SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

|X|   Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
      Act of 1934 for the fiscal year ended May 31, 2001

|_|   Transition report pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934 for the transition period from ________________ to
      ________________

                         Commission File Number 1-10751

                         STAR MULTI CARE SERVICES, INC.
                  --------------------------------------------
                       (Name of Registrant in its charter)

                 New York                                    11-1975534
--------------------------------------------             -------------------
     (State or other jurisdiction of                      (I.R.S. Employer
      incorporation or organization)                     Identification No.)

33 Walt Whitman Road, Huntington Station, NY                    11746
--------------------------------------------             -------------------
  (Address of principal executive office)                     (Zip Code)

Issuer's telephone number, including area code: (631) 423-6689
                                                --------------

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

                                                  Name of each exchange
         Title of Each Class                        on which registered

Common Stock, par value $.001 per share        Nasdaq SmallCap Market System
---------------------------------------        -----------------------------

Securities registered pursuant to Section 12(g) of the Exchange Act:  None

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirement for the past 90 days.
Yes |X| No |_|

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|

On September 10, 2001 the aggregate market value of the Common Stock of Star
Multi Care Services, Inc. held by non-affiliates equaled 559,697 with a market
value of $895,515 (based upon the closing price of the Common Stock on such date
on the Nasdaq SmallCap Market).

As of September 10, 2001, the Registrant had 601,000 shares of Common Stock
outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the issuer's Definitive Proxy Statement for the 2001 Annual Meeting
of Shareholders of the company are incorporated by reference into Part III
hereof.
<PAGE>

                                     PART I

Item 1. Description of Business

General Background and History

Star Multi Care Services, Inc. (the "Company") is in the business of providing
professional and paraprofessional home health care personnel services to
elderly, ill and physically challenged individuals in their homes, and to a
lesser extent the Company provides health care facility staffing services for
hospitals and skilled nursing facilities. As of the close of the Company's
fiscal year the Company was licensed and / or certified in five states to
provide a full array of health care personnel services, which included
Registered Nurses, Licensed Practical Nurses, Home Health Aide, Nurse Aide, and
Personal Care Aide services. In some states the Company was also licensed and /
or certified to provide Physical Therapy, Speech Therapy, Occupational Therapy,
Respiratory Therapy, and Medical Social Work services.

The Company was established in 1938 in Brooklyn, New York and was purchased by
present management in 1986 at which time the primary focus of the organization
was the provision of facility staffing and private duty nursing services. After
the Company was acquired management successfully secured, in 1989, New York
State Department of Health approval as a Licensed Home Care Services Agency.
This expanded the Company's scope of services into the home care market.
Management initiated an IPO in 1991 with the Company becoming publicly traded on
the NASDAQ SmallCap Market, and in 1995 the Company began trading on the NASDAQ
National Market. On November 11, 1999 the Company reverted to trading on the
NASDAQ SmallCap Market. In addition, the Company has maintained accreditation by
the Joint Commission on Accreditation of Health Care Organizations (JCAHO) since
1992 and was awarded in May 1999 Joint Commission Accreditation with
Commendations, attesting to the Company's commitment to the delivery of high
quality health care services.

At fiscal year end, the Company maintained 12 licensed offices within the five
States it had operated in, which included New York (3 offices), New Jersey (4
offices), Pennsylvania (3 offices), Ohio (1 office), and Florida (1 office). In
conjunction with the Premier Asset Purchase Agreement the New York and New
Jersey locations / operations at completion of the transaction will be fully
transferred to Premier. In the Company's remaining locations in Ohio and
Pennsylvania the Company also maintains as a provision of State licensing and
contracting requirements Medicare Certified Home Health Agency operations in
these states. Star maintains full functionality for service provision across the
Company 7 days a week 24 hours a day. As of the fiscal year end the Company
employed over 3,000 full-time and part-time employees and serviced over 7,500
clients annually. After completion of the Premier transaction, the Company will
maintain approximately 1000 full-time and part-time per diem and office
personnel and will service approximately 1000 clients on a weekly basis.
Additionally, the Company also maintains corporate facilities in Florida for
payroll / billing / collection data processing, with the principal executive
offices of the Company remaining located in Huntington Station, New York.

Historically, the Company grew through a series of acquisitions that began in
1992 with the acquisition of certain assets from Unity Healthcare Holding
Company, Inc. and its subsidiaries (Unity). This expanded the Company's
operations within its existing New York and the adjacent New Jersey markets by
adding new contract rights for provision of home care services. In addition, the
Unity acquisition added new operations in the state of Florida, which included
both, Medicare certified (later discontinued in 1999) and licensed operations in
South Florida.

In 1993, the Company further expanded its home care operations in New York
through the acquisition of certain assets of DSI Health Care Services, Inc.
(DSI). This acquisition added new contract relationships within the County of
Nassau with facility based Certified Home Health Care Agencies, Long Term Home
Health Care Programs, and Hospices as well as expanded the Company's existing
Medicaid operations within the County.

In May of 1995, the Company acquired certain assets of Long Island Nursing
Registry, Inc. ("LINR"), which again augmented its existing operations in Nassau
County by both adding new contracts and expanding existing contract
relationships. The acquisition of LINR expanded Company operations into the new
markets of Suffolk and Onondaga (Syracuse Area) Counties for provision of
contract Medicaid Personal Care Services, Medicaid Skilled Nursing Services and
a variety contracts with facility based Certified Home Health Agencies, Long
Term Home Health Care Programs, and Hospice Programs. However, the Company
formally withdrew from the Syracuse market on May 1, 1999 by closing this office
in conjunction with its consolidation and restructuring initiatives.


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<PAGE>

In August 1996, the Company and AMSERV Health Care, Inc. consummated a merger
whereby the Company acquired control of Amserv, which resulted in Amserv
becoming a wholly owned subsidiary of the Company. This acquisition
significantly expanded the Company within the northern and central New Jersey
markets by adding new office locations in New Jersey. Amserv Health Care of New
Jersey, Inc. was a provider of Medicaid and Medicaid Waiver reimbursed
paraprofessional services, as well as contract services with Certified Home
Health Agencies and Hospice Programs. In addition, this acquisition also brought
the Company operations in Ohio operating under the name of Amserv Health Care of
Ohio, Inc., d/b/a Central Star Home Health Services. This subsidiary company
provides Medicaid and Medicaid Waiver paraprofessional services as well as
facility staffing services for professional nursing staff. The office is also
Medicare Certified but currently provides no Medicare reimbursed services.

On September 9, 1997 the Company consummated an Agreement and Plan of Merger
with Extended Family Care Corporation (EFCC). The Agreement between the Company
and EFCC provided for the merger of EFCC Acquisition Corp. (Merger Sub), a New
York Corporation and a wholly-owned subsidiary of the Company, with EFCC, with
EFCC merging with and into the Merger Sub. At the time the EFCC acquisition
added to the Company's existing New York and New Jersey operations as well as
expanded these operations by introducing new service contracts that were similar
to and compatible with existing paraprofessional contracts in these regions.
Additionally, the Company added new market operations in Allentown,
Pennsylvania. This particular office predominantly specializes in the provision
of skilled Pediatric Nursing services. This office is both Medicaid approved and
Medicare certified.

On May 8, 2000 the Company through a subsidiary corporation, EFCC Acquisition
Corp. d/b/a Extended Family Care, acquired certain assets of the Pennsylvania
offices of US Home Care. The acquisition expanded the Company's existing
operations in Pennsylvania by adding three new locations in Philadelphia,
Lancaster and Pittsburgh. The acquisition introduced the Company into three new
major markets in Pennsylvania and added approximately $5 million in revenue. The
Philadelphia office was subsequently closed in December 2000.

Subsequent Event - Sale of Existing Operations

On July 3, 2001 the Company entered into Purchase Agreement with Premier Home
Healthcare Services, Inc. ("Premier") to acquire selected assets of the
Company's wholly owned subsidiary, Amserv Healthcare of New Jersey, Inc.,
operating the New Jersey operations of the Company and the New York operations
of the Company, with an aggregate purchase price of $5.5 million, $4.0 million
and $1.5 million for the New Jersey and New York operations, respectively. Sale
of the New Jersey Assets was completed on August 31, 2001 subject to a post
closing adjustment to the purchase price based upon certain revenue thresholds.
Additionally, on August 31, 2001 the Company entered into a Management Agreement
with Premier for management and operation of the Company's New York operations
pending New York State regulatory approval and the Company's stockholder
approval. Upon receipt of all necessary approvals, the sale of the Company's New
York operations will be completed. The purchase price of the New York operations
is also subject to adjustment based upon certain revenue thresholds. In the
interim period between the effective date of the Management Agreement with
Premier and the closing of the New York operations, Premier has loaned the
Company $800,000 which is secured by the assets that Premier intends to
purchase. Additionally, under the terms of the Purchase Agreement with Premier,
Star has retained the account receivables of the New York and New Jersey
operations equal to approximately $4.5 million.

The Company used the proceeds from the transaction with Premier to pay-off and
terminate its credit facility with Healthcare Finance Group, Inc. ("HFG"). The
Company paid HFG a total of $4.4 million in debt obligations and fees.

Organizational Restructuring Changes

Although the Company had implemented organizational restructuring plans over the
last two fiscal years in response to industry related reimbursement and
regulatory changes the Company again initiated additional restructuring
activities in fiscal year 2001. This was done in response to: 1) continued
service volume shrinkage across the industry in all areas of reimbursement
including Medicare, Medicaid and commercial insurance, 2) the Company's need to
improve profitability in order to reduce financial obligation liabilities, and
3) the Company's inability to secure adequate numbers of personnel to expand
client service volume due to an industry wide personnel shortage. The
restructuring activities were initiated and completed in the Company's second
quarter. These restructuring activities included;


                                       3
<PAGE>

o     Senior and middle management personnel changes.

o     General staff consolidations and reductions.

o     The closure of all non-profitable, marginally profitable and under
      performing divisions and locations.

o     The elimination of under performing, low margin and poor paying contracts.

In the prior two fiscal years, the Company also initiated and completed the
consolidation of certain licensed offices in both Florida and New York. The
licensed offices located in Miami Lakes and Lake Worth were consolidated and
centralized into the Company's Hollywood office to increase operational
efficiency in the region and reduce cost. Simultaneously, the Company terminated
certain under performing low margin managed care contracts in the region to
increase the regional operating margin. Additionally, the Company effective
February 26, 1999 discontinued Medicare Certified Home Health Agency operations
in Florida due to changes in the Medicare reimbursement and authorization
methodologies. In May 1999 the Company closed its Syracuse office due to cost
containment considerations.

Effective January 1, 1999, the Company successfully completed an, 18 month,
automation restructuring project by placing all offices on the same operating
software for client intake, scheduling, personnel, clinical data base
management, billing and compliance. The system downloads data to the Resource
Center into a standard accounting package for payroll, billing, collection,
financial and general ledger processing. These changes marked a significant
transition from multiple operating systems to one integrated standardized
operating system. The Company continues to upgrade these systems to the most
recent releases available.

The Company continues to maintain a three-tier Corporate Compliance structure,
which includes:

      1.    Corporate Patient Care Committee which meets quarterly to review and
            establish new policies and procedures, and reviews internal audit
            findings by department and branch;

      2.    Regional Quality Improvement Audit Committees, which conduct a
            series of operational, financial, clinical and personnel audits
            across all offices and departments. These audits test all regulatory
            and operational aspects with all findings reported to the Director
            of Corporate Compliance.

      3.    The Corporate Compliance Program provides an additional layer of
            internal audits, investigation, and reporting. The program provides
            for a Director of Corporate Compliance who operates under the
            direction of and reports directly to the Company's Board of
            Directors.

Customer Base

The Company maintains four types of customers, which form the base of its
referral source. The customer base includes Federally and State funded public
assistance programs (Medicare, Medicaid), other third party payers
(subcontracts), insurance companies and private pay customers.

A substantial portion of the Company's revenues is derived from home health care
services provided to patients who are eligible for Medicaid and Aging related
services referred to the Company through contract or subcontract relationships.
The Company maintained State and / or County approval and / or contracts in New
York, New Jersey, Ohio, and Pennsylvania for provision of professional and
paraprofessional Medicaid services which include Registered Nurse, Licensed
Practical Nurse, Home Health Aide, Personal Care Aide, Homemaking, and Live-in
Companion services. Each State maintain(ed/s) its own initial approval and
annual re-approval criteria, which are subject to audit and / or accreditation
processes. These services are reimbursed directly by State and / or local
government and represent a combination of federal, state and local funding.
Clients are referred to the Company by physicians, hospital discharge planning
departments and community based medical service organizations. The majority of
the business in the states of New York, New Jersey, Ohio, and Pennsylvania
was/is Medicaid reimbursed. If a contract were to be lost or an annual approval
/ accreditation not secured it could have a material and adverse effect on the
Company's operating results.

Although the Company discontinued Medicare operations in the State of Florida it
is still federally certified to provide Medicare reimbursed Certified Home
Health Agency services in the states of Ohio and Pennsylvania. However, the
Company conducts no Medicare reimbursed business in these states.

During the fiscal years ended May 31, 2001, 2000, and 1999, 59%70%, and
67%,respectively of the Company's revenue were attributable to Medicaid and
Medicare programs for the aged. The reasons for the decrease in the most recent
fiscal year are attributable to; 1) general service hour volume reductions in
Medicaid services in New Jersey and New York, 2) recruitment


                                       4
<PAGE>

shortages and the lack of adequate numbers of personnel to provide these
services ; 3) the May 2000 acquisition of the US Home Care operations in
Pennsylvania maintained a limited amount Medicaid type services and; 4) the
Company's decision to no longer provide Medicare services.

The Company's next largest customer base is derived from other third party
payers which consist of subcontracting relationships for provision of personnel
with community and facility based organizations that are reimbursed directly by
Medicaid and Medicare or other governmental services. This type of subcontract
relationship is maintained with Certified Home Health Agencies, Long Term Home
Health Care Programs, Hospice Programs, Health Maintenance Organizations (HMOs),
Case Management Organizations and related programs. Referrals and reimbursement
for client care initiates from these facilities, which in turn are reimbursed by
Medicare or Medicaid. This source has accounted for 31%, 16% and 15% of revenue
for fiscal years 2001, 2000, and 1999 respectively.

The insurance segment of the Company's business represented 9%, 13% and 14% of
the Company's revenue in 2001, 2000, and 1999, respectively. This business is
made up of a mix of Long Term Care Insurance, Workers Compensation Insurance,
Commercial HMO Insurance, Preferred Provider Organizations (PPO), and general
health insurance policies that provide a home health care service benefit.
Insurance referrals can come directly through contractual relationships with
insurance companies, network alliances, physicians, and hospital based discharge
planners.

Private pay customers have represented approximately 1% of revenue in each of
the last three fiscal years. These clients for a variety of reasons choose to
pay privately because the client is ineligible for public assistance programs,
chooses to supplement services provided by Medicare or an insurance program, or
have elected to pay part or all of their care out of pocket. These customers
come predominantly through referrals from physicians, hospital discharge
planners, and community based organizations.

Marketing and Sales

The Company maintained marketing and sales activities in each of the five states
it operated in and concentrated its efforts through the use of regional
marketing/sales teams comprised of field service office administration and sales
representatives. The office Administration educated the sales staff regarding
new identified targets, regulatory changes and new service programs. The Company
believes in the use of office specific Operational Plans for the management and
marketing of regional sales. Post Premier acquisition marketing activities will
be conducted by the Office Administrator of each facility. The offices utilize a
formal Operational Plan. The individual Office Operational Plan format provides
for the comprehensive approach to office growth, marketing, and recruitment, as
well as the clinical and fiscal operation of each office. The plan objective is
to maximize internal growth and assure clinical / fiscal integrity. The plan
serves as the framework for development of a continual process for Quality and
Performance Improvement in all areas of responsibility including marketing. The
marketing component of the plan identifies all potential referral sources and
establishes a systematic referral source contact strategy across the marketing
and office staff. The plan is continually reassessed by management and refined
to ensure success, and serves as an evaluation tool to identify strengths as
well as areas needing organizational support.

The Company's office staff focus on the sales and marketing component goals of
these plans. The Company targets the key representatives of the contracting
institutions, hospital discharge planning departments, insurance companies,
community based facilities, and physicians to secure contractual and referral
relationships. Representatives visit targeted facilities and programs, while
maintaining the Company's presence with existing referral sources and acting as
the first line of communication with new referral sources. Beyond the
traditional personnel services offered by the industry the Company offers
facility staffing, Shared Aide Team Model services, Skilled High Tech Nursing
and Pediatric Nursing specialty services. From an operational perspective the
Company markets quality benchmarks as demonstrated by its Joint Commission
accreditation (JCAHO), and a full functioning Corporate Compliance Program. The
sales representatives are supported by print and radio advertising, direct
mailing, and attendance at trade shows and regional health care functions.

Competition

The home health care and facility staffing industry has a variety of local,
regional and national organizations, which comprise the Company's competition
base. The Company has numerous competitors in each of the markets it serves,
however, regulatory and reimbursement changes are causing consolidation within
the industry at this time. Smaller local and regional operations are finding it
increasingly difficult to remain in the market. Companies similar in size to
Star or larger regionally based companies have


                                       5
<PAGE>

emerged to be viewed by the Company as its major competitors.

Competition is based on the quality of care provided to clients, the ability to
obtain personnel to deliver the authorized service and the price structure
offered by the organization. The Company believes that it has developed and
maintains high quality standards through its operational, clinical, and
compliance policies, procedures and activities. Additionally, the Company
maintains an aggressive recruitment and training philosophy, which has proven
effective. Cost effectiveness in operation, achieved through improved automation
platforms, new service delivery models, and economies of scale have enabled the
Company to be aggressive in its pricing structures while maintaining strong
operating margins.

Government Regulations, Licensing and Audits

The Company's business is subject to substantial and frequently changing
regulations by Federal, State, and Local authorities, which require significant
compliance responsibilities by the Company. Each State, in which the Company
operates maintains its own form of licensing standards and may maintain
Certificate of Need (CON) or other Medicare requirements specific to the State
that are above the minimum standard requirements established by the Federal
government for participation in the Medicaid and Medicare programs. The
imposition of more restrictive regulatory requirements or the denial or
revocation of any license, certification, Medicaid or Medicare approval, or
permit necessary for operation in a particular market could have a material
adverse effect on the Company's operations. In addition, any future expansion
into new markets would require the Company to comply with all licensing, and /
or CON requirements and other regulations pertinent to that jurisdiction.

As of the close of fiscal year 2001 and through the Premier New Jersey and New
York closings the Company maintained(s) all applicable licenses for provision of
home care and facility staffing services in the states of New York, New Jersey.
Likewise, the Company continues to maintain all applicable licenses and
certifications in the states of Pennsylvania, Ohio, and Florida. As a provider
of services under Medicare as well as some state Medicaid programs the Company
is required by the Federal Health Care Financing Administration and / or state
Health Departments to prepare cost reports reflecting annual expenditures and
development of capital expenditure plans. The regulatory agencies of the states
in which the Company operates require compliance with certain regulations and
standards with respect to health care personnel records, client records, nursing
and administrative supervision, incident and complaint monitoring and follow-up,
and the establishment of professional advisory boards. Additionally, both
Federal and State Anti-kickback regulations exist which are complied with.

With participation in the Medicare and Medicaid programs the Company is subject
to survey and audit of operational, clinical and financial records with respect
to proper applications of general regulations governing operation, cost
reporting criteria, and other payment formulas. These audits can result in
retroactive adjustments for payments received from these programs resulting in
either amounts due to governmental agencies from the Company or amounts due to
the Company as adjustments from the governmental agency.

Effective in January 1998, the Company was required to comply with a new payment
formula for reimbursement under the Medicare program. This payment formula,
termed the Interim Payment System (IPS), for Medicare was developed by the
federal Health Care Financing Administration (HCFA) to serve as a middle step as
the government moved from a cost based reimbursement system to a episodic
disease based Prospective Payment System (PPS). In addition, to the imposition
of IPS, which set per patient limits on Medicare home care reimbursements, HCFA
also revised regional cost limits which combined with IPS had a material effect
in reducing revenue and reimbursement for the Company's Florida based Certified
Home Health Agency. As a result, the Company elected to discontinue provision of
Medicare services in its Florida operation effective February 26, 1999 and
subsequently dissolved this Florida based subsidiary.

Liability Insurance

The Company's employees and subcontractors routinely make decisions that 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 liability insurance providing for coverage in a maximum amount of
$1,000,000 per claim, subject to a limitation of $3,000,000 for all claims in
any single year. In addition, the Company requires that each independent
contractor it refers to institutions for employment supply a certificate of
insurance evidencing that such person maintains medical professional liability
insurance providing for coverage of no less than $1,000,000 per claim. There can
be no assurance, however, that the Company will be able to maintain its existing
insurance at an acceptable cost or obtain additional insurance in the future, as
required. There can be no assurance that the Company's insurance will be
sufficient to cover liabilities


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resulting from claims that may be brought in the future. A partially or
completely uninsured claim, if successfully asserted and of significant
magnitude, could have a material adverse effect on the Company and its financial
condition.

Employees

As of September 2001, the Company employed 64 permanent office and
administrative employees. The Company also has a roster of temporary
professional and paraprofessional employees (including registered nurses,
licensed practical nurses, home health aides, personal care aides and nurses'
aides). The Company treats all such persons as employees. The Company currently
has no union contracts with any of its employees and believes that its
relationship with its employees and independent contractors is good. The Company
pays its temporary employees at wages that it believes are competitive within
industry standards.

Recruitment of Personnel

Recruitment of adequate numbers of temporary personnel continues to be
increasingly difficult in the home health industry resulting from a variety of
market forces. The previously strong economic environment, coupled with a
moderate to low reimbursement rate structure has hampered the industry in
general in recruiting adequate numbers of personnel to provide authorized
services. Field service personnel wages and benefit packages are below average
as compared to other service type industries outside of health care. Although
the downward economy should result in an influx of personnel available to the
industry this trend has yet to occur.

To address this issue the Company has focused on higher margin business or
attempted to negotiate revised contractual rate agreements with existing
referral sources in an effort to permit the Company to offer increased wage and
benefit packages to its temporary employees.

Additionally, the Company's focus has been on filling all monthly
office-training programs, development of off-site recruitment initiatives and
training locations, and recruitment of professional nursing personnel. This
project was implemented in March 2000 and has been moderately successful,
although future success of the program cannot be guaranteed.

Item 2. Description of Property

Description of Property

The Company leased as of fiscal year end a total of 12 facilities in five
states. As of the August 31, 2001 Premier transaction, the Company currently
maintains 6 leased facilities. The Company believes that its existing leases
will be negotiated as appropriate as they expire, or that alternative properties
can be leased on acceptable terms. The Company intends to seek lease space
reductions in its Florida Resource Center location by the end of the 3rd quarter
of FY 2002 in an effort to reduce operational costs. The Company also believes
that its present facilities are well maintained and are suitable for it to
maintain existing operations.

The following table describes the location and current use of each of the
Company's leased facilities as of September 2001:

Location                      Description
--------                      -----------

New York Facilities
Huntington Station            Corporate Executive Offices

Florida Facilities
Miramar                       Data Processing, Payroll, Billing, Collections
                              /Nursing and Paraprofessional Services

Ohio Facilities
Mansfield                     Nursing and Paraprofessional Services

Pennsylvania Facilities
Allentown                     Nursing and Paraprofessional Services
Pittsburgh                    Nursing and Paraprofessional Services
Lancaster                     Nursing and Paraprofessional Services


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<PAGE>

Item 3. Legal Proceedings

On July 16, 1998, the Company was advised that an audit of Star Multi Care
Services of Florida, Inc. (d/b/a American Health Care Services) ("American"),
the Company's Florida Medicare agency, was commenced by the Office of Audit
Services, Office of Inspector General of the United States Department of Health
and Human Services. This audit was conducted in conjunction with the United
States Attorney's Office for the Southern District of Florida and involved a
review of claims for home health services submitted by American Health Care
Services during 1995 and 1996. On July 11, 2001 the Company entered into a
Settlement Agreement with United States Department of Justice and the Office of
Inspector General of the Department of Health and Human Services. In order to
avoid the delay, uncertainty, inconvenience, and the expense of protracted
litigation of the claims, both parties mutually agreed upon a settlement amount
of $1.0 million payable by Star no later than November 8, 2001. The Company
anticipates that it will have the available funds necessary to complete the
payment by the due date from the proceeds of the sale of its New Jersey and New
York operations to Premier, the collection of the accounts receivable from these
operations and availability from the new credit facility.

On May 10, 1999 the Company entered into a Settlement Agreement with the State
of New York whereby the State of New York will discharge and forever release the
Company, including its officers, directors and employees, for any further
liability regarding the Company's submission of claims for or receipt of
Medicaid payments for home health care services for the audited period of 1992
through 1996. The Attorney General stated in his press release that the Company
has fully cooperated with the State's investigation and immediately remedied the
problems the Attorney General's office pointed out by improving its personnel
training procedures and submitting revised cost reports.

The terms of this Settlement Agreement provided for:

(a)   No admission by Star of any criminal or civil liability, guilt, wrongdoing
      or unacceptable practice, or a determination of guilt of any violation of
      any Federal, State or Local statute, rule or regulation.

(b)   The Company agreed to pay to New York State the total sum of $1,167,177,
      with an initial payment of $200,000. The balance shall be payable over
      four years at 9% interest.

As of May 31, 2001 the outstanding principal balance was $521,425.

Except as otherwise provided in this Annual Report on Form 10-K, there are no
legal proceedings to which the Company is currently a party or to which any of
its property is subject that could possibly have a material adverse effect upon
the Company, and the Company knows of no legal proceeding pending or threatened
against any director or officer of the Company in his or her capacity as such.


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<PAGE>

                                     PART II

Item 5. Market For Common Equity and Related Stockholder Matters

      Prior to November 11, 1999, the Company's Common Stock was quoted on the
Nasdaq National Market System, under the symbol "SMCS", and thereafter, has been
traded on the Nasdaq SmallCap market, under the symbol "SMCS". Until June 7,
1996, the Company's Common Stock was also listed on the Pacific Stock Exchange.

      The following table sets forth the high and low sales prices per share for
the Common Stock during the periods indicated on the Nasdaq National Market
System or the Nasdaq SmallCap Market.

         Period                         High           Low

Year ended May 31, 1999
First Quarter                          $25.317       $11.25
Second Quarter                          16.875        10.125
Third Quarter                           20.25         11.25
Fourth Quarter                          18.00         10.125

Year ended May 31, 2000
First Quarter                          $11.814       $ 6.21
Second Quarter                          11.34          6.75
Third Quarter                           17.625         3.75
Fourth Quarter                          22.875         5.439

Year ended May 31, 2001
First Quarter                          $ 2.188       $ 1.375
Second Quarter                           1.438          .625
Third Quarter                            1.688          .594
Fourth Quarter                           1.820         1.390

As of September 10, 2001 the Company had 601,000 shares of Common Stock
outstanding and 734shareholders of record.

The Company did not pay cash dividends on its Common Stock during any of the
three years ended May 31, 2001, 2000 and 1999. It is the present policy of the
Company to retain earnings, if any, to finance the development and growth of its
business. In addition, the Company's agreement with its lender prohibits the
payment of cash dividends without the lender's prior consent.

The Nasdaq Stock Market notified the Company that it did not meet the
maintenance criteria regarding the minimum market value of the public float of
at least $5 million for continued listing on the Nasdaq's National Market
System. Subsequently, on November 11, 1999 the Company reverted to trading on
the Nasdaq SmallCap Market.

The Board of Directors approved a 1 for 3 reverse split of the Company's common
stock effective December 13, 1999. The Board authorized an amendment to the
Certificate of Incorporation whereby the common stock of Company would be split
in a ratio of one for three and in addition, the total authorized number of
common stock shares was reduced from 10 million to 5 million shares. The par
value of the common remained unchanged at $.001 per share. The amendment to the
Certificate of Incorporation was ratified and approved by the shareholders of
the Company at the 1999 Annual Meeting of Shareholders held on December 1, 1999.

The Board of Directors approved a 1 for 3 reverse split of the Company's common
stock effective January 25, 2001. The Board authorized an amendment to the
Certificate of Incorporation whereby the common stock of Company would be split
in a ratio of one for three shares. The amendment to the Certificate of
Incorporation was ratified and approved by the shareholders of the Company at
the 2000 Annual Meeting of Shareholders held on January 17, 2001. For all
periods presented the per share amounts have been restated to reflect the 1 for
3 reverse split that occurred in December 1999 and January 2001.


                                       9
<PAGE>

On April 30, 1999 the Company completed a private placement by the sale of
$575,000 Series A 8% Convertible Preferred Stock par value $1.00 per share
("Preferred Stock") to the Shaar Fund, Ltd., providing the Company net proceeds,
after fees and expenses, of $500,000. After sixty days, the Preferred Stock may
be converted to common stock equal to the lesser of: (a) 125% of the market
price three trading days immediately preceding the closing date, or (b) the
market price of the Company's common stock discounted from 10% to 30%, such
discount increasing with the passage of time. Holders of the preferred shares
can convert the stated value of their shares, in whole or in part, into common
stock at a maximum conversion price of $12.66 per share and have liquidation
preference over common shareholders. The Preferred Stock pays an 8% dividend
payable quarterly that may be converted into common stock at the option of the
Company. The investor also received a Common Stock Purchase Warrant (the
"Warrant") for the right to purchase 5,556 common stock shares of the Company at
115% of the closing bid price on the trading day immediately preceding the
closing date of this sale. These warrants expired on April 30, 2001. The common
stock to be issued upon conversion of Preferred Stock, the common stock to be
issued upon exercise of Warrant, and common stock issued for payment of
Preferred Stock dividend was registered by the Company under the Securities Act
of 1933 on Form S-3. The Company utilized the proceeds from this sale to satisfy
its working capital needs.

Item 6. Selected Financial Data

The statement of operations for the years ended May 31, 2001, 2000, 1999, 1998,
and 1997 and balance sheet data as of May 31, 2001, 2000, 1999, 1998, and 1997
as set forth below have been derived from the audited financial statements of
the Company and should be read in conjunction with those financial statements
and notes thereto included elsewhere in this Annual Report on Form 10-K. In
addition, the selected financial data should be read in conjunction with
"Description of Business -- General" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

<TABLE>
<CAPTION>
                                                                          Year Ended
                                                     ---------------------------------------------------
                                                                            May 31
                                                     ---------------------------------------------------
                                                       2001       2000       1999      1998(1)     1997
                                                       (IN THOUSANDS EXCEPT RATIO AND PER SHARE AMOUNTS)
<S>                                                  <C>        <C>        <C>        <C>        <C>
STATEMENT OF OPERATIONS DATA (2) (4)
Net Revenues                                         $38,679    $39,206    $47,108    $49,335    $41,857
Income (Loss) from Operations                         (7,985)       103     (1,316)    (3,367)     3,161
Other Income (Expense)                                  (773)      (731)      (652)      (438)      (140)
Merger Transaction Costs                                  --         --         --         --     (2,808)
Income (Loss) from Continuing Operations              (8,759)      (628)    (1,322)    (2,622)       126
Income (Loss) from Discontinued Operations(4)         (1,000)       (36)      (145)    (1,537)        --
Gain (Loss) on Disposal of Discontinued Operations        --         --        (88)        --         --

Net Income (Loss)                                     (9,759)      (664)    (1,556)    (4,159)       126
Income Per Share (3)
Income (Loss) from Continuing Operations             $(14.21)   $ (1.17)   $ (2.28)   $ (4.74)   $   .27
Income (Loss) from Discontinued Operation            $ (1.62)   $  (.06)   $  (.24)   $ (2.79)        --
Gain (Loss) on Disposal of Discontinued Operations        --    $    --       (.15)        --         --

Net Income (loss)                                    $(15.83)   $ (1.23)   $ (2.67)   $ (7.51)   $   .27
Shares Used in Computing Per Share Amounts               619        579        582        552        468

BALANCE SHEET DATA: (2)
Cash and Cash Equivalents                            $    10    $   321    $ 1,734    $ 1,867    $   139
Working Capital                                       (6,023)     3,696      6,068        750      9,545
Total Assets                                          15,457     24,430     28,171     29,870     20,300
Total Long-Term Obligations                              311      5,784      7,601      1,066      2,945
Redeemable Preferred Stock                                --         --         --         --         --
Shareholders' Equity                                   2,880     12,658     13,388     14,433     13,071
Current Ratio                                            .51       1.62       1.85       1.05       3.23

Cash Dividend Declared Per Common Share              $    --    $    --    $    --    $    --    $    --
</TABLE>


                                       10
<PAGE>

   -------------------------

(1)   In September 1997, Star acquired EFCC Acquisition Corp. in a transaction
      accounted for as a purchase.
(2)   In August 1996, STAR acquired AMSERV HEALTHCARE SERVICES, INC. ("Amserv")
      in a transaction accounted for as a pooling-of-interests, accordingly, all
      periods presented have been restated to include the accounts and
      operations of Amserv for the periods prior to the acquisition.
(3)   Effective January 1, 1998, STAR adopted SFAS No. 128, "Earnings Per
      Share."
(4)   Effective February 1999, STAR adopted a plan to abandon its Medicare
      business provided by one of its subsidiaries, Star Multi Care Services of
      Florida, d/b/a American Health Care Services as such operations of
      American have been shown as discontinued for all periods presented.


                                       11
<PAGE>

Item 7. Management's Discussion and Analysis of Financial Condition and Results
        of Operation

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

This discussion contains forward-looking statements that are subject to a number
of known and unknown risks that, in addition to general economic, competitive
and other business conditions, could cause actual results, performance and
achievements to differ materially from those described or implied in the
forward-looking statements [See Forward Looking Statements].

The Company is subject to significant external factors that could significantly
impact its business, including changes in Medicare and Medicaid reimbursement,
government fraud and abuse initiatives and other such factors that are beyond
the control of the Company. These factors, as well as future changes in
reimbursement methodologies and new or changes in interpretations of
regulations, could cause future results to differ materially from historical
trends.

Results of Operations

Year Ended May 31, 2001 Compared to Year Ended May 31, 2000

Net revenues for the year ended May 31, 2001 decreased $527,616 or 1.3% to
$38,679,374, compared to $39,206,990 for the fiscal year ended May 31, 2000.
This decrease was primarily attributable to the elimination of poor margin
contracts, closure of an unprofitable skilled nursing division in New Jersey and
the closure or consolidation of several low volume offices.

Gross profit margin percentages for the fiscal years ended May 31, 2001 and 2000
were 33.3% and 30.3% respectively. The increase in the gross profit margin is
primarily attributable to an elimination of low profit margin contracts, change
in wage and benefit programs for employees and contract rate increases in New
Jersey, Pennsylvania and Ohio.

Selling, General and Administrative expenses ("SG&A"), as a percentage of net
revenues was 26% in 2001 as compared with 26% in 2000.

Provision for doubtful accounts as a percentage of net revenues for the year
ended May 31, 2001 was 14.3% compared to 1.4% for the year ended May 31, 2000.
The increase in reserves for doubtful accounts was attributable to final
determination that opportunities were exhausted to collect older accounts
receivable of Extended Family Care, Amserv Health Care of New Jersey, Inc. and
US Home Care or that the Company had reached timely filing / refiling limits
with some payors, as well as cash flow difficulties of certain customers.
Interest expense increased to $773,432 during fiscal 2001 as compared to
$731,948 in fiscal 2000. Interest on the Credit Facility prior to September 14,
1999 was LIBOR plus 3% for 70% of eligible accounts receivable and LIBOR plus 6%
for the remaining 30%. On September 14, 1999 the Credit Facility was amended,
and bears interest at LIBOR plus 4% for 70% of eligible accounts receivable and
LIBOR plus 7% for the remaining eligible accounts receivable. Interest of
$57,632 was paid to New York State on the Medicaid settlement as well as overall
higher interest rates in 2001 as compared to 2000 contributed to the increase in
interest expense.

During fiscal 2001, the Company initiated a plan to dispose of its New York and
New Jersey operations. In connection with this plan of disposal, the Company
determined that the carrying value of certain intangibles exceeded their fair
values. Accordingly, the Company recorded a charge of $4,205,000 to reflect the
fair value of the assets to be disposed of in the sale to Premier.

As the Company fully reserved for any benefit from the operating loss for fiscal
year ended May 31, 2001, the Company's effective tax rate for 2001 was 0%, as
compared to 0% in 2000 and 31% in 1999. At May 31, 2001 the Company had a net
operating loss carry forward for federal income tax purposes.

Discontinued Operations


                                       12
<PAGE>

In February 1999, the Company formally adopted a plan to liquidate its Medicare,
both the indemnity and HMO business, being provided by one of its subsidiaries,
Star Multi Care Services of Florida, Inc d/b/a American Health Care Services.
Decreasing utilization together with decreasing reimbursement rates and
increasing costs forced management to cease operations with its providers July
1, 1999. The Company liquidated its assets and discharged its liabilities
through an assignment for benefit of creditors under Florida state law, and the
Company was formally dissolved on August 23, 2000.

Year Ended May 31, 2000 Compared to Year Ended May 31, 1999

Net revenues for the year ended May 31, 2000 decreased $7,901,687 or 17% to
$39,206,990 compared to $47,108,677 for the fiscal year ended May 31, 1999. This
decrease was primarily attributable to a reduction in authorization of service
hours related to the New Jersey Medicaid Program, the reduction of visit
authorizations on Medicare subcontract services provided in New York and New
Jersey, resulting from a general reduction in the Medicare Program, and from the
termination of under performing contracts in the Company's Florida licensed
operations, as well as the discontinuance of the Florida Medicare operations.

Gross profit margin percentages for the fiscal years ended May 31, 2000 and 1999
were 30.3% and 30.5% respectively.

Selling, General and Administrative expenses ("SG&A"), as a percentage of net
revenues was 26% in 2000 as compared with 27% in 1999. This decrease is
principally attributable to the Company's restructuring efforts during the past
year.

Provision for doubtful accounts as a percentage of net revenues for the year
ended May 31, 2000 was 1.4% compared to 3.4% for the year ended May 31, 1999.
Interest expense increased to $731,948 during fiscal 2000 as compared to
$652,714 in fiscal 1999. Interest on the Credit Facility prior to September 14,
1999 was LIBOR plus 3% for 70% of eligible accounts receivable and LIBOR plus 6%
for the remaining 30%. On September 14, 1999 the Credit Facility was amended,
and bears interest at LIBOR plus 4% for 70% of eligible accounts receivable and
LIBOR plus 7% for the remaining eligible accounts receivable. Interest of
$77,412 was paid to New York State on the Medicaid settlement as well as overall
higher interest rates in 2000 as compared to 1999 contributed to the increase in
interest expense.

Operating income for fiscal 2000 increased to $103,830 from a loss of
($1,316,993) for fiscal 1999, an increase of $1,420,823. The increase is
primarily attributable to significant decreases in operating expenses.

The Company's effective tax rate for 2000 was 0% as compared to 31% in 1999. At
May 31, 2000 the Company had a net operating loss carryforward for federal
income tax purposes.

Year Ended May 31, 1999 Compared to Year Ended May 31, 1998

Net revenues for the year ended May 31, 1999 decreased $2,226,853 or 5% to
$47,108,677 compared to $49,335,530 for the fiscal year ended May 31, 1998. This
decrease was primarily the result of reductions in Medicare reimbursement rates
that affected contracts the Company had with Certified Home Health Agencies and
Long Term Home Health Care Programs in New York and New Jersey. This together
with Medicaid rate reductions realized during fiscal 1999 reduced Star Multi
Care Services, Inc revenues approximately $4,614,000 or 17% to 21,930,000
compared to $26,545,000 for fiscal year 1998. These reductions were offset by
increases in Amserv Healthcare of New Jersey revenues of approximately
$2,271,000 or 12%. Amserv Healthcare of New Jersey revenues was $20,442,000 and
$18,170,000 for fiscal year 1999 and 1998 respectively. This increase is the
result of an additional three months of billing realized in 1999 as compared to
1998 following the acquisition of EFCC on September 9, 1997.

Gross profit margin percentages for the fiscal years ended May 31, 1999 and 1998
were 30.5% and 30.4% respectively.

Selling, General and Administrative expenses ("SG&A") as a percentage of net
revenues were 27% for both years ended May 31, 1999 and 1998 respectively. In an
effort to implement cost savings and profitability, the Company's management
team aggressively restructured the staff and information systems to achieve cost
efficiencies during 1999 and 1998.

Provision for doubtful accounts as a percentage of net revenues for the year
ended May 31, 1999 was 3.4% compared to 3.1% for


                                       13
<PAGE>

the year ended May 31, 1998. Due to cost constraints and reimbursement
reductions being realized throughout the entire health and home care industries,
the Company continues to realize longer payment cycles of approximately 72 to 90
days. A charge of approximately $946,000 was taken in the fourth quarter 1999 to
increase the allowance for doubtful accounts and to be consistent with the trend
of bad debts as a percent to total revenues. A charge of $1,024,000, in excess
of the regular provision amount was taken in the year ended May 31, 1998. The
Company's allowance for doubtful accounts reflects a conservative position taken
on accounts in excess of 180 days. The Company continues to implement aggressive
collection procedures and is continually enhancing information systems and
internal reporting to address the more stringent documentation and time frame
requirements being imposed by managed care contracts.

During 1999 the Company appealed the Medicare assessment (I) of $1,250,000 at
the recommendation of legal counsel. Preliminary indications from the Medicare
intermediary and regulatory counsel as to the outcome have been favorable based
upon the results of similar audits in other home-care companies. Therefore it
has been management's decision to reverse the accrual in 1999.

Restructuring and termination expenses were $222,615 and $362,718 for the years
ended May 31, 1999 and 1998 respectively. Charges were consistent with the
Company's plan to restructure and consolidate several of its operating locations
and administrative functions within specific geographic areas. During the fourth
quarter 1999, the Company restructured the accounting staff and relocated the
department from Miramar, Florida to the corporate offices in New York.

Interest expense increased to $652,000 during fiscal 1999 as compared to
$438,140 in fiscal 1998. Interest on the credit facility prior to November 9,
1998 was prime plus 1/4% (8.5% at May 31, 1998). Interest on the new credit
facility subsequent to November 9, 1998 bears interest at LIBOR plus 3% for 80%
of eligible receivables and LIBOR plus 6% for the remaining 20% of eligible
receivables. On April 23, 1999 the Credit Facility was amended to bear interest
at LIBOR plus 3% for 70% of eligible receivables and LIBOR plus 6% for the
remaining 30%. Overall interest rates were higher in 1999 as compared to 1998
contributing to the overall increase in interest expense.

Operating losses for the year ended May 31, 1999 decreased to ($1,316,993) from
($3,366,936) in fiscal year 1998. This decrease was attributable to 1998
one-time regulatory charges of $2,030,511 not incurred in 1999. This decrease
was offset by $196,000 of increased amortization and depreciation costs realized
in 1999. This increase is the result of (I) full year of depreciation on assets
acquired with the EFCC acquisition (ii) amortization of loan costs associated
with the new credit facility and (iii) new information systems put in service
during 1999 attributed to the overall increase in depreciation and amortization.

The Company's effective tax rate of 31% remained consistent for 1999 and 1998
respectively. The effective tax rate remains at 31% due to non-deductible
goodwill in connection with the EFCC acquisition and adjustments to prior year
tax liabilities that reduced the Company's effective tax rate in 1999 and 1998
below statutory rates.

Net losses from continuing operations for the year ended May 31, 1999 decreased
$1,300,000 or 48% to ($1,322,707) compared to ($2,622,076) for the year ended
May 31, 1998. The decrease is primarily attributable to the one time regulatory
charges in 1998 offset with increases in interest expense during 1999. This,
together with increases in depreciation and amortization contributed to the
overall decrease in net losses for 1999.

Liquidity and Capital Resources

As of May 31, 2001 cash and cash equivalents were $10,511 a decrease of $310,954
from $321,465 for the year ended May 31, 2000. The Company has aggressively
reduced its revolving credit line by $1,001,568.

Net cash provided by operations decreased $58,766 to $448,014 from $506,780 as
compared to May 31, 2000. On November 9, 1998, the Company entered into a $10
million revolving credit facility with Daiwa Securities America, Inc. (the
Credit Facility). In connection with the agreement, Star Multi Care Services,
Inc and certain of its subsidiaries (the members) formed SMCS Care, LLC (a
limited liability Company) (the "LLC"). The operating agreement of the LLC
provides for its members to sell its eligible receivables to the LLC and whereby
the LLC will borrow from the lender in accordance with the Credit Facility.

The Credit Facility provides for the LLC to borrow up to 70% of eligible
accounts receivable (as defined) that are aged less than


                                       14
<PAGE>

180 days. All of the assets of the Company collateralize the Credit Facility. On
September 12, 2000, the Company renegotiated its Credit Facility with its lender
on more favorable terms and extended the Credit Facility for an additional three
years. The material terms of the new Credit Facility are:

      1.    The Credit Facility was reduced to $7 million from $10 million to
            more accurately reflect the Company's actual borrowing needs and to
            reduce non-utilization fees.

      2.    The interest rate was reduced to LIBOR plus 3.75% for the entire
            Credit Facility.

      3.    The Credit Facility will gradually reduce the available borrowing
            base from the present 90% of eligible receivables to 87.5% by
            January 2001.

      4.    A number of financial covenants were revised to more realistically
            measure the Company's financial performance.

      5.    The lender granted waivers for all of the financial covenants that
            were breached in the past fiscal year.

As of May 31, 2001 the borrowing base totaled $5,005,937, and the outstanding
loan balance totaled $3,847,315, as compared to $5,815,774 and $4,848,883,
respectively, as of May 31, 2000. At May 31, 2001, the Company was in violation
of certain financial covenants and the lender had granted the Company a waiver
for those covenants that were not met.

On August 31, 2001 in conjunction with the Premier Home Healthcare Services,
Inc. acquisition of the New Jersey operations of the Company, the Company
liquidated all liabilities with this lender and satisfied and paid in full
$4,408,031 representing all outstanding loan borrowings and fees. The lending
relationship between the two parties was terminated on this date

On August 31, 2001 the Company and certain subsidiaries entered into a new
lending agreement with Heller Healthcare Finance, Inc. The new revolving credit
facility is a 3-year, $2.0 million facility that provides the Company with the
ability to borrow up to 85% of eligible Accounts Receivable aged less than 150
days for the Company and its subsidiaries. Excluded from the borrowing base were
the accounts receivable from the New York and New Jersey operations that were
retained by the Company as part of the Premier transaction. The interest rate on
borrowed funds is equal to the prime Rate plus 1%. Additionally, the line has a
$400,000 collateral reserve pending finalizing the closing of the New York
operations with Premier, at which time this reserve will be lifted.

On July 11, 2001 the Company entered into a Settlement Agreement with United
States Department of Justice and the Office of Inspector General of the
Department of Health and Human Services. In order to avoid the delay,
uncertainty, inconvenience, and the expense of protracted litigation of the
claims both parties mutually agreed upon a settlement amount of $1,000,000
payable by Star by November 8, 2001. The Company believes it will have the
available funds necessary to complete the payment by the required date. Such
funds will come from the proceeds of the sale of its New Jersey and New York
operations to Premier, the collection of the accounts receivable from these
offices and availability from its line of credit.

Other than the matters described above, the Company does not anticipate any
extraordinary material commitments for capital expenditures for the Company's
current fiscal year.

The Company believes that can meet its cash requirements for the next twelve
months through the proceeds of the Premier transaction, collection of the
receivables retained by the Company of the New York and New Jersey operations,
the new credit facility with Heller Healthcare Finance and funds generated from
the continuing operations of the Company To the extent that such sources are
inadequate, the Company will be required to seek additional financing. In such
event, there can be no assurance that additional financing will be available to
the Company on satisfactory terms.

Other than the matters described above, the Company does not anticipate any
extraordinary material commitments for capital expenditures for the Company's
current fiscal year.

Inflation and Seasonality

The rate of inflation was insignificant during the year ended May 31, 2001. In
the past, the effects of inflation on personnel costs have been offset by the
Company's ability to increase its charges for services rendered. The Company
anticipates that it will be able to continue to do so in the near future. The
Company continually reviews its costs in relation to the pricing of its
services.


                                       15
<PAGE>

The Company's business is not seasonal.

Forward Looking Statements

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

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

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

HEALTH CARE REFORM. In August 1997, Congress enacted and President Clinton
signed into law the Balanced Budget Act of 1997 ("B.B.A."), resulting in
significant changes to cost based reimbursement for Medicare home health care
providers. Although the new legislation enacted by Congress retains a cost based
reimbursement system, the cost limits have been reduced for fiscal years which
began on or after October 1,1997 and a new per-beneficiary limit is effective
for fiscal years which began after such date. The B.B.A. provides two-payment
systems -- an IPS that is effective for the Company beginning January 1, 1998
until the adoption of the successor payment system that is a new prospective
payment system tentatively scheduled to begin in late 2000. Although the Company
has discontinued Medicare operations and has minimal direct Medicare revenue,
future changes in Medicare reimbursement could impact revenues associated with
the Company's subcontract relationships with Medicare Certified Home Health
Agencies in New York and New Jersey. The Company cannot quantify the full effect
of proposed anticipated Medicare reimbursement changes on the Company's future
performance because certain components of the new reimbursement methodology have
not been fully quantified and finalized at this point in time.

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

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


                                       16
<PAGE>

the type of services offered and the necessity to maximize service volume due to
anticipated operating margin decline.

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


                                       17
<PAGE>

                                    PART III

Item 10. Directors, Executive Officers, Promoters and Control Persons;
         Compliance with Section 16 (a) of the Exchange Act

      The information required by this item is incorporated by reference from
the Company's Definitive Proxy Statement to be filed pursuant to Regulation 14A.

Item 11. Executive Compensation

      The information required by this item is incorporated by reference from
the Company's Definitive Proxy Statement to be filed pursuant to Regulation 14A.

Item 12. Security Ownership of Certain Beneficial Owners and Management

      The information required by this item is incorporated by reference from
the Company's Definitive Proxy Statement to be filed pursuant to Regulation 14A.

Item 13. Certain Relationships and Related Transactions

      The information required by this item is incorporated by reference from
the Company's Definitive Proxy Statement to be filed pursuant to Regulation 14A.


                                       18

<PAGE>

                          Independent Auditors' Report

Board of Directors and Shareholders
Star Multi Care Services, Inc.
Huntington, New York

We have audited the accompanying consolidated balance sheets of Star Multi Care
Services, Inc. as of May 31, 2001 and 2000 and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended May 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Star Multi Care
Services, Inc. as of May 31, 2001 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
May 31, 2001, in conformity with accounting principles generally accepted in the
United States of America.


                                                     HOLTZ RUBENSTEIN & CO., LLP

Melville, New York
August 1, 2001 (except for Notes 7 and 22
   for which the date is August 31, 2001)
<PAGE>

                         STAR MULTI CARE SERVICES, INC.

                             REPORT ON CONSOLIDATED
                              FINANCIAL STATEMENTS

                         THREE YEARS ENDED MAY 31, 2001

<PAGE>

                         STAR MULTI CARE SERVICES, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                         Page
                                                                      ----------

Independent Auditors' Report                                             F-2

Consolidated balance sheets as of May 31, 2001 and 2000                  F-3

Consolidated statements of operations for the
   three years ended May 31, 2001                                        F-4

Consolidated statement of shareholders' equity
   for the three years ended May 31, 2001                                F-5

Consolidated statements of cash flows for the
   three years ended May 31, 2001                                        F-6

Notes to consolidated financial statements                            F-7 - F-21


                                      F-1
<PAGE>

                         STAR MULTI CARE SERVICES, INC.

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                            May 31,
                                                                 ----------------------------
              ASSETS  (Notes 7 and 8)                                2001            2000
                                                                 ------------    ------------
<S>                                                              <C>             <C>
CURRENT ASSETS:
   Cash and cash equivalents                                     $     10,511    $    321,465
   Accounts receivable, net of allowance for doubtful
     accounts of $6,602,000 and $1,378,000 at May 31,
     2001 and 2000, respectively (Notes 7 and 16)                   4,618,971       8,274,520
   Prepaid expenses and other current assets                          321,959         326,636
   Deferred income taxes (Note 10)                                  1,290,000         762,000
                                                                 ------------    ------------
       Total current assets                                         6,241,441       9,684,621

PROPERTY AND EQUIPMENT, net (Note 4)                                1,022,021       1,312,754
INTANGIBLE ASSETS, net (Notes 3 and 5)                              6,221,134      10,970,886
DEFERRED INCOME TAXES (Note 10)                                     1,755,000       2,242,000
OTHER ASSETS                                                          217,903         220,228
                                                                 ------------    ------------

                                                                 $ 15,457,499    $ 24,430,489
                                                                 ============    ============

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
   Revolving credit line (Note 7)                                $  3,847,315    $         --
   Note payable (Note 8)                                              300,000              --
   Accrued payroll and related expenses                             2,545,358       2,423,322
   Accounts payable                                                 1,243,222         451,283
   Accrued expenses (Note 6)                                          636,180         519,810
   Due to Medicare (Note 11)                                        3,593,324       2,593,324
   Due to officer (Note 9)                                            100,000              --
                                                                 ------------    ------------
       Total current liabilities                                   12,265,399       5,987,739
                                                                 ------------    ------------

LONG-TERM LIABILITIES:
   Revolving credit line (Note 7)                                          --       4,848,883
   Other long-term liabilities (Notes 6 and 8)                        311,828         935,221
                                                                 ------------    ------------
                                                                      311,828       5,784,104
                                                                 ------------    ------------

COMMITMENTS AND CONTINGENCY (Notes 18 and 19)

SHAREHOLDERS' EQUITY:  (Notes 12, 13, 14 and 18)
   Convertible preferred stock - aggregate liquidation value
     $575,000; $1.00 par value, 5,000,000 shares authorized;
     455 and 575 shares issued, respectively                              455             575
   Common stock, $.001 par value, 5,000,000 shares authorized;
     701,409 and 613,222 shares issued, respectively                      701             613
   Additional paid-in capital                                      21,585,317      21,563,990
   Subscription receivable                                           (397,782)       (397,782)
   Deficit                                                        (17,917,728)     (8,118,059)
   Treasury stock, 26,367 common shares at May 31, 2001
     and 2000, respectively, at cost                                 (390,691)       (390,691)
                                                                 ------------    ------------
       Total shareholders' equity                                   2,880,272      12,658,646
                                                                 ------------    ------------

                                                                 $ 15,457,499    $ 24,430,489
                                                                 ============    ============
</TABLE>

                 See notes to consolidated financial statements


                                      F-3
<PAGE>

                         STAR MULTI CARE SERVICES, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                 Years Ended
                                                                   May 31,
                                                  -----------------------------------------
                                                     2001           2000           1999
                                                  -----------    -----------    -----------
<S>                                               <C>            <C>            <C>
REVENUES, net                                     $38,679,374    $39,206,990    $47,108,677
                                                  -----------    -----------    -----------

OPERATING EXPENSES (Notes 18 and 20)
   Costs of revenues                               25,794,229     27,313,523     32,718,139
   Selling, general and administrative             10,127,989     10,209,179     12,610,794
   Depreciation and amortization                    1,006,635      1,035,143      1,106,952
   Provision for doubtful accounts                  5,531,259        545,315      1,580,224
   Impairment of assets to be disposed (Note 3)     4,205,000             --             --
   Impairment of intangible assets                         --             --        186,946
   Restructuring and termination expenses                  --             --        222,615
                                                  -----------    -----------    -----------
                                                   46,665,112     39,103,160     48,425,670
                                                  -----------    -----------    -----------

OPERATING (LOSS) INCOME                            (7,985,738)       103,830     (1,316,993)
INTEREST EXPENSE, net                                (773,432)      (731,948)      (652,714)
                                                  -----------    -----------    -----------

LOSS BEFORE PROVISION FOR
   INCOME TAXES                                    (8,759,170)      (628,118)    (1,969,707)
PROVISION (BENEFIT) FOR
   INCOME TAXES (Note 10)                                  --             --       (647,000)
                                                  -----------    -----------    -----------

LOSS FROM CONTINUING OPERATIONS                    (8,759,170)      (628,118)    (1,322,707)
                                                  -----------    -----------    -----------

DISCONTINUED OPERATIONS:  (Notes 5, 11 and 21)
   Loss from discontinued operations, net of
     tax benefit of $-0-, $-0- and $65,000
     for 2001, 2000 and 1999, respectively         (1,000,000)       (36,373)      (145,008)
   Loss on disposal, net of tax benefit
     of $40,000 for 1999                                   --             --        (88,320)
                                                  -----------    -----------    -----------

LOSS FROM DISCONTINUED OPERATIONS                  (1,000,000)       (36,373)      (233,328)
                                                  -----------    -----------    -----------

NET LOSS                                          $(9,759,170)   $  (664,491)   $(1,556,035)
                                                  ===========    ===========    ===========

BASIC LOSS PER COMMON SHARE:
   Continuing operations                            $(14.21)        $(1.17)        $(2.28)
   Discontinued operations                            (1.62)          (.06)          (.24)
   Loss on disposal                                      --             --           (.15)
                                                    -------         ------         ------
       Net loss                                     $(15.83)        $(1.23)        $(2.67)
                                                    =======         ======         ======

DILUTED LOSS PER COMMON SHARE:
   Continuing operations                            $(14.21)        $(1.17)        $(2.28)
   Discontinued operations                            (1.62)          (.06)          (.24)
   Loss on disposal                                      --             --           (.15)
                                                    -------         ------         ------
       Net loss income                              $(15.83)        $(1.23)        $(2.67)
                                                    =======         ======         ======

WEIGHTED AVERAGE NUMBER OF
   SHARES OUTSTANDING:
   Basic                                            619,005        579,785        582,965
                                                    =======        =======        =======
   Diluted                                          619,005        579,785        582,965
                                                    =======        =======        =======
</TABLE>

                 See notes to consolidated financial statements


                                      F-4
<PAGE>

                         STAR MULTI CARE SERVICES, INC.

                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                           Common Stock   Preferred Stock
                                                         ---------------  ---------------
                                                                    Par              Par      Paid in    Subscription
                                                          Shares   Value   Shares   Value     Capital     Receivable      Deficit
                                                         -------   -----   ------   -----   -----------  ------------  ------------
<S>                                                      <C>       <C>      <C>     <C>     <C>           <C>          <C>
Balance, June 1, 1998                                    595,864   $596       --    $  --   $20,956,666   $(397,782)   $ (5,847,531)

Shares issued under Employee Stock Purchase Plan           1,205      1       --       --        13,232          --              --
Exercise of stock options including income tax benefit     2,360      2       --       --        39,009          --              --
Issuance of preferred stock (Note 12)                         --     --      575      575       459,174          --              --
Net loss                                                      --     --       --       --            --          --      (1,556,035)
                                                         -------   ----     ----    -----   -----------   ---------    ------------

Balance, May 31, 1999                                    599,429    599      575      575    21,468,081    (397,782)     (7,403,566)

Shares issued under Employee Stock Purchase Plan           1,916      2       --       --         6,090          --              --
Exercise of stock options including income tax benefit    10,048     10       --       --        70,381          --              --
Dividends to preferred shareholders (Note 12)              1,829      2       --       --        19,438          --         (50,002)
Acquisition of treasury shares                                --     --       --       --            --          --              --
Net loss                                                      --     --       --       --            --          --        (664,491)
                                                         -------   ----     ----    -----   -----------   ---------    ------------

Balance, May 31, 2000                                    613,222    613      575      575    21,563,990    (397,782)     (8,118,059)

Exercise of stock options                                  3,334      3       --       --        13,747          --              --
Conversion of preferred stock (Note 12)                   83,024     83     (120)    (120)           37          --              --
Dividends to preferred shareholders (Note 12)              1,829      2       --       --         7,543          --         (40,499)
Net loss                                                      --     --       --       --            --          --      (9,759,170)
                                                         -------   ----     ----    -----   -----------   ---------    ------------

Balance, May 31, 2001                                    701,409   $701      455    $ 455   $21,585,317   $(397,782)   $(17,917,728)
                                                         =======   ====     ====    =====   ===========   =========    ============

<CAPTION>
                                                           Treasury Stock
                                                         ------------------       Total
                                                                              Shareholders'
                                                         Shares     Value        Equity
                                                         ------   ---------   -------------
<S>                                                      <C>      <C>          <C>
Balance, June 1, 1998                                    15,278   $(278,922)   $14,433,027

Shares issued under Employee Stock Purchase Plan             --          --         13,233
Exercise of stock options including income tax benefit       --          --         39,011
Issuance of preferred stock (Note 12)                        --          --        459,749
Net loss                                                     --          --     (1,556,035)
                                                         ------   ---------    -----------

Balance, May 31, 1999                                    15,278    (278,922)    13,388,985

Shares issued under Employee Stock Purchase Plan             --          --          6,092
Exercise of stock options including income tax benefit       --          --         70,391
Dividends to preferred shareholders (Note 12)                --          --        (30,562)
Acquisition of treasury shares                           11,089    (111,769)      (111,769)
Net loss                                                     --          --       (664,491)
                                                         ------   ---------    -----------

Balance, May 31, 2000                                    26,367    (390,691)    12,658,646

Exercise of stock options                                    --          --         13,750
Conversion of preferred stock (Note 12)                      --          --             --
Dividends to preferred shareholders (Note 12)                --          --        (32,954)
Net loss                                                     --          --     (9,759,170)
                                                         ------   ---------    -----------

Balance, May 31, 2001                                    26,367    (390,691)   $ 2,880,272
                                                         ======   =========    ===========
</TABLE>

                 See notes to consolidated financial statements


                                      F-5
<PAGE>

                         STAR MULTI CARE SERVICES, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                 Years Ended
                                                                                    May 31,
                                                                  -----------------------------------------
                                                                      2001           2000           1999
                                                                  -----------    -----------    -----------
<S>                                                               <C>            <C>            <C>
CASH FLOW FROM OPERATING ACTIVITIES:
   Net loss                                                       $(9,759,170)   $  (664,491)   $(1,556,035)
                                                                  -----------    -----------    -----------
   Adjustments to reconcile net loss to net cash provided
     by operating activities:
       Provision for doubtful accounts                              5,531,259        545,315      1,586,581
       Depreciation and amortization                                1,006,635      1,040,396      1,276,291
       Deferred income taxes                                          (41,000)       130,000       (978,000)
       Loss on disposal of assets                                          --        168,579             --
       Forgiveness of note receivable from officer                         --             --         25,000
       Impairment of assets to be disposed                          4,205,000             --             --
       Impairment of intangible assets                                     --             --        186,946
       Changes in operating assets and liabilities:
         (Increase) decrease in assets:
           Accounts receivable                                     (1,875,710)       947,714     (1,245,251)
           Prepaid expenses and other current assets                    4,677         22,417         34,270
           Income tax receivable                                           --             --      1,225,522
           Other assets                                                 2,325        (18,469)        45,216
         Increase (decrease) in liabilities:
           Accounts payable and accrued expenses                      997,391     (1,223,970)    (2,433,848)
           Due to Medicare                                          1,000,000             --      1,576,037
           Other liabilities                                         (623,393)      (440,711)       310,162
                                                                  -----------    -----------    -----------
       Total adjustments                                           10,207,184      1,171,271      1,608,926
                                                                  -----------    -----------    -----------
       Net cash provided by operating activities                      448,014        506,780         52,891
                                                                  -----------    -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of intangibles                                           (108,446)            --       (275,898)
   Purchase of property and equipment                                 (62,704)      (120,450)      (314,483)
   Business acquisitions, net of cash acquired                             --       (387,399)            --
                                                                  -----------    -----------    -----------
       Net cash used in investing activities                         (171,150)      (507,849)      (590,381)
                                                                  -----------    -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net proceeds (payments) from revolving credit line              (1,001,568)    (1,376,601)        17,632
   Proceeds from note payable                                         300,000             --             --
   Proceeds from officers' loan                                       100,000             --             --
   Repayment of long-term debt                                             --             --       (125,000)
   Proceeds from the issuance of stock under option plans              13,750         76,483         52,244
   Payment of costs in connection with preferred stock offering            --             --       (115,251)
   Proceeds from issuance of preferred stock                               --             --        575,000
   Acquisition of treasury shares                                          --       (111,769)            --
                                                                  -----------    -----------    -----------
       Net cash (used in) provided by financing activities           (587,818)    (1,411,887)       404,625
                                                                  -----------    -----------    -----------

NET DECREASE IN CASH AND CASH EQUIVALENTS                            (310,954)    (1,412,956)      (132,865)

CASH AND CASH EQUIVALENTS, beginning of year                          321,465      1,734,421      1,867,286
                                                                  -----------    -----------    -----------

CASH AND CASH EQUIVALENTS, end of year                            $    10,511    $   321,465    $ 1,734,421
                                                                  ===========    ===========    ===========

SUPPLEMENTAL DISCLOSURE:
   Income taxes paid                                              $    54,000    $   101,000    $    55,000
                                                                  ===========    ===========    ===========
   Interest paid                                                  $   774,000    $   771,000    $   568,000
                                                                  ===========    ===========    ===========
</TABLE>

                 See notes to consolidated financial statements


                                      F-6
<PAGE>

                         STAR MULTI CARE SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                         THREE YEARS ENDED MAY 31, 2001

1.    Summary of Significant Accounting Policies:

      a.    Nature of operations

            The Company is principally engaged in providing temporary health
care personnel, including registered nurses, licensed practical nurses,
certified home health aides, nurses' aides and respiratory therapists to
hospitals, nursing homes, extended care facilities and in-home patients in
Florida, Ohio, New Jersey, Pennsylvania, upstate New York and the New York City
metropolitan area.

            On July 6, 2001, the Company entered into an agreement with Premier
Home Healthcare Services, Inc. ("Premier") to sell certain assets related to the
home health care operation of the Company's New Jersey business, and certain
assets related to its home health care operations in New York. (See Note 22.)

      b.    Principles of consolidation

            The consolidated financial statements include the accounts of Star
Multi Care Services, Inc. and its subsidiaries (the "Company"), all of which are
wholly-owned. All significant intercompany transactions and accounts have been
eliminated.

      c.    Revenue recognition and allowance for doubtful accounts

            Net patient service revenues is reported at estimated net realizable
amounts from patients, third-party payors, and others for services rendered and
includes estimated retroactive revenue adjustments due to future audits,
reviews, and investigations. Retroactive adjustments are considered in the
recognition of revenue on an estimated basis in the period the related services
are rendered, and such amounts are adjusted in future periods as adjustments
become known or as years are no longer subject to such audits, reviews and
investigations. A provision for doubtful accounts is made for revenue estimated
to be uncollectible and is adjusted based upon management's evaluation of
current industry conditions, historical collection experience and other relevant
factors which, in the opinion of management, deserve recognition in estimating
the allowance for doubtful accounts.

            Under Medicaid, Medicare and other cost-based reimbursement
programs, the Company is reimbursed for services rendered to covered program
patients as determined by reimbursement formulas. Revenues from Medicaid
programs account for approximately 63%, 67% and 70% of the Company's net patient
revenue for the years ended May 31, 2001, 2000 and 1999. Laws and regulations
governing the Medicaid programs are extremely complex and subject to
interpretation. As a result, there is at least a reasonable possibility that
recorded estimates will change by a material amount in the near term.

            In December 2000, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 summarizes certain of the SEC's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. SAB 101 is not a rule or interpretation of the SEC;
however, it represents interpretations and practices followed by the Division of
Corporation Finance and the Office of the Chief Accountant in administering the
disclosure requirements of the Federal securities laws. The interpretations
outlined in SAB 101 did not have a significant impact on the Company's revenue
recognition policies.


                                      F-7
<PAGE>

1.    Summary of Significant Accounting Policies: (Cont'd)

      d.    Net income (loss) per common share

            The basic calculation is determined by dividing net income
attributable to common shares outstanding (the basic numerator) by the weighted
average number of common shares outstanding (the basic denominator) during the
period.

            The diluted calculation is determined by adjusting the basic
numerator for any changes in income or loss that would result from the assumed
exercise of potentially issued common shares. Additionally, the basic
denominator is increased to include the additional number of common shares that
would be outstanding if the potentially issued common shares had been issued, if
dilutive. Potentially issued common shares, consisting of options, are not
included in this calculation where the effect of the inclusion would be
anti-dilutive. The treasury stock method is used to reflect the dilutive effect
of outstanding options and warrants. For the years ended May 31, 2001, 2000 and
1999, the effect of any common stock equivalents would have been anti-dilutive.

      Net loss available to common shareholders was computed as follows:

                                               Years Ended May 31,
                                      -------------------------------------
                                          2001         2000        1999
                                      -----------   ---------   -----------

      Net loss                        $(9,759,170)  $(664,491)  $(1,556,035)
      Dividends on preferred shares       (40,499)    (50,002)           --
                                      -----------   ---------   -----------
      Net loss available to common
        shareholders                  $(9,799,669)  $(714,493)  $(1,556,035)
                                      ===========   =========   ===========

      e.    Property and equipment

            Property and equipment are recorded at cost. The carrying amount of
assets and related accumulated depreciation and amortization are removed from
the accounts when such assets are disposed of, and the resulting gain or loss is
included in operations. Depreciation is computed by the straight-line method
over the estimated useful lives of the assets. Leasehold improvements are
amortized over the shorter of the remaining life of the lease or the life of the
improvements.

      f.    Intangible assets

            Intangible assets are stated at acquisition cost and are being
amortized on a straight-line basis over their estimated useful lives.

      g.    Cash equivalents

            For purposes of the consolidated statements of cash flows, the
Company considers all highly liquid financial instruments with a maturity of
three months or less when purchased to be cash equivalents.

      h.    Income taxes

            Deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities,
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. Temporary differences and
carryforwards giving rise to deferred taxes primarily relate to the allowance
for doubtful accounts, depreciation, accrued expenses and net operating loss
carryforwards.


                                      F-8
<PAGE>

1.    Summary of Significant Accounting Policies: (Cont'd)

      i.    Stock-based compensation

            The Company applies APB Opinion No. 25 and related interpretations
in accounting for stock-based compensation to employees. Stock compensation to
non-employees is accounted for at fair value in accordance with FASB Statement
No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123").

      j.    Use of estimates

            The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues and expenses
during the period. Such estimates primarily relate to accounts receivable
valuation allowances, recoverability of goodwill and regulatory adjustments.
Actual results may differ from those estimates.

      k.    Impairment of long-lived assets

            In accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," an impairment loss is recognized whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable.

      l.    New accounting pronouncements

            In 1999, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which was
subsequently amended by SFAS No. 137 "Accounting for Derivative Financial
Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No.
133" and SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain
Hedging Activities." SFAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument, including certain derivative
instruments embedded in other contracts, be recorded in the balance sheet as
either an asset or liability measured at its fair value. The statement also
requires that changes in the derivative's fair value be recognized in earnings
unless specific hedge accounting criteria are met. SFAS No. 133, as amended by
SFAS No. 137 and SFAS No. 138, is effective for all fiscal quarters beginning
after June 15, 2001 and therefore will be effective for the Company's fiscal
year 2001. The adoption of SFAS No. 133 is not expected to have a material
impact on the Company's financial condition or results of operations.

      m.    Reclassifications

            Certain reclassifications have been made to the prior years'
financial statements to conform with the classifications used in 2001.

2.    Mergers and Acquisitions:

      On May 28, 2000, the Company acquired, through a wholly owned subsidiary,
certain assets of the Pennsylvania operations of U.S. HomeCare Corp. ("U.S.
HomeCare -Pennsylvania") for $300,000 in cash. The acquisition price was
allocated to contract costs, which is being amortized over a fifteen year
period.


                                      F-9
<PAGE>

2.    Mergers and Acquisitions: (Cont'd)

      The above acquisition has been accounted for utilizing purchase accounting
principles. Accordingly, the results of the operations have been included in the
accompanying consolidated financial statements since the date of acquisition.

3.    Impairment of Assets to be Disposed of:

      During and subsequent to fiscal 2001, the Company initiated and completed
a plan to dispose of its New York and New Jersey offices by way of a sale of
these operations (see Note 22.) It is anticipated that this sale will be
completed during the first quarter of fiscal 2002. In connection with this plan
of disposal, the Company determined that the carrying value of goodwill
associated with these operations exceeded their fair values. Accordingly, a loss
of $4,205,000, which is included operating expenses, and represents the excess
of the carrying value of approximately $8,800,000 over the fair value of
approximately $4,600,000, has been charged to operations in fiscal 2001.

4.    Property and Equipment:

      Property and equipment consists of the following:

                                                          May 31,
                                                 -------------------------
                                                    2001           2000
                                                 ----------     ----------

      Furniture and fixtures                     $  631,000     $  630,000
      Computer equipment                          2,168,000      2,118,000
      Leasehold improvements                        131,000        128,000
      Other                                         300,000        291,000
                                                 ----------     ----------
                                                  3,230,000      3,167,000
      Less accumulated depreciation               2,208,000      1,854,000
                                                 ----------     ----------

                                                 $1,022,000     $1,313,000
                                                 ==========     ==========

5.    Intangible Assets:

      Intangible assets are as follows:

                                                          May 31,
                                    Amortization  ------------------------
                                       Period        2001          2000
                                    ------------  ----------   -----------

      Goodwill                          5 - 40    $5,867,000   $10,073,000
      Customer contracts               11 - 15     1,856,000     1,855,000
      Covenants not-to-compete          2 - 8        335,000       335,000
      Nurses' list                      9 - 15       563,000       563,000
      Other                             2 - 25       848,000       740,000
                                                  ----------   -----------
                                                   9,569,000    13,566,000
      Less accumulated amortization                3,248,000     2,595,000
                                                  ----------   -----------

                                                  $6,221,000   $10,971,000
                                                  ==========   ===========


                                      F-10
<PAGE>

6.    Accrued Expenses:

      Accrued expenses are as follows:

                                                           May 31,
                                                   -----------------------
                                                     2001           2000
                                                   --------       --------

      Medicaid settlement (a)                      $252,000       $230,000
      Professional fees                             141,000         99,000
      Interest                                       47,000         45,000
      Other                                         196,000        146,000
                                                   --------       --------

                                                   $636,000       $520,000
                                                   ========       ========

      (a) In August 1995, the Office of Deputy Attorney General for Medicaid
Fraud Control conducted a review of personnel, clinical and billing records for
the years 1992 through 1995. In fiscal year 1999, the Company accrued $1,000,000
in connection with this matter.

      Additionally, errors were discovered in certain cost reports that had been
previously submitted to the New York State Department of Social Services during
the years 1993 through 1995. The Company filed amended cost reports, which was
expected to result in a retroactive calculation of the Medicaid reimbursement
rate and the imposition of overpayment assessments against the Company. In
fiscal year 1999, the Company accrued $660,000 in contemplation of a settlement
and offset the accrual against existing accounts receivable from Medicaid.

      In May 1999, the Company negotiated a $1,167,000 settlement with the State
of New York in connection with these matters. The settlement agreement provided
for an initial payment of $200,000, with the balance payable over four years at
9% interest per annum. Included in accrued expenses and other long-term
liabilities at May 31, 2001 was $252,000 and $270,000, respectively, and at May
31, 2000 was $230,000 and $521,000, respectively.

7.    Revolving Credit Line:

      The Company has a $7,000,000 revolving credit facility (the "Credit
Facility"). The Credit Facility, as amended, permits the Company to borrow up to
87.5% of eligible accounts receivable (as defined) that are aged less than 180
days at LIBOR+3.75%. The Credit Facility expires on September 12, 2003 and
requires the Company to meet certain financial ratios and covenants, including
current ratio, minimum tangible net worth, debt service coverage and interest
coverage. All the assets of the Company collateralize the Credit Facility.

      At May 31, 2001, the Company was in technical default of the Credit
Facility. As such the balance at May 31, 2001 has been classified as a current
liability.

      In connection with entering into the Credit Facility, Star Multi Care
Services, Inc. and certain of its subsidiaries (the "Members") formed SMCS Care,
LLC (a limited liability company) (the "LLC"). The operating agreement of the
LLC provides for its members to sell its eligible receivables to the LLC and
whereby the LLC will borrow from the lender in accordance with the Credit
Facility.

8.    Note Payable:

      On May 23, 2001, in connection with the proposed sale of certain assets of
the Company to National Home Health Care Corp., ("National") the Company
received a loan from National in the principal amount of $300,000. Subsequently,
the Company terminated the transaction with National (see Note 22).


                                      F-11
<PAGE>

8.    Note Payable: (Cont'd)

      The note bears interest at 12% per annum, and is payable in full, with all
accrued unpaid interest on December 31, 2001 and is secured by substantially all
of the assets of the Company.

9.    Due to Officer:

      The loan payable to the Company's President and CEO, which is due on
demand, bears interest at 14% per annum.

10.   Income Taxes:

      The Company files a consolidated U.S. federal income tax return that
includes all wholly owned subsidiaries. State tax returns are filed on a
consolidated, or separate basis depending on the applicable laws. At May 31,
2001, the Company has a net operating loss carryforward of approximately
$3,560,000 for federal income tax purposes which may be applied against future
taxable income through 2020.

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

                                            Years Ended May 31,
                                  ---------------------------------------
                                     2001           2000           1999
                                  ---------      ---------      ---------
      Current:
        Federal                   $  21,000      $(178,000)     $ 176,000
        State and local              20,000         48,000         40,000
                                  ---------      ---------      ---------
                                     41,000       (130,000)       216,000
                                  ---------      ---------      ---------
      Deferred:
        Federal                     (41,000)       173,000       (730,000)
        State and local                  --        (43,000)      (133,000)
                                  ---------      ---------      ---------
                                    (41,000)       130,000       (863,000)
                                  ---------      ---------      ---------

                                  $      --      $      --      $(647,000)
                                  =========      =========      =========

      The components of the net deferred tax assets are as follows:

                                                         May 31,
                                               --------------------------
                                                  2001           2000
                                               -----------    -----------
      Deferred tax assets:
        Allowance for doubtful accounts        $ 2,107,000    $   531,000
        Accrued expenses                           523,000        521,000
        Tax credits                                217,000        187,000
        Net operating loss carryforward          1,689,000      2,824,000
        Stock compensation                          56,000         56,000
        Other                                       58,000         55,000
                                               -----------    -----------
                                                 4,650,000      4,174,000
      Valuation allowance                       (1,337,000)      (542,000)
                                               -----------    -----------
                                                 3,313,000      3,632,000
                                               -----------    -----------
      Deferred tax liabilities:
        Depreciation and amortization              268,000        463,000
        Other                                           --        165,000
                                               -----------    -----------
                                                   268,000        628,000
                                               -----------    -----------

      Net deferred tax assets                  $ 3,045,000    $ 3,004,000
                                               ===========    ===========


                                      F-12
<PAGE>

10.   Income Taxes: (Cont'd)

      A reconciliation between the actual income tax expense (benefit) and
income taxes computed by applying the statutory federal income tax rate to
income before taxes is as follows:

                                                     Years Ended May 31,
                                            -----------------------------------
                                                2001         2000        1999
                                            -----------   ---------   ---------
Computed federal income tax
  at statutory rates                        $(3,318,000)  $(214,000)  $(680,000)
State taxes, net of federal benefit            (586,000)    (38,000)   (120,000)
Items without tax benefit                     1,709,000     102,000     120,000
Adjustments to prior years' tax liability       546,000     (50,000)    (88,000)
Valuation allowance                           1,377,000     200,000     185,000
Other, net                                      272,000          --     (64,000)
                                            -----------   ---------   ---------

                                            $        --   $      --   $(647,000)
                                            ===========   =========   =========

11.   Due to Medicare:

      a. Amount due to Medicare of $2,593,324 represents periodic interim
payments ("PIP") received from Medicare in excess of the current volume of
business. There is no scheduled repayment of this liability, and on July 1,
2000, the Company ceased operations of its Medicare business. See Note 21.

      b. On June 17, 2001, the Company entered into a settlement agreement (the
"Agreement") with the Office of Inspector General ("OIG") of the Department of
Health and Human Services to settle outstanding claims related to the Company's
discontinued Medicare business (Note 21) during the years 1995 to 1996. The
Agreement provides for the Company to pay $1,000,000 120 days after the
settlement date in satisfaction of the outstanding claims by the OIG. The
Company has accrued this amount as of May 31, 2001, and has included this amount
in loss from discontinued operations in the statement of operations.

12.   Shareholders' Equity:

      a. Capitalization

      On January 25, 2001, the Company effected a 1 for 3 reverse stock split.
All references to number of shares and per share data in the financial
statements and accompanying notes for all periods presented have been restated
to reflect the reverse stock split.

      In addition, the Company amended its Certificate of Incorporation and
decreased the amount of authorized common stock from 10,000,000 to 5,000,000
shares. The par value of the common stock remained unchanged at $.001 per share.

      b. Preferred stock

      The Company has authorized 5,000,000 shares of preferred stock, $1.00 par
value, which the Board of Directors has authority to issue from time to time in
series. The Board of Directors also has the authority to fix, before the
issuance of each series, the number of shares in each series and the
designation, preferences, rights and limitations of each series.


                                      F-13
<PAGE>

12.   Shareholders' Equity: (Cont'd)

      b. Preferred stock (cont'd)

      In April 2000, the Company completed a private placement by the sale of
575 Series A 8% Convertible Preferred Stock for $575,000. After sixty days from
the closing date, the Preferred Stock may be converted to common stock equal to
the lessor of: (i) 125% of the market price of common stock three trading days
immediately preceding the closing date, or (ii) the market price of the
Company's Common stock discounted from 10% to 30%, such discount increasing with
the passage of time. Holders of the preferred shares can convert the stated
value of their shares, in whole or in part, into common stock at a maximum
conversion price of $12.66 per share (45,432 shares), and have liquidation
preference over common shareholders. The Preferred Stock pays an 8% annual
dividend payable quarterly that may be converted to common stock at the option
of the Company.

      During the year ended May 31, 2001, 120 shares of convertible preferred
stock were converted into 83,024 shares of common stock.

13.   Stock Option Plans:

      Incentive stock option plans

      The Company has two stock option plans (the "Plans") as adopted and as
adjusted for stock dividends. Participants may be granted either Incentive Stock
Options or Non-Qualified Stock Options to purchase shares of common stock. The
purpose of the Plans is to promote the overall financial objectives of the
Company and its shareholders by motivating those persons selected to participate
in the Plans to achieve long-term growth in shareholder equity in the Company
and by retaining the association of those individuals who are instrumental in
achieving this growth. Such options become exercisable at various intervals
based upon vesting schedules as determined by the Compensation Committee. The
options expire between August 2002 and December 2008.

      The incentive stock options may be granted to employees and consultants of
the Company at a price not less than the fair market value on the date of grant.
All such options are authorized and approved by the Board of Directors, based on
recommendations of the Compensation Committee.

      Non-Employee Directors Stock Option Plan

      The Company has adopted a non-qualified stock option plan for all
non-employee Directors of the Company. The plan is designed to provide an
incentive to Directors and attract and retain the services of experienced and
knowledgeable non-employee Directors. The plan expires on March 25, 2007.


                                      F-14
<PAGE>

13.   Stock Option Plans: (Cont'd)

      A summary of the Company's various fixed stock option plans as of May 31,
2001, 2000 and 1999, and changes during the years then ended is presented below.

<TABLE>
<CAPTION>
                                                                   Years Ended May 31,
                                    ---------------------------------------------------------------------------------
                                               2001                        2000                        1999
                                    -------------------------   -------------------------   -------------------------
                                                    Weighted                    Weighted                    Weighted
                                                    Average                     Average                     Average
                                                    Exercise                    Exercise                    Exercise
       Fixed Stock Options             Shares        Price         Shares        Price         Shares        Price
       -------------------          -----------   -----------   -----------   -----------   -----------   -----------
<S>                                    <C>           <C>           <C>           <C>            <C>          <C>
Outstanding, beginning of year         141,778       $11.40         70,580       $21.00         64,882       $31.14

Granted                                167,500         1.98         97,614         5.28         47,452        12.24
Exercised                               (3,334)        4.13        (10,048)        7.02         (2,360)       16.53
Canceled                               (14,485)        9.11        (16,368)       18.99        (39,394)       27.45
                                    ----------                  ----------                    --------

Outstanding, end of year               291,459       $ 6.18        141,778       $11.40         70,580       $21.00
                                    ==========                  ==========                    ========

Options exercisable at year end        284,648       $ 6.19        128,433       $11.61         49,481       $22.29
                                    ==========                  ==========                    ========

Weighted average fair value of
   options granted during the year                   $ 1.64                      $ 1.86                      $ 0.69
                                                     ======                      ======                      ======
</TABLE>

The following table summarizes information about stock options outstanding at
May 31, 2001:

<TABLE>
<CAPTION>
                                             Options Outstanding                              Options Exercisable
                                --------------------------------------------              --------------------------
                                                  Weighted
                                                   Average          Weighted                                Weighted
    Range of                                      Remaining          Average                                 Average
    Exercise                       Number        Contractual        Exercise                 Number         Exercise
      Price                     Outstanding         Life              Price               Outstanding         Price
----------------                -----------      -----------        --------              -----------       --------
<S>                               <C>               <C>             <C>                     <C>             <C>
   $1.59 - $1.75                  155,000           4.77            $   1.70                155,000         $   1.70
   $3.75 - $6.60                   82,295           3.38            $   4.89                 77,028         $   4.95
 $10.13 - $16.53                   38,634           3.45            $  14.59                 37,090         $  14.70
 $20.96 - $58.50                   15,530           2.85            $  36.84                 15,530         $  36.83
</TABLE>

      Shares reserved for future issuance at May 31, 2001 are comprised of the
following:

      Incentive stock option plans
      Non-employee Directors stock option plan
      Employee stock purchase plan
      Underwriter warrants
                                                            ---------

                                                            =========


                                      F-15
<PAGE>

13.   Stock Option Plans: (Cont'd)

      In November 1995, the Company adopted an Employee Stock Purchase Plan
whereby certain employees can purchase shares of common stock at the lesser of
85% of fair market value of the stock at the beginning or end of the calendar
year. Since inception of this Plan, a total of 5,088 shares were issued.

      In accordance with APB Opinion No. 25, 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 the years ended May 31, 2001, 2000 and 1999 consistent with the
provisions of SFAS No. 123, the Company's net loss and net loss per share would
have changed to the following pro forma amounts.

                                                 Years Ended May 31,
                                      -----------------------------------------
                                          2001           2000           1999
                                      -----------    -----------    -----------

Net loss, as reported                 $(9,759,170)   $  (664,491)   $(1,556,035)

Net loss, pro forma                    (9,936,997)      (782,173)    (1,587,199)

Basic loss per share, as reported          (15.83)         (1.23)          (.90)

Basic loss per share, pro forma            (16.12)         (1.44)          (.90)

Diluted loss per share, as reported        (15.83)         (1.23)          (.90)

Diluted loss per share, pro forma          (16.12)         (1.44)          (.90)

      The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following range of
weighted-average assumptions used for grants in years ended May 31, 2001, 2000
and 1999.

                                                   Years Ended May 31,
                                            ---------------------------------
                                              2001         2000         1999
                                            --------    ----------    -------

Dividend yield                                 0.00%         0.00%      0.00%

Volatility                                   128.01%        94.16%     58.00%

Risk-Free interest rate                        5.25%         5.25%      5.20%

Expected life                               5 years     1.24 year     1 year

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


                                      F-16
<PAGE>

14.   Related Party Transactions:

      Stock subscription receivable

      On April 20, 1995, the Company accepted a non-recourse promissory note
from the former Chief Executive Officer of AMSERV, Eugene J. Mora, in the
original principal amount of $198,440, bearing interest at a rate of 10% per
annum and maturing in April 2000, and $1,100 in cash for the exercise of options
for 4,999 shares of the Company's common stock. The promissory note is secured
by 8,069 shares of the Company's common stock owned by Mr. Mora. On January 16,
1996, the promissory note was amended to become a recourse promissory note,
secured by 4,999 shares of common stock owned by Mr. Mora, with interest at a
rate of 5.73% per annum. Also on January 16, 1996, the Company accepted an
additional recourse promissory note from Mr. Mora in the original principal
amount of $199,342, bearing interest at a rate of 5.73% per annum and maturing
in January 2001, and $1,105 in cash for the exercise of options for 5,022 shares
of the Company's common stock.

      In accordance with the settlement agreement with Mr. Mora (Note 18), the
Company has agreed to forgive the subscription receivable in consideration for
Mr. Mora entering into a covenant not-to-compete agreement with the Company. The
non-compete agreement provides for the Company to forgive the subscription
receivable plus accrued interest in incremental amounts between the years 2002
through 2005 provided that Mr. Mora complies with the non-compete agreement.

15.   Fair Value of Financial Instruments:

      The methods and assumptions used to estimate the fair value of the
following classes of financial instruments were:

      Current Assets and Current Liabilities: The carrying amount of cash,
      current receivables and payables and certain other short-term financial
      instruments approximate their fair value.

      Long-Term Debt: The fair value of the Company's long-term debt, including
      the current portions, was estimated using a discounted cash flow analysis,
      based on the Company's assumed incremental borrowing rates for similar
      types of borrowing arrangements. The carrying amount of variable rate debt
      at May 31, 2001 and 2000 approximates its fair value.

16.   Concentrations of Credit Risk and Major Customers:

      Financial instruments which potentially expose the Company to
concentrations of credit risk consist principally of trade accounts receivable
and temporary cash investments.

      The Company provides temporary health care personnel to hospitals, nursing
homes, extended care facilities and in-home patients. At May 31, 2001 and 2000,
approximately 45% and 42%, respectively, of accounts receivable was due from
Medicaid. Credit losses relating to customers historically have not been
significant and within management's expectations.

      The Company places its temporary cash investments with high credit quality
financial institutions.


                                      F-17
<PAGE>

17.   Business Risks:

      The Company's primary business, offering home health care services, is
heavily regulated at both the federal and state levels. While the Company is
unable to predict what regulatory changes may occur or the impact any particular
change, the Company's operations and financial results could be negatively
affected. Further, the Company operates in a highly competitive industry, which
may limit the Company's ability to price its services at levels that they
believe appropriate. These competitive factors may adversely affect the
Company's financial results.

18.   Commitments:

      a. Employment agreement

      The Company has an employment agreement, as amended, with an officer which
expires in December 2005. The aggregate commitment for future salary, excluding
bonuses, under the agreement is $1,284,000. The agreement also provides for
increases based on the consumer price index increases and certain bonuses based
upon annual pretax income. The aggregate minimum commitment for future salaries
under the agreements is as follows:

            Years Ending
               May 31,
            ------------

                2002                                    $     281,000
                2003                                          281,000
                2004                                          281,000
                2005                                          281,000
                2006                                          140,000
                                                        -------------

                                                        $   1,264,000
                                                        =============

      b. Leases

      The Company conducts its operations from leased office space under various
operating leases which expire at various dates through 2004.

      As of May 31, 2001 future net minimum rental payments under operating
leases having initial or remaining noncancellable terms in excess of one year
are as follows:

            Years Ending
               May 31,

                2002                                    $     422,000
                2003                                          235,000
                2004                                           69,000
                                                        -------------

                                                        $     726,000
                                                        =============

      Rental expenses for operating leases for fiscal years ended 2001, 2000 and
1999 were approximately $621,000, $662,000 and $798,000, respectively.


                                      F-18
<PAGE>

18.   Commitments: (Cont'd)

      c. Settlement agreement

      In March 1998, the Company negotiated a settlement agreement with Eugene
J. Mora ("Mora") the former President and CEO of AMSERV. The agreement provided
for monthly payments of $37,285 through September 2001 in satisfaction of Mora's
employment agreement. The Company also exchanged Mora's existing stock options
for 10,000 new options with an exercise price of $36.00 per share. The Company
recorded a charge to operations of $145,000 for the issuance of these options.
In addition, the Company reimbursed Mora $210,000 for legal fees. The agreement
also provides for the forgiveness of the subscription receivable of $397,782
plus accrued interest from Mora (Note 14) in exchange for Mora entering into a
covenant not-to-compete agreement.

      In accordance with APB Opinion No. 21 "Interest on Receivables and
Payables," the Company has discounted its obligations resulting from the
settlement of Mora's employment agreement. The liability was discounted at a
rate of 9% per annum, and results in a face amount of approximately $1,035,000.

      In fiscal 2001, Mora agreed to a modification of the terms of the
Agreement. Mora agreed to reduce and extend the monthly payments to $21,000 for
the period through December 31, 2000 and then to $10,700 for the period January
through July 2002. The modification resulted in an effective interest rate of
11.65%.

      The aggregate minimum commitment under this agreement is as follows:

            Years Ending
               May 31,

                2002                                    $  366,000
                2003                                        42,000

19.   Contingencies:

      The Company is a defendant in several actions which are routine and
incidental to its business. In management's opinion, settlement of these actions
will not have a material adverse effect on the Company's consolidated financial
position, liquidity or results of operations.

20.   Retirement Plans:

      The Company had a 401(k) savings plan covering all eligible employees
which it terminated in December 1999. Contributions for the years ended May 31,
2001, 2000 and 1999 approximated $-0- and $31,000, respectively.

21.   Discontinued Operations:

      In February 1999, the Company adopted a plan to abandon its Medicare
business being provided by one of its subsidiaries, American Health Care
Services ("American") in the State of Florida. The Company ceased operations
effective July 1, 1999. The Company liquidated its assets and discharged its
liabilities through an assignment for the benefit of creditors proceeding.
Accordingly, the operating results of American, including provisions for
estimated losses during the phase-out period of approximately $128,000 have been
segregated from continuing operations and reported as a separate line item on
the statement of operations.


                                      F-19
<PAGE>

21.   Discontinued Operations:

      Operating results (exclusive of any corporate charges or interest expense
and the aforementioned provisions) from discontinued operations are as follows:

<TABLE>
<CAPTION>
                                                     Years Ended May 31,
                                          -----------------------------------------
                                              2001           2000           1999
                                          -----------    -----------    -----------
<S>                                       <C>            <C>            <C>
Revenues, net                             $(1,000,000)   $    40,953    $ 1,985,624
                                          -----------    -----------    -----------
Costs and expenses:
  Costs of revenues                                --            623      1,834,361
  Selling, general and administrative              --         64,862      1,104,431
  Regulatory costs and adjustments                 --             --     (1,250,000)
  Depreciation and amortization                    --          5,254        169,339
  Restructuring and termination expense            --             --        335,211
                                          -----------    -----------    -----------
                                                   --         70,739      2,193,342
                                          -----------    -----------    -----------
Operating (loss) income                    (1,000,000)       (29,786)      (207,718)
Other deductions                                   --         (6,587)        (2,290)
                                          -----------    -----------    -----------
Loss before income taxes                   (1,000,000)       (36,373)      (210,008)
Income tax benefit                                 --             --        (65,000)
                                          -----------    -----------    -----------

Net loss                                  $(1,000,000)   $   (36,373)   $  (145,008)
                                          ===========    ===========    ===========
</TABLE>

      Assets and liabilities for the fiscal year ending 2001 and 2000 are as
follows:

                                                               May 31,
                                                     ---------------------------
                                                        2001             2000
                                                     ----------       ----------

Total assets                                         $       --       $       --
Total liabilities                                     3,593,000        2,593,000

22.   Subsequent Events:

      On June 7, 2001, the Company reached an agreement in principle to sell
certain assets of the Company's New Jersey operations, as well as the stock of
Company's subsidiaries operating in Pennsylvania and Ohio to National Home
Health Care Corp. ("National"). The agreement in principle did not constitute a
binding obligation by the Company or National to consummate the proposed
acquisition, which was subject to the negotiation and execution of definitive
acquisition documents and the approval of the transaction by the Company's
shareholders.

      On July 6, 2001, the Company entered into an agreement with Premier Home
Healthcare Services, Inc. ("Premier") to sell certain assets related to the home
health care operation of the Company's New Jersey business ("New Jersey
Assets"), and certain assets related to its home health care operations in New
York ("New York Assets"), and terminated discussions with National. The sales
price for the New Jersey Assets and the New York Assets is $5.5 million in cash,
subject to certain adjustments, and the assumptions of certain liabilities of
the Company's New Jersey business.

      The agreement with National provides for a breakup fee of $250,000, upon
termination of the agreement by the Company. The fee is payable the earlier of
(i) the consummation of a sale by the Company, or (ii) 18 months following the
termination of the agreement.


                                      F-20
<PAGE>

23.   Fourth Quarter Adjustments:

      Certain fourth quarter adjustments were made to fiscal 2001 that are
significant to the quarter and to comparisons between quarters. During the
fourth quarter of fiscal 2001, the Company: i) recorded an impairment charge
relating to goodwill of $4,205,000 (see Note 3); ii) increased the provision for
allowance for doubtful accounts in the amount of $4,765,000 as a result of
various billing problems as well as certain customers experiencing cash flow
problems; and iii) recorded a $1,000,000 charge as a result of a settlement
agreement with the OIG for prior year claims related to the Company's
discontinued Medicare business (see Note 11).

24.   Supplementary Information - Statement of Cash Flows:

      During the years ended May 31, 2001 and 2000, the Company issued 1,829 and
1,829 shares of common stock, respectively, in satisfaction of $7,545 and
$19,440, respectively, of dividends to preferred shareholders.


                                      F-21

<PAGE>

Item 14. Exhibits and Reports on Form 8-K

      (a)   Documents filed as part of this Report:

1.    Financial Statement Schedules

3. Exhibits:  The following Exhibits are filed as a part of this Report:

      Exhibit No.       Description
      -----------       -----------

      3.    (a)   *     The Company's Certificate of Incorporation filed
                        April 25, 1961.

            (b)   *     The Company's Certificate of Amendment to Certificate of
                        Incorporation filed February 22, 1989.

            (c)         The Company's Certificate of Amendment to Certificate of
                        Incorporation filed December 4, 1990.

            (d)         The Company's Certificate of Amendment to Certificate of
                        Incorporation filed February 3, 1994. (Incorporated by
                        reference to Exhibit 3 (d) to the Company's Annual
                        Report on Form 10-KSB for the fiscal year ended May 31,
                        1994.)

      4.1               Registration Rights Agreement between the Company and
                        the Shaar Fund Ltd. dated April 26, 1999.

      5.1               Legal opinion of Muenz & Meritz, P.C.

      10.   (a)   *     Form of Indemnification Agreement between the
                        Company and Stephen Sternbach.

            (b)         Employment Agreement, dated as of December 3, 1995
                        between the Company and Stephen Sternbach. (Incorporated
                        by reference to Exhibit 10.(x) to the Company's
                        Quarterly Report on Form 10-QSB for the quarterly period
                        ended February 29, 1996.)

            (c)   *     The Company's 1991 Incentive Stock Option Plan

            (d)         The Company's 1992 Incentive Stock Option Plan (as
                        amended and restated September 13, 1993). (Incorporated
                        by reference to Exhibit 10 (h) to the Company's Annual
                        Report on Form 10-KSB for the fiscal year ended May 31,
                        1994.)

            (e)         Amendment No. 1 to the Company's 1992 Stock Option Plan.
                        (Incorporated by reference to Exhibit 10.(z) to the
                        Company's Quarterly Report on Form 10-QSB for the
                        quarterly period ended February 29, 1996.)

            (f)         The Company's Employee Stock Purchase Plan, as amended
                        on December 15, 1995. (Incorporated by reference to
                        Exhibit 10.(y) to the Company's Quarterly Report on Form
                        10-QSB for the quarterly period ended February 26,
                        1996.)

            (g)         Form of Incentive Stock Option Contract (Incorporated by
                        reference to Exhibit 10(j) to the Company's Annual
                        Report on Form 10-K for the fiscal year ended May 31,
                        1993.)

            (h)   *     New York State Department of Consumer Affairs Employment
                        Agency License.

            (i)   *     New York State Health Department Home Care License.

            (j)   *     New Jersey Employment agency License.

            (k)         Form of Indemnification Agreement between the Company
                        and directors and officers. (Incorporated by reference
                        to Exhibit 10(k) to the Company's Annual Report on Form
                        10-K for the fiscal year ended May 31, 1992.)

            (l)         Lease dated December 7, 1998 between Lighthouse
                        Hicksville Limited Partnership, a New York limited
                        partnership, and Star Multi Care Services, Inc., a
                        Delaware corporation, for the Company's office space in
                        Hicksville incorporated to the Company's Form 10-Q for
                        period ended November 30, 1998 as Exhibit 10.1 therein.

            (m)         Securities Purchase Agreement between the Company and
                        the Shaar Fund, Ltd. dated April 26, 1999 filed as
                        Exhibit 10(v) in Form S-3/Amendment 2 filed December 14,
                        1999 filed as Exhibit 10(w) in Form S-3/Amendment 2
                        filed December 14, 1999.

<PAGE>

            (w)         Common Stock Purchase Warrant issued to the Shaar Fund,
                        Ltd pursuant to the Securities Purchase Agreement
                        between the Company and the Shaar Fund, Ltd. dated April
                        26, 1999

            (x)         WAIVER AND AMENDMENT dated as of September 13, 1999 to
                        the Receivables Purchase and Transfer Agreement, dated
                        November 9, 1998, by and among Star Multi Care Services,
                        Inc., each of the parties named on Schedule I thereto
                        (each, including he Primary Servicer, a "Provider" and,
                        collectively, the "Providers") and SMCS Care, LLC, and
                        to the Loan and Security Agreement, dated as of November
                        9, 1998 between the SMCS Care, LLC and Daiwa Healthco-3
                        LLC incorporated by reference to the Company's Form 10-Q
                        for period ended November 30, 1999 as Exhibit 10.1
                        therein.

            (y)         WAIVER AND AMENDMENT dated as of September 12, 2000
                        (this "Amendment"), to the Receivables Purchase and
                        Transfer Agreement, dated as of November 9, 1998 (as
                        amended, modified or supplemented from time to time in
                        accordance with its terms, the "RPTA"), by and among
                        Star Multi Care Services, Inc., a New York corporation
                        (the "Primary Servicer"), each of the parties named on
                        Schedule I thereto (each, including the Primary
                        Servicer, a "Provider" and, collectively, the
                        "Providers") and SMCS Care, LLC, a New York limited
                        liability company (the "Purchaser"), and to the Loan and
                        Security Agreement, dated as of November 9, 1998 (as
                        amended, modified or supplemented from time to time in
                        accordance with its terms, the "LSA") between the
                        Purchaser as borrower (the "Borrower"), and Daiwa
                        Healthco-3 LLC (the "Lender") filed herein.

      21.               List of subsidiaries.

      23.   (a)         Consent of Holtz Rubenstein & Co., LLP. previously
                        filed.

            (b)         Consent of Muenz & Meritz, P.C. included in Exhibit 5.1.
                        previously filed.

-------------------
*     Incorporated by reference to the Company's Registration Statement on Form
      S-18 dated May 14, 1991. (Registration No. 33-39697-NY)


(b) Reports on Form 8-K

None

<PAGE>

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


Date September 13, 2001                 STAR MULTI CARE SERVICES, INC.


                                        By /s/ Stephen Sternbach
                                           ----------------------------
                                           Stephen Sternbach,
                                           Chairman of the Board, President and
                                           Chief Executive Officer

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


s/Stephen Sternbach     Chairman of the Board,             September 13, 2001
-------------------     President and Director


s/Gregory Turchan       Senior Vice President,             September 13, 2001
-----------------       Secretary and Director
Gregory Turchan


s/Charles Berdan        Director                           September 13, 2001
----------------
Charles Berdan


s/Gary Weinberger       Director                           September 13, 2001
----------------
Gary Weinberger


S/Matthew Solof         Director                           September 13, 2001
---------------
Matthew Solof

<PAGE>

                                INDEX OF EXHIBITS

      Exhibit No.       Description
      -----------       -----------

      3.    (a)   *     The Company's Certificate of Incorporation filed
                        April 25, 1961.

            (b)   *     The Company's Certificate of Amendment to Certificate of
                        Incorporation filed February 22, 1989.

            (c)         The Company's Certificate of Amendment to Certificate of
                        Incorporation filed December 4, 1990.

            (e)         The Company's Certificate of Amendment to Certificate of
                        Incorporation filed February 3, 1994. (Incorporated by
                        reference to Exhibit 3 (d) to the Company's Annual
                        Report on Form 10-KSB for the fiscal year ended May 31,
                        1994.)

      4.1               Registration Rights Agreement between the Company and
                        the Shaar Fund Ltd. dated April 26, 1999.

      5.1               Legal opinion of Muenz & Meritz, P.C.

      10.   (a)   *     Form of Indemnification Agreement between the
                        Company and Stephen Sternbach.

            (b)         Employment Agreement, dated as of December 3, 1995
                        between the Company and Stephen Sternbach. (Incorporated
                        by reference to Exhibit 10.(x) to the Company's
                        Quarterly Report on Form 10-QSB for the quarterly period
                        ended February 29, 1996.)

            (c)   *     The Company's 1991 Incentive Stock Option Plan

            (d)         The Company's 1992 Incentive Stock Option Plan (as
                        amended and restated September 13, 1993). (Incorporated
                        by reference to Exhibit 10 (h) to the Company's Annual
                        Report on Form 10-KSB for the fiscal year ended May 31,
                        1994.)

            (e)         Amendment No. 1 to the Company's 1992 Stock Option Plan.
                        (Incorporated by reference to Exhibit 10.(z) to the
                        Company's Quarterly Report on Form 10-QSB for the
                        quarterly period ended February 29, 1996.)

            (f)         The Company's Employee Stock Purchase Plan, as amended
                        on December 15, 1995. (Incorporated by reference to
                        Exhibit 10.(y) to the Company's Quarterly Report on Form
                        10-QSB for the quarterly period ended February 26,
                        1996.)

            (g)         Form of Incentive Stock Option Contract (Incorporated by
                        reference to Exhibit 10(j) to the Company's Annual
                        Report on Form 10-K for the fiscal year ended May 31,
                        1993.)

            (h)   *     New York State Department of Consumer Affairs
                        Employment Agency License.

            (i)   *     New York State Health Department Home Care License.

            (j)   *     New Jersey Employment agency License.

            (k)         Form of Indemnification Agreement between the Company
                        and directors and officers. (Incorporated by reference
                        to Exhibit 10(k) to the Company's Annual Report on Form
                        10-K for the fiscal year ended May 31, 1992.)

            (l)         Lease dated December 7, 1998 between Lighthouse
                        Hicksville Limited Partnership, a New York limited
                        partnership, and Star Multi Care Services, Inc., a
                        Delaware corporation, for the Company's office space in
                        Hicksville incorporated to the Company's Form 10-Q for
                        period ended November 30, 1998 as Exhibit 10.1 therein.

            (m)         Securities Purchase Agreement between the Company and
                        the Shaar Fund, Ltd. dated April 26, 1999 filed as
                        Exhibit 10(v) in Form S-3/Amendment 2 filed December 14,
                        1999 filed as Exhibit 10(w) in Form S-3/Amendment 2
                        filed December 14, 1999.

                        (y)   Common Stock Purchase Warrant issued to the Shaar
                              Fund, Ltd pursuant to the Securities Purchase
                              Agreement between the Company and the Shaar Fund,
                              Ltd. dated April 26, 1999

                        (z)   WAIVER AND AMENDMENT dated as of September 13,
                              1999 to the Receivables Purchase and Transfer
                              Agreement, dated November 9, 1998, by and among
                              Star Multi Care Services, Inc., each of the
                              parties named on

<PAGE>

                              Schedule I thereto (each, including he Primary
                              Servicer, a "Provider" and, collectively, the
                              "Providers") and SMCS Care, LLC, and to the Loan
                              and Security Agreement, dated as of November 9,
                              1998 between the SMCS Care, LLC and Daiwa
                              Healthco-3 LLC incorporated by reference to the
                              Company's Form 10-Q for period ended November 30,
                              1999 as Exhibit 10.1 therein.

            (y)         WAIVER AND AMENDMENT dated as of September 12, 2000
                        (this "Amendment"), to the Receivables Purchase and
                        Transfer Agreement, dated as of November 9, 1998 (as
                        amended, modified or supplemented from time to time in
                        accordance with its terms, the "RPTA"), by and among
                        Star Multi Care Services, Inc., a New York corporation
                        (the "Primary Servicer"), each of the parties named on
                        Schedule I thereto (each, including the Primary
                        Servicer, a "Provider" and, collectively, the
                        "Providers") and SMCS Care, LLC, a New York limited
                        liability company (the "Purchaser"), and to the Loan and
                        Security Agreement, dated as of November 9, 1998 (as
                        amended, modified or supplemented from time to time in
                        accordance with its terms, the "LSA") between the
                        Purchaser as borrower (the "Borrower"), and Daiwa
                        Healthco-3 LLC (the "Lender") filed herein.

      21.               List of subsidiaries.

      23.   (a)         Consent of Holtz Rubenstein & Co., LLP. previously
                        filed.

            (b)         Consent of Muenz & Meritz, P.C. included in Exhibit 5.1.
                        previously filed.

-------------------