<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-K
(Mark One)

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

                  For the year ended December 31, 1997

                                       OR

    [ ]  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 0-19240

                            U.S. HOMECARE CORPORATION
             (Exact name of registrant as specified in its charter)

<TABLE>
<CAPTION>
<S>                                                                             <C>
NEW YORK                                                                        13-2853680
(State or other jurisdiction of                                                 (I.R.S. Employer
incorporation or organization)                                                  Identification No.)


TWO HARTFORD SQUARE WEST, SUITE 300, HARTFORD, CT                               06106
(Address of principal executive offices)                                        (Zip Code)

(860) 278-7242
(Registrant's telephone number including area code)

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

Securities registered pursuant to Section 12(g) of the Act:
                                                                                Name of each
                                                                                exchange on which
Title of Each Class                                                             registered

COMMON STOCK, $.01 PAR VALUE                                                    OTC BULLETIN BOARD
</TABLE>


         Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
<PAGE>   2
         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.

         While it is difficult to determine the number of shares owned by
non-affiliates, the registrant estimates that the aggregate market value of
outstanding Common Stock on March 27, 1998, (based upon the average bid and
asked prices of such Common Stock on the OTC Bulletin Board on March 27, 1998)
held by non-affiliates was approximately $4,614,000 and the aggregate market
value of outstanding Preferred Stock on March 27, 1998 (based upon the price at
which such Preferred Stock was sold) held by non-affiliates was approximately
$10,765,000. For this computation, the registrant has excluded the market value
of all shares of its Common Stock and Preferred Stock reported as beneficially
owned by officers and directors and their affiliates and certain significant
shareholders of the registrant. Such exclusion shall not be deemed to constitute
an admission that any such shareholder is an affiliate of the registrant.

         Documents Incorporated by Reference

                   NONE.
<PAGE>   3
                            U.S. HOMECARE CORPORATION
                            ANNUAL REPORT ON FORM 10K
                                DECEMBER 31, 1997


                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                      PART I
<S>                                                                                                     <C>
Item 1.   BUSINESS......................................................................................  1
Item 2.   PROPERTIES.................................................................................... 11
Item 3.   LEGAL PROCEEDINGS............................................................................. 12
Item 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................... 12

                                                      PART II

Item 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
                     STOCKHOLDER MATTERS ............................................................... 13
Item 6.   SELECTED CONSOLIDATED FINANCIAL DATA ......................................................... 14
Item 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                    CONDITION AND RESULTS OF OPERATIONS................................................. 15
Item 7.A. MARKET RISK DISCLOSURES....................................................................... 21
Item 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................... 21
Item 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 0N
                     ACCOUNTING AND FINANCIAL DISCLOSURE................. .............................. 21

                                                     PART III

Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................ 22
Item 11.  EXECUTIVE COMPENSATION ....................................................................... 24
Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                     MANAGEMENT......................................................................... 28
Item 13.  CERTAIN RELATIONSHIPS AND CERTAIN TRANSACTIONS ............................................... 29

                                                      PART IV

Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
                      ON FORM 8-K....................................................................... 30
</TABLE>
<PAGE>   4
                                     PART I

ITEM 1. BUSINESS

GENERAL

         U.S. HomeCare Corporation (collectively with its subsidiaries, "USHC"or
the "Company") is a regional provider of paraprofessional and professional home
health care services, including nursing care, personal care, and other
specialized therapies. The Company is headquartered in Hartford, Connecticut and
has operations in New York (Westchester County, metropolitan New York City, Long
Island and upstate New York) as well as Connecticut and Pennsylvania. The
Company works with physicians, social service agencies, health care
institutions, and patients to identify home care services that are appropriate
for the patient's diagnosis and required to implement the physician's plan of
treatment. The Company addresses the needs of its patients by coordinating
therapies, products, equipment, and support services with the appropriate
nursing care. To further its emphasis on a diagnosis-centered approach, the
Company has designed specialized programs for patients with particular diseases
such as Cancer, AIDS and Alzheimer's disease, and for particular classes of
patients such as the developmentally disabled and hospice patients.

         Following its formation in 1986, the Company expanded through a
strategy of internal growth, the opening of new branch offices, selected
acquisitions within its region and the introduction of new services and
programs, including infusion therapy which was added in 1989. In 1992, the
Company adopted an accelerated expansion strategy, opened offices in a number of
new geographic markets, developed a new and sizable base of Medicare business in
South Florida, and, in late 1992, consummated a significant infusion therapy
acquisition in the greater New York metropolitan area. Management underestimated
the financial, managerial and system resources necessary to execute its
expansion strategy. As a result, the Company failed to successfully implement
its expansion strategy and began to incur operating losses in the second quarter
of 1993. In August 1994, the Company announced an extensive restructuring plan,
which included the closing of its development-stage offices outside of its core
markets, the consolidation of its infusion therapy pharmacy facilities from five
to two, and the sale of its South Florida operations which was completed in
December 1995. Despite these actions, the Company continued to incur operating
losses in 1994, 1995 and the first three quarters of 1996.

         At the end of September 1996, the Company undertook a series of steps
to improve operating results, restore financial health and focus on its core
home nursing services business. The Company engaged a team of experienced
turnaround consultants to improve the operating and financial performance of the
Company. During the fourth quarter of 1996 the following were accomplished:

         -        Corporate overhead was reduced by more than $4 million per
                  annum and branch level overhead and direct costs were reduced
                  by more than $2.5 million per annum;

         -        The Company sold the business and operating assets of its home
                  infusion therapy operations as of October 1, 1996; and

         -        The Company settled all of its material litigation and reduced
                  the borrowings under the Company's revolving credit facility
                  from $8.9 million on September 30, 1996 to $5.0 million on
                  December 31, 1996.

                                       1
<PAGE>   5
         In connection with these steps, the Company recognized a loss on the
sale of its home infusion therapy operations of $13.8 million (including the
write-off of $11.6 million of related goodwill and intangibles and a reserve of
$2.6 million for the collection of infusion therapy receivables) and recorded a
$3.6 million provision for restructuring and other non-recurring charges.

         During 1997, the Company reported profitable operations through the
first six months of the year. During that time the Company pursued the
possibility of merging with a larger healthcare company, culminating in an
agreement to merge with Home Health Corporation of America (HHCA), which was
announced publicly in September 1997.

         US HomeCare announced in December, 1997 that the New York State
Attorney General's office had initiated a broad-based investigation into the
billing and other practices of companies providing home health care services in
New York under Medicaid-funded state programs. US HomeCare was included in the
investigation.

         The Company cooperated fully with the State's investigation. In
addition, the Company hired outside counsel and initiated its own internal
investigation of its billing practices and Medicaid rates. Because of the
Company's pending merger with HHCA, US HomeCare asked the Attorney General for
expedited review of its investigation of the Company.

         Based on its internal review, the Company concluded that it had
meritorious legal defenses for substantially all potential claims by the state
for monetary or other penalties based on cost reporting and billing practices
related to Medicaid-funded home health care programs. However, the Company also
believed that it could take substantial time and expense to litigate any of
these issues to their conclusion. The Company in January 1998 entered into
negotiations with the office of the Attorney General in an effort to reach a
rapid resolution of the investigation.

         On Wednesday, February 11, 1998, the Company and Home Health
Corporation of America (HHCA) announced that they had mutually terminated their
merger agreement.

         Under the terms of a final agreement signed on February 27, 1998, the
Company has agreed to settle the state's investigation for a monetary payment of
$1.75 million, payable with interest over a period of 36 months. The full amount
of the settlement may be prepaid at any time, and the Company has agreed with
the state that it will use reasonable efforts to refinance the amount of the
settlement as soon as possible.


HOME HEALTH CARE MARKET

         Home health care is a growing major segment of the health care industry
and is projected to remain so through the end of the decade. According to the
Health Care Financing Administration, U.S. home health care spending was $26
billion in 1995 with $17 billion spent in home health care nursing services. The
annual industry growth rate in home health care spending from 1986 to 1991 was
estimated to be in excess of 20%. Management believes that this growth rate has
moderated in recent periods in the markets in which it operates.

                                       2
<PAGE>   6
         The primary factors contributing to this growth in homecare are:

         -        Increased acceptance of home care by physicians, patients and
                  third-party payors.

         -        Advancements in home care therapies, which allow for care
                  outside of a traditional institutional setting.

         -        Changing population demographics, including an increasing
                  number of aged.

         -        Increased number of patients suffering from therapy-intensive
                  diseases such as AIDS and cancer.

         -        Cost-effectiveness of care administered in the home (home
                  health care is estimated to cost approximately 50% of
                  equivalent care delivered in the hospital).

         Rapid industry growth and market forces have led to the emergence of
many independent and hospital-based home care agencies. The number of home
health care agencies in the U.S. has grown to more than 17,000 agencies.
Collectively, these agencies provide services to over 6 million people in the
U.S. who require care because of acute illness, long term chronic health
conditions, permanent disability or terminal illness. The home health care
industry, while still highly fragmented, is experiencing a period of
consolidation, with larger companies emerging through acquisitions and mergers
in order to achieve economies of scale.

         The home health care industry consists of four segments: nursing
services, infusion therapy, respiratory therapy and home medical equipment. The
Company operates in the nursing services segment. The nursing services segment
includes the provision of both professional and paraprofessional nursing and
personal care in the home, and is estimated to represent two-thirds of
expenditures within the home health care market, or approximately $17 billion
in 1995. Approximately 70% of nursing services are provided to people over the
age of 65 and primarily consist of non-technical, medically related personal
care services related to assisted living. Such services are often intended to
prevent costly, premature and/or unnecessary institutionalization of the
patient. The primary diagnoses of patients receiving home nursing care are
cardiovascular and cerebrovascular disease, respiratory disease, orthopedic
conditions, carcinomas, diabetes, and central nervous system problems.

         The home health care market is highly competitive and is divided among
a large number of providers, some of which are national providers, but most of
which are either regional or local providers. Certain of the Company's
competitors and potential competitors have significantly greater financial,
technical and marketing and sales resources than the Company and may, in certain
locations, possess licenses or certificates (for example, certificates of need
in New York) that permit them to provide services that the Company cannot
provide currently.


RELATIONSHIPS WITH REFERRAL SOURCES

         The development and growth of the Company's business depends to a
significant extent on its ability to establish and maintain close working
relationships with home care and social service agencies, hospitals, clinics,
nursing homes, physicians and physician groups, health maintenance organizations
and other health care providers. There can be no assurance that the Company's
existing relationships with these referral sources will be successfully
maintained or that additional relationships will be successfully developed and
maintained. In March 1994, VNS HomeCare

                                       3
<PAGE>   7
("VNS"), a non-profit home health care institution in New York City informed the
Company that it intended to reduce the Company's overall caseload due to
substandard administrative performance ratings. Consequently, the Company's net
revenues attributable to VNS declined from $8.8 million (16%) for the year ended
December 31, 1994, to $6.2 million (11%) for the year ended December 31, 1995,
and to $5.4 million (10%) for the year ended December 31, 1996, and to $4.5
million (8.4%) for the year ended December 31, 1997.

         Part of the Company's strategy is to increase its business with managed
care third party payors, such as health maintenance organizations and preferred
provider organizations. An increase in these contracts could also reduce the
profit margin for the Company's business because managed care payors typically
reimburse at lower rates and limit service coverage to a greater extent than
other non-governmental third party payors, such as indemnity insurance
providers. The Company is unable to predict how quickly, if at all, its managed
care business will increase and what effect any such increased business in this
segment would have on the Company's business or results of operations.


NEED TO REFINANCE OR EXTEND EXISTING CREDIT FACILITIES

         All of the Company's existing credit facilities, including its accounts
receivable securitization program, are scheduled to mature in January 1999. The
Company will need to replace these credit facilities to ensure sufficient
funding of the Company's operations. There can be no assurance that such
financing will be available when needed or, if available, that it will be
available on terms acceptable to the Company.

LIQUIDITY OF US HOMECARE COMMON STOCK

         The Company's Common Stock is currently trading on the OTC Bulletin
Board under the symbol "USHO". Thus, only bid and asked prices between dealers
(rather than sales prices) are currently available with respect to the Common
Stock. The fact that the Company is trading on the OTC Bulletin Board rather
than on Nasdaq or an exchange might cause the market price of the Common Stock
to be lower than it otherwise would be. Thus, holders of the Common Stock might
not realize the extent of liquidity as they might were the stock listed on
Nasdaq or a national securities exchange.


DEPENDENCE ON REIMBURSEMENT BY THIRD PARTY PAYORS

         A substantial portion of the Company's revenues are derived directly or
indirectly from government-sponsored health care programs, including Medicaid
and Medicare. The Company receives direct payments from both Medicare
(approximately 15% of revenue) and Medicaid (approximately 9% of revenue). The
Company also derives significant revenues indirectly from the Medicaid program
through contracts with local government agencies (approximately 11.6% of

                                       4
<PAGE>   8
revenue), such as the Department of Social Services of Westchester County. In
addition, a substantial portion of the Company's business is derived as a
sub-contractor to Medicare-Certified and Medicaid-Certified agencies. As a
result, the Company would likely be adversely affected by any rate freezes,
payment delays, cutbacks in coverage or any other adverse actions taken with
respect to Medicare and Medicaid and there can be no assurance that such actions
will not be taken in the future.

         Governmental and third-party payors have taken extensive steps intended
to contain or reduce payments made to health care providers such as the Company.
These steps have included, among others, changes in reimbursement methodologies,
changes in services covered, increased utilization review of services,
negotiated prospective or discounted contract pricing and adoption of a
competitive bid approach to service contracts. Managed care and related cost
containment efforts are expected to continue in the future. Home health care,
which is generally less costly than hospital-based care, has generally benefited
from many of these cost containment efforts. As expenditures in the home health
care market continue to grow, however, initiatives aimed at reducing the cost of
health care delivery at non-hospital sites are increasing. For example, several
state Medicaid programs, in an effort to contain the cost of health care and in
light of state budgetary constraints, have reduced their payment rates and have
narrowed the scope of covered services. Such initiatives are expected to
continue in the future. A significant change in coverage or a reduction in
payment rates for the types of home health care services provided by the Company
could have a material adverse effect upon the Company's business and financial
condition.

         For each office in which the Company participates in the Medicare
program, the Company is required to file annual cost reports to establish its
reimbursement rate per Medicare visit for that office. Such reimbursement rates
are subject to audit and retroactive adjustment by the Medicare fiscal
intermediaries for the geographic areas in which the Company's
Medicare-certified offices are located.

         In its core market operations the Company is required to file cost
reports for two of its upstate New York offices, for its Connecticut operations,
and for its Pennsylvania operations as well as for its home office operations.
Cost reports for all of the Company's Medicare certified operations have been
settled through June 1995 although they remain subject to reopening through
November 1998. The remaining cost reports filed for periods through December 31,
1996 are in various stages of review, audit and or settlement with the fiscal
intermediaries. While the Company has recorded estimated settlements for these
open cost report periods there can be no assurance that final settlements will
not result in future assessments against the Company. Such assessments could
result in reductions in revenue recorded.

         The Balanced Budget Act of 1997 created a new Medicare reimbursement
structure that is called the Interim Payment System (IPS). This new structure
establishes new cost reimbursement limitations that are affecting many homecare
companies to a severe level. The Company believes that, due to the limited
amount of its business that is directly reimbursed by Medicare, the impact on it
resulting from the IPS legislation will not be material. However, the Company as
a result of this legislation may experience additional pressure on rates paid it
by those of its clients who derive a material portion of their revenues from
Medicare.

         Part of the Company's strategy is to increase its business with managed
care third party payors, such as health maintenance organizations and preferred
provider organizations. An increase in these contracts could also reduce the
profit margin for the Company's business because managed care payors typically
reimburse at lower rates and limit service coverage to a greater extent than
other non-governmental third party payors, such as indemnity insurance
providers. The Company is unable to predict how quickly, if at all, its managed
care business will increase and what effect any such increased business in this
segment would have on the Company's business or results of operations.

                                       5
<PAGE>   9
GOVERNMENT REGULATION

         The Company and the health care industry generally are subject to
extensive and frequently changing state and federal regulation governing the
provision of home health care services and home infusion services, the licensing
of branch offices, certification of home health agencies and the licensing of
professionals. In addition, state and federal fraud and abuse laws prohibit,
among other things, the payment of remuneration for patient or business
referrals. New laws and regulations are enacted from time to time to regulate
new and existing services and products in the home health care industry, and any
changes in the laws or regulations or new interpretations of existing laws or
regulations could have an adverse effect on the Company's methods and costs of
doing business. Further, failure by the Company to comply with applicable laws
could adversely affect the Company's ability to continue to provide, or receive
reimbursement for, its services from Medicare, Medicaid and other third party
payors and also could subject the Company and its officers to civil and criminal
penalties. There can be no assurance that the Company will not encounter
regulatory impediments that could adversely affect its ability to open new
branch offices and to expand the services currently provided at its existing
branch offices.

         The Company's operations are subject to the illegal remuneration
provisions of the Social Security Act (sometimes referred to as the
"anti-kickback" statute and similar state laws that impose criminal and civil
sanctions on persons who knowingly and willfully solicit, offer, receive or pay
any remuneration, whether directly or indirectly, in return for, or to induce,
the referral of a patient for treatment, or, among other things, the ordering,
purchasing, or leasing, of items or services that are paid for in whole or part
by Medicare, Medicaid or similar state programs. Violations of the federal
anti-kickback statute are punishable by criminal penalties, including
imprisonment, fines and exclusion from future participation in the Medicare and
Medicaid programs. Federal enforcement officials also may attempt to impose
civil false claims liability with respect to claims resulting from an
anti-kickback violation. If successful, civil penalties could be imposed,
including assessments of $2,000 per improper claim for payment plus twice the
amount of such claims and suspension from future participation in Medicare and
Medicaid programs. Civil suspension for anti-kickback violations also can be
imposed through an administrative process, without the imposition of civil
monetary penalties. While the federal anti-kickback statute expressly prohibits
transactions that have traditionally had criminal implication, such as
kickbacks, rebates or bribes for patient referrals, its language has been
construed broadly and has not been limited to such obviously wrongful
transactions. Court decisions state that, under certain circumstances, the
statute is also violated when one purpose (as opposed to the "primary" or a
"material" purpose) of a payment is to induce referrals. Congress has frequently
considered federal legislation that would expand the federal anti-kickback
statute to include the same broad prohibitions regardless of payor source.

         In addition, an increasing number of states have laws, which vary from
state to state, prohibiting certain direct or indirect providers for the
referral of patients to a particular provider, including pharmacies and home
health agencies. Possible sanctions for violation of these restrictions include
loss of licensure and civil and criminal penalties. There can be no assurance
that such laws will ultimately be interpreted in a manner consistent with the
practices of the Company.

         Under both the Omnibus Budget Reconciliation Act of 1933 ("Stark II")
and certain state legislation, it is unlawful for a physician to refer patients
for certain designated health services to an entity with which the physician has
a financial relationship. A "financial relationship" under Stark II is defined
as an ownership or investment interest in, or a compensation arrangement
between, the physician and the entity. The entity is prohibited from claiming
payment under the Medicare or

                                       6
<PAGE>   10
Medicaid programs for services rendered pursuant to a prohibited referral and is
liable for the refund of amounts received pursuant to prohibited claims. The
entity also can receive civil penalties of up to $15,000 per improper claim and
can be excluded from participation in the Medicare and Medicaid programs.

         In New York State, a certificate of need ("CON") must be obtained in
order to be certified to participate in the Medicare and Medicaid programs. The
Company does not have CONs covering its Westchester County, metropolitan New
York and Long Island branches and is therefore not certified as a Medicare
provider for such branches. A majority of the Company's business in these
branches is therefore derived as a subcontractor to Medicare-certified and
Medicaid-certified agencies or as a contractor with local government agencies.
In upstate New York (which was an acquired operation), the Company does have
CONs.

         The Company is also subject to laws and regulations pertaining to the
environment, health and safety. If the Company were found to be in violation of
any such laws and regulations, it could have a material adverse effect on its
business or financial condition.

                                        7
<PAGE>   11
HEALTH CARE REFORM

         Political, economic and regulatory influences are likely to lead to
fundamental change in the health care industry in the United States. Numerous
proposals for comprehensive reform of the nation's health care system have been
introduced in Congress. Many approaches have been considered, including mandated
basic health care benefits, controls on health care spending through limitations
on the growth of private health insurance premiums and Medicare and Medicaid
spending, the creation of large insurance purchasing groups and fundamental
changes to health care delivery systems. In addition, some of the states in
which the Company operates are considering various health care reform proposals.
The Company anticipates that Congress and state legislatures will continue to
review and assess alternative health care delivery systems and payment
methodologies, and that public debate of these issues will continue in the
future. Due to uncertainties regarding the ultimate features of reform
initiatives and their enactment and implementation, the Company cannot predict
which, if any, reforms will be adopted, when they may be adopted, or what impact
they may have on the Company. In addition, the cost and service considerations
which have generated proposals for health care reform have also resulted in, and
are expected to continue to result in, strategic realignments and combinations
in the health care industry which may, over time, have a significant impact on
the Company's strategic direction and results of operations. The actual
announcement of reform proposals and the investment communities' reaction to
such proposals, announcements by competitors and payors of their strategies to
respond to reform initiatives and general industry conditions have produced and
may continue to produce volatility in the trading and market price of the
Company's Common Stock and for securities of health care companies generally.


ABILITY TO ATTRACT KEY MANAGEMENT AND DEPENDENCE ON HEALTH CARE PROFESSIONALS

         The Company's future success will depend in large part on its ability
to attract and retain senior management personnel and branch-level management.
In addition, the Company is dependent on its staff of professional nurses and
its other health care professionals and paraprofessionals. Competition for
qualified management personnel and health care professionals and
paraprofessionals is strong. The inability to attract, retain or motivate
management and sufficient numbers of qualified health care professionals and
paraprofessionals could adversely affect the Company's business and prospects.
Although the Company has been generally able to meet its staffing requirements
for professional nurses and other health care staff, the Company has experienced
occasional staffing shortages at certain of its offices, and an increase in
competition, or a decline in its ability to meet its staffing needs, in the
future could have a material adverse effect on the Company's profitability and
on the Company's ability to maintain or increase its patient base at certain or
all of its branch offices.


LIABILITY AND INSURANCE

         The Company's services subject it to liability risk. Malpractice claims
may be asserted against the Company if its services are alleged to have resulted
in patient injury or other adverse effects. The Company has from time to time
been subject to such suits in the ordinary course of its business. There can be
no assurance that future claims will not be made or that such claims, if made,
will not materially and adversely affect the Company's business or financial
condition. The Company currently maintains liability insurance in the amount of
$2.0 million per occurrence and $6.0 million in the aggregate. There can be no
assurance that the coverage limits of the Company's insurance policies will be
adequate. In addition, while the Company has been able to obtain liability
insurance in the past, such insurance varies in cost, is difficult to obtain and
may not be available in the future on

                                       8
<PAGE>   12
acceptable terms or at all. A successful claim against the Company in excess of
the Company's insurance coverage could have a material adverse effect upon the
Company's business and financial condition. Claims against the Company,
regardless of their merits or eventual outcome, also may have a material adverse
effect upon the Company's reputation and business.


COMPETITION

         The home health care market is highly competitive and is divided among
a large number of providers, some of which are national providers, but most of
which are either regional or local providers. The Company believes that the
programs provided, the quality of care and service provided, reputation, and the
level of charges for services are significant competitive factors. Certain of
the Company's competitors and potential competitors have significantly greater
financial, technical and marketing and sales resources than the Company and may,
in certain locations, possess licenses or certificates (for example, CONs in New
York State) that permit them to provide services that the Company cannot
currently provide. There can be no assurance that the Company will not encounter
increased competition in the future that could limit the Company's ability to
maintain or increase its business and could adversely affect the Company's
operating results.


EMPLOYEES

         As of December 31, 1997, the Company had more than 3,000 employees. The
Company believes that its employee relations are good. None of the Company's
employees is represented by a labor union.


PATENTS AND TRADEMARKS

         The Company has no material patents or trademarks.


BACKLOG OF ORDERS AND INVENTORY

         The Company has no backlog of orders.


OTHER

         The Company does not have significant research and development
expenditures. The Company's business is not significantly seasonal in nature.


RISK FACTORS

         The Company's future business, financial condition and results of
operations are dependent on the Company's ability to successfully provide home
health care services to its customers and to successfully collect fees for such
services. Inherent in this process are numerous factors that the Company must
carefully manage in order to be successful. Some of these factors are: obtaining
sufficient cash flow from operations to meet its debt service and pay vendors on
a timely basis; complying with the financial covenants in its revolving line of
credit, subordinated credit facility and

                                       9
<PAGE>   13
accounts receivable securitization program so the banks would not have the right
to declare the amounts outstanding under such facilities immediately due and
payable; competing effectively with other home health care providers;
establishing and maintaining close working relationships with home care and
social service agencies, hospitals, clinics, nursing homes, physicians and
physician groups, health maintenance organizations and other health care
providers; obtaining adequate reimbursement from third party payors; complying
with applicable law regarding the health care industry; attracting and retaining
senior management personnel and branch level management as well as qualified
health care professionals and paraprofessionals and maintaining adequate
liability insurance. The failure to manage such risks successfully could have a
material adverse effect on the Company's business, financial condition and
results of operations.

                                       10
<PAGE>   14
ITEM 2. PROPERTIES

         The following table sets forth the branch offices of the Company in
each of its markets.

<TABLE>
<CAPTION>
                                                              DATE OPENED
                                                              OR BUSINESS                 LEASE
LOCATION                                                      ACQUIRED               SQUARE FOOTAGE
--------                                                      --------               --------------
<S>                                                           <C>                    <C>
NEW YORK
Hartsdale (regional processing center)                           5/86                   5,968
Brooklyn                                                         1/88                   3,215
Queens                                                           3/89                   4,860
Nassau                                                           3/89                   5,350
Suffolk                                                          3/89                   2,118
Manhattan                                                        5/86                   9,600
Bronx                                                            5/86                   2,275
Scarsdale                                                        5/86                   5,854
Peekskill                                                        5/86                   1,250
Kingston                                                         4/92                   2,600
Latham                                                           4/92                   4,770

CONNECTICUT
Hartford                                                         1/88                   3,238
Hartford (Corporate Headquarters)                                5/86                   3,238
Bridgeport                                                       1/92                   2,061
New Haven                                                        8/92                   1,224

PENNSYLVANIA
Philadelphia                                                     7/90                   6,460
Pittsburgh                                                       9/92                   7,000
</TABLE>


         The Company's headquarters are located in Hartford, Connecticut. The
Company's nursing services are provided by staff located at branch offices in
the Company's markets. All facilities are leased with various expiration dates
through the year 2003.

         The Company regularly evaluates the suitability of each location and
overall adequacy of its various branch offices in regards to the impact on the
efficient operation of the business.

                                       11
<PAGE>   15
ITEM 3.  LEGAL PROCEEDINGS

     On November 11, 1997, the Company received a Grand Jury subpoena from the
New York State Attorney General's Medicaid Fraud Control Unit, which audits all
activities and funding pertinent to participation in the Medicaid Program, in
connection with its broad-based investigation into the billing and other
practices of a number of companies providing home care services in New York
under Medicaid-funded state programs.

     As part of the audit, the Attorney General alleged that the Company had
been overpaid in that the Company's charges to private paying clients were
lower than the Medicaid rates established by the State. The Attorney General
acknowledged that the Company did not knowingly cause such overpayment to
occur. However, the Attorney General contended that the differential between
private charges and the Medicaid rates in effect during the audit period should
be repaid to the State.

     The Company cooperated fully with the State's investigation. In addition,
the Company hired outside counsel and initiated its own internal investigation
of its billing practices and Medicaid rates. Because of the Company's pending
merger, US HomeCare asked the Attorney General for expedited review of its
investigation of the Company.

     Based on its internal review, the Company concluded that it had meritorious
legal defenses for substantially all potential claims by the state for monetary
or other penalties based on cost reporting and billing practices related to
Medicaid-funded home care programs. However, the Company also believed that
litigating these issues could take substantial time and expense.

     The Company in January 1998 entered into negotiations with the office of
the Attorney General in an effort to reach a rapid resolution of the
investigation. Under the terms of a final agreement signed on February 27, 1998
which terminated the proceeding as to the Company, the Company agreed to settle
the state's investigation for a monetary payment of $1.75 million, with
$100,000 payable initially and the remainder payable with interest over a period
of 36 months. The full amount of the settlement may be prepaid at any time, and
the Company has agreed with the state that it will use reasonable efforts to
prepay, in part or in full, the unpaid balance at any time the Company
refinances its bank debt.

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

     None.

                                       12
<PAGE>   16
                                     PART II


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

         The Company's Common Stock is traded on the OTC Bulletin Board under
the symbol "USHO." The following table presents the quarterly high and low bid
quotations, as reported by the Nasdaq National Market through the second quarter
of 1996; quotations for third and fourth quarter 1996 and all of 1997 were as
reported by on-line services monitoring the OTC Bulletin Board. These quotations
reflect the inter-dealer prices, without retail mark-up, markdown or commission
and may not necessarily represent actual transactions.


<TABLE>
<CAPTION>
                                                            1997                        1996
                                                            ----                        ----

                                                   HIGH           LOW             HIGH         LOW
<S>                                                <C>            <C>             <C>          <C>
     First Quarter                                 $1.375         $0.688          $2.500       $1.625

     Second Quarter                                $1.375         $0.969          $2.625       $1.625

     Third Quarter                                 $1.531         $0.938          $2.250       $1.250

     Fourth Quarter                                $1.531         $0.906          $1.250       $0.500
</TABLE>


         On March 27, 1998 the last reported sales price for the Company's
Common Stock on the OTC Market was $0.40625 per share.


HOLDERS

         At December 31, 1997, there were approximately 400 record holders of
Common Stock.


DIVIDENDS

         The Company has never declared or paid any cash dividends on its
capital stock. In addition, the Company's RLOC (as defined below) prohibits the
payment of cash dividends on the Company's capital stock without prior consent.
The Company currently intends to retain all earnings for the operation of its
business and does not anticipate paying any cash dividends in the foreseeable
future. The Company pays dividends on its outstanding $35.00 6% Convertible
Preferred Stock, $1.00 par value (the "$35.00 Preferred") through the issuance
of shares of Common Stock.

                                       13
<PAGE>   17
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

         The financial data set forth below is qualified by reference to, and
should be read in conjunction with, the consolidated financial statements,
related notes and other financial information included elsewhere herein and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The selected statement of operations and balance sheet data for the
years ended December 31, 1995, 1996 and 1997 and at December 31, 1996 and 1997
respectively, have been derived from the Company's audited consolidated
financial statements, and are included elsewhere herein.

<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31,
                                                    1993          1994          1995            1996          1997
                                                    ----          ----          ----            ----          ----
                                                                 (in thousands, except per share data)
<S>                                               <C>           <C>          <C>              <C>            <C>
STATEMENT OF OPERATIONS DATA:
Net revenues...................................   $ 62,637      $ 56,351     $ 56,450         $ 55,085       52,635
Cost of revenues..............................      42,016        38,295       37,605           37,815       32,630
                                                  --------      --------     --------         --------       ------
Gross profit...................................     20,621        18,056       18,845           17,270       20,005
Selling, general and administrative expenses ..     25,436        27,382       18,607           19,016       15,931
Provision for litigation settlement ...........         --         2,000           --               --        1,750
Amortization and depreciation .................      5,166         4,875        2,208            1,943        1,613
Restructuring and other non-recurring charges .         --         7,650           --            3,619        1,306
                                                  --------      --------     --------         --------       ------

Loss from continuing operations................     (9,981)      (23,851)      (1,970)          (7,308)        (595)
Interest expense...............................      1,398         1,423          870            1,092          852
                                                  --------      --------     --------         --------       ------

Loss from continuing operations before
provisions (benefit) for income taxes..........    (11,379)      (25,274)      (2,840)          (8,400)      (1,447)
Provision (benefit) for income taxes ..........     (3,606)         (219)         154              150          150
Discontinued operations:
Income (loss) from discontinued operations ....        637        (1,710)       1,196           (1,464)      (1,597)
Loss on sale of IV therapy business ...........         --            --           --          (13,779)
                                                  --------      --------     --------         --------       ------
Net loss ......................................   $ (7,136)     $(26,765)    $ (1,798)        $(23,793)      (1,597)

Dividends to preferred shareholders............         --           (34)        (641)            (690)        (690)
                                                  --------      --------     --------         --------       ------
Net Loss applicable to common shareholders.....     (7,136)      (26,799)      (2,439)         (24,483)      (2,287)
                                                  ========      ========     ========         ========       ======
Basic and diluted loss per share:
Income (loss) from continuing operations ......   $   (.94)     $  (3.04)    $   (.45)        $  (1.04)      $ (.22)
Discontinued operations:
      Income (loss) from discontinued operations       .07          (.21)         .15             (.17)          --
Loss on disposal of IV therapy business .......         --            --           --         $  (1.55)          --
                                                  --------      --------     --------         --------       ------
Basic and diluted loss per share ..............   $   (.87)     $  (3.25)    $   (.30)        $  (2.76)      $ (.22)
                                                  ========      ========     ========         ========       ======

Weighted average common shares outstanding ....      8,244         8,247        8,180            8,868       10,444
                                                  ========      ========     ========         ========       ======

BALANCE SHEET DATA:

Net accounts receivable........................   $ 24,024      $ 13,382     $ 15,480         $  7,925      $ 5,147
Working capital (deficit)......................     19,338        (6,547)       8,186           (3,511)        (345)
Total assets...................................     64,662        43,681       38,441           15,545       10,378
Short-term debt................................      2,747         6,729        1,119              346           --
Long-term debt (less current portion)..........     17,561         9,282       12,524            7,983        7,577
Stockholders' equity (deficit).................     33,408         8,593       15,915           (7,055)      (6,471)
</TABLE>


                                       14
<PAGE>   18

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

         This Annual Report on Form 10-K contains certain statements of a
forward-looking nature relating to future events or the future financial
performance of the Company. Such statements are only predictions and the actual
events or results may differ materially from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed below and under "Risk Factors."

GENERAL

         The Company was formed in April 1986 to acquire a home health care
company operating primarily through five nursing service offices in New York
City and Westchester County with net revenues of approximately $8.8 million for
the year ended May 31, 1986. Following its formation in 1986, the Company
expanded through a strategy of internal growth, the opening of new branch
offices, selected acquisitions within its region and the introduction of new
services and programs, including infusion therapy which was added in 1989.

         In 1992, the Company adopted an accelerated expansion strategy, opened
offices in a number of new geographic markets, developed a new and sizable base
of Medicare business in South Florida, and, in late 1992, consummated a
significant infusion therapy acquisition in the greater New York metropolitan
area. Management underestimated the financial, managerial and system resources
necessary to execute its expansion strategy. As a result, the Company failed to
successfully implement its expansion strategy and began to incur operating
losses in the second quarter of 1993.

         In August 1994, the Company announced an extensive restructuring plan,
which included the closing of its development-stage offices outside of its core
markets, the consolidation of its infusion therapy pharmacy facilities from five
to two, and the sale of its South Florida operations which was completed in
December 1995. Despite these actions, the Company continued to incur operating
losses in 1994, 1995 and the first three quarters of 1996.

         At the end of September 1996, the Company undertook a series of steps
to improve operating results, restore financial health and focus on building its
core home nursing services business. First, the Company engaged a team of
experienced turnaround specialists to improve the operating and financial
performance of the Company. During the fourth quarter of 1996, corporate
overhead was reduced by more than $4 million per annum and branch level overhead
and direct costs were reduced by more than $2.5 million per annum. Second, the
Company sold the business and operating assets of its home infusion therapy
operations as of October 1, 1996. Finally, the Company settled all of its
material litigation and reduced the borrowings under the Company's revolving
credit facility from $8.9 million on September 30, 1996 to $5.0 million on
December 31, 1996.

         During 1997, the Company pursued the possibility of merging the
Company with a larger healthcare

                                       15
<PAGE>   19
company, culminating in the execution of an agreement to merge with Home Health
Corporation of America (HHCA) in September 1997.

         US HomeCare announced in December, 1997 that the New York State
Attorney General's office had initiated a broad-based investigation into the
billing and other practices of companies providing home health care services in
New York under Medicaid-funded state programs. US HomeCare was included in the
investigation.

         The Company cooperated fully with the State's investigation. In
addition, the Company hired outside counsel and initiated its own internal
investigation of its billing practices and Medicaid rates. Because of the
Company's pending merger with HHCA, US HomeCare asked the Attorney General for
expedited review of its investigation of the Company.

         Based on its internal review, the Company concluded that it had
meritorious legal defenses for substantially all potential claims by the state
for monetary or other penalties based on cost reporting and billing practices
related to Medicaid-funded home health care programs. However, the Company also
believed that it could take substantial time and expense to litigate any of
these issues to their conclusion. The Company in January 1998 entered into
negotiations with the office of the Attorney General in an effort to reach a
rapid resolution of the investigation.

         On Wednesday, February 11, 1998, the Company and Home Health
Corporation of America (HHCA) announced that they had mutually terminated their
merger agreement.

         Under the terms of a final agreement signed on February 27, 1998, the
Company has agreed to settle the state's investigation of Medicaid billing for
the period 1992 through 1997 for a monetary payment of $1.75 million, payable
with interest over a period of 36 months. This settlement was accrued as of
December 31, 1997. The full amount of the settlement may be prepaid at any time,
and the Company has agreed with the state that it will use reasonable efforts to
refinance the amount of the settlement as soon as possible.



                                       16
<PAGE>   20
RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

         Net revenues from continuing (nursing) operations were $52.6 million in
1997 compared to $55.1 million in 1996. The $2.5 million decline (4.4%) was due
to a combination of rate and volume impacts. In most of the Company's markets
we maintained our revenue base, but in several we experienced declines due to
loss of contracts or due to continued pressure by payor agencies to control
costs by cutting utilization and by trimming back on rates they pay for our
services.

         Cost of revenues as a percentage of net revenues decreased to 62.0% in
1997 as compared to 68.6% in 1996. The decrease in cost of revenues reflected
efforts of company management to more closely monitor costs. Specific areas of
cost containment included the management of overtime, transportation
costs, and the productivity of salaried clinical resources. Management believes
that these savings are permanent.

         Selling, general and administrative expense decreased by $3.1 million
or 16.2% to $15.9 million in 1997 compared to $19.0 million for 1996. This
decrease primarily reflects the benefits of the restructuring accomplished in
the fourth quarter of 1996, primarily the elimination of excessive levels of
corporate staff, and tighter control over a wide variety of administrative
expenses.

         Interest expense was $0.9 million in 1997 or 21.9% lower than in 1996.
The decrease reflects the reduction of average borrowings under the Company's
bank facilities in 1997.

         During the year the Company also incurred a $1.75 million cost of
settling a regulatory matter with the State of New York, as described in Note
13. This settlement related to Medicaid contract years from 1992 through 1997.

         The Company also incurred $907,000 of expenses related to the
terminated merger with Home Health Corporation of America. These expenses were
largely professional fees paid to investment bankers, accountants and lawyers.

         The Company also incurred an additional non-recurring charge of
$399,000 related to the employment of turnaround consultants, who were
originally hired to work with Company management in September 1996. A separate
agreement was entered into in 1997 principally related to the proposed sale of
the Company.

         Had the Company not incurred the charges for the regulatory settlement,
merger, or other non-recurring charges in 1997, net income would have been
$1,459,000.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

         Net revenues from continuing (nursing) operations were $56.5 million in
both 1996 and 1995.

         Cost of revenues as a percentage of net revenues increased to 69.4% in
1996 as compared to 66.6% in 1995. The increase in cost of revenues reflected
increased workers compensation insurance expense, additional employee benefit
expense, and changes in the mix of direct labor.

         Operating expense increased by $3.8 million or 18.3% to $24.6 million
in 1996 compared to $20.8 million for 1995. This increase primarily reflecting a
restructuring charge in the third and fourth quarters of 1996 of $3.6 million, a
decline in depreciation and amortization expense of $.3 million and an increase
in selling, general and administrative expenses of $.4 million. The increase in
SG&A costs reflected increased workers compensation insurance expense, increased
employee benefits expense, information systems expense and an increase in
personnel and related costs during the first nine months of 1996, offset by the
expense reductions achieved by the restructuring program initiated in late
September 1996.

         The restructuring steps that the Company undertook at the end of
September 1996 resulted in the following. On October 31, 1996, the Company
completed the sale of certain assets (not including accounts receivable) of its
IV therapy business for approximately $2.0 million in cash. The sale had an
effective date of October 1, 1996. As a result of the sale the operations of the
IV therapy business has been treated as a discontinued operation. The Company
recorded a loss on disposal of the IV therapy business of $13.8 million. Such
loss on sale, which was net of the cash proceeds of the sale of approximately
$2,000,000, included (1) a write-off of $11.6 million of goodwill and other
intangible assets, (2) additional provisions for losses on accounts receivable
of $2.6 million, and (3) $1.6 million related to a charge for severance and
other anticipated costs during the phase out period. The loss from IV operations
in the 1996 period was $1.5 million including a provision of $1.1 million for
legal settlements. The Company also recorded a provision for restructuring and
other nonrecurring charges of $3.6 million which was comprised of: severance of
$.6 million, turnaround consultants' compensation of $1.9 million, an increase
in 1994 restructuring reserve of $.5 million and other restructuring costs of
$.6 million (including assets write-offs and lease costs). The reserve
established for compensation

                                       17
<PAGE>   21
for the turnaround consultants includes cash payments totaling $.4 million and
significant performance based equity incentives valued at approximately $1.5
million.

         Interest expense was $1.1 million in 1996 or 25.5% higher than in 1995.
The increase reflects the result of the increased average borrowings under the
Company's bank facilities in 1996.


LIQUIDITY AND CAPITAL RESOURCES

         As of December 31, 1997, the Company had cash and cash equivalents of
approximately $0.3 million. Working capital (deficit) decreased by $3.2 million,
from $(3.5) million at December 31, 1996 to a working capital (deficit) of
($0.3) million at December 31, 1997. The improvement in net working capital was
primarily a result of a reduction in accounts payable, accrued liabilities and
reserves for restructuring and other non-recurring charges offset by collection
of IV receivables.

         The reduction in net accounts receivable resulted primarily from the
reduction of receivables from the Company's discontinued infusion therapy
operations. The Company sold its infusion therapy operations on October 31, 1996
but retained its infusion therapy accounts receivable. Infusion therapy
receivables (including off balance sheet receivables, which were sold under the
securitization program) were $2.0 million on December 31, 1996 and $11,000 at
December 31, 1997.

         Trade accounts payable declined from $3.2 million at December 31, 1996
to $2.5 million at December 31, 1997 reflecting the discontinuance of the
Company's infusion therapy business and the payment of accounts payable from
improved cash flow.

         Accrued expenses decreased from $4.5 million at December 31, 1996 to
$2.8 million at December 31, 1997, resulting primarily from satisfaction of
certain accrued amounts related to the company's discontinued operations and
payments of legal settlements.

         Cash flow from operating activities for the year ended December 31,
1997 declined $5.4 million to $.6 million from $6.0 million for the year ended
December 31, 1996. This decline was principally due to the reduction of reserves
for restructuring and other non-recurring charges, payments of accounts payable
and accrued liabilities, and payments for merger expenses. Cash flow for
financing activities was ($0.8) million for the year ended December 31, 1997,
compared to ($5.3) million for the year ended December 31, 1996.

         The Company has a revolving line of credit ("RLOC"), with availability
based upon a stated formula applied to "eligible" accounts receivable balances.
Borrowings bear interest at the higher of the bank's prime rate plus 2.0% or the
federal funds rate plus 1.0%. Remaining availability under the RLOC at December
31, 1997 was $1.0 million. Borrowings under the RLOC are collateralized by
substantially all of the Company's assets. The terms of the RLOC provide, among
other things, for prepayments in the event that the Company's formula based
borrowing capacity is reduced, for maintenance of certain financial ratios and
limitations on capital expenditures, acquisitions, and cash dividends. On
December 24, 1997 the RLOC agreement was amended and restated to include a
revised maturity date of March 31, 1998. On March 26, 1998, the RLOC was
extended to January 4, 1999.

         The Company has a $3.0 million subordinated credit facility the
("Subordinated Credit

                                       18
<PAGE>   22
Facility") with a commercial bank. The Subordinated Credit Facility is 100%
guaranteed by the Connecticut Development Authority ("CDA"). On December 24,
1997 the maturity of the Subordinated Credit Facility was extended to March 31,
1998 and the CDA guarantee was extended to March 31, 1998. In connection with
the October 1995 issuance of the CDA guarantee, the Company agreed to issue
additional warrants (the "Additional Warrants") to the CDA to purchase 735,000
shares of the Company's common stock for $1.5969 per share if the guarantee was
not released by April 30, 1997. As a result of the previous extension of the CDA
guarantee to January 30, 1998 the Company issued the Additional Warrants to the
CDA on March 25, 1997. On March 26, 1998, the Fleet note was extended to
January 15, 1999, and the CDA guarantee was extended to January 30, 1999.

         The Company has a Receivables Purchase and Servicing Agreement (the
"Securitization Program"), which allows the Company to sell for cash an
undivided percentage ownership interest in a designated pool of eligible
receivables, as defined. The Company relies on this accounts receivable
financing to fund working capital for current operations. The maximum amount of
cash advances (based on eligible accounts receivable) allowed under the program
is $9.0 million. The net proceeds from the sale of accounts receivable through
the Securitization Program at December 31, 1997 were $6.9 million. On December
24, 1997 the maturity date of the Securitization Program was extended to March
31, 1998. On March 26, 1998, the program was extended to January 4, 1999.

         Sales of substantial amounts of Common Stock in the public market in
the future could adversely affect the prevailing market price of the Company's
Common Stock. As outlined above, on March 25 and March 27, 1997, the Company
issued Warrants exercisable for an aggregate of 913,000 shares of Common Stock
exercisable at $1.5969 per share to its RLOC banks and the CDA. In addition,
during 1996 the Company issued or committed to issue an aggregate of 644,000
shares in exchange for the cancellation of certain of the Company's obligations
(the "Common Shares"). The foregoing securities are all restricted securities
within the definition of Rule 144 and are subject to certain resale provisions
relating to the manner and notice of sale, availability of current public
information about the Company and volume limitations. The holders of the
foregoing securities are entitled to have such shares registered by the Company
under the Securities Act of 1933, as amended. The Company filed a registration
statement registering approximately 11,900,000 shares of Common Stock for resale
in the second quarter of 1997 and plans to keep such registration statement
effective for a minimum of three years.

         The Company believes that its cash position and liquidity will continue
to require careful management for the foreseeable future. Cash availability
improved during the last quarter of 1996 and in 1997, and the Company expects
this improvement to continue in the future.

         The Company believes that its existing credit facilities, together with
cash generated from operations, will be sufficient to fund the Company's
operations and debt obligations through 1998. Beyond 1998, the Company believes
that it will need to replace its existing credit facilities to ensure sufficient
funding of the Company's operations. The Company is currently in the process of
replacing its current credit facilities with a new lender.


YEAR 2000 COMPLIANCE

         The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a
2-digit year is commonly referred to as the Year 2000 Compliance issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
date-based information.

         The Company has identified all significant applications that will
require modification to ensure Year 2000 Compliance. Internal and external
resources are being used to make the required

                                       19
<PAGE>   23
modifications and test Year 2000 Compliance. The Company plans on completing the
testing process of all significant applications by December 31, 1998.

         The total cost to the Company of those Year 2000 Compliance activities
has not been and is not anticipated to be material to its financial position or
results of operations in any given year. These costs and the date on which the
company plans to complete the Year 2000 modification and testing processes are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, third party modifications plans and other factors. However, there can
be no guarantee that these estimates will be achieved and actual results could
differ from those plans.

                                       20
<PAGE>   24
QUARTERLY INFORMATION

         The following table presents unaudited financial data for the eight
quarters beginning January 1, 1996. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) necessary have been
made to present fairly the following selected quarterly information when read in
conjunction with the consolidated financial statements included elsewhere
herein.

<TABLE>
<CAPTION>
                                                       FIRST            SECOND           THIRD            FOURTH
                                                      QUARTER           QUARTER         QUARTER           QUARTER
                                                      -------           -------         -------           -------
                                                             (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                  <C>               <C>              <C>               <C>
1997
Net revenues................................         $ 13,754          $ 13,976         $ 12,195          $ 12,710
Income/(loss) from continuing operations
     before interest and income taxes.......            1,213             1,246             (653)           (2,401)
Net income (loss) ..........................              955               961             (900)           (2,613)
Net income (loss) applicable to common
     shareholders...........................              783               789           (1,073)           (2,786)
Basic income (loss) per share(a)............         $    .08          $    .08         $   (.11)         $   (.23)
Diluted income (loss) per share.............         $    .05          $    .05         $   (.11)         $   (.23)

1996
Net revenues................................         $ 13,776          $ 14,032         $ 13,094          $ 14,183
Income/(loss) from continuing operations
     before interest and income taxes.......             (423)             (242)          (8,300)            1,657
Income/(loss) from discontinued
     operations ............................              171               (62)         (14,452)             (900)
Net income (loss) ..........................             (567)             (608)         (23,073)              455
Net income (loss) applicable to common
     shareholders...........................             (739)             (780)         (23,246)              282
Basic income (loss) per share(a)............         $   (.09)         $   (.09)        $  (2.56)         $    .03
Diluted income (loss) per share.............         $   (.09)         $   (.09)        $  (2.56)         $    .03
</TABLE>


         During the fourth quarter of 1996, the Company recorded an adjustment
to reduce its provision for restructuring and other non-recurring charges by $.9
million based upon a reevaluation of the cost of such reorganization. Also, in
the fourth quarter of 1996 the Company increased its loss on discontinued
operations by $.9 million to adjust its estimate for uncollectable IV therapy
receivables.

         During the fourth quarter of 1997 the Company recorded an accrual for
$1.75 million representing the costs of settlement of the New York Medicaid
investigation. Also in the fourth quarter, the Company recognized an additional
$319,000 of expenses related to the now terminated merger with HHCA.

(a) The sum of the quarterly basic amounts do not equal the annual amounts due
to rounding.

ITEM 7A. MARKET RISK DISCLOSURES

         None

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                  The information required by the item is set forth in the
Consolidated Financial Statements on F-1 through F-18 and in the Financial
Statement Schedule in S-1 of this report on Form 10-K.


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

         None

                                       21
<PAGE>   25
                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT


         The directors and executive officers of the Company and their ages are
as follows:


<TABLE>
<CAPTION>
NAME                                           AGE         POSITION WITH THE  COMPANY
----                                           ---         --------------------------
<S>                                            <C>         <C>
Jay C. Huffard (2)                             56          President, Chief Executive Officer,
                                                           Chairman of the Board and Director

Clifford G. Johnson                            43          Vice President, Finance and Administration,
                                                           Chief Financial Officer, and Corporate Secretary

Hadley C. Ford (3)(4)                          62          Director

John R. Gunn (1)(3)                            54          Director

W. Wallace McDowell, Jr.(2)(4)                 61          Director

Shawkat Raslan (2)(3)                          46          Director

Susan S. Robfogel, Esq.(1)(4)                  55          Director
</TABLE>

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

(1) Member of the Nominating Committee of which Ms. Robfogel is Chairperson.
(2) Member of the Executive Committee of which Mr. Huffard is Chairperson.
(3) Member of the Audit Committee of which Mr. Gunn is Chairperson.
(4) Member of the Compensation Committee of which Mr. McDowell is Chairperson.

         The Company's directors hold office until the next annual meeting of
shareholders or until their successors have been duly elected and qualified. The
Company's officers are elected annually by the Board of Directors and serve at
the discretion of the Board. Each director who is not an employee of the Company
receives an annual retainer of $10,000 as compensation for services as a
director, except for Mr. Huffard who receives an additional annual fee of
$40,000 for his services as Chairman of the Board, and $60,000 for his services
as President. Each director who is not an employee of the Company also receives
a fee of $1,000 for attending each regular or special meeting of the Board or of
its committees. The non-employee directors are also reimbursed for expenses
incurred in connection with performing their respective duties as directors of
the Company. Directors who are employees receive no additional compensation for
their services as directors of the Company. During 1995, the Board did not
receive its $10,000 retainer and meeting fees. The Company satisfied the 1995
amounts as well as the 1996 amounts due during 1996 through the issuance of
shares of Common Stock equal in value to such fees. Fees for 1997 were also paid
in stock, with the final stock issuance occurring in January 1998.

         Jay C. Huffard has been a director of the Company since 1988, Chairman
of the Board of Directors since July 1991, interim President and Chief Executive
Officer from October 1996 to July

                                       22
<PAGE>   26
1997, at which time he was named President and Chief Executive Officer. Since
1988, Mr. Huffard has been Managing Director of Huffard & Co. LP From 1987 to
1988, he was Chief of Staff to the Chairman of The Equitable. From 1980 to 1988,
Mr. Huffard served in various executive capacities at Donaldson, Lufkin &
Jenrette Securities Corporation, including Executive Vice President and Managing
Director, and Chairman or Chief Executive of certain direct or indirect
subsidiaries thereof. Since 1993 Mr. Huffard has been a Managing Director and
Principal of Prima Management Corp., a direct investment firm.

         Clifford G. Johnson joined the Company in April 1997 and served as Vice
President, Finance and Administration & Chief Financial Officer of the Company
since May 1997. Prior to joining the Company, Mr. Johnson was Chief Financial
Officer of Medical Alliances, Inc. from April 1996 to April 1997, Controller of
Physicians Health Services from September 1994 to December 1995, Controller and
Treasurer of Connecticare, Inc. from August 1992 to September 1994, various
management positions at Aetna Life and Casualty from July 1982 to August 1992.
Prior to July 1982 Mr. Johnson was with Coopers and Lybrand. Mr. Johnson is a
Certified Public Accountant.

         W. Wallace McDowell, Jr., has been a director of the Company since
August 1992. Since December 1994, Mr. McDowell has been a private investor. From
January 1991 to December 1994 Mr. McDowell has been a Managing Director of MLGAL
Partners, LP, the General Partner of an investment partnership concentrating on
leveraged transactions. From 1983 to 1990, Mr. McDowell was Chairman and Chief
Executive Officer of The Prospect Group, Inc., a public diversified holding
company. He serves as a director of Children's Discovery Centers of America,
Inc., Jack Morton Productions, and Grossman's, Inc., and is Chairman of
Interactive Technologies, Inc. In addition, Mr. McDowell is a Trustee of The
Excelsior Funds, a family of mutual funds.

         Hadley C. Ford has been a director of the Company since November 1994.
Mr. Ford currently is a Senior Advisor to insurance industry clients of Andersen
Consulting. From 1965 until his retirement in 1992, Mr. Ford was with Booz,
Allen & Hamilton, Inc., whose insurance industry consulting practice he founded,
in various executive capacities including Senior Vice President, director and
member of its Operating Council. Mr. Ford serves as non-executive Chairman of
the Board of Gryphon Holdings, Inc., Chairman of the Board of the American
Federation for Aging Research, and is a director and officer of the Atlantic
Salmon Federation (U.S.). In addition, Mr. Ford is a trustee of Helen Keller
International.

         John R. Gunn has been a director of the Company since September 1994.
Since 1987, Mr. Gunn has served as the Executive Vice President and Chief
Operating Officer of Memorial Sloan-Kettering Cancer Center, where he has served
in various executive capacities since 1982. Previously, he was the Vice
President of Finance at Michael Reese Medical Center. Mr. Gunn serves as a board
member of several companies and associations, including the Greater New York
Hospital Association, Empire Blue Cross & Blue Shield, Hospital Association of
New York and Memorial Sloan-Kettering Cancer Center.

        Shawkat Raslan has been a director of the Company since December 1991.
Since 1983, Mr. Raslan has been President and Chief Executive Officer of
International Resource Holdings, Inc., an asset management and investment
advisory service for international clients. He serves as a director of several
companies, including Apogee Inc., a mental health rehabilitation company, Foster
Management, a health care investment fund, and Tiedemann Goodnow International,
an equity fund. Since 1993, Mr. Raslan has been a Managing Director and
Principal of Prima Management Corp., a direct investment firm.

         Susan S. Robfogel, Esq. has been a director of the Company since July
1991. Ms. Robfogel is

                                       23
<PAGE>   27
a partner in the law firm of Nixon, Hargrave, Devans & Doyle with which she has
been associated since October 1985, and is Chair of the Health Services Practice
Group. Ms. Robfogel is a member of the visiting committee of the University of
Rochester School of Medicine and Dentistry. Ms. Robfogel serves on the New York
State Data Protection Review Board for the Commissioner of Health.

Section 16(a) Beneficial Ownership Reporting Compliance

         All required filings were made in a timely fashion.


ITEM 11. EXECUTIVE COMPENSATION

                           SUMMARY COMPENSATION TABLE

         The following table sets forth the annual and long-term compensation
paid by the Company during the 1997, 1996 and 1995 fiscal years to all
individuals serving as the Company's chief executive officer or acting in a
similar capacity during 1997 and the other highest paid executive officers of
the Company whose compensation was in excess of $100,000 as of the end of the
last fiscal year (collectively, the "Named Executive Officers"):

<TABLE>
<CAPTION>
                                          ANNUAL                          LONG-TERM
                                       COMPENSATION                      COMPENSATION
                                                                                  SECURITIES
                                                                  OTHER ANNUAL     UNDERLYING           ALL OTHER
NAME AND PRINCIPAL POSITION         YEAR         SALARY           COMPENSATION     OPTIONS GRANTED      COMPENSATION
                                                   ($)                ($)               (#)                 ($)
<S>                                 <C>         <C>               <C>             <C>                   <C>
Jay C. Huffard                      1997        122,500(3)             0              100,000(4)             0
Interim President, Chief            1996        108,000(1)             0                    0                0
Executive Officer,                  1995         72,000(2)             0                    0                0
Chairman and Director

Clifford G. Johnson                 1997         89,682(5)             0               50,000(4)             0
Vice President, Finance and         1996         N/A                   N/A            N/A                    N/A
Administration & Chief              1995         N/A                   N/A            N/A                    N/A
Financial Officer
</TABLE>

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



(1)      Mr. Huffard was appointed Interim President and Chief Executive Officer
         of the Company in October 1996. The figure of $108,000 includes Mr.
         Huffard's actual earnings for the period from October 1, 1996 to
         December 31, 1996 of $15,000. For the period January to December 1996,
         he received $40,000 in compensation for his role as chairman of the
         Company and $28,000 in compensation for his role as a director of the
         Company. Mr. Huffard received an additional $25,000 for additional
         services rendered to the Company. Of the $108,000 paid to Mr. Huffard
         in 1996, $55,000 was paid in cash and $53,000 in Common Stock of the
         Company.

(2)      The figure of $72,000 includes $40,000 in cash received in compensation
         for his role as chairman of the Company and $32,000 in Common Stock of
         the Company received in compensation for his role as director of the
         Company.

(3)      Mr. Huffard's 122,500 consists of $60,000 paid as compensation for
         services as President, $40,000 for service as Chairman, and $22,500
         as fees for attending various Board meetings. The $22,500 was paid with
         Common Stock.
                                       24

<PAGE>   28
(4)      Granted pursuant to the 1995 Stock Option/ Stock Issuance Plan.

(5)      Mr. Johnson received $89,682 during 1997, based on a salary of
        $125,000 per annum.





EMPLOYMENT ARRANGEMENTS

         Jay C. Huffard's annual compensation as President & Chief Executive
Officer is $60,000. Mr. Huffard's annual compensation as Chairman of the Board
is $40,000.

         Clifford G. Johnson's annual salary as Vice President, Finance and
Administration & Chief Financial Officer of the Company was $125,000 with a
target bonus opportunity of $30,000. Stock options to purchase an aggregate of
50,000 shares of Common Stock were granted to Mr. Johnson on May 12, 1997. The
commencement date of his employment with the Company was April 8, 1997. These
options are exercisable at $1.00, the fair market value of the Company's Common
Stock on the grant date. Of the 50,000 option shares, one third were vested on
issuance, with the remaining vesting on May 12, 1998 and 1999 (subject to
acceleration of vesting upon an acquisition of the Company by a merger or by a
stock or asset sale).

         In the event that Mr. Johnson's employment is terminated, he is
entitled to his base salary, on a monthly basis, for six months.

                                       25
<PAGE>   29
                     OPTIONS/SAR GRANTS IN LAST FISCAL YEAR

         The following table shows, with respect to the Named Executive
Officers, certain information concerning the grant of stock options in 1997.


<TABLE>
<CAPTION>
                           INDIVIDUAL GRANTS                                     POTENTIAL REALIZABLE
                                                                                    VALUE AT ASSUMED
                                                                                 ANNUAL RATES OF STOCK
                                                                                 PRICE APPRECIATION FOR
                                                                                   OPTION TERM(1)
----------------------------------------------------------------------------------------------------------------------------
NAME                   NUMBER OF             PERCENT OF           INITIAL            EXPIRATION        5%                10%
                       SECURITIES            TOTAL OPTIONS        EXERCISE           DATE
                       UNDERLYING            GRANTED TO           PRICE
                       OPTIONS               EMPLOYEES IN         ($/SHARE)
                       GRANTED               FISCAL YEAR(2)
                       ----------           ---------------       ---------          ----------       ------           -----
<S>                  <C>                    <C>                  <C>                <C>              <C>              <C>
Jay C. Huffard        100,000(4)                 67%                $1.00             1/7/07           152,790         143,293
Clifford G. Johnson    50,000(3)                 33%                $1.00            5/12/07          $ 31,445        $ 79,687
                                             ------                                  -------           -------         -------
</TABLE>

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

(1       This column reflects the potential realizable value of each grant
         assuming that the market value of the Company's stock appreciates at
         five percent and ten percent annually from the date of grant over the
         term of the option. There is no assurance provided to any executive
         officer or any other holder of the Company's securities that the actual
         stock price appreciation over the option term will be at the assumed
         five percent and ten percent levels or at any other defined level.
         Unless the market price of the Common Stock does in fact appreciate
         over the option term, no value will be realized from the option grants
         made

(2)      Based on options for 50,000 shares granted to employees and directors
         in 1996 under the Company's 1995 Stock Option/Stock Issuance Plan.

(3)      Mr. Johnson was granted an option on May 12, 1997 to purchase 50,000
         shares of the Company's Common Stock at and exercise price of $1.00 per
         share. On May 12, 1997, the fair value of the Company's stock was
         $1.00.

(4)      Mr. Huffard was granted an option on January 7, 1997 to purchase
         100,000 shares of the Company's Common Stock at $1.00 per share, which
         exceeded the market value at the time of the grant.

                                       26
<PAGE>   30
                 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                        AND FISCAL YEAR-END OPTION VALUES


         The following table sets forth certain information with respect to the
Named Executive Officers regarding stock options during the year ended December
31, 1997. No stock options were exercised by such persons in 1997.

<TABLE>
<CAPTION>
                                      NUMBER OF                                 VALUE OF
                                UNEXERCISED OPTIONS AT                         UNEXERCISED
                                   FISCAL YEAR END                       IN-THE-MONEY OPTIONS AT
                                                                           FISCAL YEAR END (1)
NAME                        EXERCISABLE      UNEXERCISABLE            EXERCISABLE         UNEXERCISABLE
----                        -----------      -------------            -----------         -------------
<S>                         <C>              <C>                      <C>                 <C>
Jay C. Huffard                 85,000           140,000                    0                   0
Clifford G. Johnson            16,666            33,334                    0                   0
</TABLE>


(1)      Based on a closing price on the OTC Market of $.938 per share of Common
         Stock on December 31, 1997, there were no unexercised in-the-money
         options.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         During 1997, Messrs. Ford and McDowell and Ms. Robfogel served as
members of the Compensation Committee. There were no Compensation Committee
interlocks between the Company and any other entity during 1997. Ms. Robfogel is
a partner in the law firm of Nixon, Hargrave, Devans & Doyle, which the Company
has retained from time to time.

                                       27
<PAGE>   31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

                             PRINCIPAL STOCKHOLDERS

         The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 14, 1997 by (i) each
director, (ii) each of the Named Executive Officers, (iii) each person known by
the Company to be the beneficial owner of more than 5% of the Company's Common
Stock and (iv) all executive officers and directors as a group.

<TABLE>
<CAPTION>
                                                                                          PERCENT OF
                                                          SHARES BENEFICIALLY               SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER(1)                        OWNED(2)                  OUTSTANDING(2)
---------------------------------------                        --------                  --------------
<S>                                                       <C>                           <C>
Jay C. Huffard                                                1,253,647(6)(7)(8)              9.7%

Clifford G. Johnson                                                  16,666(3)                *

W. Wallace McDowell, Jr                                             140,784(7)(9)             1.2%

Shawkat Raslan                                                      924,650(7)(8)             7.2%
   c/o International Resources Holdings, Inc.
770 Lexington Ave New York, NY 10021

Susan S. Robfogel                                                    65,273(7)                *

John R. Gunn                                                         71,386(7)                *

Hadley C. Ford                                                      101,232(7)(10)            *

All directors and executive officers as a group
  (7 persons)                                                     1,766,376(11)               13.5%

John W. Gildea                                                    1,735,819(12)               14.3%

Network Fund III, Ltd.                                            1,076,819(12)                8.9%

Connecticut Development Authority                                 1,551,302                   11.4%
     999 West Street
     Rocky Hill, CT  06067

W. Edward Massey                                                  1,013,179(12)                8.4%
     173 Spring Valley Road
     Ridgefield, Connecticut 06877

Prima Partners, L.P                                                  807,262(7)                8.3%
     115 East 69th Street
     New York, New York 10021

Don A. Sanders                                                     1,631,734(4)               12.8%
     c/o Sanders Morris Mundy Inc.
     3100 Texas Commerce Tower
     Houston, TX 77002
</TABLE>

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

*        Less than one percent.

(1)      Except as where noted otherwise, the address of all persons listed is
         c/o U.S. HomeCare Corporation, Two Hartford Square West, Suite 300,
         Hartford, Connecticut 06106.

(2)      Gives effect to the shares of Common Stock issuable within 60 days
         after December 31, 1996 upon the conversion of the $35.00 Preferred and
         the exercise of all options, warrants and other rights beneficially
         held by the indicated shareholder of that date.

                                       28
<PAGE>   32
(3)      Includes 16,666 shares issuable upon exercise of options granted under
         the 1995 Stock Option and Issuance Plan.

(4)      Includes 355,876 shares of Common Stock held by The Lindward Group, of
         which W. Edward Massey, is a general partner. Also includes 3,984
         shares of Common Stock held by Mr. Massey under the Company's ESOP.

(5)      Includes 428,580 shares of Common Stock issuable upon conversion of
         21,429 shares of $35.00 Preferred and 2,501 shares of Common Stock
         issuable upon exercise of warrants.

(6)      Includes 185,552 shares of Common Stock held by Huffard & Co. L.P., of
         which Jay C. Huffard, Chairman of the Board and a director of the
         Company, is managing director of the general partner thereof and stock
         options for 118,333 shares of Common Stock. Does not include additional
         stock options for 106,667 shares, which will not vest within 60 days of
         December 31, 1997.

(7)      Includes 25,000 shares of Common Stock issuable upon exercise of a
         stock option granted pursuant to the 1995 Plan's Automatic Grant
         Program for non-employee directors.

(8)      Includes 629,708 shares of Common Stock of the Company issuable upon
         conversion of 28,928 shares of $35.00 Preferred of the Company held by
         Prima Partners, L.P. Also includes 37,499 shares of Common Stock
         issuable upon exercise of warrants issued to Prima Management Corp.,
         the general partner of Prima Partners, L.P. Messrs. Huffard and Raslan
         are officers, directors and shareholders of Prima Management Corp. and
         are special limited partners of Prima Partners, L.P.

(9)      Includes 31,107 shares of Common Stock of the Company issuable upon
         conversion of 1,429 shares of $35.00 Preferred. Also includes 2,501
         shares of Common Stock issuable upon exercise of warrants.

(10)     Includes 32,652 shares of Common Stock of the Company issuable upon
         conversion of 1,500 shares of $35.00 Preferred.

(11)     See Notes (2) through (10).

(12)     Includes 1,076,819 shares held by Network Fund III Ltd and 539,000
         shares held by Network Fund IV, Ltd. Mr. Gildea is a manager of both
         funds.

ITEM 13. CERTAIN RELATIONSHIPS AND CERTAIN TRANSACTIONS

         For information regarding employment and severance agreement. (See
Employment Arrangements)

         Ms. Robfogel is a partner in the law firm of Nixon, Hargrave, Devans &
Doyle, which the Company has retained from time to time.

                                       29
<PAGE>   33
                                     PART IV


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

Exhibit
Number

1.       Financial Statement and Schedules. The Financial Statements and
         Financial Statement Schedules required to be included in this report
         are listed on page F-1 hereof and attached hereto on pages F-2 through
         F-18 and S-1. All other required schedules have been omitted because
         the required information is shown in the consolidated financial
         statements or the notes thereto.

(b)      Reports on Form 8-K None.

(c)      Exhibits Required by Regulation S-K

3(i)     Restated Certificate of Incorporation. (Filed as Exhibit 3(a) to the
         Registrant's Registration Statement on Form S-1 (Registration No.
         33-40288) and incorporated herein by reference.)

3(i)(a)  Certificate of Amendment of Certificate of Incorporation regarding
         $35.00 6% Convertible Preferred Stock. (Filed as Exhibit 3(i)(a) to the
         Registrant's Form 10-K for the year ended December 31, 1994 and
         incorporated herein by reference.)

3(ii)    Bylaws. (Filed as Exhibit 3(b) to Registrant's Registration Statement
         on Form S-1 (Registration No. 33-40288) and incorporated herein by
         reference.)

4.1      Shareholders and Registration Rights Agreement dated as of March 15,
         1989. (Filed as Exhibit 10(g) to the Registrant's Registration
         Statement on Form S-1 (Registration No. 33-40288) and incorporated
         herein by reference.)

4.2      Form of 9% Convertible Subordinated Debenture. (Filed as Exhibit 10(h)
         to the Registrant's Registration Statement on Form S-1 (Registration
         No. 33-40288) and incorporated herein by reference.)

4.3      Standstill Agreement among Florence Katz, Judith Smith, Steven Cole and
         Registrant dated February 1, 1988. (Filed as Exhibit 10(i) to the
         Registrant's Registration Statement on Form S-1 (Registration No.
         33-40288) and incorporated herein by reference.)

4.4      Stock Purchase Warrant, dated October 6, 1995, granted to The Chase
         Manhattan Bank. (Filed as Exhibit 4.4 to the Registrant's Annual Report
         Form 10-K for the year ended December 31, 1996 and incorporated herein
         by reference.)

                                       30
<PAGE>   34
4.5      Stock Purchase Warrant, dated October 6, 1995, granted to Connecticut
         Development Authority. (Filed as Exhibit 4.5 to the Registrant's Annual
         Report on Form 10-K for the year ended December 31, 1996 and
         incorporated herein by reference.)

4.6      Stock Purchase Warrant, dated October 6, 1995, granted to Creditanstalt
         Bankverein. (Filed as Exhibit 4.6 to the Registrant's Annual Report on
         Form 10-K for the year ended December 31, 1996 and incorporated herein
         by reference.)

4.7      Stock Purchase Warrant, dated March 25, 1997, granted to The Chase
         Manhattan Bank. (Filed as Exhibit 4.7 to the Registrant's Annual Report
         on Form 10-K for the year ended December 31, 1996 and incorporated
         herein by reference.)

4.8      Stock Purchase Warrant, date March 25, 1997, granted to Connecticut
         Development Authority. (Filed as Exhibit 4.8 to the Registrant's Annual
         Report on Form 10-K for the year ended December 31, 1996 and
         incorporated herein by reference.)

4.9      Stock Purchase Warrant, dated March 25, 1997, granted to Creditanstalt
         Bankverin. (Filed as Exhibit 4.9 to the Registrant's Annual Report on
         Form 10-K for the year ended December 31, 1996 and incorporated herein
         by reference.)

4.10     Amendment to Stock Purchase Warrant No. WA-16 dated March 25, 1998
         between Registrant and The Chase Manhattan Bank, N.A.

4.11     Amendment to Stock Purchase Warrant No. WA-17 dated March 25, 1998
         between Registrant and the Connecticut Development Authority.

4.12     Amendment to Stock Purchase Warrant No. WA-18 dated March 25, 1998
         between Registrant and Creditanstalt AG.

10.1     Credit Facility with Bank of New York Commercial Corporation dated
         March 15, 1989 and related amendments dated February 6, 1991 and April
         25, 1991. (Filed as Exhibit 10(f) to the Registrant's Registration
         Statement on Form S-1 (Registration No. 33-40288) and incorporated
         herein by reference.)

10.2     1991 Employee Stock Purchase Plan. (Filed as Exhibit 10(m) to the
         Registrant's Registration Statement on Form S- 1 (Registration No.
         33-45748) and incorporated herein by reference.)

10.3     Agreement of Lease dated February 28, 1991. (Filed as Exhibit 10(k) to
         the Registrant's Registration Statement on Form S-1 (Registration No.
         33-40288) and incorporated herein by reference.)

10.4     Letter of Intent dated February 12, 1992 with the Bank of New York to
         extend and amend Revolving Credit and Security Agreement included as
         Exhibit 4. (Filed as Exhibit 10(o) to the Registrant's Registration
         Statement on Form S-1 (Registration No. 33-45748) and incorporated
         herein by reference.)

10.5     Employee Stock Ownership Plan, as amended. (Filed as Exhibit 10(c) to
         the Registrant's Registration Statement on Form S-1 (Registration No.
         33-40288) and incorporated herein by reference.)

10.6     1995 Stock Option/Stock Issuance Plan. (Filed as Exhibit 99.1 to the
         Registrant's Registration Statement on Form S-8 (Registration No.
         333-31177) and incorporated herein by reference.)

10.7     401(k) Plan, as amended. (Filed as Exhibit 10(d) to the Registrant's
         Registration Statement on Form S-1 (Registration No. 33-40288) and
         incorporated herein by reference.)

                                       31
<PAGE>   35
10.8     Lease Agreement dated January 31, 1992. (Filed as Exhibit 10(n) to the
         Registrant's Registration Statement on Form S- 1 (Registration No.
         33-45748) and incorporated herein by reference.)

10.9     Lease Agreement dated July 28, 1988. (Filed as Exhibit 10(e) to the
         Registrant's Registration Statement on Form S-1 (Registration No.
         33-40288) and incorporated herein by reference.)

10.10    Credit facility with The Chase Manhattan Bank dated March 19, 1993.
         (Filed as Exhibit 19 to the Registrant's Form 10-K for the year ended
         December 31, 1992 and incorporated herein by reference.)

10.11    Lease Agreement dated May 18, 1992. (Filed as Exhibit 20 to the
         Registrant's Form 10-K for the year ended December 31, 1992 and
         incorporated herein by reference.)

10.12    Lease Agreement dated July 1, 1992. (Filed as Exhibit 21 to the
         Registrant's Form 10-K for the year ended December 31, 1992 and
         incorporated herein by reference.)

10.13    Lease Agreement dated August 1, 1992. (Filed as Exhibit 22 to the
         Registrant's Form 10-K for the year ended December 31, 1992 and
         incorporated herein by reference.)

10.14    Lease Agreement dated November 18, 1992. (Filed as Exhibit 23 to the
         Registrant's Form 10-K for the year ended December 31, 1992 and
         incorporated herein by reference.)

10.15    Amendment No. 1 to Credit facility with The Chase Manhattan Bank dated
         November 8, 1993. (Filed as Exhibit 24 to the Registrant's Form 10-K
         for the year ended December 31, 1993 and incorporated herein by
         reference.)

10.16    Letter Agreement with The Chase Manhattan Bank dated March 28, 1994.
         (Filed as Exhibit 25 to the Registrant's Form 10-K for the year ended
         December 31, 1993 and incorporated herein by reference.)

10.17    Stock Purchase Agreement for $35 6% Convertible Preferred Stock, dated
         January 31, 1995. (Filed as Exhibit 10.18 to the Registrant's Form 10-K
         for the year ended December 31, 1994 and incorporated herein by
         reference.)

10.18    Employment Agreement of Stephen H. Matheson, dated January 27, 1995.
         (Filed as Exhibit 10.19 to the Registrant's Form 10-K for the year
         ended December 31, 1994 and incorporated herein by reference.)

10.19    Amendment No. 4 to Credit facility with The Chase Manhattan Bank, dated
         January 31, 1995. (Filed as Exhibit 10.20 to the Registrant's Form 10-K
         for the year ended December 31, 1994 and incorporated herein by
         reference.)

                                       32
<PAGE>   36
10.20    Form of Stock Purchase Warrant, dated February 1, 1995. (Filed as
         Exhibit 10.21 to the Registrant's Form 10-K for the year ended December
         31, 1994 and incorporated herein by reference.)

10.21    Amended and Restated Credit Agreement dated October 6, 1995, among U.S.
         HomeCare Corporation and its Consolidated Subsidiaries, signatory
         thereto, the Banks signatory thereto and The Chase Manhattan Bank, N.A.
         as Agent. (Filed as Exhibit 3 to the Registrant's Form 10-Q for the
         quarter ended September 30, 1995 and incorporated herein by reference.)

10.22    Credit Agreement dated October 6, 1995 among U.S. HomeCare Corporation
         and its Consolidated Subsidiaries, signatory thereto, and Fleet Bank,
         National Associate. (Filed as Exhibit 4 to the Registrant's Form 10-Q
         for the quarter ended September 30, 1995 and incorporated herein by
         reference.)

10.23    Guarantee Agreement dated October 6, 1995 between Connecticut
         Development Authority and Fleet Bank, National Association. (Filed as
         Exhibit 5 to the Registrant's Form 10-Q for the quarter ended September
         30, 1995 and incorporated herein by reference.)

10.24    Amendment Number 1, dated October 31, 1996, to the Amended and Restated
         Credit Agreement among U.S. HomeCare Corporation and its Consolidated
         Subsidiaries, signatory thereto, the Banks signatory thereto and The
         Chase Manhattan Bank, N.A., as agent. (Filed as Exhibit 10.24 to the
         Registrant's Annual Report on Form 10-K for the year ended December 31,
         1996, and incorporated herein by reference.)

10.25    Amendment Number 2, dated November 14, 1996 to the Amended and Restated
         Credit Agreement among U.S. HomeCare Corporation and its Consolidated
         Subsidiaries, signatory thereto, the Banks signatory thereto and The
         Chase Manhattan Bank, N.A., as agent. (Filed as Exhibit 10.25 to the
         Registrant's Annual Report on Form 10-K for the year ended December 31,
         1996, and incorporated herein by reference.)

10.26    Amendment Number 3, dated March 25, 1997, to the Amended and Restated
         Credit Agreement among U.S. HomeCare Corporation and its Consolidated
         Subsidiaries, signatory thereto, the Banks signatory thereto and The
         Chase Manhattan Bank, N.A., as agent. (Filed as Exhibit 10.26 to the
         Registrant's Annual Report on Form 10-K for the year ended December 31,
         1996, and incorporated herein by reference.)

10.27    Amendment Number 4, dated December 24, 1997, to the Amended and
         Restated Credit Agreement amount U.S. HomeCare Corporation and its
         Consolidated Subsidiaries, signatory thereto, the Banks signatory
         thereto and The Chase Manhattan Bank, as agent.

10.28    Amendment Number 5, dated as of March 25, 1998, to the Amended and
         Restated Credit Agreement among U.S. HomeCare Corporation and its
         Consolidated Subsidiaries, signatory thereto, the Banks signatory

                                       33
<PAGE>   37
         thereto and The Chase Manhattan Bank, N.A., as agent.

10.29    Amendment Number 1, dated November 14, 1996, to the Credit Agreement
         among U.S. HomeCare Corporation and its Consolidated Subsidiaries,
         signatory thereto, and Fleet Bank, National Associate. (Filed as
         Exhibit 10.27 to the Registrant's Annual Report on Form 10-K for the
         year ended December 31, 1996, and incorporated herein by reference.)

10.30    Amendment Number 2, dated March 25, 1997, to the Credit Agreement among
         U.S. HomeCare Corporation and its Consolidated Subsidiaries, signatory
         thereto, and Fleet Bank, National Associate. (Filed as Exhibit 10.28 to
         the Registrant's Annual Report on Form 10-K for the year ended December
         31, 1996, and incorporated herein by reference.)

10.31    Amendment Number 3, dated December 24, 1997, to the Credit Agreement
         among U.S. HomeCare Corporation and its Consolidated Subsidiaries,
         signatory thereto, the Banks signatory thereto and Fleet National Bank.

10.32    Amendment Number 4, dated March 24, 1998, to the Credit Agreement among
         U.S. HomeCare Corporation and its Consolidated Subsidiaries, signatory
         thereto, the Banks signatory thereto and Fleet National Bank.

10.33    First Amendment to Guarantee Agreement, dated March 25, 1997 between
         Connecticut Development Authority and Fleet National Bank (Filed as
         Exhibit 10.36 to the Registrant's Annual Report on Form 10-K for the
         year ended December 31, 1996)

10.34    Second Amendment to Guarantee Agreement, dated December 24, 1997
         between Connecticut Development Authority and Fleet National Bank.

10.35    Third Amendment to Guarantee Agreement, dated March 26, 1998
         between Connecticut Development Authority and Fleet National Bank.

10.36    Consulting Agreement between Mehdi Ali and U.S. HomeCare Corporation
         dated October 2, 1996. (Filed as Exhibit 10 (a) to the Registrant's
         Quarterly Report on Form 10-Q for the period ended September 30, 1996
         and incorporated herein by reference).

10.37    Consulting Agreement between James Laird and U.S. HomeCare Corporation
         dated October 2, 1996. (Filed as Exhibit 10 (b) to the Registrant's
         Quarterly Report on Form 10-Q for the period ended September 30, 1996
         and incorporated herein by reference).

10.38    Settlement Agreement and Mutual Release between G. Robert O'Brien and
         U.S. HomeCare Corporation dated October 14, 1996. (Filed as Exhibit
         10.31 to the Registrant's Annual Report on Form 10-K for the year ended
         December 31, 1996, and incorporated herein by reference.)

10.39    Settlement Agreement and Mutual Release between Stephen H. Matheson and
         U.S. HomeCare Corporation dated October 14, 1996. (Filed as Exhibit
         10.32 to the Registrant's Annual Report on Form 10-K for the year ended
         December 31, 1996, and incorporated herein by reference.)

10.40    Asset Purchase Agreement dated as of October 31, 1996 among Transworld
         Acquisition Corp., Transworld Home HealthCare, Inc., U.S. HomeCare
         Infusion Therapy Services Corporation of New Jersey, and U.S. HomeCare
         Corporation. (Filed as Exhibit 10.33 to the Registrant's Annual Report
         on Form 10-K for the year ended December 31, 1996, and incorporated
         herein by reference.)

                                       34
<PAGE>   38
10.41    Settlement Agreement dated as of November 25, 1996, between U.S.
         HomeCare Infusion Therapy Products Corporation and U.S. HomeCare
         Corporation and Edward J. Abel, Abel Health Management Services, Inc.
         and Home Infusion Pharmaceutical Services, Inc. (Filed as Exhibit 10.34
         to the Registrant's Annual Report on Form 10-K for the year ended
         December 31, 1996.)

10.42    Settlement Agreement, dated as of November 25, 1996, between U.S.
         HomeCare Corporation and U.S. HomeCare Infusion Therapy Products
         Corporation and Kingsland Associates. (Filed as Exhibit 10.34 to the
         Registrant's Annual Report on Form 10-K for the year ended December 31,
         1996.)

10.43    Settlement Agreement, dated as of February [ ], 1998 between U.S.
         HomeCare Corporation and the State of New York.

10.44    Employment Agreement of Clifford G. Johnson, dated [ ], 1997.

10.45    Amendment No.4 to Receivable Purchase and Servicing agreement, between
         the Company and Chase Manhattan Bank, dated December 23, 1997.

10.46    Amendment No.5 to Receivables Purchase and Servicing agreement,
         between the Company and Chase Manhattan Bank, dated March 26, 1998.

21.      List of Subsidiaries.


                                       35
<PAGE>   39
27.1     1997 Financial Data Schedule

27.2     Restated 1996 Financial Data Schedule

27.3     Restated 1995 Financial Data Schedule

27.4     Restated Quarter ended March 31, 1997 Financial Data Schedule

27.5     Restated Quarter ended June 30, 1997 Financial Data Schedule

27.6     Restated Quarter ended September 30, 1997 Financial Data Schedule

27.7     Restated Quarter ended March 31, 1996 Financial Data Schedule

27.8     Restated Quarter ended June 30, 1996 Financial Data Schedule

27.9     Restated Quarter ended September 30, 1996 Financial Data Schedule

                                       36
<PAGE>   40
                                   SIGNATURES

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

U.S. HomeCare Corporation

<TABLE>
<CAPTION>
<S>                                                                    <C>
By:/s/ Jay C. Huffard                                                  March 30, 1998
------------------------------------------
Jay C. Huffard, Interim President
and Chief Executive Officer

By:/s/ Clifford G. Johnson                                             March 30, 1998
------------------------------------------
Clifford G. Johnson, Vice President,
Finance and Administration and Chief
Financial Officer  (Principal Financial and
Accounting Officer)
</TABLE>


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


<TABLE>
<CAPTION>
<S>                                                                    <C>
By:/s/ Jay C. Huffard                                                  March 30, 1998
------------------------------------------
Jay C. Huffard, Interim President,
Chief Executive Officer and Director

By:/s/ W. Wallace McDowell, Jr.                                        March 30, 1998
-----------------------------
W. Wallace McDowell, Jr.
Director

By:/s/ Shawkat Raslan                                                  March 30, 1998
------------------------------------------
Shawkat Raslan, Director

By:/s/ Susan S. Robfogel                                               March 30, 1998
------------------------------------------
Susan S. Robfogel, Director

By:/s/ John R. Gunn                                                    March 30, 1998
------------------------------------------
John R. Gunn, Director

By:/s/ Hadley C. Ford                                                  March 30, 1998
------------------------------------------
Hadley C. Ford, Director
</TABLE>

                                       37
<PAGE>   41
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                             PAGE
<S>                                                                                          <C>
Independent Auditors' Report...................................................................F-2


Consolidated Balance Sheets as of December 31, 1997 and 1996...................................F-3


Consolidated Statements of Operations for the years ended
    December 31, 1997, 1996 and 1995...........................................................F-4


Consolidated Statements of Stockholders' Deficit for
    the years ended December 31, 1997, 1996 and 1995...........................................F-5


Consolidated Statements of Cash Flows for the years ended
     December 31, 1997, 1996 and 1995..........................................................F-6


Notes to Consolidated Financial Statements.....................................................F-7


Schedule II - Valuation and Qualifying Accounts................................................S-1
</TABLE>











All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.

                                       F-1
<PAGE>   42
                          INDEPENDENT AUDITORS' REPORT



Board of Directors and Shareholders
U.S. HomeCare Corporation
Hartford, Connecticut

We have audited the accompanying consolidated balance sheets of U.S. HomeCare
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' deficit and cash flows for
each of the three years in the period ended December 31, 1997. Our audits also
included the financial statement schedule listed in the Index on page F-1. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of U.S. HomeCare Corporation and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.



Deloitte & Touche LLP

Hartford, Connecticut
March 30, 1998

                                       F-2
<PAGE>   43




                   U.S. HOMECARE CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                        (In thousands, except share data)


<TABLE>
<CAPTION>
                                                                        DECEMBER 31,     DECEMBER 31,
                                                                           1997             1996
                                                                           ----             ----
<S>                                                                     <C>              <C>
CURRENT ASSETS
     Cash and cash equivalents                                           $    313         $    647
     Accounts receivable, net of allowance
         for doubtful accounts of $1,892 and $3,843                         5,147            7,925
     Other current assets                                                   1,339            1,225
                                                                         --------         --------
            TOTAL CURRENT ASSETS                                            6,799            9,797
                                                                         --------         --------

PROPERTY AND EQUIPMENT, net                                                   841            2,578
                                                                         --------         --------

OTHER ASSETS
     Excess cost over net assets acquired, net
         of accumulated amortization of $736 and $653                       1,497            1,581
     Intangible assets, net of accumulated
         amortization of $5,502 and $5,165                                    485              822
     Other                                                                    756              767
                                                                         --------         --------
            TOTAL OTHER ASSETS                                              2,738            3,170
                                                                         --------         --------
TOTAL ASSETS                                                             $ 10,378         $ 15,545
                                                                         ========         ========

LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
     Current maturities of long-term debt                                $   --           $    346
     Accounts payable                                                       2,528            3,175
     Accrued expenses                                                       2,821            4,509
     Reserve for restructuring and other non-recurring charges                140            3,670
     Accrued payroll and related costs                                      1,655            1,608
                                                                         --------         --------
            TOTAL CURRENT LIABILITIES                                       7,144           13,308
                                                                         --------         --------

OTHER LIABILITIES
     Long-term debt                                                         7,577            7,983
     Other long-term liabilities                                            2,128            1,309
                                                                         --------         --------
         TOTAL OTHER LIABILITIES                                            9,705            9,292
                                                                         --------         --------
TOTAL LIABILITIES                                                          16,849           22,600
                                                                         --------         --------


COMMITMENT AND CONTINGENCIES - Notes 9 and 13

STOCKHOLDERS' DEFICIT
     Common stock, $0.01 par value,  40,000,000 shares
         authorized, 12,130,353 and 9,419,973 shares outstanding              121               94
     Preferred stock, $1 par value, 5,000,000 authorized, 328,569
         shares outstanding of $35, 6% convertible preferred stock;
         liquidation preference of $11,500                                    328              328
     Additional paid-in capital                                            47,077           44,923
     Accumulated deficit                                                  (53,997)         (52,400)
                                                                         --------         --------

            TOTAL STOCKHOLDERS' DEFICIT                                    (6,471)          (7,055)
                                                                         --------         --------
TOTAL LIABILITIES & STOCKHOLDERS'
  DEFICIT                                                                $ 10,378         $ 15,545
                                                                         ========         ========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       F-3
<PAGE>   44
                   U.S. HOMECARE CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)



<TABLE>
<CAPTION>
                                                                       YEAR ENDED DECEMBER 31
                                                               1997             1996             1995
<S>                                                          <C>              <C>              <C>
Net revenues                                                 $ 52,635         $ 55,085         $ 56,450

Cost of revenues, primarily payroll and related costs          32,630           37,815           37,605
                                                             --------         --------         --------
Gross profit                                                   20,005           17,270           18,845

Operating expenses:
     Selling, general & administrative expenses                15,931           19,016           18,607
     Amortization and depreciation                              1,613            1,943            2,208
     Merger expenses                                              907
     Regulatory Settlement                                      1,750
     Restructuring and other non-recurring
        charges                                                   399            3,619             --
                                                             --------         --------         --------

Total operating expenses                                       20,600           24,578           20,815
                                                             --------         --------         --------


Loss from continuing operations before interest
   expense and income taxes                                      (595)          (7,308)          (1,970)
Interest expense                                                  852            1,092              870
                                                             --------         --------         --------

Loss from continuing operations
   before income taxes                                         (1,447)          (8,400)          (2,840)
State income taxes                                                150              150              154
                                                             --------         --------         --------
Loss from continuing operations                                (1,597)          (8,550)          (2,994)
Discontinued operations:
     Income (loss) from discontinued operations                  --             (1,464)           1,196
     Loss on sale of IV therapy business                         --            (13,779)            --
                                                             --------         --------         --------

Net loss                                                       (1,597)         (23,793)          (1,798)
Dividends to preferred shareholders                              (690)            (690)            (641)
                                                             --------         --------         --------
Net loss applicable to common shareholders                   $ (2,287)        $(24,483)        $ (2,439)
                                                             ========         ========         ========

Basic and diluted loss per share:
Loss from continuing operations                              $  (0.22)        $  (1.04)        $  (0.45)
Discontinued Operations:
     Income (loss) from discontinued operation                   --              (0.17)            0.15
     Loss on sale of IV therapy business                         --              (1.55)            --
                                                             --------         --------         --------
Basic and diluted loss per share                             $  (0.22)        $  (2.76)        $  (0.30)
                                                             ========         ========         ========

Weighted average common
  shares outstanding                                           10,444            8,868            8,180
                                                             ========         ========         ========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       F-4
<PAGE>   45
                   U.S. HOMECARE CORPORATION AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
                                 (In thousands)





<TABLE>
<CAPTION>
                                                                Series B        Additional
                                          Common Stock       Preferred Stock      Paid-In        Treasury Stock       Accumulated
                                        Shares   Amount     Shares      Amount    Capital      Shares      Amount       Deficit
                                        ------   ------     ------      ------    -------      ------      ------       -------
<S>                                     <C>      <C>        <C>         <C>     <C>            <C>        <C>         <C>

Balance, December 31, 1994              8,552    $ 85         57        $ 57     $ 37,817       s(303)    $ (2,557)    $(26,809)

Private placement                                            271         271        8,391

Purchase of treasury stock from
a related party                                                                                 (200)         (329)

Preferred dividends                                                                (1,263)       225         1,304

Stock issued in lieu of cash for
accounts payable settlement               231       3                                 545

Stock issued under
Employee Stock Savings Plan                                                           198



Net loss                                                                                                                 (1,798)
                                        -----------------------------------------------------------------------------------------
Balance, December 31, 1995              8,783      88         328         328      45,688       (278)      (1,582)      (28,607)

Preferred dividends                        95       1                              (1,583)       278        1,582

Stock issued in lieu of cash for
accounts payable settlement               534       5                                 807

Stock issued under
Employee Stock Savings Plan                 8                                          11

Net loss                                                                                                                (23,793)
                                       ----------------------------------------------------------------------------------------


Balance, December 31, 1996              9,420      94        328          328      44,923                               (52,400)

Stock issued in lieu of cash for
accounts payable settlement               494       5                                 525

Exercise of options                     1,553      15                               1,455

Preferred dividends                       663       7                                  (7)

Issuance of Warrants                                                                  181



Net loss                                                                                                                 (1,597)
                                       ----------------------------------------------------------------------------------------
Balance, December 31, 1997             12,130    $121        328        $328     $ 47,077         --           --      $(53,997)
                                       ======    ====        ===        ====     ========     ======      =======      ========
</TABLE>

See accompanying notes to consolidated financial statements

                                       F-5
<PAGE>   46
                   U.S. HOMECARE CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                            YEAR ENDED DECEMBER 31,
                                                                     1997             1996            1995
                                                                     ----             ----            ----
<S>                                                               <C>              <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
       Net loss                                                   ($ 1,597)        ($23,793)        ($ 1,798)

       Adjustments to reconcile net loss to net cash
       provided by/(used in) operating activities:

           Write-off of goodwill and intangible assets                   -           11,577                -
           Depreciation and amortization                             1,009            2,510            3,456
           Provision for bad debts                                     351            3,759            1,757
           Non-cash charges                                            444            1,470               59
           Deferred income taxes                                         -                -             (280)
           Gain on return of leased assets                               -                -              (24)
       Changes in operating assets and liabilities:
           Decrease/(increase) in accounts receivable                2,427            3,796           (3,855)
           (Increase)/decrease in other current assets                (114)           1,104            2,301
           (Increase)/decrease in other assets                         (11)             361             (425)
           (Decrease)/increase  in accounts payable
                and accrued expenses                                (1,805)           2,062           (3,389)
           (Decrease)/increase  in restructuring reserve              (976)           1,494           (3,047)
           Increase in accrued payroll
               and related costs                                        47              485               38
           Increase in other liabilities                               819            1,155
                                                                  --------         --------         --------
Net cash provided by / (used in) operating activities                  594            5,980           (5,207)
                                                                  --------         --------         --------

CASH FLOWS FROM INVESTING ACTIVITIES

       Purchases of property and equipment                            (176)            (255)            (114)
                                                                  --------         --------         --------

       Net cash used in investing activities                          (176)            (255)            (114)
                                                                  --------         --------         --------

CASH FLOWS FROM FINANCING ACTIVITIES:

       Payments on promissory note                                       -                -           (2,000)
       Proceeds from borrowings on long-term debt                        -                -            3,000
       Payments on capital leases and long-term debt                  (752)          (5,314)          (3,201)
       Purchase of treasury stock                                        -                -             (329)
       Decrease in cash overdraft                                        -                -           (1,247)
       Issuance of common stock                                                          11
       Issuance of preferred stock                                       -                -            8,664
                                                                  --------         --------         --------
       Net cash (used in)/provided by financing activities            (752)          (5,303)           4,887
                                                                  --------         --------         --------

       Net (decrease) increase in cash                                (334)             422             (434)
       Cash and cash equivalents, beginning of year                    647              225              659
                                                                  --------         --------         --------

       Cash and cash equivalents, end of year                     $    313         $    647         $    225
                                                                  ========         ========         ========

       Cash paid during the year for:
       State income taxes                                         $    140         $    169         $     25
                                                                  ========         ========         ========
       Interest                                                   $    746         $  1,043         $    870
                                                                  ========         ========         ========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       F-6
<PAGE>   47
                   U.S. HOMECARE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995

1.       SIGNIFICANT ACCOUNTING POLICIES

a. Basis of Presentation and Nature of Business - The consolidated financial
statements include the accounts of the Company and its subsidiaries, all of
which are wholly owned. All material intercompany accounts and transactions have
been eliminated. The Company is a provider of home health care services,
including nursing care and personal care, in Connecticut, New York, and
Pennsylvania. The infusion therapy business was discontinued September 30, 1996.

b. Management Actions and Operating Results - The accompanying financial
statements reflect operating and net losses for 1997, 1996 and 1995 and a
stockholders' deficit and working capital deficit at December 31, 1997. As
discussed in c. below, the Company sold its IV therapy business effective
October 1, 1996. As discussed in Note 6, in 1996 the Company restructured its
operations to reduce both corporate overhead and branch operating costs. On
February 11, 1998, the previously announced merger with Home Health Corporation
of America was terminated. As discussed in Note 8, the Company's long-term debt
maturities were extended to January 1999. As a result of the above actions, the
Company believes that its existing credit facilities, together with cash
generated from operations, will be sufficient to fund the Company's operations
through 1998. During 1998, the Company plans to replace its existing credit
facilities.

c. Discontinued Operations - On October 31, 1996, the Company completed the sale
of certain assets (not including accounts receivable) of its IV therapy business
for approximately $2,000,000 in cash. The sale had an effective date of October
1, 1996. The accompanying consolidated financial statements present the results
of operations of the IV therapy business as a discontinued operation. As a
result of the sale, the Company recorded a loss on disposal of the IV therapy
business of $13,779,000. Such loss on sale included (1) a write-off of
$11,577,000 of goodwill and other tangible assets, (2) additional provisions for
losses on accounts receivable of $2,578,000, and (3) $1,624,000 related to a
charge for severance and other anticipated costs during the phase out period net
of the net cash proceeds of the sale of approximately $2,000,000.

         Net revenues from the discontinued IV therapy operations were
approximately $0, $6,541,000, and $14,733,000 for the years ended December 31,
1997, 1996 and 1995, respectively. The income (loss) from operations of the IV
therapy business was $0, ($1,464,000), and $1,196,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. As a result of net operating
loss tax credit carryforwards, no income tax benefits have been recognized for
the discontinued operations. Included in accounts receivable at December 31,
1997 and 1996 is $11,000 and $2,000,000, respectively, related to the IV therapy
business. The accounts receivable were retained by the Company.

d. Accounting 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 and the reported amounts of revenues and expenses
during the reporting period. Significant estimates in the Company's financial
statements include: bad debt reserves, medicare reserves, and reserves for
self-insured risks. Actual results could differ from those estimates.

                                       F-7
<PAGE>   48
e. Property and Equipment - Property and equipment are recorded at cost, less
accumulated depreciation computed on a straight-line basis over the useful lives
of the related assets. The useful lives vary from three to seven years.
Leasehold improvements and leased equipment are amortized over the lives of the
respective leases or the service lives of the asset, whichever is shorter.

f. Intangible Assets - Excess cost over net assets acquired is being amortized
over a period of 25 years. The Company reviews the recoverability of the excess
cost of net assets acquired based upon anticipated future cash flows of the
acquired company. Other intangible assets consist principally of patient and
referral lists, training programs, and aides and nurses lists and are being
amortized over a period of five to ten years. The net carrying value of aides
and nurses lists was approximately $485,000 and $822,000 as of December 31, 1997
and 1996 respectively.

g. Revenue Recognition - The Company recognizes revenues as the services are
performed. The Company receives retroactive changes to certain rates and records
such changes as revenues when they are notified by the payor and the amount is
estimable. Certain of the Company's revenues and related disbursements are
subject to audit by third party payors; these revenues are accrued on an
estimated basis in the period the related services are rendered. Net revenues is
adjusted, as required in subsequent periods, based on final settlement.

h. Reclassification - The presentation of certain prior year information has
been reclassified to conform with the current year presentation.

i. Cash and Cash Equivalents - The Company considers all highly liquid
instruments with original maturities of three months or less to be cash
equivalents.

j. Income Taxes - The Company provides for income taxes based upon the asset and
liability method. Deferred income taxes have been provided for temporary
differences between the tax basis of assets and liabilities and their reported
amounts in the financial statements.

k. Non-cash transactions - Schedule of non-cash transactions for the years
ended:

<TABLE>
<CAPTION>
              DECEMBER 31, 1997
              -----------------
<S>                                                                               <C>
           Exercise of stock options                                              $1,470,000
           Stock issued in lieu of cash for accounts payable settlement              530,000
           Preferred stock dividends paid with common stock                          689,995
           Warrant issuance                                                          181,000
           Write-off of assets against restructuring reserve                       1,084,000

              DECEMBER 31, 1996
              -----------------

           Stock issued in lieu of cash for accounts payable settlement              812,000
           Preferred stock dividends paid with common stock                          689,995

              DECEMBER 31, 1995
              -----------------

           Write-off of assets against restructuring reserve                      $1,484,000
           Disposal of assets under capital leases                                   854,000
           Stock issued in lieu of cash for accounts payable settlement              548,000
           Preferred stock dividends paid with common stock                          640,867
</TABLE>

                                       F-8
<PAGE>   49
l. Stock Based Compensation - In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation," which was effective for the
Company beginning January 1, 1996. SFAS No. 123 requires expanded disclosures of
stock-based compensation arrangements with employees and non-employees and
encourages (but does not require) compensation cost to be measured based on the
fair value of the equity instrument awarded to employees. Companies are
permitted, however, to continue to apply APB Opinion No. 25, which recognizes
compensation cost based on the intrinsic value of the equity instrument awarded.
The Company will continue to apply APB Opinion No. 25 to its stock based
compensation awards to employees.

m. Fair Value of Financial Instruments - SFAS No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosure of fair value information
for certain assets and liabilities, whether or not recognized in the balance
sheets, for which it is practicable to estimate that value. The Company's
balance sheets include the following financial instruments: cash and cash
equivalents; accounts receivable; accounts payable and accrued expenses; bank
revolving line of credit; and capital lease obligations and other long-term
debt. The Company considers the carrying amount in the financial statements to
approximate fair value of these financial instruments because of the relatively
short period of time between the origination of such instruments and their
expected realization and/or the fact that the instruments reprice frequently at
market rates.

n. Recently Enacted Pronouncements - Statements of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), and No. 131,
"Disclosures About Segments of Enterprise and Related Information" ("SFAS 131"),
were issued in June 1997.

         SFAS 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. This statement is effective 1998.

         SFAS 131 establishes the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to stockholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. This statement is effective for financial statements for 1998.

         As the Company does not have changes in equity other than from
investments by owners and distributions to owners and operates in a single
segment, implementation of these standards is not expected to have a material
effect on the Company.

                                       F-9
<PAGE>   50
2.       LOSS PER SHARE

         Loss Per Share - As of December 31, 1997, the Company adopted Statement
of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128") for
all periods presented. As a result, loss per share for all periods presented has
been restated to conform with the provisions of SFAS 128. Basic loss per share
is based on weighted average number of common shares outstanding. Convertible
preferred stock, warrants, and stock options outstanding have not been used in
the calculation of diluted earnings per share because to do so would result in
anti-dilution. As such, the denominator (weighted average shares) used in
calculating both the amount of basic and diluted loss per share are equal for
all years.

The following table shows securities outstanding as of December 31 that could
potentially dilute EPS in the future that were not included in the computation
of diluted EPS because to do so would have been antidilutive:

<TABLE>
<CAPTION>
                                                     1997              1996             1995
                                                     ----              ----             ----
<S>                                               <C>               <C>               <C>
          Employee stock option                    1,130,500         1,190,500         1,966,500
          Nonemployee stock options                     --           1,730,000              --
          Warrants to acquire common stock         3,031,600         3,120,600         2,987,996
          Common stock to be used for
             convertible preferred stock           7,152,308         7,152,308         6,571,380
                                                  ----------        ----------        ----------
                     Total                        11,314,408        13,193,408        11,525,876
                                                  ==========        ==========        ==========
</TABLE>

3.       ACCOUNTS RECEIVABLE

In November 1993, the Company entered into a financing agreement with a bank
whereby it can sell an undivided percentage ownership interest in a designated
pool of accounts receivable. This agreement was amended and extended on March
27, 1997, December 24, 1997, and March 26, 1998. The bank has committed up to
$9.0 million based upon securitizing the Company's eligible accounts receivable.
The agreement now expires on January 4, 1999. In accordance with SFAS 125,
"Accounting for Transfer and Servicing of Financial Assets and Extinguishments
of Liabilities," accounts receivable in the consolidated balance sheet do not
include the receivables sold to the bank in the amount of approximately $6.9
million and $7.5 at December 31, 1997 and 1996, respectively. The Company
maintains a reserve for accounts receivable including receivables sold, based
upon the expected collectibility of all accounts receivable. Included in other
current assets at December 31, 1997 and 1996 are $945,364 and $810,301,
respectively, related to securitization program deposits and amounts due from
the bank.

4.       PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

<TABLE>
<CAPTION>
                                                 DECEMBER 31,
                                                (IN THOUSANDS)
                                               1997          1996
                                               ----          ----
<S>                                         <C>            <C>
Leasehold improvements and buildings        $ 1,115        $ 2,743
Furniture and fixtures                        1,328          1,970
Computer and other equipment                  5,182          6,889
                                            -------        -------
                                              7,625         11,602
Less accumulated depreciation
    and amortization                          6,784          9,024
                                            -------        -------
                                            $   841        $ 2,578
                                            =======        =======
</TABLE>

                                      F-10
<PAGE>   51
         Depreciation expense was $587,000, $1,086,000, and $1,235,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.

5.       INCOME TAXES

         There was no federal benefit recorded in 1997, 1996, or 1995 due to the
incurred net operating losses. The 1997, 1996, and 1995 provision consists
entirely of state taxes.

         The tax effect of temporary differences giving rise to the Company's
deferred tax assets and liabilities at December 31, 1997 and 1996 are as
follows:

<TABLE>
<CAPTION>
                                               1997             1996
                                               ----             ----
                                                  (IN THOUSANDS)
<S>                                          <C>              <C>
Deferred tax assets:
     Net operating loss carryforwards        $ 15,171         $ 12,920
     Bad debt reserves                            758            1,537
     Restructuring reserves                        56            1,468
     Legal and regulatory settlements           1,151              584
     Accrued expenses                             622              964
     Other                                        160              200
                                             --------         --------

     Total deferred tax assets                 17,918           17,673

Deferred tax liabilities:

Depreciation and amortization                     (59)            (127)
                                            ---------         --------

Net deferred tax asset                        (17,859)          17,546

Valuation allowance                           (17,859)         (17,546)
                                             --------         --------

Net deferred tax liability                   $   --           $   --
                                             ========         ========
</TABLE>

         For financial reporting purposes, deferred tax assets are reduced by a
valuation allowance to an amount that is "more likely than not" to be realized.
Due to the Company's cumulative losses, management does not consider that enough
support to overcome the "more likely than not" criteria existed at December 31,
1997 and 1996.

         At December 31, 1997 the Company has a tax net operating loss
carryforward ("NOL") of approximately $44.4 million expiring from 2009 to 2012
to offset against future taxable income, if any. The Internal Revenue Code
limits the amount of a company's NOL carryforward that may be used in any one
year to offset future income after an "ownership change" (as defined). The
Company does not believe any such "ownership change" has occurred which would
limit the available annual amount.

                                      F-11
<PAGE>   52
6.       RESTRUCTURING AND OTHER NON-RECURRING CHARGES

         During the third quarter of 1996, the Company's Board of Directors
decided to restructure the operations of the Company and restore its focus on
its core home nursing operations (the "1996 Restructuring Plan"). The 1996
Restructuring Plan included the discontinuance of the Company's IV therapy
discussed in Note 1. Additional actions included the retention of turnaround
consultants, implementation of plans to reorganize its home nursing operations
in a more cost effective manner, a reduction in both corporate management and
non-management expenses and the consolidation of certain offices. As a result of
these decisions, the Company recorded a provision for restructuring and other
non-recurring charges of $3,619,000 during 1996 which was comprised of:
severance of $640,000, turnaround consultants $1,898,000, an increase in the
reserve for the 1994 Restructuring Plan of $535,000, and other reorganization
costs of $546,000 (including asset write-offs and lease costs).

         The reserve established for compensation for the turnaround consultants
included cash payments totaling $428,000 and significant performance based
equity incentives valued at approximately $1,470,000. The equity incentives
granted to the turnaround consultants consisted of options to purchase 1,730,000
shares of the Company's common stock for $0.15 per share of which 576,667 were
vested immediately. The remaining 1,153,000 options vested in January 1997 based
on predefined operating results being achieved in the fourth quarter of 1996.
The Company had recorded a liability at December 31, 1996 of $1,470,000 to
account for the issuance of these options to non-employees. Such amount
approximated the fair value of the services provided. In October 1997, these
options were exercised.

         During 1997 and 1996, the Company paid in cash $976,000 and $406,000,
respectively, in restructuring and other non-recurring costs for severance,
turnaround consultant fees, legal costs and leasing costs. Non-cash items
charged against the reserve in 1997 totaled $2,554,000 and include the write-off
of assets for closed facilities and the exercise of options by the turnaround
consultants. In 1996, non-cash items which reduced the reserve were $715,000 and
related to the asset write-offs and obligations settled in common stock. As of
December 1997, the balance in the reserve for restructuring is $140,000 relating
to remaining severance payments and lease payments to be paid in 1998.

         In addition, during 1997, the Company recorded and paid fees totaling
approximately $399,000 for cash payments and the issuance of 222,500 shares of
common stock. These charges related to a separate agreement entered into with
the turnaround consultants for services provided in the third and fourth
quarters of 1997 principally related to the proposed sale of the Company.


7.       ACCRUED EXPENSE

Accrued expenses consisted of the following:

<TABLE>
<CAPTION>
                                                   DECEMBER 31,
                                                1997           1996
                                                ----           ----
                                                  (IN THOUSANDS)
<S>                                            <C>           <C>
Legal settlements                              $  340        $1,459
Medicare                                          556         1,012
Workers compensation                            1,185         1,398
Regulatory settlement - current portion           501          --
Other                                             239           640
                                               ------        ------
                                               $2,821        $4,509
                                               ======        ======
</TABLE>

                                      F-12
<PAGE>   53
8.       LONG TERM DEBT

         Long-term debt consisted of the following:

<TABLE>
<CAPTION>
                                                       DECEMBER 31,
                                                   1997           1996
                                                   ----           ----
                                                     (IN THOUSANDS)
<S>                                               <C>           <C>
Capitalized lease obligations                     $ --          $   69
Revolving credit facility (a)                      4,577         4,980
Subordinated revolving credit facility (b)         3,000         3,000
Other                                               --             280
                                                  ------        ------
                                                   7,577         8,329
Less current portion                                --             346
                                                  ------        ------

                                                  $7,577        $7,983
                                                  ======        ======
</TABLE>

a. The Company has a revolving line of credit ("RLOC"), with availability based
upon a stated formula applied to accounts receivable balances. Borrowings bear
interest at the higher of the bank's prime rate plus 2.0% or the federal funds
rate plus 1.0%. The interest rate at December 31, 1997 was 8.5%. Remaining
availability under the RLOC at December 31, 1997 was $967,000. Borrowings under
the RLOC are collateralized by substantially all of the Company's assets. The
terms of the RLOC provide, among other things, for prepayments in the event that
the Company's formula based borrowing capacity is reduced, for maintenance of
certain financial ratios, limitations on capital expenditures, acquisitions, and
cash dividends.

         On March 25, 1997 the RLOC agreement was amended and restated to
include a revised maturity date of January 2, 1998. In connection with the
revised agreement the banks were issued warrants to purchase 178,000 shares of
the Company's Common Stock at $1.5969 per share. On March 26, 1998, the RLOC
agreement was amended to include a revised maturity date of January 4, 1999.

b. In October 1995, the Company entered into a $3.0 million subordinated credit
facility with a commercial bank. The subordinated credit facility is 100%
guaranteed by the Connecticut Development Authority ("CDA"). The credit facility
originally had an expiration date of April 15, 1997. On March 25, 1997 the
subordinated credit facility was extended to January 15, 1998 and the CDA
guarantee was extended to January 30, 1998. The interest rate at December 31,
1997 was 8.5%. In connection with the October 1995 issuance of the CDA
guarantee, the Company agreed to issue additional warrants (the "Additional
Warrants") to the CDA to purchase 735,000 shares of the Company's common stock
for $1.5969 per share if the guarantee was not released by April 30, 1997. As a
result of the extension of the CDA guarantee to January 30, 1998 the Company
issued the Additional Warrants to the CDA on March 25, 1997. On March 26, 1998,
the subordinated credit facility was extended to January 15, 1999 and the CDA
guarantee was extended to January 30, 1999.

         All long-term debt as of December 31, 1997 becomes due in January 1999.

                                      F-13
<PAGE>   54
9.       COMMITMENTS AND CONTINGENCIES

a. Operating Leases - The Company leases office space under various leases with
terms ranging from one to fifteen years. Rent expense was $1,005,000,
$1,284,000, and $1,330,000 for the years ended December 31, 1997, 1996, and 1995
respectively. Future minimum rental commitments under non-cancelable operating
leases as of December 31, 1997 are as follows:

                                      (IN THOUSANDS)

<TABLE>
<CAPTION>
<S>                        <C>                          <C>
                           1998                         $1,117
                           1999                            926
                           2000                            819
                           2001                            674
                           2002                            568
                           Thereafter                    1,424
                                                         -----
                                                        $5,528
                                                        ======
</TABLE>

         Medicare - Approximately 15% in 1997, 14% in 1996, and 18% in 1995 of
net revenues were derived under the Medicare program. These revenues are based,
in part, on cost reimbursement principles and are subject to audit and
retroactive adjustment by the respective third-party fiscal intermediaries.
Included in accrued expenses at December 31, 1997 was approximately $556,000,
which is an estimate of what is to be paid upon finalization of certain cost
reports. In the opinion of management, additional other retroactive adjustments,
if any, are not expected to be material to the consolidated financial statements
of the Company.

b.       Litigation  -

         i.       HIPS/Abel. The Company reached settlement in November 1996 in
                  HIPS v. USHC Infusion, et al (Supreme Court, State of New York
                  County), a suit brought in July 1993 by Home Infusion
                  Pharmaceutical Services, Inc. ("HIPS") in connection with
                  acquisition (the "Acquisition") of assets from HIPS and its
                  affiliate Abel Health Management Services, Inc. and their
                  principal, Edward J. Abel. The settlement is comprised of both
                  cash and Company Common Stock, and is payable in installments
                  through April 2001.

         ii.      Kingsland Litigation. The Company reached settlement in
                  November 1996 in Kingsland Associates v. Abel Health
                  Management Services, Inc. and U.S. HomeCare Infusion Therapy
                  Products Corporation (Supreme Court of the State of New York,
                  Nassau County), a suit which also arose from the Acquisition.
                  This was settled principally in cash payable through April
                  1998.

         iii.     Debenture Litigation. The Company reached settlement in
                  February 1997, in Smith, Katz and Cole v. U.S. HomeCare
                  Corporation, et al. (Supreme Court of the State of New York,
                  Nassau County), a suit which arose from the 1986 acquisition
                  of Reliable Nurses Aides of Westchester, Inc. This was settled
                  by cash payments through August 1998.

         The Company is involved in litigation in the ordinary course of
business. The Company carries general liability insurance in the amounts of $2.0
million per occurrence and $6.0 million in the aggregate, such aggregate
coverage having been increased over time. The Company does not believe, after
giving consideration to the insurance in place and the claims outstanding, that
the resolution of these matters will have a material adverse effect on the
financial position, results of operations, or cash flows of the Company. (See
also Note 13)

                                      F-14
<PAGE>   55
10.      STOCKHOLDERS' EQUITY

a. Exchange Preferred Stock - Preferred Stock Placement - On February 1 and
February 8, 1995, the Company issued and sold in a private placement a total of
271,428 shares of $35.00 6% Convertible Preferred Stock, $1.00 par value (the
"$35.00 Preferred") for $35.00 per share (the "Private Placement"). The $35.00
Preferred is convertible into approximately 7,200,000 shares of Common Stock at
a current conversion price of $1.608 per share (as adjusted from the original
conversions price of $1.75 per share), subject to certain adjustments, and will
be automatically converted into Common Stock if the 20 day moving average of the
closing prices of the Company's Common Stock is greater than $4.375 per share.
The $35.00 Preferred pays a 6% annual dividend of $2.10, which is payable
quarterly in cash or, at the Company's option, Common Stock. Simultaneously,
with the initial closing of the Private Placement, all of the holders of
Preferred Stock issued in September and October 1994 (the "Exchange Preferred")
exchanged their 57,141 shares of Exchange Preferred for an equal number of
shares of the $35.00 Preferred and exchanged their Exchange Warrants for
Warrants to purchase an aggregate of 99,997 shares of Common Stock at $1.75 per
share. To date, the dividends have been paid in Common Stock, with a total of
approximately 1,439,944 shares issued. The total liquidation preference was
$11.5 million at December 31, 1997 and 1996.

b. In connection with the restructured financing in 1995, the Company issued
warrants, which are currently exercisable to purchase an aggregate of 816,302
shares of Common Stock at $1.608 per share to its RLOC banks. In connection with
the CDA's guarantee, the Company issued to the CDA warrants to purchase 816,302
shares of Common Stock at $1.608 per share and has issued, as a result of the
March 25, 1997 extension of the guarantee, to the CDA a warrant to purchase an
additional 735,000 shares of Common Stock at $1.5969, and an additional 89,000
shares at 1.5969 to the RLOC banks. These warrants are exercisable at any time
through March 25, 2002.

c. Stock Options - At the Company's Annual Meeting held on May 18, 1995, the
Company obtained shareholder approval of its 1995 Stock Option/Stock Issuance
Plan (the "1995 Plan"), pursuant to which 2,550,000 shares of common Stock were
reserved for issuance. The 1995 Plan is the successor to the Company's 1990
Stock Option Plan (the "1990 Plan"). Options available for grant at December 31,
1997 were 1,419,500.

         The 1995 Plan contains three separate equity incentive programs; (i) a
Discretionary Option Grant Program, (ii) an Automatic Option Grant Program and
(iii) a Stock Issuance Program.

         The 1995 Plan (other than the automatic Option Grant Program) is
administered by the Compensation Committee of the Board. However, all grants
under the Automatic Option Grant Program are made in strict compliance with the
provisions of that program, and no administrative discretion is exercised by the
Compensation Committee with respect to the grants made thereunder.

         Employees of the Company, non-employee members of the Board (other than
those serving as members of the Compensation Committee) and consultants and
independent advisors of the Company are eligible to participate in the
Discretionary Option Grant and Stock Issuance Program. Non-employee members of
the Board (including members of the Compensation Committee) are also eligible to
participate in the Automatic Option Grant Program.

                                      F-15
<PAGE>   56
         Options may be granted under the Discretionary Option Grant Program at
an exercise price per share not less than 85% of the fair market value per share
of Common Stock on the option grant date. No granted option will have a term in
excess of ten years. The fair market value per share of Common Stock on any
relevant date under the 1995 Plan will be the last reported sales price per
share on that date.

         Under the Automatic Option Grant Program, each individual who was
serving as a non-employee Board member on December 21, 1994 was automatically
granted at that time an option grant for 25,000 shares of Common Stock. Each
individual who first becomes a non-employee Board member after such date will
automatically be granted at that time an option grant for 25,000 shares of
Common Stock. Each option will have an exercise price per share equal to 100% of
the fair market value per share of Common Stock on the option grant date and a
maximum term of ten years measured from the option grant date.

         Shares may be sold under the Stock Issuance Program at a price per
share not less than 85% of fair market value per share of Common Stock, payable
in cash or through a promissory note payable to the Company. Shares may also be
issued solely as a bonus for past services.

         A summary of the status of employee and directors options under the
Company's Stock Option Plan at December 31, 1997, 1996 and 1995, and changes
during the years ending on those dates, is presented below.

<TABLE>
<CAPTION>
                                                        1997                           1996                             1995
                                                      WEIGHTED                        WEIGHTED                        WEIGHTED
                                                      AVERAGE                         AVERAGE                         AVERAGE
                                                      EXERCISE                        EXERCISE                        EXERCISE
                                                       PRICE                           PRICE                           PRICE
                                       1997                            1996                           1995
                                      SHARES                          SHARES                          SHARES
<S>                                 <C>               <C>           <C>               <C>           <C>               <C>
Outstanding at beginning of year    1,190,500         $   1.61      1,966,500         $   3.10      1,206,223         $   4.25

Granted                               150,000         $   1.00        945,000         $   1.26      1,097,232         $   2.52
Exercised                                  --               --             --               --             --               --
Cancelled/expired                    (210,000)        $   2.98     (1,721,000)        $   2.86       (336,955)        $   5.97
                                    ---------                       ---------                       ---------

Outstanding at end of year          1,130,500         $   1.44      1,190,500         $   1.61      1,966,500         $   3.10
                                    =========                       =========                       =========

Option exercisable at year end        805,499         $   1.47        767,067         $   1.95      1,151,450         $   3.37
                                    =========                       =========                       =========
</TABLE>



The following table summarizes information about stock options outstanding at
December 31, 1997:

<TABLE>
<CAPTION>
                                               WEIGHTED
                                               AVERAGE            WEIGHTED                        WEIGHTED
                                              REMAINING           AVERAGE                         AVERAGE
    EXERCISE             NUMBER            CONTRACTUAL           EXERCISE        NUMBER           EXERCISE
      PRICE            OUTSTANDING              LIFE               PRICE        EXERCISABLE         PRICE
<S>                    <C>                 <C>                  <C>            <C>               <C>
       $1.00               855,000            8.9 years            $1.00          569,999            $1.00
       $2.13               175,000            7.0 years            $2.13          175,000            $2.13
       $4.00               100,000            6.7 years            $4.00           60,000            $4.00
       $9.25                   500            5.5 years            $9.25              500            $9.25
                         ---------                                                -------
                         1,130,500                                 $1.44          805,499            $1.47
                         =========                                                =======
</TABLE>

                                      F-16
<PAGE>   57
         On December 12, 1996, the Company canceled and reissued options
previously granted to certain employees under the Discretionary Option Grant
Program at a significantly lower exercise prices but equal to or greater than
the market price on such date. A total of 409,500 shares with exercise prices
ranging from $1.22 to $25.87 were canceled and reissued with an exercise price
of $1.00. The quoted market price at the date of reissuance was $0.625

The weighted average fair values of options granted during 1997, 1996 and 1995
was $.78, $1.19 and $1.29, respectively per share for those options granted with
an exercise price that equaled the market price of the stock on the grant date
and was $.66 and $0.31 per share for options granted during 1997 and 1996,
respectively, whose exercise price was greater than the market price of the
stock on the grant date. The Company applies Accounting Principles Board Opinion
No. 25 and related Interpretations in accounting for stock option plans.
Accordingly, no compensation cost has been recognized for its stock option
plans. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of FASB Statement 123, the Company's net loss
applicable to common shareholders and net loss per share for the years ended
December 31, 1997, 1996 and 1995 would have been reduced to the pro forma
amounts indicated below:


<TABLE>
<CAPTION>
                                                              1997                  1996                1995
                                                              ----                  ----                ----
<S>                                                   <C>                  <C>                     <C>
Net loss applicable to common shareholders:
              As reported                             $     (2,287,000)    $     (24,483,000)      $     (2,439,000)
              Pro forma                               $     (2,570,000)    $     (24,808,000)      $     (3,139,000)

Basic and diluted loss per common share
              As reported                                   $(.22)              $ (2.76)                $(0.30)
              Pro forma                                     $(.25)              $ (2.80)                $(0.38)
</TABLE>


         The fair value of options granted under the Company's stock option
plans during 1997, 1996 and 1995 was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used: no dividend yield, expected volatility of 56%, risk free
interest rate of 6.0%, and expected lives of 5 years.


11.      MAJOR CUSTOMER

         VNS HomeCare ("VNS"), a non-profit home health institution in New York
City, accounted for approximately $4.5 million (8.4%), $5.4 million (10%), and
$6.2 million (11%), respectively, of net revenue for the years ended December
31, 1997, 1996, and 1995.


12.      QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

         Unaudited quarterly results of operations are shown on page 21 of the
1997 Form 10-K.

                                      F-17
<PAGE>   58
13.      REGULATORY SETTLEMENT

         In November, 1997, the New York State Attorney General's office began a
broad-based investigation into billing and other practices of companies
providing home health care services in New York under Medicaid-funded state
programs. U.S. HomeCare was included in the investigation. The Company
cooperated fully with the State's investigation. In addition, the Company hired
outside counsel and initiated its own internal investigation of its billing
practices and Medicaid rates. Because of the Company's pending merger, U.S.
HomeCare asked the Attorney General for expedited review of its investigation of
the Company. Based on its internal review, the Company concluded that it had
meritorious legal defenses for substantially all potential claims by the state
for monetary or other penalties based on cost reporting and billing practices
related to Medicaid-funded home health care programs. However, the Company also
believes that it could take substantial time and expense to litigate any of
these issues to their conclusion.

         The Company in January 1998 entered into negotiations with the office
of the Attorney General in an effort to reach a rapid resolution of the
investigation. Under the terms of a final agreement signed on February 27, 1998,
the Company has agreed to settle the state's investigation of Medicaid billing
for the period 1992 through 1997 for a monetary payment of $1,750,000, payable
with interest over a period of 36 months. This settlement was accrued as of
December 31, 1997. The full amount of the settlement may be prepaid at any time,
and the Company has agreed with the state that it will use reasonable efforts to
refinance the amount of the settlement as soon as possible. Interest is payable
at 9% in 1998, 10% in 1999 and 11% in 2000. $1,249,000 of the settlement is
payable beyond 1998 and is included in other long-term liabilities at December
31, 1997.

                                      F-18
<PAGE>   59
                   U.S. HOMECARE CORPORATION AND SUBSIDIARIES

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS






<TABLE>
<CAPTION>
DESCRIPTION                     BALANCE AT     CHARGED TO COST        CHARGED TO       DEDUCTIONS         BALANCE AT END
                               BEGINNING OF      AND EXPENSE        OTHER ACCOUNTS                            OF PERIOD
                                  PERIOD
<S>                             <C>              <C>                <C>                 <C>                  <C>
YEAR  ENDED
DECEMBER  31, 1995:
     ALLOWANCE FOR
     DOUBTFUL ACCOUNTS          $8,016,741       $1,757,469         $       --          $6,814,064           $2,960,146
                                ==========       ==========         ==========          ==========           ==========


YEAR  ENDED
DECEMBER  31, 1996:
     ALLOWANCE FOR
     DOUBTFUL ACCOUNTS          $2,960,146       $3,759,455         $      --           $2,876,141           $3,843,460
                                ==========       ==========         =========           ==========           ==========


YEAR  ENDED
DECEMBER  31, 1997:
     ALLOWANCE FOR
     DOUBTFUL ACCOUNTS          $3,843,460       $  351,000         $     --            $2,302,460           $1,892,000
                                ==========       ==========         ========            ==========           ==========
</TABLE>

The notes to the financial statements are an integral part of this schedule.

                                       S-1