<PAGE>
 
                    U.S. SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C. 20549

                                  Form 10-KSB

[_]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 For the fiscal year ended


[X]      TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
         ACT OF 1934

For the transition period from August 1, 1998 to December 31, 1998.

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

                           SUNSTAR HEALTHCARE, INC.

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

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

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

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

     Title of each class               Name of each exchange on which registered
     -------------------               -----------------------------------------
     Common Stock                      Nasdaq SmallCap 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_________                   NO     X       
                                               ------------

         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. [X]

         State issuer's revenues for its most recent fiscal year $23,090,682
                                                                 -----------

         The aggregate market value of voting stock of the Registrant held by
non-affiliates of the Registrant on March 15, 1999 was $7,690,179 (based on the
average closing bid and asked prices of the Registrant's Common Stock on March
15, 1999 of $4.125 and $4.500 respectively).

         As of March 15, 1999, 2,919,330 shares of the Registrant's Common Stock
were issued and outstanding.


                      DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the Company's Proxy Statement for its 1999 Annual Meeting
are incorporated by reference in Part III. The Company's Proxy Statement will be
filed within 120 days after the five months ended December 31, 1998.

    Transitional Small Business Disclosure Format (check one): YES  X   NO____
                                                                  -----

________________________________________________________________________________
<PAGE>
 
                                    PART I

ITEM 1.  BUSINESS

         SunStar Healthcare, Inc. ("SunStar" or the "Company") was incorporated
under the laws of the State of Delaware in December 1995 by National Home Health
Care Corp. ("NHHC"), a publicly-held Delaware corporation. In January 1996,
NHHC, then the sole shareholder of the Company, contributed to SunStar all of
the outstanding capital stock of its wholly owned subsidiaries First Health,
Inc. ("First Health") and Brevard Medical Center, Inc. ("Brevard"), which
included all of the outstanding capital stock of Brevard's wholly owned
subsidiary, SunStar Health Plan, Inc. ("SHP") (formerly known as Boro Medical
Corp.). Subsequently, the Company restructured its subsidiaries such that
Brevard, First Health and SHP all became direct, wholly-owned subsidiaries of
SunStar. Except where the context otherwise indicates, the Company, First
Health, Brevard and SHP collectively are referred to herein as "SunStar" or as
the "Company".

         On May 15, 1996, the Company completed an initial public offering (the
"IPO") 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 IPO yielded net proceeds to the Company of $5,230,372. On June 7,
1996, the underwriters in the IPO 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.

         On July 16, 1998, the Company completed a Private Placement (the
"Private Placement") under Rule 506 of Regulation D ("Regulation D") promulgated
under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to
which the Company sold 474,330 shares of previously unissued Common Stock. The
Private Placement resulted in net proceeds to the Company of $1,355,251.

         As of April 13, 1999, the Company sold 496,425 Units (the "Units", each
a "Unit"), resulting in net proceeds to the Company of approximately $4,199,000
pursuant to a private offering (the "Offering") under Rule 506 of Regulation D.
Each Unit consisted of (i) one share of Series A Preferred Stock, par value
$.001 per share (the "Series A Preferred Stock"), of the Company, each share of
Series A Preferred Stock convertible into shares of Common Stock, subject to
adjustment, and accruing dividends at the cumulative rate of 10% per share per
annum; and (ii) one warrant to purchase one share of Common Stock at $5.00 per
share up to 60 months from the date of the Offering. The purchase price per Unit
was $10.00. The Offering, originally scheduled to terminate on March 31, 1999,
was extended by the Board of Directors for purposes of accepting one additional
investor to which updated due diligence information was provided prior to the
investment.

         The Company is a managed healthcare company whose wholly owned
subsidiary, SHP, provides comprehensive healthcare benefits to individuals,
families and small and large employer groups in its service areas through its
health maintenance organization ("HMO") contracts. As originally organized, the
Company also operated seven outpatient primary care medical centers (the
"Medical Centers") located in central Florida. On April 15, 1998, the Company
sold substantially all of the assets of the Medical Centers, pursuant to an
Asset Purchase Agreement ("Asset Purchase Agreement"), thereby completing the
Company's transformation from a "provider" of medical services through its
Medical Centers to a "payor" for medical services through its statewide HMO. The
Company's sale of the Medical Centers has permitted the Company to focus its
full attention and resources on the rapid expansion of SHP.

         On February 24, 1997, SHP was awarded an HMO Certificate of Authority
by the Department of Insurance in the State of Florida ("DOI") and began
accepting its first HMO members effective May 1, 1997. Commencing from an
initial service area of a single county in eastern central Florida, SunStar has
subsequently received eight approvals from the Florida Agency for Healthcare
Administration ("AHCA") to expand its service territory to 52 counties in
central, northern, southwestern and southeastern Florida, including the
metropolitan areas of Tampa, Orlando, Jacksonville, Sarasota, Naples, Fort
Meyers, Miami, Fort Lauderdale and Palm Beach. On January 13, 1998, SunStar
filed an application to become a contracting party with the

                                       1
<PAGE>
 
Healthcare Financing Administration ("HCFA") to provide HMO health service
benefits to Medicare beneficiaries residing in Florida. At the request of HCFA,
SunStar has withdrawn its original application filed under superceded Tax Equity
Fiscal Responsibility Act rules and is in the process of finalizing its new
application due by April 15, 1999. HCFA has assured SunStar that its original
filing date will be used to prioritize the site visit and approval process. The
Medicare Service Area will include four counties in Central Florida and at least
three counties in South Florida.

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

         As of February 1, 1999 the Company served approximately 75,000 enrolled
plan members in 52 counties. The Company has established a growing distribution
network of more than 3,000 brokers and 125 general agencies to market its HMO
products. The Company has also established a comprehensive delivery system of
contractual providers numbering approximately 17,000 physicians and 130
hospitals. The Company outsources all billing, enrollment and claims processing
functions through a third party administrator ("TPA") which provides a dedicated
SunStar team with whom the Company maintains close contact for coordination and
review. In February 1999, the Company verbally notified the current TPA of its
intention to terminate the service contract effective July 1, 1999. During March
1999, written notice of termination was received. On March 26, 1999, the
Company's management finalized an agreement for similar services with a
different TPA. Management anticipates completion of the conversion from the
existing TPA to the new TPA by July 1, 1999.

         The Company's objective is to continue to establish relationships with
qualified physicians, hospitals and other healthcare providers who are willing
to provide quality 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 employer groups willing to enroll in the Company's HMO. The Company has
focused initially on enrolling medically underwritten individuals in central and
northern Florida. Currently, the Company has entered the small group and large
group markets with a suite of tailored products and is in the process of
extending and improving upon its service area throughout the State of Florida.
Upon obtaining HCFA approval, the Company will also expand its HMO product
offerings to the Medicare market.

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

         Effective April 6, 1999, four of the directors resigned from the Board
of Directors of the Company. Three of the four former directors, Frederick H.
Fialkow, Steven Fialkow and Bernard Levine, M.D., are directors of National Home
Health Care Corp. ("National") and the fourth, Richard Seidelman, M.D., is
unaffiliated with National. On April 13, 1999, the remaining directors of the
Company, Warren D. Stowell, President, Chief Executive Officer and Chairman of
the Board of Directors, and David A. Jesse, Executive Vice President, Chief
Operating Officer and Secretary, appointed Jerry Balter, Managing Partner of the
Ulysses Group, a health care and emerging technology advisory firm, to fill one
of the vacancies created by the resignations and to serve on both the audit and
compensation committees of the Company. Mr. Balter has agreed to so serve until
the next Annual Meeting of the shareholders of the Company, which is expected to
be held in May. Management anticipates that a complete slate of proposed
directors, including Messrs. Stowell, Jesse and Balter and a nominee of the
placement agent in the Offering, will be nominated for election to the Board of
the Company at such Annual Meeting.

                                       2
<PAGE>

HCFA AGREEMENT.
 
         SHP also has a prepaid cost reimbursement contract with HCFA, pursuant
to which the Company provides prescribed primary healthcare services to Medicare
beneficiaries who enrolled directly with the Company prior to January 1, 1996.
The Company provides medical services pursuant to the HCFA agreement to
approximately 2,000 Medicare enrollees through Brevard Medical Care, Inc.
("BMC"), a non affiliate entity. Medicare enrollees pay a nominal annual
enrollment fee without monthly premiums, deductibles or copayments for primary
care services.

         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 estimated 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. The Company's 1996 HCFA cost report was recently audited and no
material adjustments were made. Revenues, net of expenses related to the HCFA
contract are reported as operating income on the Consolidated Statement of
Operations for the five months ended December 31, 1998.

         Pursuant to 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. Effective January 1, 1999, the Company has
obtained HCFA approval to convert the existing contract under Section 1833 of 42
Code of Federal Regulations into a cost contract under Section 1876 of 42 Code
of Federal Regulations, which allows the Company to continue service to the
2,000 enrollees in Brevard County before it establishes Medicare HMO operations.

         Pursuant to the Asset Purchase Agreement, the Company agreed to
transfer the existing HCFA contract held by SHP to the buyer subject to HCFA
approval. During November 1998, HCFA declared the contract non-transferable and
effective January 1, 1999, the Company entered into an agreement to exclusively
use BMC to provide non-urgent and non-emergent primary care medical services to
its members of the new plan referred to above. The Company will pay a fixed
capitated amount per member per month to BMC in exchange for BMC providing all
the primary care medical services to such members.

COMPETITION.

         The managed healthcare industry is very competitive and has experienced
significant changes in recent years, primarily due to rising healthcare costs.
Employer groups have demanded a variety of healthcare options, such as
traditional indemnity insurance, HMOs, point of service plans and preferred
provider options, offered either through third-parties or by self-funding. The
Company's HMO competes with providers of all of these products, including United
Healthcare of Florida, Inc., Humana Medical Plan, Inc., Prudential Healthcare,
Inc., Health Options, Inc. and CIGNA Healthcare of Florida, Inc., most of which
have substantially greater financial, management, marketing, personnel and other
resources than the Company. Additional competitors may enter the Company's
markets in the future. Although, effective January 1, 1999, the Company has
received authorization for premium rate increases of 12% for individual and
small groups, the Company must respond to various competitive factors affecting
the healthcare industry, including trends relating to demand for healthcare
services, regulatory, economic and political factors, changes in patient
demographics and competitive pricing strategies by HMOs and other healthcare
plans. The Company will face significant competition in many of the geographic 
areas it has entered. As a result of these factors, premium pricing has been
competitive, which has contributed to instances in the State of Florida whereby
HMOs have experienced significant operating losses and financial failures over
the past several years. The Company may not be able to compete successfully in
any such market.

INSURANCE.

         Although the Company has sold the Medical Centers, the Company could
under certain circumstances become liable for negligent acts performed by
employees of the Medical Centers while such centers were owned and operated by
the Company. The Company insured such malpractice risks on a claims-made basis.
The Company had secured claims-made coverage from August 1, 1997 through April
15, 1998, with retroactive coverage through July 1, 1993. The Company does not
accrue for possible losses attributable to incidents which may have occurred and
not been identified under the Company's incident reporting system because the
amount, if any, is not readily 

                                       3
<PAGE>
 
estimable. While the Company may be indemnified by the buyer of the Medical
Centers, or is otherwise insured, against liability for such acts, the Company
could be subject to potential professional liability claims to the extent that
such claims exceed the limits of any applicable insurance coverage.

         As an HMO operator, the Company could become liable for the negligent
acts of physicians and for negligence in recruiting and selecting physicians.
The Company currently maintains managed care professional liability insurance
with limits of $1,000,000 in the aggregate and $1,000,000 per occurrence and
requires physicians in the network to maintain malpractice liability insurance
in amounts which it deems adequate for the types of medical services provided.
However, such insurance may not be sufficient to cover potential claims, and
adequate levels of coverage may not be available in the future at a reasonable
cost. A partially or completely uninsured successful claim against the Company
could have a material adverse effect on the Company's business and financial
condition.

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

GOVERNMENT REGULATION.

         The healthcare industry is subject to extensive, stringent and
frequently changing federal and state regulation, which is interpreted by
regulatory authorities with broad discretion. The federal government and the
State of Florida have each enacted statutes extensively regulating the
activities of HMOs that are applicable to the Company's operations. Among the
areas regulated are the scope of benefits required to be made available to
members, the manner in which member rates are structured, procedures for review
of quality assurance, enrollment requirements, composition of policy making
bodies to assure member representation, the interrelationship between HMOs 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 an HMO 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, HMOs must also comply with certain other provisions of
state health and insurance laws, including the licensing of salespersons and
maintenance of subscriber grievance procedures, insolvency protection and
minimum statutory financial requirements. Under Section 625 of the Florida
Insurance Code, each HMO shall deposit with the Florida Department of Insurance
cash or eligible securities with a minimum market value of $300,000. At December
31, 1998, the Company maintained $300,000 in deposits for such regulatory
requirements. Pursuant to Section 641 of the Florida Insurance Code, SHP is
required to maintain a minimum capital surplus in an amount which is the greater
of $800,000 or 10% of total liabilities or 1% of annualized premium. Effective
September 30, 1999, the capital surplus requirement increased to an amount which
is the greater of $1,150,000 or 10% of total liabilities or 1.25% of annualized
premium. Dividends are restricted to 10% of statutory surplus and the entire net
operating profits and related net capital gains derived during the immediately
preceding fiscal year unless prior approval is received from the DOI. Pursuant
to the Florida Administrative Code, the DOI may require an HMO to submit a
corrective action plan in the event that net income before taxes over the past
four quarterly reporting periods is less than 2% of total revenue. Based on this
criteria, at December 31, 1998, SHP is required to maintain a minimum capital
surplus of approximately $1,752,000. At December 31, 1998, SSHP's audited
statutory financial statements reflect an actual surplus of approximately
$405,000. 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 believes that it is in compliance with all other 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

                                       4
<PAGE>
 
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 to civil remedies, including significant fines, penalties, injunctions
and expulsion from participation in Commercial and Medicare 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
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.

NASDAQ LISTING REQUIREMENTS.

         The Company's shares of Common Stock which were registered in the IPO
are traded on the Nasdaq SmallCap Market. Continued trading of the Common Stock
on the Nasdaq SmallCap Market is conditioned upon the Company meeting certain
criteria. The National Association of Securities Dealers ("NASD"), which
administers Nasdaq, currently requires, among other things, that for the
continued listing of the Company's Common Stock on the Nasdaq SmallCap Market,
the Company must have: (a) either $2,000,000 in net tangible assets (total
assets, excluding goodwill, minus total liabilities), $35,000,000 market
capitalization or $500,000 net income (in the last fiscal year or two of the
last three fiscal years); (b) a public float of 500,000 shares having a market
value of at least $1,000,000; (c) a minimum bid price of not less than $1 per
share; (d) two market makers; and (e) at least 300 round lot shareholders
(holders of 100 shares or more). As of December 31, 1998, the Company does not
meet the net tangible assets maintenance requirement. Net of commissions and
estimated expenses, the Company will have raised approximately $4,199,000 in the
Offering. The Company currently is assessing whether such amount would bring it
into compliance with the net tangible asset requirement and has scheduled a
hearing with the Nasdaq staff on April 22, 1999. However, there can be no
assurance the Company will meet such requirement and retain its Nasdaq SmallCap
Market listing. As a result, Common Stock could be delisted from trading on the
Nasdaq SmallCap Market, which delisting could adversely affect the trading
market for the Common Stock. In such event, trading in the Common Stock would be
conducted in the over-the-counter market known as the NASD OTC Electronic
Bulletin Board, or the "pink sheets", whereupon trading in the Company's
securities would be subject to the "Penny Stock" regulations. As a result, an
investor may find it more difficult to dispose of, or to obtain accurate
quotations as to the market value of, the Company's Common Stock.

EMPLOYEES.

         The Company currently employs 94 persons, including 3 executive
officers, 1 physician and 90 other persons engaged in operations management,
administrative and clerical capacities. None of the Company's employees are
represented by a union or subject to a collective bargaining agreement. The
Company believes that its employee relations are good.


ITEM 2.  PROPERTY.

                  The Company is headquartered in the metropolitan area of
Orlando, Florida, where it leases an aggregate of approximately 10,200 square
feet pursuant to a three year lease. Administrative, customer support and
medical support services are located in this space. Although the Company
believes that its facilities are adequate for its existing operations, the
Company regularly evaluates the adequacy of these facilities in light of its
operations. 

                                       5
<PAGE>
 
         The following table sets forth the location, approximate square
footage, approximate annual rent, use of each location and expiration date of
each lease:

<TABLE> 
<CAPTION> 
                                              APPROX.
                               APPROX.        ANNUAL                                          LEASE
        LOCATION              SQ. FEET         RENT                  USE                 EXPIRATION DATE
--------------------------    ----------    -----------     -----------------------     ------------------
<S>                           <C>           <C>             <C>                         <C> 
Heathrow, FL                   10,200       $184,000        Executive Office            Oct. 31, 2000
Miami, FL                         375       $  7,600        Provider Relations          Mar. 31, 2000
                                                            Office
</TABLE> 

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 period August 1, 1998 to December 31, 1998.

                                       6
<PAGE>
 
                                    PART II


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

Market Information.

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

<TABLE> 
<CAPTION> 
                                          1997                                                     1998
                               ----------------------------                           -----------------------------
                                                               Quarter Ended and
        Quarter Ended             High           Low           Transition Period          High             Low
------------------------------ ------------ --------------- ------------------------- -------------- --------------
<S>                            <C>          <C>             <C>                       <C>            <C> 
October 31, 1996                   5.00         3.25        October 31, 1997              5.25           4.00
January 31, 1997                   5.87         3.00        January 31, 1998              5.25           2.75
April 30, 1997                     7.25         3.75        April 30, 1998                5.25           3.75
July 31, 1997                      6.50         3.75        July 31, 1998                 5.25           3.63
                                                            Transition Period             5.125          2.94
</TABLE> 

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

Holders.
-------

         The approximate number of holders of record of the Company's Common
Stock at March 15, 1999 was 88. However, the Company estimates that there were
approximately 1,000 beneficial holders of the Company's Common Stock as of that
date.

Dividends.
---------

         No cash dividends have been declared by the Company on the Common Stock
for the past two fiscal years or the transition period. Pursuant to the
Offering, holders of shares of Series A Preferred Stock are entitled to receive
dividends on each share of Series A Preferred Stock held at the annual rate of
10%. Dividends on the Series A Preferred Stock are to be paid in cash quarterly
in arrears, with the first dividend payment due April 1, 1999. This dividend
payment is currently being processed. Upon conversion of the Series A Preferred
Stock, all accumulated but unpaid dividends on the Series A Preferred Stock are
to be extinguished. Dividends are to accumulate with respect to any share of
Series A Preferred Stock from the date of issuance.

Sale of Unregistered Securities.
-------------------------------

         On July 16, 1998, the Company completed the Private Placement of
474,330 shares of previously unissued Common Stock, at a per share price of
$3.375, resulting in net proceeds to the Company of $1,355,251. The Common Stock
issued in the Private Placement was not registered with the Securities and
Exchange Commission under the Securities Act and was offered and sold solely to
"accredited investors" in reliance on exemptions from registration provided in
Section 4(2) and Section 4(6) of the Securities Act and Rule 506 of Regulation D
under the Securities Act. The Private Placement was not underwritten. The
Company entered into a Placement Agent Agreement with H.J. Meyers & Co., Inc.
(the "Placement Agent") pursuant to which the Placement Agent received 10% of
the aggregate value of the Common Stock issued in the Private Placement and is
being issued 150,000 warrants to purchase 150,000 shares of Common Stock at
$4.00 per share which expire in 4 years. The Placement Agent also received a
non-accountable expense allowance of 3% of the Private Placement proceeds. Under
the terms of the Private Placement, the Company agreed to use its reasonable
best efforts to file and obtain effectiveness of a registration statement under
the Securities Act covering the resale of the shares issued in the Private
Placement 

                                       7
<PAGE>
 
no later than 90 days after the closing of the Private Placement. If the
registration statement was not declared effective by the Securities and Exchange
Commission within such 90 day period other than by reason of delay of a selling
shareholder or its counsel or the activity or inactivity of the Securities and
Exchange Commission, then the Company was obligated to pay cash equal to 1% of
the aggregate subscription price of the Private Placement for the first month of
such delay and 2% of such aggregate subscription price for each month of delay
thereafter; provided, however, that in calculating the period of any delay,
there shall be excluded any delays attributable to the failure by a selling
shareholder to review the registration statement in a reasonably prompt manner.
All expenses incurred in any registration of these shares were the
responsibility of the Company, but the Company is not liable for any underwriter
discounts or commissions, brokerage fees or stock transfer taxes incurred with
respect to the shares or for the fees and expenses of counsel for any selling
shareholder. The Company filed a registration statement covering these shares on
February 10, 1999 and as of February 28, 1999, it has accrued approximately
$122,000 for delayed filing obligations.


ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

"FORWARD-LOOKING" INFORMATION.

         This report on Form 10-KSB contains certain "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), which represent the Company's
expectations and beliefs, including, but not limited to, statements concerning
the Company's expected growth. The words "believe," "expect," "anticipate,"
"estimate," "project," and similar expressions identify forward-looking
statements, which speak only as of the date such statement was made. These
statements by their nature involve substantial risks and uncertainties, certain
of which are beyond the Company's control, and actual results may differ
materially depending on a variety of important factors, including the Company's
ability to forge satisfactory relationships with physician groups and provider
networks and enroll sufficient numbers of HMO members; continued efforts to
control healthcare costs; future membership composition and premium rates for
the commercial business; proposed future efforts to control administrative
costs; the ability of the Company to effectively manage any future outsourcing
provider conversions; the individual and group renewal process; future health
care and administrative costs, future provider network, future provider
utilization rates, future medical-loss ratio levels, future claims payment,
service performance and other operations matters; future government regulation
and relations and the future of the health care industry; the Company's ability
to attract members that are of sufficient underwriting risk; the ability of the
Company to price its products competitively for this assumed underwriting risk;
sources for sufficient additional capital to meet the Company's growth and
operations; the failure to properly manage growth and successfully integrate
additional physician groups and providers; changes in economic conditions;
demand for the Company's products; and changes in the competitive and regulatory
environment. Future events and actual results could differ materially from those
expressed in, contemplated by, or underlying any such forward-looking
statements.

THE FOLLOWING DISCUSSION AND ANALYSIS OF THE COMPANY'S FINANCIAL CONDITION AS OF
DECEMBER 31, 1998 AND THE COMPANY'S RESULTS OF OPERATIONS FOR THE FIVE MONTHS
ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED) SHOULD BE READ IN CONJUNCTION WITH
THE COMPANY'S FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS
REPORT.

GENERAL.

         On February 24, 1997, SHP was awarded its HMO Certificate of Authority
in the State of Florida by the DOI. SHP accepted its first HMO members effective
May 1, 1997 in its initial service area of Brevard County, Florida. During the
fiscal year ended July 31, 1997 ("fiscal 1997"), SHP accelerated its plans to
enter markets that the Company believed were under-served by its managed
healthcare competitors. Thus, SHP has rapidly expanded and been approved by AHCA
to offer its HMO products in 52 counties in central, northern, southwestern and
southeastern Florida, including the metropolitan areas of Tampa, Orlando,
Jacksonville, Sarasota, Naples, Fort Meyers, Miami, Fort Lauderdale and Palm
Beach. As a result of this accelerated growth, development costs were 

                                       8
<PAGE>
 
also accelerated in the areas of advertising, marketing and materials, personnel
and related expenses. SHP intends to complete this expansion throughout the
entire state of Florida over the next twelve months. As of February 1, 1999, the
Company provided coverage to approximately 75,000 members in its current service
areas. The Company has established a growing distribution network of more than
3,000 brokers and 125 general agencies to market its HMO products. The Company
has also established a comprehensive delivery system of contractual providers
numbering approximately 17,000 physicians and 130 hospitals. The net losses for
the five months ended December 31, 1998 and 1997 are consistent with
management's expectations with respect to the costs associated with the
attainment of SHP's HMO license and the related start-up, development and
expansion costs of an HMO.

         As originally organized, the Company also provided managed healthcare
services pursuant to contractual arrangements, as well as on a fee-for-service
basis, through its seven primary care Medical Centers in central Florida. On
April 15, 1998, the Company sold substantially all the assets of the Medical
Centers and agreed to assign the existing HCFA contract held by SHP upon
approval by HCFA pursuant to the Asset Purchase Agreement, thereby completing
the Company's transformation from a "provider" of medical services through its
Medical Centers to a "payor" for medical services through its statewide HMO. The
Company's sale of its Medical Centers has permitted it to focus its full
attention and resources on the rapid expansion of SHP. During November 1998,
HCFA determined the existing contract held by SHP was not transferrable pursuant
to the Asset Purchase Agreement. Effective January 1, 1999, SHP obtained HCFA
approval to convert the existing prepaid cost reimbursement contract into a cost
contract and entered into an agreement to exclusively use BMC to provide medical
services under the new plan.

         Since accepting its first HMO members in May 1997, the Company's
initial focus had been on the marketing and sale of its HMO product in the
medically underwritten individual market. The majority of the Company's initial
growth came from the sale of its products in the individual market. The
Company's objective has been to establish a sufficient base of customers for its
HMO product in the individual market within a geographic area, and then to
broaden its focus to the marketing and sale of its HMO products to include the
small and large group markets. During the fiscal year ended July 31, 1998, the
Company had begun to broaden its focus in the geographic areas in which the
Company is currently licensed.

         On April 20, 1998, the Board of Directors approved a change in the
Company's fiscal year end from July 31 to December 31, to be effective beginning
December 31, 1998.

GENERAL FINANCIAL INFORMATION.

<TABLE> 
<CAPTION> 
                                                                                                     
                                                         Five Months Ended         Five Months Ended
                                                         December 31, 1998         December 31, 1997 
                                                         -----------------         ------------------
                                                                                        (Unaudited) 
<S>                                                      <C>                       <C> 
Total revenues                                              $23,090,682                 $2,834,196  
Loss from continuing operations                              (2,158,145)                (2,116,952) 
Net loss                                                     (2,158,145)                (2,116,952) 
Net loss per common share                                          (.74)                      (.88) 
Total assets                                                 18,420,408                  5,917,723  
Long term obligations                                            67,608                    123,884  
</TABLE> 

Results of Operations.
---------------------
Five months ended December 31, 1998 ("transition period 1998") compared to the
unaudited five months ended December 31, 1997 ("transition period 1997").

         Total revenues increased by approximately $20,257,000 from
approximately $2,834,000 for the transition period 1997 to approximately
$23,091,000 for the transition period 1998. This increase is attributable to a
$21,665,000 increase in revenues generated by the Company's HMO, which commenced
operations in May 1997, approximately $111,000 in additional revenue related to
recommendations from the audit of the HCFA cost report for 1996 and applied to
the 1997 cost report, coupled with a $1,660,000 decrease in primary care
revenues due to the sale of the medical centers during April 1998 and higher
interest income of approximately $140,000.

                                       9
<PAGE>
 
         As a result of the Company obtaining an HMO Certificate of Authority on
February 24, 1997 and commencing the enrollment of its members effective May 1,
1997, the Company realized approximately $1,080,000 and $22,745,000 in HMO
premium revenues for the transition periods 1997 and 1998, respectively. This
HMO premium revenue increase is consistent with 1998 premium rate increases and
with enrolled membership growth to 68,679 at December 31, 1998 from a membership
of 3,842 at December 31, 1997. Member months for the transition period 1998 were
approximately 234,000 as compared to member months for the transition period
1997 of approximately 12,500. The Company anticipates that HMO premium revenues
will continue to increase over the next twelve month period as the Company will
further implement its growth plan. However, there can be no assurance that such
growth will occur or that such growth will occur as the Company expects.

         HMO medical costs were approximately $16,859,000 for the transition
period 1998, resulting in a medical loss ratio of approximately 74%. HMO medical
costs include amounts accrued for actual claims reported but not paid and
estimates of medical services incurred but not reported. Total medical payments
for all dates of service, including net reinsurance premiums paid, were
approximately $5,907,000 for the transition period 1998. The Company incurred
HMO medical costs of approximately $1,438,000 for the transition period 1997,
resulting in a medical loss ratio of approximately 133%. This reduction of HMO
medical costs as a percentage of HMO revenues over the periods was directly
attributable to the Company establishing reserves for its small membership in
its new HMO products. The Company has obtained an independent actuarial
certification of its medical claims payable as of December 31, 1998.

         Selling, general and administrative expenses increased by approximately
$6,097,000, from approximately $2,252,000 for the transition period 1997 to
approximately $8,349,000 for the transition period 1998, or approximately 80% of
total revenues for the transition period 1997 compared to 36% of total revenues
for the transition period 1998. The increase is primarily the result of an
increase in sales and marketing salaries, benefits and commission expense
related to the HMO products of approximately $3,100,000, an increase in
professional and outsourcing fees of approximately $2,021,000, additional
administrative salaries and related benefits of approximately $512,000, an
increase in printing, postage and other selling costs related to HMO operations
of approximately $432,000, an increase of approximately $95,000 in other general
and administrative expenses including costs related to HMO enrollee medical
records, benefit statements and other miscellaneous office expenses, coupled
with a decrease in occupancy, insurance, general office and related costs of
approximately $63,000. These additional expenses were primarily incurred in
connection with the Company's accelerated expansion into additional Florida
markets, the development of marketing materials and increased infrastructure and
personnel to effect the Company's transformation into an HMO. The Company
expects selling, general and administrative expenses as a percentage of revenues
to decrease as HMO membership and premium revenues grow. However, there can be
no assurance that such membership and revenue growth or a decline in selling,
general and administrative expenses as a percentage of revenues will occur as
the Company anticipates.

         As a result of the foregoing, the loss from continuing operations was
approximately $2,158,000 for the transition period 1998 compared to
approximately $2,117,000 for the transition period 1997.

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

         At December 31, 1998, the Company had negative working capital of
approximately $674,000 as compared to positive working capital of approximately
$2,119,000 at December 31, 1997. The decline in working capital is attributable
primarily to the development and marketing costs incurred in order to transform
SHP into an HMO, the costs to maintain those operations and the Company's
expansion of its service areas.

         Net cash provided by operating activities was approximately $9,022,000
and net cash used in operating activities was approximately $639,000 for the
transition periods 1998 and 1997, respectively. Net cash provided by operating
activities at December 31, 1998 was primarily attributable to an increase in
medical claims payable and reserves for incurred but not reported claims of
approximately $10,038,000, additional cash received related to unearned and
deferred revenues of approximately $1,888,000, a decrease of approximately
$97,000 in prepaid expenses, depreciation expenses of approximately

                                       10
<PAGE>
 
$27,000, offset by a net loss of approximately $2,158,000, an increase in
accounts receivable and other assets of approximately $927,000 and a decrease in
accounts payable and accrued expenses of approximately $11,000.

         Net cash used by investing activities for the transition period 1998
was approximately $373,000 as a result of a restricted certificate of deposit of
$300,000 and purchases of new capital items of approximately $73,000. Net cash
used in investing activities for the transition period 1997 was approximately
$76,000, primarily as a result of purchases of furniture and equipment
associated with the development of the Company's new administrative offices and
replacement of medical office equipment.

         Net cash used in financing activities for the transition period 1998
was approximately $14,000 as compared to net cash used in financing activities
of approximately $3,500 for the transition period 1997. Cash used for financing
activities at December 31, 1998 primarily represented principal payments of
capital lease obligations of approximately $14,000. Cash used in financing
activities at December 31, 1997 related to principal payments under capital
lease obligations of approximately $16,000 and exercise of Common Stock options
of approximately $12,500.

         During the next fiscal year, the Company's liquidity will be affected
by continued accelerated HMO development, marketing and operation. Effective
September 30, 1998, SHP is required to maintain a minimum capital surplus in an
amount which is the greater of $800,000 or 10% of total liabilities or 1% of
annualized premium pursuant to Section 641 of the Florida Insurance Code. Based
on this criteria, at December 31, 1998, SHP is required to maintain a minimum
capital surplus of approximately $1,752,000. At December 31, 1998, SHP's audited
statutory financial statements reflect an actual surplus of approximately
$405,000. The Company's cash balances are currently maintained as a cash
equivalent of a Money Market Trust Fund which invests in securities issued or
guaranteed by the U.S. Treasury and repurchase agreements relating to such
securities. However, there can be no assurance that the Company will be able to 
comply with the regulatory requirements of the State.

         HMO development costs will continue to be incurred by SHP in fiscal
1999 to further establish arrangements with physicians, hospitals, and other
healthcare providers as well as to develop marketing materials and strategies
necessary to operate and maintain HMO operations in accordance with statutory
requirements (which shall include the costs of key employee's salaries and
expenses). In order to support the significant growth of the Company's HMO
operations, additional marketing, development and other personnel were hired
throughout 1998 to augment the Company's efforts to support and manage this
growth. Expenditures for such employees' salaries and related benefits will
continue to be incurred in the future and may increase as additional personnel
are needed to support further HMO membership growth. In addition, the Company
anticipates that it will make additional capital expenditures associated with,
among other things, furniture and equipment necessary due to personnel
increases. There can be no assurance that the foregoing factors will not
adversely affect the Company's future operating results.

         As of April 13, 1999, the Company sold 496,425 Units pursuant to the 
Offering, resulting in net proceeds to the Company of approximately $4,199,000.
The Series A Preferred Stock issued in the Offering was not registered with the
Securities and Exchange Commission under the Securities Act and was offered and
sold solely to "accredited investors" in reliance on exemptions from
registration provided in Section 4(2) of the Securities Act and Rule 506 of
Regulation D. The Offering was not underwritten. The Placement Agent received a
retail commission of 8% of the aggregate amount of the Offering and an is to
receive five-year warrants (the "Placement Agent Warrants") to purchase up to
100,000 shares of Common Stock at $1.50 per share, on a pro rata basis, up to
the sale of $1,500,000 in the Offering, and up to 500,000 shares of Common Stock
at $4.00 per share, on a pro rata basis, up to the sale of $6,000,000 in the
Offering. The Placement Agent Warrants are not to be exercisable until one year
after the completion of the Offering and thereafter are to be exercisable over a
period of four years. The Placement Agent also received non-accountable expenses
of 3% of the aggregate amount of the Offering and non-accountable marketing
expenses of 2% of the aggregate amount of the Offering. Under the terms of the
Offering, the Company is to file a registration statement on the appropriate
form with the Securities and Exchange Commission not later than 90 days
following the closing of the Offering covering all of the shares of Common Stock
underlying the Series A Preferred Stock and Warrants sold pursuant to the
Offering and the Placement Agent Warrants.

         The Company conducted the IPO in May 1996, the Private Placement in
July 1998 and the Offering in April 1999 to provide funds for its growth and
expansion plans. The net proceeds from such offerings, 

                                       11
<PAGE>
 
approximating $11,600,000, have been used to implement such expansion and for
the support of its HMO operations. The Company anticipates, based on currently
proposed plans and assumptions relating to its operations (including the costs
associated with its accelerated expansion), that additional offering proceeds
will be needed to fund ongoing business operations, to satisfy in the future its
net tangible asset requirements as governed by the Nasdaq SmallCap Market and to
comply with other equity requirements as governed by certain regulatory entities
including, without limitation, the Florida DOI, AHCA and HCFA. Management's
plans include consideration of the sale of additional equity securities under
appropriate market conditions, alliances or other partnership agreements with
entities interested in the Company with resources to support the Company's
expansion plans, or other business transactions which would generate sufficient
resources to assure continuation of the Company's operations.

         The Company is currently reviewing its options for the possible sale of
 additional equity securities as well as potential merger and partnering
 opportunities. However, no assurance can be given that the Company will be
 successful in raising additional capital or entering into a business alliance.
 Further, there can be no assurance, assuming the Company successfully raises
 additional funds or enters into a business alliance, that the Company will
 achieve profitability or that the funds will be sufficient to sustain the
 Company's losses. If the Company is unable to obtain adequate additional
 financing or enter into such business alliance, it will not be able to meet
 ongoing business operation needs. To the extent that the Company's available
 cash resources are insufficient to allow the Company to engage in operations
 sufficient to generate meaningful revenues or achieve profitable operations,
 the inability to obtain additional financing will have a material adverse
 effect on the Company. Additional equity financing may involve substantial
 dilution to the interests of the Company's existing stockholders.

Year 2000 Readiness
-------------------

         The Company has completed its assessment of its computer systems and
facilities that could be affected by the "Year 2000" date conversion and is
continuing to carry out the implementation plan to resolve the Year 2000 date
issue which it developed as a result of the assessment. The Year 2000 problem is
the result of computer programs being written using two digits rather than four
to define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize the date "00" as the year 1900 rather than
the year 2000. This could result in system failure or miscalculations. The
Company is utilizing internal resources to identify, correct or reprogram, and
test the systems for Year 2000 compliance.

         As of December 31, 1998, the Company was 80% complete with its Year
2000 compliance program and anticipates being complete with all phases of the
program by the second quarter of 1999. The Company's Year 2000 compliance
program requires remediation of certain programs and the replacement of certain
hardware within particular time frames in order to avoid disruption of the
Company's operations. Although the Company believes it will complete the
remediation of these programs within the applicable time frames, there can be no
assurance that such remediation will be completed or that the Company's
operations will not be disrupted to some degree.

          The Company is communicating with certain material vendors to
determine the extent to which the Company may be vulnerable to such vendors'
failure to resolve their own Year 2000 issues. The Company is attempting to
mitigate its risk with respect to the failure of such vendors to be Year 2000
compliant by, among other things, requesting project plans, status reports and
Year 2000 compliance certifications or written assurances from its material
vendors, including business partners, landlords and suppliers. The effect of
such vendors' noncompliance, if any, is not reasonably estimable at this time.

         The Company estimates that the costs in connection with its Year 2000
compliance efforts will be less than $100,000. The cost of this project and the
date on which the Company plans to complete the necessary Year 2000
modifications are based on management's best estimate, which include assumptions
of future events including the continued availability of certain resources.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those plans.

                                       12

<PAGE>
 
ITEM 7.  FINANCIAL STATEMENTS.

         Filed as part of this report are audited financial statements for the
five months ended December 31, 1998 and the years ended July 31, 1998 and July
31, 1997 commencing at page F-1.


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

         None.

                                       13
<PAGE>
 
                                   PART III


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

         Information concerning the directors, executive officers and
significant employees of the Company is contained in the Company's Proxy
Statement to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A within 120 days after the close of the five months ended December
31, 1998. Such information is hereby incorporated by reference.


ITEM 10.  EXECUTIVE COMPENSATION.

         Information concerning executive compensation is contained in the
Company's Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A within 120 days after the close of the
five months ended December 31, 1998. Such information is hereby incorporated by
reference.


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

         Information concerning the security ownership of certain beneficial
owners and management is contained in the Company's Proxy Statement to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A within
120 days after the close of the five months ended December 31, 1998. Such
information is hereby incorporated by reference.


ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         Information concerning certain relationships and related transactions
is contained in the Company's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A within 120 days after the
close of the five months ended December 31, 1998. Such information is hereby
incorporated by reference.


ITEM 13.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

         Filed as part of this 10-KSB annual report are audited financial
statements for the five months ended December 31, 1998 and for the year ended
July 31, 1998.

         Reports on Form 8-K, none.

                                       14
<PAGE>
 
                                  SIGNATURES

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


                                               SUNSTAR HEALTHCARE, INC.


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

Dated:  April 15, 1999


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

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

                                         
/s/  David A. Jesse                      Executive Vice President, Chief 
--------------------------------          
David A. Jesse                           Operating Officer, Director 
                                         
                                         
/s/  Jack W. Shields                     Vice President, Chief Financial Officer
--------------------------------
Jack W. Shields                          (Principal Financial and Accounting 
                                         Officer) 

                                       15
<PAGE>
 
         Exhibits required to be filed by Item 601 of Regulation S-B are
included in Exhibits to this Report as follows:

<TABLE> 
<CAPTION> 
EXHIBIT        EXHIBIT DESCRIPTION
<S>            <C> 
   2.1         Asset Purchase Agreement, dated April 15, 1998, between Brevard Medical Care, Inc. and SunStar
                   Healthcare, Inc.****

   3.1         Certificate of Incorporation*

   3.1         Certificate of Designation******

   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)*

   4.2         Form of Warrant Agreement (for Offering)******

   4.2         Form of Registration Rights Agreement (for Offering)******

   4.3         1996 Stock Option Plan*

   4.4         Form of 1996 Stock Option Contract**

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

  10.3         Agreement for Third Party Administrator Services, dated March 26, 1999, between Companion Information
               Management Resources, Inc. and SunStar Health Plan, Inc.******

  10.4         Lease, dated November 26, 1997 between the Company and Pizzuti*****

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

  10.4         Agreement for Health Care Cost-Based Plan, dated January 1, 1999, between the Health Care Financing
                   Administration and SunStar Health Plan, Inc. ******

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

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

  16.1         Letter on Change in Certifying Accountant***** 

  21.1         List of Subsidiaries****** 

  23.1         Consent of KPMG Peat Marwick LLP****** 

  27.1         Financial Data Schedule ******

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

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

 ***           Filed as Exhibit 10.12 to Form 10-KSB for the fiscal year ended July 31, 1997.

****           Filed as same exhibit reference to Form 10-QSB, for the quarterly period ended April 30, 1998.

*****          Filed as same exhibit reference to Form 10-KSB for the fiscal year ended July 31, 1998.

******         Filed herewith.
</TABLE> 

                                       16
<PAGE>
 
                   SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES

                       Consolidated Financial Statements

                               December 31, 1998


                  (With Independent Auditors' Report Thereon)

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

                               December 31, 1998



                               TABLE OF CONTENTS

<TABLE> 
<CAPTION> 
                                                                                                           PAGE
<S>                                                                                                        <C> 
Independent Auditors' Report                                                                                F-3

Consolidated Balance Sheet at December 31, 1998                                                             F-4

Consolidated Statements of Operations for the years ended July 31, 1997 and 1998
     and the five months ended December 31, 1998                                                            F-5

Consolidated Statement of Changes in Shareholders' Equity for the years
     ended July 31, 1997 and 1998 and the five months ended December 31, 1998                               F-6

Consolidated Statements of Cash Flows for the years ended July 31, 1997and 1998
     and the five months ended December 31, 1998                                                          F-7-8 

Notes to Consolidated Financial Statements                                                                F-9-24
</TABLE> 

                                      F-2
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT


The Board of Directors
SunStar Healthcare, Inc.:

We have audited the accompanying consolidated balance sheet of SunStar
Healthcare, Inc. and Subsidiaries (the Company) as of December 31, 1998, and the
related consolidated statements of operations, changes in shareholders' equity,
and cash flows for the years ended July 31, 1997 and 1998 and the five months
ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SunStar Healthcare,
Inc. and Subsidiaries as of December 31, 1998, and the results of its operations
and its cash flows for the years ended July 31, 1997 and 1998, and the five
months ended December 31, 1998, in conformity with generally accepted accounting
principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 9 to the
financial statements, the Company has experienced significant operating losses
which raise substantial doubt about the Company's ability to continue as a going
concern. The Company is seeking additional financing to enhance its working
capital and fund regulatory capital requirements and future expansion efforts.
Management's plans in regard to these matters are also described in note 9. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.


                                                              KPMG LLP



Jacksonville, Florida
March 12, 1999, except for
  note 9 which is as of April 14, 1999

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

                          Consolidated Balance Sheet

                               December 31, 1998
<TABLE> 
<S>                                                                                               <C> 
             ASSETS
Current assets:
    Cash and cash equivalents                                                                     $   15,983,161    
    Premiums receivable                                                                                   12,419    
    Prepaid  expenses                                                                                    255,889    
    Other current assets (note 1(a))                                                                   1,310,844    
                                                                                                  -------------------
             Total current assets                                                                     17,562,313    

Furniture and equipment, net (note 4)                                                                    381,241    
Restricted deposits                                                                                      300,000    
Other assets                                                                                              76,854    
Deferred taxes (note 6)                                                                                  100,000    
                                                                                                  -------------------
             Total assets                                                                         $   18,420,408    
                                                                                                  ===================

          LIABILITIES AND SHAREHOLDERS' EQUITY 
    Current liabilities:
    Medical claims payable                                                                        $   13,821,187    
    Unearned premium - HMO                                                                             3,525,280    
    Accounts payable and accrued expenses                                                                752,453
    Estimated Medicare settlement                                                                        103,175    
    Capital lease obligations, current (note 5)                                                           34,589    
                                                                                                  -------------------
             Total current liabilities                                                                18,236,684    

Capital lease obligations, noncurrent (note 5)                                                            67,608    
                                                                                                  -------------------
             Total liabilities                                                                        18,304,292    
                                                                                                  -------------------

Shareholders' equity (notes 1(i) and 8):
    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, 2,919,330 shares issued and outstanding                                          2,919    
    Additional paid-in capital                                                                         8,531,027    
    Unearned compensation from stock options                                                             (37,978)   
    Accumulated deficit                                                                               (8,379,852)   
                                                                                                  -------------------
             Total shareholders' equity                                                                  116,116    
                                                                                                  -------------------
Commitments and contingencies (note 5 and 8)

             Total liabilities and shareholders' equity                                           $   18,420,408    
                                                                                                  ===================
</TABLE> 

See accompanying notes to consolidated financial statements.

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

                     Consolidated Statements of Operations

         Years ended July 31, 1997 and 1998 and the five months ended
                               December 31, 1998

<TABLE> 
<CAPTION> 
                                                                                                       FIVE
                                                           YEAR ENDED         YEAR ENDED           MONTHS ENDED
                                                            JULY 31,           JULY 31,            DECEMBER 31,
                                                              1997               1998                  1998
                                                          --------------   ------------------   -------------------
<S>                                                       <C>              <C>                  <C> 
Revenues:
    HMO premiums                                          $    99,529          8,844,775            22,744,870    
    Investment income                                         249,407            231,743               234,573    
    Other                                                     101,112              2,554               111,239    
                                                          --------------   ------------------   -------------------
          Total revenues                                      450,048          9,079,072            23,090,682    
                                                                     
Operating expenses:                                                  
    HMO medical costs                                         135,211          7,076,054            16,858,937    
    Selling, general and administrative                                                          
       (notes 1(a) and 3)                                   1,997,042          7,295,065             8,348,829    
    Option based compensation (note 8(c))                      65,104             65,104                27,127    
    Amortization of intangibles                                 9,328             32,611                13,934    
                                                          --------------   ------------------   -------------------
          Total operating expenses                          2,206,685         14,468,834            25,248,827    
                                                          --------------   ------------------   -------------------

Loss before income taxes                                   (1,756,637)        (5,389,762)           (2,158,145)   
Provision for income taxes (note 6)                           (51,000)                --                    --    
                                                          --------------   ------------------   -------------------

Loss from continuing operations                            (1,705,637)        (5,389,762)           (2,158,145)   

Discontinued operations (note 2):
    Income from discontinued operations                        74,472            154,472                    --    
    Gain on sale of discontinued operations                       --             667,933                    --    
                                                          --------------   ------------------   -------------------
          Total discontinued operations                        74,472            822,405                    --    
                                                          --------------   ------------------   -------------------

             Net loss                                     $(1,631,165)        (4,567,357)           (2,158,145)   
                                                          ==============   ==================   ===================

Earnings per share (note 1(k))
    Loss from continuing operations                       $     (0.71)             (2.18)                (0.74)   
    Discontinued operations                               $      0.03               0.33                  0.00   
    Net loss                                              $     (0.68)             (1.85)                (0.74)   

Weighted average shares outstanding                         2,395,000          2,467,959             2,919,330    
</TABLE> 

See accompanying notes to consolidated financial statements.

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

           Consolidated Statement of Changes in Shareholders' Equity

            Years ended July 31, 1997 and 1998 and the five months
                            ended December 31, 1998

<TABLE> 
<CAPTION> 
                                                                              UNEARNED
                                                                            COMPENSATION
                                                            ADDITIONAL          FROM
                                              COMMON          PAID-IN          STOCK          ACCUMULATED
                                               STOCK          CAPITAL         OPTIONS           DEFICIT          TOTAL
                                          ---------------- -------------- ----------------- ---------------- --------------
<S>                                       <C>              <C>            <C>               <C>              
Balance, July 31, 1996                    $     2,395         7,193,852       (195,313)         (23,185)        6,977,749     
                                                                                                                            
Net loss                                           --                --             --       (1,631,165)       (1,631,165)   
Stock issuance costs (note 1(i))                   --           (30,052)            --               --           (30,052)    
Amortization of compensatory                                                                                                
    stock options (note 8 (c))                     --                --         65,104               --            65,104      
                                          ---------------- -------------- ----------------- ---------------- --------------

Balance, July 31, 1997                          2,395         7,163,800       (130,209)      (1,654,350)        5,381,636      
                                                                       
Net loss                                           --                --             --       (4,567,357)       (4,567,357)    
Stock options exercised (note 1(i))                50            12,450             --               --            12,500     
Amortization of compensatory                                                                                                  
    stock options (note 8 (c))                     --                --         65,104               --            65,104      
                                          ---------------- -------------- ----------------- ---------------- --------------
                                                2,445         7,176,250        (65,105)      (6,221,707)          891,883      
                                                                      
Common stock subscriptions                                            
    received (note 1(i))                          474         1,354,777             --               --         1,355,251      
                                          ---------------- -------------- ----------------- ---------------- --------------

Balance, July 31, 1998                          2,919         8,531,027        (65,105)      (6,221,707)        2,247,134     
                                                                                                                            
Net loss                                           --                --             --       (2,158,145)       (2,158,145)   
Amortization of compensatory                                                                                                
    stock options (note 8 (c))                     --                --         27,127               --            27,127      
                                          ---------------- -------------- ----------------- ---------------- --------------

Balance, December 31, 1998                $     2,919         8,531,027        (37,978)      (8,379,852)          116,116       
                                          ================ ============== ================= ================ ==============
</TABLE> 

See accompanying notes to consolidated financial statements.

                                      F-6
<PAGE>
 
                     Consolidated Statements of Cash Flows

            Years ended July 31, 1997 and 1998 and the five months
                            ended December 31, 1998

<TABLE> 
<CAPTION> 
                                                                                                                     FIVE
                                                                            YEAR ENDED         YEAR ENDED        MONTHS ENDED
                                                                             JULY 31,           JULY 31,         DECEMBER 31,
                                                                               1997               1998               1998
                                                                          ----------------   ----------------   ---------------
<S>                                                                       <C>                <C>                <C> 
Cash flows from operating activities:
    Net loss                                                              $   (1,631,165)        (4,567,357)       (2,158,145)   
    Adjustments to reconcile net loss to net cash
      (used in) provided by operating activities:
       Depreciation and amortization                                             163,543            159,955            68,396     
       Provision for doubtful accounts                                            15,000                 --                --     
       Deferred                                                                  (37,400)                --                --     
       taxes                                                                                                                      
       Noncash compensation                                                       65,104             65,104            27,127     
       Gain on sale of discontinued operations                                        --           (667,933)               --     
       Gain on the sale of furniture and equipment                                (3,473)            (1,224)               --     
       Changes in operating assets and liabilities:                                                                               
          Decrease (increase) in premiums receivable                               4,871            (51,999)            3,675     
          (Increase) decrease in prepaid expenses                               (131,546)          (197,504)           97,281     
          Increase in other current assets                                       (82,554)          (216,388)         (930,884)    
          Decrease (increase) in other assets                                     17,318             33,143              (649)    
          Increase in medical claims payable                                      93,858          3,688,857        10,038,471     
          Increase in unearned premium - HMO                                      59,213                            1,985,072     
          (Decrease) increase in unearned premium - Medicare                    (159,521)            97,452           (97,452)    
          Increase (decrease) in accounts payable and                                                                             
             accrued expenses                                                    230,826            159,093           (10,634)    
          Increase (decrease) in estimated Medicare settlement                   169,483            (27,860)               --      
                                                                          ----------------   ----------------   ---------------
             Net cash (used in) provided by operating activities              (1,226,443)           (45,666)        9,022,258    
                                                                          ----------------   ----------------   ---------------
</TABLE> 

See accompanying notes to consolidated financial statements.

                                      F-7
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                                                                                     FIVE
                                                                            YEAR ENDED         YEAR ENDED        MONTHS ENDED
                                                                             JULY 31,           JULY 31,         DECEMBER 31,
                                                                               1997               1998               1998
                                                                          ----------------   ----------------   ---------------
<S>                                                                       <C>                <C>                <C> 
Cash flows from investing activities:
    Proceeds from sale of discontinued operations                         $        --          1,500,000                --    
    Purchase of furniture and equipment                                      (183,221)          (241,585)          (73,333)   
    Proceeds from sale of furniture and equipment                               3,473              1,345                --    
    Proceeds from sale of restricted certificate of deposit                        --            280,000                --    
    Purchase of restricted certificate of deposit                                  --                 --          (300,000)   
                                                                          ----------------   ----------------   ---------------
          Net cash (used in) provided by investing activities                (179,748)         1,539,760          (373,333)   
                                                                          ----------------   ----------------   ---------------

Cash flows from financing activities:
    Principal payments under capital lease obligations                        (31,689)           (39,738)          (13,548)   
    Stock issuance costs                                                      (30,052)                --                --    
    Common stock subscribed                                                        --          1,355,251                --    
    Exercise of common stock options                                               --             12,500                --    
                                                                          ----------------   ----------------   ---------------
          Net cash (used in) provided by financing activities                 (61,741)         1,328,013           (13,548)   
                                                                          ----------------   ----------------   ---------------

          Net (decrease) increase in cash and cash equivalents             (1,467,932)         2,822,107         8,635,377    

Cash and cash equivalents, beginning of period                              5,993,609          4,525,677         7,347,784    
                                                                          ----------------   ----------------   ---------------

Cash and cash equivalents, end of period                                  $ 4,525,677          7,347,784        15,983,161    
                                                                          ================   ================   ===============

Supplemental disclosure of cash flow information:
    Cash paid for interest                                                $    10,447             18,585             5,026    
                                                                          ================   ================   ===============
</TABLE> 

Noncash investing and financing activities (notes 1(i), 5 and 8)

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

                  Notes to Consolidated Financial Statements

                               December 31, 1998




(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 in note 1(i)) 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). Subsequent thereto,
              the Company restructured its subsidiaries such that Brevard, First
              Health, and SHP all became direct, wholly-owned subsidiaries of
              SunStar.

              SunStar is engaged in providing managed healthcare services in the
              State of Florida by operating a health maintenance organization
              (HMO) through SHP. As originally organized, the Company also
              operated seven primary care medical centers through Brevard and
              First Health. On April 15, 1998, the Company sold substantially
              all the assets of Brevard and First Health, thereby completing its
              transformation from a "provider" of medical services through its
              primary care medical centers to a "payor" for medical services by
              establishing and operating a statewide HMO.

              Throughout fiscal 1997, SunStar's management was active in
              developing and obtaining certification for its HMO product. On
              February 24, 1997, SHP was issued a Certificate of Authority by
              the Insurance Department of the State of Florida to operate an HMO
              in accordance with the provisions of Chapter 641, Florida
              Statutes. Effective May 1, 1997, the Company began accepting its
              first HMO members. Through December 31, 1998, the Company has been
              approved to operate its HMO in 52 counties in the State of Florida
              and has accepted members in all of those counties. Costs
              associated with the development of SunStar's HMO, including
              management salaries and benefits, administrative and other
              indirect costs have been reflected as selling, general and
              administrative expense in the accompanying consolidated financial
              statements.

              The Company has entered into a service agreement with a third
              party administrator (TPA) for enrollment and underwriting
              administration, claims processing, payment of agent's commissions
              and premium billing and collection. Service fees charged to
              operations under such contract were $16,078, $904,141 and
              $1,949,716 for the years ended July 31, 1997 and 1998 and the five
              months ended December 31, 1998, respectively. At December 31,
              1998, the Company has a receivable of approximately $1,133,397 for
              premiums and collections due from the TPA which is included in
              other current assets.

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

                  Notes to Consolidated Financial Statements

                               December 31, 1998



       (B)    CHANGE IN FISCAL YEAR-END

              In 1998, the Company changed its fiscal year-end from July 31 to
              December 31. Included in the accompanying audited consolidated
              financial statements are the results of operations for the
              five-month transition period ended December 31, 1998. Unaudited
              results of operations for the comparable five-month period ended
              December 31, 1997 are summarized below:


                  Revenue                               $     2,834,196 
                  Operating expenses                          4,951,148 
                                                        ---------------
                  Loss from operations                       (2,116,952) 
                  Provision for income taxes                         -- 
                                                        ---------------
                  Net loss                                   (2,116,952) 
                                                        ===============
                  Net loss per common share                        (.88) 
                                                        ===============


       (C)    BASIS OF PRESENTATION

              The accompanying consolidated financial statements have been
              prepared in conformity with generally accepted accounting
              principles (GAAP). These financial statements include the accounts
              of SunStar and SHP. All significant intercompany transactions and
              balances have been eliminated in consolidation.

              As discussed in note 2, effective April 15, 1998, the Company sold
              substantially all the assets of Brevard and First Health pursuant
              to a single Asset Purchase Agreement. Accordingly, the results of
              operations for Brevard and First Health for the year ended July
              31, 1998 are reported in the accompanying consolidated statements
              of operations under discontinued operations. Pursuant to the Asset
              Purchase Agreement, the Company agreed to assign the existing
              Health Care Financing Administration (HCFA) contract held by SHP
              to the buyer subject to HCFA approval. Thus, related HCFA revenues
              and program costs were also included in discontinued operations in
              the accompanying consolidated statements of operations for the
              year ended July 31, 1998. HCFA did not approve the assignment of
              the contract during 1998, prompting SHP to renew the contract for
              1999. As a result, HCFA revenues, net of program costs, are
              included as other operating revenue in the accompanying statement
              of operations for the five-months ended December 31, 1998.

       (D)    CASH AND CASH EQUIVALENTS

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

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

                  Notes to Consolidated Financial Statements

                               December 31, 1998


       (E)    FURNITURE AND EQUIPMENT

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

       (F)    MEDICAL CLAIMS PAYABLE

              Medical claims payable consist of actual claims reported but not
              paid and estimates of medical services incurred but not reported.
              The medical claims payable is based on historical data, current
              enrollment, health service utilization statistics, premium
              revenues and other related information. These accruals are
              continually monitored and reviewed. Modification in assumptions
              for medical costs caused by variances in actual experience could
              cause these estimates to change.

       (G)    REVENUE RECOGNITION

              Premium revenue under the Company's HMO is recognized as earned on
              a pro rata basis over the contract period. 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 under the aforementioned HCFA contract
              which are subject to audit. As discussed in note 1(c), the Company
              has retained the HCFA contract through 1999.

       (H)    INCOME TAXES

              The Company accounts for income taxes in accordance with Statement
              of Financial Accounting Standards No. 109, "Accounting for Income
              Taxes." Deferred tax assets and liabilities are recognized for the
              future tax consequences attributable to differences between the
              financial statement carrying amounts of existing assets and
              liabilities and their respective tax bases and operating loss and
              tax credit carryforwards. Deferred tax assets and liabilities are
              measured using enacted tax rates expected to apply to taxable
              income in the years in which those temporary differences are
              expected to be recovered or settled. Deferred taxes result
              primarily from liabilities for medical claims payable and
              temporary differences between the tax and financial statement
              recognition of option based compensation expense.

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

                  Notes to Consolidated Financial Statements

                               December 31, 1998


       (I)    EQUITY TRANSACTIONS

              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 30.8% interest. All share
              amounts have been retroactively adjusted for all periods
              presented.

              On May 15, 1996, the Company completed an initial public offering
              (the IPO), pursuant to which the Company sold 1,300,000 shares of
              previously unissued common stock, par value $.001. The IPO
              resulted in net proceeds to the Company of $5,230,372. On June 7,
              1996, the underwriters in the IPO exercised their over-allotment
              option to purchase additional shares of common stock, pursuant to
              which the Company sold 195,000 shares of common stock, par value
              $.001, resulting in additional net proceeds to the Company of
              $853,125. During 1997, the Company paid $30,052 of additional
              stock issuance costs related to the IPO which has been reflected
              as a reduction of paid-in capital in the accompanying financial
              statements. In November 1997, a consultant exercised stock options
              to purchase 50,000 shares of common stock at $.25 per share.

              On July 16, 1998, the Company completed a Regulation D, Rule 506,
              Private Placement (the Private Placement) pursuant to which the
              Company sold 474,330 shares of previously unissued common stock,
              par value $.001, resulting in net proceeds to the Company of
              $1,355,251. Common stock sold pursuant to the private placement
              was issued on August 31, 1998. Under the terms of the Private
              Placement, the Company agreed to effect the registration and sale
              of the 474,330 shares issued on behalf of the Private Placement
              shareholders within 90 days of the Private Placement, subject to
              extensions for various causes. The Company completed the
              registration required under the Private Placement on February 10,
              1999, which resulted in the Company incurring penalties for
              failing to register the shares within 90 days of July 16, 1998. As
              of December 31, 1998, the Company had accrued $69,649 as a general
              and administrative expense to reflect the recognition of these
              penalties.

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

                  Notes to Consolidated Financial Statements

                               December 31, 1998


       (J)    ACCOUNTING FOR STOCK-BASED COMPENSATION

              In October 1995, the Financial Accounting Standards Board issued
              Statement of Financial Accounting Standards No. 123, "Accounting
              for Stock-based Compensation" (SFAS 123). SFAS 123 requires the
              fair value of stock options and other stock-based compensation
              issued to employees to either be recognized as compensation
              expense in the income statement, or be disclosed as a pro forma
              effect on net income and earnings per share in the footnotes to
              the Company's consolidated financial statements. The Company has
              elected to adopt SFAS 123 on a disclosure basis only and will
              continue to measure stock-based compensation in accordance with
              Accounting Principles Board Opinion No. 25, "Accounting for Stock
              Issued to Employees," using intrinsic values with appropriate
              disclosures under the fair value based method as required by SFAS
              123.

       (K)    PER SHARE DATA

              Statement of Financial Accounting Standards No. 128, "Earnings Per
              Share," (SFAS 128) requires specific computations, presentations
              and disclosures for earnings per share (EPS) amounts in order to
              make EPS amounts more compatible with international accounting
              standards. The Company adopted SFAS 128 during the year ended July
              31, 1998. Common stock options are not included in the computation
              of diluted earnings per share as their effect is antidilutive due
              to the Company's net losses attributable to common shares.

       (L)    RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

              In June 1997, the Financial Accounting Standards Board issued
              Statement of Financial Accounting Standards No. 130 "Reporting
              Comprehensive Income" (SFAS 130). SFAS 130 requires all items that
              meet the definition of components of comprehensive income be
              reported in the consolidated financial statements for the period
              in which they are recognized and is effective for fiscal years
              beginning after December 15, 1997. The Company did not have any
              items that met the definition of components of comprehensive
              income for the years ended July 31, 1997 and 1998 and the five
              months ended December 31, 1998.

       (M)    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 depreciable assets, valuation
              reserves for deferred tax assets, and liabilities for incurred but
              not reported medical claims.

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

                  Notes to Consolidated Financial Statements

                               December 31, 1998


       (N)    RECLASSIFICATION

              Certain amounts presented for July 31, 1998 have been reclassified
              to conform with the presentation adopted for December 31, 1998.


(2)    DISCONTINUED OPERATIONS

       On April 15, 1998, the Company sold substantially all the assets of its
       primary care medical centers, Brevard and First Health, pursuant to a
       single Asset Purchase Agreement, to Brevard Medical Care, Inc. for
       $1,500,000. The assets sold consisted primarily of accounts receivable,
       furniture, equipment and leasehold improvements and capital lease
       commitments associated with these assets as well as physician and other
       payor agreements. Pursuant to the Asset Purchase Agreement, the Company
       agreed to assign the existing HCFA contract held by SHP to the buyer
       subject to HCFA approval. HCFA, however, did not approve the assignment
       of the contract during 1998, prompting SHP to renew the contract for
       1999.

       Assets excluded from the sale consist of cash and cash equivalents. The
       Company retained substantially all obligations and liabilities which
       arose from or in connection with operations prior to the sales
       transaction, except for those capital lease commitments previously
       discussed.

       The results of operations for Brevard and First Health and HCFA revenues
       and program costs for the year ending July 31, 1998 is reported in the
       accompanying consolidated statements of operations under discontinued
       operations.

       Information with respect to discontinued operations for the year ended
       July 31, 1998 is summarized as follows:

<TABLE> 
<CAPTION> 
                                                                       YEAR ENDED          YEAR ENDED
                                                                      JULY 31, 1997      JULY 31, 1998 
                                                                     --------------     ---------------
                  <S>                                             <C>                   <C> 
                  Revenues                                        $      4,544,852          3,069,322   

                  Expenses                                               4,470,380          2,914,850   
                                                                     --------------     ---------------

                  Income from discontinued operations             $         74,472            154,472   
                                                                     ==============     ===============
</TABLE> 

       The Company will utilize previously generated net operating loss
       carryforwards to offset the tax effect of the sale and, as such, has not
       recognized any tax expense or benefits resulting from the sale.

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

                  Notes to Consolidated Financial Statements

                               December 31, 1998


(3)    RELATED PARTY TRANSACTION

       SunStar is engaged in providing managed healthcare services by operating
       an HMO through SHP. The Company has entered into a management contract
       with SHP for the provision of administrative and marketing services.
       Management fees charged to SHP under such contract were $16,078,
       $1,325,660 and $1,535,790 for the years ended July 31, 1997 and 1998 and
       the five months ended December 31, 1998, respectively. As discussed in
       note 1(a), costs associated with the development of the Company's HMO,
       including management salaries and benefits, administrative and other
       indirect costs have been reflected as selling, general and administrative
       expense in the accompanying consolidated financial statements.
       Intercompany management fees between the Company and SHP have been
       eliminated in consolidation.


(4)    FURNITURE AND EQUIPMENT

       Furniture and equipment at December 31, 1998 consist of the following:

<TABLE> 
                  <S>                                         <C> 
                  Furniture and fixtures                      $       263,277 
                  Computer equipment                                  278,992 
                  Less accumulated depreciation                      (161,028) 
                                                                -------------
                                                              
                  Net furniture and equipment                 $       381,241 
                                                                =============
</TABLE> 

       The net book value of furniture and equipment held under capital leases
       was approximately $99,000 at December 31, 1998. Depreciation expense
       includes depreciation on assets held under capital leases.

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

                  Notes to Consolidated Financial Statements

                               December 31, 1998


(5)    CAPITAL LEASE OBLIGATIONS

       Future minimum lease payments under capitalized lease obligations at
       December 31, 1998, were as follows:

<TABLE> 
<CAPTION> 
                      YEAR ENDED DECEMBER 31                        AMOUNT   
                      ----------------------                      ----------
                      <S>                                      <C> 
                      1999                                     $      44,940  
                      2000                                            44,502  
                      2001                                            26,916  
                      2002                                             5,187  
                      2003                                               283 
                                                                  ----------
                           Total minimum lease payments              121,828 
                                                           
                      Less amounts representing interest             (19,631) 
                      Less amounts due within one year               (34,589) 
                                                                  ----------  
                      Amounts due after one year               $      67,608 
                                                                  ========== 
</TABLE> 

       During 1998, the Company acquired equipment under capital leases for
       $91,660 of which $29,182 was sold pursuant to the sale of the assets of
       Brevard and First Health as discussed in note 2.


(6)    INCOME TAXES

       The provision for income taxes for the years ended July 31, 1997 and 1998
       and the five months ended December 31, 1998 consists of:

<TABLE> 
<CAPTION> 
                                                   YEAR ENDED          YEAR ENDED           FIVE MONTHS ENDED
                                                  JULY 31, 1997       JULY 31, 1998           DEC. 31, 1998 
                                                 ---------------     ---------------         ---------------
             <S>                               <C>                   <C>                    <C> 
             Current:
                Federal                        $       (13,600)                 --                      -- 
                State                                       --                  --                      -- 
                                                 --------------      --------------          --------------
                                                       (13,600)                 --                      -- 
             Deferred tax benefit                      (37,400)                 --                      -- 
                                                 --------------      --------------          --------------
                    Total                      $       (51,000)                 --                      -- 
                                                 ==============      ==============          ==============
</TABLE> 

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

                  Notes to Consolidated Financial Statements

                               December 31, 1998


       Deferred tax assets at December 31, 1998 are as follows:

<TABLE> 
                <S>                                                                     <C> 
                Deferred tax assets:
                    Net operating loss carryforward                                     $        280,700 
                    Medical claims payable                                                     2,832,500 
                    Stock option amortization                                                    138,600 
                    HMO start-up costs                                                            10,300 
                    Estimated Medicare settlement                                                 38,800 
                                                                                          ---------------
                                                                                               3,300,900 
                    Less valuation allowance                                                   3,185,300 
                                                                                          ---------------
                         Net deferred tax assets                                                 115,600 
                                                                                          ---------------
                Deferred tax liabilities:
                    Furniture and equipment                                                       15,600 
                                                                                          ---------------
                         Net deferred tax liabilities                                             15,600 
                                                                                          ---------------

                         Net deferred tax asset                                         $        100,000 
                                                                                          ===============
</TABLE> 

       The reconciliation of the statutory tax rate to the effective rate for
       the years ended July 31, 1997 and 1998 and the five months ended December
       31, 1998 are as follows:

<TABLE> 
<CAPTION> 
                                                             YEAR ENDED          YEAR ENDED       FIVE MONTHS ENDED
                                                              JULY 31,             JULY 31,          DECEMBER 31,
                                                                1997                 1998                1998      
                                                          ---------------    ------------------    ----------------
           <S>                                         <C>                   <C>                   <C> 
           Federal statutory rate                      $       (579,900)           (1,832,500)          (733,700) 
           State taxes, net of federal tax benefit              (61,900)             (195,600)           (31,200) 
           Discontinued operations                               27,100               309,500                 --   
           Change in valuation allowance                        625,200             1,600,600            697,300   
           Other                                                (61,500)              118,000             67,600   
                                                          ---------------    -----------------     ----------------
                                                       $        (51,000)                   --                 --   
                                                          ===============    =================     ================
</TABLE> 

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

                  Notes to Consolidated Financial Statements

                               December 31, 1998


       The difference between the tax provision provided for the year ended July
       31, 1998 and the five months ended December 31, 1998 and that expected
       from applying the U.S. statutory rate to loss from operations before
       taxes is primarily attributable to the Company recording a valuation
       allowance for deferred tax assets related to net operating loss (NOL)
       carryforwards and medical claims payable which are not currently
       deductible for income taxes. The realization of the tax benefits related
       to these NOL carryforwards and medical claims expenses is dependent on
       future earnings and market conditions and have not been recorded.
       Management believes that it is more likely than not that the results of
       future operations will generate sufficient taxable income to realize net
       deferred tax assets resulting from other temporary differences. NOL
       carryforwards against future taxable income were approximately $746,000
       at December 31, 1998. Such NOLs are scheduled to expire in years through
       2013.


(7)    FINANCIAL INSTRUMENTS

       The Company's financial instruments exposed to concentrations of credit
       risk consist primarily of its cash and cash equivalents and premiums and
       other receivables. The Company's cash and cash equivalents are
       concentrated in liquid investments. Premiums receivable are
       geographically disbursed throughout Central and South Florida. Other
       receivables consist primarily of amounts receivable from the Company's
       third party administrator which are generally collected by the Company
       within the month subsequent to recognition.

       Financial instruments, such as cash and cash equivalents, are valued at
       cost which approximates fair market value.
     

(8)    COMMITMENTS, CONTINGENCIES AND OTHER MATTERS

       (A)    LEASES

              The Company rents various office facilities and equipment under
              terms of several lease agreements which include escalation
              clauses.

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

                  Notes to Consolidated Financial Statements 

                               December 31, 1998


              At December 31, 1998, minimum annual rental commitments under
              noncancelable operating leases are as follows:

<TABLE> 
                                    <S>                       <C>  
                                    1999                      $     239,312
                                    2000                            188,090
                                    2001                             16,518
                                    2002                              6,677
                                    2003                              5,008
</TABLE> 

              Rent expense amounted to approximately $389,000, $322,000 and
              $102,000 for the years ended July 31, 1997 and 1998 and the five
              months ended December 31, 1998, respectively.

       (B)    REGULATORY REQUIREMENTS

              As an HMO licensed in Florida, SHP is required, pursuant to
              Section 641 of the Florida Insurance Code, to maintain a minimum
              capital surplus in an amount which is the greater of $800,000 or
              10% of total statutory liabilities or 1% of annualized premium,
              which at December 31, 1998 was approximately $1,753,000. SHP was
              not in compliance with this requirement and had an audited
              statutory surplus of $405,524 at December 31, 1998. Management's
              plans for obtaining capital to meet mandated minimum surplus
              requirements are discussed in note 9.

              Dividends are restricted to 10% of statutory surplus or the entire
              net operating profits and related net capital gains derived during
              the immediately preceding fiscal year unless prior approval is
              received from the Insurance Department of the State of Florida.

              Pursuant to the Florida Administrative Code, the Department may
              require an HMO to submit a corrective action plan in the event
              that net income before taxes over the past four quarterly
              reporting periods is less than 2% of total revenue.

       (C)    STOCK OPTION AND WARRANT PLANS

              In February 1996, the Board of Directors of SunStar adopted and
              SunStar's sole shareholder at that time, NHHC, approved the 1996
              Stock Option Plan (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.

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

                  Notes to Consolidated Financial Statements

                               December 31, 1998


              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 terminated,
              the Plan will expire on February 13, 2006.

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

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

              The Plan provides that each nonemployee director automatically
              receives, upon first becoming a nonemployee director, a grant of
              options to purchase 7,500 shares of the Company's common stock at
              an exercise price equal to the fair market value of the Company's
              common stock on the date of grant. The Company granted an
              aggregate of 37,500 of such options to nonemployee directors on
              May 15, 1996 at $5.00 per share. During the year ended July 31,
              1998, 7,500 of such options were canceled due to the resignation
              of a director. The remaining 30,000 nonemployee director options
              will expire five years from the date of grant.

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

                  Notes to Consolidated Financial Statements

                               December 31, 1998


              The Company's granting of options with exercise prices below the
              market price of the stock on the grant date resulted in charges to
              operations of approximately $65,000 for the years ended July 31,
              1997 and 1998 and $27,000 for the five months ended December 31,
              1998. Unearned compensation at December 31, 1998 amounts to
              approximately $38,000 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.

              The fair value for options was estimated at the date of grant
              using a Black-Scholes option pricing model with the following
              weighted-average assumptions for the years ended July 31, 1997 and
              1998 and the five months ended December 31, 1998: risk-free
              interest rate of 6.5%; dividend yield of 0%; volatility factor of
              the expected market price of the Company's common stock of .84,
              .82 and .84, respectively; and a weighted-average expected life of
              the option of 5 years.

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

              For purposes of pro forma disclosures, the estimated fair value of
              the options is amortized to expense over the options' vesting
              period. The Company's pro forma information for the years ended
              July 31, 1997 and 1998 and the five months ended December 31,
              1998, follows:


<TABLE> 
<CAPTION> 
                                                      YEAR ENDED        YEAR ENDED       FIVE MONTHS ENDED
                                                       JULY 31,           JULY 31,          DECEMBER 31,
                                                         1997              1998                 1998         
                                                   ---------------     -------------     ------------------
                  <S>                            <C>                   <C>               <C> 
                  Pro forma net loss             $    (1,755,373)         (4,704,324)         (2,214,004)

                  Pro forma loss per share       $         (0.73)              (1.94)              (0.76)
</TABLE> 

              The weighted average fair value of options for the years ended
              July 31, 1997 and 1998 and the five months ended December 31, 1998
              with exercise prices equal to the market price of the stock on the
              date of grant was $2.82, $2.42 and $1.59, respectively.

                                      F-21
<PAGE>
 
                   SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

                               December 31, 1998


              A summary of the Company's stock option activity, and related
              information for the years ended July 31, 1997 and 1998 and the
              five months ended December 31, 1998, follows:

<TABLE> 
<CAPTION> 
                                                 YEAR ENDED                  YEAR ENDED             FIVE MONTHS ENDED
                                                  JULY 31,                    JULY 31,                 DECEMBER 31,
                                                    1997                        1998                      1998         
                                        --------------------------   ------------------------  ------------------------
                                                        WEIGHTED                    WEIGHTED                   WEIGHTED
                                                         AVERAGE                     AVERAGE                    AVERAGE
                                                        EXERCISE                    EXERCISE                   EXERCISE
                                            OPTIONS       PRICE         OPTIONS       PRICE       OPTIONS        PRICE
                                            -------       -----         -------       -----       -------        -----
              <S>                       <C>            <C>           <C>            <C>        <C>             <C>  
              Outstanding, beginning
                  of year                 437,500      $  1.47           492,500        1.60       417,500        1.59 

              Granted                     130,000         4.00            12,500        3.50            --          -- 

              Exercised                        --          --            (50,000)        .25            --          -- 

              Forfeited/canceled          (75,000)        5.00           (37,500)       4.20            --          -- 
                                        ----------                   ------------              ------------

              Outstanding, end of year    492,500         1.60           417,500        1.59       417,500        1.59 
                                        ==========                   ============              ============

              Exercisable at end
                  of year                 280,833      $  1.46           313,333        1.55       334,166        1.69 
                                        ==========                   ============              ============
</TABLE> 

              Exercise prices for options outstanding as of December 31, 1998
              ranged from $0.25 to $5.00. Options exercisable at $0.25 per share
              totaled 275,000 of which 212,500 were exercisable at December 31,
              1998. Options with exercise prices ranging from $3.50 to $5.00
              totaled 142,500 of which 121,666 were exercisable at December 31,
              1998. The weighted average remaining contractual life of options
              exercisable at $0.25 and $3.50 to $5.00 per share was 7.11 and
              6.87 years, respectively, at December 31, 1998.

              In connection with the IPO, the Company has granted warrants to
              the underwriter to purchase an aggregate of 130,000 shares of
              common stock at an exercise price equal to $6.00 per share. The
              warrants are exercisable on or after April 15, 1997 and expire on
              May 15, 2001.

              In connection with the Private Placement, the Company has granted
              warrants to the placement agent to purchase an aggregate of
              150,000 shares of common stock at an exercise price equal to $4.00
              per share. The warrants are exercisable on or after July 16, 1998,
              and expire four years from that date.

                                      F-22
<PAGE>
 
                   SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

                               December 31, 1998


              Common stock reserved for future issuance at December 31, 1998 is
              as follows:

<TABLE> 
<CAPTION> 
                                                                                                   NUMBER OF
                                                                                                     SHARES
                                                                                                     ------
                  <S>                                                                          <C> 
                  Options granted under employment and consulting agreements                         275,000 
                  Options granted under the Plan                                                     142,500 
                  Reserved for future grants under the Plan                                           57,500 
                  Warrants granted to underwriters                                                   280,000 
                                                                                               --------------
                                                                                                     755,000  
                                                                                               ==============
</TABLE> 

       (D)    PROFESSIONAL LIABILITY

              The Company insures its professional liability risks on a
              claims-made basis. The Company has secured claims-made coverage
              from August 1, 1997 through April 15, 1998, with retroactive
              coverage through July 1, 1993 to insure for potential professional
              liability claims by patients and others as a result of the
              negligence of physicians that occurred prior to the divestment of
              the primary care medical centers. The Company could become liable
              for the negligent acts of physicians, as well as negligence in
              recruiting and selecting physicians. The Company currently
              maintains professional liability insurance with limits of
              $1,000,000 in the aggregate and $1,000,000 per occurrence and
              requires physicians to maintain malpractice liability insurance in
              amounts which it deems adequate for the type of medical services
              provided. 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
              management has not identified any such incidents.

              The Company carries "stop-loss" reinsurance to reimburse it for
              costs resulting from catastrophic injuries or illnesses to its HMO
              members. Premiums for these policies are reported as HMO medical
              costs and insurance recoveries, if any, are recorded as a
              reduction of HMO medical costs. Under the excess loss reinsurance
              policies, recoveries are made for claims of each enrollee or each
              covered dependent of each enrollee, on an annual basis, in excess
              of the deductible established in the policy subject to certain
              limitations. The deductible under the policy for commercial
              healthcare claims is $50,000 and the maximum life time reinsurance
              indemnity payable under the agreement for any one member is
              $2,000,000.

                                      F-23
<PAGE>
 
                   SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

                               December 31, 1998


(9)    SUBSEQUENT EVENTS

       In February 1999, the Company verbally notified the TPA of its intention
       to terminate the service agreement effective July 1, 1999. Subsequent
       thereto, the Company received a written notice of termination from the
       TPA. On March 26, 1999, the Company's management finalized an agreement
       for similar services with a different TPA and anticipates completion of
       the conversion from the existing TPA to the new TPA on July 1, 1999.

       The Company's consolidated financial statements for the five months ended
       December 31, 1998 have been prepared on a going concern basis which
       contemplates the realization of assets and the settlement of liabilities
       and commitments in the normal course of business. The Company incurred
       net losses of $1,631,165, $4,567,357 and $2,158,145 for the years ended
       July 31, 1997 and 1998 and the five months ended December 31, 1998,
       respectively, and as of December 31, 1998 had an accumulated deficit of
       $8,379,852. The Company expects to incur substantial expenditures to
       further its HMO development and to expand its current commercial service
       area and enter into the Medicare market. The Company's working capital at
       December 31, 1998 will not be sufficient to fund ongoing business
       operations. Management recognizes that the Company must generate
       additional resources to enable it to continue operations.

       In recognition thereof, prior to April 30, 1999, the Company is scheduled
       to complete a private offering (the Offering) under Rule 506 of
       Regulation D. As Of April 14, 1999, the Company sold 496,425 Units (the
       Units, each a Unit), resulting in net proceeds to the Company of
       approximately $4,200,000. Each Unit consisted of (i) one share of Series
       A Preferred Stock, par value $.001 per share (the Series A Preferred
       Stock), of the Company, each share of Series A Preferred Stock
       convertible into shares of Common Stock, subject to adjustment, and
       accruing dividends at the cumulative rate of 10% per share per annum; and
       (ii) one warrant to purchase one share of Common Stock at $5.00 per share
       up to 60 months from the date of the Offering. The purchase price per
       Unit was $10.00.

                                      F-24