<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, 1996
                                     -------------         

[   ]  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

               521 East State Road 434, Longwood, Florida  32750
               (Address of principal executive offices/Zip Code)
                                 (407)339-4997
                          (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.  [ ]

<PAGE>
 
     State issuer's revenues for its most recent fiscal year   $5,080,850
    
     The aggregate market value of voting stock of the Registrant held by non-
affiliates of the Registrant on October 15, 1996, was $4,937,231 (based on
the average closing bid and asked prices of the Registrant's Class A Common
Stock on October 15, 1996 of $3.625 and $4.25 respectively).

     As of September 30, 1996, 2,395,000 shares of the Registrant's Common
Stock were issued and outstanding.



                      DOCUMENTS INCORPORATED BY REFERENCE

                                      NONE

Transitional Small Business Disclosure Format (check one):  YES       NO  X
                                                               -----    -----

--------------------------------------------------------------------------------
<PAGE>
 
                                    Part I


Item 1.  Business.

     SunStar Healthcare, Inc. and its wholly owned subsidiaries, Brevard Medical
Centers, Inc., First Health, Inc. and SunStar Health Plan, Inc. (hereinafter
collectively referred to as the "Company") provide managed healthcare services
through seven (7) primary care centers located in central Florida.  Medical
services are delivered by thirteen (13) board certified or board eligible
primary care physicians employed by the Company.  The Company's healthcare
operations consist primarily of medical treatment and care typically furnished
in a family practitioner's office.  The Company also arranges for clinical
laboratory services and engages physicians specializing in various medical
practices to complement the Company's primary care operations.

     The Company currently offers health care services on a contractual and a
fee-for-services basis.  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 care to Medicare beneficiaries who enrolled
directly with the Company prior to January 1, 1996. For the year ended July 31,
1996, medical services provided under the Company's contracts with HCFA, HMOs
and on a fee-for-service basis accounted for approximately 39%, 31% and 27%,
respectively, of the Company's revenues.

     The Company's operating plan incorporates a strategy of aggressive growth
and a plan to deliver managed healthcare services through the establishment of a
commercial health maintenance organization ("HMO").  On September 4, 1996, the
Company completed and filed an application with the Florida Department of
Insurance to do business as an HMO.  The applicant is SunStar Health Plan, Inc.,
formerly known as "Boro Medical Corp.", a wholly-owned subsidiary of the
Company.

     During the next twelve (12) months, the Company intends to shift its focus
from the provision of primary care services under agreements with third-party
payors to the establishment of commercial HMO operations in Brevard County.  The
Company has established affiliations with three hospital providers located in
Brevard County:  Holmes Regional Hospital, Cape Canaveral Hospital and Palm Bay
Community Hospital.  Provided that the Company is successful in obtaining
required government approvals, the Company expects that it will commence HMO
operations and enroll members by early 1997.  The Company also intends to
continue to provide primary care services on a fee-for-service basis pursuant to
existing 

                                       1
<PAGE>
 
arrangements with third-party payors and, will evaluate the feasibility of
continuing to do so independently of commercial HMO operations in Brevard
County.

     The Company's objective is to establish relationships with qualified
physicians, hospitals and other healthcare 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 healthcare products to attract individuals and small employer
groups willing to enroll in the Company's HMO and to otherwise determine the
viability and potential of its proposed HMO operations. The Company believes
that, if it is successful in meeting this objective, its primary care physician
network will be a significant competitive factor in the marketing of managed
healthcare products.

     As part of the Company's long-term strategy, the Company intends to expand
its HMO target market to include additional counties in central and northern
Florida. The Company will also seek to further serve the Medicare-eligible
population in such market by offering comprehensive health care coverage through
a contract with the Health Care Financing Administration ("HCFA").

     In addition to establishing its own HMO (the application for which was
filed with the Florida Department of Insurance in September, 1996), the Company
will seek to capitalize on opportunities arising from the growing trend toward
managed healthcare by focusing its efforts on expanding its primary care
operations.

     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") 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 "Effective Date"), the Company completed a 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.

     As of October 15, 1996, proceeds from the IPO have primarily been used as
working capital to finance the HMO development effort and to pay HMO application
fees.

                                       2
<PAGE>
 
     Although the Company has filed an application for HMO status, the
application is subject to review by governmental agencies.  The Company's
success will be largely dependent upon the Company's ability to obtain
governmental approvals to operate as a commercial HMO; to establish satisfactory
relationships with specialty and acute care physician groups and provider
networks (including hospitals); to provide a variety of low-cost managed care
healthcare products suitable for individuals and employer groups; and to enroll
significant numbers of members.

     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 Healthcare Operations.

     The Company currently employs thirteen (13) board certified or board
eligible primary care physicians. These family practitioners, pediatricians and
general internists are responsible for providing and coordinating healthcare
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 and one physician's assistant
in its primary care operations.

     The Company has entered into a one-year employment agreement with each of
its 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 time to the Company's business, to
obtain and maintain professional malpractice insurance and 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.

     In addition, the Company has arrangements with approximately twelve
physicians specializing in various medical practices, such as cardiology,
gastroenterology, podiatry, urology, ear, nose and throat and general and
vascular surgery, to complement the Company's primary care operations. These
arrangements permit the Company to provide physician consultations both at the
Company's offices and at the physician's office, as well as acute care in the
hospital for advanced diagnostic testing and surgery. These physicians are
available to provide services as required and are paid primarily on an hourly
basis.

                                       3
<PAGE>
 
     The Company also arranges for clinical laboratory services pursuant to an
agreement with SmithKline Beecham Clinical Laboratories. The Company pays
SmithKline a fixed annual fee of approximately $70,500 to provide these
services.


Revenue Sources and Reimbursement.

     The Company currently offers healthcare services on a contractual 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>
                             Fiscal Years Ended July 31,
 
                                1995              1996
<S>                       <C>         <C>    <C>        <C> 
HCFA                       1,728,918  33.7%  1,993,889  39.2%
HMO                        1,573,394  30.7%  1,561,283  30.8%
Fee-For-Service            1,649,268  32.2%  1,393,892  27.4%
Prepaid Health Clinic        175,992   3.4%    131,786   2.6%
                          ----------  ----   ---------  ----
                          $5,127,572   100%  5,080,850   100%
</TABLE>

HCFA Agreement.
-------------- 

     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 the HCFA in the foreseeable future.

                                       4
<PAGE>
 
Agreements with Health Maintenance Organizations.
------------------------------------------------ 

     The Company also has provider agreements with Humana Healthcare Plans,
United Healthcare Corporation and Blue Cross Blue Shield of Florida, pursuant to
which the Company provides primary care services for approximately 11,000 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.

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

     The Company offers healthcare services on a fee-for-service basis, pursuant
to which the Company receives payments for medical services from individuals,
private insurance companies, 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
healthcare 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, 1996, the Company provided
medical services on a fee-for-service basis to Medicare beneficiaries through
its seven primary care facilities, which accounted for approximately 3% 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 Florida
Agency for Health Care Administration ("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, 1996,
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 1% of the Company's revenues.

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

     The Company also provides 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 healthcare coverage
to individuals for a fixed monthly premium. For the year ended July 31, 1996,
through its five centers in Brevard County, the Company had approximately 1,300
subscribers participating in the prepaid health clinic operations. The Company
has filed an application with the Accreditation Association for Ambulatory
Healthcare 

                                       5
<PAGE>
 
("AAAHC") for accreditation of its prepaid health clinic operations. Although
the Company has received a consultative survey by the AAAHC and was found to be
in substantial compliance with such survey, and also received a favorable
external quality assurance assessment, there can be no assurance that such
accreditation will be obtained. Failure to receive such accreditation may result
in the suspension of the Company's ability to enroll new members for its prepaid
health clinic operations.


Competition.

     The managed healthcare industry is highly competitive. The Company
currently competes with other providers of primary healthcare services,
including primary care centers, regional hospitals and physician practice
groups. Many of such competitors offer a broader range of primary healthcare
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 healthcare industry has experienced significant changes in
recent years, primarily due to rising healthcare 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 proposed HMO
operations will 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 competitive factors
affecting the healthcare industry generally, including new medical technologies
which may be introduced, general trends relating to demand for healthcare
services, regulatory, economic and political factors, changes in patient
demographics and competitive pricing strategies by health maintenance
organizations and other healthcare plans. The Company will 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 

                                       6
<PAGE>
 
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.


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 healthcare 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
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.

                                       7
<PAGE>
 
     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 proposed 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 healthcare 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 healthcare 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.

     The Company currently holds a Certificate of Authority issued by the
Florida Department of Insurance to provide prepaid health clinic services. The
Company also holds a Health Care Provider Certificate issued by the Florida
Agency for Health Care Administration in connection with its prepaid health
clinic operations. Most states, including Florida, require a health maintenance
organization to be licensed prior to commencing operations.

     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 healthcare reforms, including the
implementation of a government-directed national healthcare system and stringent
healthcare 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 

                                       8
<PAGE>
 
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 healthcare insurers and other
third-party payors will continue to cover certain medical services or reimburse
such services at current levels. Any significant reduction of healthcare
insurance coverage for medical services could have a material adverse effect on
the Company's business and prospects.


Employees.

     The Company currently employs 78 persons, including 4 executive officers,
13 physicians, 1 nurse practitioner, 1 physician's assistant, 21 medical
assistants and 38 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.


Item 2.  Property.

     The Company occupies its principal executive offices and primary care
centers under third-party lease agreements.  In July, 1996, the Company opened
an additional executive office in Longwood, Florida.  The following table sets
forth the location, approximate annual rent, use of each location and expiration
date of each lease:

<TABLE>
<CAPTION>
                                                                    Lease  
                    Approx.    Approx.                            Expiration
   Location         Sq. Feet    Rent          Use                    Date   
   --------         --------    ----          ---                 ----------
<S>                 <C>        <C>       <C>                    <C>
Deltona, FL            2,500    $44,000  Primary Care Center    April 30, 1998
South Daytona, FL      2,500     26,000  Primary Care Center    November 30, 1996
Melbourne, FL          1,600     14,000  Executive Office       October 31, 1996
Melbourne, FL          2,900     50,000  Primary Care Center    July 31, 1997
Longwood, FL           4,400     52,000  Executive Office       July 19, 1999
Palm Bay, FL           2,800     40,000  Primary Care Center    January 31, 1997
Merritt Island, FL     2,680     27,000  Primary Care Center    October 31, 1996
Satellite Beach, FL    2,580     45,000  Primary Care Center    October 31, 1996
Titusville, FL         3,200     58,000  Primary Care Center    October 31, 1996
</TABLE>

          Although the Company believes that such centers are adequate for its
existing operations, the Company regularly evaluates the adequacy of each
primary care center.  Each lease which expires in fiscal 1997 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 1997.

                                       9
<PAGE>
 
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.



                                    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".  Quarterly information on the high and low closing bid
prices for the Company's Common Stock is not available since the Company has
been listed on the NASDAQ Small-Cap Market only since mid-May, 1996.  However,
following are the high and low closing bid prices as provided by NASDAQ for the
period May 15, 1996 to July 31, 1996.

Period                                   High                Low
------                                   ----                ---
May 15, 1996 - July 31, 1996             8 1/2               4 3/8

          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 September 27, 1996 is 13.  However, the Company estimates that there were 974
beneficial owners of the Company's Common Stock as of that date.

                                       10
<PAGE>
 
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.


Item 6.  Management's Discussion and Analysis of Financial Condition and Results
of Operations.

     The following analysis of the Company's financial condition as of July 31,
1996 and the Company's results of operations for the years ended July 31, 1996
and 1995 should be read in conjunction with the Company's financial statements
and notes thereto included elsewhere in this report.


General Financial Information.

<TABLE>
<CAPTION>
                                            FISCAL YEAR ENDED JULY 31,
                                            --------------------------
                                        1995                           1996  
                                        ----                           ----    
<S>                               <C>                            <C>         
Patient service revenue           $5,127,572                     $5,080,850  

Income (loss) from continuing                                               
   operations                         55,431                      (222,468) 

Income (loss) from continuing                                               
   operations per common share       .05 (1)                      (.15) (2) 

Total Assets                       1,280,702                      7,499,487  

Long term obligations                 11,580                         16,540   
</TABLE>

     (1)  Gives effect to the issuance by the Company of (i) 900,000 shares of
     Common Stock to National and (ii) the shares of Common Stock issuable upon
     the exercise of certain options, as if such issuances occurred as of the
     beginning of the periods presented.

     (2)  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".)

                                       11
<PAGE>
 
     The Company recognizes fee-for-service revenues based on net realizable
amounts due from patients and third-party payors at the time medical services
are rendered.  Capitation revenues from HMOs that contract with the Company are
recognized on a monthly basis.  Reimbursement under the Company's contract with
HCFA are based on costs incurred in connection with medical services provided
and are subject to audit and retrospective adjustment.

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

Year ended July 31, 1996 ("fiscal 1996") compared to year ended July 31, 1995
("fiscal 1995").

     For the year ended July 31, 1996, the Company incurred a loss of
$(222,468), primarily as a result of a non-cash charge of approximately $211,000
relating to compensation expense in connection with the issuance of options to
certain officers, directors and a consultant to the Company to purchase an
aggregate of 325,000 shares of Common Stock.  An additional $195,000 in 
compensation expense relating to these options will be incurred over the next
three (3) years and will affect operating results accordingly.

     Net income decreased by $278,000 to $(222,000) in fiscal 1996 from $56,000
in fiscal 1995.  This decrease resulted from (i) a $211,000 non-cash charge
representing amortization of stock options; (ii) decrease of approximately
$47,000 in patient service revenues; (iii) a net increase in operating expenses
of approximately $84,000; (iv) increased interest income of $50,000; and (v) a
decrease in income tax provision of $14,000.

     Patient service revenue decreased by approximately $47,000, to $5,081,000
in fiscal 1996 from $5,128,000 in fiscal 1995. This decrease is primarily a
result of two factors. First, the company had a decrease in fee-for-service
revenue. Management believes that this decrease in revenue is a trend reflective
of the shift within the healthcare industry from fee-for-service based business
toward managed care. Second, the decline in revenue is also attributable to the
closing of a non-profitable medical center in the first quarter of fiscal 1996.

     Costs of revenue decreased by $136,000 to $3,371,000 in fiscal 1996 from
$3,507,000 in fiscal 1995. Costs of revenue as percentage of total income 
decreased to 66% in fiscal 1996 compared to 68% in fiscal 1995.  The decrease in
the expense level is due to management's efforts at improved cost control and
expense reduction, combined with closing of a non-profitable medical center in
the first quarter of fiscal 1996.

     General and administrative expenses of $1,705,000 in fiscal 1996, increased
by $233,000 or 7% during fiscal 1996, over $1,472,000 of such expenses in fiscal
1995.  The increase represents:  (i) an increase in bad debt expense of $93,000
caused by an increased provision for doubtful accounts and additional write-offs
to collection (which increased expenses for bad debts are estimated by
management to be non-recurring); (ii) settlement of litigation, with a net
charge to the Company of $66,000; (iii) additional salaries of $129,000 related
to executive officers and other significant employees which are ongoing and were
incurred primarily in connection with start-up and

                                       12
<PAGE>
 
development of the proposed HMO entity. These increases in general and
administrative expenses were partially offset by a net decrease of $55,000 in
other administrative expenses resulting from an office closing and other
reductions to expense.

Liquidity.
----------

     At July 31, 1996, the Company had working capital of $5,898,000 as compared
to working capital of $285,000 at July 31, 1995.  The Company has historically
financed its working capital requirements through cash flow from operating
activities.  The substantial increase in working capital at July 31, 1996 is
attributable primarily to proceeds received from a public offering of the
Company's Common Stock in May, 1996.

     Net cash provided by operating activities was $300,000 for fiscal 1996, as
compared to net cash provided by operating activities of $39,000 for fiscal
1995.  This increase in cash provided by operating activities was primarily
attributable to a net increase in accounts payable and accrued expenses.

     Net cash used in investing activities for fiscal 1996 was approximately
$285,000, primarily reflecting a purchase of a $250,000 Certificate of Deposit
to satisfy the Florida Department of Insurance net worth requirement for the
Company's Prepaid Health Clinic license, compared to $47,000 in fiscal 1995,
reflecting the Company's purchase of property and equipment during fiscal 1995.

     Net cash provided by financing activities for fiscal 1996 was $5,762,000 as
compared to net cash used in financing activities of $324,000 for fiscal 1995.
Cash provided by financing activities primarily represents proceeds received
from the public offering of the Company's Common Stock on May 15, 1996.  Cash
used in financing activities during fiscal 1995 primarily reflects distributions
to National.

     Humana Health Care Plans, a health maintenance organization with which the
Company has a capitated service agreement, has announced its intention to
terminate its operation in Brevard County effective January 1, 1997.  Management
estimates that capitation revenue will decrease by approximately $170,000 in
fiscal 1997 from fiscal 1996 as a result of a net loss of capitated members.

     During the next fiscal year, the Company's liquidity will be affected by
the proposed HMO establishment and operation.  As an HMO, SunStar Health Plan,
Inc. will initially be required to maintain $1,500,000 in minimum capital
surplus pursuant to Section 641 of the Florida Insurance Code. At September 13,
1996, SunStar Health Plan, Inc.'s audited financial statements (which were
prepared as part of its pending application for an HMO Certificate of Authority
in the State of Florida) reflect an actual surplus of $2,684,000 which is
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.

                                       13
<PAGE>
     HMO development costs will be incurred by SunStar Health Plan, Inc. in 
fiscal 1997 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 employees' salaries and 
expenses). Additionally, SunStar Healthcare, Inc. will incur expenditures to 
develop and/or acquire up to five additional primary care centers outside of 
Brevard County and to relocate the Company's existing medical centers to larger 
facilities.
 
     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 in Brevard County, Florida), it is
possible that the Company's proposed 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 relocate,
develop and/or acquire primary care centers and physician practices and pay
salaries for additional personnel.  The Company anticipates that it will make
capital expenditures associated with, among other things, leasehold improvements
and office equipment (including telephone and management information systems and
software).  The Company expects to pay salaries for additional financial,
marketing 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, and it is anticipated that the net proceeds from
such offering, approximating $6,000,000, will 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 timetable for, its proposed expansion), that such offering proceeds,
together with projected cash flow from operations, will be sufficient to satisfy
its contemplated cash requirements through the end of its current fiscal year.
There can be no assurance that the offering proceeds will be sufficient to
permit the Company to meet its objective of providing low-cost managed
healthcare products to individuals and employers and to otherwise determine the
viability and potential of proposed HMO operations.  In the event that the
Company's plans change, its assumptions change or prove to be inaccurate or if
the proceeds of the public offering prove to be insufficient (due to
unanticipated expenses, difficulties, problems or otherwise), the Company may be
required to seek additional financing.  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.

                                       14
<PAGE>
 
Item 7.  Financial Statements.

     Filed as part of this report are audited financial statements for the years
ended July 31, 1995 and 1996, commencing at Page F-2.

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.

     In connection with the audits of the two fiscal years ended July 31, 1994
and 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 years
ended July 31, 1995 and 1994, 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.

     The directors, executive officers and significant employees of the Company
are as follows:

<TABLE>
<CAPTION>
           NAME              AGE                     POSITION
           ----              ---                     --------                   
<S>                          <C>  <C>
Warren D. Stowell             44  President, Chief Exec. Officer & Chairman of
                                  Board of
                                  Directors
David Jesse                   47  Exec. Vice President, Chief Operating Officer
                                  & Director
Michael Landau                38  Vice President of Operations
Lisa Tomei                    35  Controller and Chief Accounting Officer
Frederick H. Fialkow          65  Director
Steven Fialkow                37  Director
Bernard Levine, M.D.          67  Director
Dean L. Sloane                50  Director
Richard Seidelman, M.D.       38  Director
</TABLE>

                                       15
<PAGE>
 
          Warren D. Stowell has been President and Chief Executive Officer of
the Company since December 1995, Chairman of the Board of Directors of the
Company since March 1996, and President and Chief Executive Officer of each of
Brevard and First Health since November 1, 1995.  From July 1993 through
November 1995, Mr. Stowell served as Chief Operating Officer, Insurance
Division, for Ramsay HMO, Inc., an HMO operating in the State of Florida.  From
June 1991 until July 1993, Mr. Stowell was President and Chief Executive Officer
of Care Florida, Inc.  From May 1988 to May 1991, Mr. Stowell served as
President and Chief Executive Officer of H.I.P. Network of Florida.

          David Jesse has been Executive Vice President, Chief Operating Officer
and a director of the Company since January 1996.  Prior to his association with
the Company, Mr. Jesse had been a principal of Masters & Jesse Co., LPA, a legal
professional association, commencing March 1, 1993. From May 1992 to February
1993, he was Vice President and General Counsel of Care Florida, Inc., a health
maintenance organization based in Miami, Florida.  From 1988 to 1992, Mr. Jesse
was an associate with the law firm of Climaco, Climaco, Seminiatore, Lefkowitz &
Garofoli in its health care law department.  Prior thereto, from 1984 to 1987,
Mr. Jesse was the Vice President and General Counsel of HealthAmerica
Corporation of Ohio, a health maintenance organization based in Cleveland, Ohio.

          Michael Landau has been Vice President of Operations of the Company
since December 1995.  Mr. Landau has been employed by Brevard since January 1988
and has served as Vice President of Operations of Brevard since January 1989 and
as Vice President of Operations of First Health since May 1994.  Mr. Landau is
the stepson of Frederick H. Fialkow.

          Lisa Tomei has been employed as Controller and Chief Accounting
Officer of the Company since June 1996.  From October 1995 to February 1996, Ms.
Tomei was employed by United Healthcare Corporation as Assistant Treasurer for
the MetraHealth Care Networks.  From May 1990 to September 1995, Ms. Tomei was
Accounting Manager for MetLife Healthcare Networks employed by MetraHealth and
Metropolitan Life Insurance Companies.  From 1986 to 1990, Ms. Tomei was
employed by Deloitte and Touche, LLP, as Senior Accountant.  Ms. Tomei is a
Certified Public Accountant.

          Frederick H. Fialkow has been a director of the Company since December
1995. Mr. Fialkow has been Chairman of the Board, President and Chief Executive
Officer of National since February 1988.  Mr. Fialkow is the father of Steven
Fialkow and the stepfather of Michael Landau.

          Steven Fialkow has been a director of the Company since December 1995.
Mr. Fialkow has served as Secretary of National since September 1995, as
Executive Vice President of New England Home Care, Inc. since August 1995 and as
a director of National since December 1991. Prior thereto he served as Executive
Vice President of Health Acquisition Corp. from May 1994 to August 1995.  He has
served as President of National HMO (New York), Inc. from April 1989 

                                       16
<PAGE>
 
to April 1994 and Vice President of National HMO (New York) Inc. from August
1984 to March 1989. Steven Fialkow is a certified public accountant. He is the
son of Frederick H. Fialkow.

          Bernard Levine, M.D. has been a director of the Company since December
1995. Dr. Levine is a private investor, primarily in the healthcare industry.
Since 1962, he has been a Professor of Internal Medicine at New York University
School of Medicine with a sub-specialty in allergy and immunology.  Dr. Levine
also serves as a director of National and Cypros Pharmaceutical Corp.

          Dean L. Sloane has been a director of the Company since February 1996.
Mr. Sloane has served as Chairman of the Board, President, Chief Executive
Officer and a director of Community Medical Transport, Inc. since December 1988.
From 1973 to 1988, Mr. Sloane served as Chief Executive Officer of Prime Medical
Services Inc. (formerly known as C.P. Rehab. Corp.), a public specialty medical
management service company.  Mr. Sloane co-founded and served as Chairman of the
Board of National from 1983 to 1986.  Mr. Sloane also served as a director of
EPIC Health Group, Inc., a public mail order pharmaceutical company, from 1984
to 1986.

          Richard Seidelman, M.D. has been a director of the Company since
February 1996. Since June 1989, Dr. Seidelman has been a pulmonary care
physician in private practice in South Florida.  Dr. Seidelman is a graduate of
the University of Pennsylvania and received his M.D. degree from Hahnemann
University.  He completed his residency in internal medicine at Georgetown
University/VA Medical Center and his fellowship in pulmonary medicine at George
Washington University.

          All directors of the Company hold office until the next annual meeting
of the stockholders and until their successors have been elected and qualified.
The officers of the Company are elected by the Board of Directors at the first
meeting after each annual meeting of the Company's stockholders, and hold office
until their death, resignation or removal from office.

          The Company obtained "key-man" insurance covering the life of Warren
D. Stowell in the amount of $1,000,000 prior to the consummation of the
Company's initial public offering.  The Company is the sole beneficiary under
this policy.  The Company also has obtained directors and officers liability
insurance in the amount of $2,000,000.


Compliance with Section 16(a) of the Securities Exchange Act of 1934.

          Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
(10) percent of the Company's Common Stock, to file with the SEC and NASDAQ
initial reports of beneficial ownership and reports of changes in beneficial
ownership of Common Stock of the Company.  Such persons are also required by SEC
regulations to furnish the Company with copies of all such Section 16(a) forms
they file.  Based solely on a review of the copies of such reports furnished to
the Company, 

                                       17
<PAGE>
 
the initial reports of beneficial ownership for National and Messrs. Jesse, 
Stowell, Seidelman, Sloane, Levine, F. Fialkow and S. Fialkow were 
inadvertently filed late.

Item 10.  Executive Compensation.

Compensation Summary.

          No executive officer of the Company received compensation in excess of
$100,000 during fiscal 1995 or 1996 in connection with services rendered to or
on behalf of the Company.  Except as set forth in the table below, no bonuses or
other compensation was paid during the fiscal year ended July 31, 1996.  The
summary compensation for the Company's Chief Executive Officers is as follows:

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                  Annual Comp.                       Long Term Comp.
                                  ------------                       ---------------
 
                          Fiscal                            Restricted
                           Year                     Other     Stock                    LTIP
                           Ended                    Annual    Awards    Options/      Payouts
Name and Position          07/31  Salary   Bonus    Comp.       ($)      SARs (#)       ($)
-----------------          -----  ------   -----    -----       ---      --------       ---  
<S>                       <C>     <C>      <C>     <C>      <C>         <C>           <C> 
Warren D. Stowell           1996  $95,193   $---    $---       $---       250,000(3)   $---
    President, CEO (1)      1995     ---     ---     ---        ---          ---        ---
                            1994     ---     ---     ---        ---          ---        ---
 
Gerald Kline                1996  $49,140   $---    $---       $---         $---       $---
    President, CEO (2)      1995   98,280    ---     ---        ---          ---        ---
                            1994   93,600    ---     ---        ---          ---        ---
</TABLE>

     (1)  Mr. Stowell is President and CEO of SunStar Healthcare, Inc., and its
          subsidiaries, Brevard Medical Centers, Inc., First Health, Inc., and
          SunStar Health Plan, Inc., effective November 1, 1996.

     (2)  Mr. Kline received such compensation as the President and CEO of
          Brevard and First Health.  He resigned from those offices in October
          1995.

     (3)  Granted pursuant to Mr. Stowell's employment agreement.  One-fourth of
          the options are exercisable immediately, and shall be exercisable as
          to one-fourth of the remaining shares thereby on each of three (3)
          successive anniversaries of the date of grant, subject to Mr.
          Stowell's employment by the Company.  (See section entitled
          "Employment Agreement".)

                                       18
<PAGE>
 
Stock Options.

     The following table sets forth information concerning options granted
during the fiscal year ended July 31, 1996 to those persons named in the
preceding Summary Compensation Table:

                       OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                         Numbers of          % of Total
                         Securities       Options Granted
                         Underlying       to Employees in   Exercise Price    Expiration
Name                   Options Granted      Fiscal Year      ($ per share)       Date
----                   ---------------      -----------      -------------       ----      
<S>                  <C>                  <C>               <C>              <C>
Warren D. Stowell       250,000(1)(3)          71.43%             $.25          none(2)
</TABLE>

     (1)  This represents a non-qualified stock option granted exclusive of the
          Company's 1996 Stock Option Plan.

     (2)  Subject to conditions of employment with the Company.

     (3)  Granted pursuant to Mr. Stowell's employment agreement.  One-fourth of
          the options are exercisable immediately, and shall be exercisable as
          to one-fourth of the remaining shares thereby on each of three (3)
          successive anniversaries of the date of grant, subject to Mr.
          Stowell's employment by the Company.  (See section entitled
          "Employment Agreement".)



     The following table sets forth information concerning the value of
unexercised stock options at July 31, 1996 for those persons named in the
Summary Compensation Table:

                   AGGREGATED OPTIONS IN LAST FISCAL YEAR AND
                         FISCAL YEAR END OPTION VALUES

<TABLE> 
<CAPTION> 
                         Number of Securities         Value of Unexercised   
                        Underlying Unexercised        In-The-Money Options   
                      Options at Fiscal Year End       at Fiscal Year End    
Name                  Exercisable/Unexercisable     Exercisable/Unexercisable
----                  -------------------------     ------------------------- 
<S>                   <C>                           <C> 
Warren D. Stowell          62,500/187,500               $278,320/$834,961
</TABLE> 


Director Compensation.

          Directors who are employees of the Company do not receive compensation
for serving as directors.  Each director who is not an employee of the Company
will receive a fee of $2,500 for 

                                       19
<PAGE>
 
attendance at each Board of Directors meeting. All directors will be reimbursed
for their reasonable out-of-pocket expenses incurred in connection with
attending meetings of the Board of Directors and for other expenses incurred in
their capacity as directors of the Company.

     In accordance with the Company's 1996 Stock Option Plan, each non-employee
director of the Company has been granted nonqualified stock options to purchase
7,500 shares of Common Stock exercisable at a price equal to the fair market
value of the Common Stock on the date of grant.  (See "Stock Option Plan.")


Employment Agreements.

     The Company entered into an employment agreement, effective as of May 15,
1996, with Warren D. Stowell pursuant to which he is employed full-time as the
Company's President and Chief Executive Officer.  The agreement expires on the
second  anniversary of the date of May 15, 1996, provided that the agreement may
be renewed for successive one (1) year periods unless, thirty (30) days prior to
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 Mr.
Stowell remains employed by the Company, he shall serve as a member of the
Company's Board of Directors and shall have the right to designate one (1)
additional member to the Board of Directors. David Jesse is Mr. Stowell's
current designee.  The agreement provides for an annual salary of $125,000,
payable commencing May 15, 1996, increasing to $150,000 per annum on May 15,
1997.  Mr. Stowell's employment agreement contains a confidentiality provision
and a covenant not to compete with the Company for a period of six (6) months
following termination of employment.

     In addition, the Company granted to Mr. Stowell options 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-fourth of the shares
covered thereby and shall be exercisable as to an additional one-fourth of the
shares covered thereby on each of the first, second and third anniversaries of
January 28, 1996, provided that Mr. Stowell is employed by the Company on such
dates.  Commencing two (2) years after May 15, 1996, 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 to Mr. Stowell pursuant to the
exercise of such options.  No options have been exercised as of July 31, 1996.

     The Company entered into an employment agreement, effective as of May 15,
1996, with David Jesse pursuant to which he is employed full-time as the
Company's Executive Vice President and Chief Operating Officer.  The agreement
expires on May 15, 1998, provided that the agreement may be renewed for
successive one (1) year periods unless, at least thirty (30) days prior to  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, payable commencing on May 15, 1996, increasing to $135,000 per annum
on May 15, 1997.  Mr. Jesse's employment 

                                       20
<PAGE>
 
agreement contains a confidentiality provision and a covenant not to compete
with the Company for a period of six (6) months following termination of
employment.

     In addition, the Company granted to Mr. Jesse options to purchase an
aggregate of 75,000 shares of Common Stock.  Options to purchase 25,000 shares
of Common Stock, at an exercise price of $.25 per share are currently
exercisable.  The remaining 50,000 options, which have been granted pursuant to
the Company's 1996 Stock Option Plan and which have an exercise price per share
equal to the initial public offering price, shall be exercisable as to one-
fourth of the shares covered thereby on each of the first four (4) anniversaries
of the date May 15, 1996, provided that Mr. Jesse is employed by the Company on
such dates.  Commencing two (2) years after May 15, 1996, 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 to Mr. Jesse pursuant to the
exercise of such options.  No options have been exercised as of July 31, 1996.

     The Company entered into an employment agreement, effective as of May 15,
1996, with Michael Landau pursuant to which he is employed full-time as the
Company's Vice President of Operations.  The agreement expires on the first
anniversary of May 15, 1996, provided that the agreement may be renewed for
successive one (1) year periods unless, within thirty (30) 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 $75,000,
payable commencing on May 15, 1996.  Mr. Landau's employment agreement contains
a confidentiality provision and a covenant not to compete with the Company for a
period of six (6) months following termination of employment.

     In addition, the Company granted to Mr. Landau options to purchase an
aggregate of 25,000 shares of Common Stock.  The options, which were granted
pursuant to the Company's 1996 Stock Option Plan and which have an exercise
price of $5.00 per share are exercisable as to one-fourth of the shares covered
thereby on each of the first four (4) anniversaries of May 15, 1996, provided
that Mr. Landau is employed by the Company on such dates.  No options have been
exercised as of July 31, 1996.


Stock Option Plan.

     In February 1996, the Board of Directors of the Company adopted, and
National (the Company's sole stockholder at that time) approved, the Company's
1996 Stock Option Plan (the "Option Plan") pursuant to which 200,000 shares of
Common Stock currently are 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 (the "Code"), or
(ii) nonqualified options.  ISOs may be granted under the Option Plan to
employees and officers of the Company.  Non-qualified options may be granted to
consultants, directors (whether or not they are employees), employees or
officers of the Company.

                                       21
<PAGE>
 
     The Option 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 Option Plan.  The Board of
Directors or the committee, as the case may be, within the limitations of the
Option 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 Option Plan will
expire on February 13, 2006.

     ISOs granted under the Option 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 Option Plan to any single optionee in any calendar year.  Non-qualified
options granted under the Option 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 Option Plan will expire not more than ten (10) years from the
date of grant (five [5] 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
Option 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 ninety
(90) days following termination of employment.

     The Option 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 Option Plan with more stringent provisions than
those specified in the Option Plan.

     The Option Plan provides that each non-employee director automatically
receives, upon first becoming a non-employee director, a grant of an option to
purchase 7,500 shares of Common Stock at an exercise price equal to the fair
market value of the Common Stock.  Each non-employee director option expires
five (5) years from the date of grant.

     The Company has granted options to purchase an aggregate of 75,000 shares
under the Option Plan, exclusive of non-employee director options to purchase an
additional 37,500 shares granted as of May 15, 1996, none of which options has
been exercised.

                                       22
<PAGE>
 
     The Company has agreed that for a period of one (1) year from May 15, 1996,
the Company will not grant any options under the Option Plan without the prior
written consent of the Underwriter, which consent shall not be unreasonably
withheld.


Item 11.  Security Ownership of Certain Beneficial Owners and Management.

     The following table sets forth certain information as of September 30,
1996, regarding beneficial ownership of the Company's Common Stock by: (i) each
director and executive officer of the Company, (ii) all directors and executive
officers as a group, and (iii) all persons known by the Company to be the
beneficial owner of more than 5% of the outstanding Common Stock.  Unless
otherwise noted, all persons named in the table have sole voting and dispositive
power with respect to Common Stock beneficially owned.

<TABLE>
<CAPTION>
                                                                 Percentage of
                                         Amount and Nature of     Outstanding
Name of Beneficial Owners                Beneficial Ownership     Shares Owned
-------------------------                --------------------     ------------ 
<S>                                      <C>                     <C>
National Home Health Care Corp                       900,000              37.6%
  700 White Plains Rd., 
  Scarsdale, NY 10583
Bernard Levine, M.D.(1)                              188,600(3)            7.9%
Frederick H. Fialkow(1)                               42,500(4)            1.8%
Warren D. Stowell(1)                                  62,500(2)            2.6%
David Jesse(1)                                        25,000(2)            1.0%
Dean Sloane(1)                                        27,500(4)            1.1%
Steven Fialkow(1)                                      7,500(2)              *
Richard Seidelman, M.D.(1)                            12,500(5)              *

All directors and executive officers
   as a group (7 persons)                        366,100(2)-(5)           15.3%
 
Underwriters                                         130,000(6)            5.4%
</TABLE>

     *   Less than 1%

     (1) Other than National, the address of each of these persons is care of
     the Company, 521 East State Road 434, Longwood, Florida 32750.

     (2) Consists of shares issuable under immediately-exercisable stock
     options.

     (3) Includes 7,500 shares of Common Stock issuable pursuant to immediately
     exercisable stock options.

     (4) Includes 7,500 shares of Common Stock issuable pursuant to immediately
     exercisable stock options.

     (5) Includes 7,500 shares of Common Stock issuable pursuant to immediately
     exercisable stock options.

                                       23
<PAGE>
 
     (6) Represents Common Stock issuable pursuant to currently exercisable
     warrants.


Item 12.  Certain Relationships and Related Transactions.

  On January 29, 1996, National made a capital contribution to the Company of
all of its shares of capital stock of Brevard and First Health, constituting all
of the issued and outstanding capital stock of each of Brevard and First Health.

  Upon consummation of the initial public offering on May 15, 1996, National
continued to own 37.6% of the outstanding Common Stock of the Company.  Certain
directors of the Company are also officers, directors and/or principal
stockholders of National and, consequently, may be able, through National, to
direct the election of the Company's directors, effect significant corporate
events and generally direct the affairs of the Company. The Company does not
intend to enter into any transactions with National or its affiliates in the
future unless such transaction is fair and reasonable to the Company and is
approved by a majority of the independent and disinterested members of the Board
of Directors and, to the extent deemed necessary or appropriate by the Board of
Directors, the Company will obtain a fairness opinion and stockholder approval
in connection with any such transaction.

     The Company has granted to Warren D. Stowell (the President, Chief
Executive Officer and a director of the Company) and David Jesse (the Executive
Vice President, Chief Operating Officer and a director of the Company) options
to purchase 250,000 and 25,000 shares, respectively, of Common Stock at an
exercise price per share of $.25 in connection with their respective employment
by the Company.  Mr. Stowell's options are currently exercisable as to one-
fourth of the shares covered thereby and shall be exercisable as to one-fourth
of the shares covered thereby on each of the first, second and third
anniversaries of January 28, 1996, provided that Mr. Stowell is employed by the
Company on such dates.  Mr. Jesse's options are currently exercisable.
Commencing two years after May 15, 1996, 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 to Mr. Stowell and Mr. Jesse pursuant to
exercise of such options.

     The Company has agreed to use its best efforts to include 83,000 shares of
Common Stock held by National in a registration statement to be filed under the
Securities Act two years after May 15, 1996.


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, 1995 and 1996.

                                       24
<PAGE>
 
     On August 27, 1996, the Company filed a Form 8-K to report the Company's
termination of Richard A. Eisner and Company, LLP, as principal accountant and
the concurrent engagement of KPMG Peat Marwick, LLP, as principal accountant.

                                       25
<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 Administra-
          tion 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**

                                       26
<PAGE>
 
Exhibit   Exhibit Description  
-------   -------------------  

  10.10   Form of First Amendment to Employment Agreement, dated as of
          April 17, 1996 between the Company and David Jesse**

  10.11   Lease, dated June 27, 1996, between the Company and Ronald
          D. Nutt***

  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*

 
-----------

*   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 herewith.

                                       27
<PAGE>
 
                   SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES

                       Consolidated Financial Statements

                             July 31, 1995 and 1996


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

                             July 31, 1995 and 1996



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



Independent Auditors' Report
                                                                          Page
                                                                          ----
 
Consolidated Balance Sheet at July 31, 1996                                  2
 
Consolidated Statements of Operations for the years ended July 31,
 1995 and 1996                                                               3
 
Consolidated Statement of Changes in Shareholders' Equity for the
 cumulative period from August 1, 1994 to July 31, 1996                      4
      
Consolidated Statements of Cash Flows for the years ended July 31,
 1995 and 1996                                                               5
 
Notes to Consolidated Financial Statements                                6 - 20
 
<PAGE>
 
                          Independent Auditors' Report
                          ----------------------------



The Board of Directors
SunStar Healthcare, Inc.:

We have audited the accompanying consolidated balance sheet of SunStar
Healthcare, Inc. (the Company) as of July 31, 1996, and the related consolidated
statements of operations, changes in shareholders' equity, and cash flows for
the year then ended.  These financial statements are the responsibility of the
Company's management.  Our responsibility is to express an opinion on these
financial statements based on our audit.  The accompanying consolidated
financial statements of SunStar Healthcare, Inc. for the year ended July 31,
1995, were audited by other auditors whose report thereon dated October 6, 1995,
expressed an unqualified opinion on those statements.

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

In our opinion, the 1996 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SunStar
Healthcare, Inc. as of July 31, 1996, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.



                                    /s/ KPMG Peat Marwick LLP


Jacksonville, Florida
September 20, 1996

                                      -1-
<PAGE>
 
                        Report of Independent Auditors



Board of Directors
SunStar Healthcare, Inc.


     We have audited the accompanying consolidated statements of operations,
changes in shareholders' equity and cash flows of SunStar Healthcare, Inc. and
subsidiaries for the year ended July 31, 1995.  These financial statements are
the responsibility of the Company's management.  Our responsibility is to
express an opinion on these financial statements based on our audit.

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

     In our opinion, the financial statements enumerated above present fairly,
in all material respects, the consolidated results of operations and cash flows
of SunStar Healthcare, Inc. and subsidiaries for the year ended July 31, 1995 in
conformity with generally accepted accounting principles.


/s/ Richard A. Eisner & Company, LLP


New York New York
October 6, 1995
<PAGE>
 
                   SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES

                           Consolidated Balance Sheet

                                 July 31, 1996
<TABLE>
<CAPTION>
 
 
        Assets
        ------
<S>                                                               <C> 
Current assets:
  Cash and cash equivalents                                       $  5,993,609
  Patients accounts receivable, less allowance for doubtful
     accounts of approximately $110,000                                181,556
  Due from Medicare                                                     38,448
  Prepaid expenses and other assets                                    150,949
  Deferred taxes (note 6)                                               38,700
                                                                     ---------
               Total current assets                                  6,403,262
 
Furniture, equipment and leasehold improvements, net (note 3)          229,403
Goodwill, net (note 4)                                                 387,562
Restricted cash (note 9(c))                                            280,000
Deposits and other assets                                              175,360
Deferred taxes (note 6)                                                 23,900
                                                                     ---------
            Total                                                 $  7,499,487
                                                                     =========
<CAPTION> 
 
      Liabilities and Shareholders' Equity
      ------------------------------------
<S>                                                                  <C> 
Current liabilities:
  Accounts payable and accrued expenses                                315,894
  Unearned premium - Medicare                                          159,521
  Capital lease obligations, current (note 5)                           16,144
  Income taxes payable (note 6)                                         13,639
                                                                     ---------
       Total current liabilities                                       505,198
 
Capital lease obligations, noncurrent (note 5)                          16,540
                                                                     ---------
          Total liabilities                                            521,738
                                                                     ---------
 
Shareholders' equity (note 1(a), 7 and 9):
  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                                         7,193,852
  Unearned compensation from stock options                            (195,313)
  Retained earnings (deficit)                                          (23,185)
                                                                     ---------
          Total shareholders' equity                                 6,977,749
                                                                     ---------
 
Commitments and contingencies (note 9)
 
          Total liabilities and shareholders' equity              $  7,499,487
                                                                     =========
 
</TABLE> 
See accompanying notes to consolidated financial statements.

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

                     Consolidated Statements of Operations

                   For the years ended July 31, 1995 and 1996


<TABLE>
<CAPTION>
 
 
                                                 1995             1996
                                                 ----             ----
<S>                                        <C>                <C>
 
Patient service revenue                    $    5,127,572        5,080,850
                                             ------------     ------------
 
Cost and expenses:
  Cost of patient related services              3,506,847        3,371,131
  General and administrative                    1,472,116        1,704,748
  Compensation expense (note 9(b))                 -               210,937
  Amortization of intangibles                      56,499           42,333
                                             ------------     ------------
       Total operating expenses                 5,035,462        5,329,149
                                             ------------     ------------
                                                        
Income (loss) from operations                      92,110         (248,299)
Interest income                                     5,921           54,431
                                             ------------     ------------
                                                        
Income (loss) before income taxes                  98,031         (193,868)
Provision for income taxes (note 6)                42,600           28,600
                                             ------------     ------------
                                                        
       Net income (loss)                   $       55,431         (222,468)
                                             ============     ============
                                                        
Net income (loss) per share (note 1(d))              $.05            $(.15)
                                                        
Weighted average shares                                 
outstanding (note 1(d))                         1,208,750        1,531,893
</TABLE> 






See accompanying notes to consolidated financial statements.

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

           Consolidated Statement of Changes in Shareholders' Equity

                   For the years ended July 31, 1995 and 1996


<TABLE>
<CAPTION>
 
 
                                                                         Unearned
                                                                       Compensation
                                     Shareholders'                         From       Additional
                                         Net        Common                 Stock       Paid-in    Retained
                                      Investment    Stock    Capital      Options     Earnings     Total
                                    --------------  ------  ---------  -------------  ---------  ----------
<S>                                 <C>             <C>     <C>        <C>            <C>        <C>
  
Balance, July 31, 1994           $      1,187,994      -        -             -          -       1,187,994
 
Net income                                 55,431      -        -             -          -          55,431
Net equity transactions with
  National Home Health
  Care Corp. (note 7)                    (206,479)     -        -             -          -        (206,479)
                                    -------------   ------  ---------  ------------    -------   ---------
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 7)                    (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 9(b))                      -          -      406,250      (406,250)     -           -
Amortization of compensatory                                                                  
  stock options (note 9(b))                -          -         -          210,937      -         210,937
                                    -------------   ------  ---------  ------------    -------   ---------
Balance, July 31, 1996           $          -        2,395  7,193,852      (195,313)   (23,185)  6,977,749
                                    =============   ======  =========  ============    =======   =========
 
</TABLE>

See accompanying notes to consolidated financial statements.

                                      -4-
<PAGE>
 
                   SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES

                     Consolidated Statements of Cash Flows

                   For the years ended July 31, 1995 and 1996
<TABLE>
<CAPTION>
 
                                                            1995        1996
                                                            ----        ----
<S>                                                   <C>             <C>
 
Cash flows from operating activities:
  Net income (loss)                                   $     55,431    (222,468)
  Adjustments to reconcile net income (loss) to
    net cash provided by operating activities:
     Depreciation and amortization                         144,231     132,592
     Provision for doubtful accounts                       132,000     225,000
     Deferred taxes                                        (30,400)    (27,700)
     Noncash compensation                                        -     210,937
     Operating expenses and income taxes
      funded by National Home Health Care, Corp.            98,000     165,068
     Changes in operating assets and liabilities:
       Decrease (increase) in accounts receivable         (151,552)   (196,832)
       Decrease (increase) in prepaid expenses
         and other assets                                    2,162    (226,647)
       (Increase) in due from Medicare                           -     (38,448)
       Increase (decrease) in accounts payable,
         accrued expenses and other liabilities           (210,496)    119,215
       Increase in unearned premium - Medicare                   -     159,521
                                                         ---------   ---------
          Net cash provided by operating activities         39,376     300,238
                                                         ---------   ---------
 
Cash flows from investing activities:
  Purchase of furniture, equipment and leasehold
   improvements                                            (47,388)    (35,377)
  Purchase of certificate of deposit, restricted                 -    (250,000)
                                                         ---------   ---------
       Net cash used in investing activities               (47,388)   (285,377)
                                                         ---------   ---------
 
Cash flows from financing activities:
  Principal payments under capital lease obligations       (19,762)    (24,958)
  Initial public offering                                    -       6,083,497
  Shareholder distributions                               (304,479)   (296,231)
                                                         ---------   ---------
       Net cash (used in) provided by financing
        activities                                        (324,241)  5,762,308
                                                         ---------   ---------
 
       Net increase (decrease) in cash and cash
        equivalents                                       (332,253)  5,777,169
 
Cash and cash equivalents, beginning of period             548,693     216,440
                                                         ---------   ---------
 
Cash and cash equivalents, end of period              $    216,440   5,993,609
                                                         =========   =========
 
Supplemental disclosure of cash flow information:
  Cash paid during the year for interest              $      7,629       5,168
                                                         =========   =========
</TABLE>
Noncash investing and financing activities (notes 1(a), 5, 7 and 9)



See accompanying notes to consolidated financial statements.

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

                   Notes to Consolidated Financial Statements

                             July 31, 1995 and 1996



(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.

        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.

        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. As of July 31,
        1996, the Company had issued 2,395,000 shares of common stock.

    (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.

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

                   Notes to Consolidated Financial Statements



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

    (b) Basis of Presentation, continued
        --------------------------------

        The financial statements reflect the results of operations, financial
        condition 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
        under other ownership. The statements of operations include, in
        management's opinion, a reasonable allocation of administrative costs
        incurred by NHHC which benefit SunStar of $25,000 in 1995 and $18,750 in
        the year ended July 31, 1996. Such allocation is based on the value of
        time devoted by NHHC employees.

        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 7) and certain compensation
        charges (see note 9). 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
        consolidated financial statements include no provision for interest on
        capital of NHHC used by the Company.

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

        The Company recognized fee-for-service revenues based on net realizable
        amounts due from patients and third-party payors at the time medical
        services are rendered. The Company recognizes capitated fee arrangements
        from Health Maintenance Organizations (HMOs) on a monthly basis for each
        participating enrollee, regardless of utilization; health care costs
        relating to capitation 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.

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

                   Notes to Consolidated Financial Statements

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

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

        The Company has reflected in its calculations of earnings per share for
        1995 and 1996 the 900,000 shares issued by SunStar to NHHC and the
        common shares issuable upon the exercise of the options granted to two
        employees and a consultant (see note 9) as if such shares were
        considered to have been issued at the beginning of the respective
        period. The earnings per share are computed to give effect to stock
        options with exercise prices below the Offering price (see note 9) using
        the treasury stock method. In accordance with Securities and Exchange
        Commission rules, such effect is also included in a loss period where
        the impact of the incremental shares is antidilutive.

    (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.

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

        Goodwill is 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.

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

                   Notes to Consolidated Financial Statements



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

    (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. 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 Standard No. 121 (SFAS 121),
        "Accounting for the Impairment of Long Lived Assets and for the Long
        Lived Assets to be Disposed of," and Statement of Financial Accounting
        Standard No. 123 (SFAS 123), "Accounting for Stock-Based Compensation,"
        respectively. SFAS 121 is effective for the Company's fiscal year ended
        July 31, 1997 and SFAS 123 has various effective and transition dates.
        The Company believes adoption of SFAS 121 and SFAS 123 will not have a
        material impact on its financial statements. The Company expects to
        continue to account for 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 using the fair value based method. The Company does not
        intend to early adopt SFAS 123.

    (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 and valuation reserves for accounts
        receivable.

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

                   Notes to Consolidated Financial Statements



(2) Acquisitions
    ------------

    In 1994, the Company purchased certain assets of two companies engaged in
    outpatient medical services in Volusia County, Florida for an aggregate
    purchase price of $147,000. The acquisition was accounted for as a purchase,
    and, accordingly, the results of operations of the acquired companies are
    included in the Company's statements of operations since the dates of
    acquisition. The purchase price was allocated as follows: $57,000 to
    furniture and equipment, $73,000 to goodwill and $17,000 to a covenant not
    to compete.


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

    Furniture, equipment and leasehold improvements at July 31, 1996 consist of
    the following:
 
 
         Furniture, equipment and fixtures    $   1,205,975
         Leasehold improvements                     269,760
                                                 ----------
                                                  1,475,735
         Less accumulated depreciation
           and amortization                      (1,246,332)
                                                 ----------
 
              Net property and equipment      $     229,403
                                                 ==========
 
    The net book value of furniture and equipment held under capital leases was
    approximately $52,000 at July 31, 1996. Depreciation expense includes
    depreciation on assets held under capital leases.

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

                   Notes to Consolidated Financial Statements



(4) Goodwill
    --------

    Goodwill at July 31, 1996 consists of the following:



         Balance, beginning of period  $    429,895
         Amortization                       (42,333)
                                          --------- 
           Balance, end of period      $    387,562
                                          =========

(5) Capital Lease Obligations
    -------------------------

    At July 31, 1996, approximate future minimum lease payments under
    capitalized lease obligations were as follows:
 
            Year ended July 31                     Amount
            ------------------                     ------ 
            1997                                  $ 17,544
            1998                                     8,266
            1999                                     8,266
            2000                                     1,239
            2001                                       310
                                                   -------
 
               Total minimum lease payments         35,625
            Less amounts representing interest      (2,941)
            Less amounts due within one year       (16,144)
                                                   -------
 
            Amounts due after one year           $  16,540
                                                   =======
 
    During 1996, the Company acquired equipment under capital leases 
    for $24,204.

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

                   Notes to Consolidated Financial Statements



(6) Income Taxes
    ------------

    The provision for income taxes for the years ended July 31, 1995 and 1996
    consists of:
 
                                        1995           1996
                                        ----           ----
         Current:
           Federal                 $   62,000         50,300
           State                       11,000          6,000
                                     --------       --------
                                       73,000         56,300
         Deferred tax benefit         (30,400)       (27,700)
                                     --------       --------
           Total                   $   42,600         28,600
                                     ========       ========
 
    Deferred tax assets at July 31, 1996 are as follows:


         Accounts receivable reserves           $  38,700
         Furniture, equipment and leasehold
           improvements                            10,700
         Goodwill and other intangible asset       13,200
                                                  -------
                                                $  62,600
                                                  =======

    The reconciliation of the statutory tax rate to the effective rate for the
    years ended July 31, 1995 and 1996 are as follows:

                                                     1995       1996
                                                     ----       ---- 
      Federal statutory rate                     $  33,000    (65,900)
      State taxes, net of federal tax benefit        7,000     (7,000)
      Compensation expense from stock options         -        79,800
      Other                                          2,600     21,700
                                                   -------   --------
                                                 $  42,600     28,600
                                                   =======   ========

    The difference between the tax provision provided for the year ended July
    31, 1996 and that expected from applying the U.S. statutory rate to loss
    from operations before taxes is primarily attributable to the Company
    recording a compensation charge for stock options to key employees which are
    not currently deductible for income taxes. The realization of the tax
    benefit related to these options is dependent on future market conditions
    and has not been recorded.

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

                   Notes to Consolidated Financial Statements



(7) Net Equity Transactions with NHHC
    ---------------------------------
 
                                              1995       1996
                                            ---------  ---------
         Corporate expense allocation    $    25,000     18,750
         Expenses paid by NHHC on
           behalf of the Company                -       115,626
         Income taxes                         73,000     30,692
         Shareholder distributions          (304,479)  (296,231)
                                            --------   --------
                                         $  (206,479)  (131,163)
                                            ========   ========
 
(8) Concentration of Credit Risk and Major Payors
    ---------------------------------------------

    Capitation revenue from three HMOs amounted to approximately 31% of patient
    service revenue in 1995 and 1996.

    In addition, approximately 34% in 1995 and 39% in 1996 of patient service
    revenue was derived under a federal cost reimbursement contract.


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

    (a)  Leases
         ------

         The Company rents various medical and office facilities through 1999
         under terms of several lease agreements which include escalation
         clauses. At July 31, 1996, minimum annual rental commitments under
         noncancelable operating leases are as follows:
 

                    1997             $  174,273
                    1998                 87,446
                    1999                 51,612
 
         The Company also rents various medical and office facilities pursuant
         to operating leases currently subject to monthly renewals at the option
         of the Company.

         Rent expense amounted to approximately $387,000 and $329,000 for the
         years ended July 31, 1995 and 1996, respectively.

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

                   Notes to Consolidated Financial Statements



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

    (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.

         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 (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-fourth of the shares covered thereby and shall be
         exercisable as to an additional one-fourth of the shares covered
         thereby on January 28, 1997, 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.

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

                   Notes to Consolidated Financial Statements


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

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

         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.

         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, currently are exercisable. The
         remaining 50,000 options, which have been granted pursuant to the
         Company's 1996 Stock Option Plan (the Plan) and which have an exercise
         price of $5.00 per share, shall be exercisable as to one-fourth of the
         shares covered thereby on each of the first four anniversaries of the
         Effective Date, 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 an employment agreement, effective on the
         Effective Date, with the Company's Vice President. The agreement
         expires on the first 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 $75,000, payable commencing
         on the Effective Date. 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.

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

                   Notes to Consolidated Financial Statements



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

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

         In addition, the Company has granted to the Vice President options to
         purchase an aggregate of 25,000 shares of the Company's common stock.
         The options, which have been granted pursuant to the Plan and which
         have an exercise price of $5.00 per share, shall be exercisable as to
         one-fourth of the shares covered thereby on each of the first four
         anniversaries of the Effective Date, provided that the Vice President
         is employed by the Company on such dates.

         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 in the
         year ended July 31, 1996. Unearned compensation at July 31, 1996
         amounts to approximately $195,000 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.

         A summary of options granted (exclusive of Plan and Offering options
         (see note 9(d)) through July 31, 1996 in connection with employment and
         consulting agreements are as follows:

 
                                             Options Outstanding
                                        ---------------------------
                                           Number        Exercise
                                             of          Price Per
                                           Shares          Share
                                           ------          -----
 
              Employment agreements     $ 275,000          $.25
              Consulting agreement         50,000          $.25
                                         --------
                                        $ 325,000          $.25
                                        =========
 
         At July 31, 1996, options to purchase 137,500 shares are exercisable.

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

                   Notes to Consolidated Financial Statements


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

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

         Restricted cash consists of funds held as collateral for certain
         regulatory requirements.

    (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 years ended July 31, 1995 and 1996
         amounted to approximately $30,000 and $29,000, respectively.

         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.

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

                   Notes to Consolidated Financial Statements



(9) 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.

         In February 1996, the Company granted options to purchase an aggregate
         of 75,000 shares under the Plan which are exercisable at $5.00 per
         share commencing on the first anniversary of the Effective Date.

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

                   Notes to Consolidated Financial Statements



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

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

         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.

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

         Activity in the Plan through July 31, 1996 including 37,500 options
         granted to nonemployee directors on the Effective Date is as follows:
         
                                               Options Outstanding
                                               -------------------
                                                Number   Exercise
                                     Options      of     Price per
                                    Available   Shares     Share
                                    ----------  -------  ---------
 
          Options authorized          200,000
          Options granted            (112,500)  112,500      $5.00
                                     --------   -------
 
          Balance, July 31, 1996       87,500   112,500      $5.00
                                     ========   =======  =========
 
         At July 31, 1996, none of the above options have been exercised.

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

                   Notes to Consolidated Financial Statements



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

    (e)  Other
         -----

         Common stock reserved for future issuance at July 31, 1996 is as
         follows:
 
                                                                       Number of
                                                                        Shares
                                                                       ---------
          Options granted under employment and consulting agreements     325,000
          Options granted under the Plan                                 112,500
          Reserved for future grants under the Plan                       87,500
                                                                         -------
                                                                         525,000
                                                                         =======

    (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.

                                      -20-
<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 on October 28, 1996.

                                               SUNSTAR HEALTHCARE, INC.


                                        By: /s/ Warren D. Stowell
                                           ----------------------------
                                        Warren D. Stowell
                                        President & Chief Executive Officer

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

Signatures                     Title                           Date
----------                     -----                           ----

/s/ Warren D. Stowell          President,
---------------------------    Chief Executive Officer         October 28, 1996
Warren D. Stowell              Chairman


/s/ David A. Jesse
---------------------------    Executive Vice President        October 28, 1996
David A. Jesse                 Chief Operating Officer,
                               Director

/s/ Frederick H. Fialkow
---------------------------    Director                        October 25, 1996
Frederick H. Fialkow


/s/ Steven Fialkow
---------------------------    Director                        October 25, 1996
Steven Fialkow

/s/ Bernard Levine, M.D.
---------------------------    Director                        October 25, 1996
Bernard Levine, M.D.


/s/ Dean L. Sloane
---------------------------    Director                        October 24, 1996
Dean L. Sloane


/s/ Richard Seidelman, M.D.
---------------------------    Director                        October 25, 1996
Richard Seidelman, M.D.


/s/ Lisa M. Tomei
---------------------------    Chief Accounting Officer        October 28, 1996
Lisa M. Tomei         
<PAGE>
 
<TABLE>
<CAPTION>
Exhibit            Exhibit Description          
-------            -------------------
<S>                <C>                                 
10.11              Lease dated June 27, 1996, between  
                   the Company and Ronald D. Nutt
                 
16.1               Letter on Change in Certifying      
                   Accountant

27                 Financial Data Schedule
</TABLE>