SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-K/A

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

      For the fiscal year ended FEBRUARY 29, 2004.
                                ------------------

                                       OR

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

      For the Transition Period from ________________ to _____________________


                         Commission File Number: 0-11380

                              ATC HEALTHCARE, INC.
             (Exact name of Registrant as specified in its charter)

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


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

     Registrant's telephone number, including area code:                               (516) 750-1600
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                                                                                                        Name of Exchange
                                                                      Title of Each Class              on Which Registered
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Securities registered pursuant to Section 12 (b) of the Act:  Class A Common Stock, $.01 par value        American Stock
         Exchange
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Securities registered pursuant to Section 12 (g) of the Act: None


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.

                           Yes |X|          No |_|

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

Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12 b-2 of the Securities Exchange Act of 1934.

                           Yes |_|          No |X|

As of August 29, 2003, the approximate aggregate market value of voting stock
held by non-affiliates of the registrant was $18,980,307 based on a closing sale
price of $0.77 per share. The number of shares of Class A Common Stock
outstanding on May 20, 2004 was 24,682,063.


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                       DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III is included in the Company's definitive
Proxy Statement for the Annual Meeting of Shareholders 2004, which information
is incorporated herein by reference. All references to "we", "us," "our," or
"ATC" in this Report on Form 10-K/A means ATC Healthcare, Inc.

                               INTRODUCTORY NOTE:

This amendment on Form 10-K/A amends the Annual Report on Form 10-K filed by ATC
Healthcare, Inc. (the "Company") on May 28, 2004 and is being filed to amend
Item 7 and Item 8 to reflect revisions made to Management's Discussion and
Analysis of Financial Condition and Results of Operations; make revisions to
Footnote 2 Summary Of Significant Accounting Policies; and add Footnote 13
Licensee Revenue. In addition, the Company has revised Item 1 to insure
consistency of disclosure with the Company's registration statement on Form S-1
Registration No. 333-117266, as amended.

PART I.

ITEM 1.   BUSINESS

GENERAL

ATC Healthcare, Inc. ("ATC" or the "Company") is a Delaware corporation which
was incorporated in New York in 1978 and reincorporated in Delaware in May 1983.
Unless the context otherwise requires, all references to the "Company" include
ATC Healthcare, Inc. and its subsidiaries. The Company is a national provider of
medical supplemental staffing services. In August 2001, the Company changed its
name from Staff Builders, Inc. to ATC Healthcare, Inc.

OPERATIONS

We provide supplemental staffing to health care facilities through our network
of 52 offices in 23 states, of which 35 are operated by 23 licensees and 17 are
owned and operated by us. We offer our clients qualified health care associates
in over 60 job categories ranging from the highest level of specialty nurse,
including critical care, neonatal and labor and delivery, to medical
administrative staff, including third party billers, administrative assistants,
claims processors, collection personnel and medical records clerks. The nurses
provided to clients include registered nurses, licensed practical nurses and
certified nursing assistants. Other services include allied health staffing
which includes mental health technicians, a variety of therapists (including
speech, occupational and physical), radiology technicians and phlebotomists.

Clients rely on us to provide a flexible labor force to meet fluctuations in
census and business and to help them acquire health care associates with
specifically needed skills. Our medical staffing professionals also fill in for
absent employees and enhance a client's core staff with temporary workers during
peak seasons.

Clients benefit from their relationship with us because of our expertise in
providing properly skilled medical staffing employees to a facility in an
increasingly tight labor market. We have developed a skills checklist for
clients to provide information concerning a prospective employee's skill level.
Clients also benefit from no longer having to concern themselves with the
payment of employee wages, benefits, payroll taxes, workers compensation and
unemployment insurance for staff since these are paid through our Company.


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We also operate a Travel Nurse Program whereby qualified nurses, physical
therapists and occupational therapists are recruited on behalf of the clients
who require such services on a long-term basis. These individuals are recruited
from the United States and foreign countries, including Great Britain,
Australia, South Africa and New Zealand, to perform services on a long-term
basis in the United States. We have contracted with a number of management
entities for the recruitment of foreign nurses. The management entities arrange
for the nurses' and therapists' immigration and licensing certifications so that
they can be employed in the United States.

We have expanded our client base to include nursing homes, physician practice
management groups, managed care facilities, insurance companies, surgery
centers, community health centers and schools. By diversifying our client list,
we believe it lessens the risk that regulatory or industry sector shifts in
staffing usage will materially affect our staffing revenues.

LICENSEE PROGRAM

Our licensing program is one of the principal factors differentiating us from
most of our competition. After agreeing to pay an initial license fee in
exchange for a grant of an exclusive territory, the licensee is paid a royalty
of approximately 55% (60% for certain licensees who have longer relationships
with us) of gross profit (in general, the difference between the aggregate
amount invoiced and the payroll and related expenses for the personnel
delivering the services). The licensee has the right to develop the territory to
its fullest potential. The licensee is also responsible for marketing,
recruiting and customer relationships within the assigned territory. All
locations must be approved by us prior to the licensee signing a lease for the
location. Various management reports are provided to the licensees to assist
them with ongoing analysis of their medical staffing operations. We pay and
distribute the payroll for the direct service personnel who are all employees of
our Company, administer all payroll withholdings and payments, invoice the
customers and process and collect the accounts receivable. The licensees are
responsible for providing an office and paying administrative expenses,
including rent, utilities, telephone and costs of administrative personnel.

We grant an initial license term of ten years. The agreement has an option to
renew for two additional five-year renewal terms, subject to the licensee
adhering to the operating procedures and conditions for renewal as set forth in
the agreement. In certain cases we may convert an independently owned staffing
business into a licensee. In those situations, we negotiate the terms of the
conversion on a transaction-by-transaction basis, depending on the size of the
business, client mix and territory.

Sales of licenses are subject to compliance with federal and state franchise
laws. If we fail to comply with the franchise laws, rules and regulations of the
particular state relating to offers and sales of franchises, we will be unable
to engage in offering or selling licenses in or from such state. To offer and
sell licenses, the Federal Trade Commission requires us to furnish to
prospective licensees a current franchise offering disclosure document. We have
used a Uniform Franchise Offering Circular ("UFOC") to satisfy this disclosure
obligation. We must update our UFOC annually or upon the occurrence of certain
material events. If a material event occurs, we must stop offering and selling
franchises until the UFOC is updated. In addition, certain states require us to
register or file our UFOC with such states and to provide prescribed
disclosures. We are required to obtain an effective registration of our
franchise disclosure document in New York State and certain other states. We are
currently able to offer new franchises in 38 states.

For fiscal 2004, 2003, and 2002, total staffing licensee distributions were
approximately $6.8 million, $9.1 million, and $16.9 million, respectively.


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PERSONNEL, RECRUITING AND TRAINING

We employ approximately 15,000 individuals who render staffing services and
approximately 154 full time administrative and management personnel.
Approximately 93 of these administrative employees are located at the branch
offices and 61 are located at the administrative office in Lake Success, New
York.

We screen personnel to ensure that they meet all eligibility standards. This
screening process includes skills testing, reference checking, professional
license verification, interviews and a physical examination. In addition, new
employees receive an orientation on our Company policies and procedures prior to
their initial assignment. We are not a party to any collective bargaining
agreement and consider our relationship with our employees to be satisfactory.

It is essential for us to constantly recruit and retain a qualified staff of
associates who are available to be placed on assignment as needed. Besides
advertising in the local classifieds, utilizing local office web sites and
participating in local and regional job fairs, we offer a variety of benefit
programs to assist in recruiting high quality medical staffing professionals.
This package provides employees access to medical, dental, life and disability
insurance, a 401(k) plan, opportunities for Continuing Education Credits,
partnerships with various vendors for discount programs (e.g., uniforms,
vacations and cruises, credit cards, appliances and cars), recognition programs
and referral bonus programs. In addition, we provide our licensees a
full-service human resources department to support the offices with policies and
procedures as well as assist with the day-to-day issues of the field staff.

SALES AND MARKETING

We begin a marketing and operational education program as soon as an office
becomes operational. This program trains the office manager, whether at a
licensee or a Company office, in our sales process. The program stresses sales
techniques, account development and retention as well as basic sales concepts
and skills. Through interactive lectures, role-plays and sales scenarios,
participants are immersed in the sales program.

To provide ongoing sales support, we furnish each licensee and corporate branch
manager with a variety of tools. A corporate representative is continuously
available to help with prospecting, customer identification and retention, sales
strategies, and developing a comprehensive office sales plan. In addition,
various guides and brochures have been developed to focus office management's
attention to critical areas in the sales process.

Each licensee and corporate branch manager is responsible for generating sales
in their territory. Licensees and corporate branch managers are instructed to do
this through a variety of methods in order to diversify their sales conduits.
The primary method of seeking new business is to call on health care facilities
in a local area. Cold calls and referrals are often used to generate leads. Once
granted an interview, the representative is instructed to emphasize the
highlights of our services.


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RECENT ACQUISITIONS

PURCHASE OF DIRECT STAFFING, INC. AND DSS STAFFING CORP

In January 2002, we purchased substantially all of the assets and business of
Direct Staffing, Inc. ("DSI"), a licensee serving the territory consisting of
Westchester County, New York and Northern New Jersey and DSS Staffing Corp.
("DSS"), a licensee serving New York City and Long Island, New York, for an
aggregate purchase price of $30,195,000. The assets purchased consisted
primarily of intangible assets and goodwill. These licensees were market leaders
in their respective territories with growing revenues. We believed that it would
be beneficial to acquire the full EBITDA (Earnings Before Income Tax,
Depreciation and Amortization) potential of these businesses, while keeping the
former management of the licensees in place. In addition to adding to our bottom
line profitability, the acquisitions reduced the source of our sales from 90%
licensee derived to 50% licensee derived, which we believed was desirable. These
acquisitions also provide a model for other licensees as a potential exit
strategy. These licensees were owned by an unrelated third party and by Stuart
Savitsky, son of Stephen Savitsky, Chairman of our Board of Directors, Shabsi
Schreier and Steven Weiner, two sons-in-law of Stephen Savitsky, who received
proceeds of the sale. We approached the senior executive officer of the
respective licensees, along with the owners, who entered into negotiations that
ultimately resulted in agreeable terms for the acquisitions. The negotiations
were conducted on an arm's length basis. Under the original purchase agreement,
we agreed to pay additional contingent consideration equal to the amount (a) the
product of (i) Annualized Net Revenues (as defined in the asset agreements) and
(ii) 5.25 exceeded (b) $17,220,000, but if and only if that product (the
"Valuation") exceeded $20 million; however, under the June amendment discussed
below, this obligation was terminated. Such licensees paid gross licensee fees
of approximately $6,527,000, and $5,263,000 in 2002 and 2001, respectively.

The purchase price was initially evidenced by two series of promissory notes
issued to each of the four owners of DSS and DSI. The first series notes (the
"First Series"), in the aggregate principal amount of $12,975,000 bore interest
at the rate of 5% per annum and was payable in 36 consecutive equal monthly
installments of principal, together with interest thereto the first installment
becoming due on March 1, 2002. The second series (the "Second Series"), in the
aggregate principal amount of $17,220,00 bore interest at the rate of 5% per
annum and was payable as follows: $11,000,000 together with interest thereon, on
January 31, 2005 (or earlier if certain capital events occurred prior to such
date) and the balance in 60 consecutive monthly installments of principal,
together with the interest thereon, with the first installment becoming due on
April 30, 2005. Payment of both the Series and the Second Series was secured by
a second lien on the assets acquired.

On June 13, 2003, the promissory notes were amended. In connection, therewith,
the subordination agreement between our noteholders and our primary lender was
also amended. As a result of those amendments, what had been two promissory
notes issued to each of the former owners of DSS and DSI has been condensed into
one note. The note issued to one of the former owners is for a term of seven
years, with a minimum monthly payment (including interest) of $40,000 in year
one and minimum monthly payments of $80,000 in subsequent years, with a balloon
payment of $3,700,000 due in year 4. The balance on that note after the balloon
payment is payable over the remaining 3 years of the note, subject to certain
limitations in the subordination agreement. The notes issued to the other three
former owners are for terms of ten years, with minimum monthly payments
(including interest) of $25,000 in the aggregate in the first year and minimum
monthly payments of $51,000 in the aggregate for the remaining years. Any unpaid
balance at the end of the note term will be due at that time. Additional
payments are payable to the noteholders if we achieve certain financial ratios.
The most significant of these ratios is the debt coverage ratio, which is
calculated by taking the current portion of long term debt and interest paid and
dividing by four quarters of earning before interest, taxes depreciation and
amortization. The additional principal payments, if any, is determined by taking
60% of the net income generated from the DSS and DSI businesses less the monthly
amounts already paid. Half of the remaining balance would be paid as additional
principal due. In conjunction with the amendments to the promissory notes, one
of the note holders, Mr. Dominick DiCoricia, agreed to reduce his note by
approximately $2,800,000 provided we make payments under the Notes as they come
due or, in certain instances, the $35 million revolving loan agreement with HFG
Healthco-4 LLC that matures in November 2005. Mr. DiCoricia did not receive any
consideration for reducing his note amount.


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ASSET PURCHASE WITH CMS CAPITAL VENTURES

On February 28, 2003, we purchased from CMS Capital Ventures all the assets
relating to their office locations in Dallas/Fort Worth, Texas and Atlanta,
Georgia which provide temporary medical staffing services. The assets purchased
consisted primarily of intangible assets and goodwill. The primary operations of
CMS Capital Ventures were in a different segment of the medical staffing
business, and it was looking to divest its nurse staffing offices in Atlanta and
Dallas/Ft. Worth. We had an existing licensee in Atlanta that was seeking to add
revenue and additional contracts through the acquisition. We also were
interested in expanding our operations into the Dallas/Ft. Worth area and
believed these offices would provide a good base of business to establish our
presence. The negotiations for the asset purchase were conducted on an arms
length basis. The purchase price for the CMS Capital Ventures assets was
$1,000,000 cash, which was paid at closing. In April 2003 we sold our interest
in one of these temporary medical staffing companies to a franchisee for
$130,000.

COMPETITION

The medical staffing industry is extremely fragmented, with numerous local and
regional providers nationwide providing nurses and other staffing solutions to
hospitals and other health care providers. We compete with full-service staffing
companies and with specialized temporary staffing agencies as well as small
local and regional healthcare staffing organizations. There are three dominant
healthcare staffing companies that we compete with, including Medical Staffing
Network, American Mobil Nursing and Cross Country Nursing.

We compete with these firms to attract our temporary healthcare professionals
and to attract hospital and healthcare facility clients. We compete for
temporary healthcare professionals on the basis of the compensation package and
benefit package offered as well as the diversity and quality of assignments
available. We compete for hospital and healthcare facility clients on the basis
of the quality of our temporary healthcare professionals, price of our services
and the timely availability of our professionals with the requisite skills.

As HMOs and other managed care groups expand, so too must the medical staffing
companies that service these customers. In addition, momentum for consolidation
is increasing among smaller players, often venture capital-backed, who are
trying to win regional and even national accounts. Because the temporary
staffing industry is dominated generally by large national companies that do not
specialize in medical staffing, management believes that its specialization will
give it a competitive edge. In addition, our licensee program gives each
licensee an incentive to compete actively in his or her local marketplace.

SERVICE MARKS

We believe that our service trademark and the ATC(R) logo have significant value
and are important to the marketing of our supplemental staffing services. These
marks are registered with the United States Patent and Trademark Office. The
ATC(R) trademark will remain in effect through January 9, 2010 for use with
nursing care services and healthcare services. These marks are each renewable
for an additional ten-year period, provided we continue to use them in the
ordinary course of business.


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REGULATORY ISSUES

In order to service our client facilities and to comply with OSHA and Joint
Commission on Accreditation of Healthcare Organizations standards, we have
developed a risk management program. The program is designed to protect against
the risk of negligent hiring by requiring a detailed skills assessment from each
healthcare professional. We conduct extensive reference checks and credential
verifications for the nurses and other healthcare professionals that we might
hire.

Professional Licensure and Corporate Practice

Nurses and other healthcare professionals employed by us are required to be
individually licensed or certified under applicable state law. In addition, the
healthcare professionals that we hire frequently are required to have been
certified to provide certain medical care, such as CPR and anesthesiology,
depending on the positions in which they are placed. Our comprehensive
compliance program is designed to ensure that our employees possess all
necessary licenses and certifications, and we believe that our employees,
including nurses and therapists, have obtained the necessary licenses and
certification required to comply with all applicable state laws.

Business Licenses

A number of states require state licensure for businesses that, for a fee,
employ and assign personnel, including healthcare personnel, to provide services
on-site at hospitals and other healthcare facilities to support or supplement
the hospitals' or healthcare facilities' work force. A number of states also
require state licensure for businesses that operate placement services for
individuals attempting to secure employment. Failure to obtain the necessary
licenses could interrupt business operations in a specific locale. We believe we
have all of the required state licenses to allow us to continue our business as
currently conducted.


Regulations Affecting Our Clients

Many of our clients are reimbursed under the federal Medicare program and state
Medicaid programs for the services they provide. In recent years, federal and
state governments have made significant changes in these programs that have
reduced reimbursement rates. Future federal and state legislation or evolving
commercial reimbursement trends may further reduce, or change conditions for,
our clients' reimbursement. Such limitations on reimbursement could reduce our
clients' cash flows, hampering their ability to pay us.


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RISK FACTORS

Currently We Are Unable to Recruit Enough Nurses to Meet Our Clients' Demands
for our Nurse Staffing Services, Limiting the Potential Growth of Our Staffing
Business.

We rely substantially on our ability to attract, develop and retain nurses and
other healthcare personnel who possess the skills, experience and, as required,
licenses necessary to meet the specified requirements of our healthcare staffing
clients. We compete for healthcare staffing personnel with other temporary
healthcare staffing companies, as well as actual and potential clients, some of
which seek to fill positions with either regular or temporary employees.
Currently, there is a shortage of qualified nurses in most areas of the United
States and competition for nursing personnel is increasing. Demand for temporary
nurses over the last year has declined due to lower hospital emissions and
nurses working full time for hospitals rather than working through temporary
staffing agencies. Accordingly, when our clients request temporary nurse
staffing we must recruit from a smaller pool of available nurses, which our
competitors also recruit from. At this time we do not have enough nurses to meet
our clients' demands for our nurse staffing services. This shortage has existed
since approximately 2000. This shortage of nurses limits our ability to grow our
staffing business. Furthermore, we believe that the aging of the existing nurse
population and declining enrollments in nursing schools will further exacerbate
the existing nurse shortage. To remedy the shortage we have increased
advertising on our website and other industry visited websites to attract new
nurses to work for us. We also offer a variety of benefits to our employees such
as life insurance, medical and dental insurance, a 401 K plan, as well as
sign-on bonuses for new employees and recruitment bonuses for current employees
who refer new employees to us. In addition, we have recently started recruiting
nurses from foreign countries, including India and the Philippines.

THE COSTS OF ATTRACTING AND RETAINING QUALIFIED NURSES AND OTHER HEALTHCARE
PERSONNEL HAVE RISEN.

We compete with other healthcare staffing companies for qualified nurses and
other healthcare personnel. Because there is currently a shortage of qualified
healthcare personnel, competition for these employees is intense. To induce
healthcare personnel to sign on with them, our competitors have increased hourly
wages and other benefits. In response to such increases by our competitors, we
raised the wages and increased benefits that we offer to our personnel. Because
we were not able to pass the additional costs to certain clients, our margins
declined and we were forced to close 18 of our offices that could no longer
operate profitably.

..

..

WE OPERATE IN A HIGHLY COMPETITIVE MARKET AND OUR SUCCESS DEPENDS ON OUR ABILITY
TO REMAIN COMPETITIVE IN OBTAINING AND RETAINING HOSPITAL AND HEALTHCARE
FACILITY CLIENTS AND TEMPORARY HEALTHCARE PROFESSIONALS.

 The temporary medical staffing business is highly competitive. We compete in
national, regional and local markets with full-service staffing companies and
with specialized temporary staffing agencies. Some of these companies have
greater marketing and financial resources than we do. Competition for hospital
and healthcare facility clients and temporary healthcare professionals may
increase in the future and, as a result, we may not be able to remain
competitive. To the extent competitors seek to gain or retain market share by
reducing prices or increasing marketing expenditures, we could lose revenues or
hospital and healthcare facility clients and our margins could decline, which
could seriously harm our operating results and cause the price of our stock to
decline. In addition, the development of alternative recruitment channels, such
as direct recruitment and other channels not involving staffing companies, could
lead our hospital and healthcare facility clients to bypass our services, which
would also cause our revenues and margins to decline.



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OUR BUSINESS DEPENDS UPON OUR CONTINUED ABILITY TO SECURE NEW ORDERS FROM OUR
HOSPITAL AND HEALTHCARE FACILITY CLIENTS.

We do not have long-term agreements or exclusive guaranteed order contracts with
our hospital and healthcare facility clients. The success of our business
depends upon our ability to continually secure new orders from hospitals and
other healthcare facilities. Our hospital and healthcare facility clients are
free to place orders with our competitors and may choose to use temporary
healthcare professionals that our competitors offer. Therefore, we must maintain
positive relationships with our hospital and healthcare facility clients. If we
fail to maintain positive relationships with our hospital and healthcare
facility clients, we may be unable to generate new temporary healthcare
professional orders and our business may be adversely affected.


DECREASES IN PATIENT OCCUPANCY AT OUR CLIENTS' FACILITIES MAY ADVERSELY AFFECT
THE PROFITABILITY OF OUR BUSINESS.

Demand for our temporary healthcare staffing services is significantly affected
by the general level of patient occupancy at our clients' facilities. When a
hospital's occupancy increases, temporary employees are often added before
full-time employees are hired. As occupancy decreases, clients may reduce their
use of temporary employees before undertaking layoffs of their regular
employees. We also may experience more competitive pricing pressure during
periods of occupancy downturn. In addition, if a trend emerges toward providing
healthcare in alternative settings, as opposed to acute care hospitals,
occupancy at our clients' facilities could decline. This reduction in occupancy
could adversely affect the demand for our services and our profitability.

HEALTHCARE REFORM COULD NEGATIVELY IMPACT OUR BUSINESS OPPORTUNITIES, REVENUES
AND MARGINS.

The U.S. government has undertaken efforts to control increasing healthcare
costs through legislation, regulation and voluntary agreements with medical care
providers and drug companies. In the recent past, the U.S. Congress has
considered several comprehensive healthcare reform proposals. Some of these
proposals could have adversely affected our business. While the U.S. Congress
has not adopted any comprehensive reform proposals, members of Congress may
raise similar proposals in the future. If some of these proposals are approved,
hospitals and other healthcare facilities may react by spending less on
healthcare staffing, including nurses. If this were to occur, we would have
fewer business opportunities, which could seriously harm our business.

State governments have also attempted to control increasing healthcare costs.
For example, the state of Massachusetts has recently implemented a regulation
that limits the hourly rate payable to temporary nursing agencies for registered
nurses, licensed practical nurses and certified nurses' aides. The state of
Minnesota has also implemented a statute that limits the amount that nursing
agencies may charge nursing homes. Other states have also proposed legislation
that would limit the amounts that temporary staffing companies may charge. Any
such current or proposed laws could seriously harm our business, revenues and
margins.

Furthermore, third party payors, such as health maintenance organizations,
increasingly challenge the prices charged for medical care. Failure by hospitals
and other healthcare facilities to obtain full reimbursement from those third
party payors could reduce the demand for, or the price paid for our staffing
services.


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WE ARE DEPENDENT ON THE PROPER FUNCTIONING OF OUR INFORMATION SYSTEMS.

Our Company is dependent on the proper functioning of our information systems in
operating our business. Critical information systems used in daily operations
identify and match staffing resources and client assignments and perform billing
and accounts receivable functions. Our information systems are protected through
physical and software safeguards and we have backup remote processing
capabilities. However, they are still vulnerable to fire, storm, flood, power
loss, telecommunications failures, physical or software break-ins and similar
events. In the event that critical information systems fail or are otherwise
unavailable, these functions would have to be accomplished manually, which could
temporarily impact our ability to identify business opportunities quickly, to
maintain billing and clinical records reliably and to bill for services
efficiently.

WE MAY BE LEGALLY LIABLE FOR DAMAGES RESULTING FROM OUR HOSPITAL AND HEALTHCARE
FACILITY CLIENTS' MISTREATMENT OF OUR HEALTHCARE PERSONNEL.

Because we are in the business of placing our temporary healthcare professionals
in the workplaces of other companies, we are subject to possible claims by our
temporary healthcare professionals alleging discrimination, sexual harassment,
negligence and other similar injuries caused by our hospital and healthcare
facility clients. The cost of defending such claims, even if groundless, could
be substantial and the associated negative publicity could adversely affect our
ability to attract and retain qualified healthcare professionals in the future.

IF STATE LICENSING REGULATIONS THAT APPLY TO US CHANGE, WE MAY FACE INCREASED
COSTS THAT REDUCE OUR REVENUE AND PROFITABILITY.

In some states, firms in the temporary healthcare staffing industry must be
registered to establish and advertise as a nurse staffing agency or must qualify
for an exemption from registration in those states. If we were to lose any
required state licenses, we would be required to cease operating in those
states. The introduction of new licensing regulations could substantially raise
the costs associated with hiring temporary employees. These increased costs may
not be able to be passed on to clients without a decrease in demand for
temporary employees, which would reduce our revenue and profitability.

FUTURE CHANGES IN REIMBURSEMENT TRENDS COULD HAMPER OUR CLIENTS' ABILITY TO PAY
US.

Many of our clients are reimbursed under the federal Medicare program and state
Medicaid programs for the services they provide. No portion of our revenue is
directly derived from Medicare and Medicaid programs. In recent years, federal
and state governments have made significant changes in these programs that have
reduced reimbursement rates. In addition, insurance companies and managed care
organizations seek to control costs by requiring that healthcare providers, such
as hospitals, discount their services in exchange for exclusive or preferred
participation in their benefit plans. Future federal and state legislation or
evolving commercial reimbursement trends may further reduce, or change
conditions for, our clients' reimbursement. Limitations on reimbursement could
reduce our clients' cash flows, hampering their ability to pay us.


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COMPETITION FOR ACQUISITION OPPORTUNITIES MAY RESTRICT OUR FUTURE GROWTH BY
LIMITING OUR ABILITY TO MAKE ACQUISITIONS AT REASONABLE VALUATIONS.

Our business strategy includes increasing our market share and presence in the
temporary healthcare staffing industry through strategic acquisitions of
companies that complement or enhance our business. Between March 2001 and
February 2004, we acquired nine unaffiliated companies. These companies had an
aggregate of approximately $11.8 million in revenue at the time they were
purchased. We have historically faced competition for acquisitions. While to
date such competition has not affected our growth and expansion, in the future
such competition could limit our ability to grow by acquisitions or could raise
the prices of acquisitions and make them less attractive to us.

WE MAY FACE DIFFICULTIES INTEGRATING OUR ACQUISITIONS INTO OUR OPERATIONS AND
OUR ACQUISITIONS MAY BE UNSUCCESSFUL, INVOLVE SIGNIFICANT CASH EXPENDITURES OR
EXPOSE US TO UNFORESEEN LIABILITIES.

We continually evaluate opportunities to acquire healthcare staffing companies
and other human capital management services companies that complement or enhance
our business. From time to time, we engage in strategic acquisitions of such
companies or their assets.

While to date, we have not experienced problems, these acquisitions involve
numerous risks, including:

      o potential loss of key employees or clients of acquired companies;

      o difficulties integrating acquired personnel and distinct cultures into
      our business;

      o difficulties integrating acquired companies into our operating,
      financial planning and financial reporting systems;

      o diversion of management attention from existing operations; and

      o assumption of liabilities and exposure to unforeseen liabilities of
      acquired companies, including liabilities for their failure to comply with
      healthcare regulations.

These acquisitions may also involve significant cash expenditures, debt
incurrence and integration expenses that could have a material adverse effect on
our financial condition and results of operations. Any acquisition may
ultimately have a negative impact on our business and financial condition.
Further, our revolving loan agreement with HFG Healthco-4 LLC requires that we
obtain the written consent of HFG Healthco-4 LLC before engaging in any
investing activities not in the ordinary course of business, including but not
limited to any mergers, consolidations and acquisitions. The restrictive
covenants of the revolving loan agreement with HFG Healthco-4 LLC may make it
difficult for us to expand our operations through acquisitions and other
investments if we are unable to obtain their consent.

SIGNIFICANT LEGAL ACTIONS COULD SUBJECT US TO SUBSTANTIAL UNINSURED LIABILITIES.

We may be subject to claims related to torts or crimes committed by our
employees or temporary staffing personnel. Such claims could involve large
claims and significant defense costs. In some instances, we are required to
indemnify clients against some or all of these risks. A failure of any of our
employees or personnel to observe our policies and guidelines intended to reduce
these risks, relevant client policies and guidelines or applicable federal,
state or local laws, rules and regulations could result in negative publicity,
payment of fines or other damages. To protect ourselves from the cost of these
claims, we maintain professional malpractice liability insurance and general
liability insurance coverage in amounts and with deductibles that we believe are
adequate and appropriate for our operations. However, our insurance coverage may
not cover all claims against us or continue to be available to us at a
reasonable cost. If we are unable to maintain adequate insurance coverage, we
may be exposed to substantial liabilities, which could adversely affect our
financial results.


                                       11
<PAGE>


IF OUR INSURANCE COSTS INCREASE SIGNIFICANTLY, THESE INCREMENTAL COSTS COULD
NEGATIVELY AFFECT OUR FINANCIAL RESULTS.

The costs related to obtaining and maintaining workers compensation,
professional and general liability insurance and health insurance for healthcare
providers has been increasing as a percentage of revenue. Our cost of workers
compensation, professional and general liability and health insurance for
healthcare providers for the fiscal years ending February 28, 2004, 2003 and
2002 was $4.7 million, $4.6 million and $3.6 million, respectively. The
corresponding gross margin for the same time periods were 20.9%, 22.2% and
23.6%, respectively. If the cost of carrying this insurance continues to
increase significantly, we will recognize an associated increase in costs which
may negatively affect our margins. This could have an adverse impact on our
financial condition and the price of our common stock.

IF WE BECOME SUBJECT TO MATERIAL LIABILITIES UNDER OUR SELF-INSURED PROGRAMS,
OUR FINANCIAL RESULTS MAY BE ADVERSELY AFFECTED.

Except for a few states that require workers compensation through their state
fund, we provide workers compensation coverage through a program that is
partially self-insured. Zurich Insurance Company provides specific excess
reinsurance of $300,000 per occurrence as well as aggregate coverage for overall
claims borne by the group of companies that participate in the program. The
program also provides for risk sharing among members for infrequent, large
claims over $75,000. If we become subject to substantial uninsured workers
compensation liabilities, our financial results may be adversely affected.

WE HAVE A SUBSTANTIAL AMOUNT OF GOODWILL ON OUR BALANCE SHEET. A SUBSTANTIAL
IMPAIRMENT OF OUR GOODWILL MAY HAVE THE EFFECT OF DECREASING OUR EARNINGS OR
INCREASING OUR LOSSES.

As of February 29, 2004, we had $32.3 million of unamortized goodwill on our
balance sheet, which represents the excess of the total purchase price of our
acquisitions over the fair value of the net assets acquired. At February 29,
2004, goodwill represented 43% of our total assets.

Historically, we amortized goodwill on a straight-line basis over the estimated
period of future benefit of up to 15 years. In July 2001, the Financial
Accounting Standards Board issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001, as well as all purchase method business combinations
completed after June 30, 2001. SFAS No. 142 requires that, subsequent to March
1, 2002, goodwill not be amortized, but rather that it be reviewed annually for
impairment. In the event impairment is identified, a charge to earnings would be
recorded. We have adopted the provisions of SFAS No. 141 and SFAS No. 142 as of
March 1, 2002. Although it does not affect our cash flow, an impairment charge
to earnings has the effect of decreasing our earnings. If we are required to
take a charge to earnings for goodwill impairment, our stock price could be
adversely affected.

DEMAND FOR MEDICAL STAFFING SERVICES IS SIGNIFICANTLY AFFECTED BY THE GENERAL
LEVEL OF ECONOMIC ACTIVITY AND UNEMPLOYMENT IN THE UNITED STATES.

When economic activity increases, temporary employees are often added before
full-time employees are hired. However, as economic activity slows, many
companies, including our hospital and healthcare facility clients, reduce their
use of temporary employees before laying off full-time employees. In addition,
we may experience more competitive pricing pressure during periods of economic
downturn. Therefore, any significant economic downturn could have a material
adverse impact on our condition and results of operations.


                                       12
<PAGE>

OUR ABILITY TO BORROW UNDER OUR CREDIT FACILITY MAY BE LIMITED.

We have a $35 million dollar asset-based revolving credit line with HFG
Healthco-4 LLC. As of February 29, 2004 and February 28, 2003 we had
approximately $22.7 million and $22.6 million, respectively, outstanding under
the revolving credit line with HFG Healthco-4 LLC with additional borrowing
capacity of $0.0 and $0.1 million, respectively. Our ability to borrow under the
credit facility is based upon, and thereby limited by, the amount of our
accounts receivable. Any material decline in our service revenues could reduce
our borrowing base, which could cause us to lose our ability to borrow
additional amounts under the credit facility. In such circumstances, the
borrowing availability under the credit facility may not be sufficient for our
capital needs.

THE POSSIBLE INABILITY TO ATTRACT AND RETAIN LICENSEES MAY ADVERSELY AFFECT OUR
BUSINESS.

Maintaining quality licensees, managers and branch administrators will play a
significant part in our future success. The possible inability to attract and
retain qualified licensees, skilled management and sufficient numbers of
credentialed health care professional and para-professionals and information
technology personnel could adversely affect our operations and quality of
service. Also, because the travel nurse program is dependent upon the attraction
of skilled nurses from overseas, such program could be adversely affected by
immigration restrictions limiting the number of such skilled personnel who may
enter and remain in the United States.

OUR SUCCESS DEPENDS ON THE CONTINUING SERVICE OF OUR SENIOR MANAGEMENT. IF ANY
MEMBER OF OUR SENIOR MANAGEMENT WERE TO LEAVE, THIS MAY HAVE A MATERIAL ADVERSE
EFFECT ON OUR OPERATING RESULTS AND FINANCIAL PERFORMANCE.

Changes in management could have an adverse effect on our business. We are
dependent upon the active participation of Messrs. David Savitsky, our Chief
Executive Officer, and Stephen Savitsky, our President. We have entered into
employment agreement with both of these individuals. While no member of our
senior management has any plans to retire or leave our company in the near
future, the failure to retain our current management could have a material
adverse effect on our operating results and financial performance. We do not
maintain any key life insurance policies for any of our executive officers or
other personnel.

OUR CERTIFICATE OF INCORPORATION AND BY-LAWS, AS AMENDED, CONTAIN CERTAIN
PROVISIONS THAT MAY PREVENT A CHANGE IN CONTROL OF OUR COMPANY IN SITUATIONS
WHEN SUCH A CHANGE IN CONTROL WOULD BE BENEFICIAL TO OUR SHAREHOLDERS, WHICH MAY
HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL PERFORMANCE AND THE MARKET PRICE
OF OUR COMMON STOCK.

Our By-laws provide for a classified Board of Directors with staggered
three-year terms for directorships. Our By-laws also allow the Board of
Directors to increase Board membership without shareholder approval. Subject to
the rights of the holders of any series of preferred stock outstanding,
vacancies on the Board of Directors, including new vacancies created by an
increase in the authorized number of directors, may be filled by the affirmative
vote of a majority of the remaining directors without shareholder approval.
Further, subject to the rights of holders of any series of preferred stock
outstanding, directors may only be removed for cause and only by the affirmative
vote of the holders of at least 80% of the voting power of all of the shares of
capital stock entitled to vote for the election of directors. In addition, our
By-laws may be amended or repealed or new By-laws may be adopted by the Board
without shareholder approval and our shareholders may amend, repeal or adopt new
By-laws only upon the affirmative vote of 80% of the voting power of all of the
shares of capital stock entitled to vote for the election of directors. Each of
these provisions may allow our Board of Directors to entrench the current
members and may prevent a change in control of our company in situations when
such a change in control would be beneficial to our shareholders. Accordingly,
these provisions of our By-laws could have a material adverse effect on our
financial performance and on the market price of our common stock.


                                       13
<PAGE>


ITEM 2. PROPERTIES

The Company's business leases its administrative facilities in Lake Success, New
York. The Lake Success office lease for approximately 14,305 square feet of
office space expires in December 2010 provides for a current annual rent of
$389,914 and is subject to a 3.5% annual rent escalation. The Company believes
that its administrative facilities are sufficient for its needs and that it will
be able to obtain additional space as needed.

There are currently 52 staffing offices in 23 states, of which 17 are operated
by the Company and 35 licensee staffing offices are operated by 23 licensees.
These offices are typically small administrative offices serving a limited
geographical area. The licensee offices are owned by licensees or are leased by
the licensee from third-party landlords. The Company believes that it will be
able to renew or find adequate replacement offices for all of the leases of the
staffing offices leased by it which are scheduled to expire within the next
twelve months at comparable costs to those currently being incurred.

ITEM 3. LEGAL PROCEEDINGS

The Company is subject to various claims and legal proceedings covering a wide
range of matters that arise in the ordinary course of business. Management and
legal counsel periodically review the probable outcome of such proceedings, the
costs and expenses reasonably expected to be incurred, and the availability and
the extent of insurance coverage and established reserves. While it is not
possible at this time to predict the outcome of these legal actions, in the
opinion of management, based on these reviews and the disposition of the
lawsuits, these matters should not have a material effect on the Company's
financial position, results of operations or cash flows.

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

Not applicable.

PART II.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
        ISSUER PURCHASES OF EQUITY SECURITIES

(A)   MARKET INFORMATION

The Company has outstanding two classes of common equity securities: Class A
Common Stock and Class B Common Stock. In March 2002, the Company's Class A
Common Stock commenced trading on the American Stock Exchange under the symbol
"AHN".

The following table sets forth, the high and low sale prices for the Class A
Common Stock for each quarter during the two fiscal years ended February 29,
2004, as reported by the American Stock Exchange.


                                       14
<PAGE>


                                                   High       Low
                                                   ----       ---

        Fiscal Year Ended February 28, 2003
        -----------------------------------
        1st quarter ended May 31, 2002             $2.74     $2.00
        2nd quarter ended August 31, 2002           2.42      0.70
        3rd quarter ended November 30, 2002         1.11      0.80
        4th quarter ended February 28, 2003         1.10      0.54

        Fiscal Year Ended February 29, 2004
        -----------------------------------
        1st quarter ended May 31, 2003             $0.90     $0.50
        2nd quarter ended August 31, 2003           1.15      0.51
        3rd quarter ended November 30, 2003         1.01      0.60
        4th quarter ended February 29, 2004         0.75      0.46


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

(B)   HOLDERS

As of February 29, 2004, there were approximately 269 holders of record of Class
A Common Stock (including brokerage firms holding stock in "street name" and
other nominees) and 368 holders of record of Class B Common Stock.

(C)   DIVIDENDS

The Company has never paid any dividends on its shares of Class A or Class B
Common Stock. The Company does not expect to pay any dividends for the
foreseeable future as all earnings will be retained for use in its business.


                                       15
<PAGE>

(D)   SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

                                                                   Number of
                                                                   Securities
                                                                   remaining
                                                 Weighted-       available for
                               Number of          Average       Future issuance
                              Securities          Exercise       under Equity
                              to be issued        Price of        Compensation
                             Upon Exercise      Outstanding     Plans (excluding
                             of Outstanding       Options,         securities
                           Options, Warrants    Warrants and      reflected in
Plan Category                and Rights (a)        Rights         column (a))
--------------------------------------------------------------------------------

Equity compensation
plans approved by
security holders               4,226,882           $0.59           2,039,235
--------------------------------------------------------------------------------

Equity compensation
plans not approved by
security holders (1)             400,000           $1.02           2,600,000
--------------------------------------------------------------------------------

Total                          4,626,882           $0.63           4,639,235
--------------------------------------------------------------------------------


(1) During fiscal 2001, the Company adopted a stock option plan (the "2000 Stock
Option Plan") under which an aggregate of three million shares of common stock
are reserved for issuance. Both key employees and non-employee directors, except
for members of the compensation committee, are eligible to participate in the
2000 Stock Option Plan.

(E)   RECENT SALES OF UNREGISTERED SECURITIES

The following is certain information concerning the sale by the Company of
securities which were not registered under the Securities Act of 1933 during the
fiscal year ended February 29, 2004.

On March 10, 2003, the Company sold 300 shares of its 7% Convertible Series A
Preferred Stock ("the Preferred Stock") and received cash proceeds of $150,000.
The purchasers of the stock were two executive officers of the Company. This
stock is convertible to Common Stock at the price of $.80 per share which is
120% of the weighted average market close price of the Company's Common Stock
for the ten day trading period ending on the date of the purchase of the
Convertible Preferred Stock.

On April 30, 2003, the Company sold 500 shares of its Preferred Stock and
received cash proceeds of $250,000.The purchasers of the stock were two
executive officers of the Company and two accredited investors. This stock is
convertible to Common Stock at the price of $.93 per share which is 120% of the
weighted average market close price of the Company's Common Stock for the ten
day trading period ending on the date of the purchase of Preferred Stock.

On July 16, 2003 the Company sold 367,647 shares of Series A Common Stock at
$.68 per share. On July 23, 2003 the Company sold 202,703 shares of Series A
Common Stock at $.74 per share. On July 24, 2003 the Company sold 133,333 shares
of Series A Common Stock at $.75 per share and on August 19, 2003 the Company
sold 256,410 shares of Series A Common Stock at $.78 per share. The sales price
per share was equal to or exceeded the market price of the Company's Common
Stock at the date of each transaction. The purchasers of the Series A Common
Stock were related to two executive officers of the Company.


                                       16
<PAGE>


ITEM 6.

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

The following table provides selected historical consolidated financial data of
the Company as of and for each of the fiscal years in the five year period ended
February 29, 2004. The data has been derived from the Company's audited
consolidated financial statements. Such information should be read in
conjunction with the Company's consolidated financial statements and related
notes and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" which is contained in this report.

<TABLE>
<CAPTION>
                                                  FEB. 29,        FEB. 28,      FEB. 28,       FEB. 28,       FEB. 29,
                                                    2004            2003          2002           2001          2000
                                                  ---------      ---------      ---------     ---------      ---------
<S>                                               <C>            <C>            <C>           <C>            <C>
CONSOLIDATED OPERATIONS DATA:
Revenues                                          $ 130,401      $ 148,720      $ 149,414     $ 120,840      $ 114,994
                                                  ---------      ---------      ---------     ---------      ---------

(Loss) income from continuing operations             (6,180)        (2,833)         3,593        (1,066)        (2,683)
Loss from discontinued operations                        --             --             --            --           (557)
                                                  ---------      ---------      ---------     ---------      ---------

Net (loss) income                                 $  (6,180)     $  (2,833)     $   3,593     $  (1,066)     $  (3,240)
                                                  =========      =========      =========     =========      =========

(Loss) income per common share-basic
     (Loss) income from continuing operations     $   (0.25)     $   (0.12)     $    0.15     $   (0.05)     $   (0.11)
     Loss from discontinued operations                   --             --             --            --          (0.03)
                                                  ---------      ---------      ---------     ---------      ---------

Net (loss) income                                 $   (0.25)     $   (0.12)     $    0.15     $   (0.05)     $   (0.14)
                                                  =========      =========      =========     =========      =========

(Loss) income per common share - diluted:
     (Loss) income from continuing operations     $   (0.25)     $   (0.12)     $    0.14     $   (0.05)     $   (0.11)
     Loss from discontinued operations                   --             --             --            --          (0.03)
                                                  ---------      ---------      ---------     ---------      ---------

Net (loss) income                                 $   (0.25)     $   (0.12)     $    0.14     $   (0.05)     $   (0.14)
                                                  =========      =========      =========     =========      =========

Weighted average common shares outstanding:
     Basic                                           24,468         23,783         23,632        23,632         23,623
     Diluted                                         24,468         23,783         25,695        23,632         23,623

CONSOLIDATED BALANCE SHEET DATA:

Total assets                                      $  74,727      $  78,615      $  75,329     $  41,431      $  39,607

Long-term debt and other liabilities                 55,844         55,790         50,177        21,059         16,049

Total liabilities                                    68,607         67,469         62,109        31,804         28,914

Stockholders' equity                                  5,053         10,546         13,220         9,627         10,693
</TABLE>

ATC Healthcare, Inc. did not pay any cash dividends on its common stock during
any of the periods set forth in the table above. Certain prior period amounts
have been reclassified to conform with the fiscal 2004 presentation.

Amortization expense of $533, $519 and $167, respectively, were included in
fiscal years 2002, 2001 and 2000 net income.

Fiscal 2002 included loss on extinguishment of debt of $854.


                                       17
<PAGE>


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

RESULTS OF OPERATIONS

COMPARISON OF YEAR ENDED FEBRUARY 29, 2004 ("FISCAL 2004") TO YEAR ENDED
FEBRUARY 28, 2003 ("FISCAL 2003").

REVENUES: In the fiscal year ended February 29, 2004, revenue declined 12% to
$130.4 million as compared to revenue for Fiscal 2003 of $148.7 million. For
fiscal year ended February 29, 2004 we opened two Company owned stores and sold
two licensees as well as closed ten Company owned stores as compared to Fiscal
2003 when we opened nine Company owned stores, sold one licensee and closed ten
Company owned stores. In addition, eight and six licensees closed for the year
ended February 29, 2004 and February 28, 2003, respectively. Office revenue for
locations open during the last two fiscal years decreased $9.7 million due to
the fact that demand for temporary nurses is going through a period of
contraction as hospitals continue to experience flat to declining admission
rates. We also closed 18 offices due to poor performance during Fiscal 2004.
These offices accounted for $14.7 million in revenue during Fiscal 2003. We
expect that demand for temporary nurses will return in 2005. Until the demand
for nurses returns to prior levels we may continue to see revenue decline in our
existing businesses which would continue our trend of losses. If revenues were
to significantly decline our ability to continue operations could be
jeopardized. To offset the decline in per diem nursing, we are actively
recruiting new licensees as well as looking into other areas of revenue
generation such as Vendor on Premise and Pharmacy staffing.

SERVICE COSTS: Service costs were 79.1% of total revenues in Fiscal 2004 as
compared to 77.8% of total revenues in Fiscal 2003. The increase in service
costs can be attributed to the decreased demand of temporary nurses, which has
increased the competitive environment pressuring fees that clients are willing
to pay for services. In addition, the rise in costs for workers compensation,
malpractice and general liability insurance has also caused an increase to our
service costs. Service costs represent the direct costs of providing services to
patients or clients, including wages, payroll taxes, travel costs, insurance
costs, the cost of medical supplies and the cost of contracted services.

GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses were
$22.7 million in Fiscal 2004 as compared to $29.5 million in Fiscal 2003.
General and administrative costs, expressed as a percentage of revenues, were
17.4% and 19.8% for Fiscal 2004 and Fiscal 2003 respectively. The reduction in
general and administrative expenses as a percentage of revenue in Fiscal 2004 is
the result of the reduction in royalty payments to licensees due to decreased
revenues as well as initiatives undertaken by us to reduce the size of or close
marginally performing offices and a reduction of back office support staff.

DEPRECIATION AND AMORTIZATION: Depreciation and amortization expenses relating
to fixed assets and intangible assets was $2.1 million in fiscal 2004 as
compared to $2.0 million in fiscal 2003.

OFFICE CLOSING AND RESTRUCTURING CHARGE: In the third quarter of fiscal 2004 the
Company recorded a charge associated with the closing of certain offices in the
amount of $2.6 million. The Company expects the restructure to result in a lower
overall cost structure to allow it to focus resources on offices with greater
potential for better overall growth and profitability. The components of the
charge are as follows:

--------------------------------------------------------------------------------
       Components                                           Amount
--------------------------------------------------------------------------------
Write-off of fixed assets                                  $   892
--------------------------------------------------------------------------------
Write-off of related goodwill                                  889
--------------------------------------------------------------------------------
Severance costs and other benefits                             608
--------------------------------------------------------------------------------
Other                                                          200
                                                           -------
--------------------------------------------------------------------------------
 Total Restructuring Charge                                $ 2,589
--------------------------------------------------------------------------------


                                       18
<PAGE>


As of February 29, 2004, the Company has paid $165 for severance and other costs
associated with the office closings. As of February 29, 2004 the Company's
accounts payable and accrued expenses included $643 of remaining costs accrued
mainly of severance and lease costs.

INTEREST EXPENSE, NET: Interest expense, net was $4.2 million and $3.3 million
in Fiscal 2004 and 2003 respectively. Interest expense increased $0.9 million in
Fiscal 2004 from Fiscal 2003 primarily due to interest costs associated with the
Company's term loan facility and to increased interest rates associated with its
revolving line of credit.

PROVISION RELATED TO TLCS GUARANTEE: In Fiscal 2003 the Company recorded a
provision of $2.3 million related to the TLCS Guarantee. The Company is
contingently liable on $2.3 million of obligations owed by TLCS which is payable
over eight years. The Company is indemnified by TLCS for any obligations arising
out of these matters. On November 8, 2002, TLCS filed a petition for relief
under Chapter 11 of the United States Bankruptcy Code. The Company has not
received any demands for payment with respect to these obligations. The next
payment is due in September 2004. The Company believes that it has certain
defenses which could reduce or eliminate its recorded liability in this matter.

PROVISION (BENEFIT) FOR INCOME TAXES: In Fiscal 2004 the Company recorded an
expense for income taxes of $2.0 million on a pretax loss of $4.2 million.

For the year ended February 29, 2004 income tax expense is due primarily to the
valuation allowance provided in that period. In the third quarter of 2004, it
became apparent that the hospital patient volumes were not returning as
anticipated and the Company would not return to profitable operations in fiscal
2004. The Company intends to maintain its valuation allowance until such time as
positive evidence exists to support reversal of the valuation allowance. Income
tax expense recorded in the future will be reduced to the extent of offsetting
reductions in the Company valuation allowance. The realization of the Company's
remaining deferred tax assets is primarily dependent on forecasted future
taxable operating and non-operating income. Any reduction in future forecasted
taxable income may require that the Company record an additional valuation
against the deferred tax assets. An increase in the valuation allowance would
result in additional income tax expense in the period the valuation was recorded
and could have a significant impact on the earnings of the Company. Management
believes that it is more likely than not that the Company's deferred tax assets
which have not been reserved for will be realized through future profitable
operations.

COMPARISON OF YEAR ENDED FEBRUARY 28, 2003 ("FISCAL 2003") TO YEAR ENDED
FEBRUARY 28, 2002 ("FISCAL 2002").

REVENUES: Revenue for Fiscal 2003 of $148.7 million remained consistent with the
revenue for Fiscal 2002 of $149.4 million. Office sales for locations open
during the last two fiscal years decreased 8%. This decrease was offset by sales
from locations opened during the last two fiscal years. For the fiscal year
ended February 28, 2003, we opened nine Company owned offices and sold one
license as well as closed ten Company owned offices as compared to Fiscal 2002
when we opened twelve Company owned offices, sold two licenses and did not close
any offices. In addition, six licensees closed for the year ended February 29,
2003 and no licensees closed for the year ended February 28, 2002. In January
2002 we purchased our largest Licensee which reduced revenue initiated through
Licensee's from 90% of our Service revenue in Fiscal 2002 to 50% of our service
revenue in Fiscal 2003.


                                       19
<PAGE>


SERVICE COSTS: Service costs were 77.8% and 76.4% of total revenues in Fiscal
2003 and Fiscal 2002 respectively. We recorded an additional $.9 million charge
in the fourth quarter of Fiscal 2003 to increase our liability for expected
workers compensation claims. Service costs represent the direct costs of
providing services to patients or clients, including wages, payroll taxes,
travel costs, insurance costs, the cost of medical supplies and the cost of
contracted services.

GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses were
$29.5 million in Fiscal 2003 as compared to $29.9 million in Fiscal 2002. We
experienced a reduction in royalty expense due to the purchase of our largest
licensee completed in January 2002, which eliminated approximately $2.9 million
of expense. This was offset by increases in employee expenses relating to the
start up of our own travel nurse division and the opening of new Company owned
locations. Additionally, we increased our bad debt reserve in Fiscal 2003 to
reserve against potential receivable collectibility issues.

DEPRECIATION AND AMORTIZATION: Depreciation and amortization expenses relating
to fixed assets and intangible assets was $2.0 million as compared to $1.8
million for Fiscal years 2003 and 2002 respectively.

INTEREST EXPENSE, NET: Interest expense increased $1.3 million in fiscal 2003 to
$3.3 million as compared to interest expense in fiscal 2002 of $2.0 million. The
increase is primarily due to the issuance of debt in connection with the
purchase of the Company's largest licensee in January 2002 and borrowings under
an acquisition line provided by its primary lender in June 2002.

PROVISION RELATED TO TLCS GUARANTEE: In fiscal 2003 the Company recorded a
provision of $2.3 million related to the TLCS Guarantee. The Company is
contingently liable on $2.3 million of obligations owed by TLCS which is payable
over eight years. The Company is indemnified by TLCS for any obligations arising
out of these matters. On November 8, 2002, TLCS filed a petition for relief
under Chapter 11 of the United States Bankruptcy Code. The Company has not
received any demands for payment with respect to these obligations. The next
payment is due in September 2004. The Company believes that it has certain
defenses which could reduce or eliminate its recorded liability in this matter.

LOSS ON EXTINGUISHMENT OF DEBT: During fiscal 2002, the Company entered into a
new $25 million facility ("New Facility") with a lending institution. The
Company's previous credit facility was repaid in full concurrent with the
closing of the New Facility. In connection with the early extinguishment of its
debt, the Company wrote off the unamortized balance of deferred financing fees
and termination fee paid.

PROVISION (BENEFIT) FOR INCOME TAXES: In fiscal 2003 the Company recorded an
income tax benefit for $1.4 million on a pretax loss of $4.3 million.


                                       20
<PAGE>


At February 28, 2003 management believed that it was more likely than not that
the Company's deferred tax assets would be realized through future profitable
operations. This was based upon the fact that the company had profitable
operations from September 1, 2000 through the third quarter ended November 30,
2002 which quarterly results were profitable before a charge for the guarantee
of certain debt of a former related party, TLC. Losses incurred in the fourth
quarter of fiscal 2003 were due to an unanticipated shortfall in hospital
patient volumes, which were expected to return in fiscal 2004. Management
believed that it would return to profitable operations during Fiscal 2004 and,
accordingly, it was more likely than not that it would realize its deferred tax
assets.

LIQUIDITY AND CAPITAL RESOURCES

The Company funds its cash needs through various equity and debt issuances and
through cash flow from operations. The Company generally pays its billable
employees weekly for their services, and remits certain statutory payroll and
related taxes as well as other fringe benefits. Invoices are generated to
reflect these costs plus the Company's markup.

Cash used in operating activities was $0.4 million during the year ended
February 29, 2004 compared to cash provided from operating activities of $0.5
million and cash used in operating activities of $1.5 million for the years
ended February 28, 2003 and 2002 respectively. Cash used in investing activities
was $0.1 million during the year ended February 29, 2004 compared to cash used
in investing activities of $2.4 million and $0.7 million during the year ended
February 28, 2003 and 2002 respectively. Cash provided by financing activities
was $0.4 million in Fiscal 2004 as compared to cash provided by financing
activities of $1.2 million and $1.5 million in Fiscal 2003 and 2002
respectively.

Cash used in operating activities during Fiscal 2004 was mainly used to fund the
company's new workers compensation collateral account. Cash used in investing
activities during Fiscal 2004 was mainly used on capital expenditures. Cash used
in investing activities during Fiscal 2003 was primarily used for business
acquisitions. Cash provided by financing activities in Fiscal 2004 and 2003 was
mainly from borrowings under the Company credit facility and the sale of
preferred and common stock. Cash provided by Financing activities in Fiscal 2002
was mainly from borrowings under the credit facility.

In April 2001, we obtained a new financing facility with HFG Healthco-4 LLC for
a $25 million, three-year term, revolving loan which expired in April 2004. The
$25 million revolving loan limit was increased to $27.5 million in October 2001.
Amounts borrowed under the $27.5 million revolving loan were used to repay $20.6
million of borrowing on our prior facility.

In November 2002, HFG Healthco-4 LLC, increased the revolving credit line to $35
million and provided for an additional term loan facility totaling $5 million.
Interest accrues at a rate of 3.95% over LIBOR on the revolving credit line and
6.37% over LIBOR on the term loan facility. The $35 million revolving loan
expires in November 2005. The term loan facility is for acquisitions and capital
expenditures. Repayment of this additional term facility is on a 36-month
straight-line amortization. The revolving credit line is subject to certain loan
covenants. These covenants include a debt service coverage ratio calculated by
taking the current portion of long term debt and interest paid and dividing by
four quarters of earnings before interest, taxes, depreciation and amortization;
consolidated net worth target calculated by taking total assets minus total
liabilities, earnings before interest, taxes, depreciation and amortization
target; current ratio calculated by taking current assets less current
liabilities; consolidated interest coverage ratio calculated by taking the most
recent four quarters of earnings before interest, taxes, depreciation and
amortization divided by four quarters of paid interest expense; and accounts
receivable turnover ratio.

In November 2002, the interest rates were revised to 4.55% over LIBOR on the
revolving line and 7.27% over the LIBOR on the term loan facility as part of a
loan modification.


                                       21
<PAGE>


On June 13, 2003, we received a waiver from HFG Healthco-4 LLC for
non-compliance of certain revolving loan covenants as of February 28, 2003.
Interest rates on both the revolving line and term loan facility were increased
2% and can decrease if we meet certain financial criteria. In addition, certain
financial ratio covenants were modified. The additional interest is not payable
until the current expiration date of the facility which is November 2005. As
part of this modification, the lender and noteholders, Direct Staffing, Inc. and
DSS Staffing Corp., amended the subordination agreement and the noteholders
amended the Notes issued to pay the purchase price. As a result of that
amendment, what had been two promissory notes issued to each of the former
owners of Direct Staffing, Inc. and DSS Staffing Corp. has been condensed into
one note. The note issued to one of the former owners is for a term of seven
years, with a minimum monthly payment (including interest) of $40,000 in year
one and minimum monthly payments of $80,000 in subsequent years, with a balloon
payment of $3,700,000 due in May 2007. The balance on that note after the
balloon payment is payable over the remaining 3 years of the note, subject to
certain limitations in the subordination agreement. The notes issued to the
other three former owners are for terms of ten years, with minimum monthly
payments (including interest) of $25,000 in the aggregate in the first year and
minimum monthly payments of $51,000 in the aggregate for the remaining years.
Any unpaid balance at the end of the note term will be due at that time.
Additional principal payments are payable to the noteholders if we achieve
certain financial ratios. In conjunction with this revision, one of the note
holders agreed to reduce his note by approximately $2,800,000 provided we do not
default under the notes or, in certain instances, our senior lending facility.

On January 8, 2004 an amendment to the $35 million revolving loan with HFG
Healthco-4 LLC was entered into modifying certain financial ratio covenants as
of November 30, 2003.

On May 24, 2004 an amendment to the $35 million revolving loan with HFG
Healthco-4 LLC was entered into modifying certain financial ratio covenants as
of February 29, 2004.

The Company's working capital was $19.7 million and $20.7 million on February
29, 2004 and February 28, 2003, respectively.

We anticipate that capital expenditures for furniture and equipment, including
improvements to our management information and operating systems during the next
twelve months will be approximately $0.3 million.

Operating cash flows have been our primary source of liquidity and historically
have been sufficient to fund our working capital, capital expenditures, and
internal business expansion and debt service. Our cash flow has been aided by
the recent sale of unregistered equity securities, securities convertible into
equity and by the debt restructuring completed on June 13, 2003. We believe that
our capital resources are sufficient to meet our working capital requirements
for the next twelve months. Our existing cash and cash equivalents are not
sufficient to sustain our operations for any length of time. We expect to meet
our future working capital, capital expenditure, internal business expansion,
and debt service from a combination of operating cash flows and funds available
under the $35 million revolving loan facility. No assurance can be given,
however, that this will be the case. Our revolving loan facility comes due in
November 2005. We plan on refinancing this loan facility prior to its
expiration. There can be no assurance that we will be able to refinance our
revolving loan facility. We do not have enough capital to operate the business
without our revolving loan facility. We are also subject under our current loan
facility to certain financial covenants. Though we believe we will meet those
covenants it is possible if revenue continues to decline and we cannot reduce
our costs appropriately that we may violate the covenants. In the past when we
have violated covenants we have been able to receive a waiver or amendment of
those covenants from the lender HFG Healthco-4 LLC. It is expected that if we
violate a covenant we will be able to receive a waiver. If we are unable to
receive a waiver then we would be in default of our lending agreement. We may
also use funds from the Standby Equity Distribution Agreement with Cornell
Capital Partners, as available. We do not have sufficient capital to run our
operations with out a financing facility and would have to look to alternative
means such as the sale of stock or the sale of certain assets to finance
operations. There can be no assurance that additional financing will be
available when required, or, if available, will be available on satisfactory
terms.


                                       22
<PAGE>


      On April 19, 2004, we entered into a Standby Equity Distribution Agreement
with Cornell Capital Partners, L.P. Pursuant to the Standby Equity Distribution
Agreement, we may, at our discretion, periodically sell to Cornell Capital
Partners shares of common stock for a total purchase price of up to $5,000,000.
For each share of common stock purchased under the Standby Equity Distribution
Agreement, Cornell Capital Partners will pay us 97% of the lowest closing bid
price of the common stock during the five consecutive trading days immediately
following the notice date. Further, we have agreed to pay Cornell Capital
Partners, L.P. 5% of the proceeds that we receive under the Standby Equity
Distribution Agreement. The Agreement is subject to us filing and maintaining an
effective S-1 registration.

INDEBTEDNESS AND CONTRACTUAL OBLIGATIONS OF THE COMPANY

The following are contractual cash obligations of the Company at February 29,
2004:

Payments due by period (amounts in thousands):

<TABLE>
<CAPTION>
                                         Less Than         1-2            3-4
                            Total         One Year        Years          Years        Thereafter
                        ------------------------------------------------------------------------
<S>                        <C>            <C>            <C>            <C>            <C>
Bank Financing             $25,542        $ 1,310       $ 24,232        $    --        $    --
Debt                        32,389          1,148          2,419          6,179         22,643
Operating leases             4,668          1,122          1,524          1,162            860
                        ------------------------------------------------------------------------
Total                      $62,599        $ 3,580       $ 28,175        $ 7,341        $23,503
                        ========================================================================
</TABLE>


BUSINESS TRENDS

Sales and margins have been under pressure as demand for temporary nurses is
currently going through a period of contraction. Hospitals are experiencing flat
to declining admission rates and are placing greater reliance on full-time staff
overtime and increased nurse patient loads. Because of difficult economic times,
nurses in many households are becoming the primary breadwinner, causing them to
seek more traditional full time employment. The U.S. Department of Health and
Human Services said in a July 2002 report that the national supply of full-time
equivalent registered nurses was estimated at 1.89 million and demand was
estimated at 2 million. The 6 percent gap between the supply of nurses and
vacancies in 2000 is expected to grow to 12 percent by 2010 and then to 20
percent five years later. As the gap between the supply of nurses and vacancies
grows, we believe that hospitals will reach out to offer nurses positions with
more flexible work schedules. Medical staffing companies can be the bridge
between these nurses and the hospitals to fashion fulltime jobs with unorthodox
work schedules. Additionally, the shortage will require hospitals to find nurses
from outside the United States. We are working with foreign recruiters to source
qualified nurses who want to work in the United States. It is our opinion that
as the economy rebounds, the prospects for the medical staffing industry should
improve as hospitals experience higher admission rates and increasing shortages
of healthcare workers.


                                       23
<PAGE>


CRITICAL ACCOUNTING POLICIES

Management's discussion in this Item 7 addresses the Company's consolidated
financial statements which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation
of these financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
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. On an on-going basis, management evaluates its estimates and
judgments, including those related to bad debts, intangible assets, income
taxes, workers' compensation, and contingencies and litigation. Management bases
its estimates and judgments on historical experience and on various other
factors that are believed to be reasonable under the circumstances. Actual
results may differ from these estimates under different assumptions or
conditions.

Management believes the following critical accounting policies, among others,
affect its more significant judgments and estimates used in the preparation of
its consolidated financial statements. The Company maintains allowances for
doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments. If the financial condition of the Company's
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required. The Company determines a
need for a valuation allowance to reduce its deferred tax assets to the amount
that it believes is more likely than not to be realized. While the Company has
considered future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for the valuation allowance, in the event the
Company were to determine that it would not be able to realize all or a part of
its net deferred tax assets in the future, an adjustment to the deferred tax
assets would be charged to income in the period such determination was made.

The Company believes the following are its most critical accounting policies in
that they are the most important to the portrayal of the Company's financial
condition and results of operations and require management's most difficult,
subjective or complex judgments.

Revenue Recognition

A substantial portion of the Company's service revenues are derived from a
unique form of franchising under which independent companies or contractors
("licensees") represent the Company within a designated territory. These
licensees assign Company personnel, including registered nurses and therapists,
to service clients using the Company's trade names and service marks. The
Company pays and distributes the payroll for the direct service personnel who
are all employees of the Company, administer all payroll withholdings and
payments, bill the customers and receive and process the accounts receivable.
The revenues and related direct costs are included in the Company's consolidated
service revenues and operating costs. The licensees are responsible for
providing an office and paying related expenses for administration, including
rent, utilities and costs for administrative personnel. The Company pays a
monthly distribution or commission to Company's domestic licensees based on a
defined formula of gross profit generated. Generally, the Company pays a
licensee approximately 55% (60% for certain licensees who have longer
relationships with us). There is no payment to the licensees based solely on
revenues. For Fiscal 2004, 2003 and 2002, total licensee distributions were
approximately $6,800, $9,100 and $16,900, respectively, and are included in the
general and administrative expenses.

Two of the Company's largest licensees, Direct Staffing, Inc. and DSS Staffing
Corp., were owned by one unrelated third party and by a son and two sons-in-law
of the Company's President and Chairman of the Board of Directors. Such
licensees were paid (gross licensee fees) approximately $6,527 in Fiscal 2002.
The Company recognizes revenue as the related services are provided to customers
and when the customer is obligated to pay for such completed services. Employees
assigned to particular customers may be changed at the customer's request or at
the Company's initiation. A provision for uncollectible and doubtful accounts is
provided for amounts billed to customers which may ultimately be uncollectible
due to documentation disputes or the customer's inability to pay.


                                       24
<PAGE>


Allowance for Doubtful Accounts

The Company regularly monitors and assess its risk of not collecting amounts
owed to it by its customers. This evaluation is based upon an analysis of
amounts currently and past due along with relevant history and facts particular
to the customer. Based upon the results of this analysis, The Company records an
allowance for uncollectible accounts for this risk. This analysis requires the
Company to make significant estimates, and changes in facts and circumstances
could result in material changes in the allowance for doubtful accounts.

Goodwill Impairment

Goodwill represents the excess of purchase price over the fair value of
identifiable net assets of companies acquired. We adopted Statement of Financial
Accounting Standards No. 141, "Business Combinations," ("SFAS 141") and
Statement of Financial Accounting Standards No. 142, "Goodwill and Intangible
Assets," ("SFAS 142") as of March 1, 2002. SFAS 141 provides specific criteria
for the initial recognition and measurement of intangible assets apart from
goodwill. SFAS 142 requires that (1) goodwill and intangible assets with
indefinite useful lives should no longer be amortized, (2) goodwill and
intangibles must be reviewed for impairment annually (or more often if certain
events occur which could impact their carrying value), and (3) our operations be
formally identified into reporting units for the purpose of assessing
impairments of goodwill. Other definite lived intangibles, primarily customer
lists and non-compete agreements, are amortized on a straight line basis over
periods ranging from three to 10 years.

In accordance with SFAS 142 the Company tested goodwill impairment at the end of
the third and fourth quarters of Fiscal 2004. The Company wrote off $0.9 million
of goodwill in the third quarter of 2004 mainly associated with the closing of
offices which were acquired through acquisitions. None of the offices closed
were acquired with the DSS and DSI acquisition. The debt restrucuturing, which
took place in June 2003 with the DSS and DSI note holders was primarily due to
renegotiations on the purchase of the business. The Company had two notes due to
each shareholder, the first note was for contingent payments the second note was
for the initial amounts due. The note holders agreed to roll these notes into a
single note and make payments under these notes. The Company does not consider
the restructure of these notes as a troubled debt restructure. The DSS and DSI
entity has provided in the past and continues to provide significant cash flow
to the Company. The Company also performed its annual testing for goodwill
impairment in the fourth quarter of Fiscal 2004. When performing this test, the
Company reviewed the current operations of the ongoing offices. In addition, The
Company reviewed the anticipated cash flows of each acquisition. The DSS and DSI
operations represented approximately 73% of the goodwill on the Company's
financial statements. The remaining 27% of goodwill is made up of various
acquisitions all of which have continued to provide positive cash flow. The
Company utilized the following methodologies for evaluating impairment of
goodwill: The income approach discounted cash flow method, where the value of
the subject investment is equal to the present value of the cash flow streams
that can be expected to be generated by the Company in the Future. The market
approach guideline company method, where the value of the subject investment is
compared to publicly traded companies and the market approach merger and
acquisition method where the value of the subject investment is determined from
transactions involving mergers and acquisitions of comparable companies. In
addition we looked at the Company's results of operations and noted that the
Company without the restructuring charge had income from operations of
$2,412,000 for fiscal year ending February 29, 2004. Based on the impairment
testing, the Company determined that no additional write-off of goodwill was
required.


                                       25
<PAGE>


If management's expectations of future operating results change, or if there are
changes to other assumptions, the estimate of the fair value of our goodwill
could change significantly. Such change could result in additional goodwill
impairment charges in future periods, which could have a significant impact on
our consolidated financial statements.

Income Taxes

The Company accounts for income taxes in accordance with the Financial
Accounting Standards Board ("FASB") statement NO. 109, Accounting for Income
Taxes. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax bases, and
net operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered. The Company records a valuation allowance against deferred tax assets
for which utilization of the asset is not likely.

Management's judgment is required in determining the realizability of the
deferred tax assets and liabilities and any valuation allowances recorded. The
realization of our remaining deferred tax assets is primarily dependent on
forecasted future taxable income. Any reduction in future forecasted operating
and non-operating taxable income may require that the Company record an
additional valuation against our deferred tax assets. An increase in the
valuation allowance would result in additional income tax expense in the period
the valuation was recorded and could have a significant impact on the earnings
of the Company.

Workers Compensation Reserves

Except for a few states that require workers compensation through their state
fund, the Company provides workers compensation coverage through a program that
is partially self-insured. Zurich Insurance Company provides excess reinsurance
for all claims over $300,000 per occurrence as well as aggregate coverage for
overall claims borne by the group of companies that participate in the program.
The program also provides for risk sharing among members for infrequent, large
claims over $75,000 but less then $300,000. The Company is responsible for all
claims under $75,000. The Company records its estimate of the ultimate cost of,
and reserve for, workers compensation and professional liability benefits based
on actuarial computations using the Company's loss history as well as industry
statistics. Furthermore, in determining its reserves, the Company includes
reserves for estimated claims incurred but not reported. The ultimate cost of
workers compensation will depend on actual costs incurred to settle the claims
and may differ from the amounts reserved by the Company for those claims.

Accruals for workers compensation claims are included in accrued expenses in the
consolidated balance sheets. A significant increase in claims or changes in laws
may require us to record additional expenses related to workers compensation. On
the other hand, significantly improved claim experience may result in lower
annual expense levels.

                                       26
<PAGE>

EFFECT OF INFLATION

The impact of inflation on the Company's sales and income from continuing
operations was immaterial during Fiscal 2004. In the past, the effects of
inflation on salaries and operating expenses have been offset by the Company's
ability to increase its charges for services rendered. The Company anticipates
that it will be able to continue to do so in the future. The Company continually
reviews its costs in relation to the pricing of its services.

RECENT ACCOUNTING PRONOUNCEMENTS

In April 2002, the Financial Accounting Standards Board (the "FASB") issued SFAS
No. 145, Rescission of FAS Nos. 4, 44, and 64, Amendment of SFAS 13, and
Technical Corrections as of April 2002. This statement amends SFAS No. 13,
Accounting for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions as well as other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. SFAS No. 145 is effective
for Fiscal years beginning after December 31, 2002. The Company has adopted SFAS
No. 145 in Fiscal 2003 and has reclassified the 2002 extraordinary loss on early
extinguishment of debt to interest and other expenses.


In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. This Statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 is
effective for Fiscal years beginning after December 31, 2002. The Company does
not anticipate that the adoption of SFAS No. 146 will have a material impact on
the consolidated financial statements.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure that amends FASB Statement No. 123,
Accounting for Stock-Based Compensation. SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. SFAS No. 148 amends the
disclosure requirements of APB Opinion No. 28, "Interim Financial Reporting" and
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reporting results. SFAS No.
148 is effective for Fiscal years ending after December 15, 2002. The adoption
of SFAS No. 148, except for the disclosure requirements, had no impact on the
consolidated financial statements.

In November 2002, the FASB issued Interpretation 45 ("FIN 45"), "Guarantor s
accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". FIN 45 requires a guarantor entity, at
the inception of a guarantee covered by the measurement provisions of the
interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. FIN 45 applies prospectively to guarantees
issued or modified subsequent to December 31, 2002, but has certain disclosure
requirements effective for interim and annual periods ending after December 15,
2002.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. In accordance with the standard, financial instruments
that embody obligations for the issuer are required to be classified as
liabilities. This Statement shall be effective for financial instruments entered
into or modified after May 31, 2003, and otherwise shall be effective at the
beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS 150 has no impact on the consolidated financial statements of
the Company.


                                       27
<PAGE>


In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." This interpretation provides
guidance with respect to the consolidation of certain entities, referred to as
variable interest entities ("VIE"), in which an investor is subject to a
majority of the risk of loss from the VIE's activities, or is entitled to
receive a majority of the VIE's residual returns. This interpretation also
provides guidance with respect to the disclosure of VIEs in which an investor
maintains an interest, but is not required to consolidate. The provisions of the
interpretation are effective immediately for all VIEs created after January 31,
2003, or in which the Company obtains an interest after that date.

In October 2003, the FASB issued a revision to FIN 46, which among other things
deferred the effective date for certain variable interests. Application is
required for interest in special-purpose entities in the period ending after
December 15, 2003 and application is required for all other types of VIEs in the
period ending after March 15, 2004. The adoption of Fin 46 and FIN46R did not
have any impact on the Company's consolidated financial statements as of and for
the year ended February 29, 2004.

FORWARD LOOKING STATEMENTS

Certain statements in this Annual Report on Form 10-K/A constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. From time to time, the Company also provides
forward-looking statements in other materials it releases to the public as well
as oral forward-looking statements. These statements are typically identified by
the inclusion of phrases such as "the Company anticipates", "the Company
believes" and other phrases of similar meaning. These forward looking statements
are based on the Company's current expectations. Such forward-looking statements
involve known and unknown risks, uncertainties, and other factors that may cause
the actual results, performance or achievements expressed or implied by such
forward-looking statements. The potential risks and uncertainties which would
cause actual results to differ materially from the Company's expectations
include, but are not limited to, those discussed in the section entitled
"Business - Risk Factors". Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's opinions only as of
the date hereof. The Company undertakes no obligation to

FORWARD LOOKING STATEMENTS (CONTINUED)

revise or publicly release the results of any revision to these forward-looking
statements. Readers should carefully review the risk factors described in other
documents the Company files from time to time with the Securities and Exchange
Commission, including Quarterly Reports on Form 10-Q to be filed by the Company
in the fiscal year 2005.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Sensitivity: The Company's primary market risk exposure is
interest rate risk. The Company's exposure to market risk for changes in
interest rates relates to its debt obligations under its New Facility described
above. Under the New Facility, the weighted average interest rate is 6.72 over
the LIBOR. At February 29, 2004, drawings on the Facility were $25.5 million.
Assuming variable rate debt at February 29, 2004, a one point change in interest
rates would impact annual net interest payments by $255 thousand. The Company
does not use derivative financial instruments to manage interest rate risk.


                                       28
<PAGE>


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ATC HEALTHCARE, INC. AND SUBSIDIARIES

INDEX

                                                                           PAGE
                                                                           ----

Report of Independent Registered Public Accounting Firms                    F-1

CONSOLIDATED FINANCIAL STATEMENTS:

     Consolidated Balance Sheets as of
       February 29, 2004 and  February 28, 2003                             F-3

     Consolidated Statements of Operations
       for the Years ended February 29, 2004,
       February 28, 2003 and 2002                                           F-4

     Consolidated Statements of Stockholders' Equity
       for the Years ended February 29, 2004,
       February 28, 2003 and 2002                                           F-5

     Consolidated Statements of Cash Flows for the
       Years ended February 29, 2004, February 28, 2003 and 2002            F-6

     Notes to Consolidated Financial Statements                             F-8

FINANCIAL STATEMENT SCHEDULE FOR THE YEARS ENDED
     FEBRUARY 29, 2004, February 28, 2003 and 2002

        II - Valuation and Qualifying Accounts                              F-26

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


                                       29
<PAGE>

             Report of Independent Registered Public Accounting Firm


To the Board of Directors
ATC HEALTHCARE, INC.

We have audited the accompanying consolidated balance sheet of ATC Healthcare,
Inc. and Subsidiaries as of February 29, 2004 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 audit provides a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ATC Healthcare, Inc.
and Subsidiaries as of February 29, 2004 and the results of their operations and
their cash flows for the year then ended, in conformity with U.S. generally
accepted accounting principles.

The information included on Schedule II is the responsibility of management, and
although not considered necessary for a fair presentation of financial position,
results of operations, and cash flows is presented for additional analysis and
has been subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements. In our opinion, the information included on
Schedule II relating to the year ended February 29, 2004 is fairly stated in all
material respects, in relation to the basic consolidated financial statements
taken as a whole. Also, such schedule presents fairly the information set forth
therein in compliance with the applicable accounting regulations of the
Securities and Exchange Commission.


GOLDSTEIN GOLUB KESSLER LLP

New York, New York
April 16, 2004, except for
the last paragraph of Note 7(a)
as to which the date is
May 28, 2004

                                      F-1

<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders of
ATC Healthcare, Inc. and Subsidiaries:

         In our opinion,  the  accompanying  consolidated  financial  statements
listed in the accompanying index present fairly, in all material  respects,  the
financial  position of ATC Healthcare,  Inc. and Subsidiaries as of February 28,
2003 and 2002, and the results of their  operations and their cash flows for the
years ended February 28, 2003 and 2002, in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial  statement schedule for the years ended February 28, 2003 and 2002
listed in the accompanying index presents fairly, in all material respects,  the
information  set  forth  therein  when  read in  conjunction  with  the  related
consolidated  financial  statements.  These  financial  statements and financial
statement  schedule are the  responsibility  of the  Company's  management;  our
responsibility  is to  express  an opinion  on these  financial  statements  and
financial  statement  schedule  based on our audits.  We conducted our audits of
these  statements  in  accordance  with  the  standards  of the  Public  Company
Accounting Oversight Board (United States). 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,  assessing the accounting  principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

         As  discussed  in Note 2, the  Company  changed  the manner in which it
accounts for goodwill and other intangible  assets upon adoption of Statement of
Financial  Accounting Standards No. 142, "Goodwill and Other Intangible Assets",
on March 1, 2002.

/s/ PricewaterhouseCoopers LLP

Melville, New York
May 12, 2003, except for the fifth paragraph
of Note 7(a) as to which the date is
June 13, 2003.


                                       F-2

<PAGE>

ATC HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
                                                                                     February 29,     February 28,
ASSETS                                                                                       2004             2003
<S>                                                                                  <C>              <C>
CURRENT ASSETS:
     Cash and cash equivalents                                                              $ 543            $ 585
     Accounts receivable, less allowance for doubtful
          accounts of $737 and $1,784, respectively                                        27,216           26,876
     Deferred income taxes                                                                      -            1,787
     Prepaid expenses and other current assets                                              4,700            3,087
                                                                               ------------------------------------
               Total current assets                                                        32,459           32,335

     Fixed assets, net                                                                        848            2,670
     Intangibles                                                                            6,423            7,186
     Goodwill                                                                              32,256           33,449
     Deferred income taxes                                                                  1,984            2,076
     Other assets                                                                             757              899
                                                                               ------------------------------------
               Total assets                                                              $ 74,727         $ 78,615
                                                                               ====================================

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
     Accounts payable                                                                     $ 1,595          $ 1,332
     Accrued expenses                                                                       6,468            6,192
     Book overdraft                                                                         2,242            2,580
     Current portion of due under bank financing                                            1,310              679
     Current portion of notes and guarantee payable                                         1,148              896
                                                                               ------------------------------------
               Total current liabilities                                                   12,763           11,679

     Notes and guarantees payable                                                          31,241           31,463
     Due under bank financing                                                              24,232           24,249
     Other liabilities                                                                        371               78
                                                                               ------------------------------------
               Total liabilities                                                           68,607           67,469
                                                                               ------------------------------------

     Convertible Series A Preferred Stock ($.01 par value;  4,000 shares
       authorized; 2,000 and 1,200 shares issued and outstanding, respectively)             1,067              600
                                                                               ------------------------------------

STOCKHOLDERS' EQUITY:
     Class A Common Stock - $.01 par value;
       75,000,000 shares authorized; 24,665,537 and 23,582,552 shares
       issued and outstanding at February 29, 2004 and
       February 29, 2003, respectively                                                       247              235
     Class B Common Stock - $.01 par value;
       1,554,936 shares authorized; 245,617 and 256,191 shares issued
       and outstanding at February 29, 2004 and February 28, 2003, respectively                3                3
Additional paid-in capital                                                                 14,421           13,679
Accumulated deficit                                                                        (9,618)          (3,371)
                                                                               ------------------------------------
               Total stockholders' equity                                                   5,053           10,546
                                                                               ------------------------------------
               Total liabilities and stockholders' equity                                $ 74,727         $ 78,615
                                                                               ====================================
</TABLE>

                                       F-3

                 See notes to consolidated financial statements

<PAGE>

ATC HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
                                                             FOR THE FISCAL YEARS ENDED

                                                       FEBRUARY 29,  FEBRUARY 28,   FEBRUARY 28,
                                                          2004           2003          2002
-----------------------------------------------------------------------------------------------
REVENUES:
<S>                                                     <C>           <C>           <C>
     Service revenues                                   $ 130,401     $ 148,720     $ 149,414
                                                        -------------------------------------

COSTS AND EXPENSES:
     Service costs                                        103,191       115,694       114,225
     General and administrative expenses                   22,692        29,458        29,879
     Depreciation and amortization                          2,106         2,037         1,753
     Office closing and restructuring charge                2,589            --            --
                                                        -------------------------------------
        Total operating expenses                          130,578       147,189       145,857
                                                        -------------------------------------

INCOME FROM OPERATIONS                                       (177)        1,531         3,557

INTEREST AND OTHER EXPENSES (INCOME):
     Interest expense, net                                  4,151         3,255         2,037
     Other  (income) expense, net                            (139)          260          (748)
     Provision related to TLCS guarantee                       --         2,293            --
     Loss on early extinguishment of debt                      --            --           854
                                                        -------------------------------------
       Total interest and other expenses                    4,012         5,808         2,143
                                                        -------------------------------------

(LOSS) INCOME BEFORE INCOME TAXES                          (4,189)       (4,277)        1,414

INCOME TAX (BENEFIT) PROVISION                              1,991        (1,444)       (2,179)
                                                        -------------------------------------

 NET (LOSS) INCOME                                      $  (6,180)    $  (2,833)    $   3,593
                                                        =====================================

DIVIDENDS ACCRETED TO PREFERRED STOCKHOLDERS'           $      67     $      --     $      --
                                                        -------------------------------------

 NET (LOSS) INCOME AVAILABLE TO COMMON STOCKHOLDERS'    $  (6,247)    $  (2,833)    $   3,593
                                                        =====================================

(LOSS) EARNINGS PER COMMON SHARE - BASIC                $   (0.25)    $   (0.12)    $    0.15
                                                        =====================================

(LOSS) EARNINGS PER COMMON SHARE - DILUTED              $   (0.25)    $   (0.12)    $    0.14
                                                        =====================================

WEIGHTED AVERAGE COMMON
     SHARES OUTSTANDING:
     Basic                                                 24,468        23,783        23,632
                                                        =====================================
     Diluted                                               24,468        23,783        25,695
                                                        =====================================
</TABLE>

                                       F-4

                 See notes to consolidated financial statements

<PAGE>

ATC HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)


<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
                                                 CLASS A                  CLASS B            ADDITIONAL
                                              COMMON STOCK              COMMON STOCK          PAID-IN     ACCUMULATED
                                         SHARES        AMOUNT        SHARES      AMOUNT       CAPITAL       DEFICIT       TOTAL
                                       ------------------------------------------------------------------------------------------
<S>                                    <C>          <C>             <C>        <C>          <C>          <C>           <C>
Balances, February 28, 2001            23,357,782   $      233      274,015    $        3   $   13,522   $   (4,131)   $    9,627

Exchange of Class B for
  Class A Common Stock                     11,161           --      (11,161)           --           --           --            --

Net income                                     --           --           --            --           --        3,593         3,593
                                       ------------------------------------------------------------------------------------------
Balances, February 28, 2002            23,368,943          233      262,854             3       13,522         (538)       13,220

Exchange of Class B for
  Class A Common Stock                      6,663           --       (6,663)           --           --           --            --

Exercise of employee stock options        103,333            1           --            --           51           --            52

Issuance of shares through
  Employee Stock Purchase Plan            103,613            1           --            --          106           --           107

Net loss                                       --           --           --            --           --       (2,833)       (2,833)
                                       ------------------------------------------------------------------------------------------

Balances, February 28, 2003            23,582,552          235      256,191             3       13,679       (3,371)       10,546

Exchange of Class B for
  Class A Common Stock                     10,774           --      (10,774)           --           --           --            --

Exercise of employee stock options         56,500            1           --            --           16           --            17

Issuance of shares through
  Employee Stock Purchase Plan             55,618            1           --            --           35                         36

Common Stock issued for cash              960,093           10           --            --          691                        701

Accrued dividends on Preferred Stock           --           --           --            --           --          (67)          (67)

Net loss                                       --           --           --            --           --       (6,180)       (6,180)
                                       ------------------------------------------------------------------------------------------
Balances, February 29, 2004            24,665,537   $      247      245,417    $        3   $   14,421   $   (9,618)   $    5,053
                                       ==========================================================================================
</TABLE>

                                       F-5

                 See notes to consolidated financial statements

<PAGE>

ATC HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
                                                                                       FOR THE FISCAL YEARS ENDED

                                                                                  FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
                                                                                     2004          2003         2002
                                                                                  ------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                               <C>           <C>           <C>
       Net (loss) income                                                          $ (6,180)     $ (2,833)     $ (3,593)
       Adjustments to reconcile net (loss) income to net
        cash provided by (used in) operations:
                   Depreciation and amortization                                     2,373         2,261         1,890
                   Write-off of fixed assets, net                                      892            --            --
                   Impairment of goodwill                                              889
                   Provision related to TLCS guarantee                                  --         2,293            --
                   Loss on early extinguishment of debt                                 --            --           854
                   Provision for doubtful accounts                                       7         1,629           400
                   Deferred income taxes                                             1,891        (1,584)       (2,279)
                   In-kind interest                                                    927           886            72
       Changes in operating assets and liabilities,
         net of effects of acquisitions:
                   Accounts receivable                                                (347)          178        (2,514)
                   Prepaid expenses and other current assets                        (1,613)       (2,714)         (176)
                   Other assets                                                        (37)          108          (293)
                   Accounts payable and accrued expenses                               526           269        (3,007)
                   Other long-term liabilities                                         293           (14)            7
                                                                                  ------------------------------------
                          Net cash provided by (used in) operating activities          445         1,199        (1,453)
                                                                                  ------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
       Capital expenditures                                                           (238)         (417)         (458)
       Finalization of acquisition purchase price                                      130            --            --
       Acquisition of businesses                                                        --        (2,071)         (320)
       Notes receivable from licensees                                                  --           (33)           --
       Other                                                                            --           108            85
                                                                                  ------------------------------------
                          Net cash used in investing activities                       (108)       (2,413)         (693)
                                                                                  ------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
       Repayment of borrowings under previous credit facility                           --            --       (20,936)
       Borrowings under new credit facility                                          1,838         1,417        23,600
       Payment of notes and capital lease obligations                               (1,363)       (2,948)         (798)
       Repayment of term loan facility                                                (757)          (87)           --
       Payment of debt issuance costs                                                  (87)         (520)         (413)
       Book overdraft                                                                 (338)        2,580            --
       Issuance of common and preferred stock                                        1,152           757            --
                                                                                  ------------------------------------
                           Net cash provided by financing activities                   445         1,199         1,453
                                                                                  ------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS                                              (42)         (735)         (693)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                           585         1,320         2,013
                                                                                  ------------------------------------
                                                                                  ------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR                                            $    543      $    585      $  1,320
                                                                                  ====================================
</TABLE>

                                       F-6

                 See notes to consolidated financial statements

<PAGE>

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:

Cash paid for:
<S>                                                                      <C>         <C>         <C>
   Interest                                                              $ 2,490     $ 2,081     $ 2,020
                                                                         ===============================
   Income taxes                                                          $    43     $    71     $   142
                                                                         ===============================

Supplemental schedule of noncash investing and financing activities:
    Fair value of assets acquired                                        $    --     $ 3,041     $31,290
    Notes issued in connection with acquisition of businesses            $    --         970      30,970
                                                                         -------------------------------
    Net cash paid                                                        $    --     $ 2,071     $   320
                                                                         ===============================

    Fixed assets acquired through capital leases                         $    --     $    --     $    97
    Dividends                                                            $    67     $    --     $    --
                                                                         -------------------------------
</TABLE>

                                       F-7

                 See notes to consolidated financial statements

<PAGE>

ATC HEALTHCARE, INC. AND SUBSIDIARIES
-------------------------------------

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


1.    ORGANIZATION AND BASIS OF PRESENTATION

ATC Healthcare, Inc. and Subsidiaries, including ATC Healthcare Services, Inc.
and ATC Staffing Services, Inc., (collectively, the "Company"), are providers of
supplemental staffing to healthcare facilities. In August 2001, the Company
changed its name from Staff Builders, Inc. to ATC Healthcare, Inc. The Company
offers a skills list of qualified health care associates in over 60 job
categories ranging from the highest level of specialty nurse, including critical
care, neonatal and labor and delivery, to medical administrative staff,
including third party billers, administrative assistants, claims processors,
collection personnel and medical records clerks. The nurses provided to clients
include registered nurses, licensed practical nurses and certified nursing
assistants.

During October 1999, the Company separated its home healthcare business from its
existing staffing business. To accomplish this separation, the Board of
Directors established a new, wholly-owned subsidiary, Tender Loving Care Health
Care Services, Inc. ("TLCS"), which acquired 100% of the outstanding capital
stock of the subsidiaries engaged in the home healthcare business. The spin-off
was effected through a pro-rata distribution to the Company's stockholders of
all the shares of common stock of TLCS owned by the Company (the
"Distribution"). The Distribution was made by issuing one share of TLCS common
stock for every two shares of the Company's Class A and Class B common stock
outstanding. The accompanying consolidated financial statements reflect the
financial position, results of operations, changes in stockholders' equity and
cash flows of the Company as if it were a separate entity for all periods
presented. The consolidated financial statements have been prepared using the
historical basis of assets and liabilities and historical results of operations
related to the Company.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries after the elimination of all significant
intercompany balances and transactions and include the results of operations of
purchased businesses from the respective dates of acquisition.

REVENUE RECOGNITION

A substantial portion of the Company's service revenues is derived from a unique
form of franchising under which independent companies or contractors
("licensees") represent the Company within a designated territory. These
licensees assign Company personnel, including registered nurses and therapists,
to service clients using the Company's trade names and service marks. The
Company pays and distributes the payroll for the direct service personnel who
are all employees of the Company, administers all payroll withholdings and
payments, bills the customers and receives and processes the accounts
receivable. The revenues and related direct costs are included in the Company's
consolidated service revenues and operating costs. The licensees are responsible
for providing an office and paying related expenses for administration,
including rent, utilities and costs for administrative personnel. The Company
pays a monthly distribution or commission to its domestic licensees based on a
defined formula of gross profit generated. Generally, the Company pays a
licensee approximately 55% (60% for certain licensees who have longer
relationships with the Company). There is no payment to the licensees based
solely on revenues. For Fiscal 2004, 2003 and 2002, total licensee distributions
were approximately $6,800, $9,100 and $16,900, respectively, and are included in
general and administrative expenses.


                                       F-8

<PAGE>

REVENUE RECOGNITION (CONTINUED)

Two of the Company's largest licensees, Direct Staffing, Inc. ("DSI") and DSS
Staffing Corp. ("DSS"), were owned by one unrelated third party and by a son and
two sons-in-law of the President and Chairman of the Board of Directors of the
Company. Such licensees were paid (gross licensee fees) approximately $6,527 in
Fiscal 2002. The Company recognizes revenue as the related services are provided
to customers and when the customer is obligated to pay for such completed
services. The Company bills its customers an hourly rate for the services
performed by our nurses on a weekly basis. Terms of payment are net 30 days.
Employees assigned to particular customers may be changed at the customer's
request or at the Company's initiation. Employees assigned to particular
customers may be changed at the customer's request or at the Company's
initiation. A provision for uncollectible and doubtful accounts is provided for
amounts billed to customers which may ultimately be uncollectible due to
documentation disputes or the customer's inability to pay. Revenues generated
from the sales of licenses and initial licensee fees are recognized upon signing
of the license agreement, if collectibility of such amounts is reasonably
assured, since the Company has performed substantially all of its obligations
under its licensee agreements by such date. In circumstances where a reasonable
basis does not exist for estimating collectibility of the proceeds of the sales
of licensees and initial license fees, such amounts are deferred and recognized
as collections are made, or until such time that collectibility is reasonably
assured. The Company does not have recurring fees from its licensees. The
Company recorded revenue from licensee fees of $448, $1,200 and $405 at February
29, 2004 and February 28, 2003 and 2002, respectively.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, revenues and expenses as well as the disclosure of contingent
assets and liabilities in the consolidated financial statements. Actual results
could differ from those estimates. The most significant estimates relate to the
collectibility of accounts receivable, obligations under workers' compensation
and valuation allowances on deferred taxes.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include liquid investments with original maturities of
three months or less.

CONCENTRATIONS OF CREDIT RISK

Concentrations of credit risk with respect to trade accounts receivable are
limited due to the large number of customers and their dispersion across a
number of geographic areas. However, essentially all trade receivables are
concentrated in the hospital and healthcare sectors in the United States and,
accordingly, the Company is exposed to their respective business, economic and
country-specific variables. Although the Company does not currently foresee a
concentrated credit risk associated with these receivables, repayment is
dependent upon the financial stability of these industry sectors.

FIXED ASSETS

Fixed assets, consisting of equipment (primarily computer hardware and
software), furniture and fixtures, and leasehold improvements, are stated at
cost and depreciated from the date placed into service over the estimated useful
lives of the assets using the straight-line method. Leasehold improvements are
amortized over the shorter of the lease term or estimated useful life of the
improvement. Maintenance and repairs are charged to expense as incurred;
renewals and improvements which extend the life of the asset are capitalized.
Gains or losses from the disposition of fixed assets are reflected in operating
results.

IMPAIRMENT OF LONG-LIVED ASSETS

In accordance with Statement of Financial Accounting Standards Board ("SFAS")
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable. The Company periodically reviews its fixed assets to determine if
any impairment exists based upon projected, undiscounted net cash flows of the
Company. During fiscal 2004, the Company charged operations $892 for fixed
assets that were impaired. As of February 29, 2004, the Company believes that no
other impairment of long-lived assets exists.

                                       F-9

<PAGE>

GOODWILL AND INTANGIBLE ASSETS

Goodwill represents the excess of purchase price over the fair value of
identifiable net assets of companies acquired. The Company adopted SFAS No. 141,
Business Combinations, ("SFAS 141") and SFAS No. 142, Goodwill and Intangible
Assets, ("SFAS 142") as of March 1, 2002. SFAS 141 provides specific criteria
for the initial recognition and measurement of intangible assets apart from
goodwill. SFAS 142 requires that (1) goodwill and intangible assets with
indefinite useful lives should no longer be amortized, (2) goodwill and
intangibles must be reviewed for impairment annually (or more often if certain
events occur which could impact their carrying value), and (3) the Company's
operations be formally identified into reporting units for the purpose of
assessing impairments of goodwill. Prior to 2002, goodwill was amortized on a
straight-line basis over 15 years. Goodwill amortization for the year ended
February 28, 2002 was $499. Other definite lived intangibles, primarily customer
lists and non-compete agreements, are amortized on a straight-line basis over
periods ranging from three to 10 years.

In accordance with SFAS 142, the Company performed a transitional impairment
test as of March 1, 2002 and its annual impairment test at the end of each year
for its unamortized goodwill. As a result of the impairment tests performed, the
Company charged operations $889 for the year ended February 29, 2004 for
goodwill the Company determined was impaired. No other impairment was noted at
the date of the adoption of SFAS 142 or at February 29, 2004 and February 28,
2003. During fiscal 2004, the Company's net goodwill decreased by $1.193 million
as a result of an impairment charge of $889 and $304 of final purchase price
allocations.

Goodwill and other intangibles are as follows:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
                                        FEBRUARY 29, 2004                      FEBRUARY 28, 2003
---------------------------------------------------------------------------------------------------------------------------
                                 Gross Carrying      Accumulated       Gross Carrying        Accumulated     Amortization
                                     Amount          Amortization          Amount            Amortization       Period
                                 --------------      -----------       --------------        -----------     ------------
<S>                                 <C>                <C>                 <C>                 <C>            <C>
Goodwill                            $ 34,945           $ 2,689             $ 36,389            $ 2,940           none
Customer lists                         6,400             1,120                6,400                480            10
Covenants not to compete                 900               375                  900                246           3-10
Other intangibles                        844               226                  672                 60           5-10
                                -----------------------------------------------------------------------
                                    $ 43,089           $ 4,410             $ 44,361            $ 3,726
                                =======================================================================
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

Amortization expense was $938, $662 and $623 for fiscal 2004, 2003 and 2002,
respectively. Estimated amortization expense for the next five fiscal years is
as follows:

                         -------------------------------
                               Amortization Expense
                         -------------------------------
                             2005                 $ 937
                             2006                   912
                             2007                   904
                             2008                   846
                             2009                   717
                         -------------------------------


                                      F-10

<PAGE>


GOODWILL AND INTANGIBLE ASSETS  (CONTINUED)

As required by SFAS 142, the results for fiscal 2002 have not been restated. A
reconciliation of net income, as if SFAS 142 had been adopted in fiscal 2002, is
presented below:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
                                                                        For the years ended
                                                                        February 29 and 28,
-------------------------------------------------------------------------------------------------------------
                                                          2004                  2003                  2002
                                                          ----                  ----                  ----
<S>                                                     <C>                   <C>                    <C>
Reported (loss) income                                  $ (6,180)             $ (2,833)              $ 3,593
Addback:  goodwill amortization, net of tax                                                              294
                                                     --------------------------------------------------------
Adjusted net (loss) income                              $ (6,180)             $ (2,833)              $ 3,887
                                                     ========================================================

Basic earnings per share:                               $  (0.25)             $  (0.12)              $  0.15
Reported (loss) income                                                                                  0.01
Addback:  goodwill amortization, net of tax
                                                     --------------------------------------------------------
Adjusted net (loss) income                              $  (0.25)             $  (0.12)              $  0.16
                                                     ========================================================

Diluted earnings per share:                             $  (0.25)             $  (0.12)              $  0.14
Reported (loss) income                                                                                  0.01
Addback:  goodwill amortization, net of tax
                                                     --------------------------------------------------------
Adjusted net (loss) income                              $  (0.25)             $  (0.12)              $  0.15
                                                     ========================================================
-------------------------------------------------------------------------------------------------------------
</TABLE>

INSURANCE COSTS

The Company is obligated for certain costs under various insurance programs,
including workers' compensation. The Company recognizes its obligations
associated with these policies in the period the claim is incurred. The Company
records an estimate of the ultimate cost of, and reserve for, workers
compensation based on actuarial computations using the Company's loss history as
well as industry statistics. . Zurich Insurance Company provides excess
reinsurance for all claims over $300,000 per occurrence as well as aggregate
coverage for overall claims borne by the group of companies that participate in
the program. The program also provides for risk sharing among members for
infrequent, large claims over $75,000 but less then $300,000. The Company is
responsible for all claims under $75,000. Furthermore, in determining reserves,
the Company includes reserves for estimated claims incurred but not reported.
Such estimates and the resulting reserves are reviewed and updated periodically,
and any adjustments resulting there from are reflected in earnings currently.

OFFICE CLOSINGS AND RESTRUCTURE CHARGES

In the third quarter of fiscal 2004, the Company recorded a charge associated
with the closing of seven offices in the amount of $2.6 million. The Company
expects the restructure to result in a lower overall cost structure to allow it
to focus resources on offices with greater potential for better overall growth
and profitability. The components of the charge are as follows:


--------------------------------------------------------------------------------
        Components                                     Amount
--------------------------------------------------------------------------------
Write-off of fixed assets                             $   892
--------------------------------------------------------------------------------
Write-off of related goodwill                             889
--------------------------------------------------------------------------------
Severance costs and other benefits                        608
--------------------------------------------------------------------------------
Other exit costs                                          200
                                                      -------
--------------------------------------------------------------------------------
 Total restructuring charge                           $ 2,589
--------------------------------------------------------------------------------


As of February 29, 2004, the Company has paid $165 for severance and other costs
associated with the office closings. As of February 29, 2004, the Company's
accounts payable and accrued expenses included $643 of remaining costs accrued
consisting mainly of severance and lease costs. The severance and remaining
other exit costs will be paid in fiscal 2005. The remaining lease costs will be
paid through the term of the related leases which expire through January 2007.

                                      F-11

<PAGE>

INCOME TAXES

The Company uses the asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.

EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is computed using the weighted average number of
common shares outstanding for the applicable period. Diluted earnings (loss) per
share is computed using the weighted average number of common shares plus
potential common shares outstanding, unless the inclusion of such potential
common equivalent shares would be anti-dilutive. Dilutive earnings per share
include common stock equivalents of 2,063 shares related to outstanding stock
options in Fiscal 2002. In Fiscal 2004 and 2003, 6,002 and 5,946 common stock
equivalents, respectively, have been excluded from the earnings per share
calculation, as their inclusion would have been anti-dilutive.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount of cash and cash equivalents, accounts receivable, accounts
payable, amounts due under bank financing and acquisition notes payable
approximate fair value.

ADVERTISING

Advertising costs, which are expensed as incurred, were $571, $1,088 and $787 in
Fiscal 2004, 2003 and 2002, respectively, and are included in general and
administrative expenses.

STOCK BASED COMPENSATION

The Company applies the intrinsic value method in accounting for its stock-based
compensation. Had the Company measured compensation under the fair value method
for stock options granted, the Company's net (loss) income and net (loss) income
per share, basic and diluted, would have been as follows:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
                                                    February 29, 2004        February 28, 2003         February 28, 2002
---------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>                      <C>                       <C>

Net (loss) income                                       $ (6,180)                $ (2,833)                 $ 3,593

Fair value method of stock based
compensation, net of tax                                    (384)                     (59)                     (98)

Net (loss) income                                         (6,564)                  (2,892)                   3,495

Basic (loss) income per share                              (0.25)                   (0.12)                    0.15

Basic (loss) income per share                              (0.27)                   (0.12)                    0.15

Diluted (loss) income per share                            (0.25)                   (0.12)                    0.14

Diluted (loss) income per share                            (0.27)                   (0.12)                    0.14
---------------------------------------------------------------------------------------------------------------------------
</TABLE>


The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for
grants in Fiscal 2004, 2003 and 2002,

                                      F-12

<PAGE>


STOCK BASED COMPENSATION (CONTINUED)

respectively. Risk-free interest rates of 4.4%, 4.7% and 4.5%; dividend yield of
0% for each year; expected lives of 10 years for each year and volatility of
96%, 96% and 89%.

RECENT ACCOUNTING PRONOUNCEMENTS

In April 2002, the Financial Accounting Standards Board (the "FASB") issued SFAS
No. 145, Rescission of FAS Nos. 4, 44, and 64, Amendment of SFAS 13, and
Technical Corrections as of April 2002. This statement amends SFAS No. 13,
Accounting for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions as well as other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. SFAS No. 145 is effective
for fiscal years beginning after December 31, 2002. The Company has adopted SFAS
No. 145 in Fiscal 2003 and has reclassified the 2002 extraordinary loss on early
extinguishment of debt to interest and other expenses.


In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. This Statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 is
effective for Fiscal years beginning after December 31, 2002. The Company does
not anticipate that the adoption of SFAS No. 146 will have a material impact on
the consolidated financial statements.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, that amends SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. SFAS No. 148 amends the disclosure
requirements of APB Opinion No. 28, "Interim Financial Reporting" and SFAS No.
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reporting results. SFAS No. 148 is
effective for Fiscal years ending after December 15, 2002. The adoption of SFAS
No. 148, except for the disclosure requirements, had no impact on the
consolidated financial statements.

In November 2002, the FASB issued Interpretation 45 ("FIN 45"), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". FIN 45 requires a guarantor entity, at
the inception of a guarantee covered by the measurement provisions of the
interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. FIN 45 applies prospectively to guarantees
issued or modified subsequent to December 31, 2002, but has certain disclosure
requirements effective for interim and annual periods ending after December 15,
2002.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This statement
establishes standards for how an issuer classifies and measures in its statement
of financial position, certain financial instruments with characteristics of
both liabilities and equity. In accordance with the statement, financial
instruments that embody obligations for the issuer are required to be classified
as liabilities. This Statement shall be effective for financial instruments
entered into or modified after May 31, 2003, and otherwise shall be effective at
the beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS 150 has no impact on the consolidated financial statements of
the Company.

In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." This interpretation provides
guidance with respect to the consolidation of certain entities,

                                      F-13

<PAGE>


RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)

referred to as variable interest entities ("VIE"), in which an investor is
subject to a majority of the risk of loss from the VIE's activities, or is
entitled to receive a majority of the VIE's residual returns. This
interpretation also provides guidance with respect to the disclosure of VIEs in
which an investor maintains an interest, but is not required to consolidate. The
provisions of the interpretation are effective immediately for all VIEs created
after January 31, 2003, or in which the Company obtains an interest after that
date.

In October 2003, the FASB issued a revision to FIN 46, which among other things
deferred the effective date for certain variable interests. Application is
required for interest in special-purpose entities in the period ending after
December 15, 2003 and application is required for all other types of VIEs in the
period ending after March 15, 2004. The adoption of FIN 46 and FIN46R did not
have any impact on the Company's consolidated financial statements as of and for
the year ended February 29, 2004.

Management does not believe any other recently issued, but not yet effective,
accounting standards if currently adopted would have a material effect on the
accompanying financial statements.

3.    ACQUISITIONS

In October 2001, the Company acquired substantially all of the assets of
Doctors' Corner and Healthcare Staffing, Inc., which is a provider of both
permanent and temporary medical administrators in Southern California. The
purchase price was $1,075, of which $300 was paid at closing, $100 was paid on
January 1, 2002, $100 was paid on April 1, 2002 and the remaining $575 is
payable in 20 quarterly installments beginning July 1, 2002. The purchase price
included a covenant not to compete for $500. The remaining purchase price was
allocated to goodwill whose amortization is deductible for tax purposes.

In January 2002, the Company purchased substantially all of the assets of DSI, a
licensee of the Company serving the territory consisting of Westchester County,
New York, and northern New Jersey, and DSS, a licensee of the Company serving
New York City and Long Island, New York, for a purchase price of $30,195. These
two licensees were owned by an unrelated third party and by a son and two
sons-in-law of the Company's Chairman of the Board of Directors who have
received an aggregate 60% of the proceeds of the sale. The Company will be
required to pay contingent consideration equal to the amount by which (a) the
product of (i) Annualized Revenues (as defined in the purchase agreement), and
(ii) 5.25 exceeds (b) $17,220, but if and only if the resulting calculation
exceeds $20 million.

The company has obtained a valuation on the tangible and intangible assets
associated with the transaction and has allocated $6,400 to customer lists
(which is being amortized over 10 years), $200 to a covenant not to complete
(which is being amortized over 8 years) and the remaining balance to goodwill.

The purchase price was evidenced by two series of promissory notes issued to
each of the four owners of DSS and DSI. The first series of notes (the "First
Series"), in the aggregate principal amount of $12,975, bore interest at 5% per
annum and was payable in 36 consecutive equal monthly installments of principal,
together with interest thereon, with the first installment having become due on
March 1, 2002. The second series of notes (the "Second Series"), in the
aggregate principal amount of $17,220, bore interest at the rate of 5% per annum
and was payable as follows: $11 million, together with interest thereon, on
April 30, 2005 (or earlier if certain capital events occur prior to such date)
and the balance in 60 consecutive equal monthly installments of principal,
together with interest thereon, with the first installment becoming due on April
30, 2005. If the contingent purchase price adjustment was triggered on April 30,
2005, then the aggregate principal balance of the Second Series was to be
increased by such contingent purchase price. Payment of the First Series and the
Second Series was collateralized by a second lien on the assets of the acquired
licensees (see Note 7). In June 2003, the notes were modified.

                                      F-14

<PAGE>


In June 2002, the Company bought out a management contract with a company
("Travel Company") which was managing its travel nurse division. The purchase
price of $620 is payable over two years beginning in December 2002. The Travel
Company had received payments from the Company of $702 and $1,362 for Fiscal
years ended February 28, 2003 and 2002, respectively, for its management of the
travel nurse division. The Company is amortizing the cost of the buyout over the
five years that were remaining on the management contract.

During Fiscal 2003, the Company purchased substantially all of the assets and
operations of eight temporary medical staffing companies totaling $3,041, of
which $2,071 was paid in cash and the remaining balance is payable under notes
payable with maturities through January 2007. The notes bear interest at rates
between 6% to 8% per annum. The purchase prices were allocated primarily to
goodwill (approximately $2,282). In April 2003, the Company sold its interest in
one of these temporary medical staffing companies to its franchisee for $130.

The acquisitions were accounted for under the purchase method of accounting,
and, accordingly, the accompanying consolidated financial statements include the
results of the acquired operations from their respective acquisition dates. The
table below reflects unaudited pro forma combined results of the Company, as if
the acquisitions had taken place on March 1, 2001.

The unaudited pro forma financial information does not purport to be indicative
of the results of operations that would have occurred had the transactions taken
place at the beginning of the periods presented or of future results of
operations. For Fiscal 2004, the acquisitions are included in the income
statement from the date of acquisition through February 29, 2004.


     ---------------------------------------------------------------------
                                         February 28,        February 28,
                                             2003               2002

     Net revenues                          $ 161,625         $ 157,586
     Income from operations                    2,178             5,672
     Net (loss) income                        (2,451)            4,103

     (Loss) earnings per share:
       Basic                               $   (0.10)        $    0.17
       Diluted                             $   (0.10)        $    0.16

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

4.    FIXED ASSETS

Fixed assets consist of the following:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
                                               Estimated Useful        February 29,           February 28,
                                                Life in Years              2004                   2003
<S>                                             <C>                    <C>                     <C>
Computer equipment and software                     3 to 5              $ 1,487                $ 7,080
Office equipment, furniture and fixtures              5                     215                    558
Leasehold improvements                                5                     191                    218
                                                                  -------------------------------------
                                                                          1,893                  7,856
Less: accumulated depreciation
   and amortization                                                       1,045                  5,186
                                                                  -------------------------------------
Net                                                                     $   848                $ 2,670
                                                                  =====================================
----------------------------------------------------------------------------------------------------------
</TABLE>

As of February 29, 2004 and February 28, 2003, fixed assets include amounts for
equipment acquired under capital leases with an original cost of $262 and
$1,529, respectively. Depreciation expense was $1,168, $1,376 and $1,217 in
2004, 2003 and 2002, respectively. The accumulated amortization on equipment
acquired under capital lease obligations was $170 and $988 as of February 29,
2004 and February 28, 2003, respectively.

                                      F-15

<PAGE>


5.    PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of the following:

--------------------------------------------------------------------------
                                            February 29,   February 28,
                                                    2004           2003
------------------------------------------------------------------------
Prepaid workers compensation expense             $ 3,946        $ 2,284
Other                                                754            803
                                              --------------------------
Total                                            $ 4,700        $ 3,087
                                              ==========================
--------------------------------------------------------------------------

6.    ACCRUED EXPENSES

Accrued expenses consist of the following:

--------------------------------------------------------------------------
                                             February 29,   February 28,
                                                     2004           2003
-------------------------------------------------------------------------
Payroll and related taxes                          $ 2,297       $ 1,518
Accrued licensee payable                             1,076         1,123
Insurance accruals                                   2,264         2,871
Interest payable                                        20           232
Other                                                  811           448
                                               --------------------------
Total                                              $ 6,468       $ 6,192
                                               ==========================
--------------------------------------------------------------------------

7.    FINANCING ARRANGEMENTS

Debt financing payable consists of the following:

----------------------------------------------------------------------
                                         February 29,    February 28,
                                                 2004            2003
----------------------------------------------------------------------

Financing Agreement (a)                      $ 25,542        $ 24,928
                                       -------------------------------
                                               25,542          24,928
      Less: current portion                     1,310             679
                                       -------------------------------
                                             $ 24,232        $ 24,249
                                       ===============================
----------------------------------------------------------------------

(a) Prior to April 2001, the Company borrowed under a financing facility (the
"Facility") with a lending institution (the "Lender") for $20 million. The term
of the Facility was for three years and bore interest at a rate of prime plus
3%. The Facility was collateralized by all of the Company's assets.

During April 2001, the Company entered into a Financing Agreement ("New
Financing Arrangement") with a lending institution, whereby the lender agreed to
provide a revolving credit facility of up to $25 million. The New Financing
Agreement was amended in October 2001 to increase the facility to $27.5 million.
Amounts borrowed under the New Financing Agreement were used to repay $20,636 of
borrowing on its existing facility. As a result, the Company recognized a loss
of approximately $850 (before a tax benefit of $341), which includes the
write-off of deferred financing costs and an early termination fee.

                                      F-16

<PAGE>


Availability under the New Financing Agreement is based on a formula of eligible
receivables, as defined in the New Financing Agreement. The borrowings bear
interest at rates based on the LIBOR plus 3.65%. At February 28, 2002, the
interest rate was 5.65%. Interest rates ranged from 5.4% to 8.2% in Fiscal 2002.
An annual fee of 0.5% is required based on any unused portion of the total loan
availability.

In November 2002, the lending institution with which the Company has the secured
facility increased the revolving credit line to $35 million and provided for an
additional term loan facility totaling $5 million. Interest accrues at a rate of
3.95% over the LIBOR on the revolving credit line and 6.37% over the LIBOR on
the term loan facility. The Facility expires in November 2005. The term loan
facility is for acquisitions and capital expenditures. Repayment of this
additional term facility will be on a 36 month straight line amortization. The
Agreement contains various restrictive covenants that, among other requirements,
restrict additional indebtedness. The covenants also require the Company to meet
certain financial ratios. In November 2002, the interest rates were revised to
4.55% over the LIBOR on the revolving line and 7.27% over the LIBOR on the term
loan facility as part of a loan modification. As of February 29, 2004 and
February 28, 2003, the outstanding balance on the revolving credit facility was
$22,698 and $22,561, respectively. As of February 29, 2004 and February 28,
2003, the outstanding balance on the term loan was $2,841 and $2,367,
respectively.

On June 13, 2003, the Company received a waiver from the lender for non
compliance of certain Facility covenants as of February 28, 2003. Interest rates
on both the revolving line and term loan facility were increased 2% and can
decrease if the Company meets certain financial criteria. In addition, certain
financial ratio covenants were modified. The additional interest is not payable
until the current expiration date of the Facility which is November 2005. As
part of this modification, the lender and the DSS and DSI noteholders amended
the subordination agreement (see Note 8). As a result of that amendment, the two
series of promissory notes to the former owners of DSS and DSI have been
condensed into one series of notes. One of the notes is for a term of seven
years, with a minimum monthly payment (including interest) of $40 in year one
and minimum monthly payments of $80 in subsequent years, with a balloon payment
of $3,600 due in year four. The balance on the first note after the balloon
payment is payable over the remaining three years of the note, subject to
limitations. The other three notes are for 10 years, with minimum monthly
payments (including interest) of $25 in the aggregate in the first year and
minimum monthly payments of $51 in the aggregate for the remaining years. Any
unpaid balance at the end of the note term will be due at that time. Additional
payments may be made to the noteholders if the Company achieves certain
financial ratios. In conjunction with this revision, one of the note holders has
agreed to reduce its note by approximately $2,800, contingent upon the Company's
compliance under the modified subordination agreement.

On January 8, 2004, an amendment to the Facility was entered into modifying
certain financial ratio covenants as of November 30, 2003.

On May 28, 2004, an amendment to the Facility was entered into modifying certain
financial ratio covenants as of February 29, 2004.

(b) Annual maturities of notes and guarantee payable discussed above are as
follows:

                       ---------------------------------------
                       2005                             1,310
                       2006                            24,232
                                                  ------------
                       Total                         $ 25,542
                                                  ============
                       ---------------------------------------

                                      F-17

<PAGE>

8.    NOTES AND GUARANTEE PAYABLE

Notes and guarantee payable consist of the following:

---------------------------------------------------------------------
                                     February 29,        February 28,
                                            2004                2003
---------------------------------------------------------------------
Notes payable to DSS and DSI (a)        $ 29,293            $ 28,544
Guarantee of TLCS liability (c)            2,293               2,293
Other (b)                                    803               1,522
                                 ------------------------------------
                                          32,389              32,359
      Less: current portion                1,148                 896
                                 ------------------------------------
                                        $ 31,241            $ 31,463
                                 ====================================
---------------------------------------------------------------------

(a) The Company originally issued two series of promissory notes to each of the
four owners of DSS and DSI (three related and one unrelated party; see Note 3).
The first series of notes (the "First Series"), in the aggregate principal
amount of $12,975, bore interest at a rate of 5% per annum and was payable in 36
equal monthly installments of principal, together with interest, with the first
installment having become due on March 1, 2002. The second series of notes (the
"Second Series"), in the aggregate principal amount of $17,220, bore interest at
a rate of 5% per annum and was payable as follows: $11 million, together with
interest, on April 30, 2005 (or earlier if certain events, as defined, occur
prior to such date) and the balance in 60 equal monthly installments of
principal, together with interest, with the first installment becoming due on
April 30, 2005. On June 13 2003, in connection with the receipt by the Company
of a waiver from its senior lender for non-compliance of certain Facility
covenants, the lender and the DSS and DSI noteholders amended the subordination
agreement and the Company and the noteholders amended the notes issued to those
noteholders (see Note 7). As a result of the amendment, what had been two
promissory notes issued to each of the former owners of DSS and DSI have been
condensed into one note. The amended note issued to one of the former owners is
for a term of seven years with a minimum monthly payment (including interest) of
$40 in year one and minimum monthly payments of $80 in subsequent years, with a
balloon payment of $3,600 due in year four. The balance on that note after the
balloon payment is payable over the remaining three years of the note, subject
to limitations. The amended note issued to other three former owners are for ten
years, with minimum monthly payments (including interest) of $25 in the
aggregate in the first year and minimum monthly payments of $51 in the aggregate
for the remaining years. Any unpaid balance at the end of the note term will be
due at that time. Additional payments are to be made to the noteholders if the
Company achieves certain financial ratios. In conjunction with this revision,
one of the noteholders has agreed to reduce his note by approximately $2,800,
provided the Company does not default under the notes or, in certain instances,
the Company's senior lending facility. Payment of the First Series and the
Second Series notes and of the amended notes was and is collateralized by the
assets of the acquired licensees. Payments on these notes are in accordance with
a subordination agreement between the four former owners of DSS and DSI, the
Facility and the Company. These notes are subordinated to the borrowings under
the Company's revolving credit facilities (see Note 7).

(b) The Company issued various notes payable, bearing interest at rates ranging
from 6% and 8% per annum, in connection with various acquisitions with
maturities through January 2007.

                                      F-18

<PAGE>


8.    NOTES AND GUARANTEE PAYABLE (CONTINUED)

(c) Guarantee of TLCS Liability - The Company is contingently liable on $2.3
million of obligations owed by TLCS which is payable over eight years. The
Company is indemnified by TLCS for any obligations arising out of these matters.
On November 8, 2002, TLCS filed a petition for relief under Chapter 11 of the
United States Bankruptcy Code. As a result, the Company has recorded a provision
of $2.3 million representing the balance outstanding on the related TLCS
obligations. The Company has not received any demands for payment with respect
to these obligations. The next payment is due in September 2004. The obligation
is payable over eight years. The Company believes that it has certain defenses
that could reduce or eliminate its recorded liability in this matter.

(d) Annual maturities of notes and guarantee payable discussed above are as
follows:

                       ----------------------------
                       2005               $  1,148
                       2006                  1,199
                       2007                  1,220
                       2008                  4,920
                       2009                  1,259
                       Thereafter           22,643
                                       ------------
                       Total              $ 32,389
                                       ============
                       ----------------------------


9.    INCOME TAXES

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

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                                                       FISCAL YEAR ENDED
                                              -----------------------------------------------------------------------
                                               FEBRUARY 29, 2004        FEBRUARY 28, 2003        FEBRUARY 28, 2002

<S>                                                  <C>                     <C>                      <C>
Current:
     Federal                                         $    --                 $     --                 $     --
     State                                               100                      140                      100
                                              -----------------------------------------------------------------
                                                         100                      140                      100
                                              -----------------------------------------------------------------
Deferred
     Federal                                           1,791                   (1,490)                  (2,143)
     State                                               100                      (94)                    (136)
                                              -----------------------------------------------------------------
                                                       1,891                   (1,584)                  (2,279)
                                              -----------------------------------------------------------------

Total income tax (benefit) expense                   $ 1,991                 $ (1,444)                $ (2,179)
                                              =================================================================
---------------------------------------------------------------------------------------------------------------------
</TABLE>

                                      F-19

<PAGE>


9.    INCOME TAXES (CONTINUED)

A reconciliation of the differences between income taxes computed at the federal
statutory rate and the provision (benefit) for income taxes as a percentage of
pretax income from continuing operations for each year is as follows:

--------------------------------------------------------------------------------
                                                  2004        2003         2002
--------------------------------------------------------------------------------
Federal statutory rate                          (34.0%)     (34.0%)       34.0%
State and local income taxes, net                 4.0%         .1%        12.2%
   of federal income tax benefit
Goodwill amortization                               --          --         7.4%
Valuation allowance increase (decrease)          80.9%          --      (208.1%)
Other                                            (3.4%)        .1%         0.4%
                                           -------------------------------------
Effective rate                                   47.5%      (33.8%)     (154.1%)
                                           =====================================
--------------------------------------------------------------------------------


The Company's net deferred tax assets are comprised of the following:

--------------------------------------------------------------------------------
                                        February 29, 2004   February 28, 2003
Current:
     Allowance for doubtful accounts              $   295             $   711
     Accrued expenses                               1,219               1,076
                                      ----------------------------------------
                                                    1,514               1,787
                                      ----------------------------------------
    Valuation allowance                            (1,514)                 --
                                      ----------------------------------------
                                                       --               1,787
                                      ----------------------------------------
Non current:
     Revenue recognition                               16                  16
     Net operating loss carryforward                3,566               1,551
     Depreciation and amortization                   (637)               (407)
     TLCS guarantee                                   916                 916
                                      ----------------------------------------
                                                    3,861               2,076
                                      ----------------------------------------
    Valuation allowance                            (1,877)                 --
                                      ----------------------------------------
                                                  $ 1,984             $ 3,863
                                      ========================================


Prior to the year ended February 28, 2002, the Company had provided a valuation
allowance for the full amount of its deferred tax assets, because of the
substantial uncertainties associated with the Company's ability to realize a
deferred tax benefit due to its financial condition. However, based on the
Company's expected profitability, the valuation allowance of $2,952 was
eliminated in Fiscal 2002.

At February 28, 2003, management believed that it was more likely than not that
the Company's deferred tax assets would be realized through future profitable
operations. This was based upon the fact that the Company had profitable
operations from September 1, 2000 through the third quarter ended November 30,
2002, which quarterly results were profitable before a charge for the guarantee
of certain debt of a former related party, TLC. Losses incurred in the fourth
quarter of fiscal 2003 were due to an unanticipated shortfall in hospital
patient volume, which were expected to return in fiscal 2004. Management
believed that it would return to profitable operations during fiscal 2004 and,
accordingly, it was more likely than not that it would realize its deferred tax
assets.

                                      F-20

<PAGE>


For the year ended February 29, 2004, income tax expense is due primarily to the
valuation allowance provided in that period. In the third quarter of 2004, it
became apparent that the hospital patient volumes were not returning as
anticipated and the Company would not return to profitable operations in fiscal
2004. The Company intends to maintain its valuation allowance until such time as
positive evidence exists to support reversal of the valuation allowance. Income
tax expense recorded in the future will be reduced to the extent of offsetting
reductions in the Company valuation allowance. The realization of the Company's
remaining deferred tax assets is primarily dependent on forecasted future
operating and non operating taxable income. Any reduction in future forecasted
taxable income may require that the Company record an additional valuation
against the deferred tax assets. An increase in the valuation allowance would
result in additional income tax expense in the period the valuation was recorded
and could have a significant impact on the earnings of the Company. Management
believes that it is more likely than not that the Company's deferred tax assets
which have not been reserved for will be realized through future profitable
operations.

At February 29, 2004, the Company has a federal net operating loss of
approximately ($10,490) which expires in 2020 through 2024.

10.   COMMITMENTS AND CONTINGENCIES

Lease Commitments:

Future minimum rental payments under noncancelable operating leases relating to
office space and equipment rentals that have an initial or remaining lease term
in excess of one year as of February 29, 2004 are as follows:


              --------------------------------------------------------------
                 Year Ending February 28,
                           2005                                     $ 1,122
                           2006                                         841
                           2007                                         683
                           2008                                         658
                           2009                                         504
                        Thereafter                                      860
                                                            ----------------
               Total minimum lease payments                         $ 4,668
                                                            ================
              --------------------------------------------------------------


Certain operating leases contain escalation clauses with respect to real estate
taxes and related operating costs.

Rental expense was approximately $1,702, $1,504 and $1,176 in Fiscal 2004, 2003
and 2002, respectively.

Capital lease obligations represent obligations under various equipment leases
with variable interest rates. The minimum annual principal payments for the
capital lease obligations are as follows as of February 29, 2004:


     ---------------------------------------------------------------------
     Year Ending February 28,
     2005                                                            $ 30
                                                         -----------------
     Total minimum lease payments                                      30
     Less: amount representing interest                                --
                                                         -----------------

     Present value of net minimum payments                           $ 30
                                                         =================
     ---------------------------------------------------------------------


                                      F-21

<PAGE>


10.   COMMITMENTS AND CONTINGENCIES (CONTINUED)

Employment Agreements:

In November 2002, the Company entered into amended employment agreements with
two of its officers, under which they will receive annual base salaries of $302
and $404, respectively. Their employment agreements are automatically extended
at the end of each Fiscal year and are terminable by the Company.

In September 2003, the Company entered into a three year employment agreement
with another officer of the Company, under which he receives an annual base
salary of $185, with a $10 increase per annum.

If a "change of control" (as defined in the agreements) were to occur and cause
the respective employment agreements to terminate, the Company would be required
to make lump sum severance payments of $906 and $1,212, respectively to the
officers who amended their employment contracts in November 2002. In addition,
the Company would be liable for payments to other officers, of which such
payments are immaterial.

Litigation

The Company is subject to various claims and legal proceedings covering a wide
range of matters that arise in the ordinary course of its business. Management
and legal counsel periodically review the probable outcome of such proceedings,
the costs and expenses reasonably expected to be incurred, and the availability
and extent of insurance coverage and established reserves. While it is not
possible at this time to predict the outcome of these legal actions, in the
opinion of management, based on these reviews and the likely disposition of the
lawsuits, these matters will not have a material effect on the Company's
financial position, results of operations or cash flows.

11.   STOCKHOLDERS' EQUITY

Convertible Preferred Stock Offering:

On February 26, 2003, the Company announced it was offering to sell 4,000 shares
of 7% Convertible Series A Preferred Stock at a cost of $500 per share to
certain accredited investors in an offering exempt from registration under the
Securities Act of 1933, as amended.

Each share of the Preferred Stock may be converted at any time by the holder
after April 30, 2003 at a conversion price equal to the lower of (i) 120% of the
weighted average closing price of the Company's common stock on the American
Stock Exchange during the 10 trading day period ending April 30, 2003, and (ii)
120% of the weighted average closing price of the Company's common stock on the
American Stock Exchange during the 10 trading day period ending on the date the
Company accepts a purchaser's subscription for shares, subject in either case to
adjustment in certain events. As of May 2, 2003, 2,000 shares were sold with
conversion prices of $.73 to $.93 per share.

The Preferred Stock will be redeemed by the Company on April 30, 2009 at $500
per share, plus all accrued dividends. At any time after April 30, 2004, the
Company may redeem all or some of a purchaser's shares of Preferred Stock, if
the weighted-average closing price of the Company's common stock during 10
trading day period ending on the date of notice of redemption is greater than
200% of the conversion price of such purchaser's shares of Preferred Stock.

                                      F-22


<PAGE>


11.   STOCKHOLDERS' EQUITY (CONTINUED)

Common Stock - Recapitalization and Voting Rights:

During Fiscal 1996, the shareholders approved a plan of recapitalization by
which the existing Common Stock, $.01 par value, was reclassified and converted
into either Class A Common Stock, $.01 par value per share, or Class B Common
Stock, $.01 par value per share. Prior to the recapitalization, shares of Common
Stock that were held by the beneficial owner for at least 48 consecutive months
were considered long-term shares, and were entitled to 10 votes for each share
of stock. Pursuant to the recapitalization, long-term shares were converted into
Class B Common Stock and short-term shares (beneficially owned for less than 48
months) were converted into Class A Common Stock.

A holder of Class B Common Stock is entitled to ten votes for each share and
each share is convertible into one share of Class A Common Stock (and will
automatically convert into one share of Class A Common Stock upon transfer
subject to certain limited exceptions). Except as otherwise required by the
Delaware General Corporation Law, all shares of common stock vote as a single
class on all matters submitted to a vote by the shareholders. The
recapitalization included all outstanding options and warrants to purchase
shares of Common Stock which were converted automatically into options and
warrants to purchase an equal number of shares of Class A Common Stock.

On August 12, 2003 the shareholders of the Company approved an amendment to the
Company's Restated Certificate of Incorporation to increase the total number of
authorized shares of Class A Common Stock from 50,000,000 shares to 75,000,000
shares.

On July 16, 2003, the Company sold 367,647 shares of Series A Common Stock at
$.68 per share. On July 23, 2003, the Company sold 202,703 shares of Series A
Common Stock at $.74 per share. On July 24, 2003, the Company sold 133,333
shares of Series A Common Stock at $.75 per share and on August 19, 2003, the
Company sold 256,410 shares of Series A Common stock at $.78 per share. The
sales price per share was equal to or exceeded the market price of the Company's
common stock at the date of each transaction. The purchasers of the Series A
Common Stock were related to two executive officers of the Company.

During September 2003, the Company issued 56,500 shares of Series A Common Stock
at a range of $.23 to $.50 per share for the exercise of employee stock options.

During Fiscal 2004, 10,774 shares of Series A Common Stock were issued upon the
conversion of the same number of Series B Common Stock.

During Fiscal 2004, the Company issued 55,618 shares of Series A Common Stock
pursuant to the Employee Stock Purchase Plan.

Stock Options:

1993 Stock Option Plan

During the year ended February 28, 1994, the Company adopted a stock option plan
(the "1993 Stock Option Plan"). Stock options issued under the 1993 Stock Option
Plan may be incentive stock options ("ISOs") or non-qualified stock options
("NQSOs"). This plan replaced the 1986 Non- Qualified Plan and the 1983
Incentive Stock Option Plan which terminated in 1993 except as to options then
outstanding. Employees, officers, directors and consultants are eligible to
participate in the 1993 Stock Option Plan. Options are granted at not less than
the fair market value of the Common Stock at the date of grant and vest over a
period of two years.

                                      F-23


<PAGE>


11.   STOCKHOLDERS' EQUITY (CONTINUED)

A total of 3,021,750 stock options were granted under the 1993 Stock Option
Plan, at prices ranging from $.50 to $3.87, of which 809,000 remain outstanding
at February 29, 2004.

1994 Performance-Based Stock Option Plan

During the year ended February 28, 1995, the Company adopted a stock option plan
(the "1994 Performance-Based Stock Option Plan") which provides for the issuance
of up to 3.4 million shares of Common Stock. Executive officers of the Company
and its wholly owned subsidiaries are eligible for grants. Performance-based
stock options are granted for periods of up to 10 years and the exercise price
is equal to the average of the closing price of the common stock for the 20
consecutive trading days prior to the date on which the option is granted.
Vesting of Performance Based Stock Options is during the first four years after
the date of grant, and is dependent upon increases in the market price of the
common stock.

Since inception, a total of 10,479,945 stock options were granted under the 1994
Performance-Based Stock Option Plan, at option prices ranging from $.53 to
$3.14, of which 2,767,382 remain outstanding at February 29, 2004.

1998 Stock Option Plan

During Fiscal 1999, the Company adopted a stock option plan (the "1998 Stock
Option Plan") under which an aggregate of two million shares of Common Stock are
reserved for issuance. Options granted under the 1998 Stock Option Plan may be
ISO's or NQSO's. Employees, officers and consultants are eligible to participate
in the 1998 Stock Option Plan. Options are granted at not less than fair market
value of the common stock at the date of grant and vest over a period of two
years.

A total of 1,898,083 stock options were granted under the 1998 Stock Option
Plan, at exercise prices ranging from $.23 to $2.40, of which 650,500 remain
outstanding at February 29, 2004.

2000 Stock Option Plan

During Fiscal 2001, the Company adopted a stock option plan (the "2000 Stock
Option Plan") under which an aggregate of three million shares of common stock
is reserved for issuance. Both key employees and non-employee directors, except
for members of the compensation committee, are eligible to participate in the
2000 Stock Option Plan.

A total of 400,000 stock options were granted under the 2000 Stock Option Plan
at an exercise price of $1.02, of which all are outstanding as of February 29,
2004.

                                      F-24


<PAGE>


11.   STOCKHOLDERS' EQUITY (CONTINUED)

Information regarding the Company's stock option activity is summarized below:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
                                                       Stock Option         Option Price      Weighted-Average
                                                         Activity                              Exercise Price
                                                  ------------------
<S>                                                       <C>               <C>                     <C>
Options outstanding as of February 28, 2001               4,848,682         $.23 - $2.06            $0.61
 Granted                                                    507,500         $.56 - $1.02            $1.00
 Exercised                                                       --              --
 Terminated                                                (220,000)        $.23 - $2.06            $1.92
                                                  ------------------
Options outstanding as of February 28, 2002               5,136,182         $.25 - $1.02            $0.59
 Granted                                                     45,000         $.85 - $2.40            $1.46
 Exercised                                                 (103,333)        $.50 - $.56             $0.50
 Terminated                                                  (6,667)            $.56                $0.56
                                                  ------------------
Options outstanding as of February 28, 2003               5,071,182         $.25 - $2.40            $0.59
 Granted                                                  3,916,382         $.59 - $.79             $0.60
 Exercised                                                  (56,500)        $.23 - $.50             $0.30
 Terminated                                              (4,304,182)        $.50 - $2.40            $0.57
                                                  ------------------
Options outstanding as of February 29, 2004               4,626,882         $.25 - $2.40            $0.63
                                                  ==================
----------------------------------------------------------------------------------------------------------------
</TABLE>

Included in the outstanding options are 253,333 ISOs and 400,000 NQSOs which
were exercisable at February 29, 2004.

The following tables summarize information about stock options outstanding at
February 29, 2004:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
                               Options Outstanding                                                Options Exercisable
-----------------------------------------------------------------------------------------------------------------------------
                                           Weighted-Average                                                        Weighted
                                              Remaining                    Weighted                                 Average
   Range of                 Number       Contractual Life (In               Average              Number            Exercise
Exercise Prices          Outstanding            Years)                  Exercise Price         Exercisable           Price
-----------------------------------------------------------------------------------------------------------------------------
<S>                       <C>                  <C>                           <C>                 <C>                 <C>
$.25 to $.58                245,500              5.5                         $0.37               170,000             $0.37
       $0.59              3,811,382              9.8                         $0.59                83,333             $0.59
$.60 to $2.40               570,000              7.3                         $1.00               400,000             $1.02
                    ---------------------------------------------------------------------------------------------------------
                          4,626,882             9.43                         $0.63               653,333             $0.79
                    =========================================================================================================
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>

Employee Stock Purchase Plan

The Company has an employee stock purchase plan under which eligible employees
may purchase common stock of the Company at 90% of the lower of the closing
price of the Company's Common Stock on the first and last day of the three-month
purchase period. Employees elect to pay for their stock purchases through
payroll deductions at a rate of 1% to 10% of their gross payroll.

12.   EMPLOYEE 401(K) SAVINGS PLAN

The Company maintains an Employee 401(k) Savings Plan. The plan is a defined
contribution plan which is administered by the Company. All regular, full-time
employees are eligible for voluntary participation upon completing one year of
service and having attained the age of 21. The plan provides for growth in
savings through contributions and income from investments. It is subject to the
provisions of the Employee Retirement Income Security Act of 1974, as amended.
Plan participants are allowed to contribute a specified percentage of their base
salary. However, the Company retains the right to make optional contributions
for any plan year. Optional contributions were not made in fiscal 2004, 2003 and
2002.

13.   LICENSEE SALES

The Company includes in its service revenues, service costs and general and
administrative costs revenues and costs associated with its Licencee's.
Summarized below is the detail associated with the above discussed items for the
years ended February 29, 28,and 28, 2004, 2003 and 2002 respectively.

<TABLE>
<CAPTION>
------------------------- --------------------- ------------------------ ----------------------
                                   Year Ended              Year Ended              Year Ended
                                    February              February 28,              February
                                    29, 2004                  2003                  28, 2002
------------------------- --------------------- ------------------------ ----------------------
<S>                                <C>                   <C>                      <C>
         Company                   $72,359               $76,330                  $14,651
         Service Revenue
------------------------- --------------------- ------------------------ ----------------------
         Licensee                  $58,042               $72,390                  $134,763
         Service Revenue
------------------------- --------------------- ------------------------ ----------------------
         Total Revenue             $130,401              $148,720                 $149,414
------------------------- --------------------- ------------------------ ----------------------
         Company
         Service Costs             $56,203               $58,588                  $9,546
------------------------- --------------------- ------------------------ ----------------------
         Licensee
         Service Costs             $46,988               $57,106                  $104,679
------------------------- --------------------- ------------------------ ----------------------
         Total Service             $103,191              $115,694                 $114,225
         Costs
------------------------- --------------------- ------------------------ ----------------------
         Company
         General and
         administrative            $15,892               $20,358                  $12,979
         costs
------------------------- --------------------- ------------------------ ----------------------
         Licensee                  $6,800                $9,100                   $16,900
         Royalty
------------------------- --------------------- ------------------------ ----------------------
         Total General
         and                       $22,692               $29,458                  $29,879
         administrative
         costs
------------------------- --------------------- ------------------------ ----------------------
</TABLE>

                                      F-25

<PAGE>


14.   QUARTERLY FINANCIAL DATA (UNAUDITED)

Summarized unaudited quarterly financial data for Fiscal 2004 and 2003 are as
follows (in thousands, except per share data):

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
Year ended February 29, 2004                       First Quarter     Second Quarter       Third Quarter      Fourth Quarter
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>                 <C>                <C>                  <C>
Total revenues                                          $ 34,043            $ 33,640           $ 32,383             $ 30,335
                                                    ----------------------------------------------------------------------------

Net loss available to common stockholders'              $   (235)           $   (671)          $ (5,064)(1)         $   (277)
                                                    ============================================================================

(Loss) earnings per common share-basic                  $  (0.01)           $  (0.03)          $  (0.20)            $  (0.01)
                                                    ============================================================================

(Loss) earnings per common share-diluted                $  (0.01)           $  (0.03)          $  (0.20)            $  (0.01)
                                                    ============================================================================

--------------------------------------------------------------------------------------------------------------------------------
Year ended February 28, 2003                       First Quarter     Second Quarter       Third Quarter      Fourth Quarter
--------------------------------------------------------------------------------------------------------------------------------
Total revenues                                          $ 37,699            $ 38,979           $ 38,282             $ 33,759
                                                    ----------------------------------------------------------------------------

Net (loss) income available to common stockholders'     $    427            $    442           $ (1,249)            $ (2,454)(2)
                                                    ============================================================================

(Loss) earnings per common share-basic                  $   0.02            $   0.02           $  (0.05)            $  (0.10)
                                                    ============================================================================

(Loss) earnings per common share-diluted                $   0.02            $   0.02           $  (0.05)            $  (0.10)
                                                    ============================================================================
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)   In the third quarter of Fiscal 2004, the Company recorded a charge of
      approximately $2,600 for a restructuring expense.

(2)   In the fourth quarter of Fiscal 2003, the Company recorded a charge of
      approximately $900 for workers' compensation liabilities.


ATC HEALTHCARE, INC. AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
                                                                         Fiscal Year Ended
                                              -------------------------------------------------------------------------
                                                 February 29, 2004        February 28, 2003          February 28, 2002
                                              -------------------------------------------------------------------------
<S>                                              <C>                      <C>                        <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:

Balance, beginning of period                               $ 1,784                  $   830                    $ 1,344

Additions charged to costs and expenses                          7                    1,629                        400

Deductions                                                  (1,054)                    (675)                      (914)
                                              -------------------------------------------------------------------------

Balance, end of period                                     $   737                  $ 1,784                    $   830
                                              =========================================================================
-----------------------------------------------------------------------------------------------------------------------
</TABLE>


                                      F-26

<PAGE>

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

      (a)   Previous Independent Accountants

(i) On September 17, 2003, ATC Healthcare, Inc. (the "Company") dismissed
PricewaterhouseCoopers LLP as its independent accountants. The Company's Audit
Committee participated in and approved the decision to change independent
accountants.

(ii) The reports of PricewaterhouseCoopers LLP on the financial statements for
the past two Fiscal years contained no adverse opinion or disclaimer of opinion
and were not qualified or modified as to uncertainty, audit scope or accounting
principle.

(iii) In connection with its audits for the two most recent Fiscal years and
through September 17, 2003, there were no disagreements with
PricewaterhouseCoopers LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of PricewaterhouseCoopers LLP
would have caused them to make reference thereto in their report on the
financial statements for such years.

(iv) During the two most recent Fiscal years and through September 17, 2003,
there were no reportable events (as defined in Regulation S-K Item
304(a)(1)(v)).

(v) The Company has requested that PricewaterhouseCoopers LLP furnish it with a
letter addressed to the SEC stating whether or not it agrees with the above
statements. A copy of such letter, dated September 22, 2003, was filed as
exhibit16 to Form 8-K.

      (b)   New Independent Accountants

      The Company engaged Goldstein Golub and Kessler LLP as its new independent
accountants as of September 17, 2003. During the two most recent Fiscal years
and through September 17, 2003, the Company has not consulted with Goldstein
Golub and Kessler LLP regarding either (i) the application of accounting
principles to a specified transaction, either completed or proposed; or the type
of audit opinion that might be rendered on the Company's financial statements,
and neither a written report was provided to the Company nor oral advice was
provided by Goldstein Golub and Kessler LLP concluded on that was an important
factor considered by the Company in reaching a decision as to the accounting,
auditing or financial reporting issue; or (ii) any matter that was either the
subject of a disagreement, as that term is defined in Item 304(a)(1)(iv) of
Regulation S-K and the related instructions to Item 304 of Regulation S-K, or a
reportable event, as that term is defined in Item 304(a)(1)(v) of Regulation
S-K.

ITEM 9A. CONTROLS AND PROCEDURES

(a) Our management has evaluated, with the participation of our Chief Executive
Officer and Chief Financial Officer, the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this Annual
Report on Form 10-K/A. Based on this evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and
procedures are effective to ensure that information we are required to disclose
in reports that we file or submit under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.

(b) During the last Fiscal quarter, there were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the evaluation of these controls.


                                       30
<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this section will be included in the Company's Proxy
Statement, which will be filed with the Securities Exchange Commission on or
before June 28, 2004 and is incorporated by reference herein.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this section will be included in the Company's Proxy
Statement, which will be filed with the Securities and Exchange Commission on or
before June 28, 2004 and is incorporated by reference herein.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMNT AND
         RELATED STOCKHOLDER MATTERS

The information required by this section will be included in the Company's Proxy
Statement, which will be filed with the Securities and Exchange Commission on or
before June 28, 2004 and is incorporated by reference herein.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this section will be included in the Company's Proxy
Statement, which will be filed with the Securities and Exchange Commission on or
before June 28, 2004 and is incorporated by reference herein.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Fees billed to the Company by Goldstein Golub Kessler LLP during the fiscal year
ended February 29, 2004 were as follows:

      Audit fees-Goldstein Golub Kessler LLP billed an aggregate of $70,000 in
fees for services rendered for the annual audit of the Company's consolidated
financial statements for the fiscal year ended February 29, 2004.

      Financial Information System Design and Implementation fees-None.

      All other fees-None.

            The Audit Committee has reviewed the amount of fees paid to
Goldstein Golub Kessler LLP for the audit and non-audit services, and concluded
that since no non-audit services were provided and no fees paid therefore, they
could not have impaired the independence of Goldstein Golub Kessler LLP.


                                       31
<PAGE>

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(A)   FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

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

(B)   REPORTS ON 8-K

There were two reports on Form 8-K filed by the Company during the Company's
last Fiscal quarter.

      (1) On January 13, 2004, the Company filed a Report on Form 8-K furnishing
information under Item 12.

      (2) On January 21, 2004, the Company filed a Report on Form 8-K furnishing
information under Item 9.

(C)   EXHIBITS

      The Exhibits filed as part of the Report are listed in the Index to
Exhibits below.


                                       32
<PAGE>

D.    EXHIBIT INDEX

EXHIBIT NUMBER                              DESCRIPTION
--------------------------------------------------------------------------------

3.1            Restated Certificate of Incorporation of the Company filed July
               11, 1998 and incorporated by reference to Form 10-K for the
               fiscal year ended February 28, 1995, filed with the Securities
               and Exchange Commission on May 5, 1995.

3.2            Certificate of Amendment to the Restated Certificate of
               Incorporation of the Company filed August 22, 1991 and
               incorporated by reference to the Company's registration statement
               on Form S-1 (File No. 33-43728), dated January 29, 1992.

3.3            Certificate of Amendment to the Restated Certificate of
               Incorporation of the Company filed September 3, 1992 and
               incorporated by reference to Form 10-K for the fiscal year ended
               February 28, 1995, filed with the Securities and Exchange
               Commission on May 5, 1995.

3.4            Certificate of Amendment of Restated Certificate of Incorporation
               of the Company filed August 23, 1994 and incorporated by
               reference to Form 10-K for the fiscal year ended February 28,
               1995, filed with the Securities and Exchange Commission on May 5,
               1995.

3.5            Certificate of Amendment of Restated Certificate of Incorporation
               of the Company filed October 26, 1995 and incorporated by
               reference to the Company's Form 8-K, filed with the Securities
               and Exchange Commission on October 31, 1995.

3.6            Certificate of Amendment of Restated Certificate of Incorporation
               of the Company filed December 19, 1995 and incorporated by
               reference to the Company's Form 10-K for the fiscal year ended
               February 28, 1996, filed with the Securities and Exchange
               Commission on May 13, 1996.

3.7            Certificate of Amendment of Certificate of Incorporation of Staff
               Builders, Inc. filed August 2, 2001 and incorporated by reference
               to the Company's Form Def 14A, filed with the Securities and
               Exchange Commission on June 27, 2001.

3.8            Amended and Restated By-Laws of the Company, incorporated by
               reference to Form 10-K for the fiscal year ended February 28,
               1995, filed with the Securities and Exchange Commission on May 5,
               1995.

3.9            Certificate of Retirement of Stock of the Company, incorporated
               by reference to Form 8-A, filed with the Securities and Exchange
               Commission on October 24, 1995.

3.10           Certificate of Retirement of Stock of the Company, incorporated
               by reference to Form 10-K for the fiscal year ended February 28,
               1995, filed with the Securities and Exchange Commission on May 5,
               1995.

3.11           Certificate of Designation, Rights and Preferences of the Class A
               Preferred Stock of the Company, incorporated by reference to Form
               10-K for the fiscal year ended February 28, 1995, filed with the
               Securities and Exchange Commission on May 5, 1995.

4.1            Specimen Class A Common Stock Certificate, incorporated by
               reference to Form 8-A, filed with the Securities and Exchange
               Commission on October 24, 1995.

4.2            Specimen Class B Common Stock Certificate, incorporated by
               reference to Form 8-A, filed with the Securities and Exchange
               Commission on October 24, 1995.

4.3            Standby Equity Distribution Agreement, dated April 19, 2004,
               between Cornell Capital Partners, L.P. and the Company,
               incorporated by reference to the Company's Form S-1 (File No.
               333-117266), filed with the Securities and Exchange Commission on
               July 9, 2004.

4.4            Registration Rights Agreement, dated April 19, 2004, by and
               between the Company and Cornell Capital Partners, L.P., in
               connection with the Standby Equity Distribution Agreement,
               incorporated by reference to the Company's Form S-1 (File No.
               333-117266), filed with the Securities and Exchange Commission on
               July 9, 2004.


                                       33
<PAGE>

EXHIBIT NUMBER                              DESCRIPTION
--------------------------------------------------------------------------------

4.5            Escrow Agreement, dated April 19, 2004, by and between the
               Company, Cornell Capital Partners, L.P. and Butler Gonzalez LLP,
               in connection with the Standby Equity Distribution Agreement,
               incorporated by reference to the Company's Form S-1 (File No.
               333-117266), filed with the Securities and Exchange Commission on
               July 9, 2004.

4.6            Placement Agent Agreement, dated April 19, 2004, by and among the
               Company, Arthur's, Lestrange & Company Inc. and Cornell Capital
               Partners, L.P., incorporated by reference to the Company's Form
               S-1 (File No. 333-117266), filed with the Securities and Exchange
               Commission on July 9, 2004.

4.7            $140,000 principal amount Compensation Debenture, due April 19,
               2007, issued to Cornell Capital Partners, L.P., in connection
               with the Standby Equity Distribution Agreement, incorporated by
               reference to the Company's Form S-1 (File No. 333-117266), filed
               with the Securities and Exchange Commission on July 9, 2004.

10.1           1993 Stock Option Plan of the Company, incorporated by reference
               to Form 10-K for the fiscal year ended February 28, 1995, filed
               with the Securities and Exchange Commission on May 5, 1995.

10.2           1998 Stock Option Plan of the Company, incorporated by reference
               to Exhibit C to the Company's Proxy Statement dated August 27,
               1998, filed with the Securities and Exchange Commission on August
               27, 1998.

10.3           Amended and Restated 1993 Employee Stock Purchase Plan of the
               Company, incorporated by reference to the Company's registration
               statement on Form S-1 (File No. 33-71974), filed with the
               Securities and Exchange Commission on November 19, 1993.

10.4           1998 Employee Stock Purchase Plan of the Company, incorporated by
               reference to Exhibit D to the Company's Proxy Statement dated
               August 27, 1998, filed with the Securities and Exchange
               Commission on August 27, 1998.

10.5           1994 Performance-Based Stock Option Plan of the Company,
               incorporated by reference to Exhibit B to the Company's Proxy
               Statement, dated July 18, 1994, filed with the Securities and
               Exchange Commission on July 27, 1994.

10.6           Stock Option Agreement, dated December 1, 1998, under the
               Company's 1993 Stock Option Plan between the Company and Stephen
               Savitsky, incorporated by reference to the Company's Form 10-Q
               for the quarterly period ended November 30, 1997, filed with the
               Securities and Exchange Commission on January 19, 1999.

10.7           Stock Option Agreement, dated December 1, 1998, under the
               Company's 1994 Performance-Based Stock Option Plan between the
               Company and Stephen Savitsky, incorporated by reference to Form
               10-K for the fiscal year ended February 28, 1995, filed with the
               Securities and Exchange Commission on May 5, 1995.

10.8           Stock Option Agreement, dated December 1, 1998, under the
               Company's 1993 Stock Option Plan between the Company and David
               Savitsky, incorporated by reference to the Company's Form 10-Q
               for the quarterly period ended November 30, 1997, filed with the
               Securities and Exchange Commission on January 19, 1999.

10.9           Stock Option Agreement, dated December 1, 1998, under the
               Company's 1994 Performance-Based Stock Option Plan between the
               Company and David Savitsky, incorporated by reference to the
               Company's Form 10-Q for the quarterly period ended November 30,
               1997, filed with the Securities and Exchange Commission on
               January 19, 1999.

10.10          Stock Option Agreement, dated December 1, 1998, under the
               Company's 1993 Stock Option Plan, between the Company and Edward
               Teixeira, incorporated by reference to the Company's Form 10-Q
               for the quarterly period ended November 30, 1997, filed with the
               Securities and Exchange Commission on January 19, 1999.


                                       34
<PAGE>


EXHIBIT NUMBER                              DESCRIPTION
--------------------------------------------------------------------------------

10.11          Stock Option Agreement, dated December 1, 1998, under the
               Company's 1994 Performance-Based Stock Option Plan, between the
               Company and Edward Teixeira, incorporated by reference to the
               Company's Form 10-Q for the quarterly period ended November 30,
               1997, filed with the Securities and Exchange Commission on
               January 19, 1999.

10.12          Stock Option Agreement, dated December 1, 1998, under the
               Company's 1998 Stock Option Plan, between the Company and Edward
               Teixeira, incorporated by reference to the Company's Form 10-Q
               for the quarterly period ended November 30, 1997, filed with the
               Securities and Exchange Commission on January 19, 1999.

10.13          Employment Agreement, dated as of June 1, 1987, between the
               Company and Stephen Savitsky, incorporated by reference to Form
               10-K for the fiscal year ended February 28, 1995, filed with the
               Securities and Exchange Commission on May 5, 1995.

10.14          Amendment, dated as of October 31, 1991, to the Employment
               Agreement between the Company and Stephen Savitsky, incorporated
               by reference to Form 10-K for the fiscal year ended February 28,
               1995, filed with the Securities and Exchange Commission on May 5,
               1995.

10.15          Amendment, dated as of December 7, 1992, to the Employment
               Agreement between the Company and Stephen Savitsky, incorporated
               by reference to Form 10-K for the fiscal year ended February 28,
               1995, filed with the Securities and Exchange Commission on May 5,
               1995.

10.16          Employment Agreement, dated as of June 1, 1987, between the
               Company and David Savitsky, incorporated by reference to Form
               10-K for the fiscal year ended February 28, 1995, filed with the
               Securities and Exchange Commission on May 5, 1995.

10.17          Amendment, dated as of October 31, 1991, to the Employment
               Agreement between the Company and David Savitsky, incorporated by
               reference to Form 10-K for the fiscal year ended February 28,
               1995, filed with the Securities and Exchange Commission on May 5,
               1995.

10.18          Amendment, dated as of January 3, 1992, to the Employment
               Agreement between the Company and David Savitsky, incorporated by
               reference to Form 10-K for the fiscal year ended February 28,
               1995, filed with the Securities and Exchange Commission on May 5,
               1995.

10.19          Amendment, dated as of December 7, 1992, to the Employment
               Agreement between the Company and David Savitsky, incorporated by
               reference to Form 10-K for the fiscal year ended February 28,
               1995, filed with the Securities and Exchange Commission on May 5,
               1995.

10.21          Asset Purchase and Sale Agreement, dated as of September 6, 1996,
               by and among ATC Healthcare Services, Inc. and the Company and
               William Halperin and All Care Nursing Service, Inc, incorporated
               by reference to the Company's Form 10-Q for the quarterly period
               ended November 30, 1996, filed with the Securities and Exchange
               Commission on January 14, 1997.

10.22          Stock Purchase Agreement by and among the Company and Raymond T.
               Sheerin, Michael Altman, Stephen Fleischner and Chelsea Computer
               Consultants, Inc., dated September 24, 1996, incorporated by
               reference to the Company's Form 10-Q for the quarterly period
               ended November 30, 1997, filed with the Securities and Exchange
               Commission on January 14, 1998.

10.23          Amendment No. 1 to Stock Purchase Agreement by and among the
               Company and Raymond T. Sheerin, Michael Altman, Stephen
               Fleischner and Chelsea Computer Consultants, Inc., dated
               September 24, 1996, incorporated by reference to the Company's
               Form 10-Q for the quarterly period ended November 30, 1997, filed
               with the Securities and Exchange Commission on January 14, 1998.


                                       35
<PAGE>

EXHIBIT NUMBER                              DESCRIPTION
--------------------------------------------------------------------------------

10.24          Shareholders Agreement between Raymond T. Sheerin and Michael
               Altman and Stephen Fleischner and the Company and Chelsea
               Computer Consultants, Inc., dated September 24, 1996,
               incorporated by reference to the Company's Form 10-Q for the
               quarterly period ended November 30, 1997, filed with the
               Securities and Exchange Commission on January 14, 1998.

10.25          Amendment No. 1 to Shareholders Agreement among Chelsea Computer
               Consultants, Inc., Raymond T. Sheerin, Michael Altman and the
               Company, dated October 30, 1997, incorporated by reference to the
               Company's Form 10-Q for the quarterly period ended November 30,
               1997, filed with the Securities and Exchange Commission on
               January 14, 1998.

10.26          Indemnification Agreement, dated as of September 1, 1987, between
               the Company and Stephen Savitsky, incorporated by reference to
               Form 10-K for the fiscal year ended February 28, 1995, filed with
               the Securities and Exchange Commission on May 5, 1995.

10.27          Indemnification Agreement, dated as of September 1, 1987, between
               the Company and David Savitsky, incorporated by reference to Form
               10-K for the fiscal year ended February 28, 1995, filed with the
               Securities and Exchange Commission on May 5, 1995.

10.28          Indemnification Agreement, dated as of September 1, 1987, between
               the Company and Bernard J. Firestone, incorporated by reference
               to Form 10-K for the fiscal year ended February 28, 1995, filed
               with the Securities and Exchange Commission on May 5, 1995.

10.29          Indemnification Agreement, dated as of September 1, 1987, between
               the Company and Jonathan Halpert, incorporated by reference to
               Form 10-K for the fiscal year ended February 28, 1995, filed with
               the Securities and Exchange Commission on May 5, 1995.

10.30          Indemnification Agreement, dated as of May 2, 1995, between the
               Company and Donald Meyers, incorporated by reference to the
               Company's Form 10-K for the fiscal year ended February 28, 1997,
               filed with the Securities and Exchange Commission on May 27,
               1997.

10.31          Indemnification Agreement, dated as of May 2, 1995, between the
               Company and Edward Teixeira, incorporated by reference to Form
               10-K for the fiscal year ended February 28, 1995, filed with the
               Securities and Exchange Commission on May 5, 1995.

10.32          Form of Medical Staffing Services Franchise Agreement,
               incorporated by reference to the Company's Form 10-K for the
               fiscal year ended February 28, 1996, filed with the Securities
               and Exchange Commission on May 13, 1996.

10.33          Confession of Judgment, dated January 27, 2000, granted by a
               subsidiary of the Company, to Roger Jack Pleasant, incorporated
               by reference to Amendment No. 1 to the Company's Form S-1 (File
               No. 333-117266), filed with the Securities and Exchange
               Commission on September 14, 2004.

10.34          Distribution agreement, dated as of October 20, 1999, between the
               Company and TLCS, incorporated by reference to Form 10-Q of
               Tender Loving Care Health Care Services Inc. for the quarterly
               period ended August 31, 1999 (File No. 0-25777), filed with the
               Securities and Exchange Commission on October 20, 1999.

10.35          Tax Allocation agreement dated as of October 20, 1999, between
               the Company and TLCS, incorporated by reference to Form 10-Q of
               Tender Loving Care Health Care Services Inc. for the quarterly
               period ended August 31, 1999 (File No. 0-25777), filed with the
               Securities and Exchange Commission on October 20, 1999.


                                       36
<PAGE>

EXHIBIT NUMBER                              DESCRIPTION
--------------------------------------------------------------------------------

10.36          Transitional Services agreement, dated as of October 20, 1999,
               between the Company and TLCS, incorporated by reference to Form
               10-Q of Tender Loving Care Health Care Services Inc. for the
               quarterly period ended August 31, 1999 (File No. 0-25777), filed
               with the Securities and Exchange Commission on October 20, 1999.

10.37          Trademark License agreement, dated as of October 20, 1999,
               between the Company and TLCS, incorporated by reference to Form
               10-Q of Tender Loving Care Health Care Services Inc. for the
               quarterly period ended August 31, 1999 (File No. 0-25777), filed
               with the Securities and Exchange Commission on October 20, 1999.

10.38          Amendment, dated as of October 20, 1999, to the Employment
               agreement between the Company and Stephen Savitsky, incorporated
               by reference to the Company's Form 10-Q for the quarterly period
               ended August 31, 1999, filed with the Securities and Exchange
               Commission on October 20, 1999.

10.39          Amendment, dated as of October 20, 1999, to the Employment
               agreement between the Company and David Savitsky, incorporated by
               reference to the Company's Form 10-Q for the quarterly period
               ended August 31, 1999, filed with the Securities and Exchange
               Commission on October 20, 1999.

10.40          Receivables Purchase and Transfer Agreement dated April 6, 2001
               between the Company and HFG Healthco-4 LLC, incorporated by
               reference to the Company's Form 10-K/A for the fiscal year ended
               February 28, 2001, filed with the Securities and Exchange
               Commission on June 28, 2001.

10.41          Asset purchase agreement dated October 5, 2001, between the
               Company and Doctors' Corner and Healthcare Staffing, Inc.,
               incorporated by reference to the Company's Form 10-Q for the
               quarterly period ended August 31, 2001, filed with the Securities
               and Exchange Commission on October 15, 2001.

10.42          Asset purchase agreement dated January 31, 2002, between the
               Company and Direct Staffing, Inc. and DSS Staffing Corp.,
               incorporated by reference to the Company's Form 8-K, filed with
               the Securities and Exchange Commission on February 19, 2002.

10.43          Amendment to Employment agreement dated November 28, 2001 between
               the Company and Stephen Savitsky, incorporated by reference to
               the Company's Form 10-K for the fiscal year ended February 28,
               2002, filed with the Securities and Exchange Commission on June
               10, 2002.

10.44          Amendment to Employment agreement dated November 28, 2001 between
               the Company and David Savitsky, incorporated by reference to the
               Company's Form 10-K for the fiscal year ended February 28, 2002,
               filed with the Securities and Exchange Commission on June 10,
               2002.

10.45          Amendment to Employment agreement dated December 18, 2001 between
               the Company and Edward Teixeira, incorporated by reference to the
               Company's Form 10-K for the fiscal year ended February 28, 2002,
               filed with the Securities and Exchange Commission on June 10,
               2002.

10.46          Amended and Restated Loan and Security Agreement dated November
               7, 2002 between the Company and HFG Healthco-4 LLC, incorporated
               by reference to the Company's Form 10-Q for the quarter ended
               November 30, 2002, filed with the Securities and Exchange
               Commission on January 21, 2003.

10.47          Agreement of Lease between Matterhorn USA, Inc. and the Company
               for premises located in Lake Success, New York, incorporated by
               reference to Amendment No. 1 to the Company's Form S-1 (File No.
               333-117266), filed with the Securities and Exchange Commission on
               September 14, 2004.

10.48          First Lease Amendment between CMF Capital Company, LLC and the
               Company for premises located in Lake Success, New York,
               incorporated by reference to Amendment No. 1 to the Company's
               Form S-1 (File No. 333-117266), filed with the Securities and
               Exchange Commission on September 14, 2004.


                                       37
<PAGE>

EXHIBIT NUMBER                              DESCRIPTION
--------------------------------------------------------------------------------

10.49         Second Lease Amendment between Great Oak, LLC and the Company for
              premises located in Lake Success, New York, incorporated by
              reference to Amendment No. 1 to the Company's Form S-1 (File No.
              333-117266), filed with the Securities and Exchange Commission on
              September 14, 2004.

10.50         Third Lease Amendment between Fair Oak, LLC and the Company for
              premises located in Lake Success, New York, incorporated by
              reference to Amendment No. 1 to the Company's Form S-1 (File No.
              333-117266), filed with the Securities and Exchange Commission on
              September 14, 2004.

16            Letter dated September 22, 2003 from PricewaterhouseCoopers LLP
              to the Securities and Exchange Commission, incorporated by
              reference to the Company's Form 8-K, filed with the Securities
              and Exchange Commission on September 23, 2003.

21            Subsidiaries of the Company, incorporated by reference in the
              Company's Form 10-K for the fiscal year ended February 29, 2004,
              filed with the Securities and Exchange Commission on May 28, 2004.

23.1          Consent of Goldstein Golub Kessler LLP.*

23.2          Consent of PricewaterhouseCoopers LLP.*

24            Powers of Attorney.*

31.1          Certification pursuant to 18 U.S.C. Section 1350, as adopted
              pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

31.2          Certification pursuant to 18 U.S.C. Section 1350, as adopted
              pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

32.1          Certification pursuant to 18 U.S.C. Section 1350, as adopted
              pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

32.2          Certification pursuant to 18 U.S.C. Section 1350, as adopted
              pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

* Filed herewith.



                                       38
<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.



                                        ATC HEALTHCARE, INC.

                                        By:  /S/  DAVID SAVITSKY
                                             --------------------
                                             David Savitsky
                                             Chief Executive Officer

Dated: November 3, 2004

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

<TABLE>
<CAPTION>
          SIGNATURE                           TITLE                             DATE
          ---------                           -----                             ----
<S>                                   <C>                                  <C>

/S/ DAVID SAVITSKY                    Chief Executive Officer              November 3, 2004
----------------------------          (Principal Executive
David Savitsky                        Officer) and Director


/S/  ANDREW REIBEN                    Senior Vice President, Finance,      November 3, 2004
----------------------------          Chief Financial Officer and
Andrew Reiben                         Treasurer (Principal Financial and
                                      Accounting Officer)


/S/  STEPHEN SAVITSKY                 President and Chairman of the        November 3, 2004
----------------------------
Stephen Savitsky                      Board


*                                     Director                             November 3, 2004
----------------------------
Bernard J. Firestone, Ph. D.


*                                     Director                             November 3, 2004
----------------------------
Jonathan Halpert, Ph. D.


*                                     Director                             November 3, 2004
----------------------------
Martin Schiller


*By: /S/  DAVID SAVITSKY
     ----------------------------
         David Savitsky
         Attorney-in-Fact
</TABLE>


                                       39