions and have not been recorded. Management considers net deferred tax
    assets resulting from other temporary differences to be realizable based on
    anticipated future earnings. NOL carryforwards against future taxable income
    were approximately $1,609,000 at July 31, 1997. Such NOLs are scheduled to
    expire in 2112.


(6) Net Equity Transactions with NHHC
    ---------------------------------
<TABLE>
<CAPTION>
 
                                             1996        1997
                                          ----------  ----------
<S>                                       <C>         <C> 
 
         Corporate expense allocation     $ 18,750         - 
         Expenses paid by NHHC on   
           behalf of the Company           115,626         -
         Income taxes                       30,692         -
         Shareholder distributions        (296,231)        -
                                         ---------    ----------
                                         $(131,163)        -
                                         =========    ==========
</TABLE> 

                                      F-13
<PAGE>
 
                   SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



(7) Concentration of Credit Risk and Major Payors
    ---------------------------------------------

    Capitation revenue from HMOs as a percentage of patient service revenue
    amounted to approximately 31% in 1996 and 34% in 1997.

    In addition, approximately 39% in 1996 and 38% in 1997 of patient
    service revenue was derived under a federal cost reimbursement contract.


(8) Commitments, Contingencies and Other Matters
    --------------------------------------------

   (a)  Leases
        ------

        The Company rents various medical and office facilities under terms of
        several lease agreements which include escalation clauses. The Company
        also rents various medical and office facilities pursuant to operating
        leases currently subject to monthly renewals at the option of the
        Company. At July 31, 1997, minimum annual rental commitments under
        noncancelable operating leases are as follows:
 
           1998             $  326,070
           1999                207,877
           2000                101,629
           2001                 72,631
           2002                  9,636

        Rent expense amounted to approximately $329,000 and $389,000 for the
        years ended July 31, 1996 and 1997, respectively.

   (b)  Employment and Consulting Agreements
        ------------------------------------

        In connection with the Offering, the Company agreed to retain the
        underwriter as a consultant for a period of two years at a fee of
        $18,500 per year. In addition, the Company has granted warrants to the
        underwriter to purchase an aggregate of 130,000 shares of common stock
        at an exercise price equal to $6.00 per share. The warrants are
        exercisable on or after April 15, 1997 and expire on May 15, 2001.

                                      F-14
<PAGE>
 
                   SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



(8) Commitments, Contingencies and Other Matters, continued
    -------------------------------------------------------

   (b)  Employment and Consulting Agreements, continued
        -----------------------------------------------

        The Company has entered into an employment agreement with the Company's
        President and Chief Executive Officer. The agreement expires on the
        second anniversary of the successful completion of the Offering which
        became effective on May 15, 1996 (the Effective Date), provided that the
        agreement may be renewed for successive one-year periods unless, within
        thirty days of the expiration of the agreement, either party notifies
        the other of its election not to renew the agreement. The agreement also
        provides that for so long as the President remains employed by the
        Company, he shall serve as a member of the Company's Board of Directors
        and shall have the right to appoint one additional member to the Board
        of Directors. The agreement provides for an annual salary of $125,000 in
        the first year and $150,000 in the second year, payable commencing on
        the Effective Date. The agreement also provides for such bonuses as the
        Board of Directors may determine based on performance and other
        criteria. The agreement contains a confidentiality provision and a
        covenant not to compete with the Company for a period of six months
        following termination of employment.

        In addition, in January, 1996, the Company granted options to the
        President to purchase an aggregate of 250,000 shares of common stock at
        an exercise price equal to $.25 per share. The options are currently
        exercisable as to one-half of the shares covered thereby and shall be
        exercisable as to an additional one-fourth of the shares covered thereby
        on January 28, 1998 and 1999, respectively, provided that the President
        is employed by the Company on each such date. Commencing two years after
        the Effective Date, the Company has agreed to use its best efforts to
        file a registration statement under the Securities Act to register the
        shares of common stock issuable pursuant to the exercise of such
        options.

        The Company has also entered into an employment agreement with the
        Company's Executive Vice President. The agreement expires on the second
        anniversary of the Effective Date, provided that the agreement may be
        renewed for successive one-year periods unless, within thirty days of
        the expiration of the agreement, either party notifies the other of its
        election not to renew the agreement. The agreement provides for an
        annual salary of $100,000 in the first year and $135,000 in the second
        year, payable commencing on the Effective Date. The agreement also
        provides for such bonuses as the Board of Directors may determine based
        on performance and other criteria. The agreement contains a
        confidentiality provision and a covenant not to compete with the Company
        for a period of six months following termination of employment.

                                      F-15
<PAGE>
 
                   SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


(8) Commitments, Contingencies and Other Matters, continued
    -------------------------------------------------------

   (b)  Employment and Consulting Agreements, continued
        -----------------------------------------------

        In addition, the Company granted to the Executive Vice President options
        to purchase an aggregate of 75,000 shares of the Company's common stock,
        of which options to purchase 25,000 shares, at an exercise price of
        $0.25 per share, and 16,667 shares, at an exercise price of $4.00 per
        share, currently are exercisable. The remaining 33,333 options, which
        have been granted pursuant to the Company's 1996 Stock Option Plan (the
        Plan) and which have an exercise price of $4.00 per share, shall be
        exercisable as to an additional 16,667 of the shares covered thereby on
        May 15, 1998 and 1999, respectively, provided that the Executive Vice
        President is employed by the Company on such dates. Commencing two years
        after the Effective Date, the Company has agreed to use its best efforts
        to file a registration statement under the Securities Act to register
        the shares of common stock issuable upon exercise of such options.

        The Company has entered into a consulting agreement, as of the Effective
        Date, with an individual pursuant to which such individual will provide
        management consulting services to the Company. The agreement expired on
        July 31, 1996. As compensation for all management consulting services
        performed under this agreement, the Company has granted to this
        individual options to purchase an aggregate of 50,000 shares of common
        stock at an exercise price equal to $0.25 per share. All of these
        options are currently exercisable.

        The Company's granting of options relating to the above agreements
        resulted in a charge to operations of approximately $211,000 and $65,000
        in the years ended July 31, 1996 and 1997, respectively. Unearned
        compensation at July 31, 1997 amounts to approximately $130,000 which is
        presented as a reduction of equity. Such unearned amounts will be
        accounted for as an expense during the periods in which the related
        services are performed.

   (c)  Regulatory Requirements
        -----------------------

        Restricted cash consists of funds held as collateral for certain
        regulatory requirements. As an HMO licensed in Florida, SunStar Health
        Plan, Inc. is required to maintain a minimum capital surplus in an
        amount which is the grater of $500,000 or 10% of total liabilities
        pursuant to Section 641 of the Florida Insurance Code. The Company is in
        compliance with this requirement and had a statutory surplus of
        $3,257,000 at July 31, 1997. Dividends are restricted to 10% of
        statutory surplus or the entire net operating profits and related net
        capital gains derived during the immediately preceding fiscal year
        unless prior approval is received from the Insurance Department of the
        State of Florida.

                                      F-16
<PAGE>
 
                   SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



(8) Commitments, Contingencies and Other Matters, continued
    -------------------------------------------------------

   (d)  Stock Option and Benefit Plans
        ------------------------------

        Through the Effective Date, employees of the Company participated in
        NHHC's Employee Savings and Stock Investment Plan organized under
        Section 401(k) of the Internal Revenue Code. Under the Plan, employees
        may have contributed 10% of their salary into the Plan, limited to the
        maximum amount allowable under federal tax regulations. The Company
        matched employee contributions invested in NHHC common stock up to 5% of
        the employees' salary and may also have made additional contributions at
        its discretion. In addition to investing in NHHC stock, an employee may
        have invested in several mutual funds. The Company's contribution for
        the year ended July 31, 1996 amounted to approximately $29,000.

        In February 1996, the Board of Directors of SunStar adopted and
        SunStar's sole shareholder at that time, NHHC, approved the Plan
        pursuant to which 200,000 shares of common stock were reserved for
        issuance upon the exercise of options designated as either (i) options
        intended to constitute incentive stock options (ISOs) under the Internal
        Revenue Code of 1986, as amended, or (ii) nonqualified options. ISOs may
        be granted under the Plan to employees and officers of the Company.
        Nonqualified options may be granted to consultants, directors (whether
        or not they are employees), employees or officers of the Company.

        The Plan is intended to qualify under Rule 16b-3 under the Securities
        Exchange Act of 1934, as amended (the Exchange Act) and is administered
        by a committee of the Board of Directors; provided that the full Board
        of Directors currently is administering the Plan. The Board of Directors
        or the committee, as the case may be, within the limitations of the
        Plan, determines the persons to whom options will be granted, the number
        of shares to be covered by each option, whether the options granted are
        intended to be ISOs, the duration and rate of exercise of each option,
        the exercise price per share and the manner of exercise and the time,
        manner and form of payment upon exercise of an option. Unless sooner
        terminated, the Plan will expire on February 13, 2006.

                                      F-17
<PAGE>
 
                   SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



(8) Commitments, Contingencies and Other Matters, continued
    -------------------------------------------------------

   (d)  Stock Option and Benefit Plans, continued
        -----------------------------------------

        ISOs granted under the Plan may not be granted at a price less than the
        fair market value of the common stock on the date of grant (or 110% of
        fair market value in the case of persons holding 10% or more of the
        voting stock of the Company). The aggregate fair market value of shares
        for which ISOs granted to any employee are exercisable for the first
        time by such employee during any calendar year (under all stock option
        plans of the Company) may not exceed $100,000 and options to purchase no
        more than 50,000 shares may be granted under the Plan to any single
        optionee in any calendar year. Nonqualified options granted under the
        Plan may not be granted at a price less than 90% of the fair market
        value of the common stock on the date of grant. Options granted under
        the Plan will expire not more than ten years from the date of grant
        (five years in the case of ISOs granted to persons holding 10% or more
        of the voting stock of the Company). All options granted under the Plan
        are not transferable during an optionee's lifetime but are transferable
        at death by will or by the laws of descent and distribution. In general,
        upon termination of employment of an optionee, all options granted to
        such person which are not exercisable on the date of such termination
        immediately terminate, and any options that are exercisable terminate 90
        days following termination of employment.

        The Plan contains anti-dilution provisions authorizing appropriate
        adjustments in certain circumstances. Shares of common stock subject to
        options which expire without being exercised or which are canceled as a
        result of cessation of employment are available for further grants. No
        shares of common stock may be issued to any optionee until the full
        exercise price has been paid. The Board of Directors or the committee,
        as the case may be, may grant individual options under the Plan with
        more stringent provisions than those specified in the Plan.

        The Plan provides that each nonemployee director automatically receives,
        upon first becoming a nonemployee director, a grant of options to
        purchase 7,500 shares of the Company's common stock at an exercise price
        equal to the fair market value of the Company's common stock on the date
        of grant. The Company granted an aggregate of 37,500 of such options to
        nonemployee directors on the Effective Date at $5.00 per share. Each
        nonemployee director option will expire five years from the date of
        grant.

                                      F-18
<PAGE>
 
                   SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



(8) Commitments, Contingencies and Other Matters, continued
    -------------------------------------------------------

   (d)  Stock Option and Benefit Plans, continued
        -----------------------------------------

        SunStar had agreed that for a period of one year from the Offering, it
        would not grant any options under the Plan without the prior written
        consent of the underwriter, which consent would not be unreasonably
        withheld.

        The fair value for options was estimated at the date of grant using a
        Black-Scholes option pricing model with the following weighted-average
        assumptions for the years ended July 31, 1996 and 1997: risk-free
        interest rate of 6.5%; dividend yield of 0%; volatility factor of the
        expected market price of the Company's common stock of .84; and a
        weighted-average expected life of the option of 5 years.

        The Black-Scholes option valuation model was developed for use in
        estimating the fair value of traded options which have no vesting
        restrictions and are fully transferable. In addition, option valuation
        models require the input of highly subjective assumptions including the
        expected stock price volatility. Because the Company's stock options
        have characteristics significantly different from those of traded
        options, and because changes in the subjective input assumptions can
        materially affect the fair value estimate, in management's opinion, the
        existing models do not necessarily provide a reliable single measure of
        the fair value of its stock options.

        For purposes of pro forma disclosures, the estimated fair value of the
        options is amortized to expense over the options' vesting period. The
        Company's pro forma information for the years ended July 31, follows:
<TABLE>
<CAPTION>
                                                 1996        1997
                                              ---------  -----------
<S>                                           <C>        <C>
               Pro forma net loss             $(286,341)  (1,755,373)
 
               Pro forma loss per share       $    (.19)        (.73)
 
</TABLE>

                                      F-19
<PAGE>
 
                   SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



(8) Commitments, Contingencies and Other Matters, continued
    -------------------------------------------------------

   (d)  Stock Option and Benefit Plans, continued
        -----------------------------------------

        The weighted average fair value of options granted during the year ended
        July 31, 1996 with exercise prices below the market price of the stock
        on the date of grant was $1.12. Options granted during the year ended
        July 31, 1996 with exercise prices greater than the market price of the
        stock on the date of grant have a weighted average fair value of $.57.
        The weighted average fair value of options granted during the years
        ended July 31, 1996 and 1997 with exercise prices equal to the market
        price of the stock on the date of grant was $3.53 and $2.82,
        respectively. A summary of the Company's stock option activity, and
        related information for the years ended July 31 follows:
<TABLE>
<CAPTION>
                                                   1996               1997
                                           ------------------  ------------------
                                                     Weighted            Weighted
                                                     Average             Average
                                                     Exercise            Exercise
                                           Options    Price    Options    Price
                                           --------  --------  --------  --------
<S>                                        <C>       <C>       <C>       <C>
 
         Outstanding, beginning of year        -     $   -     437,500      $1.47
 
         Granted                            437,500      1.47  130,000       4.00
 
         Forfeited/canceled                    -         -     (75,000)      5.00
                                            -------            -------
 
         Outstanding, end of year           437,500      1.47  492,500       1.60
                                           ========            =======
 
         Exercisable at end of year         175,000      1.27  280,833       1.46
                                           ========            =======
 
</TABLE>

        Exercise prices for options outstanding as of July 31, 1997 ranged from
        $0.25 to $5.00. Options exercisable at $0.25 per share totaled 325,000
        of which 200,000 were exercisable at July 31, 1997. Options with
        exercise prices ranging from $4.00 to $5.00 totaled 167,500 of which
        80,833 were exercisable at July 31, 1997. The weighted average remaining
        contractual life of options exercisable at $0.25 and $4.00 to $5.00 per
        share was 8.52 and 7.40 years, respectively, at July 31, 1997.

                                      F-20
<PAGE>
 
                   SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



(8) Commitments, Contingencies and Other Matters, continued
    -------------------------------------------------------

   (e)  Other
        -----

        Common stock reserved for future issuance at July 31, 1997 is as
        follows:
<TABLE>
<CAPTION>
 
 
                                                                        Number of
                                                                         Shares
                                                                        ---------
<S>                                                                     <C>
 
          Options granted under employment and consulting agreements      325,000
          Option granted to a director                                     20,000
          Options granted under the Plan                                  147,500
          Reserved for future grants under the Plan                        32,500
          Warrants granted to underwriters                                130,000
                                                                          -------
                                                                          655,000
                                                                          =======
</TABLE>

   (f)  Settlement of Complaints
        ------------------------

        In the July 31, 1996 financial statements, the Company included a
        $66,000 charge in settlement of certain complaints in general and
        administrative expenses.

   (g)  Malpractice
        -----------

        The Company insures its malpractice risks on a claims-made basis. The
        Company has secured claims-made coverage from August 1, 1996 through
        July 31, 1997, with retroactive coverage through July 1, 1993. No
        accrual for possible losses attributable to incidents which may have
        occurred and not been identified under the Company's incident reporting
        system has been made, because the amount, if any, is not readily
        estimable.

        The Company carries "stop-loss" reinsurance to reimburse it for costs
        resulting from catastrophic injuries or illnesses to its HMO members.
        Premiums for these policies are reported as medical expense and
        insurance recoveries, if any, are recorded as a reduction of medical
        expenses. Under the excess loss reinsurance policies, recoveries are
        made for claims of each enrollee or each covered dependent of each
        enrollee, on an annual basis, in excess of the deductible established in
        the policy subject to certain limitations. The deductible under the
        policy for commercial healthcare claims is currently $50,000.

                                      F-21
<PAGE>
 
                                   Signatures

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

                                            SUNSTAR HEALTHCARE, INC.

                                            By: /s/ Jack W. Shields
                                                --------------------------------
                                                   Jack W. Shields
                                                   Vice President and
                                                   Chief Financial Officer

Dated:  November 13, 1997
                 -- 

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

SIGNATURES                                                TITLE
----------                                                -----
/s/ Warren D. Stowell
---------------------------     President, Chief Executive Officer, and Chairman
Warren D. Stowell               (Principal Executive Officer)

/s/ David A. Jesse
---------------------------     Executive Vice President, Chief Operating 
David A. Jesse                  Officer, Director

/s/ Jack W. Shields
---------------------------     Vice President, Chief Financial Officer
Jack W. Shields                 (Principal Financial and Accounting Officer)

/s/ Frederick H. Fialkow
---------------------------     Director
Frederick H. Fialkow

/s/ Steven Fialkow
---------------------------       Director
Steven Fialkow

/s/ Bernard Levine, M.D.
---------------------------     Director
Bernard Levine, M.D.

/s/ Richard Seidelman, M.D.
---------------------------     Director
Richard Seidelman, M.D.
<PAGE>
 
  Exhibits required to be filed by Item 601 of Regulation SB are included in
Exhibits to this Report as follows:

Exhibit   Exhibit Description
-------   -------------------

  3.1     Certificate of Incorporation*

  3.2     By-Laws*

  4.1     Specimen Certificate of the Company's Common Stock**

  4.2     Form of Warrant Agreement (including Form of Underwriter's
          common Stock Purchase Warrant*

  4.3     1996 Stock Option Plan*

  4.4     Form of 1996 Stock Option Contract**

  10.1    Form of Agreement with Humana Health Care Plans*

  10.2    Form of Agreement with CAC/United Healthcare Plans of Florida, Inc.*

  10.3    Form of Agreement with Blue Cross Blue Shield of Florida*

  10.4    Agreement for Health Care Prepayment Plan, dated September 30,
          1992, between the Health Care Financing Administration and Boro
          Medical Corporation*

  10.5    Certificate from State of Florida, Agency for Health Care
          Administration certifying Boro Medical Corporation a Healthcare
          Provider*

  10.6    Form of Employment Agreement, dated as of November 1, 1995,
          between the Company and Warren D. Stowell*

  10.7    Form of Employment Agreement, dated as of January 10, 1996,
          between the Company and David Jesse*

  10.8    Form of Employment Agreement, dated as of January 10, 1996,
          between the Company and Michael Landau *

  10.9    Form of First Amendment to Employment Agreement, dated as of
          April 17, 1996 between the Company and Warren D. Stowell**

  10.10   Form of First Amendment to Employment Agreement, dated as of
          April 17, 1996 between the Company and David Jesse**
<PAGE>
 
  10.11   Lease, dated June 27, 1996, between the Company and Ronald
          D. Nutt***

  10.12   Agreement for Third Party Administrator Services, dated March 7, 1997,
          between Healthplan Services, Inc. and SunStar Health Plan, Inc.****

  11.     Statement of Per Share Earnings (included in Consolidated Financial
          Statements attached to this report)

  16.1    Letter on Change in Certifying Accountant****

  21.1    List of Subsidiaries*

  23.1    Consent of KPMG Peat Marwick LLP****

  27.     Financial Data Schedule ****

------- 

*     Filed as same exhibit reference to Form SB-2 Registration Statement, filed
on February 26, 1996, File No. 333-1650

**    Filed as same exhibit reference to Amendment No. 2 to Form SB-2
Registration Statement, filed on May 9, 1996, File No. 333-1650.

***   Filed as same exhibit reference to Form 10-KSB for the fiscal year ended
July 31, 1996.

****  Filed herewith.