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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K/A

[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 acquired 100% of the
outstanding capital stock of the Staff Builders subsidiaries engaged in the home
health care business. The spin-off was 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 was 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, 11,809,694 shares of TLC common stock
was distributed to holders of Staff Builders common stock. Staff Builders'
supplemental staffing business will remain with Staff Builders. The completion
of the spin-off was 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 HEALTH 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.

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 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 determine compliance with all regulations.

In addition to the on-site reviews conducted by the 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 ("JACCS"). Currently, the Company has approximately
100 offices, which have been accredited by JACCS, of which 31 were accredited
with commendation.

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






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provides support including brochures, training seminars and materials to assist
in developing patient care programs as needed within each community.

Local effort 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 organization 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 policyholders 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 are 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. 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







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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.

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 lease 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 service 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 the Company's LHCSAs until such ownership, control
or holding has be 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 PROGRAMS

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







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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 licensees 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 cost.

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 the 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 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 reselling 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 which
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
franchiser-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








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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.

The Company has standardized procedures for recruiting, interviewing, testing
and reference checking prospective personnel. All nurses and therapists must be
licensed by the appropriated 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 is competitive with
others in








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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(TM), Staffline(TM),
the stick figure logo and Tender Loving Care(TM) 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(TM) 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(TM)
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(TM) 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 provided
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 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 nurse 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.








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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 the 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 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 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 a large number 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.







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FRANCHISE PROGRAM

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

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






                                       10
<PAGE>   11

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.

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, and 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".

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







                                       11
<PAGE>   12

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 emphasizes 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
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 Offices, 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







                                       12
<PAGE>   13


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-1B 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 an H-1B
visa status for six consecutive years. After working in the United States for
the length of time, if the alien has not yet become a lawful permanent United
Sates 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 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 for 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





                                       13
<PAGE>   14
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 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 or 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(TM) and
the ATC(TM) 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 healthcare
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.

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.






                                       14
<PAGE>   15


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 franchise
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.

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 to the allegations contained in the prior
complaint, claims under the Racketeer Influenced and Corrupt Complaint
Organizations Act (`RICO"), claiming a series of deliberate and illegal actions
designed to put certain Staff Builders franchisees out 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 Service, 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, In.,
former home care 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 plaintiffs, seeking damages for violations of
California franchise law, breach of contract, fraud and deceit, unfair trade
practices, claims under the RICO, negligence, intentional







                                       15
<PAGE>   16

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 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.











                                       16
<PAGE>   17
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.









                                       17
<PAGE>   18
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.

Additionally, the financial statements for the year ended February 28, 1998 have
been restated (see note 1 to the consolidated financial statements included
elsewhere herein).








                                       18
<PAGE>   19
                             SUMMARY FINANCIAL DATA
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

         The following tables set forth a summary of historical financial data
of Staff Builders and pro forma financial data of the Company that reflect the
Distribution. Since after the Distribution TLC will own a majority of the
operations, employees and assets of the historical business of Staff Builders,
the Distribution will be treated as a "reverse spin-off" for financial reporting
purposes under Generally Accepted Accounting Principles ("GAAP"). The pro forma
information, which follows the historical data, may not necessarily be
indicative of the results of operations or financial position that would have
been obtained if the supplemental staffing business had been a separate,
independent company during the periods shown or of the supplemental staffing
business future performance as an independent company. The historical summary
financial data for the three years ended February 28, 1999 have been derived
from the consolidated financial statements included in this Information
Statement. The historical financial statements for the two years ended February
29, 1996 have been derived from audited consolidated financial statements not
included separately herein. See "Selected Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Consolidated Financial Statements beginning at page F-1.


<TABLE>
<CAPTION>
                                                                              FISCAL YEARS ENDED FEBRUARY 28/29,
                                                                  -----------------------------------------------------------
                                                                     1999         1998         1997        1996        1995
                                                                  ---------    ---------    ---------   ---------   ---------
<S>                                                               <C>          <C>          <C>         <C>         <C>
STAFF BUILDERS CONSOLIDATED HISTORICAL
  OPERATIONS DATA
Revenues....................................................      $ 437,588    $ 526,673    $ 480,355   $ 410,160   $ 325,111
Net income (loss)...........................................        (73,086)     (21,632)       3,761       2,014       4,735
Income (loss) per common share:
  Basic.....................................................      $   (3.16)   $   (0.90)   $    0.16   $    0.09   $    0.21
  Diluted...................................................      $   (3.16)   $   (0.90)   $    0.15   $    0.08   $    0.20
STAFF BUILDERS CONSOLIDATED HISTORICAL
  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 (deficiency in assets).................        (39,359)      38,369       59,466      55,310      52,351
</TABLE>

Certain prior period amounts have been reclassified to conform with the
presentation as of February 28, 1999 and the fiscal year then ended.
Additionally, the financial statements for the year ended February 28, 1998 have
been restated (see Note 1 to the consolidated financial statements included
elsewhere herein).



                                       19
<PAGE>   20
The following unaudited pro forma information has been prepared to reflect the
financial position of the supplemental staffing operations of Staff Builders as
if the distribution had occurred on February 28, 1999 and their results of
operations as if the Distribution had occurred on the first day of the
respective periods (in thousands).

<TABLE>
<CAPTION>
                                                                        For the Year Ended
                                                                        February 28, 1999
<S>                                                                      <C>
SUPPLEMENTAL STAFFING CONSOLIDATED PRO FORMA OPERATIONS DATA

Total revenues .......................................................   $  125,057

Operating costs ......................................................       99,048
General and administrative expenses ..................................       22,610
Amortization of intangible assets ....................................          696
Interest expense .....................................................        2,787
Interest income ......................................................          (75)
Other expense, net ...................................................          338
                                                                         ----------
Restructuring costs ..................................................          130

Total costs and expenses .............................................      125,534

Loss before income taxes .............................................         (477)

Provision for income taxes ...........................................          509

Net loss .............................................................         (986)
                                                                         ==========
</TABLE>


<TABLE>
<CAPTION>
SUPPLEMENTAL STAFFING CONSOLIDATED PRO FORMA BALANCE SHEET DATA
                                                                        February 28, 1999
                                                                        -----------------
<S>                                                                     <C>
Total assets .........................................................   $   57,180
Working capital (deficiency) .........................................         (560)
Current portion of long-term debt ....................................       24,305
Long-term debt and other liabilities .................................           80
Total liabilities ....................................................       34,770
Stockholders' equity .................................................       22,410
</TABLE>










                                       20
<PAGE>   21







                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

         The Distribution will be treated as a "reverse spin-off" for financial
reporting purposes under GAAP. Therefore, although the Company will be engaged
exclusively in supplemental staffing business, and not in the home health care
business, the historical consolidated financial statements and the historical
selected financial data contained in this Information Statement include the
financial position and results of operations of both the home health care
business and the supplemental staffing business previously conducted by Staff
Builders. Consistent with this presentation, the following discussion and
analysis provides information which management believes is relevant to an
assessment and understanding of Staff Builders' results of operations and
financial condition. This discussion should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in this
Information Statement. Management believes that the unaudited pro forma
consolidated financial statements of the Company for the year ended February 28,
1999 are a better reflection of the performance of the Company's home health
care business for those periods than the consolidated financial statements of
Staff Builders for the same periods. Nonetheless, such pro forma statements do
not represent what the Company's financial position and results of operations
would have been if the Distribution had occurred prior to the periods discussed
below, nor should they be considered projections of the future financial
performance of the Company.

RESULTS OF OPERATIONS

Years Ended February 28, 1999 ("fiscal 1999"), February 28, 1998 ("fiscal 1998")
and February 28, 1997 ("fiscal 1997")

         Revenues. Staff Builders' revenues consist of the following:

<TABLE>
<CAPTION>
                                                                                                YEARS ENDED
                                                                                                FEBRUARY 28,
                                                                                   ------------------------------------
                                                                                      1999         1998         1997
                                                                                   ----------   ----------   ----------
                                                                                             ($ IN MILLIONS)
<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 Staff Builders' 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 Staff
Builders' 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 Staff Builders' home health care service revenues from
$436.6 million in fiscal 1997 to $451.1 million in fiscal 1998. Additionally,
Staff Builders' 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 Revenues. 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 IPS enacted under the 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 Staff Builders'
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, Staff
Builders granted rights to develop home health care agencies throughout Japan
using Staff Builders' home health expertise and licensee model.

         Staff Builders receives payment for its home health care services from
several sources. The following are Staff Builders' home







                                       21
<PAGE>   22

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. 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. Also, fiscal 1999 was the
first full year in which Chelsea was included in Staff Builders' consolidated
results of operations. Chelsea is Staff Builders' information technology
staffing subsidiary in which Staff Builders 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.

         The service revenues, operating costs and resultant gross margins
generated by Staff Builders' licensee and Staff Builders-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 -- Staff Builders-Owned ............................         96         72         81
                                                                              --------   --------   --------
Total service revenues ....................................................   $    310   $    451   $    437
                                                                              ========   ========   ========
Operating costs-- Licensee ................................................   $    136   $    234   $    216
Operating costs-- Staff Builders-Owned ....................................         64         46         53
                                                                              --------   --------   --------
Operating costs ...........................................................   $    200   $    280   $    269
                                                                              ========   ========   ========
Gross margin-- Licensee ...................................................   $     78   $    145   $    140
Gross margin-- Staff Builders-Owned .......................................         32         26         28
                                                                              --------   --------   --------
Gross margin ..............................................................   $    110   $    171   $    168
                                                                              ========   ========   ========
</TABLE>






                                       22
<PAGE>   23

<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 -- Staff Builders-Owned ...           35          9         41
                                                                                 --------   --------   --------
                          Total service revenues ...........................     $    125   $     74   $     42
                                                                                 ========   ========   ========
                          Operating costs-- Licensee .......................     $     70   $     51   $      1
                          Operating costs-- Staff Builders-Owned ...........           29          7         32
                                                                                 --------   --------   --------
                          Operating costs ..................................     $     99   $     58   $     33
                                                                                 ========   ========   ========
                          Gross margin-- Licensee ..........................     $     20   $     14
                          Gross margin-- Staff Builders-Owned ..............            6          2          9
                                                                                 --------   --------   --------
                          Gross margin .....................................     $     26   $     16   $      9
                                                                                 ========   ========   ========
</TABLE>

         The number of licensee locations in operation and Staff Builders-owned
locations in operation are as follows:

<TABLE>
<CAPTION>
                                                                                                  YEARS ENDED
                                                                                                  FEBRUARY 28,
                                                                                          ----------------------------
                                                                                           1999       1998       1997
                                                                                          ------     ------      -----
<S>                                                                                       <C>        <C>         <C>
                       Home Health Care
                       Number of licensee  locations (as of each fiscal year end) ...         54        163        179
                       Number of Staff Builders-owned  locations (as of each fiscal
                          year end) .................................................         71         35         49
                       Supplemental Staffing
                       Number of licensee  locations (as of each fiscal year end) ...         54         41         35
                       Number of Staff Builders-owned  locations (as of each fiscal
                          year end) .................................................          4          5          1
</TABLE>

         General and Administrative Expenses. General and administrative
expenses decreased by $27.6 million, or 15.5%, in fiscal 1999 to $150.2 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 34.5%, 33.9% and 35.5% in
fiscal 1999, 1998 and 1997, respectively.

         The decrease of $27.6 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 $37.1 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 Staff Builders' 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. Also included in general and administrative
expenses in fiscal 1999 is approximately $1.0 million for the reserve for
uncollectible notes receivable and $527 thousand for the write-off of obsolete
fixed assets.

         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 resultant balance in the
allowance for doubtful accounts was $7.0 million, or 8.1%, of gross accounts
receivable at February 28, 1999 as compared to $3.7 million, or 4.1%, of gross
receivables at February 28, 1998. These increases are primarily due to the
following factors: higher standards of documentation to evidence the nature of
services provided required by home health care payor sources; an increased rate
of rejected billings by payors; a reduced number of licensees which would
normally bear part of the cost of uncollectible receivables against
distributions paid; and increased supplemental staffing business volume.

         Staff Builders is in the process of replacing its existing, separate
billing and accounts receivable systems with new systems which will integrate
payroll/billing, scheduling and clinical management. The new systems, which are
designed to be Year 2000 compliant, require the input of necessary billing
support to generate complete transaction information. Staff Builders anticipates
that bad debt expense relative to billing issues will be reduced as a result of
the enhancements of new systems and procedures. In fiscal 1999, the supplemental
staffing division allowance for doubtful accounts increased as a percentage of
related revenue due to sales to certain new customers in fiscal 1999 which
proved uncollectible. Based upon the curtailment of business with these
customers and improvements in the division's credit policies, the resultant bad
debt expense is deemed to be non-recurring and therefore a reduced provision for
bad debts may be attainable. However, there can be no assurance that the
foregoing reductions in bad debt expense can be realized.





                                       23
<PAGE>   24

         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 Staff Builders' 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 Staff Builders' 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.

         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, Staff Builders
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 $464 thousand in fiscal
1999 primarily consists of approximately $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 Staff Builders'
gain on the sale of several offices. Fiscal 1997 income includes approximately
$1.2 million resulting from the sale of a Staff Builders' division.

         Medicare and Medicaid Audit Adjustments. In the third quarter of fiscal
1999, Staff Builders 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, Staff Builders 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, Staff Builders has recorded an accrual for third party
liability ("TPL") to state Medicaid agencies which have claimed that Staff
Builders 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 Staff Builders has been
paid. Staff Builders 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 Staff Builders 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







                                       24
<PAGE>   25

date, Staff Builders 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 thousand per month. The other $6.4 million
is a general reserve based upon preliminary discussions with several states.

         Staff Builders continues to appeal many audit issues and has engaged
outside professional advisors to support its positions on these issues. Staff
Builders 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. Staff
Builders 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 $38.3 million for Federal and
state audit adjustments as of February 28, 1999 which includes $27.3 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 for IPS which became applicable for Staff Builders on March 1,
1998 and will remain in effect until the adoption of a prospective payment
system scheduled to be effective for all home health care agencies beginning 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, Staff Builders 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 IPS.

         During the fourth quarter of fiscal 1998, management prepared the home
health care business segment of Staff Builders for the impact of IPS and for
long-term growth. As a result, Staff Builders implemented a corporate-wide
restructuring and cost reduction program. These actions, together with Staff
Builders' 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.
Included in this pre-tax charge was the write-off of goodwill of $24.5 million
and $8.9 million of other restructuring costs. Other restructuring costs
included expenses related to the closing or conversion of many licensee-operated
locations to company-owned locations, as well as severance payments for
terminated employees. Approximately 60 administrative employees received
severance payouts, of which approximately 50 were terminated at February 28,
1999 and represented 90% of the severance pay costs. These terminations occurred
in 14 locations, and included certain regional operations personnel.
Additionally, by the end of the first quarter of fiscal 1999, Staff Builders had
closed 13 locations, including 10 closed by February 28, 1999, and converted ten
licensee operated locations to Staff Builders-owned locations. During the
quarter ended November 30, 1998, as a result of Staff Builders' further
operating modifications, including the additional closure and conversion of many
locations from licensed to company-owned operations, Staff Builders has written
off or reserved approximately $4.5 million. This amount is included in total
fiscal 1999 restructuring costs of $20.5 million, as discussed further below.

         In fiscal 1999, management further evaluated the carrying value of
Staff Builders' goodwill and intangible assets in light of current home health
care industry conditions and its impact on Staff Builders' 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, Staff Builders
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 Staff Builders' 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 Staff Builders' 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.






                                       25
<PAGE>   26

         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. Because of Staff Builders'
recent operating losses, its working capital deficiency, the possibility that
its bank will accelerate Staff Builders' obligation to pay the banks' loans to
Staff Builders, Staff Builders' questionable ability to obtain new financing on
satisfactory terms, if at all, and the uncertainty of if or when there will be
increases in allowable rates for Medicare-reimbursed services, it is
questionable whether Staff Builders will be able to return to profitability in
the foreseeable future. While Staff Builders intends to return to profitability,
its conclusion that it is "more likely than not" that the deferred tax assets
will not be realized is based upon significant doubt as to if or when there may
be any favorable changes to the uncertainties noted above. Staff Builders 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.

         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 Staff Builders'
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, Staff
Builders 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
Staff Builders' 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 Staff Builders' 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 Staff Builders' 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.

         Staff Builders has a secured credit facility which consists of a
revolving line of credit under which Staff Builders is permitted to borrow
amounts based upon certain percentages of eligible receivables, up to the
maximum amount of the credit facility. As of







                                       26
<PAGE>   27

February 28, 1999, Staff Builders also had an acquisition line of credit which
was paid off on September 17, 1999. At February 28, 1999 and 1998, Staff
Builders had borrowed $35.4 million and $29.4 million, respectively, under its
then existing credit facility. Staff Builders classified its outstanding
borrowings as a current liability as of February 28, 1999 because the bank had
the option to declare all borrowings under the then existing credit facility to
become immediately due and payable.

         On September 24, 1999, the home health care business of Staff Builders
("TLC") entered into an amended and restated loan and security agreement which
expires on February 29, 2000. The TLC loan agreement provides for the home
health care business to borrow up to a maximum of $17.0 million which will be
reduced to (i) $16.75 million on the earlier of: (A) October 29, 1999, or (B)
the Distribution, (ii) $16.25 million thirty days after the date of the
reduction set forth in clause (i) above, and (iii) $16.0 million thirty days
after the date of the reduction set forth in clause (ii) above. TLC is permitted
to borrow up to 80% of eligible accounts receivable, up to the maximum amount of
the credit facility. Further, availability is reduced by a separate reserve in
the amount of $750 thousand until such time as a more favorable payment plan has
been agreed upon in writing between TLC and HCFA, under terms and conditions
acceptable to the bank. As of September 24, 1999, TLC had borrowed an aggregate
of $14.8 million under its new facility.

         The TLC loan bears interest at 2.0% over the prevailing prime lending
rate (such rate being 8.25% as of September 29, 1999), a monthly collateral
management fee of $8 thousand, and a fee of .375% per annum of the daily unused
portion of the credit facility. Based on the outstanding borrowings at September
24, 1999, an increase of 1% in the prime rate would have the effect of
increasing aggregate, annual interest expense by approximately $150 thousand.
TLC paid bank fees of $170 thousand in connection with the execution of the loan
agreement. Subsequently, TLC is required to pay facility fees of .875% of its
then maximum revolving credit amount on November 30, 1999 and on December 30,
1999, and .5% of its then maximum revolving credit amount on January 31, 2000.
If the loan is fully paid on a date prior to any of the foregoing dates, then
TLC will not be required to make any of the payments on dates subsequent to the
loan pay off date.

         On September 17, 1999, Staff Builders sold its entire interest in
Chelsea for total consideration of $17.5 million, subject to a post-closing net
asset book value adjustment. Such consideration included $14.5 million received
in cash and $3.0 million to be paid in cash upon completion of the Distribution,
$500 thousand of which is payable to a former principal of Chelsea. The proceeds
received of $14.5 million were used to pay off $8.4 million of borrowings under
Staff Builders' acquisition line of credit and $6.1 million was used to pay down
the revolving line of credit, of which $4.6 million and $1.5 million paid down
the home health care and ATC supplemental staffing division portions of the
revolving line of credit, respectively. Staff Builders expects that there will
be no material gain or loss from this transaction.

         Staff Builders' 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 facility and $8.1 million for the current
portion of other debt obligations. While Staff Builders 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, Staff Builders is investigating alternative sources of
funding.





                                       27
<PAGE>   28

         The above conditions raise substantial doubt about the ability of Staff
Builders to continue as a going concern. As a result, management of Staff
Builders 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 Staff Builders by the Federal government
as well as for $6.8 million of audit liabilities assessed to date. Such payment
schedule constituted an oral agreement which required 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 were made as such oral agreement was not
formalized pending a reconciliation of the related amounts by the fiscal
intermediary. Based upon the subsequent written payment schedule received later
in June 1999, Staff Builders is required to pay 24 equal monthly installments
commencing June 25, 1999 of approximately $1.3 million, including principal and
interest. Staff Builders has paid the first of these installments in July 1999,
upon reconciliation of the related amounts. In August 1999, Staff Builders
entered into a revised payment agreement which required a payment of $350
thousand in August 1999, monthly installments of approximately $1.1 million in
September 1999 through August 2000, monthly installments of approximately $1.0
million from September 2000 through April 2001, and approximately $650 thousand
per month thereafter through March 2002. The August, September and October 1999
payments have been made as required. Staff Builders continues to negotiate more
favorable payment terms. No penalties have been assessed in connection with the
revised schedule, which enabled payments to commence after the original required
date of May 1999. Additionally, Staff Builders has obtained favorable extended
payment terms with some of its trade creditors and is continuing to negotiate
extended payment terms with other vendors. However, there can be no assurance
that these actions will be successful to provide adequate funds for Staff
Builders' current level of operations and to pay Staff Builders' past-due
obligations.

         From March 6, 1998 through October 16, 1998, Staff Builders 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 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.

         Staff Builders 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. Staff
Builders is continuing its upgrades with respect to the front end systems, which
include clinical, scheduling and billing. Staff Builders expects to complete
such upgrades by October 31, 1999. Staff Builders 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 Staff Builders, the precise degree of which cannot
be known at this time.

         In addition to risks associated with Staff Builders' own computer
systems and equipment, Staff Builders has relationships with, and is to varying
degrees dependent upon, a large number of third party vendors that provide
information, goods and services to Staff Builders and third party customers to
which Staff Builders 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 Staff Builders' ability to process transactions or engage in similar
normal business activities. While some of these risks are outside of Staff
Builders' 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.






                                       28
<PAGE>   29

         The total cost of the Year 2000 systems assessment and upgrades is
funded through operating cash flows and leases and Staff Builders 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. Staff Builders 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.

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
Staff Builders' ability to increase its charges for services rendered. Staff
Builders 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. Staff Builders continually
reviews its costs in relation to the pricing of its services.

RECENTLY ISSUED ACCOUNTING STANDARDS

         In April 1998, the Financial Accounting Standards Board ("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
Staff Builders' consolidated financial statements.

         During 1998, FASB issued Statement of Financial Accounting Standards
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities".
Staff Builders 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.








                                       29
<PAGE>   30





                          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 schedules
listed in the Table of Contents. These financial statements and the financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
financial statement schedules 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, such financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole, present 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.

         As discussed in Note 1, the accompanying consolidated financial
statements for the year ended February 28, 1998 have been restated.

                                               /s/ DELOITTE & TOUCHE, LLP
                                               -------------------------------
Jericho, New York
May 25, 1999 (August 30, 1999 as to the effects of
the restatement described in Note 1)








                                       30
<PAGE>   31
                      STAFF BUILDERS, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                             FEBRUARY 28,
                                                                      -------------------------
                                                                                       1998
                                                                                   (RESTATED --
                                                                         1999       SEE NOTE 1)
                                                                      -----------  ------------
<S>                                                                    <C>           <C>
ASSETS

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 (DEFICIT)
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 (DEFICIT):
  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......                         233         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........................                           3          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


                                       31
<PAGE>   32

                      STAFF BUILDERS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                         YEARS ENDED
                                            --------------------------------------
                                                          FEBRUARY 28,
                                                             1998
                                            FEBRUARY 28,  (RESTATED--  FEBRUARY 28,
                                               1999       SEE NOTE 1)     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 ............................      150,169      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 ............          464         (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

                                       32
<PAGE>   33

                      STAFF BUILDERS, INC. AND SUBSIDIARIES

            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                        (IN THOUSANDS, EXCEPT SHARE DATA)


<TABLE>
<CAPTION>
                                                  COMMON STOCK           PREFERRED    ADDITIONAL
                                           --------------------------      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


                                       33
,
<PAGE>   34

                      STAFF BUILDERS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)



<TABLE>
<CAPTION>
                                                                   YEARS ENDED
                                                      --------------------------------------
                                                                    FEBRUARY 28,
                                                                       1998
                                                      FEBRUARY 28,  (RESTATED--  FEBRUARY 28,
                                                         1999       SEE NOTE 1)     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


                                       34
<PAGE>   35

                      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 August 20, 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.

    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 monthly 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.
Amounts due to licensees are typically paid within 45 days after each month
based upon an average rate of 60% of gross margin. The amount of monthly gross
margin includes the adjustment for cost limitations and reimbursement of
allowable Medicare costs.



                                       35
<PAGE>   36

    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 owned 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 had intended to retain its investment in Chelsea by
combining the Chelsea operations with its existing supplemental staffing
business (See Note 20). The accounts of Chelsea were originally accounted for on
the equity basis in the Company's financial statements for the year ended
February 28, 1998 based on management's intent to dispose of its investment in
Chelsea. Because of management's intent to retain its investment in Chelsea
during 1999, the accounts of Chelsea were fully consolidated in the Company's
financial statements for the year ended February 28, 1999 and the 1998 financial
statements were restated from amounts previously reported to properly
consolidate the accounts of Chelsea for 1998. This change in presentation was
originally disclosed as a reclassification. Subsequent to the issuance of the
Company's fiscal 1999 financial statements, the Company's management determined
that because the conditions that gave rise to temporary control were based on
voluntary actions on the Company's part, it should have originally consolidated
the accounts of Chelsea in its fiscal 1998 financial statements and disclosed
the effects of this change as a correction of an error. As a result, current
assets, total assets, current liabilities, and total liabilities have been
increased by $5.3 million, $3.7 million, $3.5 million, and $3.7 million,
respectively as of February 28, 1998 and total revenues and total expenses by
$7.0 million each for the year then ended from the amounts originally reported
in the Company's financial statements. Stockholders' equity (deficit), net loss,
and basic and diluted loss per share were not affected. 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.

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 the five years on
a straight line basis. The weighted average life of remaining goodwill and
intangible assets was 39.9 years as of February 28, 1999 and 1998. The weighted
average life of remaining goodwill and intangible assets related to the home
health care division was 39.6 years and 40.0 years as of February 28, 1999 and
1998, respectively. The weighted average life of remaining goodwill and
intangible assets related to the supplemental staffing division was 39.9 years
and 39.4 years as of February 28, 1999 and 1998, respectively.



                                       36
<PAGE>   37

    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).
As a result of the factors related to the home health care industry including
industry consolidation, changing third-party reimbursement requirements and an
uncertain regulatory environment, Staff Builders has determined that the useful
life of goodwill and other intangibles should have been reduced from forty years
to twenty years, effective March 1, 1999. As a result, the accompanying
unaudited consolidated financial statements as of May 31, 1999 and for the three
months then ended have been restated to give effect to this change. The effect
of the change is to reduce goodwill and total assets by $77 and to increase net
loss and accumulated deficit by $77 from the amounts previously reported. Basic
and diluted loss per share were not affected. Based upon the remaining net book
value of the home health care goodwill and intangible assets as of February 28,
1999, the increase in annual amortization expense will approximate $300.

    Indicators which reflect the existence of impairment to the carrying value
of goodwill include adverse regulatory and reimbursement developments, cash flow
deficits, a decrease in historic and anticipated revenue and operating results
and a decrease in the fair value of some or all assets. As such negative
indicators have been present, the carrying value of goodwill and other
long-lived assets were reviewed to determine if the assets will be recoverable,
based on undiscounted estimated cash flows. Since the goodwill was not
recoverable based on undiscounted estimated cash flows, the carrying value of
the goodwill has been reduced to estimated fair value as required by FAS 121.
Accordingly, Staff Builders has reduced the carrying value of its goodwill by
approximately 75% over the last two fiscal years to reflect these impairment
indicators.

REVENUE RECOGNITION

    Staff Builders' home health care division recognizes revenue on the accrual
basis as the related services are provided to customers and when the customer is
obligated to pay for such completed services. Staff Builders' home health care
earnings process is completed as each hour of service or home care visit is
rendered. Revenues are recorded net of contractual allowances or other
allowances to which its home health care customers are entitled.

    Staff Builders' supplemental staffing division recognizes revenue on the
accrual basis as the related services are provided to customers and when the
customer is obligated to pay for such completed services. Staff Builders'
supplemental staffing earnings process is completed as each hour of service or
staffing shift is rendered. Revenues are recorded net of contractual allowances
or other allowances to which its supplemental staffing customers are entitled.

    Employees assigned to particular home health care customers or supplemental
staffing customers may be changed at the customer's request or at Staff
Builders' initiation.

    For financial reporting purposes, a provision for uncollectible and doubtful
accounts is provided for amounts billed to customers which 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.





                                       37
<PAGE>   38
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 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 Financial Accounting Standards Board ("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 Company does not believe that adoption of SOP No. 98-5 will 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.

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



                                       38
<PAGE>   39

    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. Staff Builders'
valuation considered, among other factors, the additional operating losses
generated during the third and fourth quarters of fiscal 1999. During the third
quarter ended November 30, 1998, Staff Builders experienced losses in some
locations as a result of not being able to reduce the number of visits required
by its patients and to contain the related costs as mandated by the restrictive
guidelines of the IPS enacted in connection with the BBA and reductions in home
care payments by other home care payor sources. Staff Builders reacted by
closing selected branches and converting many licensee operated locations to
company-owned locations. Upon the closure or sale of locations, the goodwill
associated with those locations was written off. Subsequent to November 30, 1998
and through the date of filing Staff Builders' financial statements for the year
ended February 28, 1999, Staff Builders continued to experience operating
difficulties like many other companies in the home health care industry.
Accordingly, the value of such businesses experienced a further decline. Based
upon the foregoing factors, in the fourth quarter ended February 28, 1999, Staff
Builders evaluated the net carrying value of goodwill and intangible assets
based upon the net present value of future cash flows in accordance with the
requirements of SFAS No. 121. As a result, Staff Builders recorded a write-down
in goodwill of approximately $15.3 million, leaving a remaining net carrying
value of goodwill and intangible assets as of February 28, 1999 of $5.1 million
in Staff Builders' home health care business segment. Staff Builders' actions to
increase operational efficiencies, close unprofitable locations and to terminate
certain licensee locations, represented a furtherance of a restructuring plan
necessitated out of continuing losses and a current, deteriorating business
climate within the home health care industry. 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.

    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.

    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. This aggregate liability of $9.5 million includes $4.3 million which
was provided as part of the $29.0 million provided during the quarter ended
November 30, 1998, as discussed below.

    During the fourth quarter of fiscal 1999, approximately $2.7 million of the
$9.5 million was offset against current receivables from Medicare to result in a
remaining balance of $6.8 million at February 28, 1999 related to fiscal 1997
audits. Fiscal 1997 audits have been completed for the home office cost reports
and for substantially all branch operating locations, for which Staff Builders
has received a Notice of Provider Reimbursement to indicate completion of these
audits. All years prior to fiscal 1997 are closed relative to substantially all
field operating location audits. Fiscal 1996, 1995 and 1993 remain open for home
office cost report audits. Fiscal 1999 and 1998 are open for all audits.
However, Staff Builders continues to appeal various audit findings dating back
to fiscal 1992 and has discussed some of these issues at an August 1999
mediation hearing with United Government Services representatives.



                                       39
<PAGE>   40

    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 provision of $29.0 million includes $18.0 million for Medicare audit
liabilities and $11.0 million for Medicaid audit liabilities. The Medicare audit
liabilities include $6.0 million, $8.0 million and $4.0 million for additional
accruals required for home office cost report issues, field operating location
audits and clinical audits, respectively. The fiscal 1997 Medicare audits
commenced in January 1998 and were completed by November 1998, for which there
was an aggregate liability of $9.5 million, including $8.2 million and $1.3
million for field operating locations and the home office cost reports,
respectively. The results of the fiscal 1997 audits provided a basis for
determining an estimated accrual for the probable amounts to be asserted for
similar issues subject to audit which existed at some points in the open audit
periods of fiscal 1999, 1998, 1996 and 1995. Although United Government Services
auditors have completed substantially all of their field audits for fiscal 1997
and prior years, they have not completed the home office audits which they began
for fiscal 1996 and fiscal 1995. The fiscal 1996 and fiscal 1995 home office
audits commenced in mid-calendar year 1997 and mid-calendar year 1996,
respectively. Based upon the results of the fiscal 1997 audits, Staff Builders
provided additional accruals of $4.3 million for fiscal 1997 to total the
aggregate amount of $9.5 million. Additionally, Staff Builders provided $1.5
million and $5.0 million for audits not yet commenced for fiscal 1999 and 1998,
respectively. Further, based upon the results of the fiscal 1997 home office
audit, Staff Builders provided additional accruals of $2.2 million and $1.0
million for home office audits for fiscal 1996 and 1995, respectively. The
extent of the increased audit scope and detailed documentation requirements
represented significant changes from historical experience in prior audits which
could not be anticipated by Staff Builders prior to performance of the fiscal
1997 audits. Additionally, Staff Builders provided $4.0 million based upon
clinical audits conducted in fiscal 1999.

    The nature of the adjustments made as a result of audits conducted were
primarily due to an inadequate level of detail in documentation to support costs
incurred for actual services rendered.

    The Medicaid audit liabilities of $11.0 million reflect amounts for third
party liability issues which cover several years dating back to 1988. While the
respective state agencies have conducted on-going reviews of claims, they
pursued an aggressive audit process beginning in fiscal 1999 to review claims
paid over several prior years for which these agencies are currently demanding
documentation for such claims. As part of Staff Builders' response to these
audits, Staff Builders conducted an internal review of this issue resulting in
the assessment of its open liability for repayment to the state agencies.

    The resultant liabilities for Medicare and Medicaid audit adjustments,
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 $38.3 million as of February 28, 1999 for Federal and state audit
adjustments which includes $27.3 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. Staff Builders does not believe
that it is reasonably possible that the outcome of open Medicare and Medicaid
matters may result in a liability exceeding the amounts accrued and, as such, an
accrual for additional loss amounts is not required.

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.



                                       40
<PAGE>   41

    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 million 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
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 excess PIP payments made to the
Company by the Federal government as well as for audit liabilities assessed to
date. Such payment schedule constituted an oral agreement which required 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 were made as such
oral agreement was not formalized pending a reconciliation of the related
amounts by the fiscal intermediary. Based upon the subsequent written payment
schedule received later in June 1999, Staff Builders is required to pay 24 equal
monthly installments commencing June 25, 1999 of approximately $1.3 million,
including principal and interest. Staff Builders has paid the first of these
installments in July 1999, upon reconciliation of the related amounts. In August
1999, Staff Builders has paid approximately $350 thousand pursuant to a further
reduced payment agreement, as Staff Builders continues to negotiate more
favorable payment terms. No penalties have been assessed in connection with the
revised schedule, which enabled payments to commence after the original required
date of May 1999. 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. Additionally, Staff Builders 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 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.

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.



                                       41
<PAGE>   42

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


<TABLE>
<CAPTION>
                                                         HOME HEALTH CARE
                                           --------------------------------------------
                                                            YEARS ENDED
                                           --------------------------------------------
                                           FEBRUARY 28,     FEBRUARY 28,   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              123.6            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 ...................      48.5             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 .....................    $ 89.3           $122.1         $134.1
                                              ======           ======         ======
</TABLE>

<TABLE>
<CAPTION>
                                                          SUPPLEMENTAL STAFFING
                                              --------------------------------------------
                                                               YEARS ENDED
                                              --------------------------------------------
                                              FEBRUARY 28,     FEBRUARY 28,   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 ....................      $ 57.2           $ 36.6         $ 22.1
                                                 ======           ======         ======
</TABLE>

<TABLE>
<CAPTION>
                                                         CONSOLIDATED
                                         --------------------------------------------
                                                          YEARS ENDED
                                         --------------------------------------------
                                         FEBRUARY 28,     FEBRUARY 28,   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 ...........................       146.2            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 ...............        48.9             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>



                                       42
<PAGE>   43

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.

    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 totaling $1.2 million and is recording the related income as it is earned
through September 30, 1999. The terms of the master license agreement specify
that the master license fee must be paid in full by September 30, 1999, at which
time such fee is deemed fully earned and non-refundable. Staff Builders'
continuing obligations under the license agreement with the Japanese company
include the delivery of advisory assistance and providing confidential operating
manuals for the operation of franchise home health care centers, initial
training programs including materials which cover home health care
administration and clinical operations and the provision of one Company
representative to visit the licensee's territory for an aggregate of 35 to 50
days within the first 270 days of the agreement and from one to four times
annually thereafter for a maximum of ten days during each visit. 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.



                                       43
<PAGE>   44

    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.
Included in the write-down of goodwill in the fourth quarter of fiscal 1999 (see
Note 2), was $2.7 million related to businesses acquired during fiscal 1999,
consisting primarily of the purchase of the rights to operate locations
previously operated by licensees.

    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.

    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



                                       44
<PAGE>   45

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, Staff Builders wrote off fixed assets of $911. This
amount included assets related to closed locations of $384 and obsolete computer
equipment of $527 which is included in restructuring costs and general and
administrative expenses, respectively. 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>

    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>

    Beginning in January 1999, Staff Builders maintained most of its health
insurance coverage under a self-insured policy. Health insurance consists of
coverage for medical and prescription drug costs. Stop-loss coverage is
maintained under specific excess loss insurance with a deductible of $100 per
family and a specific reimbursement maximum of $900 per covered person.
Essentially, Staff Builders is responsible for the first $100 in claims per
covered family, and then each family member is covered for the balance of claims
up to $1.0 million.

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:



                                       45
<PAGE>   46

<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>

----------

(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. These audits consist of
         the fiscal 1997 audits of $6.8 million and the fiscal 1994 home office
         audit of $3.4 million.

(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.

(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,



                                       46
<PAGE>   47

         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 (See Note
         20).

(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
         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:



                                       47
<PAGE>   48

<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>

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 28,  FEBRUARY 28,  FEBRUARY 28,
                          1999          1998          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>

    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:



                                       48
<PAGE>   49

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

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

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

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

<TABLE>
<CAPTION>
                                                                        YEARS ENDED
                                                           ----------------------------------------
                                                           FEBRUARY 28,  FEBRUARY 28,  FEBRUARY 28,
                                                              1999          1998          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>
                            HOME HEALTH  SUPPLEMENTAL
  YEARS ENDING 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.



                                       49
<PAGE>   50

    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, $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 Court granted the Company's
motion to dismiss the RICO claims and other claims which allege violation of
business law in New York, including the claim for money damages of $25 million,
treble damages and all of the claims against the named executive officers of the
Company. The Court allowed to stand certain claims which allege violation of the
Ohio business opportunities statute relating to disclosure requirements. The
Court also denied Plaintiffs' motion attempting to dismiss all of defendants'
counter-claims and denied third party defendant's motion to dismiss the
Company's third party complaint. 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. 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 has filed a motion to dismiss the Amended Complaint.



                                       50
<PAGE>   51

    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' licensees (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.

    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. See Note 3 for a discussion
of Staff Builders' accruals and contingencies with respect to Medicare and
Medicaid liabilities. (See Note 3 for a discussion of Staff Builders accruals
and contingencies with respect to Medicare and Medicaid liabilities).

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 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 28, FEBRUARY 28,  FEBRUARY 28,
                                                        1999         1998          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.



                                       51
<PAGE>   52

    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 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.

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

<TABLE>
<CAPTION>
                              OPTIONS OUTSTANDING

                                             WEIGHTED
                                              AVERAGE      WEIGHTED
                                             REMAINING      AVERAGE
                               NUMBER    CONTRACTUAL LIFE  EXERCISE
RANGE OF 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>



                                       52
<PAGE>   53

<TABLE>
<CAPTION>
                          OPTIONS EXERCISABLE

                                               WEIGHTED
                                                AVERAGE          WEIGHTED
                                               REMAINING         AVERAGE
                               NUMBER       CONTRACTUAL LIFE     EXERCISE
RANGE OF 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
                                             REMAINING      AVERAGE
                               NUMBER    CONTRACTUAL LIFE  EXERCISE
RANGE OF 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>



                                       53
<PAGE>   54

                              OPTIONS EXERCISABLE
<TABLE>
<CAPTION>

                                             WEIGHTED
                                              AVERAGE      WEIGHTED
                                             REMAINING      AVERAGE
                               NUMBER    CONTRACTUAL LIFE  EXERCISE
RANGE OF 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
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 Employee 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
                                                                      FOR
                                                        RESERVED   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.

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):



                                       54
<PAGE>   55

<TABLE>
<CAPTION>
                                                                         YEARS ENDED
                                                          --------------------------------------
                                                          FEBRUARY 28,  FEBRUARY 28, FEBRUARY 28,
                                                              1999          1998         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>

    The number of antidilutive shares for the years ended February 28, 1999,
1998 and 1997 were 6,046, 5,812 and 2,702, respectively.

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
                                             -----------  -----------  -----------  -----------
                                             (RESTATED--  (RESTATED--  (RESTATED--  (RESTATED--
                                             SEE NOTE 1)  SEE NOTE 1)  SEE NOTE 1)  SEE NOTE 1)
<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
                                             -----------  -----------  -----------  -----------
                                                                       (RESTATED--   (RESTATED--
                                                                        SEE NOTE 1)   SEE NOTE 1)
<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.

20. SUBSEQUENT EVENTS (UNAUDITED)

    On September 17, 1999, Staff Builders sold its entire interest in Chelsea
for total consideration of $17.5 million, subject to a post-closing net asset
book value adjustment. Such consideration included $14.5 million received in
cash and $3.0 million to be paid in cash upon completion of the Distribution,
$500 of which is payable to a former principal of Chelsea. The proceeds received
of $14.5 million were used to pay off $8.4 million of borrowings under Staff
Builders' acquisition line of credit and $6.1 million was used to



                                       55
<PAGE>   56

pay down the revolving line of credit, of which $4.6 million and $1.5 million
paid down the home health care and ATC supplemental staffing division portions
of the revolving line of credit, respectively. Staff Builders expects that there
will be no material gain or loss from this transaction.

    On September 24, 1999, the home health care business of Staff Builders
("TLC") entered into an amended and restated loan and security agreement which
expires on February 29, 2000. The TLC loan agreement provides for the home
health care business to borrow up to a maximum of $17.0 million which shall be
reduced to (i) $16.75 million on the earlier of: (A) October 29, 1999, or (B)
the Distribution, (ii) $16.25 million thirty days after the date of the
reduction set forth in clause (i) above, and (iii) $16.0 million thirty days
after the date of the reduction set forth in clause (ii) above. TLC is permitted
to borrow up to 80% of eligible accounts receivable, up to the maximum amount of
the credit facility. Further, availability is reduced by a separate reserve in
the amount of $750 until such time that a more favorable payment plan has been
agreed upon in writing between TLC and HCFA, under terms and conditions
acceptable to the bank. As of September 24, 1999, Staff Builders had borrowed an
aggregate of $14.8 million under its TLC loan.

    The TLC loan bears interest at 2.0% over the prevailing prime lending rate
(such rate being 8.25% as of September 27, 1999), a monthly collateral
management fee of $8 and an unused fee of .375% per annum of the daily unused
portion of the credit facility. Based on the outstanding borrowings at September
24, 1999, an increase of 1% in the prime rate would have the effect of
increasing annual interest expense by approximately $150 thousand. TLC paid bank
fees of $170 in connection with the execution of the loan agreement.
Subsequently, TLC is required to pay facility fees of .875% of its then maximum
revolving credit amount on November 30, 1999 and on December 30, 1999 and .5% in
a facility fee of its then maximum revolving credit amount on January 31, 2000.
If the loan is fully paid on a date prior to any of the foregoing dates, then
TLC will not be required to make any of the payments on dates subsequent to the
loan pay off date.



                                       56
<PAGE>   57
                                                                     SCHEDULE II

                      STAFF BUILDERS, INC. AND SUBSIDIARIES

                        VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                            YEARS ENDED
                                                             ----------------------------------------
                                                             FEBRUARY 28,  FEBRUARY 28,  FEBRUARY 28,
                                                                 1999          1998          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>



                                       57
<PAGE>   58

                                   SIGNATURES

    Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Registrant has duly caused this Amendment No. 5 to this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                      STAFF BUILDERS, INC.

                                      By:  /s/ Alan Levy
                                           -------------------------
                                           Alan Levy
                                           Chief Financial Officer and
                                           Vice President of Finance



Dated: May 12, 2000



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