SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

(Mark One)

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934
         For the fiscal year ended:  December 31, 1998

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
         SECURITIES EXCHANGE ACT OF 1934
         For the transition period from:

                           Commission File No. 1-12451

                            NEW YORK HEALTHCARE, INC.
                 (Name of small business issuer in its charter)

            New York                                   11-2636089
 (State of other jurisdiction of           (I.R.S. Employer Identification No.)
  incorporation or organization)

1850 McDonald Avenue, Brooklyn, New York                 11223
(Address of principal executive offices)               (Zip Code)

Issuer's telephone number, including area code:      (718) 375-6700

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

                                                          Name of exchange on
      Title of each class                                  which registered
      -------------------                                  ----------------

  Common Stock $.01 par value                            Boston Stock Exchange
<PAGE>

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

Common Stock $.01 par value

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days. Yes X No__

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

State issuer's revenues for its most recent fiscal year.  $20,223,674

State the  aggregate  market  value of the voting  stock held by  non-affiliates
computed by reference  to the price at which the stock was sold,  or the average
bid and asked prices of such stock, as of a specified date within the past sixty
(60) days. $1,510,038 (as of 4/13/99).

                         (ISSUERS INVOLVED IN BANKRUPTCY
                  PROCEEDINGS DURING THE PRECEDING FIVE YEARS)

Indicate  by check mark  whether  the  Registrant  has filed all  documents  and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities under
a plan confirmed by a court.
Yes __    No __

                   (APPLICABLE ONLY TO CORPORATE REGISTRANTS)

State the number of shares  outstanding  of each of the issuer's class of common
equity, as of the latest practicable date: 3,708,030

                       DOCUMENTS INCORPORATED BY REFERENCE

If the following documents are incorporated by reference,  briefly describe them
and  identify  the part of the Form 10-KSB  (e.g.,  Part I, Part II,  etc.) into
which the document is incorporated:  (1) any annual report to security  holders;
(2) any proxy or information  statements;  and (3) any prospectus filed pursuant
to Rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act"). The list
of documents should be clearly described for identification purposes.



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<PAGE>

                           FORWARD LOOKING STATEMENTS

     Information  provided by the Company in this annual  report  contains,  and
from time to time the  Company may  disseminate  materials  and make  statements
which may contain, "forward-looking" information, as that term is defined by the
Private Securities Litigation Reform Act of 1995 (the "Act"). In particular, the
information  contained  in  "Management's  Discussion  and Analysis of Financial
Condition and Results of  Operation-Liquidity  and Capital  Resources"  contains
information concerning the ability of the Company to service its obligations and
other  financial  commitments as they come due and "Company  Strategy"  contains
information  regarding  management's belief concerning the growth  opportunities
available to the Company. The aforementioned forward looking statements, as well
as other forward looking  statements made in this annual report are qualified in
their entirety by these cautionary statements,  which are being made pursuant to
the  provisions  of the Act and with the  intention of obtaining the benefits of
the "safe harbor" provisions of the Act.

     The Company cautions investors that any forward-looking  statements made by
the Company are not guarantees of future performance and that actual results may
differ  materially from those in the  forward-looking  statements as a result of
various factors, including, but not limited to, the following:

          (a) In recent years,  an increasing  number of  legislative  proposals
     have been introduced or proposed by Congress and in some state legislatures
     which would effect major changes in the  healthcare  system.  However,  the
     Company cannot predict the form of healthcare reform legislation, which may
     be proposed or adopted by Congress or by state  legislatures.  Accordingly,
     the Company is unable to assess the effect of any such  legislation  on its
     business. There can be no assurance that any such legislation will not have
     a material adverse impact on the future growth,  revenues and net income of
     the Company.

          (b) The Company  derives  substantial  portions of its  revenues  from
     third-party  payers  including,  both directly and  indirectly,  government
     reimbursement  programs  such as Medicare and Medicaid and some portions of
     its revenues from  non-governmental  sources,  such as commercial insurance
     companies,   health   maintenance   organizations  and  other  charge-based
     contracted payment sources.  Both government and non-government payers have
     undertaken   cost-containment   measures  designed  to  limit  payments  to
     healthcare  providers.  There  can  be no  assurance  that  payments  under
     governmental  and  non-governmental  payer  programs  will be sufficient to
     cover the costs allocable to eligible patients.  The Company cannot predict
     whether or what proposals or cost-containment  measures will be adopted or,
     if adopted and implemented,  what effect, if any, such proposals might have
     on the operations of the Company.

          (c) The  Company  is  subject to  extensive  federal,  state and local
     regulations   governing  licensure,   conduct  of  operations  at  existing
     facilities,  construction of new facilities,  purchase or lease of existing
     facilities,   addition  of  new  services,  certain  capital  expenditures,
     cost-containment  and reimbursement for services  rendered.  The failure to
     obtain or renew required regulatory approvals or licenses,  the delicensing
     of   facilities   owned,   leased  or   operated  by  the  Company  or  the
     disqualification  of the Company from  participation in certain federal and
     state reimbursement  programs could have a material adverse effect upon the
     operations of the Company.

          (d)  There  can be no  assurance  that  the  Company  will  be able to
     continue its  substantial  historical  growth or be able to fully implement
     its business  strategies or that  management  will be able to  successfully
     integrate the operations of its various acquisitions.


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<PAGE>

                                     PART I

Item 1. DESCRIPTION OF BUSINESS.

     (a) General Development of Business.

     New York Health Care,  Inc. (the  "Company") is a licensed home health care
agency  engaged  primarily in supplying  the services of  paraprofessionals  who
provide a broad  range of health  care  support  services  to  patients in their
homes.

     The Company operates 24 hours a day, seven days a week to receive referrals
and  coordinate  services with  physicians,  case  managers,  patients and their
families.

     The Company operates in all five boroughs of New York City and the counties
of Nassau, Westchester, Rockland, Orange, Dutchess, Ulster, Putnam and Sullivan,
in the  State of New York.  The  Company's  services  are  supplied  principally
pursuant to contracts with health care institutions and agencies such as various
county departments of social services, Beth Abraham Health Services in the Bronx
and Westchester  County,  Kingsbridge  Medical Center,  Mt Sinai Medical Center,
Coram Network,  Aetna US Healthcare,  Prudential Tri-State,  Olsten and New York
Methodist Hospital.

      As a result of recent  acquisitions,  described  elsewhere  in this annual
report, the Company also operates in Budd Lake, Edison, Shrewsbury,  Toms River,
East Orange and  Hackensack,  New  Jersey,  where it  recently  acquired  branch
offices whose operations are being integrated with the Company's existing branch
office structure.

     When the Company was initially organized under the laws of the State of New
York,  in February  1983,  it engaged  principally  in the business of providing
nursing staff in nursing homes.

     In 1988, the Company  purchased the equipment,  fixtures,  client lists and
paraprofessional  aide lists of  National  Medical  Home Care,  Inc.  located in
Brooklyn,  Queens  Village,   Rockville  Centre  and  Mount  Vernon,  New  York.
Thereafter,  the Company  maintained  offices in Brooklyn,  Hempstead  and Mount
Vernon,  New York and shifted the focus of its business to the provision of home
health care support services.

     In 1992,  the Company opened a fourth  office,  in Spring Valley,  New York
and,  in 1993,  opened its fifth  office,  in  Newburgh,  New York.  Each of the
Company's five offices are  responsible for the sales and health care operations
within  their  respective   territories  and  maintain  their  own  recruitment,
scheduling,  training and quality assurance  programs.  

     In August 1993,  the Company  established a  maternal/child  care division,
called "Special  Deliveries,"  which presently  accounts for approximately 5% of
the Company's  business and which supplies  comprehensive  nursing  services for
women  during  pregnancy,   and  for  them  and  their  newborn  children  after
childbirth.  The  Company  provides  its  skilled  nursing  staff  with  special
additional  training  in this  division,  which  offers a wide  range of quality
health services to patients at home through the provision of Registered  Nurses,
including those with at least two years of


                                       3
<PAGE>

experience in maternal child care, Neonatal Intensive Care Unit ("NICU") Nurses,
Maternal/Newborn Registered Nurses, Certified Childbirth Educators and Certified
Lactation Consultants. Referral services are also available for support programs
providing  social  workers,  bereavement  counselors  and  nutritionists.   Each
patient's  individual treatment plan and insurance coverage is reviewed prior to
commencement of services being rendered, except for childbirth education,  which
is privately contracted.

     The  Company's  primary  objective  is to enhance its  position in the home
health care market by increasing the promotion of its full service and specialty
health  care  capabilities  to existing  and new  referral  sources;  expand its
markets  and enter new markets by  establishing  additional  branch  offices and
acquiring other related health care businesses;  expand its provision of skilled
nursing  services,  principally  infusion  therapy and the care of women  during
pregnancy and their newborn children; and develop complimentary home health care
products and services,  as well as maintaining its regular  training and testing
programs, and recruitment activities.

     On December 8, 1997, a newly-formed wholly-owned subsidiary of the Company,
named  "NYHC  Newco  Paxxon,  Inc.",  a New  York  corporation  ("NYHC  Newco"),
purchased  from  Metro  Healthcare  Services,  Inc.,  a New  Jersey  corporation
("Metro"),  the home care business assets (other than accounts receivable) which
Metro  operated  in West  Orange,  Budd Lake and Jersey  City,  New Jersey for a
purchase price  consisting of $580,000 paid at closing and a promissory  note in
the  principal  sum of $200,000  payable in eight equal  quarterly  installments
commencing  March 5, 1998 together  with accrued  interest at a rate equal to 1%
per annum over the prime  interest rate  published by the Wall Street Journal on
December 8, 1997, adjusted quarterly. The promissory note is subordinated to all
obligations  due to the  Company's  banks or other  institutional  lenders.  The
promissory  note and the covenants of NYHC Newco are  guaranteed by the Company.
As part of the acquisition transaction, NYHC Newco assumed leasehold obligations
for the three offices located in West Orange (expiring  October 31, 2000),  Budd
Lake (expiring November 30, 2001) and Jersey City, New Jersey (expiring June 30,
1998) in the  aggregate  sum of  $5,638.67  per  month,  together  with  various
equipment leases for items of business equipment.

     On February 8, 1998, NYHC Newco purchased from Metro the home care business
assets  (other  than  accounts  receivable)  which  Metro  operated  in  Edison,
Shrewsbury  and Toms  River,  New  Jersey  for a purchase  price  consisting  of
$500,000 paid at closing and a promissory  note in the principal sum of $580,000
payable in twelve equal quarterly  installments  commencing May 5, 1998 together
with  accrued  interest at a rate equal to 1% per annum over the prime  interest
rate  published  by the Wall  Street  Journal  on  February  8,  1998,  adjusted
quarterly.  The promissory  note is  subordinated  to all obligations due to the
Company's  banks or other  institutional  lenders.  The promissory  note and the
covenants  of  NYHC  Newco  are  guaranteed  by  the  Company.  As  part  of the
acquisition  transaction,  NYHC Newco assumed a leasehold obligation for the one
office located in Toms River, New Jersey (expiring May 1, 1998) in the aggregate
sum of $2,400 per month,  together  with various  equipment  leases for items of
business equipment. It also entered into two leases for additional office space;
one in Shrewsbury, New Jersey (expiring February 28, 2001) at a rent of $700 per
month and the other in Edison,  New Jersey  (expiring May 31, 1999) at a rent of
$1,140 per month.


                                       4
<PAGE>

     On March 26,  1998,  NYHC Newco  purchased  from Heart to Heart  Healthcare
Services,  Inc.,  a New Jersey  corporation  ("Heart  to  Heart")  the home care
business assets (other than accounts  receivable)  which Heart to Heart operated
in East Orange and Hackensack,  New Jersey for a purchase price  consisting of a
promissory note in the principal sum of $1,150,000 payable in 24 equal quarterly
installments  commencing June 26, 1998 together with accrued  interest at a rate
equal to 1% per annum over the prime  interest rate published by the Wall Street
Journal  on  March  26,  1998,  adjusted  quarterly.   The  promissory  note  is
subordinated   to  all   obligations   due  to  the  Company's  banks  or  other
institutional  lenders.  The promissory note and the covenants of NYHC Newco are
guaranteed by the Company.  As part of the acquisition  transaction,  NYHC Newco
assumed  leasehold  obligations  for  the two  offices  located  in East  Orange
(expiring August 31, 2002) and Hackensack, New Jersey (expiring May 31, 1998) in
the aggregate sum of $1,815 per month,  together with various  equipment  leases
for items of business equipment. 

     As noted in the Company's  December 20, 1996  prospectus  and in Item 12. -
Certain Relationship and Related Transactions,  certain of its directors are the
sole  stockholders  of  Heart  to  Heart.  The  Company  therefore  obtained  an
independent  opinion that the terms and conditions of the acquisition are, under
all circumstances, fair to the Company.

     The Company is accounting for each of these acquisitions as a "purchase" in
accordance with Generally Accepted Accounting Principles.

      On February 22, 1999 NYHC Newco completed the acquisition of the assets of
a home health care office in  Shrewsbury,  New Jersey,  formerly  owned by Staff
Builders  Services,  Inc. for the purchase price of $65,000.  The newly acquired
Shrewsbury office had generated annualized revenues of approximately $600,000 by
providing home care services throughout Central New Jersey.

     The Company had been treated as an "S  Corporation"  under  Subchapter S of
the Internal  Revenue  Code since its  inception.  As a result,  the Company was
exempt from federal and certain state income taxes  attributable to its earnings
and such income taxes were instead the obligation of the Company's stockholders.
The Company terminated its S Corporation status during the last quarter of 1996.
As a result of the  termination,  the Company is subject to federal income taxes
at rates of up to 35% and may, in certain  circumstances,  become subject to the
federal  alternative  minimum tax imposed on  corporations.  The Company is also
subject to state and local income taxes.

     The  Company  maintains  its  principal  offices at 1850  McDonald  Avenue,
Brooklyn, NY 11223, telephone (718) 375-6700.

Industry Background.

     The home health care industry has grown  substantially over the past decade
according to published  industry  information.  In 1997, HCFA estimated that 3.4
million  enrollees  received  fee-for-service  home  health  services  in  1997,
representing  a greater than 40% rise from the number of home health  recipients
in 1990. For the period 1990-1997,  Medicare home health expenditures  increased
from $3.9 billion to an estimated  $17.2  billion.  Most of the rise in spending
occurred as a result of the  increase in visits,  from 70 million inn 1990 to an
estimated 270 million in 1997.  Medicaid home health  benefits  between 1994 and
1997 have increased from  approximately $7 billion and $12 billion.  The Company
believes that the primary  reasons for the growth in the home health care market
include the aging of the U.S.  population;  the realization of substantial  cost
savings through treatment at home as an alternative to hospitalization; advances
in medical  technology  which have enabled a growing  number of treatments to be
provided  in  the  home  rather  than  requiring  hospitalization;  the  general
preference  of  patients  to  receive  treatment  in  a  familiar   environment;
reductions  in the  length  of  hospital  stays as a result of  increasing  cost
containment  efforts in the health care industry;  growing acceptance within the
medical  profession of home health care and the rapid  increase in the incidence
of AIDS-related diseases and cancer.


                                       5
<PAGE>

   Aging Population.

     The number of individuals  over age 65 in the United States is estimated to
have  grown  from  25.7  million  in  1980,  or  11.3%  of  the  population,  to
approximately 34.1 million in 1996, or 12.9% of the population, and is projected
to  increase to more than 35 million,  or 12.8% of the  population,  by the year
2000.  The  elderly  have  traditionally  accounted  for two to three  times the
average per capita share of health care expenditures. As the number of Americans
over age 65  increases,  the need for home health care services is also expected
to increase.

   Cost Effectiveness of Home Health Care Services.

      National  health  care  expenditures  increased  from  approximately  $697
billion  in  1990  (12.6%  of the  United  States  gross  national  product)  to
approximately  $1,008 billion in 1995 (14.2% of the United States gross national
product)  and  approximately  to  $1,147  billion  in 1998 and is  projected  to
increase to more than $1,481  billion (15.9% of the United States cross national
product) by the year 2000. In response to rapidly rising costs, governmental and
private payers have adopted cost  containment  measures that  encourage  reduced
hospital  admissions,  reduced lengths of stay in hospitals and delayed nursing,
home admissions. Changes in hospital reimbursement methods under Medicare from a
cost-based  method  to a  fixed  reimbursement  method  based  on the  patient's
diagnosis  have created an  incentive  for earlier  discharge  of patients  from
hospitals.  These measures have in turn fostered an increase in home health care
which, when appropriate, provides medically necessary care at significantly less
expense than similar care provided in an institutional setting.

   Advances in Technology.

      Advances  in  technology  in the  past  decade  now  enable  patients  who
previously  required  hospitalization  to be treated at home.  For example,  the
development of a compact and portable  phototherapy  blanket performing the same
functions  as  bilirubin  lighting  systems in  hospitals  for the  treatment of
newborn children with jaundice, a common condition,  permits these infants to be
treated at home.  Prior to the  development  of this device,  these infants were
kept in the neonatal  unit of a hospital  even after the mother was  discharged.
This practice delayed mother-infant  bonding, made breast-feeding  difficult and
otherwise  caused  substantial  inconvenience  and concern to families at a time
when the mother was in a weakened state. Similar advances have been made in home
infusion therapy (which is provided by the Company) and rehabilitation equipment
permitting  treatments  at home,  which used to require  hospital  settings  for
pediatric and adult populations.

   Patient Preference and Physician Acceptance.

     The Company  believes  that,  if possible in any given case, a patient will
prefer to be treated at home rather than in an institutional  setting.  Further,
in the last decade,  the medical profession has shown greater acceptance of home
health care in the clinical management of patients.  As evidence of this greater
acceptance, the American Medical Association Councils on Scientific


                                       4
<PAGE>

Affairs and Medical  Education has  recommended  that training in the principles
and  practice  of home  health  care be  incorporated  into  the  undergraduate,
graduate and continuing education of physicians.

   Incidences of AIDS and Cancer.

     Increases in the incidence of AIDS/HIV infections and cancer have also been
responsible for a significant  portion of the growth in the home care market. As
of June 1998,  665,357 cases of AIDS had been reported to the Center for Disease
Control (not including those with less advanced HIV who could still benefit from
treatment).  During  their  treatment,  AIDS/HIV  patients  may receive  several
courses of  infusion  and other  therapies  typically  administered  by infusion
therapy companies,  including AZT, aerosolized Pentamidine(TM),  antibiotics and
nutritional support. The Company presently provides a limited amount of infusion
therapy with pharmaceuticals  provided by licensed suppliers.  The Company plans
to expand its infusion therapy operations during the next year. See "Home Health
Care Services."

     The  National  Cancer  Institute  estimates  that 8.2 million of  Americans
alive  today have a history  of cancer.  About  1,221,800  new cancer  cases are
expected to be diagnosed in 1999. Cancer treatment is one of the fastest growing
segments of outpatient  infusion  therapy due to increasing  numbers of patients
and  new   technologies   that  allow  for  the  therapy's  safe  and  effective
administration  in the home and at alternate site locations.  Over the course of
their  treatment,  cancer  patients  may require a range of infusion  therapies,
including chemotherapy, pain management and nutritional support.

     (b) Financial Information About Industry Segments

         Not Applicable

     (c) Narrative Description of Business

     The Company currently offers a broad range of support  services,  including
assistance with personal hygiene, dressing and feeding, meal preparation,  light
housekeeping  and  shopping,  and,  to a limited  extent,  physical  therapy and
standard skilled nursing services such as the changing of dressings, injections,
catheterizations and administration of medications. The Company's personnel also
train  patients in their own care,  monitor  patient  compliance  with treatment
plans,  make  reports to the  physicians  and  process  reimbursement  claims to
third-party  payers.  Among the  paraprofessionals  and nurses  supplied  by the
Company are those  fluent in Spanish,  Yiddish and Russian as well as  personnel
knowledgeable in the requirements and practices of Kosher homes.


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<PAGE>

Home Health Care Services

      The Company's  home health care services are provided  principally  by its
professional and  paraprofessional  staff, who provide personal care to patients
and, to a lesser  extent,  by its skilled  nursing  staff,  who provide  various
therapies  employing  medical  supplies  and  equipment  and  infusion  therapy.
Personal  care and nursing  services for a particular  patient can extend from a
few visits to years of service and can involve  intermittent or continuous care.
Approximately  70% of the Company's total net revenues in 1998 were attributable
to services by its paraprofessional staff.

Certified Paraprofessionals

     The Company's  certified  paraprofessional  staff provide a combination  of
unskilled nursing and personal care services to patients,  as well as assistance
with  daily  living,  tasks  such  as  hygiene  and  feeding,.  Consistent  with
applicable regulations,  all of the Company's aides are certified and work under
the  supervision  of a  licensed  professional  nurse.  Certain  aides have been
specially  trained by the Company to work with patients with  particular  needs,
such as new mothers and their newborn infants, patients with particular diseases
such as cancer,  AIDS or Alzheimer's  Disease and particular classes of patients
such as the developmentally disabled and terminal.

     The Company is approved by the New York State Department of Health to train
"Home Health Aides" and by the New York  Department of Social  Services to train
"Personal  Care Aides." The Company is also  approved by the Board of Nursing in
New  Jersey  to  train   "Certified  Home  Health  Aides".   Medicaid   provides
reimbursement for services performed by both Home Health Aides and Personal Care
Aides,  while Medicare provides  reimbursement only for the services provided by
Home Health  Aides.  In order to provide a qualified  and  reliable  staff,  the
Company  continuously  recruits,  trains,  provides continuing education for and
offers  benefits  and  other  programs  to  encourage  retention  of its  staff.
Recruiting  is conducted  primarily  through  advertising,  direct  contact with
community  groups and  employment  programs,  and the use of  benefits  programs
designed to encourage new employee referrals by existing employees.

     All  paraprofessional  personnel  must  pass a  written  exam  and a skills
competency test prior to employment, with all certificates having been validated
by the issuing  agency.  The  Director of Nursing or Director of  Maternal/Child
Health  in each of the  Company's  branch  offices  validates  the  professional
competency  of all new hires.  Newly  hired  employees  are  re-evaluated  as to
competency  within  six  months  of  their  employment  and  all  employees  are
re-evaluated on an on-going,  basis at least  semi-annually.  In addition,  they
undergo an orientation  program which includes material  regarding HIV patients,
Hepatitis  B,  universal  precautions  which  must be taken  with all  patients,
patient's  rights  issues,  and  the  Company's  policies  and  procedures.   An
orientation manual is also provided to each employee.


                                       6
<PAGE>

     Competition  for  qualified  staff has been  intense in recent  years.  The
Company  competes to attract and retain  personnel on the basis of  compensation
and working  conditions.  Among the benefits  which the Company  provides to its
staff  are  competitive  salaries,  a  401(k)  Plan and  employee-funded  health
insurance. The Company has generally not experienced difficulties in the past in
attracting  and  retaining  personnel.  It  believes  it will be able to compete
effectively in this area and satisfy its overall staffing requirements. However,
there can be no assurance  that  shortages of health care  professionals  in the
future will not occur and such shortages could  materially  effect the Company's
ability to maintain or increase its current commitments.

Licensed Professional Nurses

     The Company employs licensed  professional  nurses (both registered  nurses
and  licensed  practical  nurses) who provide  special and general  professional
nursing  services  (these nurses are employed on a per diem basis).  The Company
also employs  registered nurses who are responsible for training and supervising
the Company's  paraprofessional  staff, as well as providing backup in the field
for the nursing  staff which is providing  care (these  nurses are employed on a
salaried  basis).  General  nursing care is provided by registered  and licensed
practical nurses and includes  periodic  assessments of the  appropriateness  of
home  care,  the  performance  of therapy  procedures,  and  patient  and family
instruction.  Patients  receiving  such care  include  stabilized  postoperative
patients  recovering at home, patients who, although acutely ill, do not need to
be cared for in an acute care  facility  and  patients  who are  chronically  or
terminally ill.

     Specialty nurses are registered  nurses with experience or certification in
particular  specialities,  such as emergency service,  intensive care, oncology,
intravenous  therapy  or infant  and  pediatric  nursing.  The  Company  employs
specialty  nurses to provide a variety of therapies  and special care regimes to
patients in their homes. These specialty nurses also instruct patients and their
families  in the self  administration  of  certain  therapies  and in  infection
control,  emergency procedures and the proper handling and usage of medications,
medical supplies and equipment.

     The  Company's  licensed  professional  nurses also  provide a very limited
amount of in-home administration to patients of nutrients, antibiotics and other
medications  intravenously  (into a vein),  subcutaneously  (under  the skin) or
through feeding tubes,  utilizing supplies provided by licensed suppliers.  Such
intravenous therapy is used for antibiotic treatment,  parenteral nutrition (the
administration of nutrients), enteral nutrition (the administration of nutrients
directly into the digestive tract), growth hormone therapy, pain management, and
chemotherapy.  The duration,  progression and complexity of infusion  therapy is
governed by the patient's  disease and  condition and can range  anywhere from a
few weeks to many years.

     All nurses  hired by the  Company  must have at least  one year of current,
verifiable experience, including references and license verification. All nurses
working in specialty areas, must have at least two years of experience.


                                       7
<PAGE>

     While the provision of licensed professional nursing services accounted for
less than 30% of the  Company's  net revenues in 1998,  the Company has expanded
its maternal/child  care and infusion therapy operations in its existing markets
as well as new Geographic locations. See "Company Strategy."

Company Strategy

     The Company  continues  to move rapidly  towards its  objective to become a
comprehensive  provider of  efficient  and high  quality  home health care to an
increased  share of expanding  markets.  The primary  elements of the  Company's
strategy to achieve this objective are geographic expansion of its branch office
network by investment in additional  branch  offices and by the  acquisition  of
other home health care companies,  and by expansion of the services  provided by
its licensed professional nurses,  principally in the areas of infusion therapy,
pediatrics and maternal/child care. The Company intends to initially concentrate
its expansion  efforts in its current market areas and the counties  surrounding
those market areas. In addition to expansion into geographic  areas in proximity
to the Company's  current  branch  offices,  the Company will  generally seek to
enter and expand into new  metropolitan  areas in the  Northeast  and  Southeast
regions  of the United  States  which have large  patient  populations  and,  in
particular, patients traveling between these regions.

   Acquisitions

     A major  element of the  Company's  strategy is to acquire home health care
and related companies in order to diversify in additional geographic markets and
to increase  market share in the Company's  current markets and add patients and
referral sources to existing branch offices without adding substantial  overhead
cost. The Company is interested in home health care agencies (which are expected
to cost  between  $500,000 and $ 1,000,000  each),  infusion  therapy  companies
(which are expected to cost between  $750,000 and  $1,500,000  each) and durable
medical  equipment  businesses  (which are expected to cost between $400,000 and
$800,000 each) in the states of New York, New Jersey, Pennsylvania, Connecticut,
North Carolina, Georgia and Florida. However, there can be no assurance that any
such  acquisition  which may be consistent  with the Company's  strategy will be
available or, if  available,  that it will be at a price which the Company deems
to be favorable.

     On December 8, 1997, a newly-formed wholly-owned subsidiary of the Company,
named  "NYHC  Newco  Paxxon,  Inc.",  a New  York  corporation  ("NYHC  Newco"),
purchased  from  Metro  Healthcare  Services,  Inc.,  a New  Jersey  corporation
("Metro"),  the home care business assets (other than accounts receivable) which
Metro  operated  in West  Orange,  Budd Lake and Jersey  City,  New Jersey for a
purchase price  consisting of $580,000 paid at closing and a promissory  note in
the  principal  sum of $200,000  payable in eight equal  quarterly  installments
commencing  March 5, 1998 together  with accrued  interest at a rate equal to 1%
per annum over the prime  interest rate  published by the Wall Street Journal on
December 8, 1997, adjusted quarterly. The promissory note is subordinated to all
obligations  due to the  Company's  banks or other  institutional  lenders.  The
promissory  note and the covenants of NYHC Newco are  guaranteed by the Company.
As part of the acquisition transaction, NYHC Newco assumed leasehold obligations
for the three offices located in West Orange (expiring  October 31, 2000),  Budd
Lake (expiring November 30, 2001) and Jersey City, New Jersey (expiring June 30,
1998) in the  aggregate  sum of  $5,638.67  per  month,  together  with  various
equipment leases for items of business equipment.

     On February 8, 1998, NYHC Newco purchased from Metro the home care business
assets  (other  than  accounts  receivable)  which  Metro  operated  in  Edison,
Shrewsbury  and Toms  River,  New  Jersey  for a purchase  price  consisting  of
$500,000 paid at closing and a promissory  note in the principal sum of $580,000
payable in twelve equal quarterly  installments  commencing May 5, 1998 together
with  accrued  interest at a rate equal to 1% per annum over the prime  interest
rate  published  by the Wall  Street  Journal  on  February  8,  1998,  adjusted
quarterly.  The promissory  note is  subordinated  to all obligations due to the
Company's  banks or other  institutional  lenders.  The promissory  note and the
covenants  of  NYHC  Newco  are  guaranteed  by  the  Company.  As  part  of the
acquisition  transaction,  NYHC Newco assumed a leasehold obligation for the one
office located in Toms River, New Jersey (expiring May 1, 1998) in the aggregate
sum of $2,400 per month,  together  with various  equipment  leases for items of
business equipment. It also entered into two leases for additional office space;
one in Shrewsbury, New Jersey (expiring February 28, 2001) at a rent of $700 per
month and the other in Edison,  New Jersey  (expiring May 31, 1999) at a rent of
$1,140 per month.


                                       10
<PAGE>

     On March 26,  1998,  NYHC Newco  purchased  from Heart to Heart  Healthcare
Services,  Inc.,  a New Jersey  corporation  ("Heart  to  Heart")  the home care
business assets (other than accounts  receivable)  which Heart to Heart operated
in East Orange and Hackensack,  New Jersey for a purchase price  consisting of a
promissory note in the principal sum of $1,150,000 payable in 24 equal quarterly
installments  commencing June 26, 1998 together with accrued  interest at a rate
equal to 1% per annum over the prime  interest rate published by the Wall Street
Journal  on  March  26,  1998,  adjusted  quarterly.   The  promissory  note  is
subordinated   to  all   obligations   due  to  the  Company's  banks  or  other
institutional  lenders.  The promissory note and the covenants of NYHC Newco are
guaranteed by the Company.  As part of the acquisition  transaction,  NYHC Newco
assumed  leasehold  obligations  for  the two  offices  located  in East  Orange
(expiring August 31, 2002) and Hackensack, New Jersey (expiring May 31, 1998) in
the aggregate sum of $1,815 per month,  together with various  equipment  leases
for items of business equipment. 

    As noted in the Company's  December 20, 1996  prospectus  and in Item 12. -
Certain Relationship and Related Transactions,  certain of its directors are the
sole  stockholders  of  Heart  to  Heart.  The  Company  therefore  obtained  an
independent  opinion that the terms and conditions of the acquisition are, under
all circumstances, fair to the Company.

      On February 22, 1999,  NYHC Newco  completed the acquisition of the assets
of a home health care office in Shrewsbury,  New Jersey, formerly owned by Staff
Builders  Services,  Inc., for a purchase  price of $65,000.  The newly acquired
Shrewsbury  office generated  annualized  revenues of approximately  $600,000 by
providing home care services throughout central New Jersey.

      The Company management believes that it has successfully integrated all of
its acquisitions,  with minimum interruptions to its daily operations.  This has
been accomplished by the formation of a mergers and acquisitions  ("M&A") group,
which includes Chief Executive Officer, Chief Operating Officer, Chief Financial
Officer and Vice  President of Clinical  Operations.  The Company has integrated
its billing,  payroll and clinical  services to all new locations to ensure they
meet its high quality  standards.  The experience  acquired  during this process
should allow the Company to continue down its path of  significant  M&A activity
in order to become  one of the  leading  home  health  agencies  in the New York
metropolitan area.

     The Company is accounting for each of these acquisitions as a "purchase" in
accordance with Generally Accepted Accounting Principles.

   Branch Offices

     The home health care industry is, fundamentally,  a local one in which both
the patients and the referral sources (such as hospitals,  home health agencies,
social service agencies and physicians) are located in the local geographic area
in which the  services  are  provided.  The Company  seeks to serve local market
needs  through  its  branch  office  network,  run by  branch  managers  who are
responsible  for  all  aspects  of  local  office   decision-making,   including
recruiting,  training,  staffing,  and marketing.  In December 1997, the Company
acquired  three branch  offices in West Orange,  Budd Lake and Jersey City,  New
Jersey.  In February  1998,  the Company  acquired an  additional  three  branch
offices in Edison,  Shrewsbury  and Toms River,  New Jersey.  In March 1998, the
Company acquired  another two branch offices in East Orange and Hackensack,  New
Jersey.  In February 1999, the Company acquired the assets of a branch office of
Staff Builders in Shrewsbury, New Jersey. See Item 1(a) - General Development of
Business;  Item 2 - Description of Properties;  Item 6 - Management's Discussion
and Analysis of Financial  Condition  and Results of  Operations - Liquidity and
Capital Resources; and Item 12 - Certain Relationships and Related Transactions.
The Company intends to open additional branch offices


                                       8
<PAGE>

in New York  State,  subject  to  entering  agreements  with the  local New York
Department of Social Services agencies. In addition, the Company hopes to expand
further into New Jersey,  Pennsylvania and Connecticut in order to offer a wider
geographic coverage to the health maintenance organizations ("HMO's") and health
care  insurance  organizations  with  which  it  deals,  and to  add  additional
organizations.  This further  expansion is subject to the  completion  of market
surveys in the various  locations to ascertain the extent to which existing home
care  medical  needs are not being met as well as  competition  and  recruitment
issues.

   Expansion of Infusion Therapy

     The  Company  presently  provides  infusion  therapy  service to  patients,
utilizing  pharmaceuticals  provided by licensed suppliers.  Management believes
that the total market for home  infusion  therapy is  continuing  its growth and
that  increasing  the provision of infusion  therapy will build on the Company's
strength in providing nursing services, because such therapies generally require
administration  by  specialty  nurses.  The  Company  will  also  seek to supply
infusion therapy patients with the other home health care services and therapies
which they often require and which are offered by the Company. While the Company
has no current commitments to establish infusion therapy facilities,  it intends
to pursue the  establishment  of such  facilities  in order to increase its very
small market  share.  However,  there can be no assurance  that the Company will
expand its infusion therapy business or, if expanded,  that it will conduct such
a business on a profitable basis.

   Professional Care Resources

     The Company  intends to continue its expansion of its  maternal/child  care
division, Special Deliveries, as well as its pediatric care programs in order to
meet the needs which  management  believes are being created by early  discharge
programs.  The existing  referral  base utilized by the Company from the various
agencies, social workers, case managers and physicians will be used to meet what
management  perceives  to be a need not  being met by the  current  pool of home
health care  agencies.  The Company  expects that the  expansion of this program
will require the hiring of an  additional  service  directors  with an extensive
background  in  pediatrics  to assist  the  Directors  of Nursing in each of the
Company's  branch offices.  Additional  support staff will also be required,  as
well as new training, materials, assistant directors, coordinators and marketing
staff.  The Company  also  expects  that  expansion  of the  Special  Deliveries
division will result in the acquisition of additional office facilities.

Organization and Operations

     The  Company  operates  24  hours  a day,  seven  days a week,  to  receive
referrals and coordinate services with physicians,  case managers,  patients and
their  families.  The Company  provides  services  through its 12 principal  and
branch offices and three recruitment and training, offices. The Company seeks to
achieve economies of scale by having each branch office serve a large


                                       9
<PAGE>

patient population.  Each office conducts its own marketing efforts,  negotiates
contracts  with  referral  sources,   recruits  and  trains   professionals  and
paraprofessionals  and coordinates  patient care and care givers. Each office is
typically  staffed  with  a  branch  manager,   director  of  nursing,   nursing
supervisor, home care coordinators, clerical staff and nursing services staff.

     The Company's  principal  office retains all functions  necessary to ensure
quality of patient care and to maximize financial efficiency. Services performed
at the principal  office  include  billing and  collection,  quality  assurance,
financial and accounting  functions,  policy and procedure  development,  system
design and development,  corporate  development and marketing.  The Company uses
financial  reporting  systems  through  which it  monitors  data for each branch
office, including patient mix, volume,  collections,  revenues and staffing. The
Company's systems also provide monthly budget analysis, financial comparisons to
prior periods and comparisons among the Company's branch offices. The Company is
in the process of acquiring  new computer  hardware and upgrade its software and
other  systems  with  the  intention  of  increasing  its  processing  capacity,
enhancing  its database  capabilities  and clinical  management  capacities  and
improving collections and financial management.

   Work Flow

     A case is initiated by one of the Company's  referral sources  contacting a
branch  office and advising it of the  patient's  general  location,  diagnosis,
types of services  required,  hours of service required and the time of day when
the services are to be rendered.  The branch  office then  contacts the referral
source as promptly as possible with the  identification  of the staff person who
will be rendering the service,  after which the referral source transmits to the
branch  office a detailed copy of the plan for the  patient's  home care,  which
includes  the type of care to be  rendered,  the  method  by which it  should be
rendered, the precise location and hours.

     The supervisory  staff at the branch office then reviews the care plan with
the staff member(s) who will be providing the care and then dispatches the staff
member(s) to begin rendering the care, usually the next day.

     The  clerical  staff at the branch  office  enters  all of the  information
regarding  the case into the local area computer  network of the branch  office,
which then generates the work schedule for the staff member(s), which provides a
detailed  description  of the services to be  rendered,  the hours and number of
days  during  which  the  care is to be  provided.  All of this  information  is
spontaneously received by the Company's principal office by way of the wide area
computer  network  linking the principal  office to each of the branch  offices.
This  information is then processed by the principal office computer system on a
weekly basis to (generate the documentation of the services being provided. Such
documentation  is then used to  generate  the billing for the service as well as
process the payroll for the staff member(s) providing the service.


                                       10
<PAGE>

   Referral Sources

     The Company obtains patients  primarily through  contracts,  referrals from
hospitals, community-based health care institutions and social service agencies,
case management and insurance companies.  Referrals from these sources accounted
for  substantially  all of the  Company's  net  revenues  in 1998.  The  Company
generally  conducts  business with most of its  institutional  referral sources,
including those referred to below,  under one-year contracts which fix the rates
and terms of all future referrals but do not require that any referrals be made.
Under these  contracts,  the referral  sources refer patients to the Company and
the Company bills the referral sources for services provided to patients.  These
contracts also  generally  designate the kinds of services to be provided by the
Company's employees, liability insurance requirements, billing and recordkeeping
responsibilities,  complaint  procedures,  compliance with applicable  laws, and
rates for  employee  hours or days  depending  on the  services to be  provided.
Approximately 150 such contracts were in effect as of December 31, 1998.

     One or more referring  institutions  have accounted for more than 5% of the
Company's net revenues  during the Company's last two fiscal years, as set forth
in the following table:

                                                 Percentage of Net Revenues
   Referring Institution                            1998            1997
   ---------------------                         -----------      ---------
   New Jersey Medical Assistance Program            21.4%             .7%
   County Departments of Social Services(l)         18.6%           22.7%
   Beth Abraham Health Services                      8.3%           10.0%
   Kingsbridge Medical Center                        5.5%            6.4%
   Center for Nursing and Rehabilitation             2.7%            5.0%
                                                                
----------
(1)  The various  county  departments  of social  services are funded by the New
     York State  Department of Health which, as of October 1, 1996,  assumed the
     responsibility  for the overall  administration of Medicaid programs in New
     York formerly administered by the New York Department of Social Services.

     Overall,  the Company's ten largest  referring  institutions  accounted for
approximately 67% of net revenues for 1998 and 68% of net revenues for 1997.

   Billing and Collection

     The  Company   screens  each  new  case  to  determine   whether   adequate
reimbursement  will be  available  and has  developed  substantial  expertise in
processing  claims. The Company makes a concerted effort to provide complete and
accurate claims data to the relevant payer sources in order


                                       11
<PAGE>

to accelerate the collectibility of its accounts receivable. 

      Days Sales Outstanding  ("DSO") is a measure of the average number of days
taken by the Company to collect its  accounts  receivable,  calculated  from the
date services are billed.  For the year ended  December 31, 1998,  the Company's
DSO was 103,  compared to 122 days for the year ended  December  31,  1997.  The
improvement  of 19 days in DSO is the net  effect of  combining  the New  Jersey
DSO's  (which  consist  primarily  of medicaid  billings) of 39 days and the New
York's DSO's which are 135 days.

     The Company licenses the Dataline Home Care System, a computerized  payroll
system  designed to produce  invoices for services  rendered as a by-product  of
employee  compensation.   Automated  schedules  and  staffing  requirements  are
maintained  in the  Company's  offices,  with the ability to enter all  relevant
patient and employee demographic information. The payroll is processed weekly at
the Company's  principal office in Brooklyn.  This office is responsible for the
processing  of  data,   ensuring  the   availability  of  all  required  billing
documentation and its accuracy, and the printing and distributing of payments.

     Once  payroll  processing  is  completed,  the  Company's  computer  system
generates the resulting invoices  automatically.  The necessary documentation is
attached to all invoices that are mailed to clients.

     In the  opinion  of  management,  there is no  reason to  believe  that any
computer  system or software  used  internally  by the Company  will  materially
affect transactions with any customer,  supplier or business partner,  now or in
the future.  The Company cannot predict the impact that year 2000 failure of any
computer system  operated by the Company's  suppliers and customers will have on
the Company's operations.

     Management  reviews  reports  for all  phases of the  billing  process  and
prepares reconciliations for the purpose of ensuring accuracy and maintenance of
controls. When errors are found, new processes are developed, as appropriate, to
ensure  and  improve  the  quality  and  accuracy  of the  billing  process  and
responsiveness to clients' needs and requirements.

     Accounts  receivable  reports  are  produced  weekly and are  analyzed  and
reviewed by staff and management to locate negative trends or emerging  problems
which would require  immediate  attention.  All unpaid invoices are reviewed and
telephone  contacts  established  for invoices  over 90 days old. The  Company's
experience  with  collection of accounts  receivable  has been  favorable,  with
uncollectible accounts within the allowances provided by the Company.

     Private  patients are required to pay the one week fee for their service in
advance,  as a deposit for services to be provided.  For patients with insurance
covering home health services,  the Company accepts  assignment of the insurance
and submits  claims if the carrier  first  verifies  coverage  and  eligibility.
Payments from private  patients are required to be made weekly,  as invoices are
submitted and, if unpaid over three weeks,  result in follow-up  telephone calls
to ensure prompt


                                       12
<PAGE>

payment.  Requests for terms from private  patients  are  generally  honored and
payment  arrangements  structured based on the patient's financial resources and
ability  to pay.  Unresponsive  accounts  are  referred  to  outside  collection
agencies.

   Reimbursement

      The  Company  is  reimbursed  for its  services,  primarily  by  referring
institutions,  such as health care  institutions  and social  service  agencies,
which in turn receive their reimbursement from Medicaid, Medicare and, to a much
lesser  extent,  through  direct  payments by  insurance  companies  and private
payers. New York State and New Jersey Medicaid programs constitute the Company's
largest reimbursement source, when including both direct Medicaid  reimbursement
and  indirect  Medicaid  payments  through  many  of  the  Company's   referring
institutions.  For 1997 and 1998,  payments from  referring  institutions  which
receive  direct  payments  from  Medicare  and  Medicaid,  together  with direct
reimbursement to the Company from Medicaid,  accounted for approximately 94% and
95%,  respectively,  of net revenues. For the same periods, a significant number
of  referring   institutions  with  home  health  care  programs  accounted  for
approximately  69% and 54%,  respectively,  of net  revenues  for 1997 and 1998.
Direct reimbursements from private insurers,  prepaid health plans, patients and
other private sources  accounted for approximately 6% and 5% of net revenues for
the calendar years 1996 and 1997, respectively.

     The New  York  State  Department  of  Health,  in  conjunction  with  local
Departments  of Social  Services,  promulgates  annual  reimbursement  rates for
patients  covered  by  Medicaid.  These  rates are  generally  established  on a
county-by-county  basis, using a complex  reimbursement  formula applied to cost
reports  filed by  providers.  The  Company has filed all  required  annual cost
reports for each of its offices which provide  services to Medicaid  recipients.
Generally,  the first report filed (called a "budgeted" report) uses projections
to develop  the  current  year's  reimbursement  rate,  subject  to  retroactive
recapture  of any  monies  paid by local  Departments  of  Social  Services  for
budgeted  expenses  which are greater  than the actual  expenses  incurred.  The
Company's expenses have always equaled or exceeded the budgeted amounts.

     Third party payers, including Medicaid, Medicare and private insurers, have
taken extensive steps to contain or reduce the costs of health care. These steps
include reduced  reimbursement rates,  increased  utilization review of services
and negotiated  prospective or discounted  pricing and adoption of a competitive
bid approach to service  contracts.  Home health care,  which is generally  less
costly to third party payers than  hospital-based  care, has benefited from many
of these cost containment measures.

     The New York State  Department  of Health issues  Certificates  of Need for
Certified Home Health Agencies  ("CHHA's"),  which provide  post-acute home care
services  for people who have just been  discharged  from a hospital but are not
yet fully recovered, and Long-Term Home


                                       13
<PAGE>

Health Care  Programs  ("LTHHCP's"),  also known as the  "Nursing  Home  Without
Walls,"  which is intended to provide  elderly  people with an  alternative  for
long-term  care other than by  entering a nursing  home at less than the cost of
nursing home care. The Company negotiates its contracts with CHHA's and LTHHCP's
on the basis of services to be provided,  in connection  with  contracts  either
currently in effect with the Company or with other agencies.  Prevailing  market
conditions  are  such  that,  despite  escalating  operating  expenses,  reduced
contract  rates  are  regularly  "demanded"  as  a  result  of  internal  budget
restraints  and  reductions  mandated  by managed  care  contracts  between  the
Company's  clients  and  HMO's  and  other  third  party  administrators.  While
management anticipates that this trend is likely to continue for the foreseeable
future,  it does not expect the impact on the Company to be  significant,  since
its rates are  competitive  and,  therefore,  are expected to be subject to only
minor  reductions.  However,  as  expenditures  in the home  health  care market
continue  to grow,  initiatives  aimed at  reducing  the  costs of  health  care
delivery at non-hospital sites are increasing.  A significant change in coverage
or a reduction in payment  rates by third party  payers,  particularly  New York
State  Medicaid,  would  have a  material  adverse  effect  upon  the  Company's
business.

Quality Assurance

     The Company has established a total quality  management program including a
quality  assurance  program to ensure that its service standards are implemented
and that the objectives of those standards are met. The Company believes that it
has developed and implemented  service  standards that comply with or exceed the
service standards required by JCAHO. The Company received  "Accreditation"  from
JCAHO after its triannual survey in November 1997. In February 1996, the Company
was selected by the University of Colorado Health Sciences Center as one of only
22 home health care agencies participating in a two to three year study known as
the New York State Outcome-Based  Quality Improvement in Home Care Demonstration
project being funded by the New York State  Department  of Health,  by reason of
the Company's commitment to both quality assurance and improvement.  The Company
believes that its reputation for quality patient care has been and will continue
to be a significant  factor in its success.  An adverse  determination  by JCAHO
regarding the Company on any branch office could adversely  affect the Company's
reputation and competitive position.

     The Company's quality assurance program includes the following:

     Quality Advisory Board. The Company maintains a Professional Advisory Board
for its branch offices, which consists of a physician, nursing professionals and
representatives of branch management. The Professional Advisory Board identifies
problems and  suggests  ways to improve  patient care based on internal  quality
compliance audits and clinical and personnel record reviews.

     Internal Quality  Compliance Review Process.  Periodic internal reviews are
conducted  by  the   Company's   management  to  ensure   compliance   with  the
documentation and


                                       14
<PAGE>

operating  procedures  required  by state  law,  JCAHO  standards  and  internal
standards.  Written  reports are forwarded to the director of nursing and branch
managers.  The Company believes that the internal review process is an effective
management tool for the director of nursing and branch managers.

     Case conferences.  Staff  professionals  regularly hold case conferences to
review  problem  and high risk  cases,  the  physician's  treatment  and Company
services  provided for such cases in order to ensure  appropriate,  safe patient
care and to evaluate patient progress and plans for future care.

     Clinical Record Review.  Clinical record review is the periodic  evaluation
of the  documentation in patient clinical records.  In this review process,  the
Company  evaluates the performance of the nursing  services staff to ensure that
professional  and patient care  policies  are followed in providing  appropriate
care and that the  needs of  patients  are being  met.  Clinical  record  review
findings are documented and reviewed by the  applicable  Quality  Advisory Board
for recommendations.

Sales and Marketing

     The Company's  executive  officers,  Jerry Braun and Jacob  Rosenberg,  are
principally responsible for the marketing of the Company's services. Each branch
office director is also  responsible for sales activities in the branch office's
local  market  area.  The  Company  attempts  to  cultivate  strong,   long-term
relationships  with referral  sources through high quality service and education
of local health care personnel about the appropriate role of home health care in
the clinical management of patients.

Government Regulation

     The federal government and the States of New York and New Jersey, where the
Company currently operates, regulates various aspects of the Company's business.
Changes in the law or new  interpretations  of existing laws can have a material
effect on permissible  activities of the Company,  the relative costs associated
with doing  business and the amount of  reimbursement  by  government  and other
third-party payers.

     The Company is licensed by New York State as a home care  services  agency.
The  state  requires  approval  by the New  York  State  Public  Health  Council
("Council")  of any  change in "the  controlling  person"  of an  operator  of a
licensed  home  care  services  agency ( a  "LHCSA").  Control  of an  entity is
presumed to exist if any person owns, controls or holds the power to vote 10% or
more of the voting  securities  of the LHCSA.  A person  seeking  approval  as a
controlling  person of a LHCSA, or of an entity that is the operator of a LHCSA,
must  file an  application  for  Council  approval  within  30 days of  becoming
controlling  person and, pending a decision by the Council,  such person may not
exercise  control of the LHCSA. If any person should become the owner or holder,
or  acquire  control  of or the  right  to vote  10% or more of the  issued  and
outstanding Common


                                       15
<PAGE>

Stock of the Company,  such person could not exercise  control of the  Company's
LHCSA until an application for approval of such  ownership,  control or holding,
has been submitted to the Council and approved. In the event such an application
is not approved,  such owner or holder may be required to reduce their ownership
or  holding to less than 10% of the  Company's  issued  and  outstanding  Common
Stock.

     The Company is also subject to federal and state laws prohibiting  payments
for patient  referrals and  regulating  reimbursement  procedures  and practices
under Medicare,  Medicaid and state programs.  The federal Medicare and Medicaid
legislation contains anti-kickback provisions which prohibit any remuneration in
return for the referral of Medicare and Medicaid patients. Courts have, to date,
interpreted  these  anti-kickbacks  laws to apply to a broad range of  financial
relationships.  Violations of these  provisions may result in civil and criminal
penalties,  including fines of up to $15,000 for each separate service billed to
Medicare  in  violation  of  the   antikickback   provisions,   exclusion   from
participation  in the Medicare and state  health  programs  such as Medicaid and
imprisonment for up to five years.

     The Company's healthcare operations  potentially subject it to the Medicare
and  Medicaid  anti-kickback  provisions  of  the  Social  Security  Act.  These
provisions are broadly worded and often vague, and the future  interpretation of
these provisions and their  applicability to the Company's  operations cannot be
fully predicted with certainty.  There can be no assurance that the Company will
be able to arrange its  acquisitions or business  relationships  so as to comply
with these laws or that the Company's  present or future  operations will not be
accused of violating',  or be determined to have violated, such provisions.  Any
such result could have a material adverse effect on the Company.

     Various Federal and state laws regulate the relationship among providers of
healthcare services,  including employment or service contracts,  and investment
relationships.  These laws include the broadly worded fraud and abuse provisions
of the Social  Security  Act that are  applicable  to the  Medicare and Medicaid
programs,  which prohibit various  transactions  involving  Medicare or Medicaid
covered  patients or services.  Among other things,  these  provisions  restrict
referrals for certain  designated health services by physicians to entities with
which the physician or the physician's  immediate family member has a "financial
relationship"  and the  receipt of  remuneration  by anyone in return for, or to
induce,  the  referral  of a patient  for  treatment  or  purchasing  or leasing
equipment  or services  that are paid for,  in whole or in part,  by Medicare or
Medicaid.  Violations  of these  provisions  may  result  in  civil or  criminal
penalties for individuals or entities and/or exclusion from participation in the
Medicare and Medicaid  programs.  The future  interpretation of these provisions
and their  applicability to the Company's  operations  cannot be fully predicted
with certainty.

     In May 1991,  the United  States  Department  of Health and Human  Services
adopted  regulations  creating  certain "safe harbors" from federal criminal and
civil  penalties by  identifying  certain types of joint venture and  management
arrangements that would not be treated as violating


                                       16
<PAGE>

the federal  anti-kickback  laws  relating to referrals of patients for services
paid by the  Medicare and Medicaid  programs.  It is not possible to  accurately
predict the ultimate impact of these regulations on the Company's business.

     New York and other states also have  statutes and  regulations  prohibiting
payments for patient  referrals and other types of financial  arrangements  with
health  care  providers  which,  while  similar in many  respects to the federal
legislation,  vary from state to state,  are often  vague and have  infrequently
been  interpreted by courts or regulatory  agencies.  Sanctions for violation of
these state  restrictions  may include loss of licensure  and civil and criminal
penalties.  In addition,  the  professional  conduct of  physicians is regulated
under  state  law.  Under  New York  law,  it is  unprofessional  conduct  for a
physician to receive, directly or indirectly, any fee or other consideration for
the  referral  of a patient.  Finally,  under New York law, a  physician  with a
financial  interest in a health care provider must disclose such  information to
the patients and advise them of alternative providers.

     The Company believes that the foregoing  arrangements in particular and its
operations in general comply in all material  respects with  applicable  federal
and state laws relating to  anti-kickbacks,  and that it will be able to arrange
its  future  business  relationships  so as to  comply  with the fraud and abuse
provisions.

     Management  believes that the trend of federal and state  legislation is to
subject  the  home  health  care  and  nursing  services   industry  to  greater
regulation,  particularly  in  connection  with  third-party  reimbursement  and
arrangements  designed  to induce or  encourage  the  referral  of patients to a
particular  provider  of  medical  services.  The  Company is  attempting  to be
responsive  to such  regulatory  climate.  However,  the  Company  is  unable to
accurately  predict  the  effect,  if any,  of  such  regulations  or  increased
enforcement activities on the Company's future results of operations.

     In addition, the Company is subject to laws and regulations which relate to
business corporations in general,  including antitrust laws, occupational health
and safety laws and environmental laws (which relate, among other things, to the
disposal,  transportation and handling of hazardous and infectious wastes). None
of these laws and regulations has had a material adverse effect on the Company's
business or competitive  position or required material  expenditures on the part
of the Company, although no assurance can be given that such will continue to be
the case in the future.

     The Company is unable to accurately predict what additional legislation, if
any,  may be enacted in the future  relating  to the  Company's  business or the
health care industry,  including third-party  reimbursement,  or what effect any
such legislation may have on the Company.

     The Company has never been denied any license it has sought to obtain.  The
Company  believes that its operations are in material  compliance with all state
and federal regulations and licensing requirements.


                                       17
<PAGE>

Competition

     The  home  health  care  market  is  highly   fragmented  and   significant
competitors  are  often  localized  in  particular   geographical  markets.  The
Company's  largest  competitors  include U.S. Home Care,  Inc.,  Star Multicare,
Inc.,  Pediatric  Services of America,  Inc.,  Patient Care,  Inc., Plaza Nurses
Agency,  Inc. and Personal Touch Home Care  Services,  Inc. The home health care
business is marked by low entry  costs.  The Company  believes  that,  given the
increasing  level  of  demand  for  nursing  services,   significant  additional
competition can be expected to develop in the future. Some of the companies with
which the Company  presently  competes  in home  health care have  substantially
greater  financial  and human  resources  than the  Company.  The  Company  also
competes with many other small temporary medical staffing agencies.

     The home  infusion  therapy  market is highly  competitive  and the Company
expects that the competition will intensify.  As the Company seeks to expand its
provision of infusion therapy  services,  it will compete with a large number of
companies and programs in the areas in which its facilities are located. Many of
these are local operations servicing a single area; however,  there are a number
of large national and regional companies, including Olsten Kimberly QualityCare,
Inc., Coram Health Care Corp., Staff Builders, Inc. and Interim Personnel,  Inc.
In addition,  certain hospitals,  clinics and physicians,  who traditionally may
have been referral sources for the Company, have entered or may enter the market
with local programs.

     The Company believes that the principal competitive factors in its industry
are  quality  of care,  including  responsiveness  of  services  and  quality of
professional  personnel;  breadth of  therapies  and nursing  services  offered;
successful referrals from referring  Government  agencies,  hospitals and health
maintenance  organizations;  general reputation with physicians,  other referral
sources  and  potential  patients;  and price.  The  Company  believes  that its
competitive  strengths have been the quality,  responsiveness,  flexibility  and
breadth of services and staff it offers,  and to some extent price  competition,
as well as its reputation with physicians, referral sources and patients.

     The United  States  health  care  industry  generally  faces a shortage  of
qualified  personnel.  Accordingly,  the Company experiences intense competition
from other companies in recruiting  qualified health care personnel for its home
health  care  operations.  The  Company's  success  to date has  depended,  to a
significant  degree,  on its ability to recruit and retain qualified health care
personnel.   Most  of  the  registered  and  licensed  nurses  and  health  care
paraprofessionals  who are employed by the Company are also registered with, and
may accept placements from time to time through, competitors of the Company. The
Company   believes  it  is  able  to  compete   successfully   for  nursing  and
paraprofessional   personnel  by  aggressive   recruitment   through   newspaper
advertisements,   flexible   work   schedules   and   competitive   compensation
arrangements.  There can be no assurance, however, that the Company will be able
to continue to attract and retain qualified  personnel.  The inability to either
attract or retain such qualified  personnel would have a material adverse effect
on the Company's business.


                                       18
<PAGE>

Employees

     On  March  31,  1999,  the  Company  had  1,335  employees,  of whom 85 are
salaried,  including 3 executive  officers,  1 vice president of  operations,  2
regional  managers,  1 program  director,  1  administrative  director  of field
operations, 9 branch managers, 8 directors of nursing, 7 nursing supervisors,  1
director of patient services,  22  accounting/clerical  staff and 30 field staff
supervisors.  The  remaining  1,250  employees  are paid on an hourly  basis and
consist of professional and  paraprofessional  employees.  None of the Company's
employees  are  compensated  on an  independent  contractor  basis.  The Company
believes that its employee  relations are good. None of the Company's  employees
are represented by a labor union.

Other Matters

     The Company's  authorized  capital stock  consists of 12,500,000  shares of
Common Stock,  par value $.01 per share and 2,000,000 shares of Preferred Stock,
par value $.01 per share. The authorized  shares of capital stock give effect to
a 56,625 for 1 stock split  effected  March 26,  1996,  a 1.25 for 1 stock split
effected October 17, 1996 and a .8830022 for 1 stock split effected  December 4,
1996.

      In December  1996 the Company  successfully  completed  an initial  public
offering   ("IPO")  with  H.J.   Meyers  &  Co.,  Inc.,  as   underwriter   (the
"Underwriter") in which it issued 1,250,000 shares of Common Stock at a price of
$4.00 per share.  This offering  resulted in net proceeds to the Company,  after
the payment of all costs relating to the offering, of $3,765,703.

     The following is the amount of net offering  proceeds  which have been used
for each of the purposes listed below as of December 31, 1998.

    Acquisition of other businesses                      $2,711,663
    Funding of infusion therapy division (1)             $   45,000
    Funding of pediatric division (2)                         --
    Establishment of new branch offices (3)              $   92,593
    Sales and marketing                                  $  143,000
    Establishment of new principal office                $  106,283
    Upgrade of facilities and computer systems           $  153,132
    Working capital (1)(2)(3)(4)                         $  587,363  

     The uses and proceeds  described  above and in the  footnotes  below do not
represent  a  material  change  in  the  uses  of  proceeds   described  in  the
Registrant's December 20, 1996 prospectus.
                
1.   Working  capital of  approximately  $30,000  has also been used to fund the
     Company's infusion therapy division receivables.

2.   Working  capital  of  approximately  $70,000  has  been  used to  fund  the
     Company's pediatric division receivables.

3.   The balance of the $500,000 use of proceeds allocation for establishing new
     branch  offices has been used for that purpose in the  acquisition of other
     businesses.

4.   Approximately  $400,000  of working  capital  has been used to finance  the
     receivables of the eight New Jersey branch offices which were acquired from
     other businesses.

      The Registrant's  current bank credit lines have increased from $3,500,000
to $6,000,000  (after the repayment  noted above) of which  $2,600,000  has been
utilized as of December 31, 1998.  The  Registrant  will draw down from its bank
credit lines,  as disclosed in the  prospectus,  to fund the additional  uses of
proceeds which remain unfunded.

     A portion of the proceeds allocated to acquisition of other businesses were
used to  acquire  the home care  business  assets  of Heart to Heart  Healthcare
Services,  Inc. ("Heart to Heart"),  which was an affiliate of the Registrant as
described below.


                                       22
<PAGE>

Common Stock

     The holders of Common Stock are entitled to one vote for each share held of
record on all  matters to be voted on by  stockholders.  There is no  cumulative
voting  with  respect to the  election  of  directors  with the result  that the
holders  of more than 50% of the  shares  of  Common  Stock can elect all of the
directors.  The holders of Common Stock are entitled to receive  dividends when,
as and if  declared by the Board of  Directors  out of funds  legally  available
therefor.  In the event of the  liquidation,  dissolution  or  winding up of the
Company, the holders of Common Stock are entitled to share ratably in all assets
remaining  available for  distribution  to them after payment of liabilities and
after provision has been made for each class of stock, if any, having preference
over the  Common  Stock,  as such,  having no  conversion,  preemptive  or other
subscription  rights, and there are no redemption  provisions  applicable to the
Common Stock.

Preferred Stock

     The  Board  of  Directors  of the  Company  is  authorized  to  issue up to
2,000,000 shares of preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, including the dividend rights,
dividend rate, conversion rights, voting rights, terms of


                                       
<PAGE>

redemption  (including  sinking fund  provisions),  redemption  price or prices,
liquidations preferences and the number of shares constituting any series or the
designations  of  such  series,  without  any  further  vote  or  action  by the
stockholders. It would be possible for the Board of Directors to issue shares of
such preferred stock in a manner which would make  acquisition of control of the
Company, other than as approved by the Board, exceedingly difficult.

     The Company  currently has  outstanding  480,000 of its Class A Convertible
Preferred Stock, each share of which is convertible into one share of its common
stock.

Transfer Agent

     Continental  Stock  Transfer & Trust  Company,  New York,  New York, is the
transfer agent for the shares of Common Stock.

Item 2.  DESCRIPTION OF PROPERTIES.

     The  Company's  principal  place  of  business  is a  one-story  commercial
building of  approximately  6,000 square feet located at 1850  McDonald  Avenue,
Brooklyn, New York 11223, which is leased from an unaffiliated person. The lease
is for a period  ending  March 31,  2000 and is subject to a renewal  option for
five years in favor of the Company.  The rent is $5,200 per month and is subject
to annual  increases,  beginning  April 1, 1997,  equal to 4% of the total prior
year's  monthly rent and all increases in real estate taxes for the original and
renewal  terms.  The  Company  recently  recaptured  a 2,500  square foot sublet
portion to house its new HRA division.

     The Company  acquired the lease and sublease  from an  unaffiliated  person
pursuant to an agreement dated October 8, 1996 in consideration for $90,000.


                                       20
<PAGE>

     The table below sets forth certain  information with respect to each of the
Company's  existing branch and recruitment  office  locations,  all of which are
leased from non-affiliated lessors.

                                                               Lease Terms
                                           Approximate   ----------------------
                                Opening    Square         Expiration   Annual
         Location               Date       Footage        Date         Rental(l)
         --------               ----       -------        ----         ---------

Kings County (2)
Branch Office
1667 Flatbush Avenue
Brooklyn, NY 11210              11/95      2,000          11/01/99     $41,674

Nassau County
Branch Office
175 Fulton Avenue
Hempstead, NY 11550              9/93      1,600          10/31/03     $24,225

Westchester County
Branch Office
6 Gramatan Avenue
Mt. Vernon, NY 10550            12/96      2,000          10/30/01     $25,200

Rockland County
Branch Office
49 South Main Street
Spring Valley, NY 10977         10/94      1,500           9/30/00     $17,568

Orange County
Branch Office
45 Grand Street
Newburgh, NY 11250               9/92      1,500           4/30/01     $10,800

Queens
Recruitment Office
91-31 Queens Blvd.
Elmhurst, NY 11373              10/95        500          10/31/00     $11,400

Staten Island
Recruitment Office
37 New Dorp Plaza
Staten Island, NY 10306          6/97        500           5/31/98     $ 9,300

White Plains (3)
Recruitment Officer
237 Mamaroneck Avenue
White Plains NY 10605          1/12/99       500           1/31/99     $ 6,915

West Orange
Branch Office (4)
111 Northfield Avenue
Suite 310
West Orange, NJ 07052           12/97      1,500          12/31/99     $28,424

Jersey City
Branch Office
2780 Kennedy Blvd.
Jersey City, NJ 07306           12/97      1,000           4/01/01     $17,400

Budd Lake 
Branch Office
389 Route 46
Budd Lake, NJ 07828             12/97      1,700          11/30/01     $12,000

Shrewsbury 
Branch Office
167 Avenue at the Commons,
Suite 11B
Shrewsbury, NJ 07702             2/98        700           2/28/01     $ 8,601

Toms River 
Branch Office
617 Highway 37 West
Toms River, NJ 08753             2/98      2,400           5/01/01     $28,200

Edison
Branch Office
85 Route 27
Edison, NJ 08820                 2/98      1,500           5/31/99     $13,680

East Orange 
Branch Office
60 Evergreen Place
East Orange, NJ 07018            3/98      1,500           8/31/02     $19,200

Hackensack
Recruitment Office
144 Main Street
Suite 212
Hackensack, NJ 07601             5/97        300           6/30/99     $ 4,140

----------
(1)  The leases  provide for  additional  rentals  based upon  increases in real
     estate taxes and other cost escalations.

(2)  The Company's  Kings County Branch Office  occupies two of the three floors
     of a commercial  building  owned by 1667 Flatbush  Avenue,  LLC, a New York
     limited liability company owned by the Company's current stockholders.  See
     "Certain Relationships and Related Transactions." The lease is subject to a
     renewal option for five years in favor of the Company.  The rent is subject
     to annual increases,  beginning  November 1, 1997, equal to 5% of the total
     prior year's  monthly rent for the original  term and all renewal  terms of
     the lease.

(3)  The Company did not renew this lease.

(4)  The Company's  West Orange location has  been merged into  the  East Orange
     office.


                                       21
<PAGE>

Item 3. LEGAL PROCEEDINGS

     The Company is subject to various  legal  proceedings  and  claims,  either
asserted or unasserted,  which arise in the ordinary  course of business.  While
the outcome of these claims cannot be predicted with certainty,  management does
not believe that the outcome of any of these legal  matters will have a material
adverse effect on the Company's results of operations or financial position.

     To the  best  of the  Company's  knowledge,  there  are no  material  legal
proceedings pending or threatened against the Company or its properties.

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

      There were no matters  submitted  to a vote of the  Registrant's  security
holders during the fourth quarter of 1998 through the solicitation of proxies or
otherwise.

<PAGE>


                                     PART II

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

     The  Company's  Common  Stock is  quoted  on the  National  Association  of
Securities Dealers Automated  Quotation System ("NASDAQ") SmallCap Market and is
traded on the Boston Stock Exchange. The following table sets forth the range of
the last  price  on  NASDAQ  for the  Company's  Common  Stock  for the  periods
indicated.  Quotations do not necessarily present actual transactions and do not
reflect related mark-ups, mark-downs or commissions:

                            High          Low
                            ----          ---
Fiscal 1998
-----------
First  Quarter              3.50          1.50
Second Quarter              1.958         1.562
Third  Quarter              1.50          1.125
Fourth Quarter              1.187          .83

Fiscal 1999
-----------
First  Quarter              1.312          .771


     At March 26,  1999 the  Company  had 49 holders of record and more than 492
beneficial holders of its shares of Common Stock.

     On April 13,  1999,  the last sale price of the  shares of Common  Stock as
reported by NASDAQ was $1.250 per share.


                                       22
<PAGE>

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

Fiscal year ended December 31, 1998 compared with fiscal year ended December 31,
1997.

Results of operations

      Revenues  for  the  year  ended  December  31,  1998  increased  52.9%  to
approximately  $20,224,000  from  approximately  $13,231,000  for the year ended
December  31,  1997.   Approximately   5.4%  or  $380,000  of  the  increase  is
attributable  to  increased  hours of service  provided  under  existing and new
contracts in the State of New York.  The  remaining  increase of $6,613,000 is a
result of the  acquisition  of seven  offices  in New Jersey in  December  1997,
February 1998 and March 1998.

Cost of  professional  care of  patients  for the year ended  December  31, 1998
increased to  approximately  $13,795,000 from  approximately  $9,248,000 for the
year ended December 31, 1997. The increase  resulted from hiring additional home
health care  personnel to service the increased  business in New York and hiring
the staff of the seven offices purchased in New Jersey. The cost of professional
care of patients as a percentage  of revenues  decreased  1.7% to  approximately
68.2% for the year ended  December  31, 1998 from  approximately  69.9% for year
ended December 31, 1997.  The decrease was primarily  caused by reduced rates of
unemployment  taxes  and  workers  compensation  insurance  as a  result  of the
Company's improved experience ratings.

Selling,  general and  administrative  expenses for the year ended  December 31,
1998 increased to approximately $5,237,000 from approximately $3,535,000 for the
year  ended  December  31,  1997.  The  increase  resulted  primarily  from  the
acquisition of seven offices in New Jersey. Selling,  general and administrative
expenses  as a  percentage  of  revenue  decreased  to 25.9%  from  26.7% due to
allocation of corporate overhead over a larger revenue base.

Interest expense for the year ended December 31, 1998 increased to approximately
$321,000 as compared to  approximately  $22,000 for the year ended  December 31,
1997,  primarily as a result of increased  borrowing to finance the purchases of
the New Jersey  offices and,  secondarily,  the need to fund the  operations  of
these offices as the receivables grew to normal levels.

The provision for Federal, State and Local taxes for the year ended December 31,
1998 increased to  approximately  $256,000 from  approximately  $187,000 for the
year ended December 31, 1997.  This increase is as a result of increased  income
for the period.

In view of the  foregoing,  net  income  for the year ended  December  31,  1998
increased 85.3% to approximately  $341,000 as compared to approximately $184,000
for the year ended December 31, 1997.

Liquidity and Capital Resources

For the year ended  December 31, 1998,  net cash used in operations was $309,000
as compared to $1,413,000 during the year ended December 31, 1997, a decrease of
$1,104,000 or 78.1%.  The $295,000 used in the year ended  December 31, 1998 was
principally  for interest paid on liabilities  incurred for the purchases of the
New Jersey offices.  The $1,413,000 used in the year ended December 31, 1997 was
principally due to the approximately  $1,930,000 increase in accounts receivable
and unbilled services,  offset by an approximately  $264,000 increase in accrued
payroll and accounts payable and approximately  $184,000 in net income,  whereas
the increase in accounts receivable in 1997 was primarily the result of the sale
of receivables in 1996 and their  subsequent  growth back to normal levels.  Net
cash  used in  investing  activities  approximates  $726,000  primarily  for the
acquisition of the New Jersey offices. Net cash provided by financing activities
for the  year  ended  December  31,  1998  totaled  $1,056,000  compared  to the
$1,132,000 provided in the year ended


                                       23

<PAGE>

December 31, 1997.  Approximately  $800,000  borrowed in the year ended December
31, 1998 was used for the  acquisition of the New Jersey offices and $70,000 was
used to fund the start up of the HRA contract, which began servicing patients on
January 6, 1999.

As of December 31, 1998,  approximately  $5,869,000  (approximately  59%) of the
Company's  total assets  consisted of accounts  receivable  from clients who are
reimbursed by third-party payors, as compared to $4,748,000  (approximately 74%)
as of December  31,  1997,  a decrease of 15%.  Such  payors  generally  require
substantial  documentation in order to process claims.  The decrease of accounts
receivable from clients who are reimbursed by third-party payors as a percentage
of  total  assets  is the  result  of an  increase  in total  assets  due to the
acquisition of intangible assets purchased with the New Jersey offices in 1998.

Days Sales Outstanding  ("DSO") is a measure of the average number of days taken
by the  Company to collect its  accounts  receivable,  calculated  from the date
services are billed. For the year ended December 31, 1998, the Company's DSO was
103,  compared to 122 days for the year ended December 31, 1997. The improvement
of 19 days in DSO is the net effect of  combining  the New Jersey  DSO's  (which
consist  primarily  of medicaid  billings)  of 39 days and the New York's  DSO's
which are 135 days.

The Company's liquidity and long-term capital  requirements depend upon a number
of factors,  including the lag time to realize  collections of amounts billed to
clients for services  provided and the rate at which new offices and  facilities
are established and  acquisitions,  if any, are completed.  The Company believes
that the  development  and  start-up  costs for a new  branch  office  aggregate
approximately $100,000, including leasehold improvements, lease deposits, office
equipment,   marketing,   recruiting,  labor  and  operating  costs  during  the
pre-opening  and start-up  phase,  and also the provision of working  capital to
fund  accounts  receivable.  Such  costs will vary  depending  upon the size and
location of each facility and,  accordingly,  may vary  substantially from these
estimates.

The Company is actively pursuing  potential  acquisitions.  Further expansion of
the Company's business may require the Company to incur additional debt or offer
additional  equity  if  internally  generated  funds,  cash on hand and  amounts
available  under its bank credit  facilities  are inadequate to meet such needs.
There can be no assurance that such  additional debt or equity will be available
to the Company, or, if available, will be on terms acceptable to the Company.

Potential Regulatory Changes

There have been recent  news  reports  concerning  federal  budget  negotiations
regarding potential changes in the way the Government will reimburse home health
care companies in the future, including the possibility of capitation. While the
Company is not  currently a  Medicare-Certified  Home Health  Agency  subject to
these  changes,  most of the  Company's  referral  sources  are and  they may be
negatively  impacted by future  legislation which may be adopted to control home
health care costs.  While it is still premature to discern what impact,  if any,
the  potential  changes may have on the  Company's  operations,  there can be no
assurance that future legislation will not result in reduced reimbursement rates
from referral sources.


                                       24

<PAGE>

Year 2000 Issues

      The "Year 2000" Issue is the result of computer systems and programs using
two digits  rather  than four  digits to define the  applicable  year.  Computer
systems and programs that have date-sensitive  applications may recognize a date
using "00" as the year 1900 rather than the Year 2000. This can result in system
failures or miscalculations causing disruption of operations including,  but not
limited to, complete system failures, erroneous results and inability to process
transactions,  send invoices, make payments or otherwise conduct normal business
activities.

      The Company has initiated a "Year 2000" compliance program in which it has
identified the following areas of significant risk; computer hardware,  computer
software and cash flow.

      The Company  presently  operates  two  independent  computer  networks;  a
Unix-based  system for  payroll  and billing  functions  and a Windows  NT-based
system  for other  accounting,  word  processing  and  database  functions.  The
Company's  billing  system  has been  modified  by the  software  vendor  and is
expected to be Year 2000 compliant.  The Company expects to complete  testing of
the  software by the end of the second  quarter of 1999.  The  Windows  NT-based
system for the Company's general ledger and accounting software,  as well as its
Microsoft  Office software  package for word processing and database  functions,
are already Year 2000 compliant.

      The Company has obtained the services of an outside  consultant to make an
inventory of all of its computer hardware and software in all of its offices and
to design  and  implement  a  communications  network  that will link all of the
Company's   facilities  and  computer  systems.  The  principal  focus  of  that
assessment is on the Company's  hardware and operating  systems for its computer
network and  telephone  system,  which have the most  significant  effect on the
Company's ability to conduct business in a normal manner. The new communications
network, and all new hardware and software,  will be Year 2000 compliant. At the
present time,  all computers in the corporate  headquarters  have been replaced.
Upgrading and  implementation  of the new system will be completed at the branch
office  level in the  second  quarter  of 1999,  where the  Company  anticipates
replacing  approximately 25 desktop computers which may not function properly on
the Year 2000  compliant  network,  which is  expected  to be fully  operational
during the second quarter of 1999.

      The Company has begun formal  communications  with its significant  payors
and vendors to determine  the extent to which the Company may be  vulnerable  to
those third  parties'  failures to  remediate  their own Year 2000  issues.  The
Company's  management  believes  that the failure of such  vendors to  remediate
their  Year 2000  issues in a timely  manner  will not have a  material  adverse
effect upon the Company.  However,  there can be no assurance  that the computer
systems  of such  third  parties  will be  remedied  in a timely  manner or that
failures or  incompatibility  issues arising out of the  remediation  methods of
such third  parties  will not have a  material  adverse  effect on the  Company.
Management  believes  that,  so long as the  Company's  ability to  provide  its
services and process its payroll and billing is  unaffected by Year 2000 issues,
the Company's available line of credit 


                                       25
<PAGE>

will be  adequate  to sustain  operations  in the event  significant  payors are
temporarily unable to make timely payment of their obligations to the Company.

      At the present  time,  the Company has a Year 2000  remediation  budget of
approximately $50,000;  $25,000 of which is for the replacement of non-compliant
hardware,   $15,000  for  consulting  services  and  $10,000  for  software  and
contingencies.

      The   Company's   assessment  of  its  Year  2000  issues  is  based  upon
management's best estimates,  which have been derived  utilizing  assumptions of
future events,  including the  availability  of certain  resources,  third-party
modification  plans  and other  factors,  and  there  can be no  assurance  that
management's  assessment of the  Company's  Year 2000 issues will not have to be
revised as a result of Year 2000  compliance  problems  which may be revealed in
the future and which could have a material adverse effect on the Company.


                                       26
<PAGE>

                    NEW YORK HEALTH CARE, INC. AND SUBSIDIARY

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

NEW YORK HEALTH CARE, INC.:

     Independent Auditors' Report                                     28 

     Consolidated Balance Sheet at December 31, 1998                  29

     Consolidated Statements of Income for the Years Ended
        December 31, 1997 and 1998                                    30

     Consolidated Statements of Shareholders' Equity for the 
         Years Ended December 31, 1997 and 1998                       31

     Consolidated Statements of Cash Flows for the Years Ended
        December 31, 1997 and 1998                                    32

     Notes to Consolidated Financial Statements                       42-47


                                       27
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors
New York Health Care, Inc.

We have audited the accompanying  consolidated  balance sheet of New York Health
Care, Inc. and Subsidiary (the  "Corporation")  as of December 31, 1998, and the
related consolidated  statements of income,  shareholders' equity and cash flows
for the years ended December 31, 1997 and 1998.  These financial  statements are
the  responsibility of the Corporation's  management.  Our  responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of New York Health Care, Inc. and
Subsidiary as of December 31, 1998,  and the results of its  operations  and its
cash flows for the years ended  December  31, 1997 and 1998 in  conformity  with
generally accepted accounting principles.

                                          M.R. Weiser & Co.LLP
                                          Certified Public Accountants

New York, NY
March 29, 1999


                                       28
<PAGE>

                    NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEET
                                DECEMBER 31, 1998

                                   A S S E T S

Current assets:
   Cash and cash equivalents                                        $   192,675
   Accounts receivable, net of allowance for uncollectible
     amounts of $168,000                                              5,722,406
   Unbilled services                                                    293,877
   Prepaid expenses                                                     140,947
   Due from affiliates                                                    6,475
   Deferred tax assets                                                   77,000
                                                                    -----------
         Total current assets                                         6,433,380

Property and equipment, net                                             484,667
Intangibles, net                                                      3,024,548
Deposits                                                                 45,852
                                                                    -----------
         Total assets                                               $ 9,988,447
                                                                    ===========

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
   Accrued payroll                                                  $   564,957
   Note payable - bank                                                2,600,000
   Current maturities of long term debt                                 517,323
   Accounts payable and accrued expenses                                379,684
   Income taxes payable                                                  35,215
                                                                    -----------
         Total current liabilities                                    4,097,179
                                                                    -----------
Deferred tax liability                                                   54,000
Long-term debt, less current maturities                                 624,038
                                                                    -----------
                                                                        678,038
                                                                    -----------
Commitments, contingencies and other comments
Shareholders' equity:
   Preferred stock $.01 par value, 2,000,000 shares authorized;
     480,000 issued                                                       4,800
   Common stock, $.01 par value, 12,500,000 shares authorized;
     3,750,000 shares issued; 3,708,030 outstanding                      37,500
   Additional paid-in capital                                         4,659,518
   Retained earnings                                                    562,336
                                                                    -----------
                                                                      5,264,154
         Less: Treasury stock (41,970 common shares at cost)            (50,924)
                                                                    -----------
         Total shareholders' equity                                   5,213,230
                                                                    -----------
         Total liabilities and shareholders' equity                 $ 9,988,447
                                                                    ===========

           See accompanying notes to consolidated financial statements


                                       29
<PAGE>

                    NEW YORK HEALTH CARE, INC. AND SUBSIDIARY

                        CONSOLIDATED STATEMENTS OF INCOME

                                                       For The Years Ended
                                                           December 31,
                                                   -----------------------------
                                                        1997          1998
                                                        ----          ----

Net patient service revenue                        $ 13,231,066    $ 20,223,674
                                                   ------------    ------------
Expenses:
   Professional care of patients                      9,248,446      13,794,969
   General and administrative                         3,534,955       5,236,740
   Bad debts expense                                     51,000         150,000
   Depreciation and amortization                         75,461         197,826
                                                   ------------    ------------
         Total operating expenses                    12,909,862      19,379,535
                                                   ------------    ------------
Income from operations                                  321,204         844,139
                                                   ------------    ------------
Nonoperating income (expenses):
   Interest income                                       45,190          56,720
   Other income                                          26,391          17,273
   Interest expense                                     (21,622)       (320,980)
                                                   ------------    ------------
         Nonoperating income (expenses), net             49,959        (246,987)
                                                   ------------    ------------
Income before provision for income taxes                371,163         597,152
                                                   ------------    ------------
Provision (credit) for income taxes:
   Current                                              232,300         234,000
   Deferred                                             (45,000)         22,000
                                                   ------------    ------------
                                                        187,300         256,000
                                                   ------------    ------------
Net income                                         $    183,863    $    341,152
                                                   ============    ============
Basic and diluted earnings per share               $       0.05    $       0.09
                                                   ============    ============
Weighted average shares outstanding                   3,750,000       3,739,864
                                                   ============    ============
Diluted weighted average shares outstanding           3,750,000       3,933,179
                                                   ============    ============

           See accompanying notes to consolidated financial statements


                                       30
<PAGE>

                    NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998

<TABLE>
<CAPTION>
                                                           Preferred                       Treasury
                                     Common Stock             Stock       Additional         Stock
                                     ------------        --------------    Paid-In      ----------------     Retained
                                   Shares     Amount     Shares  Amount    Capital      Shares    Amount     Earnings       Total
                                 ----------   ------     ------  ------   -----------   ------    ------     ---------   ----------

<S>                                <C>        <C>                        <C>                                <C>         <C>       
Balance at January 1, 1997         3,750,000  $37,500                    $4,076,783                         $ 37,321    $4,151,604
Net income                                                                                                   183,863       183,863
Additional costs of initial
    public offering common
    stock                                                                   (11,976)                                       (11,976)
                                   ---------  -------   -------   ------   ----------    ------   --------    --------   ----------
Balance at December 31,
    1997                           3,750,000   37,500                     4,064,807                          221,184     4,323,491
Treasury stock purchased
   during June through December
   ($1.30 average per share)                                                            51,970   $(67,663)                 (67,663)
Exercise of stock warrants
    on June 2, 1998                                                            (489)   (10,000)    16,739                   16,250
Issuance of  preferred  stock on
   August  6,  1998 in  exchange
   for  promissory  note  ($1.25
   per share)                                          480,000   $4,800      595,200                                       600,000
Net income                                                                                                    341,152      341,152
                                   --------- -------   -------   ------   ----------    ------   --------    --------   ----------
Balance at December 31, 1998       3,750,000 $37,500   480,000   $4,800   $4,659,518    41,970   $(50,924)   $562,336   $5,213,230
                                  ========== =======   =======   ======   ==========   =======   ========    ========   ==========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       31
<PAGE>

                    NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                               For the Years Ended
                                                                                   December 31,
                                                                              1997         1998

<S>                                                                         <C>         <C>        
Cash flows from operating activities:
   Net income                                                            $   183,863    $   341,152
   Adjustments to reconcile net income to net cash
     used in operating activities:
       Depreciation and amortization                                          61,532        197,826
       Bad debts expense                                                      51,000        150,000
       Deferred tax (credit) provision                                       (45,000)        22,000
       Deferred revenue                                                                     (36,000)
       Changes in operating assets and liabilities:
         Increase in accounts receivable and unbilled services            (1,749,179)    (1,370,283)
         Increase in due from affiliates                                                     (6,475)
         Decrease (increase) in prepaid expenses                              57,043        (15,953)
         Increase in deposits                                                 (1,110)       (19,053)
         (Increase) decrease in accounts receivable due after one year      (180,604)       180,604
         Increase in accrued payroll                                         102,571        207,483
         Increase in accounts payable and accrued expenses                   161,312        107,153
         Decrease in income taxes payable                                    (54,537)       (67,818)
                                                                         -----------    -----------
              Net cash used in operating activities                       (1,413,109)      (309,364)
                                                                         -----------    -----------
Cash flows from investing activities:
   Acquisition of fixed assets                                              (108,488)      (154,507)
   Payments for purchase acquisitions and associated costs                  (624,728)      (571,602)
   Costs incurred for future acquisitions                                     (2,577)        
                                                                         -----------    -----------
              Net cash used in investing activities                         (735,793)      (726,109)
                                                                         -----------    -----------
Cash flows from financing activities:
   Borrowings under notes payable                                          1,150,000      1,450,000
   Repayment of long-term debt                                                (5,713)      (342,298)
   Exercise of warrants                                                                      16,250
   Net charges from issuance of common stock                                 (11,976)
   Purchase of treasury stock                                             __________        (67,663)
                                                                                        -----------
              Net cash provided by financing activities                    1,132,311      1,056,289
                                                                         -----------    -----------
Net (decrease) increase in cash and cash equivalents                      (1,016,591)        20,816

Cash and cash equivalents at beginning of year                             1,188,450        171,859
                                                                         -----------    -----------
Cash and cash equivalents at end of year                                 $   171,859    $   192,675
                                                                         ===========    ===========

</TABLE>

           See accompanying notes to consolidated financial statements


                                       32
<PAGE>

                    NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

       Basis of Consolidation and the Company:

       The accompanying  consolidated  financial statements include the accounts
       of New York Health Care,  Inc.  ("NYHC") and its wholly owned  subsidiary
       which was  formed on August  20,  1997,  NYHC Newco  Paxxon,  Inc.  D/B/A
       Helping Hands Healthcare  ("Helping  Hands"),  (the  "Corporation").  All
       material  intercompany  transactions and accounts have been eliminated in
       consolidation.

       The  Corporation    provides    services   of   registered   nurses   and
       paraprofessionals to patients throughout New York and New Jersey.

       On  December 7, 1997,  the  Corporation  purchased  the  customer  lists,
       employee  lists and other  intangible  assets of three  offices  of Metro
       Healthcare  Services,  Inc.  at a cost  of  $780,000.  The  Company  also
       incurred  costs of  approximately  $75,000  related  to the  acquisition.
       Except for $30,000 which was allocated to fixed assets,  the aggregate of
       the purchase price and these costs have been allocated to goodwill, which
       is being  amortized  using  the  straight-line  method  over a period  of
       twenty-five years.

       On February 8, 1998,  the  Corporation  purchased the customer  lists and
       other  intangible  assets of an additional  three offices in the State of
       New Jersey from Metro Healthcare  Services,  Inc. for $500,000 cash and a
       promissory note in the amount of $580,000.  The acquisition was accounted
       for as a  purchase  and,  accordingly,  the  assets  acquired  have  been
       recorded at their estimated fair values at the date of  acquisition.  The
       excess of cost  over  fair  values  of the  purchased  business  has been
       allocated to goodwill,  customer lists and other intangible assets and is
       being amortized over 25 and 10 years, respectively.  Operating results of
       the business have been included in the consolidated  financial statements
       of the Corporation since the date of acquisition.

       The  purchase  price of  $1,080,000  plus  costs  incurred  in making the
       acquisition ($73,000), aggregating $1,153,000, exceeded the fair value of
       the net assets  acquired at the date of acquisition  by  $1,123,000.  The
       purchase  price has been allocated to furniture and fixtures for $30,000,
       $79,000 was assigned to contract  value and employee lists and $1,044,000
       was assigned to goodwill.

       On March 26, 1998, the Corporation purchased the customer lists and other
       intangible assets of Heart to Heart Health Care Services,  Inc. (Heart to
       Heart). The entity is related to the Corporation through common ownership
       and management.  The aggregate purchase price is $1,150,000.  This amount
       was paid  through  issuance of a promissory  note.  The  acquisition  was
       accounted for as a purchase and,  accordingly,  the assets  acquired have
       been recorded at their  estimated fair values at the date of acquisition.
       The excess of cost over fair values of the  purchased  business  has been
       allocated to goodwill,  customer lists and other intangible assets and is
       being amortized over 25 and 10 years, respectively.  Operating results of
       the business have been included in the consolidated  financial statements
       of the Corporation since the date of acquisition.


                                       33
<PAGE>

                    NEW YORK HEALTH CARE, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       The  purchase  price of  $1,150,000  plus  costs  incurred  in making the
       acquisition ($45,000),  aggregating $1,195,000 exceeded the fair value of
       the net assets  acquired at the date of acquisition  by  $1,185,000.  The
       purchase  price has been allocated to furniture and fixtures for $10,000;
       $55,000 was assigned to contract  value and employee lists and $1,130,000
       was assigned to goodwill.

       The following  unaudited pro forma summary for 1997 and 1998 combines the
       results of operations of the  Corporation  and the other entity  acquired
       March 26, 1998 as if the acquisition had occurred on January 1, 1997. The
       proforma summary for 1998 does not include the results of operations from
       January  1,  1998 to the date of  acquisition  for the  February  8, 1998
       purchase  because  it  occurred  near  the  beginning  of the  year.  The
       unaudited  proforma summary is not necessarily  indicative  either of the
       results of operations that would have occurred had the purchase been made
       during the periods  presented,  or of future results of operations of the
       combined companies:

                  Unaudited                        1997                 1998
       -------------------------------          -----------         -----------

       Proforma revenues                        $20,881,956         $20,719,738
       Proforma net income                          394,924             370,924
       Proforma basic and dilutive 
          earnings per share                           $.11                $.10


       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.  Actual  results  could  differ from those
       estimates.

       Revenue Recognition:

       The  Corporation  recognizes  net  patient  service  revenue  on the date
       services are rendered.  In 1997, the Corporation  entered into a contract
       that has payment terms  greater than one year.  For these  services,  the
       Corporation  records the accounts  receivable at the present value of the
       face amount of the bill on the date services are rendered.  In 1998, this
       contract was amended and payment  terms are less than one year.  Unbilled
       services  represent  amounts  due for  services  rendered  which were not
       billed at the end of each period.


                                       34
<PAGE>

                    NEW YORK HEALTH CARE, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       Property, Plant and Equipment:

       Property, plant and equipment is carried at cost and is being depreciated
       under the straight-line  method over the following estimated useful lives
       of the assets or the life of the lease, whichever is shorter.

                  Machinery and equipment                     5 years
                  Furniture and fixtures                      7 years
                  Leasehold improvements                      9 years

       Long-lived Assets:

       The Corporation's  policy is to evaluate long-lived assets,  goodwill and
       certain identifiable  intangibles for possible impairment whenever events
       or changes in  circumstances  indicate  that the carrying  amount of such
       assets may not be  recoverable.  This  evaluation is based on a number of
       factors,  including  expectations  for operating  income and undiscounted
       cash flows that will result from the use of such assets.  The Corporation
       has not identified any such impairment or losses.

       Income Taxes:

       The Corporation uses the asset and liability method to calculate deferred
       tax assets and  liabilities.  Deferred taxes are recognized  based on the
       differences  between  financial  reporting and income tax bases of assets
       and liabilities  using enacted income tax rates.  Deferred tax assets and
       liabilities  are measured using enacted tax rates in effect for the years
       in which those  temporary  differences  are  expected to be  recovered or
       settled. The effect on deferred tax assets and liabilities of a change in
       tax rates is  recognized  in  income  in the  period  that  includes  the
       enactment date.

       Cash Equivalents:

       For purposes of the statements of cash flows,  the Corporation  considers
       all highly  liquid  investments  with  maturities of three months or less
       when purchased to be cash equivalents.

       Stock Based Compensation:

       The   Corporation   applies   SFAS  123   "Accounting   for  Stock  Based
       Compensation"  in accounting  for its stock based  compensation  plan. As
       permitted  by SFAS 123, the  Corporation  applies  Accounting  Principles
       Board Opinion No. 25 and related interpretations for expense recognition.


                                       35
<PAGE>

                    NEW YORK HEALTH CARE, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       The warrants issued in connection with the  Corporation's  initial public
       offering  (see  Note 12) have not been  considered  for this  computation
       since they are not deemed to be an employee stock based  transaction  and
       the effect of their  exercise,  under the fair value based method,  would
       have been to reduce the proceeds of the offering  rather than a charge to
       operations. The estimated fair value of the warrants was determined to be
       insignificant   and,   accordingly,   has  not  been   reflected  on  the
       Corporation's   balance   sheet  and  other  stock   based   compensation
       agreements.

       Earnings Per Share:

       Basic  earnings per share  excludes  dilution and is computed by dividing
       income available to common shareholders by the weighted average number of
       common shares outstanding for the period.

       Diluted  earnings per share is computed by dividing  income  available to
       common  shareholders  by the  weighted  average  number of common  shares
       outstanding  for the  period,  adjusted to reflect  potentially  dilutive
       securities  including the presumed conversion of the Preferred Stock from
       the date of its  issuance.  The options and warrants were not included in
       the computation of diluted  earnings per share because the exercise price
       was greater than the average market price of the stock.  Dividends on the
       Class A Convertible  Preferred  Stock are  noncumulative  and not payable
       until 1999.  Accordingly,  the 9% dividends have not been included in the
       computation of basic or diluted earnings per share.

       Start-Up Costs:

       During  the year  ending  December  31,  1998,  the  Corporation  adopted
       Statement  of  Position   98-5   "Reporting  on  the  Costs  of  Start-Up
       Activities."  Start-up activities,  which include (i) one-time activities
       relating to the  introduction  of a new  product or  service,  conducting
       business  in a new  territory,  conducting  business  with a new class of
       customer or commencing a new operation and (ii)  organization  costs, are
       expensed as incurred.  The Company  believes  that there is no cumulative
       effect on the amount of retained  earnings at December 31, 1998 resulting
       from the adoption of SOP 98-5.  During the year ended  December 31, 1998,
       start up costs of approximately $34,000 was expensed as incurred.

       New Accounting Pronouncements:

       In  1998,  SFAS  130,  "Reporting  Comprehensive  Income"  and  SFAS  131
       "Disclosures  about  Segments of an Enterprise  and Related  Information"
       became effective. The Corporation operates in one business segment. These
       standards expand or modify disclosures and,  accordingly,  have no effect
       on the Corporation's  financial  position,  results of operations or cash
       flows.


                                       36
<PAGE>

                    NEW YORK HEALTH CARE, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       In 1998, the  Accounting  Standards  Executive  Committee of the American
       Institute of Certified  Public  Accountants  issued Statement of Position
       98-1 (SOP 98-1), "Accounting for the Costs of Computer Software Developed
       or Obtained for Internal Use." This statement, which becomes effective in
       1999, requires that certain costs of developing or obtaining software for
       internal  use  be  capitalized.  The  Corporation  does  not  expect  the
       statement to have a material affect on the Company's  financial position,
       results of operations or cash flows.

2.      PROPERTY AND EQUIPMENT:

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

           Machinery and equipment                                     $465,498
           Furniture and fixtures                                       177,904
           Leasehold improvements                                       116,745
                                                                      ---------

                                                                        760,147
           Less accumulated depreciation and amortization               275,480
                                                                      ---------

                                                                       $484,667
                                                                      =========

       At  December  31,  1998,  the amounts  shown  above  include  assets  of
       approximately  $160,750  under  capitalized   leases   and   accumulated
       depreciation of approximately $ -0-, relating thereto.

3.      INTANGIBLES:

       Intangibles consist of the following at December 31, 1998:

                                                                    Lives
        Goodwill                                  $3,008,834        25 years
        Contract value                                62,000        10 years
        Customer lists                                72,000        10 years
                                                  ----------
                                                   3,142,834
        Less accumulated amortization                118,286
                                                  ----------

                                                  $3,024,548
                                                  ==========

4.     LINE OF CREDIT:

       On January 26, 1998, the  Corporation  entered into a $6,000,000  line of
       credit   agreement   with  a  bank  which  expires  June  30,  1999.  The
       availability  of the line of  credit is based on a  formula  of  eligible
       accounts  receivable.  The line is  collateralized  by all  property  and
       assets of the  Corporation.  The Corporation has also guaranteed the line
       of credit.  At December 31, 1998,  $2,600,000  was  outstanding.  Certain
       borrowings  under the agreement bear interest at prime plus 1/2 (8.25% at
       December 31, 1998),  and other  borrowings  are due between March and May
       1999 and bear interest between 7.8% and 7.6%.


                                       37
<PAGE>

                    NEW YORK HEALTH CARE, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. LONG-TERM DEBT:

       Long-term debt consists of the following at December 31, 1998:

           Capitalized   computer   equipment  lease,  payable
              in  equal  monthly installments of approximately
              $1,100, including principal and interest through
              December  2003,   collateralized   by  computer
              equipment costing approximately $51,400                  $ 49,211

           Capitalized   computer   equipment  lease,  payable
              in  equal  monthly installments of approximately
              $2,570, including principal and interest through
              November   2001,   collateralized   by  computer
              equipment costing approximately $81,200                    76,046

           Capitalized  phone  sYstem  lease, payable in equal
              monthly   installments  of  approximately  $600,
              including   principal   and   interest   through
              October  2003,   collateralized   by  the  phone
              system costing approximately $28,150                       26,937

           Note  payable  in 12  equal  quarterly  installments
              commencing   May  1998  of   $48,333,   including
              principal  only,  bearing  interest at prime rate
              plus 1% per annum (9.50% at December 31, 1998)            435,000

           Note payable in 8 quarterly installments  commencing
              May 1998 of $25,000,  including  principal  only,
              bearing  interest at prime rate plus 1% per annum
              (9.5% at December 31, 1998)                               100,000

           Note payable,  to a related  party,  in 11 quarterly
              installments  commencing  June  1998 of  $47,917,
              including  principal  only,  bearing  interest at
              prime  rate plus 1% per annum  (9.5% at  December
              31, 1998)                                                 454,167
                                                                    -----------
                                                                      1,141,361
           Less current maturities                                      517,323
                                                                    -----------
                                                                    $   624,038
                                                                    ===========


                                       38
<PAGE>

                    NEW YORK HEALTH CARE, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       The following are  maturities of long-term  debt  (excluding  capitalized
       leases):

           For the Years
               Ended
           December 31,
           ------------
                1999                              $485,000
                2000                               385,000
                2001                               119,000

6.     INCOME TAXES:

       The components of deferred tax assets and  liabilities as of December 31,
       1998 are as follows:

              Deferred tax assets:
                 Accounts receivable reserve                        $77,000
                                                                    =======
              Deferred tax liabilities:
                 Property and equipment                             $23,000
                 Intangibles                                         31,000
                                                                    -------
                                                                    $54,000
                                                                    =======

       Differences   between  book  and  tax  are  primarily  due  to  temporary
       differences  resulting  from  use  of the  direct  write-off  method  for
       receivables,  using accelerated  methods of amortization and depreciation
       for property and equipment, and using statutory lives for intangibles for
       tax purposes.

       The  historical  provision  (credit) for income taxes is comprised of the
       following:

                                                      1997            1998
                                                    --------        --------
                Current:                                         
                   Federal                          $164,200        $180,000
                   State                              68,100          54,000
                                                    --------        --------
                                                     232,300         234,000
                                                    --------        --------
                Deferred:                                        
                                                                 
                   Federal                           (26,000)         13,200
                   State                             (19,000)          8,800
                                                    --------        --------
                                                     (45,000)         22,000
                                                    --------        --------
                                                                 
                                                    $187,300        $256,000
                                                    ========        ========


                                       39
<PAGE>

                    NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       The  statutory  Federal  income  tax rate and the  effective  rate of the
       provision for income taxes is reconciled as follows:

                                                       1997            1998

       Statutory Federal income tax rate                34%             34%
       State taxes, net of Federal tax benefit          16               9
                                                        --              --

                                                        50%             43%
                                                        ==              ==

7.     FAIR VALUE OF FINANCIAL INSTRUMENTS

       As of December 31,  1998,  the  carrying  amount of accounts  receivable,
       unbilled services, accounts payable and accrued payroll approximates fair
       value due to the short-term maturities of these instruments.

8.     THIRD-PARTY RATE ADJUSTMENTS AND REVENUE:

       Approximately  24% and 19% of net  patient  service  revenue  was derived
       under New York State third-party  reimbursement programs during the years
       ended December 31, 1997 and 1998, respectively. 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.   Provision  for   estimated   amounts  due  to/from  the
       Corporation  has  been  made  in the  financial  statements.  Differences
       between  estimated  revised  rates  and  subsequent   revisions  will  be
       reflected  in  the  statement  of  income  in  the  year   revisions  are
       calculated.

9.     PERFORMANCE INCENTIVE PLAN, OPTIONS AND 401(K) PLAN:

       Performance Incentive Plan:

       On March 26,  1996,  the  Corporation's  Board of  Directors  adopted the
       Performance  Incentive Plan, (the "Option Plan").  Under the terms of the
       amended  Option  Plan,  682,500  shares of common  stock may be  granted,
       including  the June 25,  1998  authorization  for the  reservation  of an
       additional 210,000 shares of $.01 par value common stock, for each of two
       additional years, for a total of 420,000  additional  shares.  The Option
       Plan  will be  administered  by a  Committee  appointed  by the  Board of
       Directors.  The Committee will determine  which key employee,  officer or
       director on the  regular  payroll of the  Company,  shall  receive  stock
       options.   Granted   options  are   exercisable  in  three  equal  annual
       installments,  commencing six months after the date of grant,  and expire
       up to ten  years  after  the date of  grant.  The  exercise  price of any
       incentive  stock option or  nonqualified  option granted under the Option
       Plan may not be less than 100% of the fair market  value of the shares of
       common stock of the Company at the time of the grant.


                                       40
<PAGE>

                    NEW YORK HEALTH CARE, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       On June 2, 1998 and December 23, 1998, the  Corporation  granted  247,500
       and 191,000 stock options, respectively,  pursuant to the option plan, to
       key  employees at the exercise prices of $1.625 and $.938,  respectively.
       The options  expire in 5-10 years.  The exercise  prices of these options
       was equal to the fair market  price of the Common Stock as of the date of
       grant.

       On March 26, 1996, the  Corporation  issued an option to purchase  93,750
       shares of Common Stock to the President of the Corporation at an exercise
       price of $3.00 per share. The option may be exercised at any time through
       March 26, 2006. These options were not issued under the Option Plan. None
       of these options have been exercised or cancelled.

       Activity  in stock  options,  including  those  outside  the  Performance
       Incentive Plan, is summarized as follows:


<TABLE>
<CAPTION>
                                                       Shares
                                                        Under             Weighted Average
                                                       Options             Exercise Price
                                                       -------             --------------
<S>                                                    <C>                     <C>  
       Balance at December 31, 1997                     93,750                  $3.00

       Options granted                                 438,500                   1.38
       Options cancelled                                (6,000)                  1.63
                                                       -------                  -----

       Balance at December 31, 1998                    526,250                  $1.73
                                                       =======                  =====

       Eligible for exercise at December 31, 1998      174,250                  $2.37
                                                       =======                  =====
</TABLE>


       The following table summarizes  information about options outstanding and
       exercisable at December 31, 1998.

<TABLE>
<CAPTION>
                                       Options Outstanding                                 Options Exercisable
                        ---------------------------------------------------          -----------------------------------
                                            Weighted                                                        Weighted
       Range of                              Average             Weighted                                    Average
       Exercise           Options           Remaining             Average               Options              Options
        Price           Outstanding      Contractual Life      Exercise Price         Exercisable           Exercisable
       --------         -----------      ----------------      --------------         -----------           -----------
<S>                       <C>               <C>                    <C>                  <C>                    <C>  
       $1.63-$1.79        241,500           7.72 years             $1.70                80,500                 $1.70
       $.94-$1.03         191,000           8.17 years               .97                  --                      --
           $3.00           93,750           8.25 years              3.00                93,750                  3.00
                          -------                                                     --------

                          526,250           7.98 years             $1.73               174,250                 $2.37
                          =======                                  =====               =======                 =====
</TABLE>


                                       41
<PAGE>

                    NEW YORK HEALTH CARE, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       The Corporation does not recognize compensation expense for stock options
       granted at or above fair market  value,  as permitted  by the  accounting
       standards.  The fair value of options  granted  during 1998 was $372,500.
       Fair value is estimated based on the Black-Scholes  option-pricing  model
       with the following assumptions for grants in 1998: expected volatility of
       55%;  risk free  interest  rates ranging from 4.81% through 5.56% in 1998
       and expected lives of  approximetely 8 years.  Had  compensation  expense
       been  determined  based on the fair  value of the  options  on the  grant
       dates,  the  Corporation's  net  income  would  have  been  decreased  by
       $372,500, ($.09 per share) in 1998.

       401 (K) Plan:

       NYHC maintains an Internal  Revenue Code Section 401 (k) salary  deferred
       savings plan (the "Plan") for eligible  employees  who have been employed
       for at least one year and are at least 21 years  old.  Subject to certain
       limitations, the Plan allows participants to voluntarily contribute up to
       15%  of  their  pay  on  a  pre-tax  basis.  The  Corporation   currently
       contributes 50% of each dollar contributed to the Plan by participants up
       to a maximum of 6% of the participants salary. The Plan also provides for
       certain  discretionary  contributions by the Corporation as determined by
       the Board of  Directors.  The  Corporation's  contributions  amounted  to
       $43,000  and  $41,000  for the years  ended  December  31, 1997 and 1998,
       respectively.

10.    COMMITMENTS, CONTINGENCIES AND OTHER COMMENTS:

       Lease Commitments:

       The Corporation leases office space under noncancellable operating leases
       in  New York and New Jersey that expire between January 1999 and October 
       2003.

       At December 31, 1998 future  minimum lease  payments due under  operating
       and capital leases approximate:

                                                   Rental Expense
                                                     Operating        Capital
                                                      Leases           Leases
                                                     ---------    --------------

         1999                                        $323,000        $  47,000
         2000                                         222,000           51,000
         2001                                          96,000           49,000
         2002                                          37,000           20,000
         2003                                          20,000           19,000
                                                     --------        ---------
                                                                    
         Total minimum future payments               $698,000          186,000
                                                     ========       
                                                              
         Less amounts representing interest                            (34,000)
                                                                     ---------

         Present value of net minimum lease payments                 $ 152,000
                                                                     =========


                                       42
<PAGE>

                    NEW YORK HEALTH CARE, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       Rental  expense  charged to  operations  was  approximately  $181,000 and
       $302,000 for the years ended  December  31, 1997 and 1998,  respectively.
       Rental  income under the sublease  agreement in the amount of $36,000 and
       $28,000  for the years ended  December  31, 1997 and 1998 has been offset
       against rental expense.

       Interest rates on capitalized leases vary from 9.2% to 11.0%.

       Employment Agreements:

       The Corporation has entered into employment agreements with two officers,
       with terms  expiring in 1999. The  agreements  call for aggregate  annual
       compensation of approximately $315,000 and provide for certain additional
       benefits.

       Bonus Plan:

       The Corporation has established a bonus plan pursuant to which 10% of the
       Corporation's  pre-tax net income is contributed to a bonus pool which is
       available  for   distribution  to  all  employees  as  decided  upon  the
       Corporation's   Compensation  Committee.   The  Corporation  has  accrued
       approximately $41,000 and $65,000 for its contributions to the bonus pool
       for 1997 and 1998.

       Concentrations of Credit Risk:

       Financial  instruments  which  potentially  subject  the  Corporation  to
       concentrations  of  credit  risk  consist  primarily  of  temporary  cash
       investments  which  from  time  to time  exceed  the  Federal  depository
       insurance coverage and commercial  accounts  receivable.  The Corporation
       has cash investment policies that restrict placement of these investments
       to financial institutions evaluated as highly creditworthy. Cash and cash
       equivalents  exceeding federally insured limits  approximated  $77,000 at
       December  31,  1998.  The  Corporation  does not  require  collateral  on
       commercial accounts receivable at the customer base generally consists of
       large, well-established institutions.

       Major Customers:

       One  major  customer  accounted  for  approximately  10% and  8.3% of net
       patient  service  revenue for the years ended December 31, 1997 and 1998,
       respectively.  In addition,  the Corporation  has another  customer whose
       accounts  receivable  balance  represents  approximately  18% of accounts
       receivable at December 31, 1998.


                                       43
<PAGE>

                    NEW YORK HEALTH CARE, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       Business Risks:

       Certain  factors  relating  to the  industry  in  which  the  Corporation
       operates and the Corporation's  business should be carefully  considered.
       The Company's  primary business,  offering home health care services,  is
       heavily  regulated  at both the  federal  and  state  levels.  While  the
       Corporation is unable to predict what regulatory changes may occur or the
       impact on the  Corporation of any particular  change,  the  Corporation's
       operations and financial results could be negatively affected.

       Further,  the Corporation operates in a highly competitive industry which
       may limit the Corporation's  ability to price its services at levels that
       the  Corporation  believes  appropriate.  These  competitive  factors may
       adversely affect the Corporation's financial results.

       During 1998, the  Corporation  entered into an agreement with the City of
       New York acting  through the  Department of Social  Services of the Human
       Resources  Administration  ("HRA") to provide  personal  care services to
       certain qualified  individuals as determined by HRA commencing January 1,
       1999.

       Other Comments:

11.    RELATED PARTY TRANSACTION:

       The Corporation has entered into a Service Agreement with Heart to Heart,
       a company affiliated through common ownership. The Corporation has agreed
       to  provide  administrative   services  relating  to  payroll,   benefits
       management and data processing to the company through  December 31, 1998.
       The fee for these services approximated $26,000 and $12,000 for the years
       ended December 31, 1997 and 1998, respectively. As referred to in Note 1,
       the  Corporation  purchased  certain  of  the  intangible  assets  of the
       company.

       The Corporation leases one of its offices from an affiliated company. The
       lease  expires on October  31,  2000.  Rent  expense  for the years ended
       December 31, 1997 and 1998 amounted to approximately $38,000 and $40,000,
       respectively.

12.    SHAREHOLDERS' EQUITY:

       Preferred Stock:

       On August 6, 1998,  the Board of Directors  created a series of Preferred
       Stock to  consist  initially  of  480,000  shares of Class A  Convertible
       Preferred  Stock. The holders of the Preferred Stock shall be entitled to
       a dividend  equal to 9% of the purchase price for shares of the Preferred
       Stock before any  dividend is paid on Common  Stock.  Dividends  shall be
       payable quarterly  commencing with the first calendar quarter of 1999 and
       are not cumulative.  The holders of Preferred Stock receive no preference
       on liquidation  and such shares may be converted into one share of Common
       Stock at any time.


                                       44
<PAGE>

                    NEW YORK HEALTH CARE, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       On August 6, 1998,  Heart to Heart Health Care Services,  Inc. ("Heart to
       Heart"), which is the holder of the Corporation's  promissory note in the
       face amount of $1,150,000  currently  bearing  interest at the rate of 9%
       per annum,  converted $600,000 of the principal amount of that promissory
       note into 480,000 shares of the  Corporation's  newly  authorized Class A
       Convertible  Preferred  Stock at a  conversion  price of $1.25 per share,
       each  share of which  is  convertible  at any  time  into  shares  of the
       Corporation's  $.01 par value  common  stock.  Heart to Heart is owned by
       Jerry Braun,  Jacob  Rosenberg,  Samson  Soroka,  Hirsch  Chitrik and Sid
       Borenstein. Messrs. Braun, Rosenberg, Chitrik and Borenstein are officers
       or directors of the  Corporation  and  together  with Mr.  Soroka are all
       principal  shareholders.   The  Corporation  has  therefore  obtained  an
       independent opinion that the terms and conditions of the transaction are,
       under the circumstances, fair to the Corporation.

       Warrants:

       In  connection  with the initial  public  offering  of the  Corporation's
       Common Stock, the underwriter acquired for nominal consideration warrants
       to purchase an aggregate of 125,000 shares of Common Stock.  The warrants
       are exercisable at a price of $5.20 for a period of four years commencing
       one year from  December  20,  1996.  These  warrants  grant to the holder
       certain "piggyback"  registration rights for a period of seven years from
       December 20, 1997, and demand  registration  rights for a period of seven
       years from December 20, 1996 with respect to the  registration  under the
       Securities  Act of the  securities  issuable  upon  the  exercise  of the
       warrants.

       On June 2,  1998,  the  Corporation  granted  two of its board  members a
       warrant  for each to  purchase  up to 10,000  shares  of Common  Stock at
       ($1.625 per share) at any time until June 1, 2008.  On June 2, 1998,  one
       of the board members exercised his warrant and purchased 10,000 shares of
       Common Stock at a price of $16,250.

       Treasury Stock:

       During 1998, the Corporation  purchased 51,970 shares of Common Stock for
       treasury at a cost of $67,663.  The treasury  stock is shown at cost.  On
       June 2,  1998,  the  Corporation  issued  10,000  shares of Common  Stock
       previously  held in  treasury  in  connection  with the  exercise  of the
       warrants  issued on June 2,  1998.  The  aggregate  cost of the  treasury
       shares issued  exceeded the  aggregate  proceeds from the exercise of the
       warrants  by  $489,   which  amount  has  been   charged  to   additional
       paid-in-capital.

       Reserves:

       The  Corporation  has reserved an aggregate of 807,500  shares of Common
       Stock for the exercise of options  under the Option Plan referred  to in
       Note 9 and the warrants issued on June 2, 1998.


                                       45
<PAGE>

                    NEW YORK HEALTH CARE, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13.    EARNINGS PER SHARE:

       Earnings per share are computed as follows:

<TABLE>
<CAPTION>
                                                                                       For the Years Ended
                                                                                          December 31,
                                                                                   ---------------------------
                                                                                      1997             1998
                                                                                      ----             ----
<S>                                                                                <C>              <C>       
         Basic and diluted earnings per share:
           Earnings:

              Net income applicable to common stock                                $  183,863       $  341,152
                                                                                   ==========       ==========
           Shares:
              Weighted average number of common shares
                 outstanding - basic                                                3,750,000        3,739,864
              Effect of dilutive convertible preferred stock                                           193,315
                                                                                    ---------        ---------
       Diluted weighted average shares outstanding                                  3,750,000        3,933,179
                                                                                    =========        =========
       Basic earnings per share                                                          $.05             $.09
                                                                                         ====             ====
       Diluted earnings per share                                                        $.05             $.09
                                                                                         ====             ====
</TABLE>

14.     SUPPLEMENTAL CASH FLOW DISCLOSURES:

<TABLE>
<CAPTION>
                                                                                       For the Years Ended
                                                                                           December 31,
                                                                                   ---------------------------
                                                                                       1997             1998
                                                                                       ----             ----
<S>                                                                                   <C>             <C>     
       Cash paid during the year for:

           Interest                                                                   $20,567         $295,338
                                                                                      =======         ========

           Income taxes                                                              $268,062         $300,685
                                                                                     ========         ========

       Supplemental schedule of noncash investing and financing activities:

              The Company  purchased   customer   lists,   furniture  and  other
                 intangibles which were partially  acquired through the issuance
                 of promissory notes                                                 $200,000       $1,730,000
                                                                                     ========       ==========

              The Corporation issued preferred stock
                 in exchange for a promissory note                                                    $600,000
                                                                                                      ========

              The Corporation entered into capital lease obligations
                 for certain equipment                                                                $160,750
                                                                                                      ========
</TABLE>


                                       46
<PAGE>

                    NEW YORK HEALTH CARE, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15.    SUBSEQUENT EVENTS:

       On Febuary 22, 1999,  the  Corporation  purchased the customer  lists and
       other  intangible  assets  from  Staff  Builders'  Shrewbury  office  for
       $65,000.


                                       47
<PAGE>

Item 8.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
          ON ACCOUNTING AND FINANCIAL DISCLOSURES

          None

                                    PART III

Item 9.   DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY;
          COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

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

        Name                   Age                        Position
        ----                   ---                        --------

Jerry Braun                    42       President, Chief Executive Officer and
                                          Director

Jacob Rosenberg                41       Vice President, Chief Operating Officer,
                                        Secretary and Director

David Grossman                 31       Chief Financial Officer and Chief
                                        Accounting Officer

Hirsch Chitrik                 70       Director

Sid Borenstein                 45       Director

H. Gene Berger                 58       Director

Charles J. Pendola             53       Director

     Jerry  Braun has been the  President,  Chief  Executive  Officer  and Chief
Operating Officer of the Company since its inception in 1983.

     Jacob  Rosenberg,  has been  Secretary  and a Director  since the Company's
inception in 1983, and Vice President and Chief Operating Officer since February
1995.

     David  Grossman has been the Company's  chief  financial  officer and chief
accounting  officer since  December 1997.  From 1991 to 1997,  Mr.  Grossman was
employed as a certified public accountant at M.R. Weiser & Co., LLP, who are the
independent  auditors  of the  Company.  Mr.  Grossman  is a  graduate  of  Pace
University (BBA, Public Accounting, 1991).


                                       48
<PAGE>

     Hirsch  Chitrik has been a Director of the Company since May 1995. For more
than the last five years,  Mr.  Chitrik has been the  President of Citra Trading
Corporation,  a  privately-held  company  in New  York  engaged  in the  jewelry
business.

     Sid  Borenstein has been a Director of the Company since May 1995. For more
than the last five years, Mr.  Borenstein,  a Certified Public  Accountant,  has
been a General Partner in Sid Borenstein & Co., CPA's, in Brooklyn, New York.

     H. Gene  Berger has been a director  of the Company  since  February  1998.
Since  1981 Mr.  Berger  has  been  the  president  of Jay  Isle  Associates,  a
consulting firm to the health care industry.  From October 1991 to October 1997,
Mr. Berger was employed by  Transworld  Health Care,  Inc.,  which is a regional
provider of alternate  site health care  services and  products,  in a number of
capacities  including  executive  vice  president,  president,  chief  operating
officer and chief executive officer.

     Charles J. Pendola has been a director of the Company since  February 1998.
Since April 1997, Mr. Pendola has been an independent  management  consultant to
various  organizations  in the health care  industry.  From August 1996 to March
1997 Mr. Pendola was the president and chief executive  officer of First Medical
Corporation,  an international health care management firm providing services to
health  care  networks,   managed  care  organizations  and  independent  health
providers  in the United  States and Europe.  From April 1989 to June 1996,  Mr.
Pendola  was the  president  and chief  executive  officer of  Preferred  Health
Network,  a  not-for-profit  corporation  which managed a  diversified  group of
health care providers and health related organizations including five acute care
hospitals and 20  ambulatory  care centers.  Mr.  Pendola is a certified  public
accountant.

     Directors  hold  their  offices  until  the  next  annual  meeting  of  the
stockholders  and thereafter  until their  successors have been duly elected and
qualified. Executive officers are elected by the Board of Directors on an annual
basis and serve at the  direction of the Board.  All of the  executive  officers
devote  approximately  90% of their time to the business affairs of the Company.
See "Certain  Relationships  and Related  Transactions." 

     The  Company's  Board of Directors met a total of 9 times during the fiscal
year ended December 31, 1997. Each of the directors attended at least 90% of the
aggregate of the total meetings of the Board of Directors.

     The Company has an Audit  Committee  which was formed in February  1998 and
consists of three non-employee  directors:  Mr. Borenstein,  Mr. Pendola and Mr.
Berger.  The Audit  Committee  assists in selecting  the  independent  auditors,
designating   services   they  are  to   perform   and   maintaining   effective
communications  with  those  auditors.  
 
Employment Agreements

     On March 26, 1996,  the Company  entered into  employment  agreements  with
Jerry Braun and Jacob Rosenberg, each of which is for a term ending December 31,
1999. 

     Mr.  Braun's  agreement  provides for his  services as President  and Chief
Executive  Officer  in  consideration  of (i)  initial  annual  compensation  of
$175,000;  (ii)  reimbursement  of  authorized  business  expenses  incurred  in
connection with the conduct of the Company's  business;  (iii)  participation in
the  Company's  401  (k)  Plan  and  stock  option  plan;   (iv)  an  automobile
reimbursement  allowance  of $500 per month toward  automobile  leasing cost and
reimbursement of automobile  insurance cost; (v) an allowance of $3,500 per year
towards the cost of $500,000 of term life insurance,  and disability  insurance;
(vi) four weeks paid  vacation;  and (vii) annual  increase in salary of 10% for
each year.


                                       49
<PAGE>

     Mr. Rosenberg's  agreement has the same general terms and conditions as Mr.
Braun's,  except that he will serve as Chief Operating  Officer,  and the annual
compensation is $140,000.

     Mr. Braun and Mr. Rosenberg also  participate,  together with all employees
of the Company,  in a bonus plan pursuant to which 10% of the  Company's  annual
pre-tax net income is contributed to the bonus pool which is distributed to such
persons  and in such  amounts  as  decided  upon by the  Company's  Compensation
Committee.

      During the Company's  fiscal year ended December 31, 1998, Jerry Braun and
Jacob  Rosenberg  did not file on a timely  basis a report on Form 4 required by
Section 16(a) of the Securities Exchange Act of 1934.


                                       50
<PAGE>

Item 10.  EXECUTIVE COMPENSATION

Summary Compensation Table

     The  following  table sets forth,  for the fiscal years ended  December 31,
1997 and 1998,  the cash  compensation  paid by the Company,  as well as certain
other  compensation  paid with  respect to those years,  to the chief  executive
officer  and,  to the extent  applicable,  each of the three  other most  highly
compensated  executive  officers of the Company in all  capacities in which they
served.

<TABLE>
<CAPTION>
                                            Annual Compensation                            Long-Term Compensation
                           -------------------------------------------   -----------------------------------------------------------
                                                                            Awards                                       Payouts
                                                                         ---------------                             ---------------
------------------------------------------------------------------------------------------------------------------------------------
                                                                                           Securities
Name and                                                 Other Annual      Restricted      underlying     LTIP         All other
Principal Position(1)      Year   Salary($)  Bonus($)   Compensation($)  Stock Awards($)  options/SARs  Payouts(#)   compensation($)
----------------------     ----   ---------  --------   ---------------  ---------------  ------------  ----------   ---------------
<S>                        <C>    <C>                     <C>                                <C>   
Jerry Braun                1998   $196,943   $24,600      $23,765(1)                         273,750
 President and Chief       1997   $175,737    36,530      $22,721(1)                         Shares
 Executive Officer         
                           
Jacob Rosenberg            1998   $157,554    16,400      $26,337(2)                         180,000
 Chief Operating Officer   1997   $140,267   $24,255      $26,209(2)                         Shares
                           

David Grossman             1998   $88,270                                                    17,500
Chief Financial and        1997   $ 3,923                                                    Shares
   Accounting Officer
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

-----------
(1)    Includes  $13,290 and $13,031 and of medical  insurance  premiums paid on
       behalf  of such  individual  for each of the  years  ended  1998 and 1997
       respectively,  $7,234 and $5,931,  for automobile and  automobile-related
       costs,  including  insurance,  incurred  on  behalf  of such  individual,
       respectively,  for each of the years  ended  1998 and 1997 and  $3,500 in
       expense allowance for each of the fiscal years ended 1998 and 1997.

(2)    Includes $13,031 and $17,290 of medical insurance premiums paid on behalf
       of  such   individual   for  each  of  the  years  ended  1998  and  1997
       respectively,  $9,806 and $9,419 for  automobile  and  automobile-related
       costs,  including  insurance,  incurred  on  behalf  of such  individual,
       respectively,  for each of the years  ended  1998 and 1997 and  $3,500 in
       expense allowance for each of the fiscal years ended 1998 and 1997.


                                       51
<PAGE>

Directors Compensation

     The Company  currently  reimburses  each  non-employee  director  for their
expenses in connection with attending meetings.

Savings and Stock Option Plans

   401(k) Plan

     The Company  maintains  an Internal  Revenue  Code  Section  401(k)  salary
deferral  savings plan (the  "Plan") for all of its eligible New York  employees
who  have  been  employed  for at least  one year and are at least 21 years  old
(effective July 1, 1996,  field staff  employees at the Company's  Orange County
branch office in Newburgh,  New York ceased being eligible to participate in the
Plan).  Subject  to  certain  limitations,   the  Plan  allows  participants  to
voluntarily  contribute  up to 15% of their  pay on a pre-tax  basis.  Under the
Plan,  the  Company  may make  matching  contributions  on behalf of the pre-tax
contributions made by participants. For 1995 and for the first half of 1996, the
Company  contributed 50% of each dollar  contributed to the Plan by participants
up to a maximum of 6% of the  participant's  salary.  All participants are fully
vested in their  accounts  in the Plan with  respect  to their  salary  deferral
contributions  and are vested in Company  matching  contributions at the rate of
20% per year for two years  through  four years of  service,  with 100%  vesting
after five years of  service.  However,  participants  who are first hired after
December 31, 1994 will not be vested in the Company matching contributions until
the completion of five years service,  when they become 100% vested. The Company
has agreed with the Underwriter that no discretionary  contributions to the Plan
may be made for officers or stockholders of the Company.

   Stock Option Plan

     In March 1996, the Company's Board of Directors and  stockholders  approved
and adopted the New York  Health  Care,  Inc.  Performance  Incentive  Plan (the
"Option Plan")  providing for options to purchase up to 262,500 shares of Common
Stock for to key  employees of the  Company.  On June 25,  1998,  the  Company's
shareholders   ratified  an  amendment  to  the  Option  Plan   authorizing  the
reservation  of an additional  210,000 shares of Common Stock for issuance under
that plan for each of two  additional  years,  resulting  in a total of  682,500
shares in the Option Plan. To date, options have been granted under the plan for
a total of 426,500  shares.  The Option Plan is  administered  by a Compensation
Committee  appointed  by the  Board of  Directors  (the  "Committee"),  which is
authorized to grant incentive stock options and  non-qualified  stock options to
selected employees of the Company and to determine the participants,  the number
of options to be granted and other terms and provisions of each option.

     The exercise  price of any incentive  stock option or  nonqualified  option
granted under the Option Plan may not be less than 100% of the fair market value
of the shares of Common Stock


                                       52
<PAGE>

of the Company at the time of the grant.  In the case of incentive stock options
granted  to holders of more than 10% of the  voting  power of the  Company,  the
exercise price may not be less than 110% of the fair market value.

     Under the  terms of the  Option  Plan,  the  aggregate  fair  market  value
(determined  at the time of grant) of shares  issuable to any one recipient upon
exercise of incentive  stock options  exercisable  for the first time during any
one calendar  year may not exceed $ 100,000.  Options  granted  under the Option
Plan become  exercisable  in whole or in part from time to time as determined by
the  Committee,  but in no  event  may a stock  option  granted  in  conjunction
therewith be exercisable  prior to the expiration of six months from the date of
grant, unless the grantee dies or becomes disabled prior thereto.  Stock options
granted  under the Option Plan have a maximum  term of 10 years from the date of
grant,  except  that with  respect  to  incentive  stock  options  granted to an
employee  who,  at the time of the  grant,  is a holder  of more than 10% of the
voting  power of the  Company,  the stock option shall expire not more than five
years from the date of the grant.  The option  price must be paid in full on the
date of exercise  and is payable in cash or in shares of Common  Stock  having a
fair market value on the date the option is exercised equal to the option price.

     If a grantee's  employment  by, or  provision  of services  to, the Company
shall be terminated,  the Committee may, in its discretion,  permit the exercise
of stock options for a period not to exceed one year following such  termination
of  employment  with respect to incentive  stock options and for a period not to
extend beyond the expiration date with respect to non-qualified options,  except
that no incentive stock option may be exercised after three months following the
grantee's  termination  of  employment,  unless it is due to death or  permanent
disability,  in which case they may be exercised  for a period of up to one year
following such termination.

     The underwriting agreement between the Company and the underwriter provided
that,  until December 20, 1999, the Company will not adopt,  propose to adopt or
otherwise permit to exist any employee,  officer,  director or compensation plan
or arrangement permitting the grant, issue or sale of any shares of Common Stock
or other  securities  of the Company in an amount  greater than 262,500  shares,
other  than the  proposed  increase  in the Option  Plan  described  above.  The
underwriting  agreement  also provides  that,  (i) for the three year period the
exercise price for any option  granted  pursuant to the Option Plan or otherwise
during such period  cannot be less than the greater of the fair market value per
share of the  Common  Stock on the date of grant or $4.00  per share and (ii) if
the Company's  shareholders  approve an increase of an additional 262,500 shares
for each of two  additional  years,  then any option  granted in the three years
following such an increase will have an exercise price no lower than the greater
of the fair  market  value per share of the  Common  Stock  upon the date of the
option grant or $4.00 per share.


                                       53
<PAGE>

                      Option/SAR Grants in Last Fiscal Year

                                Individual Grants

--------------------------------------------------------------------------------
                Number of       % of Total  
                Securities      Options/SARs
                Underlying      Granted to
                Options/SARs    Employees in   Exercise or 
Name            Granted         Fiscal Year    Base Price      Expiration Date
-----------     -------------   ------------   -----------     --------------
Jerry Braun     55,000 Shares   11.65%         $1.7875/Share   June 2, 2003
                55,000 Shares   11.65%         $1.625/Share    June 2, 2008
                35,000 Shares    7.42%         $1.0318/Share   December 23, 2003
                35,000 Shares    7.42%         $.938/Share     December 23, 2008

Jacob Rosenberg 55,000 Shares   11.65%         $1.7875/Share   June 2, 2003     
                55,000 Shares   11.65%         $1.625/Share    June 2, 2008     
                35,000 Shares    7.42%         $1.0318/Share   December 23, 2003
                35,000 Shares    7.42%         $.938/Share     December 23, 2008

David Grossman   7,500 Shares    1.59%         $1.625/Share    June 2, 2008
                10,000 Shares    2.19          $.938/Share     December 23, 2008
--------------------------------------------------------------------------------

               Aggregated Option/SAR Exercises in Last fiscal Year
                     and Fiscal Year-End Option/SAR Values

--------------------------------------------------------------------------------
                                               Number of
                                               Securities        Value of
                                               Underlying        Unexercised
                                               Unexercised       In-the-Money
                                               Options/SARs at   Options/SARs at
                                               Fiscal Year-End   Fiscal Year-End
             Shares Acquired                   Exercisable/      Exercisable/
Name         on Exercise      Value Realized   Unexercisable     Unexercisable
-----------  ---------------  --------------   -------------     -------------
Jerry Braum                                    93,750/0 Shares   --
                                               55,000/0 Shares   --
                                               55,000/0 Shares   $3,410
                                               35,000/0 Shares   --
                                               35,000/0 Shares   $2,170

Jacob Rosenberg                                55,000/0 Shares   --
                                               55,000/0 Shares   $3,410
                                               35,000/0 Shares   --
                                               35,000/0 Shares   $2,170

David Grossman                                  7,500/0 Shares   
                                               10,000/0 Shares   $620
--------------------------------------------------------------------------------

     Other than the stock options described in the tables above, the Company has
not issued any options to  officers  and  directors  under the Option  Plan,  or
otherwise, except common stock purchase warrants issued to two outside directors
during 1998. On June 2, 1998, the Registrant issued warrants pursuant to warrant
agreements with each of H. Gene Berger and Charles J. Pendola, who are directors
of the Registrant. Each warrant provided that the holder could purchase up to an
aggregate of 10,000 shares of the Registrant's $.01 par value common stock at an
exercise  price of $1.625 per share at any time up until  June 1, 2008.  On June
10, 1998, Mr. Pandola  exercised his warrant and purchased  10,000 shares of the
$.01 par value common stock of the Registrant for an aggregate purchase price of
$16,250.

     The Company does not have any other existing stock option or other deferred
compensation plans, but may adopt such plans in the future. However, the Company
agreed  with its  Underwriter  not to adopt any other  stock  option or deferred
compensation plans during the three-year period December 20, 1999.


                                       54
<PAGE>

Item 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information  regarding shares of the
Common Stock beneficially  owned as of March 31, 1999 by (i) each person,  known
to the Company,  who  beneficially  owns more than 5% of the Common Stock,  (ii)
each of the Company's directors and (iii) all officers and directors as a group:

                                             Shares           Percentage
         Name and Address of                 Beneficially     of Stock
         Beneficial Owner                    Owned(l)         Outstanding(l)
         ----------------                    --------         --------------

         Jerry Braun(2)                      1,204,248         29.13%
         929 East 28th Street
         Brooklyn, NY  11210

         Jacob Rosenberg(3)                    549,401         13.90%
         932 East 29th Street
         Brooklyn, NY  11210

         Samson Soroka(4)                      530,911         13.82%
         1228 East 22nd Street
         Brooklyn, NY  11210

         Hirsch Chitrik(5)                     596,000         15.52%
         1401 President Street
         Brooklyn, NY  11213

         Sid Borenstein(6)                     131,178          3.48%
         1246 East 10th Street
         Brooklyn, NY  11230

         H. Gene Berger (7)                     10,000           .27%
         11 Fenimore Drive
         Scotch Plains, NJ 07076

         Charles J. Pendola                     10,000           .27%
         18 Guild Court
         Plainview, NY 11803-3932

         All officers and directors
            as a group (6 persons)(1)(2)  
            (3)(4)(5)(6)(7)                  2,500,824          56.1%

----------
(1)  The shares of Common  Stock owned by each  person or by the group,  and the
     shares included in the total number of shares of Common Stock  outstanding,
     have been  adjusted  in  accordance  with Rule 13d-3  under the  Securities
     Exchange  Act of 1934,  as  amended,  to reflect  the  ownership  of shares
     issuable upon  exercise of  outstanding  options,  warrants or other common
     stock equivalents which are exercisable within 60 days. As provided in such
     Rule,  such shares  issuable to any holder are deemed  outstanding  for the
     purpose of calculating such holder's beneficial ownership but not any other
     holder's beneficial ownership.

(2)  Includes  a total of  273,750  shares of  Common  Stock  issuable  upon the
     exercise of stock options  granted to Mr. Braun and 180,000 shares issuable
     upon the conversion of shares of Class A Convertible Preferred Stock.

(3)  Includes  a total of  110,000  shares of  Common  Stock  issuable  upon the
     exercise  of stock  options  granted to Mr.  Rosenberg  and  90,000  shares
     issuable upon the conversion of his shares of Class A Convertible Preferred
     Stock.

(4)  Includes  90,000 shares of Common Stock issuable upon the conversion of Mr.
     Soroka's shares of Class A Convertible Preferred Stock.

(5)  Includes  96,000 shares of Common Stock issuable upon the conversion of Mr.
     Chitrik's shares of Class A Convertible Preferred Stock.

(6)  Includes  24,000 shares of Common Stock issuable upon the conversion of Mr.
     Borenstein's shares of Class A Convertible Preferred Stock.

(7)  Includes  10,000  shares of Common  Stock  issuable  upon the exercise of a
     Common Stock Purchase Warrant granted to Mr. Berger.


                                       55
<PAGE>

Item 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The Company  operated as an S Corporation  prior to the end of 1996 and has
paid out a  substantial  portion of its  earnings to the  current  stockholders.
These distributions  aggregated $100,230,  $840,302 and $3,225,431 for the years
ended December 31, 1994, 1995 and 1996, respectively.

      Jerry  Braun,  Jacob  Rosenberg,  Samson  Soroka,  Hirsch  Chitrik and Sid
Borenstein, who are directors of the Company, have been the sole stockholders of
a New Jersey corporation named Heart to Heart Health Care Services, Inc. ("Heart
to Heart"),  which began its home health care  business in 1995 in northern  New
Jersey,  but not in the State of New York, and sold its assets to the Company on
March 26, 1998.  Heart to Heart had net revenues of $1,950,890 in the year ended
December  31,  1997.  Since  its  inception,  Heart  to Heart  utilized  Company
personnel  for  its  administrative   functions   regarding  payroll,   benefits
management  and data  processing.  The  Company and Heart to Heart had a Service
Agreement  pursuant  to  which  the  Company  provided  administrative  services
relating to  payroll,  benefits  management  and data  processing  for which the
Company was  reimbursed  for all expenses  attributable  to such  operations  of
approximately $15,000 per year.

     On March 26, 1998,  NYHC Newco, a  wholly-owned  subsidiary of the Company,
purchased  Heart to Heart's  home care  business  assets  (other  than  accounts
receivable)  for a  purchase  price  consisting  of a  promissory  note  in  the
principal  sum  of  $1,150,000  payable  in  24  equal  quarterly   installments
commencing  June 26, 1998 together  with accrued  interest at a rate equal to 1%
per annum over the prime  interest rate  published by the Wall Street Journal on
March 26, 1998, adjusted  quarterly.  The promissory note is subordinated to all
obligations  due to the  Company's  banks or other  institutional  lenders.  The
promissory  note and the covenants of NYHC Newco are  guaranteed by the Company.
As part of the acquisition transaction, NYHC Newco assumed leasehold obligations
for the two  offices  located in East  Orange  (expiring  August  31,  2002) and
Hackensack,  New Jersey  (expiring  May 31, 1998) in the aggregate sum of $1,815
per  month,  together  with  various  equipment  leases  for  items of  business
equipment.  Because  directors  of the Company are the owners of Heart to Heart,
the Company obtained an independent opinion that the terms and conditions of the
acquisition agreement with Heart to Heart are, under all circumstances,  fair to
the Company.

     On August 6, 1998,  Heart to Heart Health Care  Services,  Inc.  ("Heart to
Heart") which was the holder of the Company's promissory note in the face amount
of $1,150,000  bearing interest at the rate of 9% per annum,  converted $600,000
of the  principal  amount of that  promissory  note into  480,000  shares of the
Company's newly authorized Class A Convertible Preferred Stock


                                       56
<PAGE>

at a conversion price of $1.25 per share,  each share of which is convertible at
any time into shares of the Company's  Common Stock.  Heart to Heart is owned by
Jerry Braun, Jacob Rosenberg,  Samson Soroka, Hirsch Chitrik, and Sid Borenstein
(the  "Affiliated  Shareholders")  Mr. Braun received  180,000  shares,  Messrs.
Rosenberg and Soroka each received 90,000 shares and Mr. Chitrik received 96,000
shares  and Mr.  Borenstein  received  24,000  shares of such  preferred  stock.
Messrs. Braun,  Rosenberg,  Chitrik and Borenstein are officers or  directors of
the Company and, together with Mr. Soroka, were all principal shareholders.  The
Company obtained an independent  opinion that the consideration  received by the
Company in the transaction was, under the  circumstances,  fair from a financial
point of view to the Company, not including, the Affiliated Shareholders.

     On November 1, 1995, the Company  transferred the land and building located
at 1667  Flatbush  Avenue,  Brooklyn,  New York,  which  houses its Kings County
Branch office, to 1667 Flatbush. This transfer,  which relieved the Company of a
first mortgage obligation  aggregating $146,250,  was a non-cash distribution to
the current  stockholders  of S  Corporation  earnings in the  aggregate  sum of
$144,927.  The Company  leases its Kings County Branch office from 1667 Flatbush
until October 31, 2000 for $3,150 per month in rent,  which is subject to annual
increases  beginning  November 1, 1997 equal to 5% of the prior  year's  monthly
rent.  Management  believes that the terms of the lease are no less favorable to
the Company than could have been obtained from unaffiliated third parties.

     On March 26, 1996,  the Company  issued a stock option to its President and
Chief Executive  Officer,  Jerry Braun, for the purchase of 93,750 shares of the
Company's Common Stock at an exercise price of $3.00 per share during the period
ending March 31, 2006. See "Management Savings and Stock Option Plans."

     On March 26, 1996,  the Company  entered into  employment  agreements  with
Jerry Braun and Jacob Rosenberg. See "Management - Employment Agreements."

     On July 8, 1996, the Company  entered into the  Receivables  Sale Agreement
with 1667 Flatbush pursuant to which 1667 Flatbush  purchased  $3,500,000 of the
Company's accounts  receivable for a purchase price of $3,150,000.  The purchase
price was represented by a negotiable promissory note which bore interest at the
rate of 12% per annum and was payable  $1,100,000 on August 1, 1996,  $1,100,000
on  September   1,  1996  and  $950,000  on  October  1,  1996.   The  note  was
collateralized by a lien on the accounts  receivable  purchased from the Company
and was personally guaranteed by each of the members of 1667 Flatbush.  The note
was paid in full on September  30, 1996.  As a result of the  Company's  sale of
accounts receivable for less than their face value, the Company recognized a net
charge to its earnings during 1996 in the amount of $204,137.

     On July 30, 1997, the Company  entered into a consulting  agreement with H.
Gene Berger, who became a member of the Company's Board of Directors in February
1998.  The agreement  provides Mr.  Berger's  services as a healthcare  industry
consultant. In the event Mr. Berger introduces an acquisition transaction to the
Company  which  is  completed,  a fee will be due upon  closing  based  upon the
"Lehman  Formula" equal to 5% of the first $5 million of purchase  price,  4% of
the next $1 million, 3% of the next $1 million, 2% of the next $1 million and 1%
of the balance of the purchase  price. In January 1998 Mr. Berger received a fee
of $39,000 from the Company by reason of his  introduction to the Company of the
December 8, 1997  acquisition of the home care business  assets of three offices
in New Jersey from Metro.

     In September  1997, the Company entered into an oral agreement with Charles
J. Pendola,  who became a member of the Company's Board of Directors in February
1998. The agreement  provides Mr.  Pendola's  services as a healthcare  industry
consultant,  with particular attention to new business,  for a fee of $1,000 per
month.  During  1997 Mr.  Pendola  received  consulting  fees  from the  Company
totaling $3,000 pursuant to his agreement.


                                       57
<PAGE>

     On June 2, 1998, the Company  issued stock options  pursuant to Option Plan
to each of Jerry  Braun,  Jacob  Rosenberg  and David  Grossman.  Mr.  Braun was
granted an  Incentive  Stock  Option to  purchase up to an  aggregate  of 55,000
shares of the Company's  Common Stock at an exercise  price of $1.7875 per share
at any time up until June 2, 2003 and a  Non-Qualified  Stock Option to purchase
up to an aggregate of 55,000 shares of the Company's Common Stock at an exercise
price of $1.625 per share at any time up until June 2, 2008.  Mr.  Rosenberg was
granted an  Incentive  Stock  Option to  purchase up to an  aggregate  of 55,000
shares of the Company's  Common Stock at an exercise  price of $1.7875 per share
at any time up until June 2, 2003 and a  Non-Qualified  Stock Option to purchase
up to an aggregate of 55,000 shares of the Company's Common Stock at an exercise
price of $1.625  per share at any time up until June 2, 2008.  Mr  Grossman  was
granted an Incentive Stock Option to purchase up to an aggregate of 7,500 shares
of the  Company's  Common Stock at an exercise  price of $1.625 per share at any
time up until June 2, 2008.

     On June 2, 1998, the Company issued warrants pursuant to warrant agreements
with each of H. Gene Berger and Charles J. Pendola.  Each warrant  provided that
the holder could  purchase up to an aggregate of 10,000  shares of the Company's
$.01 par value common stock at an exercise price of $1.625 per share at any time
up until June 1, 2008. On June 10, 1998,  Mr.  Pendola  exercise his warrant and
purchased 10,000 shares of the $.01 par value common stock of the Company for an
aggregate purchase price of $16,250.

     On June 25, 1998. the Company's  shareholders  ratified an amendment to the
Option Plan  authorizing  the  reservation  of an additional  210,000  shares of
Common  Stock for  issuance  under that plan for each of two  additional  years,
resulting in total of 682,500  shares in the Option Plan. To date,  options have
been granted under the Plan for a total of 426,500 shares.
                                                       
     On December 23, 1998, the Company  issued stock options  pursuant to Option
Plan to each of Jerry Braun,  Jacob Rosenberg and David Grossman,  Mr. Braun was
granted an  Incentive  Stock  Option to  purchase up to an  aggregate  of 35,000
shares of the Company's  Common Stock at an exercise  price of $1.0318 per share
at any time up until  December  23,  2003 and a  Non-Qualified  Stock  Option to
purchase up to an aggregate of 35,000 shares of the Company's Common Stock at an
exercise  price of $.938 per share at any time up until  December 23, 2008.  Mr.
Rosenberg  was granted an Incentive  Stock Option to purchase up to an aggregate
of 35,000 shares of the Company's  Common Stock at an exercise  price of $1.0318
per  share at any time up until  December  23,  2003 and a  Non-Qualified  Stock
Option to purchase up to an aggregate of 35,000 shares of the  Company's  Common
Stock at an exercise price of $.938 per share any any time up until December 23,
2008.  Mr.  Grossman was granted an Incentive  Stock Option to purchase up to an
aggregate of 10,000 shares of the Company's Common Stock at an exercise price of
$.938 per share at any time up until December 23, 2008.

     The transactions  described above involve actual or potential  conflicts of
interest  between the Company and its officers or directors.  In order to reduce
the potential for conflicts of interest between the Company and its officers and
directors,  prior to entering into any transaction in which a potential material
conflict  of  interest  might  exist,  the  Company's  policy  has been and will
continue to be that the Company does not enter into  transactions with officers,
directors or other  affiliates  unless the terms of the transaction are at least
as  favorable to the Company as those which would have been  obtainable  from an
unaffiliated  source.  The  Company  has no plans to enter  into any  additional
transactions which involve actual or potential conflicts of interest between the
Company  and its  officers  or  directors  and  will  not  enter  into  any such
transactions in the future without first  obtaining an independent  opinion with
regard to the  fairness to the Company of the terms and  conditions  of any such
transaction.


                                       58
<PAGE>

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

     (a)  The following documents are filed as part of the Report:

          (1)  FINANCIAL STATEMENTS:

               Report of Independent Certified Public Accountants.

               Balance Sheet as at December 31, 1997.

               Statements  of Income for the Years Ended  December  31, 1997 and
               1996.

               Statements of  Stockholders'  Equity for the Years Ended December
               31, 1997 and 1996.

               Statements  of Cash Flows for the Years Ended  December  31, 1997
               and 1996.

               Notes to Financial Statements.

     (2)  FINANCIAL STATEMENT SCHEDULES.

               NONE

     (3)  EXHIBITS

     Exhibit
     Number           Description of Exhibit
     ------           ----------------------     
     1.1              Form of Underwriting Agreement.*

     2.1              Purchase and Sale  Agreement dated  December 7, 1997 among
                      NYHC   Newco   Paxxon,   Inc.   and    Metro    Healthcare
                      Services, Inc.**
        
     2.2              Purchase and Sale  Agreement  dated February 8, 1998 among
                      NYHC     Newco    Paxxon,    Inc.  and   Metro  Healthcare
                      Services, Inc.***

     2.3              Purchase and Sale Agreement dated  February 25, 1998 among
                      NYHC Newco Paxxon,  Inc.  and Heart to  Heart   Healthcare
                      Services, Inc.***
     
     3.1              Certificate of Incorporation of the Company.*
     
     3.2              Restated Certificate of Incorporation of the
                      Company.*
     
     3.3              Certificate of Correction of Restated Certificate of
                      Incorporation of New York Health Care, Inc.*
     
     3.4              Amendment to the Certificate of Incorporation filed
                      October 17, 1996.*


                                       59
<PAGE>

     3.5              By-laws of the Company.*

     3.6              Amendment to the Certificate of Incorporation of the
                      Company filed December 4, 1996.*

     3.7              Certificate of Designations, Rights and Preferences of
                      New York Health Care, Inc. Class A Convertible Preferred
                      Stock.*****

     4.1              Form of certificate evidencing shares of Common
                      Stock.*

     4.2              Underwriter's Warrant Agreement and Form of
                      Underwriter's Warrant.*

    10.1              Purchase and Sale Agreement by and between the
                      Company, National Medical Homecare, Inc., Jerry
                      Braun and Sam Soroka dated March 18, 1988.*

    10.2              Lease for 105 Stevens Avenue, White Plains, New
                      York by and between the Company and Vincent
                      Rippa as receiver dated October 30, 1992.*

    10.3              Lease for 175 Fulton Avenue, Suite 30IA, Hempstead,
                      New York by and between and the Company and
                      Hempstead Associates Limited Partnership dated July
                      22, 1993.*

    10.4              Deed for 1667 Flatbush Avenue, Brooklyn, New York
                      from Tiara Realty Co. to the Company dated April 22,
                      1994.*

    10.5              Agreement between Jerry Braun, Jacob Rosenberg,
                      Samson Soroka, Hirsch Chitrik, Sid Borenstein and
                      the Company dated March 31, 1988.*

    10.6              Lease for 49 South Main Street, Spring Valley, New
                      York by and between the Company and Joffe
                      Management dated November 1, 1994.*

    10.7              Agreement for Provisions of Home Health Aide and
                      Personal Care Worker Services by and between the
                      Company and Kingsbridge Heights Health Facilities
                      Long Term Home Health Care Program dated
                      November 2, 1994.*


                                       60
<PAGE>

    10.8              State of New York Department of Health Office of
                      Health Systems Management Home Care Service
                      Agency License for the Company doing business in
                      Rockland, Westchester and Bronx Counties dated
                      May 8, 1995.*

    10.9              State of New York Department of Health Office of
                      Health Systems Management Home Care Service
                      Agency License for the Company doing business in
                      Dutchess, Orange, Putnam, Sullivan and Ulster
                      Counties dated May 8, 1995.*

    10.10             State of New York Department of Health Office of
                      Health Systems Management Home Care Service
                      Agency License for the Company doing business in
                      Nassau, Suffolk and Queens Counties dated May 8,
                      1995.*

    10.11             State of New York Department of Health Office of
                      Health Systems Management Home Care Service
                      Agency License for the Company doing business in
                      Orange and Rockland Counties dated July 1. 1995.*

    10.12             Lease Renewal for 45 Grand Street, Newburgh, New
                      York by and between the Company and Educational
                      and Charitable Foundation of Eastern Orange County,
                      Inc. dated July 12, 1995.*

    10.13             Lease for 91-31 Queens Boulevard, Elmhurst, New
                      York by and between the Company and Expressway
                      Realty Company dated September 15, 1995.*

    10.14             Settlement Agreement and General Release by and
                      between the Company and Samson Soroka dated
                      September 28, 1995.*

    10.15             Personal Care Aide Agreement by and between the
                      Company and Nassau County Department of Social
                      Services dated October 18, 1995.*


                                       61
<PAGE>

    10.16             Lease for 1667 Flatbush Avenue, Brooklyn, New
                      York by and between the Company and 1667 Flatbush
                      Avenue LLC dated November 1, 1995.*

    10.17             State of New York Department of Health Office of
                      Health Systems Management Home Care Service
                      Agency License for the Company doing business in
                      Bronx, Kings, New York, Queens and Richmond
                      Counties dated December 29, 1995.*

    10.18             Home Health Agency Agreement by and between the
                      Company and the Center for Nursing and
                      Rehabilitation dated January 1, 1996.*

    10.19             Homemaker and Personal Care Agreements by and
                      between the Company and the County of Rockland
                      Department of Social Services dated January 1,
                      1996.*

    10.20             Home Health Aide/ Personal Care Worker Services
                      Agreement by and between the Company and Beth
                      Abraham Hospital dated January 12, 1996.*

    10.21             Homemaker Services Agreement by and between the
                      Company and the Orange County Department of
                      Social Services dated February 16, 1996.*

    10.22             Personal Care Service Agreement by and between the
                      Company and the Orange County Department of
                      Social Services dated February 16, 1996.*

    10.23             Certified Home Health Agency Agreement by and
                      between the Company and New York Methodist
                      Hospital dated February 28, 1996.*

    10.24             Employment Agreement by and between the
                      Company and Jacob Rosenberg dated March 26,
                      1996.*

    10.25             Employment Agreement by and between the
                      Company and Jerry Braun dated March 26, 1996.*


                                       62
<PAGE>

    10.26             Stock Option Agreement by and between the
                      Company and Jerry Braun dated March 26, 1996.*

    10.27             Home Health Agency Agreement by and between the
                      Company and the Mount Sinai Hospital Home Health
                      Agency dated April 1, 1996.*

    10.28             Absolute, Unconditional, Irrevocable and Limited
                      Continuing Guaranty of Payment by and between
                      Jacob Rosenberg and United Mizrahi Bank and Trust
                      Company dated May 9, 1996.*

    10.29             Absolute, Unconditional, Irrevocable and Limited
                      Continuing Guaranty of Payment by and between
                      Jerry Braun and United Mizrahi Bank and Trust
                      Company dated May 9, 1996.*

    10.30             Continuing General Security Agreement by and
                      between the Company and United Mizrahi Bank and
                      Trust Company dated May 9, 1996.*

    10.31             Agreement for the Purchase of Accounts Receivable
                      between the Company and 1667 Flatbush Avenue
                      LLC dated July 8, 1996.*

    10.32             401 (k) Plan for the Company.*

    10.33             Performance Incentive Plan for the Company.*

    10.34             Services Agreement between the Company and Heart
                      to Heart Health Care Services, Inc., dated January 1,
                      1996.*

    10.35             Employment Agreement by and between the
                      Company and Gilbert Barnett dated August 27,
                      1996.*

    10.36             Assignment of lease dated October 8, 1996, lease
                      dated March 31, 1995 and sublease dated May 1995
                      among the Company, as tenant, Prime Contracting
                      Design Corp., as assignor, Bellox Realty Corp., as
                      landlord and Nutriplus Corp., as subtenant.*


                                       63
<PAGE>

    10.37             Lease for 6 Gramatan Avenue, Mount Vernon, New
                      York, 10550 by and between the Company and 6
                      Gramatan Avenue Corp. dated December 1, 1996.*

    10.38             Form of Financial Consulting Agreement with H.J.
                      Meyers & Co., Inc.*

    10.39             Forms of Merger & Acquisition Agreement and
                      Indemnification with H.J. Meyers & Co., Inc.*

    10.40             Consulting Agreement by and between the Company and 
                      H. Gene Berger dated July 30, 1997.****

    10.41             Agreement between the Company and Heart to Heart Health
                      Care Services, Inc. dated August 6, 1998.*****

    11                Computation of Earnings Per Common Share of the
                      Company.

*    Incorporated  by  reference  to  Exhibits  filed  as part of the  Company's
     Registration Statement on Form SB-2 under S.E.C. File No. 333-08152,  which
     was declared effective on December 20, 1996.

**   Incorporated  by reference to Exhibit filed as part of the  Company's  Form
     8-K report with an event date of December 8, 1997.

***  Incorporated  by reference to Exhibits  filed as part of the Company's Form
     8-K report with an event date of February 8, 1998.

**** Incorporated  by reference to Exhibits  filed as part of the Company's Form
     10-KSB report for the year ended December 31, 1997.

*****Incorporated  by reference to Exhibits  filed as part of the Company's Form
     10-QSB report for the quarter ended June 30, 1998.

     New York  Healthcare,  Inc.  will  furnish a copy of any exhibit  described
above to any  beneficial  holder of its  securities  upon  receipt  of a written
request,  provided  that the  holder  pays to New York  Healthcare,  Inc.  a fee
compensating  it  for  its  reasonable   expenses  in  furnishing  the  exhibits
requested.

      (b)  Reports on Form 8-K.  The Company  filed a Form 8-K report  March 31,
1998.


                                       64
<PAGE>

                                   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.

April 15, 1999

                                    NEW YORK HEALTH CARE, INC.

                                    By: /s/ Jerry Braun
                                       ----------------------------
                                       Jerry Braun
                                       President and Chief Executive Officer

     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.

/s/ Jerry Braun                 President, Chief Executive        April 15, 1999
-------------------------       Officer and Director                    
Jerry Braun                              

/s/ Jacob Rosenberg             Vice President, Chief Operating   April 15, 1999
-------------------------       Officer, Secretary and Director         
Jacob Rosenberg          

/s/ David Grossman              Chief Accounting                  April 15, 1999
-------------------------       and Financial Officer
David Grossman                          

/s/ Hirsch Chitrik              Director                          April 15, 1999
------------------------
Hirsch Chitrik

/s/ Sid Borenstein              Director                          April 15, 1999
------------------------
Sid Borenstein

/s/ H. Gene Berger              Director                          April 15, 1999
------------------------
H. Gene Berger

/s/ Charles J. Pendola          Director                          April 15, 1999
------------------------
Charles J. Pendola


                                       65