<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934

     FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1999

                                       OR

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

     FOR THE TRANSITION PERIOD FROM ________________ TO _______________.

                         Commission File Number: 0-11380

                              STAFF BUILDERS, INC.
                              --------------------
             (Exact name of Registrant as specified in its charter)

            DELAWARE                                      11-2650500
---------------------------------           ------------------------------------
  (State or other jurisdiction              (I.R.S. Employer Identification No.)
of incorporation or organization)

 1983 MARCUS AVENUE, LAKE SUCCESS, NY                        11042
---------------------------------------                    ----------
(Address of principal executive offices)                   (Zip Code)

Registrant's telephone number, including area code:  (516) 358-1000

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act:

                      CLASS A COMMON STOCK, $.01 PAR VALUE
                      CLASS B COMMON STOCK, $.01 PAR VALUE

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
                  Yes   [X]            No [ ]

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

The aggregate market value of the voting stock (Class A and Class B Common
Stock, assuming conversions of Class B Common Stock into Class A Common Stock on
a share for share basis) held by non-affiliates of the registrant based on the
closing price of such stock on May 28, 1999, was $9,578,978.

The number of shares of Class A Common Stock and Class B Common Stock
outstanding on May 28, 1999 was 23,311,035 and 308,353 shares, respectively.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      NONE

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PART I

ITEM 1. BUSINESS

GENERAL

         Staff Builders, Inc. ("Staff Builders" or the "Company") is a Delaware
corporation which was incorporated in New York in 1978 and reincorporated in
Delaware in May 1983. Unless the context otherwise requires, all references to
the "Company" include the Company and its subsidiaries. The Company is a leading
national provider of home health care and supplemental staffing services.

SPIN-OFF TRANSACTION

         On March 22, 1999, the Company's Board of Directors approved a plan to
separate its home health care business from its supplemental staffing business
and to create a separate, publicly-traded company engaged exclusively in
providing home health care services. To accomplish this separation of its
businesses, the Company's Board of Directors established a new, wholly-owned
subsidiary, Tender Loving Care Health Care Services, Inc. ("TLC"), which will
acquire 100% of the outstanding capital stock of the Staff Builders subsidiaries
engaged in the home health care business. The spin-off will be effected through
a pro rata distribution to Staff Builders' stockholders of all the shares of
common stock of TLC owned by Staff Builders. The distribution will be made by
issuing one share of TLC common stock for every two shares of Staff Builders
common stock outstanding on the record date of the spin-off. Based upon the
23,619,388 shares of Staff Builders common stock outstanding on May 28, 1999,
the Company estimates that 11,809,694 shares of TLC common stock will be
distributed to holders of Staff Builders common stock. Staff Builders'
supplemental staffing business will remain with Staff Builders. The completion
of the spin-off is subject to the satisfaction of certain conditions, including
obtaining certain regulatory approvals and bank financing for each of Staff
Builders and TLC.

         The Board of Directors believes that the spin-off is in the best
interests of Staff Builders and its stockholders. One of the principal benefits
of the spin-off should be to create a separate and distinct identity for the
supplemental staffing business of Staff Builders. This separation should allow
financial analysts and institutional investors to better understand that
business. It also should enhance Staff Builders' ability to obtain financing
outside an environment of tighter government regulation of the home health care
industry and reduced government reimbursement for the provision of home health
care services.

         On April 14, 1999, the Company caused TLC to file a Registration
Statement on Form 10 with the Securities and Exchange Commission to register the
shares of TLC common stock to be issued in the spin-off under the Securities
Exchange Act of 1934, as amended.




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HOME HEATH CARE BUSINESS

GENERAL

         The Company is a leading national provider of home health care
services. The Company has 125 home health care locations in 26 states and the
District of Columbia, and has master franchise licenses in Japan, Spain and
Brazil. Staff Builders owns and operates 71 of its offices and 54 of these
offices are operated by 31 licensees.

OPERATIONS

         The Company provides a wide range of home health care services. Its
licensed personnel provide skilled nursing services, including cardiac care,
pulmonary management, wound management, maternal health, behavioral health care,
infusion therapy administration, hospice support, and extensive patient and
family education. Additional professional services include physical therapy,
occupational therapy, speech therapy and medical social services. The Company
also provides paraprofessional home health aide services and other unlicensed
personnel services to assist patients with activities of daily living.

         Home health care service revenues were $310.3 million, $451.1 million
and $436.6 million in the fiscal year ended February 28, 1999 ("fiscal 1999"),
the fiscal year ended February 28, 1998 ("fiscal 1998") and the fiscal year
ended February 28, 1997 ("fiscal 1997"), respectively. Approximately 69% of the
Company's home health care service revenues in fiscal 1999 were generated by
licensees as compared to 87% in fiscal 1998. As of February 1999, the portion of
revenues generated by licensees approximated 61%.

         Clients' requests for home health care are typically received at a
local office and all skilled home health care services are provided pursuant to
the orders of the patient's physician. Generally, after a referral is received,
the director of clinical services will schedule a physical assessment in order
to identify the patient's care needs. Home care services are rendered in
accordance with the plan of care as prescribed by a physician.

         During the intake process, the Company contacts third-party payors to
confirm the extent of Medicare or Medicaid eligibility or insurance coverage.
The primary payment sources for home health care are Medicare, Medicaid,
insurance, individuals, and state and local government health programs.

         In five locations, the Company operates hospices in accordance with the
Federal Medicare program. Hospice services include a full range of medical and
nursing services as well as spiritual and emotional support, specialized pain
management and bereavement counseling with interdisciplinary support for
patients and their families, where patients are expected to live less than six
months.

         The quality and reputation of the Company's health care personnel
and operations is critical to the Company's success.  The Company



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maintains uniform quality assurance programs for its home health care
operations, including its consumer hotline and service evaluation system in
which patients are asked by the Company to rate the quality of care provided.
These programs are administered at the national and local levels. The Company's
clinical staff conduct periodic on-site reviews to determine compliance with all
regulations.

         In addition to the on-site reviews conducted by Company personnel, the
Company seeks to maintain and improve the quality of its home health care
operations by seeking accreditation from the Joint Commission on Accreditation
of Healthcare Organizations ("JCAHO"). Currently, the Company has approximately
100 offices which have been accredited by JCAHO, of which 31 were accredited
with commendation.

         The Company has developed the Staff Builders Clinical Outcomes and
Resource Evaluation System ("SCORES"TM). SCORES is a clinical management process
that identifies and analyzes patient potential for variances upon admission to
home care, customizes a transdisciplinary plan of care and quantifies clinical
outcomes and resource utilization.

         The Company has developed a number of proprietary disease-specific
programs designed to be used in the home. These programs include the areas of
asthma, cardiac care, diabetes, hospice, maternity, behavioral health,
rehabilitative services, pain management and wound care.

         The Company offers its home health care services on a national and
local basis. Each office seeks to retain strong local identification in order to
best respond to prevailing market conditions and cultivate local referrals. The
Company provides support including brochures, training seminars and materials to
assist in developing patient care programs as needed within each community.

         Local efforts principally involve communicating with hospital discharge
planners, nursing management, physicians and other individuals at hospitals,
nursing homes and other health care facilities to advise them of the array of
services available from the Company.

         Due to changes in health care reimbursement, insurance companies and
health maintenance organizations have become more involved in directing services
for those to whom they provide coverage. The Company has sought to adapt to the
increased role of these organizations in patient referrals. The Company provides
services to members of health maintenance organizations or policy holders of
insurance companies at negotiated rates. The Company believes that some of these
organizations, as a result of their strict guidelines, centralized
administration and geographic diversity, retain the Company because of its
ability to consistently offer quality services on a national basis. Moreover,
the Company believes that its ability to offer patients a wide variety of home
health care services will provide it with a competitive edge in obtaining
additional business from these organizations.

         The Company's information systems provide for the input of information
at the branch office (including payroll, billing and other administrative
functions) for its home health care operations which connects directly to its
corporate headquarters in Lake Success, NY.


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Generally, bills are rendered, payroll is processed and collections are received
at the corporate headquarters or at lock-boxes.

REIMBURSEMENT

         Revenues generated from the Company's home health care services are
paid by insurance carriers, health maintenance organizations, individuals,
Medicare, Medicaid and other state and local government health insurance
programs. During fiscal 1999, approximately 19% of the Company's home health
care revenues represented reimbursement from insurance carriers, health
maintenance organizations and individuals; 43% came from Medicare; and 36% came
from Medicaid and other local government health programs. Medicare is a
Federally funded program available to persons with certain disabilities and
persons of age 65 or older. Medicaid, a program jointly funded by Federal and
state governments, and other local government health care programs is designed
to pay for certain health care and medical services provided to low income
individuals without regard to age.

         The Company has 87 offices in 26 states and the District of Columbia
which are certified to provide home health care services to Medicare patients.
Medicare reimburses the Company for covered items and services at the lower of
the Company's cost, as determined by Medicare regulations, or cost limits
established by the Federal government. The Company submits all Medicare claims
to a single insurance company acting as a fiscal intermediary which processes
claims on behalf of the Federal government. The Balanced Budget Act of 1997 (the
"BBA") resulted in significant changes to cost based reimbursement for Medicare
home health care providers. Although the BBA retains a cost based reimbursement
system, the cost limits were reduced and new per-beneficiary limits were set for
home health care providers. The BBA provides for an interim payment system
("IPS") which became applicable for the Company on March 1, 1998 and will remain
in effect until the adoption of a new prospective payment system scheduled to be
effective for all home health care agencies on October 1, 2000. The Health Care
Financing Administration ("HCFA") committed to this revised schedule in a report
presented to Congress dated February 4, 1999. The effect of the changes under
IPS is to reduce the limits for the amount of costs that are reimbursable to
home health care providers under the Medicare program. Recently, management
moved proactively to prepare the Company for the impact of IPS and for long-term
growth. As a result, the Company implemented a corporate-wide restructuring and
cost reduction program.

         As of February 28, 1999, the Company has 50 offices which participate
in Medicare's periodic interim payments ("PIP") program. Under PIP, the Company
receives regular bi-weekly payments based on past Medicare activity of
participating offices, which are adjusted quarterly for actual levels of
activity. As presently amended by the BBA, the PIP program will terminate for
all home health care agencies on or after October 1, 2000. Offices which are not
participating in the PIP program receive payment for services upon submission of
individual claims.

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         The Company is also reimbursed for covered items by Medicaid. The
Company has approximately 85 home health care offices in 22 states and the
District of Columbia which are approved to provide services to Medicaid
recipients. Medicaid reimbursement procedures vary from state to state.

GOVERNMENT REGULATION

         The Company's home health care business is subject to extensive and
frequently changing regulation by Federal, state and local authorities. This
regulation includes state licensing, obtaining a Certificate of Need ("CON") in
certain states, and Federal and state eligibility standards for certification as
a Medicare and Medicaid provider. The imposition of more stringent regulatory
requirements or the denial or revocation of any license or permit necessary for
the Company to operate in a particular market could have a material adverse
effect on the Company's operations.

         The Federal government and all states in which the Company currently
operates regulate various aspects of the Company's business. HCFA must certify
home health agencies that seek to receive reimbursement for services from
Medicare. As conditions of participation in the Medicare program, HCFA requires,
among other things, the satisfaction of certain standards with respect to:
personnel and their supervision; services and the documentation thereof; and the
establishment of a professional advisory group that includes at least one
physician, one registered nurse and other representatives from related
disciplines or consumer groups.

         Certain states require a provider of home health care services to
obtain a license before rendering services. Some states, including many of the
states in which the Company presently operates, maintain CON legislation
requiring an office to file an application that must be approved by the
appropriate state authority before certain health care services can be provided
in an area. Approval is dependent upon, among other things, good character and
competence, financial capability and a demonstration that the need exists for
such services. In states having a CON requirement, HCFA will grant Medicare
certification to an office (so that the office may provide services covered by
Medicare) only if the office has obtained a CON.

         New York State requires the approval by the Public Health Council of
the New York State Department of Health ("NYPHC") of any change in the
"controlling person" of an operator of a licensed health care services agency
(an "LHCSA"). Control of an entity is presumed to exist if any person owns,
controls or holds the power to vote 10% or more of the voting securities of such
entity. A person seeking approval as a controlling person of an operator of a
LHCSA must file an application for NYPHC approval within 30 days of becoming a
controlling person, and pending a decision by the NYPHC, such person may not
exercise control over the LHCSA. The Company has 10 offices in New York State
which are LHCSAs. Such offices accounted for approximately 11% of the Company's
revenues in fiscal 1999. If any person should become the owner or holder, or
acquire control, of the right to vote 10% or more of the common stock of the
Company, such person could not exercise control of


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the Company's LHCSAs until such ownership, control or holding has been approved
by the NYPHC.

         The Company's home health care revenues generated from Medicare,
Medicaid and other local government programs were $247 million, $376 million and
$361 million in fiscal 1999, 1998 and 1997, respectively.

FRANCHISE PROGRAM

         The Company's home health care business utilizes a unique form of
franchising whereby it licenses independent companies or contractors
("licensees") to represent the Company within a designated territory using the
Company's trade names and service marks. Of the Company's 125 field offices, 54
are operated by 31 home health care licensees pursuant to the terms of a
franchise agreement with the Company. The Company's franchise program has
permitted it to quickly penetrate new markets and realize economies of scale.
The program also has enabled the Company to maintain stable local management by
reducing personnel turnover.

         The Company owns all necessary health care related permits and licenses
and, where required, CON's for operation of home health care franchise offices.
The Company employs all direct service employees. The licensees recruit direct
service personnel for the Company, solicit orders and assign Company personnel,
including registered nurses, therapists and home health aides, to service the
Company's clients. The Company pays and distributes the payroll for the
Company's direct service personnel, administers all payroll withholdings and
payments, bills the customers and receives and processes the accounts
receivable. The licensees are responsible for providing an office and paying
related expenses for administration including rent, utilities and costs for
administrative personnel. The Company includes all revenues and related direct
costs in its consolidated service revenues and operating costs.

         Generally, the Company grants a ten year initial franchise term. A
licensee has the option to extend for an additional five-year term, subject to
the licensee adhering to the operating procedures and quality control standards
established by the Company. The initial license fee is currently $29,500. When
converting independently owned agencies into licensees, the Company negotiates
the terms of the conversion on a transaction-by-transaction basis depending on
the size of the agency, the nature of the agency's business and the location of
the agency.

         The Company pays a distribution or commission to its domestic home
health care licensees based upon a defined formula of gross profit generated.
Generally, the Company pays the licensee 60% of the gross profit attributable to
the non-Medicare operations of the franchise. The Company adjusts the payment to
the licensees related to Medicare operations for cost limitations and
reimbursement of allowable Medicare costs. For fiscal 1999, 1998 and 1997, total
home health care licensee distributions of approximately $38.3 million, $84.1
million and $82.4 million, respectively, were included in the Company's general
and administrative expenses.

         The Company has an international home health care franchise program
using the Staff Builders name and service marks. The Company has a



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master license agreement with licensees in Japan and Brazil under which
royalties are paid to the Company by the licensee for certain services provided
by the Company for the transfer of home health care technology from the Company
to the licensee. The term of the Japanese master license agreement is five years
with a five-year additional term which may be exercised by the Company. The
existing agreement in Japan will expire on October 27, 2002. The Company
received an initial license fee of $1.2 million under the terms of this
Agreement. In the case of the Brazilian master license agreement, it has a
25-year term with an additional ten-year renewal term exercisable by the
licensee. The Company received a master license fee of $80,000 from its
Brazilian licensee. The Company also has a separate master license in Spain.

         The Company is currently not offering any home health care franchises.
However, if in the future the Company should offer and sell franchises, such
offers and sales will be subject to Federal and certain state franchise laws. If
the Company fails to comply with the franchise laws, rules and regulations of a
particular state relating to offers and sales of franchises, the Company will be
unable to engage in offering or selling franchises in or from such state. To
offer and sell franchises, the Federal Trade Commission requires the Company to
furnish to prospective licensees a current franchise offering disclosure
document. The Company has used a Uniform Franchise Offering Circular ("UFOC") to
satisfy this disclosure obligation. The Company must update its UFOC annually or
upon the occurrence of certain material events. If a material event occurs, the
Company must stop offering and selling franchises until the UFOC is updated. In
addition, certain states require the Company to register or file its UFOC with
such states and to provide prescribed disclosures. The Company is also subject
to a number of state laws that regulate certain substantive aspects of the
franchisor-franchisee relationship.

PERSONNEL; RECRUITING AND TRAINING

         The Company's home health care division has approximately 30,000
individuals who render home health care services and employs approximately 1,600
full time administrative and management personnel. Approximately 1,200 of these
administrative employees are located at the branch offices and 400 are located
at the corporate headquarters in Lake Success, NY.

         The Company screens caregivers to ensure that they meet all licensing
requirements and the Company's eligibility standards. This screening process
includes skills testing, reference checking, professional license verification,
personal interviews and a physical examination. In addition, new employees
receive an orientation on the Company's policies and procedures prior to their
initial assignment. The Company is not a party to any collective bargaining
agreement and considers its relationship with its employees to be satisfactory.

         The home health care division and its licensees recruit home health
care principally through referrals from other personnel, newspaper
advertisements and direct mail solicitations to nursing, paramedical and other
recruiting sources. A large percentage of these personnel are employed only when
needed, and are paid for the actual number of hours worked or visits made.



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         The Company has standardized procedures for recruiting, interviewing,
testing and reference checking prospective personnel. All nurses and therapists
must be licensed by the appropriate licensing authorities. Substantially all
unlicensed health care personnel must be certified either through a
state-approved certification program or must have had previous experience in
providing direct patient care in a hospital, nursing home or in the home. After
selection, applicants receive instruction in the Company's procedures and
policies. Subsequently, they are included on a list of personnel eligible for
placement. The Company has an in-service training program for its home health
personnel which satisfies the requirements for certification required by certain
states.

         In addition to health care personnel recruited and trained by the
Company, the Company contracts with third parties to meet its personnel
requirements. These contracted personnel must meet the same qualifications
required of Company personnel.

INSURANCE

         The Company maintains various insurance policies which cover its
businesses. The Company's employees make decisions which can have significant
medical consequences to the patients in their care. As a result, the Company is
exposed to substantial liability in the event of negligence or wrongful acts of
its personnel. The Company maintains medical professional and general liability
insurance providing for coverage in a maximum amount of up to $26 million per
claim, subject to a limitation of $26 million for all claims in any single year.
Also, the Company maintains errors and omissions and professional liability
insurance. In addition, franchisees are required to maintain general liability
insurance providing for coverage of at least $1 million.

COMPETITION

         Although there are national home health care companies, the industry is
highly fragmented and competitors are often localized in particular geographical
markets. In general, there has been a trend toward consolidation in the health
care industry which is expected to continue, especially in light of the Federal
Medicare program's reductions in cost limits and establishment of per
beneficiary limits. The Company expects that it will continue to compete with
the national organizations as well as local providers including home health care
providers owned or otherwise controlled by hospitals. Some of the entities with
which the Company competes have substantially greater resources. In addition,
the Company's operations depend, to a significant degree, on its ability to
recruit qualified health care personnel and the Company faces competition from
other companies in recruiting. Generally, there is a shortage of qualified
health care personnel and, as a result, the Company, from time to time, has
experienced difficulties in obtaining health care personnel to meet demands for
services.

         The Company believes that prompt service, price, quality and range of
services offered are the principal competitive factors which enable it to
compete effectively. The Company believes that its rate structure



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is competitive with others in the industry. During fiscal 1999, no single client
or group contract of the home health care business accounted for ten percent or
more of the Company's home health care revenues.

SERVICE MARKS

         The Company believes that its service marks, Staff Builders(R),
Staffline(R), the stick figure logo and Tender Loving Care(R) have significant
value and are important to the marketing of its home health care services. These
names and marks are registered as service marks with the United States Patent
and Trademark Office. The registration of the Staff Builders(R) service mark
will remain in effect through February 14, 2009, with respect to home care and
hospital staff relief, and through June 28, 2006 with respect to temporary
personnel for business and industry. The registration of the Staffline(R)
service mark will remain in effect through August 1, 2009. The registration of
the stick figure logo service mark will remain in effect through August 16,
2008. The registration of the Tender Loving Care(R) service mark will remain in
effect through January 8, 2005. Each of these marks is renewable for additional
ten-year periods, provided the Company continues to use them in the ordinary
course of business. The Company also owns other federally registered marks for
names used in connection with its home health care business.

SUPPLEMENTAL STAFFING BUSINESS

GENERAL

         The Company's supplemental staffing services are provided through its
wholly-owned subsidiary, ATC Healthcare Services, Inc. ("ATC"), which provides
medical staffing services (the "Medical Staffing Division"), and the Company's
81.8% owned subsidiary, Chelsea Computer Consultants, Inc. ("Chelsea"), which
provides information technology staffing services (the "IT Staffing Division").

         The Company acquired ATC in July 1994. In September 1996, the Company
purchased 20.9% of the outstanding common stock of Chelsea and

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purchased an additional 60.9% in October 1997. ATC and Chelsea (together with
their subsidiaries) comprise the Company's supplemental staffing business.

OPERATIONS

         Supplemental staffing revenues were $125.1 million, $74.5 million and
$42.8 million in fiscal 1999, 1998 and 1997, respectively. Revenue increased
because of acquisitions, granting of additional licenses and the consolidation
of revenues of the IT Staffing Division.

         The Company provides medical supplemental staffing to health care
facilities through its network of 58 offices in 27 states, of which 54 are
operated by 41 licensees and four are owned and operated by the Company. The
Medical Staffing Division offers a skills list of qualified health care
associates in over 55 job categories ranging from the highest level of specialty
nurses including critical care, neonatal and labor and delivery, to medical
administrative staff, including third party billers, administrative assistants,
claims processors, collection personnel and medical records clerks. The nurses
provided to clients include registered nurses, licensed practical nurses and
certified nursing assistants. Allied health staffing includes mental health
technicians, a variety of therapists (including speech, occupational and
physical), radiology technicians and phlebotomists.

         Clients rely on the Company to provide a flexible labor force to meet
fluctuation in census and business and help the facility acquire a specifically
needed skill. The Company's medical staffing professionals also fill in for
absent employees and enhance a client's core staff with temporary workers during
peak seasons.

         Clients benefit from their relationship with the Company because of its
expertise in providing properly skilled medical staffing employees to a facility
in an increasingly tight labor market. The Medical Staffing Division has
developed a skills checklist to provide even more information concerning a
prospective employee's skill level. Clients also benefit from no longer having
to concern themselves with the payment of employee wages, benefits, payroll
taxes, workers compensation, and unemployment insurance.

         The Medical Staffing Division also operates a Travel Nurse Program
whereby qualified nurses, physical therapists and occupational therapists are
recruited on behalf of clients who require such services on a long-term basis.
These individuals are recruited from foreign countries, primarily Great Britain,
to perform services on a long-term basis in the United States.

         The Medical Staffing Division contracts with a management entity for
the recruitment of the foreign nurses. The management entity must arrange for
the nurses' and therapists' immigration, licensing certifications as well as
their living accommodations while employed in the United States.

         Presently, there is a freeze on visa activity for foreign nurses
because the program for the admission of foreign nurses expired in the fall of
1995. Recently, the House of Representatives passed a bill to



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authorize work visas for up to 500 qualified foreign nurses annually for four
years and sent the bill to the Senate.

         When the Company first acquired the Medical Staffing Division in 1994,
its client base was composed predominantly of hospitals. Currently, the Medical
Staffing Division has expanded its client base to include nursing homes,
physician practice management groups, managed care facilities, insurance
companies, surgery centers, community centers and schools. By diversifying its
client list, the Company lessens the risk that regulatory or industry sector
shifts in staffing usage will materially affect the Company's medical staffing
revenues.

         Approximately 20% of the supplemental staffing revenues are
attributable to an ATC franchise operation located in Long Island, NY operated
by a corporation, the majority of the stock of which is owned by two family
members of one of the Company's executive officers.

         The Company, through its IT Staffing Division, provides trained
information technology ("IT") professionals to clients who lack the in-house
personnel or skills necessary to accomplish IT objectives. The demand for those
professionals has increased dramatically due to rapid technological change,
substantial economic growth and mass change issues, such as the adoption of a
common currency in the European Union and the Year 2000 issue.

         The IT Staffing Division provides flexible staff augmentation services,
generally for client-managed projects, to fill short and long-term or
specialized technology skill set needs. Because the IT Staffing Division has a
pool of full-time employees, it can generally provide qualified candidates to
clients within 24 hours of receiving requests for staffing. The Company provides
a "vendor-on-premises" at seven sites where large numbers of its IT
professionals are working, and plans to provide more in the future. The
"vendor-on-premises" acts as a liaison between the client and the Company, and
is trained to recognize areas where improvements could be made in the service to
the IT Staffing Division's clients, and to act quickly to effectuate the
improvements.

         The IT Staffing Division's clients include financial service,
communications, manufacturing, consulting intermediaries and other clients that
outsource IT functions to third party vendors. The Company serves clients in
diverse industries which helps mitigate cyclical effects in any one industry or
market. The IT Staffing Division derives an additional level of diversification
by working with many different operating divisions within a given client.

         During fiscal 1999, no single client of the supplemental staffing
business accounted for more than 10% of the revenues of the Company's
supplemental staffing business.

FRANCHISE PROGRAM

         The Medical Staffing Division's franchise program is one of the core
differentiating factors between the Company and most of its



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competition. The program grants each franchisee, or licensee, a vested interest
in the success of both his or her individual branch as well as the Company as a
whole. After paying an initial franchise fee of $19,500 in exchange for his or
her own exclusive territory determined based on demographic, economic and
competitive studies, a franchise owner generally is paid a royalty effectively
equal to approximately 60% of gross profit. The licensee has the right to
develop the territory to its fullest potential. For example, a licensee can open
a satellite office in the area if he believes there will be an appropriate
return on the investment. The franchise owner also handles marketing and
recruiting within the assigned territory. The corporate office works closely
with the licensee to ensure the best approach and strategy for the franchise and
the profitability of the location. All locations must be approved by the Company
prior to signing a lease. Various management reports are provided to the offices
to assist them with ongoing analysis of their medical staffing operations.

         For fiscal 1999, 1998 and 1997, total medical staffing licensee
distributions of approximately $12.3 million, $8.8 million and $6.2 million,
respectively, were included in the Company's general and administrative
expenses.

         The Company grants a ten-year initial franchise term. The licensee has
an option to extend the term for two additional five-year renewal terms, subject
to the licensee adhering to the operating procedures and conditions for renewal
set forth in the franchise agreement. When the Company converts an independently
owned medical staffing business into a franchise, the Company negotiates the
terms of the conversion on a transaction-by-transaction basis, depending on the
size of the business and the location.

         Sales of franchises are subject to compliance with Federal and certain
state franchise laws. If the Company fails to comply with the franchise laws,
rules and regulations of the particular state relating to offers and sales of
franchises, the Company will be unable to engage in offering or selling
franchises in or from such state. To offer and sell franchises, the Federal
Trade Commission requires the Company to furnish to prospective licensees a
current franchise offering disclosure document. The Company has used a UFOC to
satisfy this disclosure obligation. The Company must update its UFOC annually or
upon the occurrence of certain material events. If a material event occurs, the
Company must stop offering and selling franchises until the UFOC is updated. In
addition, certain states require the Company to register or file its UFOC with
such states and to provide prescribed disclosures. The Company is required to
obtain an effective registration of its franchise disclosure document in New
York State. Presently, the Company is filing a response to a comment letter sent
by the State of New York. The Company expects approval by New York immediately
upon its receipt and review of the Company's response to the comment letter.
Approval by New York State will enable the Company to offer the medical staffing
franchise in 38 states.





                                      -13-
<PAGE>   14


PERSONNEL; RECRUITING AND TRAINING

         The Company's supplemental staffing division employs approximately
4,000 individuals who render medical staffing services, approximately 380
individuals who render information technology staffing services and
approximately 140 full time administrative and management personnel.
Approximately 86 of these administrative employees are located at the branch
offices and 54 are located at the supplemental staffing administrative offices
in Atlanta, Georgia and New York City, New York.

         The Company screens supplemental staffing personnel to ensure that they
meet all eligibility standards. This screening process includes skills testing,
reference checking, professional license verification, personal interviews and a
physical examination. In addition, new employees receive an orientation on the
Company's policies and procedures prior to their initial assignment. The Company
is not a party to any collective bargaining agreement and considers its
relationship with its supplemental staffing employees to be satisfactory.

         It is essential to recruit and retain a qualified staff of medical
staffing associates who are available to be placed on assignment as needed.
Besides advertising in the local classifieds and conducting local public
relations projects, the Company's Medical Staffing Division offers a variety of
benefit programs to assist in recruiting high quality medical staffing
professionals. This package provides employees access to medical, dental, life
and disability insurance, a 401(k) plan, opportunities for Continuing Education
Credits ("CEUs"), partnerships with various vendors for discount programs (e.g.,
uniforms, vacations and cruises, credit cards, appliances and cars), recognition
programs and referral bonus programs. In addition, the Company provides its
Medical Staffing Division licensees a full-service human resources department to
support the Medical Staffing Division offices with policies and procedures as
well as the day-to-day issues of the field staff.

         As of February 28, 1999, the IT Staffing Division employed
approximately 380 IT professionals in the United States, over 90% of whom were
recruited from the Philippines, Singapore, Australia, New Zealand and the Middle
East.

         Because the Company's IT staffing business involves the delivery of
professional IT services, its success depends upon its ability to attract,
motivate and retain highly skilled individuals who possess the technical skills
and experience necessary to deliver the services. The Company's IT Staffing
Division recruits IT professionals globally, principally through traditional
advertising in newspaper and trade publications, the internet, job fairs,
networking through seminars, user group meetings, local recruiting symposia at
overseas hotels, referrals from other personnel and an ongoing data base of
applicants.

                                      -14-
<PAGE>   15


         Management from the IT Staffing Division's New York office makes
several international trips per year for recruiting purposes. The Company uses
its Manila office in the Philippines, and intends to use other foreign offices
when opened, to follow up on contacts initiated through the above-mentioned
methods. In addition, the Company employs a local agent in Manila as a
recruiting coordinator who helps to identify possible candidates and recruits
and interviews these individuals.

         Once the IT professionals arrive in the U.S., they frequently train on
a work site (free of charge to the client) for a one to two week period before
commencing work at the site. In addition, the IT Staffing Division provides
training programs at the Company's offices in New York City using manuals and
the Company's staff. Through its Quality Management System, the IT Staffing
Division monitors its IT professionals' performance and aids their development
as necessary. Clients evaluate individual IT professionals three months after
they commence work, and after that, annually. If an IT professional gets a low
rating in, for example, communication skills, the IT Staffing Division may send
the IT professional to English language courses. The IT Staffing Division
employs an instructor to provide ongoing English training one to two times per
week after working hours.

         In addition to their training, IT professionals receive a strong
benefits package from the Company (relocation expenses averaging $7,500,
including a $3,000 cash advance; medical, dental, long and short-term disability
and life insurance; legal representation; temporary housing; 401-K plan;
internet access; laptop computer; assistance procuring credit cards; and loans
to relocate families from their countries of origin). Management believes that
the hiring of foreign-born IT professionals leads to longer retention periods.
The retention period is longer because the Company obtains H-1B visas for its
employees, and if the foreign employees wish to work for another employer in the
United States they must obtain another visa, a lengthy and cumbersome process.
See "Immigration Laws".




                                      -15-
<PAGE>   16


         Qualified IT professionals are in great demand worldwide and are likely
to remain a limited resource for the foreseeable future. There can be no
assurance that qualified IT professionals will continue to be available to the
Company in sufficient numbers, that the Company will be successful in retaining
current or future employees, or that the cost of employing such IT professionals
will not increase due to shortages. Failure to attract or retain qualified IT
professionals in sufficient numbers could have a material adverse effect on the
IT Staffing Division's business, operating results and financial condition.

SALES AND MARKETING

         The Company begins a marketing education program as soon as a new
medical staffing office becomes operational. This training details the entire
sales process. The program stresses sales techniques, account development and
retention as well as basic sales concepts and skills. Through interactive
lectures, role plays and sales scenarios, participants are immersed in the sales
program.

         To provide ongoing sales support, the Company furnishes medical
staffing field offices with a variety of tools. A corporate representative is
continuously available to help with prospecting, customer identification and
retention, sales strategies, and developing a comprehensive office sales plan.
In addition, various guides and brochures have been developed to focus a
branch's attention to critical areas in the sales process. The Company has
developed a web page that provides information to clients, located at
www.atchealthcare.com.

         Each licensee in the Medical Staffing Division is responsible for
generating sales in his or her territory. Licensees are taught to do this
through a variety of methods in order to diversify their sales conduits. The
primary method of seeking new business is to call on health care facilities in
the local area. Cold calls and referral are often used to generate leads.
Advertising in yellow page phone books is also utilized. Once granted an
interview, the licensee is instructed to emphasize the key highlights of the
Company.

         The Company focuses its IT marketing efforts on businesses with
significant IT budgets and recurring software development needs. Sales methods
include an internet site containing pictures, voice recordings and resumes of IT
professionals (with the possibility for clients to set up interviews); weekly
facsimile transmittals of lists of available IT professionals to 100 users; and
direct calls to clients based on known client needs. Clients also sometimes
accompany the Company's personnel on international recruiting trips in order to
select IT professionals. These methods, along with the possibility for clients
to have telephone and videoconferenced interviews with IT professionals around
the world, allow the Company to "pre-sell" IT professionals to the clients. The

                                      -16-
<PAGE>   17


Company also believes that its pricing structure is lower than average for the
IT staffing industry, due in part to its low overhead, and that this pricing
structure aids the Company's marketing efforts.

         The Company gathers market research by communicating with employees,
clients and consultants and by monitoring business and industry sources. These
resources also serve as a prospecting and networking mechanism for locating key
decision makers, securing quality referrals and introductions for the IT
Staffing Division's account team and assessing the competitive circumstances and
barriers to entry at prospective or established clients.

         The Company generally employs a top-down approach to account
penetration and development of its IT Staffing Division. The Company endeavors
to establish contacts with Chief Contracting Officers, human resource directors
and other senior management through professional contacts of the Company's
senior management, through referrals by the Company's existing clients, and
through client contacts who move to new employers.


IMMIGRATION LAWS

         The Company recruits its IT professionals on a global basis and,
therefore, must comply with the immigration laws in the countries in which it
operates, particularly the United States. Over 99% of the Company's IT
professionals are citizens of other countries.

         Most of the IT professionals who provide services to the Company's
clients are present in the United States on an H-1B temporary work visa. The
Immigration and Naturalization Service ("INS") is authorized under current law
to approve no more than 115,000 new petitions for H-1B status in the Federal
government's fiscal year ending September 30, 1999. As of April 30, 1999,
103,753 petitions have been approved. It is expected that the cap will be
reached before the end of June 1999. After the ceiling is reached, no H-B1 visa
petitions will be approved by the INS until the beginning of the next Federal
fiscal year. If the IT Staffing Division were unable to obtain H-1B permits for
its employees in sufficient quantities or at a sufficient rate, its business,
operating results and financial condition could be materially adversely
affected.

         Foreign nationals are only permitted to work in the United States on a
H-1B visa status for six consecutive years. After working in the United States
for that length of time, if the alien has not yet become a lawful permanent
United States resident, the alien must leave the United States. The total time
required for the process of permanent residency can vary significantly and may
take more than three years to complete. Since an alien on an H-1B visa may only
remain in the United States for six years, in those instances where the Company
may have hired an alien after he or she had worked for another company for
several years or where he or she did not pursue permanent residency of several
years, the consultant could reach the end of the allotted six years in H-1B visa
status before the permanent residency application process has been completed. In
addition, although the Company recruits


                                      -17-
<PAGE>   18

IT professionals in the Philippines, Singapore, Australia, New Zealand, and
Middle Eastern countries, residency applications by the sponsoring employer are
limited to national quotas. Therefore, if a high number of residency
applications have been granted for certain nationalities, additional residency
applications might not be available for those groups.

         Furthermore, Congress and administrative agencies with jurisdiction
over immigration matters have periodically expressed concerns over the levels of
legal and illegal immigration into the United States. These concerns have often
resulted in proposed legislation, rules and regulations aimed at reducing the
number of work permits that may be issued. Any changes in such laws making it
more difficult to hire foreign nationals or limiting the ability of the Company
to retain foreign employees could require the Company to incur additional
unexpected labor costs and expenses and decrease the Company's number of IT
professionals available to its clients. Any such restrictions or limitations on
the Company's hiring practices could have a material adverse effect on the IT
Staffing Division's business, operating results and financial condition. To date
the Company has not experienced difficulties with the governments of the home
countries from which it recruits IT professionals with regards to emigration
matters. However, any such difficulties (for example, restrictions on
emigration), particularly in the Philippines or Singapore, could have a material
adverse effect on the IT Staffing Division's business.

INSURANCE

         The Company maintains errors and omissions insurance for the
supplemental staffing division: medical professional and general liability
insurance providing for coverage in a maximum amount of $26 million per claim,
subject to a limitation of $26 million for all claims in any single year, and IT
staffing errors and omissions insurance of $1 million per claim and $1 million
in the aggregate.

         The IT Staffing Division also carries general liability insurance with
aggregate coverage of $2.0 million and a $1.0 million limit per occurrence,
crime insurance including employee dishonesty, theft, disappearance and
destruction with aggregate coverage of $2.0 million, as well as umbrella
coverage of $5.0 million for each occurrence and $5.0 million dollars of
aggregate liability. The Company also maintains fidelity bonds covering general
liability, workers compensation claims, employee theft and in some cases errors
and omissions.

COMPETITION

         The medical staffing industry is extremely fragmented, with numerous
local and regional providers nationwide providing nurses and other staffing
solutions to hospitals and other health care providers. As HMOs and other
managed care groups expand, so too must the medical staffing companies that
service those customers. In addition, momentum for consolidation is increasing
among smaller players, often venture capital-backed, who are trying to win
regional and even national accounts. Because the staffing industry is dominated
generally by large national providers that do not specialize in medical
staffing, the Medical Staffing Division management believes that its
specialization

                                      -18-
<PAGE>   19

will give it a competitive edge. In addition, its franchise program gives each
franchisee or licensee an incentive to compete actively in his or her local
marketplace. In addition to the Medical Staffing Division's medical staffing
specialty which services the health care community exclusively, the Company
continues to diversify among the medical staffing services it offers, unlike
many of its small regional competitors who focus on nurse staffing only.

         The IT services industry is highly competitive and served by numerous
international, national, regional and local firms, all of which are either
existing or potential competitors of the Company. Primary competitors of the
Company's IT Staffing Division include accounting firms, software consulting and
implementation firms, applications software firms, service groups of computer
equipment companies, general management consulting firms, programming companies
and temporary staffing firms and the internal IT staff of the Company's clients.
The Company believes that the principal competitive factors in the IT services
industry include the range of services offered, cost, technical expertise,
responsiveness to client needs, speed in delivering IT solutions, quality of
service and perceived value. Based on the Company's experience in competitive
situations, the Company believes that it competes favorably with respect to
these factors.

         The management of the Company believes that the Company's IT Staffing
Division will distinguish itself from its competitors because of lower overhead,
client charges on a time and material, rather than on a fixed price-based basis.
This reduces the risk that the Company will incur large costs and expenses for
which it will not be paid. The Company further distinguishes itself by employing
all of the Company's IT professionals as the IT Staffing Division does not use
independent contractors, leading to stability in the IT Staffing Division's
workforce and the ability to rapidly fulfill client's requests for staffing.

SERVICE MARKS

         The Company believes that its service marks Chelsea Computer
Consultants(R)' and the ATC(R) logo have significant value and are important to
the marketing of its supplemental staffing services. These trademarks are
registered with the United States Patent and Trademark Office. The Chelsea
trademark will remain in effect through April 14, 2008 for use with temporary
employment services providing computer consultants and computer technicians and
other temporary employees proficient with computers. The ATC trademark will
remain in effect through January 9, 2000 for use with nursing care services and
health care services. These marks are each renewable for an additional ten year
period, provided the Company continues to use it in the ordinary course of
business.



                                      -19-
<PAGE>   20

ITEM 2. PROPERTIES

         The Company's corporate headquarters consists of approximately 65,000
square feet of leased office space and 8,100 square feet of storage space in
Lake Success, New York. The lease for the corporate headquarters expires on
September 30, 2005 and provides for current annual rent of approximately $1.5
million, which increases annually by three percent. The Company believes that
its headquarters office space is sufficient for its immediate needs and that it
will be able to obtain additional space as needed in the future.

         The Company's supplemental staffing business leases its administrative
facilities in Atlanta, Georgia and New York City, New York. The Atlanta office
lease for approximately 11,300 square feet of office space expires on May 31,
2000 and provides for a current annual rent of approximately $156,000.
Approximately 6,000 square feet of office space is sublet to a subtenant
unaffiliated with the Company at an annual rental of approximately $73,000 with
annual increases of 4.5 percent. The New York City offices lease approximately
5,500 square feet of office space. These leases expire on May 31, 2000 and
September 30, 2000 and provide for a current annual rental of $140,000. The
Company believes that its supplemental staffing administrative facilities are
sufficient for its needs and that it will be able to obtain additional space as
needed.

         The Company's home health care division leases all of its branch office
locations from landlords unaffiliated with the Company or any of its executive
officers or directors. Most of these are for a specified term although several
of them are month-to-month leases. There are currently 125 home health care
offices including 71 operated by the Company and 54 operated by 31 licensees.
Two of these licensee offices sublease the office space from the Company and the
remaining licensed offices are owned by licensees or are leased by the licensee
from third-party landlords. The Company believes that it will be able to renew
or find adequate replacement offices for leases which are scheduled to expire in
the next twelve months at comparable costs.

         The Company's supplemental staffing division leases substantially all
of its branch office locations from landlords unaffiliated with the Company or
any of its executive officers or directors. There are currently 58 supplemental
staffing branch offices including 4 operated by the Company and 54 operated by
41 licensees. One of the supplemental staffing offices operated by the Company
subleases the office space from the home health care division and one licensee
office subleases the office space from the Company. The remaining licensed
offices are owned by licensees or are leased by the licensee from third-party
landlords. The Company believes that it will be able to renew or find adequate
replacement offices for all leases which are scheduled to expire in the next
twelve months at comparable costs.

                                      -20-
<PAGE>   21


ITEM 3. LEGAL PROCEEDINGS

         On September 20, 1995, the United States Attorney for the Eastern
District of Pennsylvania alleged that (i) between 1987 and 1989, a corporation,
substantially all assets and liabilities of which were acquired by a subsidiary
of the Company in 1993, submitted false claims to Medicare totaling
approximately $1.5 million and (ii) officers and employees of that corporation
submitted false statements in support of such claims, and made a pre-complaint
civil settlement demand of approximately $4.5 million. The alleged false claims
and false statements were made before the Company acquired that corporation in
1993. There have been significant discussions with the office of the United
States Attorney which the Company believes are likely to lead to an arbitration
within specified parameters.

         On June 18, 1998, 6100 Cleveland, Inc., Orsinger Enterprises, Inc., and
First Choice Medical Staffing, Inc., three former home care and staffing
licensees (franchisees) of the Company in Ohio, commenced an action in the
United States District Court for the Northern District of Ohio, Eastern Division
against the Company's subsidiary, Staff Builders International, Inc. The action
sought to recover damages and other relief alleging unpaid royalties, wrongful
termination by the Company of the Franchise Agreement between the Company and
the Plaintiffs, breach of contract and other damages. The Company answered the
complaint and moved for a change of venue. On December 1, 1998, Plaintiffs,
without the required permission of the Court, filed a Second Amended Complaint
alleging in addition to the allegations contained in the prior Complaint, claims
under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), claiming
a series of deliberate and illegal actions designed to put certain Staff
Builders franchisees out of business, as well as claims arising under New York
and Ohio loss of business opportunity statutes. The Second Amended Complaint
seeks money damages in excess of $25 million and a claim for treble damages on
the RICO claim. The Second Amended Complaint added as defendants Staff Builders
Services, Inc., and certain executive officers of the Company. The Company has
moved to dismiss the Second Amended Complaint challenging the legal sufficiency
of the RICO claims and other claims which allege a loss of business
opportunities under New York and Ohio laws. A companion case, 6100 Columbus,
Inc. v. Staff Builders International, Inc. was recently filed alleging breach of
contract only. This case will probably be consolidated with the previous case.

         On December 21, 1998, H.L.N. Corporation, Frontlines Homecare, Inc.,
E.T.H.L., Inc., Phoenix Homelife Nursing, Inc., and Pacific Rim Health Care
Services, Inc., former home care licensees (franchisees) of the Company for the
territory comprising certain counties in and around Los Angeles, California and
their holding company, instituted an action against the Company's subsidiaries,
Staff Builders, Inc., Staff Builders International, Inc., Staff Builders
Services, Inc., and certain executive officers of the Company in the Superior
Court for the State of California, County of Los Angeles. The action was removed
to United States District Court for the Central District of California on
December 22, 1998. Plaintiffs filed a First Amended Complaint in the Central
District on January 8, 1999 to challenge the termination of the four franchise
agreements between the Company and certain of the named


                                      -21-
<PAGE>   22

plaintiffs, seeking damages for violations of California franchise law, breach
of contract, fraud and deceit, unfair trade practices, claims under the RICO,
negligence, intentional interference with contractual rights, declaratory and
injunctive relief and a request for an accounting. Plaintiffs seek an
unspecified amount of damages.
Discovery is currently in process.

         On July 17, 1998, the Federal government ordered that a complaint filed
by Ali Waris, the former owner of a home health care agency purchased by the
Company in 1993, be unsealed and served upon Staff Builders, Inc. and Targa
Group, Inc., a former licensee (franchisee) of the Company. The government has
elected not to intervene in the action, in which Mr. Waris claimed damages for
alleged violations of the False Claims Act by the Company in connection with
payments made by the Company for consulting services. Following a motion to
dismiss, on March 4, 1999, the Court granted Mr. Waris leave to amend the
Complaint, the amended filing for which was served on the Company on March 31,
1999. The Company intends to file a motion to dismiss the Amended Complaint.

         On April 30, 1999, Nursing Services of Iowa, Inc., Helen Kelly,
Geri-Care Home Health, Inc. and Jacquelyn Klooster, two former home health care
licensees (franchisees) of the Company and their principals in Des Moines and
Sioux City, Iowa, respectively, commenced an action in the United States
District Court for the Southern District of Iowa, Central Division against the
Company's subsidiaries Staff Builders International, Inc., Staff Builders
Services, Inc., Staff Builders, Inc., and certain executive officers of the
Company. The action alleges claims under the RICO, claiming a series of
deliberate and illegal actions designed to defraud Staff Builders' licensees, as
well as claims for negligence, breach of fiduciary duty, breach of contract,
fraudulent misrepresentation and violation of the Iowa franchise law. The
complaint seeks unspecified money damages, a claim for treble damages on the
RICO claims and punitive and exemplary damages.

         The Company is a defendant in several civil actions which are routine
and incidental to its business. The Company purchases insurance in such amounts
which management believes to be reasonable and prudent.

         Although the Company cannot estimate the ultimate cost of its open
legal matters with precision, it has recorded a loss accrual at February 28,
1999 for the aggregate, estimated amount to resolve such matters. The aggregate
balance of this accrual is $3.1 million at February 28, 1999 and was included in
restructuring costs incurred of $2.2 million and $1.2 million in fiscal 1999 and
1998, respectively, less $300 expended to date.



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


         No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1999.



                                      -22-
<PAGE>   23


                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK
        AND RELATED STOCKHOLDER MATTERS

(A)
                  MARKET INFORMATION

                  The Company has outstanding two classes of common equity
securities: Class A Common Stock and Class B Common Stock. These two classes
were created by a recapitalization of the Company's Common Stock that was
completed in October 1995. The Company's Class A Common Stock is traded in the
over-the-counter market and quoted on the OTC Bulletin Board System under the
symbol "SBLI".

                  The following table sets forth, for the indicated fiscal
periods, the high and low sale prices for the Class A Common Stock for each
quarter during the fiscal year ended February 28, 1998 and February 28, 1999
(through January 29, 1999), as reported by the Nasdaq National Market. Effective
with the close of business on January 29, 1999, the Company's Class A Common
Stock was delisted from the Nasdaq National Market and was immediately
thereafter quoted on the OTC Bulletin Board. Between January 29, 1999 and
February 28, 1999, the bid price of the Class A Common Stock as quoted on the
OTC Bulletin Board did not exceed $.69 or fall below $.09.

<TABLE>
<CAPTION>
                                          HIGH          LOW
                                         ------       -------
<S>                                      <C>          <C>
Fiscal Year Ended February 28, 1998
1st quarter ended May 31, 1997           $ 2.94       $ 1.81
2nd quarter ended August 31, 1997          2.84         1.94
3rd quarter ended November 30, 1997        2.81         2.16
4th quarter ended February 28, 1998        2.75         1.53

Fiscal Year Ended February 28, 1999
1st quarter ended May 31, 1998           $ 2.47       $ 1.28
2nd quarter ended August 31, 1998          1.69          .50
3rd quarter ended November 30, 1998         .87          .34
4th quarter ended February 28, 1999         .69          .09
</TABLE>

                  There is no established public trading market for the
Company's Class B Common Stock, which has ten votes per share and upon transfer
is convertible automatically into one share of Class A Common Stock, which has
one vote per share.

(B)               HOLDERS

                  As of May 28, 1999, there were approximately 307 holders of
record of Class A Common Stock (including brokerage firms holding stock in
"street name" and other nominees) and 468 holders of record of Class B Common
Stock.

(C)               DIVIDENDS

                  Since its organization, the Company has not paid any dividends
on its shares of common stock. Management anticipates that for the foreseeable
future all earnings will be retained for use in its business and, accordingly,
it does not intend to pay cash dividends. The Company's current revolving credit
facility prohibits the payment of cash dividends on the common stock.



                                      -23-
<PAGE>   24




ITEM 6.

SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>


                                                                              YEARS ENDED
                                                -----------------------------------------------------------------------
                                                  FEBRUARY       FEBRUARY       FEBRUARY       FEBRUARY       FEBRUARY
                                                  28, 1999       28, 1998       28, 1997       29, 1996       28, 1995
                                                -----------    -----------    -----------    -----------    -----------
<S>                                             <C>            <C>            <C>            <C>            <C>
CONSOLIDATED OPERATIONS DATA:
Revenues                                        $   437,588    $   526,673    $   480,355    $   410,160    $   325,111
                                                -----------    -----------    -----------    -----------    -----------
Costs and expenses:
  Operating costs                                   299,057        338,225        301,508        256,719        201,365
  General and administrative expenses               148,642        177,761        170,290        146,382        113,893
  Amortization of intangible assets                   1,314          2,807          2,623          1,823          1,237
  Interest expense                                    4,233          3,706          1,601            948          1,237
  Interest income                                    (1,061)        (1,358)          (896)          (976)          (796)
  Other (income) expense, net                         1,991           (419)        (1,487)         1,791            (22)
  Medicare and Medicaid audit adjustments            29,000           --             --             --             --
  Restructuring costs                                20,464         33,447           --             --             --
                                                -----------    -----------    -----------    -----------    -----------

    Total costs and expenses                        503,640        554,169        473,639        406,687        316,914
                                                -----------    -----------    -----------    -----------    -----------
Income (loss)
  before income taxes                               (66,052)       (27,496)         6,716          3,473          8,197
Provision (benefit) for income taxes                  7,034         (5,864)         2,955          1,459          3,462
                                                -----------    -----------    -----------    -----------    -----------

Income (loss) applicable to
  common stockholders                           $   (73,086)   $   (21,632)   $     3,761    $     2,014    $     4,735
                                                ===========    ===========    ===========    ===========    ===========

Income (loss) per common share:
  Basic                                         $     (3.16)   $      (.90)   $       .16    $       .09    $       .21
                                                ===========    ===========    ===========    ===========    ===========
  Diluted                                       $     (3.16)   $      (.90)   $       .15    $       .08    $       .20
                                                ===========    ===========    ===========    ===========    ===========

Weighted average common shares outstanding:
  Basic                                              23,162         23,939         23,668         23,598         22,389
                                                ===========    ===========    ===========    ===========    ===========
  Diluted                                            23,162         23,939         24,577         25,504         24,053
                                                ===========    ===========    ===========    ===========    ===========

CONSOLIDATED BALANCE SHEET DATA:

Total assets                                    $   146,505    $   158,701    $   156,172    $   120,527    $   103,486

Working capital (deficiency)                        (39,826)        16,085         27,245         12,007         22,038

Current portion of long-term debt                    43,460         10,664          5,071          1,655          1,208

Long-term debt and other liabilities                 59,082         40,508         37,998          9,611          9,186

Total liabilities                                   185,864        120,332         96,706         65,217         51,135

Stockholders' equity (deficit)                      (39,359)        38,369         59,466         55,310         52,351
</TABLE>


Staff Builders, Inc. did not pay any cash dividends on its common stock during
any of the periods set forth in the table above.

Certain prior period amounts have been reclassified to conform with the fiscal
1999 presentation.



                                      -24-
<PAGE>   25


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

         The following discussion and analysis provides information which the
Company's management believes is relevant to an assessment and understanding of
the Company's results of operations and financial condition. This discussion
should be read in conjunction with the consolidated financial statements and
notes thereto appearing elsewhere herein, particularly Note 5 which discusses
operating results by business segment.

RESULTS OF OPERATIONS

YEARS ENDED FEBRUARY 28, 1999 ("FISCAL 1999"), FEBRUARY 28, 1998 ("FISCAL 1998")
AND FEBRUARY 28, 1997 ("FISCAL 1997")

REVENUES.  The Company's revenues consist of the following:

<TABLE>
<CAPTION>
                                             ($ in millions)
                                               Years Ended
                                               February 28,
                               ---------------------------------------------

                                      1999         1998          1997
                                     ------       ------        ------
<S>                                  <C>          <C>           <C>
Home health care and other           $310.3       $451.1        $436.6
Supplemental staffing                 124.9         74.3          42.4
                                     ------       ------        ------
Total service revenues                435.2        525.4         479.0
                                     ------       ------        ------
Sales of licensees and fees             2.4          1.3           1.4
                                     ------       ------        ------
Total revenues                       $437.6       $526.7        $480.4
                                     ======       ======        ======
</TABLE>


         Total revenues decreased to $437.6 million in fiscal 1999 compared to
$526.7 million in fiscal 1998. This decrease of $89.1 million, or 16.9%, was a
result of a decrease in the Company's home health care division service revenues
of $140.8 million to $310.3 million in fiscal 1999 from $451.1 million in fiscal
1998. This decrease was partially offset by a 68.0% increase in the Company's
staffing division service revenues of $50.6 million from $74.3 million in fiscal
1998 to $124.8 million in fiscal 1999.

         Total revenues increased by $46.3 million to $526.7 million in fiscal
1998 from $480.4 million in fiscal 1997. This increase included an increase of
$14.5 million or 3.3% in the Company's home health care service revenues from
$436.6 million in fiscal 1997 to $451.1 million in fiscal 1998. Additionally,
the Company's supplemental staffing division service revenues increased by $31.9
million or 75.2% from $42.4 million in fiscal 1997 to $74.3 million in fiscal
1998.

HOME HEALTH CARE

         The primary reason for the decrease of $140.8 million in the home
health care service revenues in fiscal 1999 over fiscal 1998 was a decrease in
Medicare revenues. This decrease resulted from the negative impact of the
Medicare Interim Payment System ("IPS")




                                      -25-
<PAGE>   26

enacted under the Balanced Budget Act of 1997 ("BBA"). The IPS reduced the
limits for the amount of costs which are reimbursable under the Medicare
program. See Note 2 to the consolidated financial statements.

         The increase in home health care revenues of $14.5 million in fiscal
1998 over fiscal 1997 included $28.4 million primarily due to acquisitions made
during fiscal 1997 which were included in the full fiscal 1998 period offset by
a decrease in revenues of $13.9 million resulting from the closing or sale of
approximately 30 locations during fiscal 1998. Included in the Company's fiscal
1998 revenues under sales of licensees and fees, net, is $502 thousand for
license fees earned in connection with a master license agreement with a home
health care company based in Tokyo, Japan. Under the agreement, the Company
granted rights to develop home health care agencies throughout Japan using Staff
Builders' home health expertise and licensee model.

The Company receives payment for its home health care services from several
sources. The following are the Company's home health care division revenues by
payment source:

<TABLE>
<CAPTION>
                                                   Years Ended
                                                   February 28,
                                   --------------------------------------------

                                        1999           1998           1997
                                        ----           ----           ----
<S>                                   <C>            <C>           <C>
Medicare                                43.4%          60.1%         61.0%
Medicaid and other local
government programs                     36.2           23.1           21.7

Insurance and individuals               19.3           15.1           15.4
Other                                    1.1            1.7            1.9
                                       -----          -----          -----
Total                                  100.0%         100.0%         100.0%
                                       =====          =====          =====
</TABLE>

         The home health care division has 125 locations as of May 31, 1999 as
compared to 198 and 228 locations as of February 28, 1998 and 1997,
respectively. Included in these locations are 54, 160 and 179 offices which were
operated by 31, 64 and 72 licensees, respectively. The percentage of home health
care division revenues attributable to licensees was 69%, 84% and 82% in fiscal
1999, 1998 and 1997, respectively. The decrease in the number of licensees and
their respective share of business is consistent with the industry as a whole
which has experienced a significant reduction in the number of providers as a
result of the BBA.

SUPPLEMENTAL STAFFING

         Revenues for the supplemental staffing division grew to $124.9 million
in fiscal 1999 compared to $74.3 million in fiscal 1998. This increase of $50.6
million, or 68.0% was primarily due to the increase in the number of staffing
office locations from 46 at February 28, 1998 to 58 locations at February 28,
1999, including an increase in the number of licensees which increased from 35
to 41, respectively.


                                      -26-
<PAGE>   27


Also, fiscal 1999 was the first full year in which Chelsea Computer Consultants,
Inc. ("Chelsea") was included in the Company's consolidated results of
operations. Chelsea is the Company's information technology staffing subsidiary
in which the Company acquired a majority interest on October 30, 1997. Chelsea's
revenues were $31.1 million in fiscal 1999 and were $7.0 million from October
30, 1997 through February 28, 1998.

         The increase in supplemental staffing revenues of $31.9 million in
fiscal 1998 over fiscal 1997 included $9.0 million resulting from the September
1996 acquisition of a provider in the metropolitan New York area which generated
revenues of $17.5 million and $8.5 million in fiscal 1998 and fiscal 1997,
respectively. Additionally, the increase in supplemental staffing revenues
included $4.5 million resulting from the September 1997 acquisition of a
provider of travel nursing services, whereby nursing professionals render
services in long-term assignments, away from the professional's permanent
domicile.

         OPERATING COSTS. Operating costs were 68.7%, 64.4%, and 62.9% of
service revenues in fiscal 1999, 1998 and 1997, respectively. Operating costs
represent the direct costs of providing services to patients or clients,
including wages, payroll taxes, travel costs, insurance costs, medical supplies
and the cost of contracted services. The increases in operating costs as a
percentage of service revenues were primarily due to the increase in
supplemental staffing revenues which have higher direct operating costs as a
percentage of service revenues as compared to home health care revenues.

         The payroll fringe costs, consisting primarily of payroll taxes and
workers compensation insurance, represents 15.3%, 16.0%, and 15.9% of direct
service wages in fiscal 1999, 1998 and 1997, respectively. These payroll fringe
costs as a percentage of direct service wages for the home health care division
were 16.9%, 16.8% and 16.3% and for the supplemental staffing division were
12.4%, 12.5% and 13.2%, respectively.

         The cost of contracted services represents 6.6%, 6.5% and 8.1% of
related service revenues in fiscal 1999, 1998 and 1997, respectively. Contracted
services consist primarily of physical therapy, occupational therapy, speech
therapy and medical social services utilized in the home health care division.



                                      -27-
<PAGE>   28

         The service revenues, operating costs and resultant gross margins
generated by the Company's licensee and company-owned locations are as follows
($ in millions):


<TABLE>
<CAPTION>
                                                       HOME HEALTH CARE
                                                         Years Ended
                                                         February 28,
                                         ------------------------------------------

                                                 1999        1998       1997
                                              ---------   ---------   ---------
<S>                                           <C>         <C>         <C>
Total service revenues - Licensee             $     214   $     379   $     356
Total service revenues -
  Company-Owned                                      96          72          81
                                              ---------   ---------   ---------
Total service revenues                        $     310   $     451   $     437
                                              =========   =========   =========

Operating costs - Licensee                    $     136   $     234   $     216
Operating costs - Company-Owned                      64          46          53
                                              ---------   ---------   ---------
Operating costs                               $     200   $     280   $     269
                                              =========   =========   =========

Gross margin - Licensee                       $      78   $     145   $     140
Gross margin - Company-Owned                         32          26          28
                                              ---------   ---------   ---------
Gross margin                                  $     110   $     171   $     168
                                              =========   =========   =========
</TABLE>



<TABLE>
<CAPTION>
                                                     SUPPLEMENTAL STAFFING
                                                         Years Ended
                                                         February 28,
                                        ---------------------------------------------
                                                 1999        1998       1997
                                              ---------   ---------   ---------
<S>                                           <C>         <C>         <C>
Total service revenues - Licensee             $      90   $      65   $       1
Total service revenues -
  Company-Owned                                      35           9          41
                                              ---------   ---------   ---------
Total service revenues                        $     125   $      74   $      42
                                              =========   =========   =========

Operating costs - Licensee                    $      70   $      51   $       1
Operating costs - Company-Owned                      29           7          32
                                              ---------   ---------   ---------
Operating costs                               $      99   $      58   $      33
                                              =========   =========   =========

Gross margin - Licensee                       $      20   $      14   $    --
Gross margin - Company-Owned                          6           2           9
                                              ---------   ---------   ---------
Gross margin                                  $      26   $      16   $       9
                                              =========   =========   =========
</TABLE>


         GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses decreased by $29.2 million, or 16.4%, in fiscal 1999 to $148.6 million
as compared to $177.8 million in fiscal 1998 and increased by $7.6 million, or
4.5%, in fiscal 1998 as compared to $170.3 million in fiscal 1997. These costs
expressed as a percentage of service revenues were 34.2%, 33.9% and 35.5% in
fiscal 1999, 1998 and 1997, respectively.

         The decrease of $29.2 million in fiscal 1999 as compared to fiscal 1998
was the result of a decrease in the general and administrative expenses of the
home health care division of $38.7 million which was partially offset by a $9.5
million increase in such expenses in the supplemental staffing division.
Included in general and administrative expenses is the Company's provision for
doubtful accounts which increased by $5.7 million in fiscal 1999 over fiscal
1998. The provision for doubtful accounts was $5.6 million and $2.5 million in
fiscal 1999 and fiscal 1998 for the home care business segment and $2.8 million
and $0.2 million in fiscal 1999 and fiscal 1998 for the supplemental staffing
business segment, respectively.



                                      -28-
<PAGE>   29

         The decrease in the general and administrative expenses of the home
health care division was a result of a reduced number of operating locations and
management's efforts to address the revenue reductions associated with IPS. This
decrease was partially offset by re-engineering costs incurred in connection
with meeting the demands of IPS, including improvement of the home care
division's patient billing, scheduling and accounts receivable functions and
implementing other operating efficiencies.

         The general and administrative expenses of the supplemental staffing
division increased from $13.3 million in fiscal 1998 to $22.8 million in fiscal
1999 due to an increase in the number of supplemental staffing licensees and the
increased expenses associated with the first full year of operation of Chelsea.

         The increase in general and administrative expenses of $7.6 million in
fiscal 1998 over fiscal 1997 was primarily due to the increase in supplemental
staffing expenses of approximately $4.8 million, including $1.1 million
attributable to the consolidation of Chelsea's general and administrative
expenses from October 30, 1997 to February 28, 1998. The increase in the
supplemental staffing expenses is due to the expansion of that division. The
increase in these general and administrative expenses includes approximately
$900 thousand resulting from the September 1996 acquisition of a provider in the
metropolitan New York area and approximately $500 thousand resulting from the
September 1997 acquisition of a provider of travel nurse services. Additionally,
there was an increase in corporate and regional home health care expenses of
$2.4 million, or 6.2% over the prior year, due to increased support for
expansion of the Company's home health care services, primarily resulting from
acquisitions made in fiscal 1997 which were included in the full fiscal 1998
period.

         AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
was approximately $1.3 million in fiscal 1999 as compared to $2.8 million in
fiscal 1998 and $2.6 million in fiscal 1997. The reduction of $1.5 million in
fiscal year 1999 compared to fiscal year 1998 was primarily the result of the
write-off of goodwill recorded in fiscal year 1998. The home health care
division amortization expense was $1.2 million, $2.5 million and $2.5 million
and the supplemental staffing division amortization expense was $100 thousand,
$300 thousand and $100 thousand in fiscal 1999, 1998 and 1997, respectively.

         INTEREST EXPENSE. Interest expense was approximately $4.2 million in
fiscal 1999 as compared to $3.7 million in fiscal 1998 and $1.6 million in
fiscal 1997. The increases in interest expense in fiscal 1999 over fiscal 1998
and over fiscal 1997 was primarily due to an increase in the level of borrowings
under the Company's secured credit facility. On October 30, 1997, the Company
borrowed $12.6 million under the acquisition line of credit to purchase an
additional 60.9% of the outstanding common stock of Chelsea.


                                      -29-
<PAGE>   30

         INTEREST INCOME. Interest income includes interest on franchise notes
receivable of $225 thousand, $481 thousand and $527 thousand in fiscal 1999,
1998 and 1997, respectively. Interest earned on franchise notes receivable is
generally at the prime rate plus three percent. Additionally, the Company earned
interest from funds on deposit for workers compensation premiums of $520
thousand, $564 thousand and $243 thousand in fiscal 1999, 1998 and 1997,
respectively.

         OTHER (INCOME) EXPENSE, NET. Other expense of $2.0 million in fiscal
1999 primarily consists of approximately $1.0 million for the reserve for
uncollectible notes receivable, $600 thousand for the write-off of obsolete
fixed assets and $300 thousand to record minority interest expense incurred by
Chelsea. Other (income) expense, net in fiscal 1998 primarily includes
approximately $300 thousand of income from the Company's gain on the sale of
several offices. Fiscal 1997 income includes approximately $1.2 million
resulting from the sale of a Company division.

         MEDICARE AND MEDICAID AUDIT ADJUSTMENTS. In the third quarter of fiscal
1999, the Company recorded a charge of $29.0 million to reflect audit
adjustments from both Medicare and Medicaid. Medicare and Medicaid audit
adjustments recorded in fiscal 1999 include Federal and state audit liabilities
arising from some completed audit examinations as well as estimated liabilities
for open audit periods through February 28, 1999. As a home health care
provider, the Company is subject to extensive and changing state and Federal
regulations relating to the licensing and certification of its offices and the
sale and delivery of its products and services. The Federal government and
Medicare fiscal intermediaries have become more vigilant in their review of
Medicare reimbursements to home health care providers generally, and have become
more restrictive in their interpretation of those costs for which reimbursement
will be allowed to such providers. These regulatory agencies have increased the
number of audits performed and have applied a more intensive degree of scrutiny
in the conduct of these audits.

         During the quarter ended November 30, 1998, the Medicare fiscal
intermediary completed and issued the results of 88 audits for the fiscal year
ended February 28, 1997, including 25 audits conducted on site at branch
operating locations. These results together with the results of the home office
audit for the year ended February 28, 1997, indicated an aggregate liability of
approximately $9.5 million.

         Additionally, the Company has recorded an accrual for third party
liability ("TPL") to state Medicaid agencies which have claimed that the Company
did not follow proper billing procedures in several locations. These state
Medicaid agencies have challenged the eligibility of individuals for whom
services were provided. The related claims are being reviewed by the state
agencies encompassing several prior years for which the Company has



                                      -30-
<PAGE>   31

been paid. The Company has reached a settlement for a portion of its TPL
liability and is continuing to negotiate to resolve amounts payable to these
state agencies. While the Company believes that it will ultimately prevail in
many of these cases, it has accrued for the anticipated losses for those cases
in which it will not prevail. To date, the Company has reached settlement on
$4.6 million of the $11.0 million of TPL provided for in the quarter ended
November 30, 1998. This amount is payable monthly at approximately $250 per
month. The other $6.4 million is a general reserve based upon preliminary
discussions with several states.

         The Company continues to appeal many audit issues and has engaged
outside professional advisors to support its positions on these issues. The
Company anticipates that any resolution of these appeals may require up to
several years. The settlement of Medicare and Medicaid liabilities for specific
periods provides a basis for reasonably estimating the liability that may exist
for periods not yet examined or where the examination is in process. The Company
was able to consider the scope of audits being performed by the fiscal
intermediary and the issues raised for such periods, and then use this
information as a basis to estimate the accrual required for audits not yet
performed, or not yet completed. The $29.0 million charge to operations in the
quarter ended November 30, 1998, together with the balance of liabilities
previously established, less amounts expended during the fourth quarter of
fiscal 1999, results in an aggregate liability of $28.1 million for Federal and
state audit adjustments as of February 28, 1999 which includes $17.1 million and
$11.0 million for Federal and state liabilities, respectively.

         HEALTH CARE REFORM AND RELATED RESTRUCTURING COSTS.

         The BBA resulted in significant changes to cost based reimbursement for
Medicare home health care providers. Although a cost based reimbursement system
remains, the BBA reduced the cost limits and created new per-beneficiary limits.
The BBA provides two payment systems -- IPS which became applicable for the
Company on March 1, 1998 until the adoption of prospective payment system
scheduled to be effective for all home health care agencies after October 1,
2000. The Federal Health Care Financing Administration committed to the revised
schedule in a report presented to Congress dated February 4, 1999. The effect of
the changes under IPS is to reduce the limits for the amount of costs that are
reimbursable to home health care providers under the Medicare program.
Accordingly, the Company together with many of its licensees have modified their
operations as needed to meet the demands of IPS, including taking steps to
reduce costs and maximize operational efficiencies within the constraints of the
IPS.

         During the fourth quarter of fiscal 1998, management prepared the home
health care business segment of the Company for the impact



                                      -31-
<PAGE>   32

of IPS and for long-term growth. As a result, the Company implemented a
corporate-wide restructuring and cost reduction program. These actions, together
with the Company's assessment of the impact of health care reform legislation,
resulted in a pre-tax charge in the fourth quarter of fiscal 1998 of $33.4
million. During the quarter ended November 30, 1998, as a result of the
Company's further operating modifications, including the additional closure and
conversion of many locations from licensed to company-owned operations, the
Company has written off or reserved approximately $4.5 million.

         In fiscal 1999, management further evaluated the carrying value of the
Company's goodwill and intangible assets in light of current home health care
industry conditions and its impact on the Company's operations. Such valuation
resulted in an additional write-off of home health care goodwill of $15.3
million leaving a remaining net carrying value of goodwill and intangible assets
as of February 28, 1999 of $5.1 million in its home health care business
segment. The fiscal 1998 write-off of goodwill and intangible assets included
$21.5 million for the home health care segment and $3.0 million for the
supplemental staffing segment. The write-off of goodwill and intangible assets
is required under SFAS No. 121.

         In addition to the fiscal 1999 write-off of goodwill, the Company
recorded other home health care restructuring costs aggregating $5.2 million.
These costs included $0.9 million for the closure and reduction in size of some
of the Company's operating locations including the write-off of fixed assets and
the accrual for employee severance payments. Further, restructuring costs
include $2.2 million of litigation related costs, $1.1 million for the write-off
of receivables from converted licensee locations and $0.9 million for the
write-off of home care related investments and receivables. These restructuring
costs reflect the Company's operating modifications in order to meet the demands
of IPS as well as its assessment of the carrying value of goodwill and
intangible assets in light of the deterioration within the home health care
industry and the resultant effect on reduced profitability.

         PROVISION (BENEFIT) FOR INCOME TAXES. The provision (benefit) for
income taxes reflects an effective rate of (10.6%), 21.3% and 44.0% in fiscal
1999, 1998 and 1997, respectively.

         The provision for income taxes in fiscal 1999 consists of a valuation
allowance of $28.9 million offset by potential tax benefits of $20.2 million
resulting from losses incurred in that period. Such valuation allowance was
recorded because management does not believe that the utilization of the tax
benefits from operating losses and other temporary differences are "more likely
than not" to be realized, as required by SFAS 109. The Company has recorded an
income tax receivable of $1.7 million resulting from the carryback of net
operating losses.

         NET INCOME (LOSS). Net (loss) for fiscal 1999 was $(73.1) million, or
$(3.16) per share, compared to net (loss) in fiscal 1998 of $(21.6) million, or
$(.90) per share, and net income of $3.7 million, or $.16 per share, in fiscal
1997.

LIQUIDITY AND CAPITAL RESOURCES


         Net cash provided by operating activities was $13.0 million for the
fiscal year ended February 28, 1999 which consisted primarily of periodic
interim payments received from Medicare of $14.4 million, a net increase in
accounts payable and accrued expenses of $2.4 million and a decrease in trade
accounts receivable of $2.0 million. Offsetting these sources of cash was the
loss from operations requiring cash payments of $5.8 million. The fiscal 1999
loss of $(73.1) million included non-cash items consisting primarily of the
write-off of goodwill, deferred income taxes and other assets aggregating $27.5
million; depreciation, amortization and a net increase to the allowance for
doubtful accounts aggregating $8.6 million; an increase in Medicare and Medicaid
audit liabilities of $29.0 million and an increase in accrued litigation costs
of $2.2 million.

                                      -32-
<PAGE>   33

         Net cash used in investing activities was $7.3 million in fiscal 1999,
which consisted of the purchase of fixed assets of $5.0 million and $2.9 million
of cash used to acquire businesses, offset by $0.6 million of proceeds from the
sale of five home health care franchise businesses.

         Net cash used in financing activities of $6.5 million in fiscal 1999
included the payment of notes payable and other long-term liabilities of $11.1
million which consisted primarily of $3.1 million paid on the Company's
acquisition line of credit under its secured credit facility, $2.9 million of
capital lease payments, a net reduction of $1.0 million in the line of credit
under which Chelsea borrowed on its accounts receivable and a reduction of $1.9
million in a term loan which matures in December 1999. Additionally, the Company
purchased and retired 5.1 million shares of its common stock at a cost of $4.8
million. Offsetting these items was $9.1 million of cash provided from the
Company's revolving line of credit.

         Net cash provided by operating activities was $13.5 million for the
fiscal year ended February 28, 1998, which consisted primarily of an increase in
accounts payable and accrued expenses of $10.4 million and periodic interim
payments received from Medicare of $4.3 million. Net cash used in investing
activities of $16.4 million in fiscal 1998 consisted primarily of cash used for
business acquisitions of $16.2 million, including $12.7 million for the
purchase of 60.9% of the outstanding common stock of Chelsea. Net cash provided
by financing activities of $3.7 million in fiscal 1998 includes proceeds of
$12.6 million from the acquisition line of credit, less $4.0 million of a
decrease in borrowings under the Company's revolving line of credit and $6.1
million for the payment of notes payable and other long-term liabilities. These
payments include $2.3 million of capital lease payments, a reduction of $1.8
million in a term loan and $0.8 million of repayments of the acquisition line
of credit.

         Net cash used in operating  activities was $19.4 million for the fiscal
year ended February 28, 1997, which consisted primarily of an increase in trade
accounts receivable of $23.8 million offset by net income of $3.8 million. Net
cash used in investing activities of $11.9 million in fiscal 1997 consisted
primarily of cash used for business acquisitions of $10.3 million, including
$2.1 million for the purchase of 20.9% of the outstanding common stock of
Chelsea. Net cash provided by financing activities in fiscal 1997 was $24.6
million, which consisted primarily of an increase in the level of borrowings
under the Company's revolving line of credit of $21.6 million and proceeds from
a term loan of $5.7 million, offset by the payment of notes payable and other
long-term liabilities of $3.1 million.


         The Company has a secured credit facility which consists of a revolving
line of credit, an acquisition line of credit and a standby letter of credit
facility. On January 14, 1999, the bank provided the Company with written
notification that, in its opinion, the Company's non-compliance with certain
financial covenants constitutes an event of default under the terms of the
credit facility agreement. Those covenants require the Company to maintain a
minimum level of net worth and a maximum ratio of senior debt to net worth,
failures of which resulted from losses incurred for the three and nine months
ended November 30, 1998. At the time that the bank declared its opinion as to an
event of default, the Company had borrowed $39.4 million under the credit
facility, including $29.7 million and $9.7 million under the revolving line of
credit and the acquisition line of credit, respectively. The bank has advised
Staff Builders that while it has no obligation to provide additional advances as
a result of the non-compliance with certain financial covenants, it is willing
to consider making additional advances to Staff Builders under such conditions
as it may determine. As of May 28, 1999, the Company had borrowed $38.9 million
under the credit facility, including $30.5 million and $8.4 million under the
revolving line of credit and the acquisition line of credit, respectively.

         In connection with the bank's notice of default, the maximum aggregate
amount which can be borrowed under the credit facility was reduced from $50
million to $40 million. Additionally, the bank increased the rate of interest on
all borrowings to 2.0% over the prevailing prime lending rate on its revolving
line of credit and 2.75% over the prevailing prime lending rate on its
acquisition line of credit (such prime lending rate being 7.75% as of February
28, 1999). The Company's primary sensitivity to changes in interest rates
results from its secured credit facility. Based on outstanding borrowings at
February 28, 1999, an increase of 1% in the prime rate would have the effect of
increasing annual interest expense by approximately $400 thousand. The Company
has classified its outstanding borrowings as a current liability as of February
28, 1999 because the bank has the option to declare all borrowings under the
credit facility to become immediately due and payable. At February 28, 1999 and
1998, the Company borrowed $35.4 million and $29.4 million, respectively, under
the credit facility.

         The Company's working capital deficiency was $(39.8) million at
February 28, 1999. Current liabilities at February 28, 1999 include $22.7
million for Medicare and Medicaid liabilities, $35.4 million of outstanding
borrowings under the secured credit


                                      -33-
<PAGE>   34

facility and $8.1 million for the current portion of other debt obligations.
While the Company cannot accurately determine the required payment dates for its
total Medicare and Medicaid audit liabilities, it has included $34.6 million of
such liabilities in other long term liabilities based upon its current estimate
of when payments would likely become due. In order to pay its current
liabilities in the normal course of business as well as to pay its liabilities
to the Medicare and Medicaid agencies as they become due, the Company is
investigating alternative sources of funding.

         The above conditions raise substantial doubt about the ability of the
Company to continue as a going concern. As a result, management of the Company
is pursuing various strategies, including but not limited to, negotiating with
alternative lending sources, deferred payment terms for Medicare and Medicaid
audit liabilities as well as for any repayments of Medicare periodic interim
payment(s) ("PIP") and deferred payment terms for other creditors. Further,
management is implementing an intensified collection effort and has obtained a
deferred payment schedule for the repayment of $19.0 million of excess PIP
payments made to the Company by the Federal government as well as for $6.8
million of audit liabilities assessed to date. Such payment schedule requires
these amounts to be paid in 24 equal monthly installments of approximately $1.1
million beginning in May 1999. As of June 1, 1999 no payments have been made
pursuant to this schedule. Additionally, the Company has obtained favorable
extended payment terms with some of its trade creditors and is continuing to
negotiate extended payment terms with other vendors. Further, the spin-off
described in Note 1 will be completed only if the bank or another lender creates
a separate credit facility for the home health care business under TLC and the
supplemental staffing business retained by Staff Builders, and allocates the
aggregate pre-spin-off debt between those two entities. However, there can be no
assurance that these actions will be successful to provide adequate funds for
the Company's current level of operations and to pay the Company's past-due
obligations.

         From March 6, 1998 through October 16, 1998, the Company purchased and
retired a total of 5,088,060 shares of its common stock at a cost of
approximately $4.8 million. No repurchases have been made since October 16,
1998.

YEAR 2000

         Many computer systems, applications, information technologies and
equipment containing computer related components (generally "computer systems
and equipment") are unable to differentiate
between the year 2000 and the year 1900 because they were programmed with
two-digit, rather than four digit, date fields. Accordingly, older computer
systems that have time-sensitive applications may not properly recognize the
year 2000 and beyond ("Year 2000 issue"). This could cause system or equipment
shut


                                      -34-
<PAGE>   35

downs, failures or miscalculations resulting in inaccuracies in computer output
or disruptions of operations, including, among other things, inaccurate
processing of financial information and/or temporary inabilities to process
transactions, manufacture products, or engage in similar normal business
activities.

         The Company has made upgrades to its computer systems and equipment
controlling its general ledger, accounts payable, payroll and human resources
systems and believes that these systems are largely Year 2000 compliant. The
Company is continuing its upgrades with respect to the front end systems, which
include clinical, scheduling and billing. The Company expects to complete such
upgrades by October 31, 1999. The Company believes that with these upgrades, the
Year 2000 issue will not pose significant operational problems for its computer
systems and equipment. However, if such upgrades are not made or are not
completed in a timely fashion, the Year 2000 issue might have an adverse impact
on the operations of the Company, the precise degree of which cannot be known at
this time.

         In addition to risks associated with the Company's own computer systems
and equipment, the Company has relationships with, and is to varying degrees
dependent upon, a large number of third party vendors that provide information,
goods and services to the Company and third party customers to which the Company
provides its services. These include financial institutions, companies in
industry, and Federal and state government agencies. If significant numbers of
these third parties experience failures in their computer systems or equipment
due to the Year 2000 issue and if, in particular, the Federal government is not
Year 2000 compliant these failures could adversely affect the Company's ability
to process transactions or engage in similar normal business activities. While
some of these risks are outside of the Company's control, it has instituted
programs, including internal records review to identify key third parties,
assess their level of Year 2000 compliance, update contracts and address any
non-compliance issues.

         The total cost of the Year 2000 systems assessment and upgrades is
funded through operating cash flows and leases and the Company is expensing
certain items and capitalizing others. The estimated cost to replace existing
software applications consisting of Lawson software and HBO Corporation systems,
including modifications to accommodate the Year 2000, is approximately $25
million, including the cost of implementation. The actual cost could, however,
exceed this estimate. The Company has not established a contingency plan to deal
with major year 2000 failures, if any, and does not intend to establish a
contingency plan because it is comfortable with progress made to date, although
no assurances can be made.




                                      -35-
<PAGE>   36



EFFECT OF INFLATION

         The rate of inflation was immaterial during fiscal 1999. In the past,
the effects of inflation on salaries and operating expenses have been offset by
the Company's ability to increase its charges for services rendered. The Company
anticipates that it will be able to continue to do so in the future, subject to
applicable restrictions with respect to services provided to clients eligible
for Medicare and Medicaid reimbursement. The Company continually reviews its
costs in relation to the pricing of its services.

RECENTLY ISSUED ACCOUNTING STANDARDS

         In April 1998, FASB adopted Statement of Position No. 98-5, "Reporting
on the Costs of Start-Up Activities" ("SOP No. 98-5") which requires that costs
previously capitalized as start-up costs will be expensed as incurred.  SOP No.
98-5 becomes effective for fiscal years beginning after December 15, 1998, with
earlier application encouraged.  The adoption of SOP No. 98-5 will not have a
material effect on the Company's consolidated financial statements.

         During 1998, FASB issued Statement of Financial Accounting Standards
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities".
The Company does not expect the adoption of this new accounting pronouncement to
have a material effect, if any, on its financial condition or results of
operations.

FORWARD-LOOKING STATEMENTS

         Certain statements in this report on Form 10-K constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements are typically identified by the
inclusion of phrases such as "the Company anticipates", "the Company believes"
and other phrases of similar meaning. These forward-looking statements are based
on the Company's current expectations. Such forward-looking statements involve
known and unknown risks, uncertainties, and other factors that may cause the
actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. The potential risks and
uncertainties which could cause actual results to differ materially from the
Company's expectations include the impact of further changes in the Medicare
reimbursement system, including any changes to the current interim payment
system and/or the ultimate implementation of a prospective payment system;
government regulation; health care reform; pricing pressures from third-party
payors, including managed care organizations; retroactive Medicare audit
adjustments; year 2000




                                      -36-
<PAGE>   37

failures; changes in laws and interpretations of laws or regulations relating to
the health care industry; and inability to obtain financing on satisfactory
terms.

GOVERNMENT REGULATION. As a home health care provider, the Company is subject to
extensive and changing state and Federal regulations relating to the licensing
and certification of its offices and the sale and delivery of its products and
services. The Federal government and Medicare fiscal intermediaries have become
more vigilant in their review of Medicare reimbursements to home health care
providers generally, and are becoming more restrictive in their interpretation
of those costs for which reimbursement will be allowed to such providers.
Changes in the law and regulations as well as new interpretations enforced by
the relevant regulatory agencies could have an adverse effect on the Company's
operations and the cost of doing business.

THIRD-PARTY REIMBURSEMENT AND MANAGED CARE. Because the Company is reimbursed
for its services primarily by the Medicare/Medicaid programs, insurance
companies, managed care companies and other third-party payors, the
implementation of alternative payment methodologies for any of these payors
could have an impact on revenues and profit margins. Generally, managed care
companies have sought to contain costs by reducing payments to providers.
Continued cost reduction efforts by managed care companies could adversely
affect the Company's results of operations.

HEALTH CARE REFORM. The BBA resulted in significant changes to cost based
reimbursement for Medicare home health care providers. Although the BBA retains
a cost based reimbursement system, the cost limits have been reduced and a
per-beneficiary limit has been implemented. The BBA provides for IPS which
became applicable for the Company on March 1, 1998 and will remain in effect
until the adoption of a new prospective payment system scheduled to be effective
for all home health care agencies beginning on October 1, 2000. The effect of
the changes under IPS is to reduce the limits for the amount of costs that are
reimbursable to home health care providers under the Medicare program. The
Company cannot quantify the full effect of IPS on the Company's future
performance because certain components of health care reform legislation, such
as the per-beneficiary limit, require annual data which will not be known until
a final assessment by Medicare and/or its fiscal intermediary is completed for
each annual period.

         As Congress and state reimbursement entities assess alternative health
care delivery systems and payment methodologies, the Company cannot predict
which additional reforms may be adopted or what impact they may have on the
Company. Additionally, uncertainties relating to the nature and outcomes of
health care reforms have also generated numerous realignments, combinations and
consolidations in the health care industry which may also have an


                                      -37-
<PAGE>   38

adverse impact on the Company's business strategy and results of operations. The
Company expects that in addition to industry consolidation generally, there may
be consolidations within the Company's company-owned and licensed locations,
with the likely result that there will be fewer offices by the end of the next
fiscal year.

BUSINESS CONDITIONS. The Company must continue to establish and maintain close
working relationships with physicians and physician groups, managed care
organizations, hospitals, clinics, nursing homes, social service agencies and
other health care providers. There can be no assurance that the Company will
continue to establish or maintain such relationships. The Company expects
additional competition will develop in future periods given the increasing
market demand for the type of services offered.

ATTRACTION AND RETENTION OF LICENSEES AND EMPLOYEES. Maintaining quality
licensees, managers and branch administrators will play a significant part in
the future success of the Company. The Company's professional nurses and other
health care personnel are also key to the continued provision of quality care to
the Company's patients. The possible inability to attract and retain qualified
licensees, skilled management and sufficient numbers of credentialed health care
professionals and para-professionals and information technology personnel could
adversely affect the Company's operations and quality of service.

SATISFACTORY FINANCING. Staff Builders' working capital deficiency as of
February 28, 1999 was $39.8 million and it has received notice from its bank
that it is in non-compliance with certain financial covenants constituting an
event of default under the terms of its credit facility agreement. Further, the
Company is at or near its borrowing limit under such credit facility. In order
to pay its current liabilities in the normal course of business and its
liabilities to the Medicare and Medicaid agencies as they become due, management
believes that the Company needs a new credit facility. Although the Company is
in the process of seeking a new facility, there can be no assurance that a new
credit facility will be available on favorable terms, if at all.

         YEAR 2000. The Company believes that because of the upgrades it has
made and is making to its computer systems, the Year 2000 issue will not pose
significant operational problems for it. However, if the upgrades are not
completed on time, the Year 2000 issue might have an adverse effect. The Company
has no contingency plans to address major Year 2000 failures. The total cost of
the Company's Year 2000 systems assessments and upgrades is funded through
operating cash flows and leases. If the financial condition of Staff Builders
deteriorates, it may be unable to fund these systems assessments and upgrades.




                                      -38-
<PAGE>   39



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


STAFF BUILDERS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS


<TABLE>
<CAPTION>

                                                                     PAGE
                                                                     -----
<S>                                                                 <C>
INDEPENDENT AUDITORS' REPORT                                          F-1


CONSOLIDATED FINANCIAL STATEMENTS:

  Consolidated Balance Sheets as of
    February 28, 1999 and February 28, 1998                           F-2

  Consolidated Statements of Operations
    for the Years ended February 28, 1999,
    February 28, 1998 and February 28, 1997                           F-3

  Consolidated Statements of Stockholders' Equity
    for the Years ended February 28, 1999,
    February 28, 1998 and February 28, 1997                           F-4

  Consolidated Statements of Cash Flows
    for the Years ended February 28, 1999,
    February 28, 1998 and February 28, 1997                           F-5

  Notes to Consolidated Financial Statements                          F-6

FINANCIAL STATEMENT SCHEDULE FOR THE YEARS ENDED
  FEBRUARY 28, 1999, FEBRUARY 28, 1998
  AND FEBRUARY 28, 1997

    II - Valuation and Qualifying Accounts                            F-35
</TABLE>



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

<PAGE>   40

INDEPENDENT AUDITORS' REPORT

To the Stockholders and Board of Directors
 of Staff Builders, Inc.:

We have audited the accompanying consolidated balance sheets of Staff Builders,
Inc. and subsidiaries (the "Company") as of February 28, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the three years in the period ended February 28,
1999. Our audits also included the financial statement schedule listed in the
Table of Contents. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and the financial
statement schedule based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Staff Builders, Inc. and
subsidiaries at February 28, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended February
28, 1999 in conformity with generally accepted accounting principles. Also, in
our opinion, the financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.

The accompanying consolidated financial statements for the year ended February
28, 1999 have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 4 to the consolidated financial statements, the
Company's losses from operations, working capital deficiency and non-compliance
with the terms of its secured credit facility raise substantial doubt about its
ability to continue as a going concern. Management's plans concerning these
matters are also described in Note 4. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.

/s/ Deloitte & Touche, LLP

Jericho, New York
May 25, 1999


                                      F-1
<PAGE>   41




STAFF BUILDERS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                          FEBRUARY 28,
                                                                                 ------------------------------
ASSETS                                                                               1999              1998
------                                                                           -------------    -------------
<S>                                                                              <C>              <C>
CURRENT ASSETS:
  Cash and cash equivalents                                                      $       2,007    $       2,757
  Accounts receivable, net of allowance
    for doubtful accounts of $7,000
    and $3,660, respectively                                                            79,662           85,123
  Deferred income taxes                                                                   --              3,176
  Income tax refund receivable                                                           1,733             --
  Prepaid expenses and other current assets                                              3,554            4,853
                                                                                 -------------    -------------
          Total current assets                                                          86,956           95,909

FIXED ASSETS, net                                                                       27,987           11,622
INTANGIBLE ASSETS, net                                                                  27,091           40,295
OTHER ASSETS                                                                             4,471           10,875
                                                                                 -------------    -------------
TOTAL                                                                            $     146,505    $     158,701
                                                                                 =============    =============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable                                                               $      20,379    $      17,107
  Accrued expenses                                                                      14,520           11,976
  Accrued payroll and payroll related expenses                                          25,750           28,152
  Current portion of Medicare and Medicaid liabilities                                  22,673           11,925
  Current portion of long-term debt                                                     43,460           10,664
                                                                                 -------------    -------------
          Total current liabilities                                                    126,782           79,824
                                                                                 -------------    -------------

LONG-TERM DEBT                                                                          19,749           36,508
                                                                                 -------------    -------------
LONG-TERM MEDICARE AND MEDICAID LIABILITIES                                             34,608             --
                                                                                 -------------    -------------
OTHER LIABILITIES                                                                        4,725            4,000
                                                                                 -------------    -------------

COMMITMENTS AND CONTINGENCIES (Note 16)

STOCKHOLDERS' EQUITY:
  Common stock -
    Class A Common Stock - $.01 par value; 50,000,000 shares authorized;
    23,307,129 and 23,009,247 outstanding at February 28, 1999
    and 1998, respectively                                                                 236              230
    Class B Common Stock - $.01 par value;
    1,554,936 shares authorized; 312,251 and
    1,056,356 outstanding at February 28, 1999
    and 1998, respectively                                                                --                 10
  Preferred stock, 10,000 shares authorized;
    Class A - $1.00 par value; 666 2/3 shares
    outstanding at February 28, 1998                                                      --                  1
  Additional paid-in capital                                                            69,055           73,692
  Accumulated deficit                                                                 (108,650)         (35,564)
                                                                                 -------------    -------------
          Total stockholders' equity (deficit)                                         (39,359)          38,369
                                                                                 -------------    -------------

  TOTAL                                                                          $     146,505    $     158,701
                                                                                 =============    =============
</TABLE>




                 See notes to consolidated financial statements



                                      F-2
<PAGE>   42


STAFF BUILDERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                        YEARS ENDED
                                                       --------------------------------------------
                                                          FEBRUARY       FEBRUARY       FEBRUARY
                                                          28, 1999       28, 1998       28, 1997
                                                       ------------    ------------    ------------
<S>                                                    <C>             <C>             <C>
REVENUES:

  Service revenues:
  Home health care                                     $    310,297    $    451,098    $    436,599
  Supplemental staffing                                     124,867          74,300          42,430
                                                       ------------    ------------    ------------
  Total service revenues                                    435,164         525,398         479,029
  Sales of licensees and fees, net                            2,424           1,275           1,326
                                                       ------------    ------------    ------------
    Total revenues                                          437,588         526,673         480,355
                                                       ------------    ------------    ------------
COSTS AND EXPENSES:

  Operating costs                                           299,057         338,225         301,508
  General and administrative expenses                       148,642         177,761         170,290
  Amortization of intangible assets                           1,314           2,807           2,623
  Interest expense                                            4,233           3,706           1,601
  Interest income                                            (1,061)         (1,358)           (896)
  Other (income) expense, net                                 1,991            (419)         (1,487)
  Medicare and Medicaid audit adjustments                    29,000            --              --
  Restructuring costs                                        20,464          33,447            --
                                                       ------------    ------------    ------------
    Total costs and expenses                                503,640         554,169         473,639
                                                       ------------    ------------    ------------
INCOME (LOSS) BEFORE INCOME TAXES                           (66,052)        (27,496)          6,716

PROVISION (BENEFIT) FOR INCOME TAXES                          7,034          (5,864)          2,955
                                                       ------------    ------------    ------------

NET INCOME (LOSS)                                      $    (73,086)   $    (21,632)   $      3,761
                                                       ============    ============    ============


EARNINGS (LOSS) PER COMMON SHARE:

  Basic                                                $      (3.16)   $       (.90)   $        .16
                                                       ============    ============    ============
  Diluted                                              $      (3.16)   $       (.90)   $        .15
                                                       ============    ============    ============

WEIGHTED AVERAGE COMMON
  SHARES OUTSTANDING:

  Basic                                                      23,162          23,939          23,668
                                                       ============    ============    ============
  Diluted                                                    23,162          23,939          24,577
                                                       ============    ============    ============

</TABLE>




                 See notes to consolidated financial statements


                                      F-3
<PAGE>   43




STAFF BUILDERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share data)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                      Preferred  Additional
                                                  Common Stock
                                                -------------------    Stock     Paid-In     Accumulated
                                                  Shares    Amount    Class A    Capital       Deficit        Total
                                                ----------  -------  ---------  ----------  -------------  ----------
<S>                                             <C>         <C>      <C>        <C>         <C>           <C>
Balances, March 1, 1996                         23,537,320   $  235    $    1   $   72,767   $  (17,693)   $  55,310

Additional common stock in
  connection with a 1987 acquisition                 4,870        -                                                -

Common stock issued - exercise of
  stock options, net of 15,232 shares
  used to pay for shares                            23,768        -                     29                        29

Exercise of common stock warrants                  160,680        2                    193                       195

Common stock issued-employee
  stock purchase plan                              234,693        2                    579                       581

Purchase and retirement of common stock           (155,000)      (1)                  (409)                     (410)

Net Income                                                                                        3,761        3,761
                                                ----------   ------    ------   ----------   ----------    ---------
Balances, February 28, 1997                     23,806,331      238         1       73,159      (13,932)      59,466

Additional common stock in
  connection with a 1987 acquisition                   171        -                                                -

Exercise of common stock warrants                    5,000        -                     11                        11

Common stock issued-employee
  stock purchase plan                              254,101        2                    522                       524

Net (Loss)                                                                                      (21,632)     (21,632)
                                                ----------   ------    ------   ----------   ----------    ---------
Balances, February 28, 1998                     24,065,603      240         1       73,692      (35,564)      38,369

Additional common stock in
  connection with a 1987 acquisition                26,935        -                      -                         -

Exercise of stock options                           20,000        -                     35                        35

Purchase and retirement of
  common stock                                  (5,088,060)     (50)                (4,719)                   (4,769)

Conversion of preferred
  stock into common stock                        4,269,820       43        (1)        (242)                     (200)

Common stock issued-employee
  stock purchase plan                              325,082        3                    289                       292

Net (Loss)                                                                                      (73,086)     (73,086)
                                                ----------   ------    ------   ----------   ----------    ---------
Balances, February 28, 1999                     23,619,380   $  236    $    -   $   69,055   $ (108,650)   $ (39,359)
                                                ==========   ======    ======   ==========   ==========    =========
</TABLE>




                 See notes to consolidated financial statements


                                      F-4
<PAGE>   44



STAFF BUILDERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                               YEARS ENDED
                                                                  FEBRUARY      FEBRUARY      FEBRUARY
                                                                  28, 1999      28, 1998      28, 1997
                                                               -----------    -----------    -----------
<S>                                                            <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                            $   (73,086)   $   (21,632)   $     3,761
  Adjustments to reconcile net income (loss) to
    net cash provided by (used in) operations:
    Depreciation and amortization of fixed assets                    3,991          3,805          2,757
    Amortization of intangibles and other assets                     1,314          2,807          2,623
    Write-off of goodwill and intangible assets                     16,327         24,540           --
    Write-off of investments and other assets                        1,724          1,198           --
    Write-off of fixed assets                                          911           --             --
    Increase (decrease) in other long term liabilities               5,100            424           (758)
    Allowance for doubtful accounts                                  3,340            800            600
    Deferred income taxes                                            8,540         (7,101)           548
    Gain on sale of assets                                          (1,148)          (290)        (1,247)
  Change in operating assets and liabilities:
    Accounts receivable                                              1,972         (6,391)       (23,718)
    Prepaid expenses and other current assets                       (1,216)           415         (1,193)
    Accounts payable                                                 3,271          2,646          4,977
    Accrued expenses                                                  (918)         7,719         (6,525)
    Increase in Medicare and Medicaid audit liabilities             28,092           --             --
    Increase in periodic interim payment liability                  14,364          4,320            275
    Other assets                                                       451            211         (1,529)
                                                               -----------    -----------    -----------
    Net cash provided by (used in)
     operating activities                                           13,029         13,471        (19,429)


CASH FLOWS FROM INVESTING ACTIVITIES:
  Acquisitions, net of cash acquired                                (2,876)       (16,226)       (10,327)
  Purchase of fixed assets                                          (5,020)        (1,029)        (2,334)
  Proceeds from disposal of assets                                     576            855            775
                                                               -----------    -----------    -----------
    Net cash used in investing activities                           (7,320)       (16,400)       (11,886)
                                                               -----------    -----------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from Employee Stock Purchase Plan                           292            524            581
  Proceeds from exercise of stock options                               35             11             29
  Proceeds from exercise of warrants                                  --             --              195
  Purchase and retirement of common stock                           (4,770)          --             (410)
  Increase (decrease) in borrowings
   under revolving line of credit                                    9,094         (3,978)        21,565
  Proceeds from acquisition line of credit                            --           12,625           --
  Proceeds from other notes payable                                   --              581          5,727
  Payment of notes payable and other
   long-term liabilities                                           (11,110)        (6,083)        (3,076)
                                                               -----------    -----------    -----------
    Net cash provided by (used in) financing
     activities                                                     (6,459)         3,680         24,611
                                                               -----------    -----------    -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                  (750)           751         (6,704)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                       2,757          2,006          8,710
                                                               -----------    -----------    -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD                       $     2,007    $     2,757    $     2,006
                                                               ===========    ===========    ===========

SUPPLEMENTAL DATA:
  Cash paid for:

    Interest                                                   $     3,963    $     3,449    $     1,081
                                                               ===========    ===========    ===========
    Income taxes, net                                          $     2,287    $     2,344    $     1,867
                                                               ===========    ===========    ===========
Fixed assets purchased through
  capital lease agreements                                     $    16,323    $     2,351    $     4,770
                                                               ===========    ===========    ===========
Acquisition of businesses through
  issuance of notes payable                                    $       760    $      --      $     3,113
                                                               -----------    -----------    -----------
</TABLE>


                 See notes to consolidated financial statements



                                      F-5
<PAGE>   45



STAFF BUILDERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 28, 1999 ("FISCAL 1999"), FEBRUARY 28, 1998 ("FISCAL 1998")
AND FEBRUARY 28, 1997 ("FISCAL 1997")
--------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT WHERE INDICATED OTHERWISE AND, FOR PER SHARE
AMOUNTS)

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

                  NATURE OF BUSINESS

                  Staff Builders, Inc. ("Staff Builders" or the "Company") is
a national provider of home health care services and supplemental
staffing, including medical services provided through its wholly-owned
subsidiary, ATC Healthcare Services, Inc. ("ATC") and information
technology services provided through its 81.8% owned subsidiary,
Chelsea Computer Consultants, Inc. ("Chelsea").

                  On March 22, 1999, the Company's Board of Directors approved a
plan to separate its home health care business from its supplemental staffing
business and to create a separate, publicly-traded company engaged exclusively
in providing home health care services. To accomplish this separation of its
businesses, the Company's Board of Directors established a new, wholly-owned
subsidiary, Tender Loving Care Health Care Services, Inc. ("TLC") which will
acquire 100% of the outstanding capital stock of the Staff Builders subsidiaries
engaged in the home health care business. The spin-off will be effected through
a pro rata distribution to Staff Builders' stockholders of all the shares of
common stock of TLC owned by Staff Builders. The distribution will be made by
issuing one share of TLC common stock for every two shares of Staff Builders
common stock outstanding on the record date of the spin-off. Based upon the
23,619,388 shares of Staff Builders common stock outstanding on May 28, 1999,
the Company estimates that 11,809,694 shares of TLC common stock will be
distributed to holders of Staff Builders common stock. Staff Builders'
supplemental staffing business will remain with Staff Builders. The completion
of the spin-off is subject to the satisfaction of certain conditions, including
obtaining certain regulatory approvals and bank financing for each of the home
health care company and the supplemental staffing company.

                  PRINCIPLES OF CONSOLIDATION

                  The accompanying consolidated financial statements include the
accounts of Staff Builders, its wholly-owned subsidiaries and its majority owned
subsidiary. The Company maintains its records on a fiscal year ending the last
day in February. All material intercompany accounts and transactions have been
eliminated. Certain prior period amounts have been reclassified to conform with
the fiscal 1999 presentation.


                                      F-6
<PAGE>   46

                  A substantial portion of the Company's service revenues are
derived under a unique form of franchising which is a license agreement under
which independent companies or contractors represent the Company within a
designated territory. These licensees assign Company personnel including
registered nurses, therapists and home health aides to service the Company's
clients using the Company's trade names and service marks. The Company pays and
distributes the payroll for the direct service personnel who are all employees
of the Company, administers all payroll withholdings and payments, bills the
customers and receives and processes the accounts receivable. The licensees are
responsible for providing an office and paying related expenses for
administration including rent, utilities and costs for administrative personnel.

                  The Company owns all necessary health care related permits and
licenses and, where required, certificates of need for operation of licensee
offices. The revenues generated by the licensees along with the related accounts
receivable belong to the Company. The revenues and related direct costs are
included in the Company's consolidated service revenues and operating costs.

                  The Company pays a distribution or commission to the licensees
based on a defined formula of gross profit generated. Generally, the Company
pays the licensees 60% of the gross profit attributable to the non-Medicare
operations of the licensee. The payment to the Company's licensees related to
Medicare operations is adjusted for cost limitations and reimbursement of
allowable Medicare costs. There is no payment to the licensees based solely on
revenues.

                  For fiscal 1999, 1998 and 1997, total distributions or
commissions paid to licensees of approximately $50.6 million, $92.9 million and
$88.6 million, respectively, were included in the Company's general and
administrative expenses. These amounts consist of $38.3 million, $84.1 million
and $82.4 million for home health care licensees and $12.3 million, $8.8 million
and $6.2 million for supplemental staffing licensees, respectively.

                  In October 1997, the Company purchased 60.9% of the
outstanding common stock of Chelsea. Together with the 20.9% of the common stock
of Chelsea purchased in September 1996, the Company owns 81.8% of the
outstanding common stock of Chelsea. In connection with the Company's plans to
spin-off its home health care business, management has decided to retain its
investment in Chelsea by combining the Chelsea operations with its existing
supplemental staffing business. Accordingly, the accounts of Chelsea, which were
previously accounted for on the equity basis, are now included in the Company's
consolidated financial statements within the supplemental staffing business
segment, with prior years reclassified on a consistent basis. Earnings
attributable to the minority interest in Chelsea, the amounts of which are not
significant, are included in other (income) expense in the accompanying
statements of operations and accrued expenses in the accompanying balance
sheets.



                                      F-7
<PAGE>   47

                  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,
revenues and expenses as well as the disclosure of contingent assets and
liabilities in the financial statements. Actual results could differ from those
estimates.

                  CASH AND CASH EQUIVALENTS

                  Cash and cash equivalents include certificates of deposit and
commercial paper purchased with a maturity of less than three months.

                  FIXED ASSETS

                  Fixed assets, consisting of equipment (primarily computer
hardware and software), furniture and fixtures, and leasehold improvements, are
stated at cost and depreciated from the date placed into service over the
estimated useful lives of the assets using the straight-line method. The
estimated useful lives of the related assets are generally five to seven years.

                  GOODWILL AND INTANGIBLE ASSETS

                  The excess of the purchase price and related acquisition costs
over the fair market value of the net assets of the businesses acquired is
amortized on a straight-line basis over periods ranging from five to forty
years. Intangible assets include customer lists, which are being amortized over
five years on a straight-line basis.

                  In fiscal 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." This Statement
requires that certain assets be reviewed for impairment and, if impaired,
remeasured at fair value, whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. In the fourth
quarter of fiscal 1999 and 1998, the Company wrote off $15.3 million and $24.5
million, respectively, of goodwill and intangible assets. These amounts
primarily resulted from the Company's assessment of the adverse change in health
care reform (See Note 2).

                  REVENUE RECOGNITION

                  The Company recognizes revenue on the accrual basis as the
related services are provided to customers. Revenues are recorded net of
contractual or other allowances to which customers are entitled. Employees
assigned to particular customers may be changed at the customer's request or at
the Company's initiation. In addition, for financial reporting purposes, a
provision for uncollectible and
doubtful accounts is provided for amounts billed to customers which

                                      F-8
<PAGE>   48

may ultimately be uncollectible due to billing errors, documentation disputes or
the customer's inability to pay.


                  Revenues generated from the sales of licensees and initial
licensee fees are recognized upon signing of the domestic license agreement, if
collectibility of such amounts is reasonably assured, since the Company has
performed substantially all of its obligations under its license agreements by
such date. In circumstances where a reasonable basis does not exist for
estimating collectibility of the proceeds of the sales of license and initial
license fees, such amounts are deferred and recognized as collections are made,
utilizing the cost recovery method (see Note 6), or until such time that
collectibility is reasonably assured.

                  Medicare reimburses the Company for covered items and services
at the lower of the Company's cost as determined by Medicare, cost limits
established by the Federal government, or the amount charged by the Company.
Revenues generated from Medicare services are recorded when services are
provided at an estimated reimbursement rate. Certain factors used to develop
these rates are subject to review and adjustment by the appropriate governmental
authorities and may result in additional amounts due to or due from the Company.
Management reduces revenues by its estimate of the amount of net adjustments
which should ultimately occur. Adjustments, if any, are recorded to these
estimates in the period during which they arise.

                  INCOME TAXES

                  Deferred income taxes result from timing differences between
financial and income tax reporting which primarily include the deductibility of
certain expenses in different periods for financial reporting and income tax
purposes. A valuation allowance is provided against net deferred tax assets
unless, in management's judgment, it is more likely than not that such deferred
tax asset will be realized.

                  EARNINGS (LOSS) PER SHARE

                  The basic net earnings (loss) per share is computed using
weighted average number of common shares outstanding for the applicable period.
The diluted earnings (loss) per share is computed using the weighted average
number of common shares plus common equivalent shares outstanding, except if the
effect on the per share amounts of including equivalents would be anti-dilutive.

                  FAIR VALUE OF FINANCIAL INSTRUMENTS

                  The carrying amount of cash and cash equivalents, notes
receivable from licensees, long-term debt and other liabilities related to
acquisitions approximate fair value.

                  DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE

                  In fiscal 1999, the Company adopted Statement of Financial



                                      F-9
<PAGE>   49

Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 provides standards which require
publicly held companies to report about operating segments in annual financial
statements together with related disclosures about products and services, major
customers and geographic areas (see Note 5).

                  NEW ACCOUNTING PRONOUNCEMENTS


                  In April 1998, the FASB adopted Statement of Position No.
98-5, "Reporting on the Costs of Start-Up Activities" ("SOP No. 98-5") which
requires that costs previously capitalized as start-up costs will be expensed as
incurred. SOP No. 98-5 becomes effective for fiscal years beginning after
December 15, 1998, with earlier application encouraged. The adoption of SOP No.
98-5 will not have a material effect on the Company's consolidated financial
statements.

                  During 1998, the FASB issued Statement of Financial Accounting
Standards (SFAS No. 133), "Accounting for Derivative Instruments and Hedging
Activities". The Company does not expect the adoption of this new accounting
pronouncement to have a material effect, if any, on its financial condition or
results of operations.

2.  HEALTH CARE REFORM AND RELATED RESTRUCTURING COSTS

                  The Federal Balanced Budget Act of 1997 ("BBA") resulted in
significant changes to cost based reimbursement for Medicare home health care
providers. Although a cost based reimbursement system remains, the BBA reduced
the cost limits and created new per-beneficiary limits. The BBA provides for an
interim payment system ("IPS") which became applicable for the Company on March
1, 1998 and will remain in effect until the adoption of a new prospective
payment system which is scheduled to be effective for all home health care
agencies on October 1, 2000. The Federal Health Care Financing Administration
committed to the revised schedule in a report presented to Congress dated
February 4, 1999. The effect of the changes under IPS is to reduce the limits
for the amount of costs that are reimbursable to home health care providers
under the Medicare program. Accordingly, the Company together with many of its
licensees have modified their operations as needed to meet the demands of IPS,
including taking steps to reduce costs and maximize operational efficiencies
within the constraints of the IPS.

                  During the fourth quarter of fiscal 1998, management prepared
the home health care business segment of the Company for the impact of IPS and
for long term growth. As a result, the Company implemented a corporate-wide
restructuring and cost reduction program.
 These actions, together with the Company's assessment of the impact of health
care reform legislation, resulted in a pre-tax charge in the fourth quarter of
fiscal 1998 of $33.4 million. During the quarter ended November 30, 1998, as a
result of the Company's further operating modifications, including the
additional closure and



                                      F-10
<PAGE>   50

conversion of many locations from licensed to company-owned operations, the
Company wrote off or reserved approximately $4.5 million.

                  In fiscal 1999, management further evaluated the carrying
value of the Company's goodwill and intangible assets in light of current home
health care industry conditions and its impact on the Company's operations. Such
valuation resulted in an additional write-off of home health care goodwill of
$15.3 million leaving a remaining net carrying value of goodwill and intangible
assets as of February 28, 1999 of $5.1 million in the Company's home health care
business segment. The fiscal 1998 write-off of goodwill and intangible assets
included $21.5 million for the home health care segment and $3.0 million for the
supplemental staffing segment. The write-off of goodwill and intangible assets
is required under SFAS No. 121.

                  A summary of restructuring costs is as follows (in millions of
dollars):

<TABLE>
<CAPTION>
                                                   YEARS ENDED
                                                   FEBRUARY 28,
                                                  --------------
                                                  1999      1998
                                                  ----      ----
<S>                                               <C>       <C>
          Write-off of goodwill and
            intangible assets                     $15.3     $24.5
          Employee severance and
            reduction in size                       0.9       1.0
          Write-down of home health care
            related investments and receivables     0.9       6.3
          Accrued litigation related costs          2.2       1.2
          Receivables from converted
            licensee locations                      1.1        -
          Other                                     0.1       0.4
                                                  -----     -----
          Total restructuring costs               $20.5     $33.4
                                                  =====     =====
</TABLE>


                  As of February 28, 1999, all amounts provided have either been
recorded as direct write-downs of assets or expended from the reserves, except
for the remaining accrued litigation related costs described in Note 16.

3.  MEDICARE AND MEDICAID AUDIT ADJUSTMENTS

                  As a home health care provider, the Company is subject to
extensive and changing state and Federal regulations relating to the licensing
and certification of its offices and the sale and delivery of its products and
services. The Federal government and Medicare fiscal intermediaries have become
more vigilant in their review of Medicare reimbursements to home health care
providers generally, and have become more restrictive in their interpretation of
those costs for which reimbursement will be allowed to such providers. These
regulatory agencies have increased the number of audits performed and have
applied a more intensive degree of scrutiny in the conduct of these audits.


                                      F-11
<PAGE>   51


                  During the quarter ended November 30, 1998, the Medicare
fiscal intermediary completed and issued the results of 88 audits for the fiscal
year ended February 28, 1997, including 25 audits conducted on site at branch
operating locations. These results together with the results of the home office
audit for the year ended February 28, 1997, indicated an aggregate liability of
approximately $9.5 million.

                  Additionally, the Company has recorded an accrual for third
party liability ("TPL") to state Medicaid agencies which have claimed that the
Company did not follow proper billing procedures in several locations. These
state Medicaid agencies have challenged the eligibility of individuals for whom
services were provided. The related claims are being reviewed by the state
agencies encompassing several prior years for which the Company has been paid.
The Company has reached a settlement for a portion of its TPL liability and is
continuing to negotiate to resolve amounts payable to these state agencies.

                  While the Company believes that it will ultimately prevail in
many of these cases, it has accrued for the anticipated losses for those cases
in which it will not prevail. Based upon the Company's consideration of the
scope of audits being performed by the fiscal intermediary, the issues raised
for such periods, the effect of the these issues on periods yet to be audited,
and the balance of liabilities previously provided, the company recorded
aggregate expense of $29.0 million in the quarter ended November 30, 1998. The
resultant liability together with the balance of liabilities previously
established, less amounts expended during the fourth quarter of fiscal 1999,
results in an aggregate audit liability of $28.1 million as of February 28, 1999
for Federal and state audit adjustments which includes $17.1 million and $11.0
million for Federal and state liabilities, respectively. (See Note 12). The
Company continues to appeal many audit issues and has engaged outside
professional advisors to support the Company's positions on these issues. The
Company anticipates that any resolution of the appeals may take up to several
years.

4.  BANK DEFAULT AND GOING CONCERN MATTERS

                  As described more fully in Note 13, the Company has a secured
credit facility with a bank. On January 14, 1999, the bank provided the Company
with written notification that, in its opinion, the Company's non-compliance
with certain financial covenants as of November 30, 1998 constitutes an event of
default under the terms of the credit facility agreement. Those covenants
require the Company to maintain a minimum level of net worth and a maximum ratio
of senior debt to net worth, failures of which resulted from losses incurred in
connection with the recording of Medicare and Medicaid audit adjustments (Note
3). At the time that the bank declared its opinion as to an event of default,
the Company had borrowed $39.4 million under the credit facility, including
$29.7 million and $9.7 million under the revolving line of credit and the
acquisition line of credit, respectively. The bank has advised the Company that
while it has no obligation to provide additional advances as a result of the
non-compliance with certain financial covenants, it is willing to consider
making additional advances to the Company under such conditions as it may
determine.


                                      F-12
<PAGE>   52
                  In connection with the bank's notice of default, the maximum
aggregate amount which can be borrowed under the credit facility was reduced
from $50 million to $40 million. Additionally, the bank increased the rate of
interest on all borrowings to 2.0% over the prevailing prime lending rate on its
revolving line of credit and 2.75% over the prevailing prime lending rate on its
acquisition line of credit (such prime lending rate being 7.75% as of February
28, 1999). The Company has classified its outstanding borrowings as a current
liability as of February 28, 1999 because the bank has the option to declare all
borrowings under the credit facility to become immediately due and payable. At
February 28, 1999 and 1998, the Company borrowed $35.4 million and $29.4
million, respectively, under the credit facility. A commitment fee on the unused
portion of the credit facility is payable at the rate of .375% per annum,
together with an annual collateral management fee of $85. The Company's working
capital deficiency was $(39.8) million at February 28, 1999. Current liabilities
at February 28, 1999 include $22.7 million for Medicare and Medicaid audit
liabilities, $35.4 of outstanding borrowings under the secured credit facility
and $8.1 million for the current portion of other debt obligations. While the
Company cannot accurately determine the required payment dates for its total
Medicare and Medicaid audit liabilities, it has included $34.6 million thereof
in other long-term liabilities based upon its current estimate of when payments
would likely become due. In order to pay its current liabilities in the normal
course of business as well as to pay its liabilities to the Medicare and
Medicaid agencies as they become due, the Company is investigating alternative
sources of funding.

                  The above conditions raise substantial doubt about the ability
of the Company to continue as a going concern. As a result, management of the
Company is pursuing various strategies, including but not limited to,
negotiating with alternative lending sources, deferred payment terms for
Medicare and Medicaid audit liabilities as well as for any repayments of
Medicare periodic interim payments(s) ("PIP") and deferred payment terms for
other creditors. Further, management is implementing an intensified collection
effort and has obtained a deferred payment schedule for the repayment of excess
PIP payments made to the Company by the Federal government as well as for audit
liabilities assessed to date. Such payment schedule requires these amounts to be
paid in 24 equal monthly installments beginning in May 1999, as of June 1, 1999
no payments have been made pursuant to this schedule. As of February 28, 1999,
the total amount of excess PIP amounts received and settled Medicare audit
liabilities were approximately $19.0 million and $6.8 million, respectively. In
addition, the spin-off described in Note 1 will be completed only if the bank or
another lender creates separate credit facilities for the home health care
business under TLC and the supplemental staffing business retained by Staff
Builders, and allocates the aggregate pre-spin-off debt between those two
entities. However, there can be no assurance that these actions will be
successful to provide adequate funds for the Company's current level of
operations and to pay the Company's past-due obligations.




                                      F-13
<PAGE>   53

5.  SEGMENT REPORTING

     The Company operates in two reportable business segments, home health care
and supplemental staffing. Reportable segments have been identified based upon
how management has organized the business, the planned spin-off of the home
health care business, and the criteria in SFAS #131, "Disclosures about Segments
of an Enterprise and Related Information." Segment revenue consists of only
sales to outside customers. Segment gross margin consists of segment revenues
reduced by the direct costs of generating such revenues. Segment operating
profit consists of segment gross margin less general and administrative
expenses. General and administrative expenses incurred at the corporate level
have been allocated to segments based on the utilization of such services by
each segment.

                  The following table sets forth the selected results of
operations by business segment (in millions of dollars):

<TABLE>
<CAPTION>
                                                  Home Health Care
                                        -------------------------------------
                                               Year Ending February 28,
                                           1999          1998         1997
                                        -----------  -----------  -----------
<S>                                     <C>          <C>          <C>
Service revenues                        $     310.3  $     451.1  $     436.6

Sales of licensees and fees, net                2.2          1.1          1.0
                                        -----------  -----------  -----------

Total revenues                                312.5        452.2        437.6
                                        -----------  -----------  -----------

Gross margin                                  112.5        172.1        169.0

General & administrative
 expenses                                     122.1        161.0        159.2


Interest expense                                2.6          2.8          1.4

Depreciation and amortization
 expense                                        4.9          6.1          5.1

Other (income) expense                         50.0         28.4         (2.3)
                                        -----------  -----------  -----------

Income (loss) before
 income taxes                           $     (67.1) $     (26.2) $       5.6

Provision (benefit) for
 income taxes                           $       6.6  $      (5.3) $       2.5
                                        -----------  -----------  -----------
Net income (loss)                       $     (73.7) $     (20.9) $       3.1
                                        ===========  ===========  ===========


Total assets                            $      94.4  $     116.8  $     139.6
                                        ===========  ===========  ===========
</TABLE>



                                      F-14
<PAGE>   54

<TABLE>
<CAPTION>
                                                Supplemental Staffing
                                           ----------------------------------
                                                Year Ending February 28,
                                             1999        1998         1997
                                           ---------   ---------    ---------
<S>                                        <C>         <C>          <C>
Service revenues                           $   124.9   $    74.3    $    42.4

Sales of licensees and
 fees, net                                       0.2         0.2          0.4
                                           ---------   ---------    ---------


Total revenues                                 125.1        74.5         42.8
                                           ---------   ---------    ---------

Gross margin                                    26.0        16.3          9.9

General & administrative
 expenses                                       22.6        13.0          8.4

Interest expense                                 1.6         0.9          0.2

Depreciation and amortization
 expense                                         0.4         0.5          0.3

Other (income) expense                           0.4         3.2         (0.1)
                                           ---------   ---------    ---------

Income (loss) before
 income taxes                                    1.0        (1.3)         1.1

Provision (benefit) for
 income taxes                                    0.4        (0.6)         0.4
                                           ---------   ---------    ---------

Net income (loss)                          $     0.6   $    (0.7)   $     0.7
                                           =========   =========    =========

Total assets                               $    52.1   $    41.9    $    16.6
                                           =========   =========    =========
</TABLE>





                                      F-15
<PAGE>   55


<TABLE>
<CAPTION>

                                                     Consolidated
                                           -----------------------------------
                                                 Year Ending February 28,
                                             1999          1998        1997
                                           ---------    ---------    ---------
<S>                                        <C>          <C>          <C>
Service revenues                           $   435.2    $   525.4    $   479.0

Sales of licensees and
 fees, net                                       2.4          1.3          1.4
                                           ---------    ---------    ---------

Total revenues                                 437.6        526.7        480.4
                                           ---------    ---------    ---------
Gross margin                                   138.5        188.4        178.9

General & administrative
 expenses                                      144.7        174.0        167.6

Interest expense                                 4.2          3.7          1.6

Depreciation and amortization
 expense                                         5.3          6.6          5.4

Other (income) expense                          50.4         31.6         (2.4)
                                           ---------    ---------    ---------
Income (loss) before
 income taxes                                  (66.1)       (27.5)         6.7

Provision (benefit) for
 income taxes                                    7.0         (5.9)         2.9
                                           ---------    ---------    ---------
Net income (loss)                          $   (73.1)   $   (21.6)   $     3.8
                                           =========    =========    =========
Total assets                               $   146.5    $   158.7    $   156.2
                                           =========    =========    =========
</TABLE>


6.   LICENSEE OPERATIONS

                  Notes receivable from licensees generally bear interest at the
prevailing prime lending rate plus three percent and are generally payable over
a term of ten years. The balance of these notes receivable at February 28, 1999
and February 28, 1998 amounted to $726 and $1,734, net of deferred income
reflected as a valuation reserve for financial reporting purposes of $2,482 and
$4,387, respectively. The net balances of these notes at February 28, 1999 and
February 28, 1998 include $118 and $306 in Prepaid Expenses and Other Current
Assets and $608 and $1,428 in Other Assets, respectively.

                  The decrease in the foregoing balances reflect a reduction in
the number of licensees during fiscal 1999. The Company acquired the rights to
operate 34 home health care locations and sold or closed 38 other home health
care locations previously operated by licensees. Licensee notes receivable from
acquired locations had been substantially offset by valuation allowances and
therefore no charge to operations was required as a result of the transactions.
Additional consideration, if any, paid to acquire licensee operations is
included in the acquisitions described in Note 7.


                                      F-16
<PAGE>   56

                  The remaining balance of notes receivable from licensees
related to the home health care and supplemental staffing business segments are
as follows:


<TABLE>
<CAPTION>

                                        February 28, 1999                        February 28, 1998
                         -----------------------------------------    ------------------------------------------
                           Home                                        Home
                           Health       Supplemental                   Health        Supplemental
                           Care         Staffing          Total        Care          Staffing         Total
                         -----------    -----------    -----------    -----------    -----------    -----------
<S>                      <C>            <C>            <C>            <C>            <C>            <C>
Notes receivable         $     2,845    $       363    $     3,208    $     5,800    $       321    $     6,121
Deferred income               (2,182)          (300)        (2,482)        (4,086)          (301)        (4,387)
                         -----------    -----------    -----------    -----------    -----------    -----------
Net                      $       663    $        63            726    $     1,714    $        20          1,734
                         ===========    ===========                   ===========    ===========
Less current portion                                          (118)                                        (306)
                                                       -----------                                  -----------
Long term notes receivable                             $       608                                  $     1,428
                                                       ===========                                  ===========
</TABLE>


                   Sales of licensees and fees, net were $2,424, $1,275 and
$1,326 for fiscal 1999, 1998 and 1997, respectively. The home health care
portion of these amounts were $2,234, $1,119 and $987, for fiscal 1999, 1998 and
1997, and the supplemental staffing portion of these amounts were $190, $156 and
$339, respectively.

                   During fiscal 1999, fiscal 1998 and fiscal 1997, $228, $473
and $444, respectively, of home health care notes receivable previously not
recognized as income were collected and included in revenues. Additionally, the
initial franchise fees received in fiscal 1999, 1998 and 1997 for home health
care franchises were $182, $135 and $488, respectively. Sales of licensees and
fees, net for the fiscal 1999 period includes $1,223 from the sale of five home
health care franchise businesses. Further, license fees generated from the
Company's international franchise program were $601 and $512 in fiscal 1999 and
fiscal 1998, respectively. Included in the international fees were initial
franchise fees of $441 and $502 for fiscal 1999 and 1998, respectively, from the
Company's master license agreement with a home health care company based in
Tokyo, Japan. As of March 1998, the Company received the entire balance of the
master license fee totalling $1.2 million and is recording the related income as
it is earned through September 30, 1999. Under its revised agreement which
expires in October 2002 with a five-year renewable term, the Company will
receive periodic royalty payments based upon the Japanese company's service
revenues. Also included in the fiscal 1999 international franchise fees is $101
of such periodic royalties. Although the contract life has changed to expire in
October 2002, the $1.2 million franchise fee has not changed. Also included in
the fiscal 1999 international franchise fees was $59 pursuant to a master
license fee agreement with a Brazilian company.

                   The Company has performed substantially all of its
obligations as required under the terms of its franchise agreements. Interest
income on franchise notes receivable is included in other income.

                   In September 1996, in connection with the acquisition of a
supplemental staffing business, a corporation acquired the rights to operate
this business as a franchise and paid a fee of $75 to the Company. A majority of
the stock of this corporation is owned by two family members of one of the
Company's executive officers.




                                      F-17
<PAGE>   57

                   In April 1992, one of the Company's franchises was acquired
by a corporation owned by a family member of one of the Company's executive
officers. The purchase price for the franchise included the assumption of a note
payable to the Company of $845 of which $645 remains outstanding at February 28,
1999. The note bears interest at the prevailing prime lending rate and matures
in 2009.

7.   ACQUISITIONS

                   During fiscal 1999, 1998 and 1997, the Company made numerous
acquisitions for which consideration was paid in cash, the issuance of notes
payable and the assumption of certain liabilities. The transactions were
accounted for as purchases and, accordingly, the results of operations of the
acquired businesses are included in the accompanying consolidated financial
statements from their respective dates of acquisition.

                   In fiscal 1999, the Company acquired the rights to 18 home
health care locations previously operated by licensees for aggregate
consideration of $3.7 million which included cash paid of $2.1 million,
liabilities assumed of $800 and the write-off of notes receivable of $800.
Additionally, the Company acquired ten home health care businesses for aggregate
consideration of approximately $800, including cash paid of $600 and liabilities
assumed of $200.

                   In fiscal 1998, the Company acquired the assets of nine
businesses, consisting of seven home health care and two supplemental staffing
operations, which added six locations. The aggregate consideration included cash
paid of approximately $3.7 million and liabilities assumed of approximately $1.3
million.

                   In fiscal 1997, the Company acquired the assets of 19
businesses, consisting of 17 home health care and two supplemental staffing
operations, which added 33 locations. The aggregate consideration included net
cash paid of $8.2 million, the issuance of notes payable of $3.1 million and
liabilities assumed of $1.0 million.

                  The effect of the fiscal 1999 and 1998 acquisitions on
revenue, net loss and net loss per share on an unaudited pro forma basis for
fiscal 1999 and 1998 is not material. Revenues, net income and earnings per
share, on an unaudited pro forma basis for the year ended February 28, 1997, if
the fiscal 1998 and fiscal 1997 acquisitions had occurred on March 1, 1996,
would have approximated $500 million, $4.9 million and $.20, respectively.
Revenues, net income and earnings per share on an unaudited pro forma basis for
the year ended February 29, 1996, if the fiscal 1997 and 1996 acquisitions had
occurred on March 1, 1995, would have approximated $448 million, $2.6 million
and $.10, respectively.




                                      F-18
<PAGE>   58

                   In connection with the fiscal 1999 and fiscal 1998
acquisitions, assets acquired and consideration paid was as follows:

<TABLE>
<CAPTION>
                                               1999          1998
                                              ------        ------
<S>                                          <C>           <C>
        Fair value of assets acquired, net   $ 4,498       $ 4,904
        Net cash paid for acquired
         assets and stock                     (2,844)       (3,724)
        Liabilities assumed and notes        -------       -------
         payable issued for acquisitions     $ 1,654       $ 1,180
                                             =======       =======
</TABLE>

      The fair value of assets acquired is net of the write-off of notes
receivable from ex-licensees of approximately $800.

8.   FIXED ASSETS

     Fixed assets consist of the following:

<TABLE>
<CAPTION>
                                                 FEBRUARY 28,
                                             --------------------
                                               1999         1998
                                             -------      -------
<S>                                          <C>          <C>
        Computer equipment and
          software (see Note 13)             $23,897      $11,196
        Office equipment, furniture
          and fixtures                        12,177        7,490
        Leasehold improvements                 1,303        1,106
        Land and buildings                       106          106
                                             -------      -------
        Total, at cost                        37,483       19,898
        Less accumulated depreciation
          and amortization                     9,496        8,276
                                             -------      -------
        Fixed assets, net                    $27,987      $11,622
                                             =======      =======
</TABLE>


      Computer equipment and software includes $13.7 million for computer
equipment and year 2000 compliant software. Such amount is pursuant to a
six-year lease agreement which requires payments through December 2004 (See Note
13). Additionally, office equipment includes the cost of year 2000 compliant
systems in other areas aggregating $3.2 million. The combined cost of these
systems will be amortized over the life of the software from the dates placed
into service.

      During fiscal 1999, the Company wrote off fixed assets relating to closed
locations and obsolete computer equipment which is included in restructuring
costs. During fiscal 1999 and fiscal 1998, the Company wrote off fully
depreciated fixed assets of approximately $1.4 million and $1.7 million,
respectively.


9.    INTANGIBLE ASSETS, NET

     Intangible assets consist of the following amounts by business segment:

<TABLE>
<CAPTION>
                                                              February 28,
                          ----------------------------------------------------------------------------------
                                           1999                                      1998
                          ----------------------------------------   ---------------------------------------
                            Gross      Accumulated                     Gross      Accumulated
                             Cost      Amortization        Net          Cost      Amortization       Net
                          ----------   -------------    ----------   ----------   ------------    ----------
<S>                       <C>          <C>              <C>          <C>          <C>             <C>
Home health care          $   14,052   $      (8,926)   $    5,126   $   27,648   $     (9,064)   $   18,584
                          ----------   -------------    ----------   ----------   ------------    ----------

Supplemental staffing         24,141          (2,176)       21,965       23,168         (1,457)       21,711
                          ----------   -------------    ----------   ----------   ------------    ----------

Intangible assets:        $   38,193   $     (11,102)   $   27,091   $   50,816   $    (10,521)   $   40,295
                          ==========   =============    ==========   ==========   ============    ==========
</TABLE>




                                      F-19
<PAGE>   59

     The above amounts are net of the cumulative write-offs of goodwill and
intangibles which were approximately $39.8 million and $24.5 million at February
28, 1999 and February 28, 1998, respectively.

10.   ACCRUED EXPENSES

     Accrued expenses include $4,384 and $6,877 at February 28, 1999 and
February 28, 1998, respectively, of accrued distributions payable to licensees.

11.  ACCRUED PAYROLL AND PAYROLL RELATED EXPENSES

     Accrued payroll and payroll related expenses consist of the following:

<TABLE>
<CAPTION>
                                                 FEBRUARY 28,
                                             -------------------
                                               1999        1998
                                             -------     -------
<S>                                          <C>         <C>
     Accrued payroll                         $ 7,602     $ 9,006
     Accrued insurance                        12,503      11,807
     Accrued payroll taxes                     4,072       5,882
     Other                                     1,573       1,457
                                             -------     -------
     Total                                   $25,750     $28,152
                                             =======     =======
</TABLE>

12.  MEDICARE AND MEDICAID LIABILITIES

     Medicare and Medicaid liabilities include amounts payable or estimated to
be payable to Federal or state government agencies as a result of the Company's
participation in Medicare and Medicaid programs. These amounts consist of the
following:

<TABLE>
<CAPTION>
                                                FEBRUARY 28,
                                            --------------------
                                              1999        1998
                                            --------    --------
<S>                                         <C>         <C>
     Medicare:
     Periodic interim payment
      liability ("PIP")(a)                  $ 18,959    $  4,595
     Completed audits (b)                     10,220           -
     Audits in process or
      net yet conducted (c)                   17,155       7,330
                                            --------    --------
                                              46,334      11,925
     Medicaid:
     Completed assessments (d)                 4,600           -
     Assessments in process or
      not yet conducted (e)                    6,347           -
                                            --------    --------
                                              10,947           -
                                            --------    --------
     Total                                    57,281           -
     Less current portion                    (22,673)    (11,925)
                                            --------    --------
     Long term Medicare and
      Medicaid liabilities                  $ 34,608    $      -
                                            ========    ========
</TABLE>



                                      F-20
<PAGE>   60

     (a)  PIP liability represents amounts received from Medicare in excess of
          current volume of business which are scheduled to be repaid in 24
          equal monthly installments beginning in May 1999.

     (b)  The fiscal intermediary has completed audits for which the Company has
          received a Notice of Provider Reimbursement.

     (c)  The fiscal intermediary has not yet commenced an audit or is currently
          conducting audits for which no Notice of Provider Reimbursement has
          been received.


     (d)  The Company has obtained payment terms which require repayment equal
          to 25% of current remittances.

     (e)  The state Medicaid agencies have not yet commenced an audit or are
          currently conducting audits for which no notice of repayment has yet
          been received.

     The above amounts have been classified as current liabilities unless a
formal or informal agreement has been reached to defer certain payments beyond
February 29, 2000 or, based upon audit timetables, management does not expect
that the audit will be completed and a request for payment received until after
February 29, 2000.


13.  LONG-TERM DEBT
     Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                 FEBRUARY 28,
                                             -------------------
                                               1999        1998
                                             -------     -------
<S>                                          <C>         <C>
     Borrowings under a secured revolving
       line of credit(a)                     $26,681     $17,587
     Borrowings under acquisition
       line of credit (a)                      8,680      11,836
     Obligations under capital leases(b)      20,000       6,606
     Notes payable and other liabilities
       related to acquisitions(c)              5,043       5,225
     Other note payable (d)                    1,707       3,635
     Chelsea notes payable (e)                 1,098       2,283
                                             -------     -------
     Total                                    63,209      47,172
     Less current portion                     43,460      10,664
                                             -------     -------
     Long-term debt(f)                       $19,749     $36,508
                                             =======     =======
</TABLE>


      As described in Note 4, the bank has advised the Company that in its
opinion the Company is presently in default of its bank agreement.
Accordingly, at February 28, 1999 such bank debt is shown as a current
liability. The following information provides relevant detail about the specific
terms of the outstanding debt.




                                      F-21
<PAGE>   61

(a) The Company has a secured credit facility which consists of a revolving line
of credit, an acquisition line of credit and a standby letter of credit
facility, under which the Company can borrow up to an aggregate amount of $40
million. Amounts borrowed under the revolving line of credit are collateralized
by a pledge of all the stock of the Company's subsidiaries, by all accounts
receivable and by liens on substantially all other assets of the Company and its
subsidiaries. The agreement contains certain financial covenants which, among
other things, (i) require the maintenance of a specified minimum defined level
of book net worth, a minimum ratio of net income before depreciation and
amortization to the sum of payments made for long term debt, unfunded capital
expenditures, stock repurchases and permitted acquisitions, and a maximum ratio
of senior debt to book net worth, (ii) limit the amount of unfunded capital
expenditures, and (iii) prohibit the declaration or payment of cash dividends.
Based upon the non-recurring charge recorded in the fourth quarter of fiscal
1998 which primarily consisted of the write-down of goodwill (See Note 2), the
Company obtained an amendment with its bank to provide some relief from the
terms of those covenants which required a specified level of net worth and net
income before depreciation and amortization.

     At February 28, 1999 and 1998, the amounts available for borrowing under
the credit facility were $2.3 million and $18.6 million, respectively. The
maximum amounts borrowed under the credit facility for fiscal 1999 and 1998 were
$40.1 million and $37.0 million, respectively. The maximum amount outstanding
under the revolving line of credit portion of the facility was $30.4 million and
$28.1 million in fiscal 1999 and 1998, respectively.

     The Company is permitted to borrow up to 75% of eligible accounts
receivable, up to the maximum amount of the credit facility less amounts
outstanding under the acquisition line of credit and any outstanding letters of
credit. No additional borrowings are permitted under the acquisition line of
credit.

         Effective March 25, 1999, the bank established a separate and distinct
borrowing base calculation which limited the maximum amount of borrowings for
each of the home health care operations and the supplemental staffing operations
to approximately $16.1 million and $15.5 million, respectively. Together with
the current outstanding balance of $8.4 million under the acquisition line of
credit, the aggregate maximum level of borrowings permitted remains at $40
million. From February 28, 1999 through May 28, 1999, the average outstanding
balance under the secured credit facility was $38.1 million.

(b) At February 28, 1999, the Company had capital lease agreements for computers
and other equipment through December 2004. The Company's capital lease
obligations includes a six-year lease agreement in the




                                      F-22
<PAGE>   62

amount of $13.7 million which requires monthly installments through December
2004. The net carrying value of the assets under capital leases was
approximately $19.7 million and $7.1 million at February 28, 1999 and February
28, 1998, respectively, and such amounts are included in Fixed Assets.

(c) At February 28, 1999, the Company had a balance of notes payable related to
acquisitions of $5.0 million. The notes payable bear annual interest from zero
to 10.50% and have maturity dates through September 2010.

(d) The Company has a secured term loan which bears annual interest at 6.69% and
requires monthly payments of $176 through December 1999.

(e) The Chelsea notes payable consists of two types of debt instruments, one of
which is a secured financing arrangement and two unsecured loans. The secured
financing arrangement provides for borrowings on lines of credit up to 90% of
Chelsea's eligible accounts receivable, not to exceed a maximum line of credit
of $4 million. This financing arrangement bears interest at the prevailing prime
lending rate plus two percent and includes an annual facility fee of $30. The
balance outstanding was $333 at February 28, 1999. Such lines of credit are
collateralized by a security interest in Chelsea's trade accounts receivable.

      The unsecured loans consist of certain related party transactions within
Chelsea. In January 1998, Chelsea borrowed $500 from its Chief Executive
Officer. This demand note bears interest at 15% with payments of interest only
beginning February 15, 1998. In November 1997, Chelsea borrowed $500 from its
Chief Operating Officer which loan bears annual interest at 10% and is payable
in ten quarterly installments of $57 beginning February 15, 1998. The aggregate
balance of these unsecured loans outstanding was $765 at February 28, 1999.

(f) Repayments of long-term debt at February 28, 1999 are due as follows:

<TABLE>
<CAPTION>
                                  OBLIGATIONS
                                     UNDER
                                    CAPITAL      OTHER
     YEARS ENDING FEBRUARY          LEASES       DEBT      TOTAL
     ------------------------       -------    -------    -------
<S>                                 <C>        <C>        <C>
     2000                           $ 4,686    $38,774    $43,460
     2001                             4,689        370      5,059
     2002                             3,632        419      4,051
     2003                             2,996        386      3,382
     2004                             2,506        320      2,826
     Thereafter                       1,491      2,940      4,431
                                    -------    -------    -------
     Total                          $20,000    $43,209    $63,209
                                    =======    =======    =======
</TABLE>





                                      F-23
<PAGE>   63

14.  OTHER LIABILITIES

     Other liabilities consist of the following:

<TABLE>
<CAPTION>

                                               FEBRUARY 28,
                                          --------------------
                                            1999         1998
                                          ------        ------
<S>                                       <C>           <C>
       Accrued litigation (a)             $3,105        $1,168
       Accrued acquisition cost (b)           -            700
       Rent escalation liability (c)         751           883
       Other                                 869         1,249
                                          ------        ------
       Total                              $4,725        $4,000
                                          ======        ======
</TABLE>



(a) At February 28, 1999, the Company has recorded a loss accrual for the
aggregate, estimated amount to settle or litigate open legal matters.

(b) In connection with the Company's supplemental staffing division's September
1997 acquisition of a provider of travel nurse services, the Company is liable
to pay additional amounts based upon the attainment of certain gross margin
levels. As of February 28, 1999, the remaining amount payable was $1,005 which
is included in accrued expenses. The Company's estimate of such amounts at
February 28, 1998 was $1,124, of which $424 was included in accrued expenses.

(c) The lease on the Company's corporate headquarters requires scheduled rent
increases through September 30, 2005. A rent escalation liability is recorded
for the amounts required to record the expense of this lease on a straight-line
basis over the life of the lease, in excess of payments made. The balance of
this liability was $883 and $982 at February 28, 1999 and 1998 of which $132 and
$99, respectively, was included in accrued expenses.

15.  INCOME TAXES


     The provision (benefit) for income taxes consists of the following:

<TABLE>
<CAPTION>
                                            YEARS ENDED
                                  ------------------------------
                                  FEBRUARY   FEBRUARY   FEBRUARY
                                  28, 1999   28, 1998   28, 1997
                                  --------   --------   --------
<S>                               <C>        <C>        <C>
     Current:
       Federal                    $(1,733)   $ 1,051    $1,709
       State                          554        377       558
     Deferred                       8,213     (7,292)      688
                                  -------    -------    ------
     Total                        $ 7,034    $(5,864)   $2,955
                                  =======    =======    ======
</TABLE>




                                      F-24
<PAGE>   64

         The provision for income taxes in fiscal 1999 consists of a valuation
allowance of $28.9 million offset by potential tax benefits of $20.2 million
resulting from losses incurred in that period. Such valuation allowance was
recorded because management does not believe that the utilization of the tax
benefits resulting from operating losses and other temporary differences are
"more likely than not" to be realized, as required by SFAS 109. The Company has
recorded an income tax receivable of $1.7 million resulting from the carryback
of net operating losses.

         The deferred tax assets (liabilities) at February 28, 1999 and February
28, 1998 are comprised of the following:

<TABLE>
<CAPTION>

                                                   FEBRUARY 28,
                                           ----------------------------
                                               1999            1998
                                           ------------    ------------
<S>                                        <C>             <C>
Current:
  Allowance for doubtful
   accounts receivable                     $      2,595    $      1,215
  Accruals not currently
   deductible                                     8,492           1,961
                                           ------------    ------------
                                                 11,087           3,176
  Valuation allowance                           (11,087)           --
                                           ------------    ------------
    Current                                           0           3,176
                                           ------------    ------------

Non-Current:
  Goodwill and intangible assets                  7,905           5,696
  Revenue recognition                               324             409
  Accelerated depreciation                         (888)           (972)
  Accruals not currently deductible               8,474             225
  Other assets (liabilities)                         35               7
  Net operating loss carryforward                 1,975            --
                                           ------------    ------------
                                                 17,825           5,365
  Valuation allowance                           (17,825)           --
                                           ------------    ------------
    Non-current                                       0           5,365
                                           ------------    ------------
      Total                                $          0    $      8,541
                                           ============    ============
</TABLE>

The non-current deferred tax assets are included in Other Assets on the
accompanying balance sheet at February 28, 1998.







                                      F-25
<PAGE>   65

         The following is a reconciliation of the effective income tax rate to
the Federal statutory rate:

<TABLE>
<CAPTION>
                                                   YEARS ENDED
                                     -------------------------------------
                                      FEBRUARY      FEBRUARY      FEBRUARY
                                      28, 1999      28, 1998      28, 1997
                                     ---------     ---------     ---------
<S>                                  <C>           <C>           <C>
Federal statutory rate                    34.0%         34.0%         34.0%
State and local income taxes,
 net of Federal income
 tax benefit                               3.4           3.8           7.6
Write-off of goodwill and
 intangible assets                        (3.9)        (12.3)         (0.2)
Tax credits                               --            --            (0.4)
Goodwill amortization                     (0.3)         (1.1)          4.6
Reversal of prior year
 accrual                                  --            (1.8)         (2.3)
Valuation allowance                      (43.8)         --            --
Other                                     --            (1.3)          0.7
                                     ---------     ---------     ---------
Effective rate                           (10.6)%        21.3%         44.0%
                                     =========     =========     =========
</TABLE>

         The Company has a Federal net operating loss carryover of $4,550 which
will expire in 2019.

16.      COMMITMENTS AND CONTINGENCIES

         Approximate minimum annual rental commitments for the remaining terms
of the Company's noncancellable operating leases relating to office space and
equipment rentals are as follows:

<TABLE>
<CAPTION>

   YEARS ENDING          HOME HEALTH    SUPPLEMENTAL
    FEBRUARY                CARE          STAFFING      TOTAL
   -------------        ------------    ------------  ---------
<S>                     <C>             <C>          <C>
      2000                $ 4,532         $ 388        $ 4,920
      2001                  3,365           192          3,557
      2002                  2,433            17          2,450
      2003                  2,168             4          2,172
      2004                  2,023             -          2,023
      Thereafter            2,918             -          2,918
                          -------         -----        -------
      Total               $17,439         $ 601        $18,040
                          =======         =====        =======
</TABLE>

         Certain leases require additional payments based upon property tax and
maintenance expense escalations.

         Aggregate rental expense for fiscal 1999, 1998 and 1997 approximated
$5,899, $4,862 and $3,967, respectively. These rent expense amounts include home
health care of $5,519, $4,598 and $3,789 and supplemental staffing of $380, $264
and $178 for fiscal 1999, 1998 and 1997, respectively.

         The Company has entered into employment or consulting agreements with
several officers and other individuals which require minimum aggregate payments
of approximately $3,510, $2,924,



                                      F-26
<PAGE>   66



$2,031, $1,466 and $1,582 over the next five fiscal years. Agreements with two
executives provide, in the event of their death, for the continued payment of
their compensation to their beneficiaries for the duration of their agreements.
Additionally, certain officers have entered into agreements which provide that
in the event of change in control of, and the discontinuance of such employee's
employment, the Company will pay a lump sum amount of 2.99 times the average
annual compensation paid to the employee during the five-year period immediately
preceding the date of the discontinuance of employment.

         On September 20, 1995, the United States Attorney for the Eastern
District of Pennsylvania alleged that (i) between 1987 and 1989, a corporation,
substantially all assets and liabilities of which were acquired by a subsidiary
of the Company in 1993, submitted false claims to Medicare totaling
approximately $1.5 million and (ii) officers and employees of that corporation
submitted false statements in support of such claims, and made a pre-complaint
civil settlement demand of approximately $4.5 million. The alleged false claims
and false statements were made before the Company acquired that corporation in
1993. There have been significant discussions with the office of the United
States Attorney which the Company believes are likely to lead to an arbitration
within specified parameters.

         On June 18, 1998, 6100 Cleveland, Inc., Orsinger Enterprises,Inc., and
First Choice Medical Staffing, Inc., three former home care and staffing
licensees (franchisees) of the Company in Ohio, commenced an action in the
United States District Court for the Northern District of Ohio, Eastern Division
against the Company's subsidiary, Staff Builders International, Inc. The action
sought to recover damages and other relief alleging unpaid royalties, wrongful
termination by the Company of the Franchise Agreement between the Company and
the Plaintiffs, breach of contract and other damages. The Company answered the
complaint and moved for a change of venue. On December 1, 1998, Plaintiffs
without the required permission of the Court, filed a Second Amended Complaint
alleging in addition to the allegations contained in the prior Complaint, claims
under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), claiming
a series of deliberate and illegal actions designed to put certain Staff
Builders franchisees out of business, as well as claims arising under New York
and Ohio loss of business opportunity statutes. The Second Amended Complaint
seeks money damages in excess of $25 million and a claim for treble damages on
the RICO claim. The Second Amended Complaint added as defendants Staff Builders
Services, Inc., and certain executive officers of the Company. The Company has
moved to dismiss the Second Amended Complaint challenging the legal sufficiency
of the RICO claims and other claims which allege a loss of business
opportunities under New York and Ohio laws. A companion case, 6100 Columbus,
Inc. v. Staff Builders International, Inc. was recently filed alleging breach of
contract


                                      F-27
<PAGE>   67

only. This case will probably be consolidated with the previous case.

         On December 21, 1998, H.L.N. Corporation, Frontlines Homecare, Inc.,
E.T.H.L., Inc., Phoenix Homelife Nursing, Inc., and Pacific Rim Health Care
Services, Inc., former home care licensees (franchisees) of the Company for the
territory comprising certain counties in and around Los Angeles, California and
their holding company, instituted an action against the Company's subsidiaries,
Staff Builders, Inc., Staff Builders International, Inc. and Staff Builders
Services, Inc., and certain executive officers of the Company in the Superior
Court for the State of California, County of Los Angeles. The action was removed
to United States District Court for the Central District of California on
December 22, 1998. Plaintiffs filed a First Amended Complaint in the Central
District on January 8, 1999 to challenge the termination of the four franchise
agreements between the Company and certain of the named plaintiffs, seeking
damages for violations of California franchise law, breach of contract, fraud
and deceit, unfair trade practices, claims under the RICO, negligence,
intentional interference with contractual rights, declaratory and injunctive
relief and a request for an accounting. Plaintiffs seek an unspecified amount of
damages. Discovery is currently in process.

         On July 17, 1998, the Federal government ordered that a complaint filed
by Ali Waris, the former owner of a home health care agency purchased by the
Company in 1993, be unsealed and served upon Staff Builders, Inc. and Targa
Group, Inc., a former licensee (franchisee) of the Company. The government has
elected not to intervene in the action, in which Mr. Waris claimed damages for
alleged violations of the False Claims Act by the Company in connection with
payments made by the Company for consulting services. Following a motion to
dismiss, on March 4, 1999, the Court granted Mr. Waris leave to amend the
Complaint, the amended filing for which was served on the Company on March 31,
1999. The Company intends to file a motion to dismiss the Amended Complaint.

         On April 30, 1999, Nursing Services of Iowa, Inc., Helen Kelly,
Geri-Care Home Health, Inc. and Jacquelyn Klooster, two former home health care
franchisees of the Company and their principals in Des Moines and Sioux City,
Iowa, respectively, commenced an action in the United States District Court for
the Southern District of Iowa, Central Division against the Company's
subsidiaries Staff Builders International, Inc., Staff Builders Services, Inc.,
Staff Builders, Inc., and certain executive officers of the Company. The action
alleges claims under the RICO claiming a series of deliberate and illegal
actions designed to defraud Staff Builders' franchisees, as well as claims for
negligence, breach of fiduciary duty, breach of contract, fraudulent
misrepresentation and violation of the Iowa franchise law. The complaint seeks
unspecified money damages, a claim for treble damages on the RICO claims and
punitive and exemplary damages.



                                      F-28
<PAGE>   68

         The Company is a defendant in several civil actions which are routine
and incidental to its business. The Company purchases insurance in such amounts
which management believes to be reasonable and prudent.

         Although the Company cannot estimate the ultimate cost of its open
legal matters with precision, it has recorded a loss accrual at February 28,
1999 and February 28, 1998 for the aggregate, estimated amount to litigate or
resolve such matters. In the opinion of management, the outcome of pending
litigation will not have a material adverse effect on the Company's consolidated
financial position or results of operations. However, unfavorable resolutions of
these actions could have an adverse impact on liquidity.

17.      STOCKHOLDERS' EQUITY

         COMMON STOCK - RECAPITALIZATION AND VOTING RIGHTS

         During fiscal 1996, the shareholders approved a plan of
recapitalization by which the existing Common Stock, $.01 par value, was
reclassified and converted into either Class A Common Stock, $.01 par value per
share, or Class B Common Stock, $.01 par value per share. Prior to the
recapitalization, shares of common stock that were held by the beneficial owner
for at least 48 consecutive months were considered long-term shares, and, were
entitled to ten votes for each share of stock. Pursuant to the recapitalization,
long-term shares were converted into Class B Common Stock and short-term shares
(beneficially owned for less than 48 months) were converted into Class A Common
Stock. As a result of the recapitalization, 1,554,936 shares of Class B common
stock were issued.

         A holder of Class B Common Stock is entitled to ten votes for each
share and each share is convertible into one share of Class A Common Stock (and
will automatically convert into one share of Class A Common Stock upon any
transfer subject to certain limited exceptions). Except as otherwise required by
the Delaware General Corporation Law, all shares of common stock vote as a
single class on all matters submitted to a vote by the stockholders.

         The recapitalization included all outstanding options and warrants to
purchase shares of common stock which were converted automatically into options
and warrants, to purchase an equal number of shares of Class A Common Stock.


         STOCK OPTIONS

         The Company has adopted the disclosure provisions of the
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS 123"). Accordingly, no compensation
expense has been recognized for the stock option plans.  Had the


                                      F-29
<PAGE>   69

Company recorded compensation expense for the stock options based on the fair
value at the grant date for awards in fiscal years ended 1999, 1998 and 1997
consistent with the provisions of SFAS 123, the Company's net income (loss) and
net income (loss) per share would have reflected the following pro forma
amounts:

<TABLE>
<CAPTION>
                              FEBRUARY    FEBRUARY   FEBRUARY
                              28, 1999    28, 1998   28, 1997
                              --------    --------   --------
<S>                           <C>         <C>        <C>
Net income (loss)
  -as reported                $(73,086)   $(21,632)  $  3,761
Net income (loss)
  -pro forma                   (73,099)    (22,075)     3,708
Basic earnings (loss)
  per share as reported          (3.16)    (  0.90)       .16
Basic earnings (loss)
  per share pro forma            (3.16)    (  0.92)       .16
Diluted earnings (loss)
  per share as reported          (3.16)    (  0.90)       .15
Diluted earnings (loss)
  per share pro forma            (3.16)    (  0.92)       .15
</TABLE>

         Because the SFAS 123 method of accounting has not been applied to
options granted prior to March 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.

         The fair value of each option grant is estimated on the date of grant
using the Black Scholes option pricing model with the following weighted-average
assumptions used for grants in fiscal years 1999, 1998 and 1997, respectively:
expected volatility of 142%, 56% and 48%; risk-free interest rate averaging
5.5%, 5.8% and 7.1%; and expected lives of 10 years for all.

         During the year ended February 28, 1994 ("fiscal 1994"), the Company
adopted a stock option plan (the "1993 Stock Option Plan") under which an
aggregate of one million shares of common stock are reserved for issuance upon
exercise of options thereunder. Options granted under this plan may be incentive
stock options ("ISO's") or non-qualified options ("NQSO's"). This plan replaces
the 1986 NonQualified Plan ("1986 NQSO Plan") and the 1983 Incentive Stock
Option Plan ("1983 ISO Plan") which terminated in 1993 except as to options then
outstanding. Employees, officers, directors and consultants are eligible to
participate in the plan. Options are granted at not less than the fair market
value of the common stock at the date of grant.

         A total of 2,227,750 stock options were granted under the 1993 Stock
Option Plan, at prices ranging from $.50 to $3.87, of which 924,750 remain
outstanding at February 28, 1999. Effective December 1, 1998, 914,750 of these
options issued to certain employees under the 1993 Stock Option Plan were
rescinded and the same number of new options at an option price of $.50 reissued
to these employees.

         During the year ended February 28, 1999 ("fiscal 1999"), the Company
adopted a stock option plan ("the "1998 Stock Option Plan") under which an
aggregate of two million shares of common stock are



                                      F-30
<PAGE>   70

reserved for issuance upon exercise of options thereunder. Options granted under
this plan may be incentive stock options ("ISO's") or non-qualified options
("NQSO's"). Employees, officers, directors and consultants are eligible to
participate in the plan. Stephen Savitsky and David Savitsky are not eligible to
receive options under the plan. Options are granted at not less than fair market
value of the common stock at the date of grant.

         A total of 960,583 stock options were granted under the 1998 Stock
Option Plan, at a price of $.50, all of which remain outstanding at February 28,
1999. Effective December 1, 1998, 117,550 options issued to certain employees
under the 1983 ISO Plan and 31,250 options issued to certain employees under the
1986 NQSO Plan were rescinded and 148,800 options at an option price of $.50
were issued to these employees under the 1998 Stock Option Plan.

         A summary of activity under the 1998 Stock Option Plan, the 1993 Stock
Option Plan, the 1986 NQSO Plan and the 1983 ISO Plan is as follows:

<TABLE>
<CAPTION>

                                  OPTIONS
                                  FOR SHARES     PRICE PER SHARE
                                  -----------    ---------------
<S>                               <C>            <C>
         Options outstanding at
           February 29, 1996       2,503,030     $1.63 to $6.38
         Granted                     222,500     $2.50 to $3.19
         Exercised                   (39,000)    $2.27
         Terminated                 (213,500)    $2.19 to $6.38
                                  ----------

         Options outstanding at
           February 28, 1997       2,473,030     $1.63 to $6.13
         Granted                     414,000     $2.28 to $2.50
         Exercised                    (5,000)    $2.19
         Terminated                 (392,750)    $2.19 to $4.00
                                  ----------


         Options outstanding at
           February 28, 1998       2,489,280     $1.63 to $6.13
         Granted                   1,880,333     $ .50 to $2.06
         Exercised                   (20,000)    $1.75
         Terminated               (1,474,840)    $1.75 to $6.13
                                  ----------

         Options outstanding at
           February 28, 1999       2,874,773     $ .50 to $3.00
                                  ==========
</TABLE>



         Included in the outstanding options are 148,169 ISO's and 900,440
NQSO's which were exercisable at February 28, 1999. The remaining options to
purchase 1,826,164 shares become exercisable at various dates through December
2004.



                                      F-31
<PAGE>   71

         The following tables summarize information about stock options
outstanding at February 28, 1999:

<TABLE>
<CAPTION>
                         OPTIONS OUTSTANDING
                         -------------------

                                       WEIGHTED
                                        AVERAGE        WEIGHTED
       RANGE OF                        REMAINING       AVERAGE
       EXERCISE         NUMBER     CONTRACTUAL LIFE    EXERCISE
        PRICES       OUTSTANDING      (IN YEARS)        PRICE
     --------------  -----------   -----------------   --------
<S>                  <C>           <C>                 <C>
     $ .50 to $1.50   1,875,333          7.6            $ .50
     $1.51 to $2.50     939,440          3.2            $1.84
     $2.51 to $3.00      60,000          3.2            $3.00
                     ----------       ------            -----
                      2,874,773          6.1            $ .99
                     ==========       ======            =====
</TABLE>


<TABLE>
<CAPTION>
                         OPTIONS EXERCISABLE
                         -------------------

                                       WEIGHTED
                                        AVERAGE        WEIGHTED
        RANGE OF                       REMAINING       AVERAGE
        EXERCISE        NUMBER     CONTRACTUAL LIFE    EXERCISE
         PRICES      EXERCISABLE      (IN YEARS)        PRICE
     --------------  -----------   -----------------   --------
<S>                  <C>           <C>                 <C>
     $ .50 to $1.50      49,169          9.8            $ .50
     $1.51 to $2.50     939,440          3.2            $1.84
     $2.51 to $3.00      60,000          3.2            $3.00
                     ----------       ------            -----
                      1,048,609          3.5            $1.84
                     ==========       ======            =====
</TABLE>


         During the year ended February 28, 1995, the Company adopted a stock
option plan (the "1994 Performance-Based Stock Option Plan") which provides for
the issuance of up to 3,400,000 shares of its common stock. Executive officers
of the Company and its wholly-owned subsidiaries are eligible for grants.
Performance-based stock options are granted for periods of up to ten years and
the exercise price is equal to the average of the closing price of the common
stock for the twenty consecutive trading days prior to the date on which the
option is granted. Vesting of performance based options is during the first four
years after the date of grant, and is dependent upon increases in the market
price of the common stock.

         Since inception a total of 7,712,563 stock options were granted under
the 1994 Performance-Based Stock Option Plan, at option prices ranging from $.53
to $3.14, of which 3,396,849 remain outstanding at February 28, 1999. Effective
December 1, 1998, 3,150,714 of these options issued to certain employees under
the plan were rescinded and new options at option prices ranging from $.53 to
$.59 were issued to these employees. Of the 3,396,849 options outstanding as of
February 28, 1999, 30,000 options were terminated in March 1999, 25,000 options
are exercisable through September, 2004 and the remaining 3,341,849 options will
become exercisable on, or before, December 1, 2004.

         A summary of activity under the 1994 Performance-Based Stock Option
Plan is as follows:

<TABLE>
<CAPTION>
                                               OPTIONS
                                             FOR SHARES          PRICE PER SHARE
                                             ----------          ---------------
<S>                                          <C>                 <C>
Options outstanding at
 February 28, 1996                            2,230,000             $3.14
Granted                                          0                        --
Exercised                                        0                        --
Terminated                                       0                        --
                                              ---------

Options outstanding at
 February 28, 1997                            2,230,000             $3.14
Granted                                       1,100,714             $1.81 to $2.25
Exercised                                        0                        --
Terminated                                      (50,000)            $3.14
                                              ---------

Options outstanding at
 February 28, 1998                            3,280,714             $1.81 to $3.14
Granted                                       4,381,849             $ .53 to $2.16
Exercised                                        0                        --
Terminated                                   (4,265,714)            $1.81 to $3.14
                                              ---------

Options outstanding at
 February 28, 1999                            3,396,849             $ .53 to $3.14
                                              =========
</TABLE>


         The following tables summarize information about stock options
issued under the 1994 Performance-Based Stock Option Plan outstanding at
February 28, 1999:

<TABLE>
<CAPTION>
                         OPTIONS OUTSTANDING
                         -------------------

                                       WEIGHTED
                                        AVERAGE        WEIGHTED
       RANGE OF                        REMAINING       AVERAGE
       EXERCISE         NUMBER     CONTRACTUAL LIFE    EXERCISE
        PRICES       OUTSTANDING      (IN YEARS)        PRICE
     --------------  -----------   -----------------   --------
<S>                  <C>           <C>                 <C>
     $ .53 to $ .59   3,341,849          9.8            $ .58
     $ .60 to $2.15           0           --               --
     $2.16 to $3.14      55,000          6.5            $2.90
                     ----------       ------            -----
                      3,396,849          9.7            $ .62
                     ==========       ======            =====
</TABLE>


<TABLE>
<CAPTION>
                         OPTIONS EXERCISABLE
                         -------------------

                                       WEIGHTED
                                        AVERAGE        WEIGHTED
        RANGE OF                       REMAINING       AVERAGE
        EXERCISE        NUMBER     CONTRACTUAL LIFE    EXERCISE
         PRICES      EXERCISABLE      (IN YEARS)        PRICE
     --------------  -----------   -----------------   --------
<S>                  <C>           <C>                 <C>
     $ .53 to $ .59           0           --               --
     $ .60 to $2.15           0           --               --
     $2.16 to $3.14      40,000          5.6            $3.10
                         ------          ---            -----
                         40,000          5.6            $3.10
                         ======          ===            =====
</TABLE>

         During fiscal 1994, the Company adopted an employee stock purchase plan
(the "1993 Employee Stock Purchase Plan") which provided for the issuance of up
to one million shares of its common stock. The purchase price of the shares is
the lesser of 90 percent of the fair market value at the enrollment date, as



                                      F-32
<PAGE>   72

defined, or the exercise date. All one million shares have been issued and the
1993 Employee Stock Purchase Plan has been terminated.

         During fiscal 1999, the Company adopted an employee stock purchase plan
(the "1998 Stock Purchase Plan") which provides for the issuance of up to one
million shares of its common stock. This plan replaces the 1993 Employee Stock
Purchase Plan. The purchase price of the shares is the lesser of 90 percent of
the fair market value at the enrollment date, as defined, or the exercise date.
Since inception of this plan, a total of 96,634 shares were issued. The 1998
Employee Stock Purchase Plan has been indefinitely suspended and no further
shares will be issued during the suspension.

         PREFERRED STOCK, CLASS A

         During fiscal 1999, the holders of all issued and outstanding shares of
Class A Preferred Stock (the "Preferred Stock") exchanged their Preferred Stock
for 4,269,820 shares of Class A Common Stock. There are currently no outstanding
shares of Preferred Stock.


         COMMON SHARES RESERVED

         The following represents common shares reserved and available for
issuance, at February 28, 1999, for options granted and outstanding warrants and
employee stock purchases:

<TABLE>
<CAPTION>
                                                     AVAILABLE
                                         RESERVED   FOR ISSUANCE
                                        ----------  ------------
<S>                                     <C>         <C>
  1994 Performance-Based Stock
   Option Plan                          3,396,849        3,151
  1998, 1993, 1986 and 1983 Stock
   Option Plans                         2,874,773    1,039,417
  1998 Employee Stock Purchase Plan           -        903,366
  Other                                    12,894           -
                                        ---------    ---------
  Total                                 6,284,516    1,945,934
                                        =========    =========
</TABLE>

         PURCHASE AND RETIREMENT OF COMMON STOCK

         From March 6, 1998 through October 16, 1998, the Company purchased and
retired a total of 5,088,060 shares of its common stock at a cost of $4.8
million. No repurchases have been made since October 16, 1998 and no repurchases
were made in fiscal 1998. During fiscal 1997, the Company purchased and retired
a total of 155,000 shares of its common stock at a cost of $410.




                                      F-33
<PAGE>   73

18.      EARNINGS (LOSS) PER COMMON SHARE

         The following table sets forth the computation of the basic and diluted
earnings (loss) per share (In thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                           YEARS ENDED
                                           ------------------------------------------
                                             FEBRUARY       FEBRUARY       FEBRUARY
                                             28, 1999       28, 1998       28, 1997
                                           ------------   ------------   ------------
<S>                                        <C>            <C>            <C>
Numerator:
  Net income (loss)                        $    (73,086)  $    (21,632)  $      3,761
                                           ============   ============   ============
Denominator:
  Share reconciliation:
  Shares used for basic earnings
    (loss) per share                             23,162         23,939         23,668
  Effect of dilutive items:-
    Stock options                                  --             --              864
    Other                                          --             --               45
                                           ------------   ------------   ------------
  Shares used for dilutive earnings
    (loss) per share                             23,162         23,939         24,577
                                           ============   ============   ============

Earnings (loss) per share:
  Basic                                    $      (3.16)  $      (0.90)  $       0.16
                                           ============   ============   ============
  Diluted                                  $      (3.16)  $      (0.90)  $       0.15
                                           ============   ============   ============
</TABLE>

19.      UNAUDITED QUARTERLY FINANCIAL DATA

         Summarized unaudited quarterly financial data for fiscal 1999 and 1998
are as follows (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                  First          Second       Third         Fourth
                                                  Quarter        Quarter      Quarter       Quarter
                                                -----------    -----------   -----------    -----------
<S>                                             <C>            <C>           <C>            <C>
Fiscal 1999
Revenues                                        $   111,281    $   111,670   $   107,883    $   106,754
Gross profit                                    $    34,897    $    37,484   $    35,301    $    30,849
Net income (loss)                               $       (99)   $       135   $   (45,370)   $   (27,752)
Income (loss) per common share:
   Basic                                        $      0.00    $       .01   $     (1.99)   $     (1.18)
   Diluted                                      $      0.00    $       .01   $     (1.99)   $     (1.18)
Weighted average number of common shares:
   Basic                                             23,647         22,526        22,846         23,577
   Diluted                                           23,647         22,563        22,846         23,577
</TABLE>

<TABLE>
<CAPTION>
                                                  First          Second       Third         Fourth
                                                  Quarter        Quarter      Quarter       Quarter
                                                -----------    -----------   -----------    -----------
<S>                                             <C>            <C>           <C>            <C>
Fiscal 1998
Revenues                                        $   130,501 $   131,617 $   133,075 $   131,480
Gross profit                                    $    46,525 $    47,548 $    47,494 $    46,881
Net income                                      $       849 $       989 $       975 $   (24,445)
Income per common share:
   Basic                                        $       .04 $       .04 $       .04 $     (1.02)
   Diluted                                      $       .04 $       .04 $       .04 $     (1.02)
Weighted average number of common shares:
   Basic                                             23,842      23,910      23,970      24,035
   Diluted                                           24,080      24,246      24,388      24,035
</TABLE>


     During the third quarter of fiscal 1999, the Company recorded pre-tax
charges including $29.0 million for Medicare and Medicaid audit adjustments and
$4.5 million for restructuring costs. During the fourth quarter of fiscal 1999,
the Company wrote-off goodwill and intangible assets aggregating $15.3 million
and recorded other restructuring costs of $0.7 million. During the fourth
quarter of fiscal 1998, the Company recorded a pre-tax non-recurring charge of
$33.4 million.


                                      F-34
<PAGE>   74


                                                                     SCHEDULE II

STAFF BUILDERS, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                          YEARS ENDED
                                           -----------------------------------------
                                             FEBRUARY       FEBRUARY       FEBRUARY
                                             28, 1999       28, 1998       28, 1997
                                           -----------    -----------    -----------
<S>                                        <C>            <C>            <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:

  Balance, beginning of period             $     3,660    $     2,800    $     2,200

  Charged to costs and expenses                  9,109          4,800          2,740

  Addition from consolidation of
    majority-owned business                       --               60           --

  Deductions                                    (5,769)        (4,000)        (2,140)
                                           -----------    -----------    -----------

  Balance, end of period                   $     7,000    $     3,660    $     2,800
                                           ===========    ===========    ===========


ACCUMULATED AMORTIZATION OF
  INTANGIBLE ASSETS:

  Balance, beginning of period             $    10,521    $     9,126    $     7,282

  Charged to costs and expenses                    581          2,601          2,503

  Write-off of fully
    amortized assets                              --           (1,206)          (659)
                                           -----------    -----------    -----------

  Balance, end of period                   $    11,102    $    10,521    $     9,126
                                           ===========    ===========    ===========



DEFERRED INCOME (NETTED AGAINST
  FRANCHISE NOTES RECEIVABLE):

  Balance, beginning of period             $     4,387    $     5,600    $     5,735

  Charged to notes receivable                      428             89            341

  Deductions                                    (2,333)        (1,302)          (476)
                                           -----------    -----------    -----------
  Balance, end of period                   $     2,482    $     4,387    $     5,600
                                           ===========    ===========    ===========
</TABLE>

                                     F-35

<PAGE>   75


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

                  There have been no such changes or disagreements.






<PAGE>   76





                                    PART III



ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The following table sets forth as to each director and each executive
officer of the Company: (1) such person's name; (2) the year in which such
person was first elected (or designated) a director of the Company; (3)
biographical information for the last five years; (4) certain other
directorships, if any, held by such person; and (5) such person's age.

<TABLE>
<CAPTION>

                                       Principal Occupation During the
                                         Past Five Years, Any Office                             Year First
                                                  Held in the                                      Elected
                                             Company and Any Other                                   as a
NAME                            Age              Directorships                                     Director
----                            ---              -------------                                     --------

<S>                             <C>   <C>                                                        <C>
Stephen Savitsky                53    A founder of the Company, Mr.                                  1983
                                      Savitsky has served as Chairman of the
                                      Board, Chief Executive Officer and a
                                      Director of the Company since 1983 (and of
                                      its predecessor from 1978 to 1983), and as
                                      President of the Company from November
                                      1991 until November 30, 1998. Mr. Savitsky
                                      is the brother of David Savitsky.

David Savitsky                  51    A founder of the Company, Mr.                                  1983
                                      Savitsky has served as
                                      Secretary, Treasurer and a
                                      Director of the Company since
                                      1983 (and of its predecessor
                                      from 1978 to 1983), as
                                      Executive Vice President from
                                      December 1987 until November
                                      30, 1998 and as Chief Operating
                                      Officer from April 1991 until
                                      November 30, 1998.  On December
                                      1, 1998, Mr. Savitsky became
                                      President of the Company.  Mr.
                                      Savitsky is the brother of
                                      Stephen Savitsky.
</TABLE>





<PAGE>   77


<TABLE>
<CAPTION>

                                       Principal Occupation During the
                                         Past Five Years, Any Office                             Year First
                                                  Held in the                                      Elected
                                             Company and Any Other                                   as a
NAME                            Age              Directorships                                     Director
----                            ---              -------------                                     --------
<S>                             <C>   <C>                                                        <C>

Jonathan J.                     54    Dr. Halpert was elected a                                      1983
Halpert, Ph.D.                        Director by the Board of
                                      Directors in August 1987. He previously
                                      served as a Director of the Company from
                                      May 1983 until he resigned from the Board
                                      in February 1985. Dr. Halpert is a
                                      consultant in the area of
                                      deinstitutionalization of the mentally
                                      retarded and Chief Executive Officer of
                                      the Camelot Community Residence Program.

Bernard J.                      50    Dr. Firestone was elected a                                    1987
Firestone, Ph.D.                      Director by the Board of
                                      Directors in August 1987. He is an
                                      associate dean for curriculum and
                                      personnel in the College of Liberal Arts
                                      and Sciences and professor of political
                                      science at Hofstra University where he has
                                      been teaching for 24 years.

Donald Meyers                   70    Mr. Meyers was elected a                                       1994
                                      Director by the Board of
                                      Directors in August 1994.  He
                                      has been an Associate Clinical
                                      Professor, Health Policy and
                                      Management, and the Director of
                                      the Resident and Fellow Program
                                      in administration in New York
                                      University's Robert W. Wagner
                                      Graduate School of Public
                                      Service since November 1991. Mr. Meyers is
                                      also the President and sole director and
                                      stockholder of RMR Health & Hospital
                                      Management Consultants, Inc., a health
                                      care consulting firm, where he has been an
                                      executive officer, director and
                                      stockholder since 1976.

</TABLE>


<PAGE>   78



<TABLE>
<CAPTION>

                                       Principal Occupation During the
                                         Past Five Years, Any Office                             Year First
                                                  Held in the                                      Elected
                                             Company and Any Other                                   as a
NAME                            Age              Directorships                                     Director
----                            ---              -------------                                     --------
<S>                             <C>   <C>                                                        <C>

Dale R. Clift                   48    Mr. Clift has been Executive                                    Not
                                      Vice President of Finance and                               Applicable
                                      Chief Financial Officer of the
                                      Company since February 1998.
                                      On December 1, 1998, Mr. Clift
                                      became the Chief Operating
                                      Officer of the Company.  From
                                      January 1996 through February
                                      1998, Mr. Clift provided
                                      consulting services to a number
                                      of companies, including several
                                      in the health care industry.
                                      From April 1994 through January
                                      1996, Mr. Clift was Executive
                                      Vice President of Rock Bottom
                                      Restaurants, Inc., a restaurant
                                      operator.

Edward Teixeira                 56    Mr. Teixeira has been the                                       Not
                                      Executive Vice President and                                Applicable
                                      Chief Operating Officer of a
                                      principal subsidiary of the
                                      Company since April, 1999. From December
                                      1990 to April, 1999, Mr. Teixeira served
                                      as the Senior Vice President, Franchising
                                      of a principal subsidiary of the Company.

Willard T. Derr                 42    Mr. Derr has been Senior Vice                                   Not
                                      President and Corporate                                     Applicable
                                      Controller of the Company since
                                      March 1998.  From February 1993
                                      to March 1998, Mr. Derr served
                                      as Vice President and
                                      Controller of a principal
                                      subsidiary of the Company.

</TABLE>





<PAGE>   79




<TABLE>
<CAPTION>

                                       Principal Occupation During the
                                         Past Five Years, Any Office                             Year First
                                                  Held in the                                      Elected
                                             Company and Any Other                                   as a
NAME                            Age              Directorships                                     Director
----                            ---              -------------                                     --------
<S>                             <C>   <C>                                                        <C>

Sandra Parshall                 51    Ms. Parshall has been the                                       Not
                                      Senior Vice President,                                      Applicable
                                      Operations, of a principal subsidiary of
                                      the Company since March 1998. From
                                      September 1996 through March 1998, Ms.
                                      Parshall served as the Vice President of
                                      Operations of a principal subsidiary of
                                      the Company. From June 1995 to September
                                      1996, Ms. Parshall served as a regional
                                      director of operations of a principal
                                      subsidiary of the Company. From 1993 to
                                      1995, Ms. Parshall was a Divisional Vice
                                      President of Nursefinders, Inc., a home
                                      healthcare and medical staffing company.

</TABLE>


COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         The Company's Compensation and Stock Option Committee is composed of
Bernard J. Firestone and Jonathan J. Halpert.

         No member of the Compensation Committee of the Board of Directors of
the Company was, during the fiscal year ended February 28, 1999 an officer or
employee of the Company or any of its subsidiaries, or was formerly an officer
of the Company or any of its subsidiaries, or had any relationship requiring
disclosure pursuant to applicable rules and regulations of the Securities and
Exchange Commission. During the fiscal year ended February 28, 1999, no
executive officer of the Company served as (i) a member of the compensation
committee (or other board committee performing equivalent functions) of another
entity, one of whose executive officers served on the Compensation Committee of
the Company, (ii) a director of another entity, one of whose executive officers
served on the Compensation Committee of the Company, or (iii) a member of the
compensation committee (or other board committee performing equivalent
functions) of another entity, one of whose executive officers served as a
director of the Company.


COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

         Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers and persons who own beneficially more
than ten percent of the Class A Common Stock or Class B Common Stock to file
with the Securities and Exchange Commission initial reports of beneficial
ownership and reports of changes in beneficial ownership of the Common Stock.
Officers, directors and persons owning more than ten percent of the Company's
Class A Common Stock, $.01 par value per share (the "Class A Common Stock"), or
the Company's Class B Common Stock, $.01 par value per share (the "Class B
Common Stock" and, collectively with the Class A Common Stock, the "Common
Stock"), are required to furnish the Company with copies of all such reports. To
the Company's knowledge, based on a review of copies of such reports furnished
to the Company and written representations from its officers and directors that
no other reports were required, during the fiscal year ended February 28, 1999,
all Section 16(a) filing requirements applicable to its executive officers,
directors and persons owning beneficially more than ten percent of the Common
Stock were complied with on a timely basis, except that initial reports of
ownership were filed late by Willard T. Derr and Sandra Parshall and reports of
change of beneficial ownership


<PAGE>   80

were filed late by Stephen Savitsky, David Savitsky and Ed Teixeira with respect
to one transaction during the 1999 fiscal year.

ITEM 11.  EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

         The following table sets forth information concerning the annual and
long-term compensation of the Company's Chief Executive Officer and four other
executive officers (the "Named Executive Officers") for services as executive
officers of the Company for the last three fiscal years.

<TABLE>
<CAPTION>
                                          SUMMARY COMPENSATION TABLE

                                                                 ANNUAL COMPENSATION
                                                 ---------------------------------------------------          LONG-TERM
NAME AND PRINCIPAL                                                                                           COMPENSATION
POSITION                                                                                                        AWARDS
--------                                                                                                        ------
                                                                                                              SECURITIES
                                                                      BONUS             OTHER ANNUAL          UNDERLYING
                                     YEAR         SALARY          COMPENSATION          COMPENSATION          OPTIONS(#)
                                     ----        --------         ------------          ------------         ------------
<S>                                  <C>         <C>              <C>                   <C>                   <C>
Stephen Savitsky.................... 1999        $594,991               ---                  ---                1,383,691
Chairman and Chief                   1998        $520,571               ---                  ---                  580,691
Executive Officer                    1997        $474,704               ---                  ---                      ---

David Savitsky...................... 1999        $426,131               ---                  ---                1,383,691
President, Secretary and             1998        $377,016               ---                  ---                  580,691
Treasurer                            1997        $343,705               ---                  ---                      ---

Sandra Parshall..................... 1999        $170,654               ---                  ---                   75,000
Senior Vice President,               1998        $148,105             $25,000                ---                      ---
Operations of a Principal            1997        $118,640             $14,250                ---                   25,000
Subsidiary

Dale R. Clift....................... 1999        $244,781           $143,665(1)              ---                  700,000
Executive Vice President,            1998        $ 13,599           $ 18,000(2)              ---                      ---
Finance, Chief Financial             1997           ---                 ---                  ---                      ---
Officer and Chief Operating
Officer

Edward Teixeira..................... 1999        $178,684             $30,625                ---                  102,800
Executive Vice President and         1998        $176,615             $19,375                ---                      ---
Chief Operating Officer              1997        $167,714               ---                  ---                   10,000
of a Principal Subsidiary
</TABLE>




<PAGE>   81


(1) Bonus was paid to compensate for additional cost of living in the New York
    metropolitan area as part of relocation.

(2) Sign on-bonus



OPTION GRANTS TABLE

               The following table sets forth information with respect to the
Named Executive Officers concerning the grant of stock options during the fiscal
year ended February 28, 1999. The Company did not have during such fiscal year,
and currently does not have, any plans providing for the grant of stock
appreciation rights ("SARs").

<TABLE>
<CAPTION>
                        OPTION GRANTS IN LAST FISCAL YEAR
                                INDIVIDUAL GRANTS


                                                           % OF
                                                           TOTAL
                                                          OPTIONS
                                                          GRANTED
                                          NUMBER OF         TO
                                          SECURITIES     EMPLOYEES                                             GRANT
                                          UNDERLYING        IN            EXERCISE                              DATE
                                            OPTIONS       FISCAL             OR        EXPIRATION              PRESENT
          NAME                              GRANTED        YEAR          BASE PRICE        DATE                VALUE(1)
          ----                          -------------   -----------     -----------    ------------          -----------
<S>                                     <C>             <C>              <C>           <C>                    <C>
Stephen Savitsky..............             397,000(2)      7.6%             $.55          12/01/03             $166,740
Stephen Savitsky..............           1,383,691(3)      26.4%            $.59          12/01/08              636,498

David Savitsky................             397,000(2)      7.6%             $.55          12/01/03              166,740
David Savitsky................           1,383,691(3)      26.4%            $.59          12/01/08              636,498

Dale R. Clift.................             333,333(4)      6.4%             $.50          12/01/08              153,333
Dale R. Clift.................             366,667(3)      7.0%             $.53          12/01/08              168,667

Sandra Parshall...............              25,000(2)      0.5%             $.50          12/01/08               11,500

Sandra Parshall...............              50,000(3)      1.0%             $.53          12/01/08               23,000

Edward Teixeira...............              10,000(2)      0.2%             $.50          12/01/08                4,600

Edward Teixeira...............              77,800(3)      1.5%             $.53          12/01/08               35,788

Edward Teixeira...............              15,000(4)      0.3%             $.50          12/01/08                6,900
</TABLE>


<PAGE>   82

(1)      The values shown were calculated utilizing the Black-Scholes option
         pricing model and are presented solely for the purpose of comparative
         disclosure in accordance with certain regulations of the Securities and
         Exchange Commission. This model is a mathematical formula used to value
         traded stock price volatility. The actual value that an executive
         officer may realize, if any, is dependent on the amount by which the
         stock price at the time of exercise exceeds the exercise price. There
         is no assurance that the value realized by an executive officer will be
         at or near the value estimated by the Black- Scholes model. In
         calculating the grant date present values, the Company used the
         following assumptions: (a) expected volatility of approximately 142%;
         (b) risk-free rate of return of approximately 5.5%; (c) no dividends
         payable during the relevant period; and (d) exercise at the end of a 10
         year period from the date of grant.

(2)      Issued under the 1993 Stock Option Plan. Effective December 1, 1998,
         all options previously issued to the Named Executive Officers under the
         1993 Stock Option Plan were rescinded and new options issued. Options
         become exercisable pursuant to the terms of the individual option
         agreements. A total of 11,668 options were exercisable as of February
         28, 1999.

(3)      Issued under the 1994 Performance-Based Stock Option Plan. On March 19,
         1998 options to purchase 500,000 shares issued to each of Stephen
         Savitsky and David Savitsky and options to purchase 25,000 shares
         issued to Edward Teixeira were rescinded and new options issued.
         Effective December 1, 1998 all options previously issued to the Named
         Executive Officers were rescinded and new options issued. A percentage
         of options may become exercisable in each of the four years following
         the grant date if



<PAGE>   83

         certain stock price targets are achieved. All options automatically
         become exercisable on December 1, 2004. A total of 15,000 options were
         exercisable as of February 28, 1999.

(4)      Issued under the 1998 Stock Option Plan. Options become exercisable
         pursuant to the terms of the individual option agreements. No options
         were exercisable as of February 28, 1999.


AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUE
TABLE

         The following table provides information concerning the number and
value of stock options exercised during the fiscal year ended February 28, 1999,
and held at the end of such

fiscal year, by the Named Executive Officers.  No SARs were
exercised during such fiscal year, and no SARs are held by any
Named Executive Officer, because the Company does not have any
plans providing for SARs.

<TABLE>
<CAPTION>
                                                           NUMBER OF            VALUE OF UNEXERCISED
                                                      SECURITIES UNDERLYING          IN-THE-MONEY
                             SHARES                    UNEXERCISED OPTIONS             OPTIONS
                            ACQUIRED                  AT FEBRUARY 28, 1999      AT FEBRUARY 28, 1999
                               ON          VALUE           EXERCISABLE/              EXERCISABLE/
       NAME                 EXERCISE      REALIZED        UNEXERCISABLE             UNEXERCISABLE
       ----                 --------      --------    ---------------------     ---------------------
<S>                         <C>            <C>        <C>                       <C>
Stephen Savitsky...........    ---           ---         334,000/1,780,691               0/0
David Savitsky.............    ---           ---         320,000/1,780,691               0/0
Dale R. Clift..............    ---           ---                 0/700,000               0/0
Sandra Parshall............    ---           ---              8,334/66,666               0/0
Edward Teixeira............    ---           ---              3,334/99,466               0/0
</TABLE>


EMPLOYMENT AGREEMENTS

          On June 1, 1987, the Company entered into a five-year employment
agreement with Stephen Savitsky under which Mr. Savitsky received an initial
base salary (beginning in June 1987) of $200,000 per year, which base salary
increases annually at the rate of ten percent plus any increase in the cost of
living. Mr. Savitsky's employment agreement is automatically extended at the end
of each year for an additional year and is terminable by the Company upon five
years' notice. For the



<PAGE>   84


fiscal year ended February 28, 1999, Mr. Savitsky received a base salary of
$594,991. Mr. Savitsky's employment agreement provides that, upon a "change of
control" of the Company and his termination of employment other than for his
conviction of a felony, he will be entitled to receive a lump sum severance
payment equal to 2.99 times his average annual compensation for the five
calendar years prior to termination. Mr. Savitsky is required to devote all of
his business time to the affairs of the Company and his employment agreement
provides that during the term of his employment and for a period of six months
thereafter he will not compete with the Company. After termination of his
employment (other than by reason of his conviction of a felony), Mr. Savitsky
will provide consulting services to the Company for a period of ten years at an
annual salary of $50,000. Upon consummation of the spin-off described earlier,
Mr. Savitsky's current employment agreement will be amended to among other
things, reduce his base salary and eliminate his post-termination consulting
fee.

          The Company entered into an employment agreement, effective as of June
1, 1987, with David Savitsky on terms substantially similar to the employment
agreement with Stephen Savitsky, except that his initial base salary was
$110,000 per year. Under his employment agreement, Mr. Savitsky is required to
devote all of his business time to the affairs of the Company. His base salary
for the fiscal year ended February 28, 1999, was $426,131. Upon consummation of
the spin-off described earlier, Mr. Savitsky's current employment agreement will
be amended to among other things, reduce his base salary and eliminate his
post-termination consulting fee.

          Effective April 15, 1999, the Company entered into a three-year
employment agreement with Edward Teixeira to serve as Executive Vice President
and Chief Operating Officer of a principal subsidiary of the Company. The
employment agreement provides for an annual base salary of $200,000, $210,000
and $220,500 for each of the three years ending April 14, 2000, 2001 and 2002,
respectively. Mr. Teixeira also received options to purchase 60,000 shares of
Class A Common Stock of the Company and an automobile allowance of approximately
$6,700 per annum. In addition, Mr. Teixeira is entitled to receive a yearly
bonus provided certain pre-tax profit levels are achieved. Further, if within
twelve months after a "change of control" Mr. Teixeira were terminated for any
reason (other than the commission of a felony or the perpetration of fraud
against the Company), he would then be entitled to a severance payment equal to
twelve months' salary, payable in weekly installments. Under his employment
agreement, Mr. Teixeira is obligated to devote his full business time to the
affairs of the Company and is prevented from competing with the Company for six
months after his employment is terminated. Mr. Teixeira's base salary for the
fiscal year ended February 28, 1999 was $178,684. In addition, Mr. Teixeira
received a bonus of $30,625.

          Effective March 1, 1999, a principal subsidiary of the Company entered
into an employment agreement with Sandra Parshall to serve as the Senior Vice
President-Operations. The employment agreement, which will terminate upon the
effective date of the spin-off transaction discussed previously, provides


<PAGE>   85


for an annual base salary of $204,000. In addition, the Company leases an
automobile for Ms. Parshall's use at an annual cost of approximately $6,400.
Further, if within 12 months after a "change of control" Ms. Parshall is
discharged, or she resigns, for any reason (other than breach of his employment
agreement) she would be entitled to receive a severance payment equal to 2.99
times her average annual base salary for the past five years to be paid in
weekly installments for the three-year period following such discharge or
resignation. The employment agreement requires Ms. Parshall to devote her full
business time to the affairs of the Company and prevents her from competing with
the Company for six months after her employment is terminated. Ms. Parshall's
base salary for the fiscal year ended February 28, 1999 was $170,654.

          As of February 9, 1998, the Company entered into a 37-month employment
agreement with Dale R. Clift to serve as Executive Vice President, Finance, and
Chief Financial Officer until March 31, 2001. Effective December 1, 1998, Mr.
Clift assumed the position of Chief Operating Officer and his employment
agreement was amended and extended to February 28, 2002. The employment
agreement provides for a base salary of $300,000 per annum. Additionally, Mr.
Clift received bonuses totaling $161,665, reimbursement of his moving expenses
up to $40,000, an automobile allowance of approximately $8,700 per annum and
options to purchase 700,000 shares of Class A Common Stock. Further, if within
12 months after a "change of control" Mr. Clift is discharged, or he resigns,
for any reason (other than a breach of his employment agreement) he would be
entitled to receive a severance payment equal to 2.99 times his average annual
base salary for the past 3 years to be paid in weekly installments for the
three-year period following such discharge or resignation. Under his employment
agreement, Mr. Clift is obligated to devote his full business time to the
affairs of the Company and he is prevented from competing with the Company for
six months after his employment is terminated. Mr. Clift's base salary for the
fiscal year ended February 28, 1999 was $244,781. Upon consummation of the
spin-off described earlier, Mr. Clift's current employment agreement will be
amended to among other things, reduce his base salary, change his position and
eliminate certain benefits.

<PAGE>   86

          If a "change of control" were to occur prior to the next anniversary
date of the respective employment agreements of Stephen Savitsky, David
Savitsky, Dale R. Clift, Edward Teixeira and Sandra Parshall and such officers'
employment relationships with the Company were to terminate for reasons
triggering the severance payments noted above, then the Company would be
obligated to make lump sum payments to them in the approximate amounts of
$1,756,000, $1,345,000, $1,096,000, $207,000 and $466,000, respectively. The
lump sum severance payments payable after the end of the calendar year or the
anniversary dates of the respective employment agreements, as the case may be,
would change as a result of changes in such individuals' compensation. The term
"change of control" as used in the employment agreements with the Company's
executive officers refers to an event in which a person, corporation,
partnership, association or entity (i) acquires a majority of the Company's
outstanding voting securities, (ii) acquires securities of the Company bearing a
majority of voting power with respect to election of directors of the Company,
or (iii) acquires all or substantially all of the Company's assets.

DIRECTOR COMPENSATION

          Each director who is not an officer or employee of the Company
receives a fee of $10,000 per annum for service on the Company's Board of
Directors. Directors who are officers or employees of the Company receive no
fees for service on the Board.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

          The following table sets forth information as of May 28, 1999 with
respect to the beneficial ownership of the Company's Class A Common Stock and
Class B Common Stock by (i) each person known to the Company who beneficially
owns more than 5% of any class of voting securities of the Company, (ii) each
director of the Company, (iii) the Named Executive Officers, and (iv) all
directors and executive officers of the Company as a group.


<PAGE>   87

<TABLE>
<CAPTION>

CLASS A AND CLASS B COMMON STOCK

                                                                                   AMOUNT AND NATURE OF
                                                                                  BENEFICIAL OWNERSHIP(1)
                                         -----------------------------------------------------------------------------------------
                                                                      PERCENTAGE                        PERCENTAGE
                                               NUMBER OF             OUTSTANDING       NUMBER OF       OUTSTANDING      PERCENTAGE
                                               SHARES OF              SHARES OF        SHARES OF        SHARES OF           OF
NAME OF                                         CLASS A                CLASS A          CLASS B          CLASS B        OUTSTANDING
BENEFICIAL OWNER                             COMMON STOCK(2)         COMMON STOCK    COMMON STOCK(3)   COMMON STOCK     VOTES OWNED
----------------                          --------------------      -------------    ---------------   -------------    -----------
<S>                                       <C>                       <C>              <C>               <C>              <C>
Stephen Savitsky (4)..................      3,130,179(5)(6)(7)          13.1                 ---            ---             11.6
David Savitsky (4)....................      3,171,977(6)(8)(9)          13.6               1,000(10)         *              11.8
Bernard J. Firestone (11).............            ---                    ---               2,100(12)         *                *
Jonathan J. Halpert (11)..............            ---                    ---                 ---            ---              ---
Donald Meyers (11)....................          2,000(13)                 *                  ---            ---               *
Dale R. Clift(11).....................        111,111(14)                 *                  ---            ---               *
Edward Teixeira (11)..................         52,334(15)                 *                  ---            ---               *
Sandra Parshall (11)..................         20,733(16)                 *                  ---            ---               *
S Squared Technology
  Corp. (17)..........................      2,614,500                   11.2                 ---            ---              9.9
Dimensional Fund
  Advisors, Inc. (18).................      1,372,460                    5.9                 ---            ---              5.2

All executive
  officers and directors
as a group (10 persons)...............      6,266,844(6)(19)            26.0               3,100            1.0             23.0

</TABLE>


*Less than one percent


(1)      "Beneficial ownership" is determined in accordance with Rule 13d-3
         under the Securities Exchange Act of 1934, as amended. In general, a
         person is treated as the "beneficial owner" of stock under Rule 13d-3
         if such person has (or shares) (i) either investment power or voting
         power over such stock which may be by means of a contract, arrangement,
         understanding, relationship or otherwise, or (ii) the right to acquire
         such stock within 60 days, including by means of the exercise of an
         option or the conversion of a convertible security. Each beneficial
         owner's percentage of ownership and percentage of votes is determined
         by assuming that options that are held by such person (but not those
         held by any other person) and which are exercisable within 60 days of
         the date of this table have been exercised. Except as indicated in the
         that follow, shares listed in the table are held with sole voting and
         investment power.

(2)      Each holder of record of shares of Class A Common Stock is entitled to
         one vote per share held by such holder.


<PAGE>   88

(3)      Each holder of record of Class B Common Stock is entitled to ten votes
         for each share of Class B Common Stock held by such holder, except in
         certain circumstances.

(4)      The address of each of these persons is c/o Staff Builders, Inc., 1983
         Marcus Avenue, Lake Success, New York 11042. Each of these persons has
         sole power with respect to the voting and investment of the shares
         which he owns, except as follows: on November 1, 1991, Ephraim
         Koschitzki, a former executive officer and director of the Company,
         granted to Stephen Savitsky and David Savitsky a ten year revocable
         proxy to vote all shares of Common Stock now or hereafter owned of
         record by him. The Company believes that Mr. Koschitzki beneficially
         owns 225,440 shares of Class A Common Stock underlying options granted
         to him. As a result, (i) Stephen Savitsky has sole voting and
         investment power with respect to 2,844,739 shares of Class A Common and
         has shared voting power with respect to the 225,440 shares of Class A
         Common Stock beneficially owned by Mr. Koschitzki and (ii) David
         Savitsky has sole voting and investment power with respect to 2,635,287
         shares of Class A Common Stock and has shared voting power with respect
         to the 225,440 shares of Class A Common Stock beneficially owned by Mr.
         Koschitzki.

(5)      Includes options to purchase 334,000 shares of Class A Common Stock
         under the 1986 Non-Qualified Stock Option Plan.

(6)      Includes options to purchase 225,440 shares of Class A Common Stock
         granted to Ephraim Koschitzki which are subject to the revocable proxy
         referred to in footnote 4 above.

(7)      Includes 60,000 shares of Class A Common Stock held by Mr. Savitsky's
         wife as trustee for the benefit of one of their children. Mr. Savitsky
         disclaims beneficial ownership of these shares.

(8)      Includes options to purchase 320,000 shares of Class A Common Stock
         under the 1986 Non-Qualified Stock Option
         Plan.

(9)      Includes 7,450 shares of Class A Common Stock held by Mr. Savitsky's
         wife, 202,600 shares of Class A Common Stock held by Mr. Savitsky's
         wife as trustee for the benefit of their children and 101,200 shares of
         Class A Common Stock held by one of Mr. Savitsky's children. Mr.
         Savitsky disclaims beneficial ownership of these shares.


<PAGE>   89

(10)     Includes 1,000 shares of Class B Common Stock held by Mr. Savitsky's
         wife as trustee for the benefit of their three children. Mr. Savitsky
         disclaims beneficial ownership of these shares.

(11)     The address of each of these persons is c/o Staff Builders, Inc., 1983
         Marcus Avenue, Lake Success, New York 11042. Each of these persons has
         sole power with respect to the voting and investment of the shares
         which he owns.

(12)     Includes 1,000 shares of Class B Common Stock held by Dr. Firestone's
         wife. Dr. Firestone disclaims beneficial ownership of these shares.

(13)     Includes 2,000 shares of Class A Common Stock held by Mr. Meyers' wife.
         Mr. Meyers disclaims beneficial ownership of these shares.

(14)     Includes options to purchase 111,111 shares of Class A Common Stock
         under the 1998 Stock Option Plan.

(15)     Includes options to purchase 3,334 shares of Class A Common Stock under
         the 1993 Stock Option Plan and options to purchase 20,000 shares of
         Class A Common Stock under the 1998 Stock Option Plan.

(16)     Includes options to purchase 16,667 shares of Class A Common Stock
         under the 1993 Stock Option Plan.

(17)     S Squared Technology Corp. ("S Squared"), a registered investment
         adviser, is located at 515 Madison Avenue, New York, New York 10022.
         Includes 2,402,500 shares of Class A Common Stock for which S Squared
         has sole voting and sole investment power and 212,000 shares of Class A
         Common Stock for which S Squared has shared voting and shared
         investment power. The shares are owned by limited partnerships for
         which S Squared is the sole general partner, by advisory clients of S
         Squared, and by Seymour Goldblatt, the principal of S Squared, and
         members of his family.

(18)     Dimensional Fund Advisors, Inc. ("Dimensional"), a registered
         investment advisor, is located at 1299 Ocean Avenue, Santa Monica,
         California 90401. Dimensional is deemed to have beneficial ownership of
         1,372,460 shares of Class A Common Stock, all of which shares are held
         in portfolios of DFA Investment Dimensions Group Inc., a registered
         open-end investment company, or in series of the DFA Investment Trust
         Company, a Delaware business trust, or the DFA Group Trust and DFA
         Participation Group Trust, investment vehicles for qualified employee
         benefit plans.



<PAGE>   90

         Dimensional Fund Advisors Inc. serves as investment manager of these
         entities and disclaims beneficial ownership of all such shares.

(19)     Includes options to purchase 20,001 shares of Class A Common Stock
         under the 1993 Stock Option Plan, options to purchase 131,111 shares of
         Class A Common Stock under the 1998 Stock Option Plan, and options to
         purchase 654,000 shares of Class A Common Stock under the 1986
         Non-Qualified Stock Option Plan.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Effective April 1, 1992, the Company approved the sale by CTR
Management Corp. ("CTR") of a home care franchise for Nassau County, New York to
Bayit Care Corp. ("BCC"). The shareholders, officers and directors of BCC are
Stuart Savitsky, son of Stephen Savitsky, Samuel Schreier, the son-in-law of
Stephen Savitsky, and Julie Schreier, the daughter of Stephen Savitsky. The
terms and conditions of the franchise agreement between the Company and BCC,
entered into at the time of the sale, are substantially similar to those for
other licensees of the Company, including the term of ten years with a five year
renewal option. In connection with the acquisition of its franchise, CTR
purchased certain assets of an existing branch office of the Company for
$911,000. The purchase price was evidenced by a promissory note, dated August
30, 1989. BCC purchased the franchise from CTR by assuming this promissory note
which, at the time of BCC's purchase of the franchise, had an outstanding
principal balance of $844,573 (the "BCC Note"). The terms of the BCC Note
originally provided for repayment of the outstanding principal amount in 120
consecutive monthly installments of $7,038 each, commencing May 1, 1994,
together with interest at 3% over the prime rate, payable monthly. Effective
June 1, 1994, the BCC Note was amended and restated to (i) provide for the
repayment of the outstanding principal amount over a fifteen (15) year period,
and (ii) reduce the interest rate to the prime rate. The amended principal
payment schedule requires fixed monthly principal payments of $3,500 each with
all unpaid principal due at the end of the fifteen (15) year period or earlier
upon the termination of the franchise agreement for such franchise. The BCC Note
is secured by all of the licensee's assets. The Company restructured the BCC
Note because it found the additional monthly expense associated with the start
of the principal repayment schedule in May 1994 to have a clear negative impact
on the licensee's ability to operate the franchise. As described in greater
detail below, during the fiscal year ended February 28, 1999, the Company
retained $55,144 from the amount otherwise due to BCC under the terms of its
franchise agreement as interest payments on the BCC Note.


<PAGE>   91

The outstanding balance of the BCC Note was $645,073 at February 28, 1999.

         Effective March 1, 1998, Boro Care Corp. ("Boro") acquired a home care
franchise for Bronx, Kings, New York and Queens counties in New York. Stuart
Savitsky and Samuel Schreier each own 45% of the capital stock of Boro. To
acquire the franchise, Boro agreed to pay a $29,500 franchise fee, payable in 12
consecutive monthly payments of $2,458 commencing March 1, 1998. As part of the
franchise transaction, Boro purchased certain assets for $50,000 and issued a
$50,000 promissory note (the "First Boro Note") to the Company with respect to
such purchase. Boro also received a $200,000 line of credit and issued a
$200,000 promissory note (the "Second Boro Note") to the Company with respect to
such line of credit. The terms of the First Boro Note required repayment of the
$50,000 in 108 consecutive monthly payments of principal plus interest, computed
at 3% over prime, commencing March 1, 1999. The terms of the Second Boro Note
required monthly payments of interest, computed at 3% over prime, commencing 30
days after the first withdrawal of funds on the available line of credit.
Monthly principal payments were required commencing 24 months after the first
withdrawal of funds on the available line of credit, through the expiration date
of the line of credit on March 1, 2006. The terms and conditions of the
franchise agreement between the Company and Boro are substantially similar to
those for other licensees of the Company, except that the Boro franchise
agreement provided the licensee with two additional five-year renewal options.
Effective February 1, 1999, the Company repurchased the franchised territories
from Boro and the franchise agreement was terminated in an arm's length
transaction. The purchase price paid by the Company was $1.00 plus the
forgiveness of $286,548 in debt owed by Boro to the Company, including amounts
owed as of February 1, 1999 pursuant to the First Boro Note and the Second Boro
Note noted above. The terms of the termination agreement, including the
forgiveness of debt, are substantially similar to those for other recently
terminated licensees.

         Effective September 8, 1996, DSS Staffing Corp. ("DSS") acquired a
medical staffing services license from the Company for Nassau, Suffolk, Queens,
Kings, New York, Bronx and Richmond counties in New York. Stuart Savitsky and
Samuel Schreier each owns one third of the outstanding capital stock of DSS. As
part of the franchise transaction, DSS paid a $75,000 franchise fee, agreed to
make monthly payments of $10,500 for a period of five years and entered into a
franchise agreement with the Company. The terms and conditions of the franchise
agreement between the Company and DSS are substantially similar to those for
other licensees of the Company, except that the DSS franchise agreement provides
the licensee with two additional five-year renewal options.


<PAGE>   92


         Effective August 23, 1993, Home Care Plus, Inc. ("Home Care") acquired
a home care franchise from the Company for Bristol and Barnstable counties in
Massachusetts. Edward Teixeira and his wife each owns 25% of the outstanding
capital stock of Home Care. In purchasing the franchise, Home Care paid a
$23,000 franchise fee, received a commitment to advance up to $75,000 for
expenses from the Company, issued a $75,000 promissory note (the "Home Care
Note") to the Company with respect to such advance, and entered into a franchise
agreement with the Company. The terms of the Home Care Note required repayment
of the $75,000 in 60 consecutive monthly payments of principal and interest,
computed at 3% over prime, through August 1999. Effective April 1, 1998, the
Home Care Note was amended to provide for a three month payment deferral through
June 1998 and monthly principal and interest payments of $1,280 from July 1998
through November 1999. The terms and conditions of the franchise agreement
between the Company and Home Care are substantially similar to those for other
licensees of the Company, including the term of ten years with a five-year
renewal option. During the fiscal year ended February 28, 1999, the Company
retained $1,488 from the amount otherwise due Home Care under the terms of its
franchise agreement as interest payments on the Home Care Note. The outstanding
balance of the Home Care Note was $12,798 at February 28, 1999.

         Effective February 6, 1995, Home Care Plus Two, Inc. ("Home Care Two")
acquired a home care franchise from the Company for Worcester, Hampden and
Franklin counties in Massachusetts. Edward Teixeira and his wife each owns 25%
of the outstanding capital stock of Home Care Two. During fiscal 1996, Home Care
Two paid $29,500 for the purchase of this franchise. The terms and conditions of
the franchise agreement between the Company and Home Care Two are substantially
similar to those for other licensees of the Company, including the term of ten
years with a five-year renewal option. On November 27, 1996, Home Care Two
received a $50,000 advance for expenses for which a promissory note was issued
to the Company (the "Home Care Two Note"). The terms of the Home Care Two Note
required repayment of the $50,000 in 36 consecutive monthly payments of
principal and interest, computed at 3% over prime, through December 1999.
Effective April 1, 1998, the Home Care Two Note was amended to provide for a
three month payment deferral through June 1998 and monthly principal and
interest payments of $1,425 from July 1998 through March 2000. Mr. Teixeira
guaranteed payment of all amounts due under the Home Care Two Note. During the
fiscal year ended February 28, 1999, the Company retained $1,946 from the
amounts otherwise due Home Care Two under the terms of its franchise agreement
as interest payments on the Home Care Two Note. The outstanding balance of the
Home Care Two Note was $18,535 at February 28, 1999.


<PAGE>   93

         Effective March 1, 1999, the Company repurchased the franchised
territories from Home Care and Home Care Two and the franchise agreements were
terminated in an arm's length transaction. The purchase price paid by the
Company was $495,605, which included the assumption by the Company of certain
liabilities totaling $25,000 the forgiveness of $160,605 in debt owed by Home
Care and Home Care Two to the Company and the issuance by the Company of two
$155,000 promissory notes. Each promissory note bears interest at 8% per annum
and provides for 60 monthly payments of $3,142.84 commencing on April 1, 1999
and terminating on March 1, 2004. The terms of the termination agreement are
substantially similar to those for other recently terminated franchises.


         Effective February 20, 1998, ViTex, Inc. ("VTI") acquired a medical
staffing services franchise from the Company for Worcester County and
surrounding areas in Massachusetts. Edward Teixeira's wife owns 50% of the
capital stock of VTI. VTI agreed to pay a franchise fee of $10,000 in one
installment of $5,000, which was paid in February 1998, and the balance in five
monthly payments of $1,000 commencing June 1998. The terms and conditions of the
franchise agreement between the Company and VTI are substantially similar to
those for other licensees of the Company including the term of ten years with a
five-year renewal option. In connection with the termination of the Home Care
and Home Care Two franchise agreements noted above, Vitex relinquished its
franchise territories and the franchise agreement was terminated effective March
1, 1999.


<PAGE>   94


         Under the Company's franchise program, the Company processes and pays
the payroll to the field employees who service clients and invoices the clients
for such services. Each month the Company pays the licensee 60% of the gross
margin dollars (in general, the difference between the amount so invoiced and
the payroll and related expenses for such field employees) from the licensee's
business for the prior month's activity. Licensees are responsible for their
general and administrative expenses, including office payroll. If the licensee
elects, the Company will process payment of the licensee's office payroll and
some or all of the licensee's other administrative expenses, and withhold the
amount so expended from the 60% gross margin otherwise due the licensee.
During the fiscal year ended February 28, 1999, the Company paid (i) BCC
$162,301 under the terms of its franchise agreement, representing a 60% gross
margin of $1,236,575 less $55,144 and $42,000 of interest and principal,
respectively, withheld on the BCC Note and $977,130 withheld for administrative
expenses; (ii) DSS $961,956 under the terms of its franchise agreement,
representing a 60% gross margin of $2,591,522 less $1,629,566 withheld for
administrative expenses; (iii) Home Care $1,017,248 under the terms of its
franchise agreement, representing a 60% gross margin of $1,048,657 less $1,488
and of $11,519 of interest and principal, respectively, withheld on the Home
Care Note and $18,403 withheld for administrative expenses; (iv) Home Care Two
$117,932 under the terms of its franchise agreement, representing a 60% gross
margin of $923,594 less $1,946 and $11,405 of interest and principal,
respectively, withheld on the Home Care Two Note and $792,311 withheld for
administrative expenses; (v) Vitex $57,654 under the terms of its franchise
agreement, representing a 60% gross margin of $60,284 less $2,630 withheld for
administrative expenses and (v) Partners $492,900 under the terms of its
franchise agreement, representing a 60% gross margin of $1,321,822 less $2,105
and $250 of interest and principal, respectively, withheld on the Partners Note
and $826,567 withheld for administrative expenses.

         In order to facilitate the acquisition of a franchise by a willing
prospective licensee, the Company will frequently accept a promissory note as
consideration for the purchase from the Company of an existing branch location
and will


<PAGE>   95

occasionally advance expenses to a licensee. The Company's transactions with
BCC, DSS, Home Care, Home Care Two, VTI, Boro and Partners described above are
consistent with this business purpose and with accommodations which have been
granted to other, unaffiliated licensees.

         Although the Company has no formal policy regarding transactions with
affiliates, it does not intend to enter into a transaction with any affiliate on
terms less favorable to the Company than those it would receive in an arm's
length transaction with an unaffilitated party.






<PAGE>   96



                                     PART IV

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

(A)  FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

The financial statements, including the supporting schedules, filed as part of
the report, are listed in the Table of Contents to the Consolidated Financial
Statements.

(B)  REPORTS ON FORM 8-K

No reports on Form 8-K were filed by the Registrant for the quarter ended
February 28, 1999.





<PAGE>   97
(C) EXHIBITS

                                 EXHIBIT INDEX


EXHIBIT NO.                       DESCRIPTION
-----------                       -----------

3.1                        Restated Certificate of Incorporation of the
                           Company, filed July 11, 1988. (A)

3.2                        Certificate of Amendment to the Restated Certificate
                           of Incorporation of the Company, filed August 22,
                           1991. (B)

3.3                        Certificate of Amendment to the Restated Certificate
                           of Incorporation of the Company, filed September 3,
                           1992. (A)

3.4                        Certificate of Retirement of Stock of the Company,
                           filed February 28, 1994.

3.5                        Certificate of Retirement of Stock of the Company,
                           filed June 3, 1994. (A)

3.6                        Certificate of Designation, Rights and Preferences
                           of the Class A Preferred Stock of the Company, filed
                           June 6, 1994. (A)

3.7                        Certificate of Amendment of Restated Certificate of
                           Incorporation of the Company, filed August 23,
                           1994. (A)

3.8                        Certificate of Amendment of Restated Certificate
                           of Incorporation of the Company, filed October 26,
                           1995. (C)

3.9                        Certificate of Amendment of Restated Certificate
                           of Incorporation of the Company, filed December
                           19, 1995. (D)

3.10                       Plan Of Recapitalization dated as of May 12,
                           1995. (D)

3.11                       Amended and Restated By-Laws of the Company. (A)

4.1                        Specimen Class A Common Stock Certificate. (E)


---------------------
See Notes to Exhibits


<PAGE>   98


EXHIBIT NO.                       DESCRIPTION
-----------                       -----------

4.2                        Specimen Class B Common Stock Certificate. (F)

4.3                        Non-Qualified Option Agreement, dated March 27, 1998
                           between the Company and Ephraim Koschitzki. (G)

10.1                       1983 Incentive Stock Option Plan (incorporated by
                           reference to Exhibit 18.1 to the Company's
                           Registration Statement on Form S-18, (File No.
                           1-83939NY), filed with the Commission on
                           September 15, 1983).

10.2                       Amendment to the 1983 Incentive Stock Option Plan
                           (adopted on May 15, 1986). (A)

10.3                       Amendment to the 1983 Incentive Stock Option Plan,
                           dated January 1, 1987. (A)

10.4                       Amendment to the 1983 Incentive Stock Option Plan,
                           dated as of December 1, 1987. (A)

10.5                       Amendment to the 1983 Incentive Stock Option Plan,
                           dated as of August 3, 1988. (A)

10.6                       Amendment to the 1983 Incentive Stock Option Plan,
                           dated as of August 8, 1990.  (A)

10.7                       Amendment to the 1983 Incentive Stock Option Plan,
                           dated as of October 27, 1995. (H)

10.8                       1986 Non-Qualified Stock Option Plan of the
                           Company. (I)

10.9                       First Amendment to the 1986 Non-Qualified Stock
                           Option Plan, effective as of May 11, 1990. (A)

10.10                      Amendment to the 1986 Non-Qualified Stock Option
                           Plan, dated as of October 27, 1995. (J)

10.11                      Resolutions of the Company's Board of Directors
                           amending the 1983 Incentive Stock Option Plan and the
                           1986 Non-Qualified Stock Option Plan, dated as of
                           June 3, 1991. (A)


---------------------
See Notes to Exhibits

<PAGE>   99


EXHIBIT NO.                       DESCRIPTION
-----------                       -----------

10.12                      1993 Stock Option Plan of the Company. (A)

10.13                      1998 Stock Option Plan of the Company (incorporated
                           by reference to Exhibit C to the Company?s Proxy
                           Statement dated August 27, 1998, filed with the
                           Commission on August 27, 1998).

10.14                      Amended and Restated 1993 Employee Stock Purchase
                           Plan of the Company. (K)

10.15                      1998 Employee Stock Purchase Plan of the Company
                           (incorporated by reference to Exhibit D to the
                           Company's Proxy Statement dated August 27, 1998,
                           filed with the Commission on August 27, 1998).

10.16                      Executive Deferred Compensation Plan, effective as
                           of March 1, 1994.

10.17                      Form of Split-Dollar Life Insurance Agreement.

10.18                      1994 Performance-Based Stock Option Plan of the
                           Company (incorporated by reference to Exhibit B to
                           the Company's Proxy Statement, dated July 18, 1994,
                           filed with the Commission on July 27, 1994.)

10.19                      Stock Option Agreement, dated as of March 28, 1990,
                           under the Company's 1986 Non-Qualified Stock Option
                           Plan between the Company and Stephen Savitsky. (A)

10.20                      Stock Option Agreement, dated as of June 17, 1991,
                           under the Company's 1986 Non-Qualified Stock Option
                           Plan between the Company and Stephen Savitsky. (A)

10.21                      Stock Option Agreement, dated December 1, 1998,
                           under the Company's 1993 Stock Option Plan between
                           the Company and Stephen Savitsky. (L)


---------------------
See Notes to Exhibits



<PAGE>   100

EXHIBIT NO.                       DESCRIPTION
-----------                       -----------

10.22                      Stock Option Agreement, dated December 1, 1998, under
                           the Company's 1994 Performance-Based Stock Option
                           Plan between the Company and Stephen Savitsky. (L)

10.23                      Stock Option Agreement, dated as of March 28, 1990,
                           under the Company's 1986 Non-Qualified Stock Option
                           Plan between the Company and David Savitsky. (A)

10.24                      Stock Option Agreement, dated as of June 17, 1991,
                           under the Company's 1986 Non-Qualified Stock Option
                           Plan between the Company and David Savitsky. (A)

10.25                      Stock Option Agreement, dated December 1, 1998, under
                           the Company's 1993 Stock Option Plan between the
                           Company and David Savitsky. (L)

10.26                      Stock Option Agreement, dated December 1, 1998, under
                           the Company's 1994 Performance-Based Stock Option
                           Plan between the Company and David Savitsky. (L)

10.27                      Stock Option Agreement, dated December 1, 1998, under
                           the Company's 1993 Stock Option Plan, between the
                           Company and Edward Teixeira. (L)

10.28                      Stock Option Agreement, dated December 1, 1998 under
                           the Company's 1994 Performance-Based Stock Option
                           Plan, between the Company and Edward Teixeira. (L)

10.29                      Stock Option Agreement, dated December 1, 1998,
                           under the Company's 1994 Performance-Based Stock
                           Option Plan, between the Company and Edward
                           Teixeira. (L)

10.30                      Stock Option Agreement, dated December 1, 1998,
                           under the Company's 1998 Stock Option Plan,
                           between the Company and Edward
                           Teixiera. (L)

---------------------
See Notes to Exhibits

<PAGE>   101


EXHIBIT NO.                       DESCRIPTION
-----------                       -----------

10.31                      Stock Option Agreement, dated December 1, 1998,
                           under the Company's 1994 Performance-Based
                           Stock Option Plan, between the Company and Dale
                           Clift. (L)

10.32                      Stock Option Agreement, dated December 1, 1998,
                           under the Company's 1994 Performance-Based
                           Stock Option Plan, between the Company and Dale
                           Clift. (L)

10.33                      Stock Option Agreement, dated December 1, 1998,
                           under the Company's 1998 Stock Option Plan,
                           between the Company and Dale R. Clift.

10.34                      Stock Option Agreement, dated December 1, 1998,
                           under the Company's 1993 Stock Option Plan,
                           between the Company and Sandra Parshall. (L)

10.35                      Stock Option Agreement, dated December 1, 1998,
                           under the Company's 1994 Performance-Based Stock
                           Option Plan between the Company and Sandra
                           Parshall. (L)

10.36                      Stock Option Agreement, dated December 1, 1998,
                           under the Company's 1994 Performance-Based Stock
                           Option Plan, between the Company and Willard T.
                           Derr.

10.37                      Stock Option Agreement, dated December 1, 1998,
                           under the Company's 1994 Performance-Based Stock
                           Option Plan, between the Company and Willard T. Derr.

10.38                      Stock Option Agreement, dated December 1, 1998,
                           under the Company's 1998 Stock Option Plan,
                           between the Company and Willard T. Derr.

10.39                      Employment Agreement, dated as of June 1, 1987,
                           between the Company and Stephen Savitsky. (A)


---------------------
See Notes to Exhibits

<PAGE>   102


EXHIBIT NO.                       DESCRIPTION
-----------                       -----------

10.40                      Amendment, dated as of October 31, 1991, to the
                           Employment Agreement between the Company and Stephen
                           Savitsky. (A)

10.41                      Amendment, dated as of December 7, 1992, to the
                           Employment Agreement between the Company and Stephen
                           Savitsky. (A)

10.42                      Employment Agreement, dated as of June 1, 1987,
                           between the Company and David Savitsky. (A)

10.43                      Amendment, dated as of October 31, 1991, to the
                           Employment Agreement between the Company and David
                           Savitsky. (A)

10.44                      Amendment, dated as of January 3, 1992, to the
                           Employment Agreement between the Company and David
                           Savitsky. (A)

10.45                      Amendment, dated as of December 7, 1992, to the
                           Employment Agreement between the Company and David
                           Savitsky.  (A)

10.46                      Employment Agreement, dated as of April 15, 1999,
                           between the Company and Edward Teixeira.

10.47                      Employment Agreement, dated as of February 9,
                           1998, between the Company and Dale R. Clift. (G)

10.48                      First Amendment to Employment Agreement, dated
                           as of December 1, 1998, to the Employment Agreement
                           between the Company and Dale R. Clift. (L)

10.49                      Employment Agreement, dated as of March 1, 1998,
                           between Staff Builders, Inc. (NY) and Willard T.
                           Derr. (O)


---------------------
See Notes to Exhibits




<PAGE>   103


EXHIBIT NO.                       DESCRIPTION
-----------                       -----------

10.50                      Employment Agreement, dated as of March 1, 1999,
                           between Staff Builders, Inc. (NY) and Sandra
                           Parshall.

10.51                      Employment Agreement, dated as of October 1, 1997,
                           between Staff Builders, Inc. (NY) and Cynthia
                           Nye. (P)

10.52                      Agreement and Release, dated as of December 24, 1998,
                           between Staff Builders, Inc. (NY) and Cynthia
                           Nye. (L)

10.53                      Agreement and Release, dated as of February 28, 1997,
                           between Staff Builders, Inc. (NY) and Larry
                           Campbell. (N)

10.54                      Amended and Restated Loan and Security Agreement,
                           dated as of January 8, 1997, between the Company,
                           its subsidiaries and Mellon Bank, N.A.  (N)

10.55                      First Amendment to Amended and Restated Loan and
                           Security Agreement dated as of April 27, 1998,
                           between the Company, its subsidiaries and Mellon
                           Bank, N.A. (G)

10.56                      Master Lease Agreement dated as of December 4, 1996,
                           between the Company and Chase Equipment Leasing,
                           Inc. (N)

10.57                      Premium Finance Agreement, Disclosure Statement
                           and Security Agreement dated as of December 26, 1996,
                           between the Company and A.I. Credit Corp. (N)

10.58                      Agreement of Lease, dated as of October 1, 1993,
                           between Triad III Associates and Staff Builders, Inc.
                           (NY). (A)

10.59                      First Lease Amendment, dated October 25, 1998,
                           between Matterhorn USA, Inc. and Staff Builders,
                           Inc. (NY)


-----------------------
See Notes to Exhibits




<PAGE>   104


EXHIBIT NO.                       DESCRIPTION
-----------                       -----------

10.60                      Supplemental Agreement, dated as of January 21, 1994,
                           between General Electric Capital Corporation, Triad
                           III Associates and Staff Builders, Inc. (NY) (A)

10.61                      Agreement of Lease, dated as of June 19, 1995,
                           between Triad III Associates and Staff Builders,
                           Inc. (NY). (D)

10.62                      Agreement of Lease, dated as of February 12, 1996,
                           between Triad III Associates and Staff Builders,
                           Inc. (NY). (D)

10.63                      License Agreement, dated as of April 23, 1996,
                           between Matterhorn One, Ltd. and Staff Builders,
                           Inc. (NY). (N)

10.64                      License Agreement, dated as of January 3, 1997,
                           between Matterhorn USA, Inc. and Staff Builders,
                           Inc. (NY) (N)

10.65                      License Agreement, dated as of January 16, 1997,
                           between Matterhorn USA, Inc. and Staff Builders,
                           Inc. (NY). (N)

10.66                      License Agreement, dated as of December 16, 1998,
                           between Matterhorn USA, Inc. and Staff Builders,
                           Inc. (NY)

10.67                      Lease Agreement, dated as of November 4, 1996,
                           between Airport Landing Center, L.L.C. and Staff
                           Builders Home Health Care, Inc. (N)

10.68                      Asset Purchase Agreement dated as of June 22, 1993,
                           between Albert Gallatin Home Care, Inc and Albert
                           Gallatin Visiting Nurse Association, Inc.

10.69                      Stock Purchase Agreement, dated as of August 30,
                           1995, between Staff Builders Services, Inc.,
                           MedVisit, Inc. and Roger Jack Pleasant. (D)


---------------------
See Notes to Exhibits



<PAGE>   105


EXHIBIT NO.                       DESCRIPTION
-----------                       -----------

10.70                      Asset Purchase and Sale Agreement, dated as of
                           September 1, 1995, between Staff Builders
                           Services, Inc. and Accredicare, Inc. (D)

10.71                      Asset Purchase and Sale Agreement, dated as of
                           September 6, 1996, by and among ATC Healthcare
                           Services, Inc. and Staff Builders, Inc. and William
                           Halperin and All Care Nursing Service, Inc. (Q)

10.72                      Stock Redemption Agreement, dated as of March 18,
                           1997, between the Company and American HomeCare
                           Management Corp. (N)

10.73                      Stock Purchase Agreement by and among the Company
                           and Raymond T. Sheerin, Michael Altman, Stephen
                           Fleischner and Chelsea Computer Consultants, Inc.,
                           dated September 24, 1996. (M)

10.74                      Amendment No. 1 to Stock Purchase Agreement by and
                           among the Company and Raymond T. Sheerin, Michael
                           Altman, Stephen Fleischner and Chelsea Computer
                           Consultants, Inc., dated October 30, 1997. (M)

10.75                      Shareholders Agreement between Raymond T. Sheerin
                           and Michael Altman and Stephen Fleischner and the
                           Company and Chelsea Computer Consultants, Inc.,
                           dated September 24, 1996. (M)

10.76                      Amendment No. 1 to Shareholders Agreement among
                           Chelsea Computer Consultants, Inc., Raymond T.
                           Sheerin, Michael Altman and the Company, dated
                           October 30, 1997. (M)

10.77                      Indemnification Agreement, dated as of September 1,
                           1987, between the Company and Stephen Savitsky. (A)



---------------------
See Notes To Exhibits






<PAGE>   106


EXHIBIT NO.                       DESCRIPTION
-----------                       -----------

10.78                      Indemnification Agreement, dated as of September 1,
                           1987, between the Company and David Savitsky. (A)

10.79                      Indemnification Agreement, dated as of September 1,
                           1987, between the Company and Bernard J.
                           Firestone. (A)

10.80                      Indemnification Agreement, dated as of September 1,
                           1987, between the Company and Jonathan Halpert. (A)

10.81                      Indemnification Agreement, dated as of May 2, 1995,
                           between the Company and Donald Meyers. (N)

10.82                      Indemnification Agreement, dated as of May 2, 1995,
                           between the Company and Edward Teixeira. (A)

10.83                      Form of Home Health Care Services Franchise
                           Agreement. (B)

10.84                      Form of Medical Staffing Services Franchise
                           Agreement (D)

21                         Subsidiaries of the Company.

24                         Powers of Attorney.

---------------------
See Notes to Exhibits


<PAGE>   107


EXHIBIT NO.                       DESCRIPTION
-----------                       -----------

                                NOTES TO EXHIBITS
                                -----------------

(A)               Incorporated by reference to the Company's exhibit booklet to
                  its Form 10-K for the fiscal year ended February 28, 1995
                  (File No. 0-11380), filed with the
                  Commission on May 5, 1995.

(B)               Incorporated by reference to the Company's Registration
                  Statement on Form S-1 (File No. 33-43728), dated January 29,
                  1992.

(C)               Incorporated by reference to the Company's Form 8-K  filed
                  with the Commission on October 31, 1995.

(D)               Incorporated by reference to the Company?s exhibit booklet to
                  its Form 10-K for the fiscal year ended February 28, 1996
                  (File No. 0-11380), filed with the Commission on May 13, 1996.

(E)               Incorporated by reference to the Company's Form 8-A filed with
                  the Commission on October 24, 1995.

(F)               Incorporated by reference to the Company's Form 8-A filed with
                  the Commission on October 24, 1995.

(G)               Incorporated by reference to the Company?s exhibit booklet to
                  its Form 10-K for the fiscal year ended February 28, 1998
                  (File No. 0-11380), filed with the Commission on May 28, 1998.

(H)               Incorporated by reference to the Company's Registration
                  Statement on Form S-8 (File No. 33-63941), filed with the
                  Commission on November 2, 1995.

(I)               Incorporated by reference to the Company's Registration
                  Statement on Form S-4, as amended (File No. 33-9261), dated
                  April 9, 1987.

(J)               Incorporated by reference to the Company's Registration
                  Statement on Form S-8 (File No. 33-63939), filed with the
                  Commission on November 2, 1995.


<PAGE>   108

EXHIBIT NO.                       DESCRIPTION
-----------                       -----------

                                NOTES TO EXHIBITS
                                -----------------

(K)               Incorporated by reference to the Company's Registration
                  Statement on Form S-1 (File No. 33-71974), filed with the
                  Commission on November 19, 1993.

(L)               Incorporated by reference to the Company?s Form 10-Q for the
                  quarterly period ended November 30, 1998 (File No. 0-11380),
                  filed with the Commission on January 19 1999.

(M)               Incorporated by reference to the Company's Form 10-Q for the
                  quarterly period ended November 30, 1997 (File No. 0-11380),
                  filed with the Commission on January 14, 1998.

(N)               Incorporated by reference to the Company?s exhibit booklet to
                  its Form 10-K for the fiscal year ended February 28, 1997
                  (File No. 0-11380), filed with the Commission on May 27, 1997.

(O)               Incorporated by reference to the Company?s Form 10-Q for the
                  quarterly period ended August 31, 1998 (File No. 0-11380),
                  filed with the Commission on October 15, 1998.

(P)               Incorporated by reference to the Company?s Form 10 for the
                  quarterly period ended May 31, 1998 (File No. 0-11380), filed
                  with the Commission on July 15, 1998.

(Q)               Incorporated by reference to the Company?s Form 10-Q for the
                  quarterly period ended November 30, 1996 (File No. 0-11380),
                  filed with the Commission on January 14, 1997.
<PAGE>   109

                                   SIGNATURES

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


                                               STAFF BUILDERS, INC.
                                               By:  /S/ STEPHEN SAVITSKY
                                                  --------------------------
                                                  Stephen Savitsky
                                                  Chairman of the Board,
                                                  President and Chief
                                                  Executive Officer
Dated:   June 11, 1999

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

<TABLE>
<CAPTION>

         SIGNATURE                                  TITLE                        DATE
------------------------------             -------------------------        ---------------------

<S>                                        <C>                              <C>
/S/ STEPHEN SAVITSKY                       Chairman of the Board,                June 11, 1999
------------------------------             President and Chief
Stephen Savitsky                           Executive Officer
                                           (Principal Executive
                                           Officer) and Director

/S/ DAVID SAVITSKY                         President, Secretary,                 June 11, 1999
------------------------------             Treasurer and Director
David Savitsky


/S/ DALE R. CLIFT                          Executive Vice President,             June 11, 1999
------------------------------             Finance, Chief Operating
Dale R. Clift                              Officer and Chief Financial
                                           Officer (Principal Financial
                                           Officer)

/S/ WILLARD T. DERR                        Sr. Vice President-                   June 11, 1999
------------------------------             Corporate Controller
Willard T. Derr                            (Principal Accounting
                                           Officer)

         *                                 Director                              June 11, 1999
------------------------------
Bernard J. Firestone,
  Ph.D.

         *                                 Director                              June 11, 1999
------------------------------
Jonathan Halpert,
  Ph.D.

         *                                 Director                              June 11, 1999
------------------------------
Donald Meyers

* By:  /S/ STEPHEN SAVITSKY
       -----------------------
       (Stephen Savitsky,
        Attorney-in-Fact)
</TABLE>




<PAGE>   110


                                 EXHIBIT INDEX


EXHIBIT NO.                       DESCRIPTION
-----------                       -----------

3.1                        Restated Certificate of Incorporation of the
                           Company, filed July 11, 1988. (A)

3.2                        Certificate of Amendment to the Restated Certificate
                           of Incorporation of the Company, filed August 22,
                           1991. (B)

3.3                        Certificate of Amendment to the Restated Certificate
                           of Incorporation of the Company, filed September 3,
                           1992. (A)

3.4                        Certificate of Retirement of Stock of the Company,
                           filed February 28, 1994.

3.5                        Certificate of Retirement of Stock of the Company,
                           filed June 3, 1994. (A)

3.6                        Certificate of Designation, Rights and Preferences
                           of the Class A Preferred Stock of the Company, filed
                           June 6, 1994. (A)

3.7                        Certificate of Amendment of Restated Certificate of
                           Incorporation of the Company, filed August 23,
                           1994. (A)

3.8                        Certificate of Amendment of Restated Certificate
                           of Incorporation of the Company, filed October 26,
                           1995. (C)

3.9                        Certificate of Amendment of Restated Certificate
                           of Incorporation of the Company, filed December
                           19, 1995. (D)

3.10                       Plan Of Recapitalization dated as of May 12,
                           1995. (D)

3.11                       Amended and Restated By-Laws of the Company. (A)

4.1                        Specimen Class A Common Stock Certificate. (E)


---------------------
See Notes to Exhibits


<PAGE>   111


EXHIBIT NO.                       DESCRIPTION
-----------                       -----------

4.2                        Specimen Class B Common Stock Certificate. (F)

   Non-Qualified Option Agreement, dated March 27, 1998 between the Company and
   Ephraim Koschitzki. (G)

10.1                       1983 Incentive Stock Option Plan (incorporated by
                           reference to Exhibit 18.1 to the Company's
                           Registration Statement on Form S-18, (File No.
                           1-83939NY), filed with the Commission on
                           September 15, 1983).

10.2                       Amendment to the 1983 Incentive Stock Option Plan
                           (adopted on May 15, 1986). (A)

10.3                       Amendment to the 1983 Incentive Stock Option Plan,
                           dated January 1, 1987. (A)

10.4                       Amendment to the 1983 Incentive Stock Option Plan,
                           dated as of December 1, 1987. (A)

10.5                       Amendment to the 1983 Incentive Stock Option Plan,
                           dated as of August 3, 1988. (A)

10.6                       Amendment to the 1983 Incentive Stock Option Plan,
                           dated as of August 8, 1990.  (A)

10.7                       Amendment to the 1983 Incentive Stock Option Plan,
                           dated as of October 27, 1995. (H)

10.8                       1986 Non-Qualified Stock Option Plan of the
                           Company. (I)

10.9                       First Amendment to the 1986 Non-Qualified Stock
                           Option Plan, effective as of May 11, 1990. (A)

10.10                      Amendment to the 1986 Non-Qualified Stock Option
                           Plan, dated as of October 27, 1995. (J)

10.11                      Resolutions of the Company's Board of Directors
                           amending the 1983 Incentive Stock Option Plan and the
                           1986 Non-Qualified Stock Option Plan, dated as of
                           June 3, 1991. (A)


---------------------
See Notes to Exhibits

<PAGE>   112


EXHIBIT NO.                       DESCRIPTION
-----------                       -----------

10.12                      1993 Stock Option Plan of the Company. (A)

10.13                      1998 Stock Option Plan of the Company (incorporated
                           by reference to Exhibit C to the Company?s Proxy
                           Statement dated August 27, 1998, filed with the
                           Commission on August 27, 1998).

10.14                      Amended and Restated 1993 Employee Stock Purchase
                           Plan of the Company. (K)

10.15                      1998 Employee Stock Purchase Plan of the Company
                           (incorporated by reference to Exhibit D to the
                           Company?s Proxy Statement dated August 27, 1998,
                           filed with the Commission on August 27, 1998).

10.16                      Executive Deferred Compensation Plan, effective as
                           of March 1, 1994.

10.17                      Form of Split-Dollar Life Insurance Agreement.

10.18                      1994 Performance-Based Stock Option Plan of the
                           Company (incorporated by reference to Exhibit B to
                           the Company's Proxy Statement, dated July 18, 1994,
                           filed with the Commission on July 27, 1994.)

10.19                      Stock Option Agreement, dated as of March 28, 1990,
                           under the Company's 1986 Non-Qualified Stock Option
                           Plan between the Company and Stephen Savitsky. (A)

10.20                      Stock Option Agreement, dated as of June 17, 1991,
                           under the Company's 1986 Non-Qualified Stock Option
                           Plan between the Company and Stephen Savitsky. (A)

10.21                      Stock Option Agreement, dated December 1, 1998,
                           under the Company's 1993 Stock Option Plan between
                           the Company and Stephen Savitsky. (L)


---------------------
See Notes to Exhibits



<PAGE>   113

EXHIBIT NO.                       DESCRIPTION
-----------                       -----------

10.22                      Stock Option Agreement, dated December 1, 1998, under
                           the Company's 1994 Performance-Based Stock Option
                           Plan between the Company and Stephen Savitsky. (L)

10.23                      Stock Option Agreement, dated as of March 28, 1990,
                           under the Company's 1986 Non-Qualified Stock Option
                           Plan between the Company and David Savitsky. (A)

10.24                      Stock Option Agreement, dated as of June 17, 1991,
                           under the Company's 1986 Non-Qualified Stock Option
                           Plan between the Company and David Savitsky. (A)

10.25                      Stock Option Agreement, dated December 1, 1998, under
                           the Company's 1993 Stock Option Plan between the
                           Company and David Savitsky. (L)

10.26                      Stock Option Agreement, dated December 1, 1998, under
                           the Company's 1994 Performance-Based Stock Option
                           Plan between the Company and David Savitsky. (L)

10.27                      Stock Option Agreement, dated December 1, 1998, under
                           the Company's 1993 Stock Option Plan, between the
                           Company and Edward Teixeira. (L)

10.28                      Stock Option Agreement, dated December 1, 1998 under
                           the Company's 1994 Performance-Based Stock Option
                           Plan, between the Company and Edward Teixeira. (L)

10.29                      Stock Option Agreement, dated December 1, 1998,
                           under the Company's 1994 Performance-Based Stock
                           Option Plan, between the Company and Edward
                           Teixeira. (L)

10.30                      Stock Option Agreement, dated December 1, 1998,
                           under the Company's 1998 Stock Option Plan,
                           between the Company and Edward
                           Teixiera. (L)

---------------------
See Notes to Exhibits

<PAGE>   114


EXHIBIT NO.                       DESCRIPTION
-----------                       -----------

10.31                      Stock Option Agreement, dated December 1, 1998,
                           under the Company's 1994 Performance-Based
                           Stock Option Plan, between the Company and Dale
                           Clift. (L)

10.32                      Stock Option Agreement, dated December 1, 1998,
                           under the Company's 1994 Performance-Based
                           Stock Option Plan, between the Company and Dale
                           Clift. (L)

10.33                      Stock Option Agreement, dated December 1, 1998,
                           under the Company's 1998 Stock Option Plan,
                           between the Company and Dale R. Clift.

10.34                      Stock Option Agreement, dated December 1, 1998,
                           under the Company's 1993 Stock Option Plan,
                           between the Company and Sandra Parshall. (L)

10.35                      Stock Option Agreement, dated December 1, 1998,
                           under the Company's 1994 Performance-Based Stock
                           Option Plan between the Company and Sandra
                           Parshall. (L)

10.36                      Stock Option Agreement, dated December 1, 1998,
                           under the Company's 1994 Performance-Based Stock
                           Option Plan, between the Company and Willard T.
                           Derr.

10.37                      Stock Option Agreement, dated December 1, 1998,
                           under the Company's 1994 Performance-Based Stock
                           Option Plan, between the Company and Willard T. Derr.

10.38                      Stock Option Agreement, dated December 1, 1998,
                           under the Company's 1998 Stock Option Plan,
                           between the Company and Willard T. Derr.

10.39                      Employment Agreement, dated as of June 1, 1987,
                           between the Company and Stephen Savitsky. (A)


---------------------
See Notes to Exhibits

<PAGE>   115


EXHIBIT NO.                       DESCRIPTION
-----------                       -----------

10.40                      Amendment, dated as of October 31, 1991, to the
                           Employment Agreement between the Company and Stephen
                           Savitsky. (A)

10.41                      Amendment, dated as of December 7, 1992, to the
                           Employment Agreement between the Company and Stephen
                           Savitsky. (A)

10.42                      Employment Agreement, dated as of June 1, 1987,
                           between the Company and David Savitsky. (A)

10.43                      Amendment, dated as of October 31, 1991, to the
                           Employment Agreement between the Company and David
                           Savitsky. (A)

10.44                      Amendment, dated as of January 3, 1992, to the
                           Employment Agreement between the Company and David
                           Savitsky. (A)

10.45                      Amendment, dated as of December 7, 1992, to the
                           Employment Agreement between the Company and David
                           Savitsky.  (A)

10.46                      Employment Agreement, dated as of April 15, 1999,
                           between the Company and Edward Teixeira.

10.47                      Employment Agreement, dated as of February 9,
                           1998, between Staff Builders, Inc. (NY) and Dale
                           R. Clift. (G)

10.48                      First Amendment to Employment Agreement, dated
                           as of December 1, 1998, to the Employment Agreement
                           between the Company and Dale R. Clift. (L)

10.49                      Employment Agreement, dated as of March 1, 1998,
                           between Staff Builders, Inc. (NY) and Willard T.
                           Derr. (O)


---------------------
See Notes to Exhibits




<PAGE>   116


EXHIBIT NO.                       DESCRIPTION
-----------                       -----------

10.50                      Employment Agreement, dated as of March 1, 1999,
                           between Staff Builders, Inc. (NY) and Sandra
                           Parshall.

10.51                      Employment Agreement, dated as of October 1, 1997,
                           between Staff Builders, Inc. (NY) and Cynthia
                           Nye. (P)

10.52                      Agreement and Release, dated as of December 24, 1998,
                           between Staff Builders, Inc. (NY) and Cynthia
                           Nye. (L)

10.53                      Agreement and Release, dated as of February 28, 1997,
                           between Staff Builders, Inc. (NY) and Larry
                           Campbell. (N)

10.54                      Amended and Restated Loan and Security Agreement,
                           dated as of January 8, 1997, between the Company,
                           its subsidiaries and Mellon Bank, N.A.  (N)

10.55                      First Amendment to Amended and Restated Loan and
                           Security Agreement dated as of April 27, 1998,
                           between the Company, its subsidiaries and Mellon
                           Bank, N.A. (G)

10.56                      Master Lease Agreement dated as of December 4, 1996,
                           between the Company and Chase Equipment Leasing,
                           Inc. (N)

10.57                      Premium Finance Agreement, Disclosure Statement
                           and Security Agreement dated as of December 26, 1996,
                           between the Company and A.I. Credit Corp. (N)

10.58                      Agreement of Lease, dated as of October 1, 1993,
                           between Triad III Associates and Staff Builders, Inc.
                           (NY). (A)

10.59                      First Lease Amendment, dated October 25, 1998,
                           between Matterhorn USA, Inc. and Staff Builders,
                           Inc. (NY)


-----------------------
See Notes to Exhibits




<PAGE>   117


EXHIBIT NO.                       DESCRIPTION
-----------                       -----------

10.60                      Supplemental Agreement, dated as of January 21, 1994,
                           between General Electric Capital Corporation, Triad
                           III Associates and Staff Builders, Inc. (NY) (A)

10.61                      Agreement of Lease, dated as of June 19, 1995,
                           between Triad III Associates and Staff Builders,
                           Inc. (NY). (D)

10.62                      Agreement of Lease, dated as of February 12, 1996,
                           between Triad III Associates and Staff Builders,
                           Inc. (NY). (D)

10.63                      License Agreement, dated as of April 23, 1996,
                           between Matterhorn One, Ltd. and Staff Builders,
                           Inc. (NY). (N)

10.64                      License Agreement, dated as of January 3, 1997,
                           between Matterhorn USA, Inc. and Staff Builders,
                           Inc. (NY) (N)

10.65                      License Agreement, dated as of January 16, 1997,
                           between Matterhorn USA, Inc. and Staff Builders,
                           Inc. (NY). (N)

10.66                      License Agreement, dated as of December 16, 1998,
                           between Matterhorn USA, Inc. and Staff Builders,
                           Inc. (NY)

10.67                      Lease Agreement, dated as of November 4, 1996,
                           between Airport Landing Center, L.L.C. and Staff
                           Builders Home Health Care, Inc. (N)

10.68                      Asset Purchase Agreement dated as of June 22, 1993,
                           between Albert Gallatin Home Care, Inc and Albert
                           Gallatin Visiting Nurse Association, Inc.

10.69                      Stock Purchase Agreement, dated as of August 30,
                           1995, between Staff Builders Services, Inc.,
                           MedVisit, Inc. and Roger Jack Pleasant. (D)


---------------------
See Notes to Exhibits



<PAGE>   118


EXHIBIT NO.                       DESCRIPTION
-----------                       -----------

10.70                      Asset Purchase and Sale Agreement, dated as of
                           September 1, 1995, between Staff Builders
                           Services, Inc. and Accredicare, Inc. (D)

10.71                      Asset Purchase and Sale Agreement, dated as of
                           September 6, 1996, by and among ATC Healthcare
                           Services, Inc. and Staff Builders, Inc. and William
                           Halperin and All Care Nursing Service, Inc. (Q)

10.72                      Stock Redemption Agreement, dated as of March 18,
                           1997, between the Company and American HomeCare
                           Management Corp. (N)

10.73                      Stock Purchase Agreement by and among the Company
                           and Raymond T. Sheerin, Michael Altman, Stephen
                           Fleischner and Chelsea Computer Consultants, Inc.,
                           dated September 24, 1996. (M)

10.74                      Amendment No. 1 to Stock Purchase Agreement by and
                           among the Company and Raymond T. Sheerin, Michael
                           Altman, Stephen Fleischner and Chelsea Computer
                           Consultants, Inc., dated October 30, 1997. (M)

10.75                      Shareholders Agreement between Raymond T. Sheerin
                           and Michael Altman and Stephen Fleischner and the
                           Company and Chelsea Computer Consultants, Inc.,
                           dated September 24, 1996. (M)

10.76                      Amendment No. 1 to Shareholders Agreement among
                           Chelsea Computer Consultants, Inc., Raymond T.
                           Sheerin, Michael Altman and the Company, dated
                           October 30, 1997. (M)

10.77                      Indemnification Agreement, dated as of September 1,
                           1987, between the Company and Stephen Savitsky. (A)



---------------------
See Notes To Exhibits






<PAGE>   119


EXHIBIT NO.                       DESCRIPTION
-----------                       -----------

10.78                      Indemnification Agreement, dated as of September 1,
                           1987, between the Company and David Savitsky. (A)

10.79                      Indemnification Agreement, dated as of September 1,
                           1987, between the Company and Bernard J.
                           Firestone. (A)

10.80                      Indemnification Agreement, dated as of September 1,
                           1987, between the Company and Jonathan Halpert. (A)

10.81                      Indemnification Agreement, dated as of May 2, 1995,
                           between the Company and Donald Meyers. (N)

10.82                      Indemnification Agreement, dated as of May 2, 1995,
                           between the Company and Edward Teixeira. (A)

10.83                      Form of Home Health Care Services Franchise
                           Agreement. (B)

10.84                      Form of Medical Staffing Services Franchise
                           Agreement. (D)

21                         Subsidiaries of the Company.

24                         Powers of Attorney.

27                         Financial Data Schedule.
---------------------
See Notes to Exhibits


<PAGE>   120


EXHIBIT NO.                       DESCRIPTION
-----------                       -----------

                                NOTES TO EXHIBITS
                                -----------------

(A)               Incorporated by reference to the Company's exhibit booklet to
                  its Form 10-K for the fiscal year ended February 28, 1995
                  (File No. 0-11380), filed with the
                  Commission on May 5, 1995.

(B)               Incorporated by reference to the Company's Registration
                  Statement on Form S-1 (File No. 33-43728), dated January 29,
                  1992.

(C)               Incorporated by reference to the Company's Form 8-K  filed
                  with the Commission on October 31, 1995.

(D)               Incorporated by reference to the Company?s exhibit booklet to
                  its Form 10-K for the fiscal year ended February 28, 1996
                  (File No. 0-11380), filed with the Commission on May 13, 1996.

(E)               Incorporated by reference to the Company's Form 8-A filed with
                  the Commission on October 24, 1995.

(F)               Incorporated by reference to the Company's Form 8-A filed with
                  the Commission on October 24, 1995.

(G)               Incorporated by reference to the Company?s exhibit booklet to
                  its Form 10-K for the fiscal year ended February 28, 1998
                  (File No. 0-11380), filed with the Commission on May 28, 1998.

(H)               Incorporated by reference to the Company's Registration
                  Statement on Form S-8 (File No. 33-63941), filed with the
                  Commission on November 2, 1995.

(I)               Incorporated by reference to the Company's Registration
                  Statement on Form S-4, as amended (File No. 33-9261), dated
                  April 9, 1987.

(J)               Incorporated by reference to the Company's Registration
                  Statement on Form S-8 (File No. 33-63939), filed with the
                  Commission on November 2, 1995.


<PAGE>   121

EXHIBIT NO.                       DESCRIPTION
-----------                       -----------

                                NOTES TO EXHIBITS
                                -----------------

(K)               Incorporated by reference to the Company's Registration
                  Statement on Form S-1 (File No. 33-71974), filed with the
                  Commission on November 19, 1993.

(L)               Incorporated by reference to the Company?s Form 10-Q for the
                  quarterly period ended November 30, 1998 (File No. 0-11380),
                  filed with the Commission on January 19 1999.

(M)               Incorporated by reference to the Company's Form 10-Q for the
                  quarterly period ended November 30, 1997 (File No. 0-11380),
                  filed with the Commission on January 14, 1998.

(N)               Incorporated by reference to the Company?s exhibit booklet to
                  its Form 10-K for the fiscal year ended February 28, 1997
                  (File No. 0-11380), filed with the Commission on May 27, 1997.

(O)               Incorporated by reference to the Company?s Form 10-Q for the
                  quarterly period ended August 31, 1998 (File No. 0-11380),
                  filed with the Commission on October 15, 1998.

(P)               Incorporated by reference to the Company?s Form 10 for the
                  quarterly period ended May 31, 1998 (File No. 0-11380), filed
                  with the Commission on July 15, 1998.

(Q)               Incorporated by reference to the Company?s Form 10-Q for the
                  quarterly period ended November 30, 1996 (File No. 0-11380),
                  filed with the Commission on January 14, 1997.