SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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

           For the fiscal year ended 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)

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

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

       Registrant's telephone number, including area code: (516) 750-1600
                                                           --------------

<TABLE>
<CAPTION>
                                                                                  Name of Exchange
                                               Title of Each Class              on Which Registered
                                               -------------------              -------------------
<S>                                   <C>                                      <C>
Securities registered pursuant to
Section 12 (b) of the Act:            Class A Common Stock, $.01 par value     American Stock Exchange
</TABLE>

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.

<PAGE>


                       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 means ATC Healthcare, Inc.

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

The Company provides supplemental staffing to health care facilities through its
network of 52 offices in 23 states, of which 35 are operated by 23 licensees and
17 are owned and  operated  by the  Company.  The  Company  offers  its  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 the  Company  to  provide  a  flexible  labor  force  to  meet
fluctuations  in census and  business and to help  clients  acquire  health care
associates  with  specifically  needed skills.  The Company's  medical  staffing
professionals  also fill in for absent  employees  and  enhance a client's  core
staff with temporary workers during peak seasons.

Clients  benefit  from  their  relationship  with  the  Company  because  of the
Company's  expertise in providing properly skilled medical staffing employees to
a facility in an  increasingly  tight labor market.  The Company has 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  provided  by the  Company
because these are paid through the Company.

The Company  also  operates a Travel Nurse  Program  whereby  qualified  nurses,
physical  therapists and occupational  therapists are recruited on behalf of the
clients who require such services on a long-term  basis.  These  individuals are
recruited from 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.

The  Company  has  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.


                                       2
<PAGE>

ATC has expanded its client base to include  nursing homes,  physician  practice
management  groups,  managed  care  facilities,   insurance  companies,  surgery
centers,  community health centers and schools. By diversifying its client list,
the  Company  believes it lessens the risk that  regulatory  or industry  sector
shifts in staffing usage will materially affect the Company's staffing revenues.

LICENSEE PROGRAM

The Company's licensing program is one of the principal factors  differentiating
it from most of its 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 the  Company)  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 the Company 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.  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,  invoices  the  customers  and  processes  and  collects  the accounts
receivable.  The  licensees are  responsible  for providing an office and paying
administrative  expenses,  including  rent,  utilities,  telephone  and costs of
administrative personnel.

The Company  grants 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  the  Company  may  convert  an
independently owned staffing business into a licensee. In those situations,  the
Company  negotiates 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  particular  state
franchise  laws. If the Company fails to comply with the franchise  laws,  rules
and  regulations  of the  particular  state  relating  to  offers  and  sales of
franchises,  the  Company  will be  unable  to engage  in  offering  or  selling
licensees in or from such state. To offer and sell licensees,  the Federal Trade
Commission  requires the Company to furnish to  prospective  licensees a current
franchise offering disclosure document. The Company has used a Uniform Franchise
Offering  Circular ("UFOC") to satisfy this disclosure  obligation.  The Company
must update its UFOC annually or upon the occurrence of certain material events.
If a  material  event  occurs,  the  Company  must  stop  offering  and  selling
franchises  until the UFOC is updated.  In addition,  certain states require the
Company to register or file its UFOC with such states and to provide  prescribed
disclosures.  The Company is required to obtain an effective registration of its
franchise  disclosure  document in New York State and certain other registration
states. The Company is 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.

PERSONNEL, RECRUITING AND TRAINING

The  Company  employs  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.


                                       3
<PAGE>

The  Company  screens  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 the Company's  policies and
procedures prior to their initial assignment.  The Company is not a party to any
collective   bargaining  agreement  and  considers  its  relationship  with  its
employees to be satisfactory.

It is  essential  for the Company to  constantly  recruit and retain a qualified
staff of staffing  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,  the Company offers a
variety  of  benefit  programs  to assist in  recruiting  high  quality  medical
staffing  professionals.  This  package  provides  employees  access to medical,
dental,  life  and  disability  insurance,  a  401(k)  plan,  opportunities  for
Continuing  Education  Credits,  partnerships  with various vendors for discount
programs (e.g.  uniforms,  vacations and cruises,  credit cards,  appliances and
cars),  recognition  programs  and referral  bonus  programs.  In addition,  the
Company  provides its licensees a  full-service  human  resources  department to
support the offices with  policies and  procedures as well as to assist with the
day-to-day issues of the field staff.

SALES AND MARKETING

The Company begins 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 the  Company's  sales  process.  The program
stresses sales  techniques,  account  development and retention as well as basic
sales concepts and skills.  Through interactive  lectures,  role plays and sales
scenarios, participants are immersed in the sales program.

To provide  ongoing  sales  support,  the Company  furnishes  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 its territory.  Licensees and corporate branch managers are taught to do this
through a variety of methods in order to  diversify  their sales  conduits.  The
primary  method of seeking new business is to call on health care  facilities in
the local area. Cold calls and referrals are often used to generate leads.  Once
granted an  interview,  the ATC  representative  is  instructed to emphasize the
highlights of the Company's services.

RECENT ACQUISITIONS

On February 28, 2003, the Company  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.  In April
2003 the Company sold its interest in one of these  temporary  medical  staffing
companies to its 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.


                                       4
<PAGE>

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,  its  licensee  program  gives each
licensee an incentive to compete actively in his or her local marketplace.

SERVICE MARKS

The  Company  believes  that its  service  trademark  and the  ATC(R)  logo have
significant  value  and  are  important  to the  marketing  of its  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 the Company continues
to use them in the ordinary course of business.

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 such 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.


                                       5
<PAGE>

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.

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  significantly 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.  At this time we do
not have  enough  nurses to meet our  clients'  demands  for our nurse  staffing
services.  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.

The Costs of Attracting  and  Retaining  Qualified  Nurses and Other  Healthcare
Personnel May Rise.

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 may increase hourly
wages or other benefits.  If we do not raise wages in response to such increases
by  our  competitors,  we  could  face  difficulties  attracting  and  retaining
qualified healthcare  personnel.  In addition,  if we raise wages in response to
our competitors' wage increases and are unable to pass such cost increases on to
our clients, our margins could decline.

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 could
lead our hospital and healthcare facility clients to bypass our services,  which
would also cause our revenues and margins to decline.


                                       6
<PAGE>

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 them.  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 adopt 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.


                                       7
<PAGE>

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  to them  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  Regulations that Apply to us Change,  We May Face Increased Costs That
Reduce our Revenue and Profitability.

The temporary  healthcare staffing industry is regulated in many states. In some
states,  firms such as our company 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 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.   In  addition,  if  government
regulations were implemented that limited,  directly or indirectly,  the amounts
we could charge for our services, our profitability could be adversely affected.

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.  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.


                                       8
<PAGE>

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.  We have  historically  faced
competition for  acquisitions.  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.

These acquisitions involve numerous risks, including:

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

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

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

     -    diversion of management attention from existing operations; and

     -    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.

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
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.


                                       9
<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.  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 or
Certain Contingent Liabilities, Our Financial Results May Be Adversely Affected.

We provide  workers  compensation  coverage  through a program that is partially
self-insured. 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.

Our Ability to Borrow Under Our Credit Facility May be Limited.

The Company has a $35 million asset-based revolving credit line and a $3 million
term note.  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.


                                       10
<PAGE>

Business Conditions.

Our business is dependent on the Company  continuing  to establish  and maintain
close working  relationships with physicians and physician groups,  managed care
organizations,  hospitals,  clinics,  nursing homes, social service agencies and
other health care  providers.  There can be no  assurance  that the Company will
continue  to  establish  or maintain  such  relationships.  The Company  expects
additional  competition  will  develop in future  periods  given the  increasing
market demand for the type of services offered.

Attraction and Retention of Licensees and Employees.

Maintaining  quality licensees,  managers and branch  administrators will play a
significant   part  in  the  future  success  of  the  Company.   The  Company's
professional  nurses  and  other  health  care  personnel  are  also  key to the
continued provision of quality care to patients of the Company's customers.  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
the Company's 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.

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.


                                       11
<PAGE>

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.

                                                   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.


                                       12
<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
                             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.


                                       13
<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            $   (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.


                                       14
<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,  the  Company's  revenue
declined 12% to $130.4  million as compared to revenue for Fiscal 2003 of $148.7
million.  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.  The  Company  also  closed 18 offices  due to poor
performance  during Fiscal 2004.  These  offices  accounted for $14.7 million in
revenue during Fiscal 2003.

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 and the increased cost of
insurance.  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 the  Company 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
                                                        =======


                                       15
<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.

SERVICE  COSTS:  Service costs were 77.8% and 76.4% of total  revenues in Fiscal
2003 and 2002  respectively.  The  Company  recorded an  additional  $.9 million
charge in the fourth  quarter  of fiscal  2003 to  increase  its  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.


                                       16
<PAGE>

GENERAL AND ADMINISTRATIVE  EXPENSES:  General and administrative  expenses were
$29.5  million in Fiscal 2003 as compared to $29.9  million in Fiscal 2002.  The
Company  experienced  a reduction in royalty  expense due to the purchase of its
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  Company's  start up of its own travel nurse  division and the opening of
new company owned locations.  Additionally,  the Company  increased its 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.

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


                                       17
<PAGE>

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,  the Company  entered  obtained a new  financing  facility  ("New
Facility") with a new lending  institution  for a $25 million,  three year term,
revolving loan. The New Facility limit was increased to $27.5 million in October
2001.  Amounts  borrowed under the New Facility were used to repay $20.6 million
of borrowing on its existing facility.

In November  2002,  the lending  institution  with which the Company has the New
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 LIBOR on the  revolving  credit line and 6.37% over LIBOR on the term
loan facility. The New 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.

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.

On  June  13,  2003,  the  Company   received  a  waiver  from  the  lender  for
non-compliance  of certain  New  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 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 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 the  Company  achieves
certain  financial  ratios.  In conjunction with this revision,  one of the note
holders  agreed to reduce  his note by  approximately  $2,800,000  provided  the
Company does not default under the notes or, in certain instances, the Company's
senior lending facility.

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


                                       18
<PAGE>

On May 24, 2004 an amendment  to the New  Facility  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.

The Company  anticipates that capital  expenditures for furniture and equipment,
including  improvements  to its  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.  The Company's 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.  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
Facility.  No assurance can be given,  however,  that this will be the case. The
Company may require  additional  equity and debt  financing  to meet our working
capital needs,  or to fund our acquisition  activities,  if any. There can be no
assurance that  additional  financing  will be available  when required,  or, if
available, will be available on satisfactory terms.

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 economy rebounds, the prospects for the medical
staffing industry should improve as hospitals  experience higher admission rates
and increasing shortages of healthcare workers.


                                       19
<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,  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
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  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.  Revenues
are recorded net of  contractual  or other  allowances  to which  customers  are
entitled.  Employees  assigned  to  particular  customers  may be changed at the


                                       20
<PAGE>

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 billing errors, documentation disputes or the
customer's inability to pay.

Allowance for Doubtful Accounts

The Company regularly  monitors and assesses 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.  The Company 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) the  Company's
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. As a result of the testing in the
third  quarter of Fiscal 2004,  the Company  wrote off $0.9 million of goodwill.
The Company also  performed  its annual  testing for goodwill  impairment in the
fourth quarter of Fiscal 2004 and determined that no additional  write-offs were
required to be taken.

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


                                       21
<PAGE>

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

The Company  records  its  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.  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  the  Company  to record  additional  expenses  related  to workers
compensation.  On the other hand,  significantly  improved claim  experience may
result in lower annual expense levels.

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


                                       22
<PAGE>

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,  ("FAS 150").
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 ("FINAL"), "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   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 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.


                                       23
<PAGE>

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.



                                       24
<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.

<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  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
   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),  which 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.

   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, 2004       FEBRUARY 28, 2003       FEBRUARY 28, 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 PER SHARE DATA)

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
                                                                         Class A                     Class B
                                                                      Common Stock                Common Stock
                                                                   Shares       Amount        Shares        Amount
------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>             <C>         <C>             <C>
Balances, February 28, 2001                                      23,357,782      $ 233       274,015         $  3

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

Net income                                                              --          --            --           --
                                                           -------------------------------------------------------
Balances, February 28, 2002                                      23,368,943        233       262,854            3

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

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

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

Net loss                                                                 --         --            --           --
                                                           -------------------------------------------------------
Balances, February 28, 2003                                      23,582,552        235       256,191            3

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

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

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

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

Accrued dividends on Preferred Stock                                     --         --            --           --

Net loss                                                                 --         --            --           --

                                                           -------------------------------------------------------
Balances, February 29, 2004                                      24,665,537      $ 247       245,417         $  3
                                                           =======================================================

<CAPTION>
---------------------------------------------------------------------------------------------------------
                                                               Additional
                                                                 Paid-In     Accumulated
                                                                 Capital       Deficit            Total
---------------------------------------------------------------------------------------------------------
<S>                                                              <C>           <C>               <C>
Balances, February 28, 2001                                      $13,522       $ (4,131)         $ 9,627

Exchange of Class B for Class A Common Stock                          --             --               --

Net income                                                            --          3,593            3,593
                                                           ----------------------------------------------
Balances, February 28, 2002                                       13,522           (538)          13,220

Exchange of Class B for Class A Common Stock                          --             --               --

Exercise of employee stock options                                    51             --               52

Issuance of shares through Employee Stock Purchase Plan              106             --              107

Net loss                                                              --         (2,833)          (2,833)
                                                           ----------------------------------------------
Balances, February 28, 2003                                       13,679         (3,371)          10,546

Exchange of Class B for Class A Common Stock                          --             --               --

Exercise of employee stock options                                    16             --               17

Issuance of shares through Employee Stock Purchase Plan               35                              36

Common Stock issued for cash                                         691                             701

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

Net loss                                                              --         (6,180)          (6,180)

                                                           ------------------------------------------------
Balances, February 29, 2004                                     $ 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
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>              <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
       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              (379)             479          (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>
<S>                                                                             <C>               <C>              <C>
Cash paid for:
   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  healthcare  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.  Revenues are recorded net of contractual or other allowances to which
customers  are  entitled.  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  billing  errors,
documentation disputes or the customer's inability to pay.

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 Statement of
Financial Accounting Standards 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 costs of
both  reported  claims and claims  incurred  but not  reported,  up to specified
deductible  limits,  are estimated based on historical data,  current enrollment
statistics and other information.  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,  common stock equivalents 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, 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%.


                                      F-12
<PAGE>

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  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,  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.


                                      F-13
<PAGE>

RECENT ACCOUNTING PRONOUNCEMENTS (Continued)

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 VIE's in
the period  ending  March 15,  2004.  The adoption of FIN 46 and FIN 46R 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  that  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 statement of
operations 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 Arrangment") 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>

(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  non-cancellable  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, and 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 the 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
ISOs or NQSOs.  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.

                                      F-25
<PAGE>

13.     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. 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.


                                       51
<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.



                                       52
<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.


                                       53
<PAGE>

D. EXHIBIT INDEX

EXHIBIT NO.                          DESCRIPTION

3.1   Restated Certificate of Incorporation of the Company,  filed July 11, 1998
      (A)

3.2   Certificate of Amendment to the Restated  Certificate of  Incorporation of
      the Company, filed August 22, 1991. (B)

3.3   Certificate of Amendment to the Restated  Certificate of  Incorporation of
      the Company, filed September 3, 1992. (A)

3.4   Certificate  of  Retirement  of Stock of the Company,  filed  February 28,
      1994.

3.5   Certificate of Retirement of Stock of the Company, filed June 3, 1994. (A)

3.6   Certificate  of  Designation,  Rights  and  Preferences  of  the  Class  A
      Preferred Stock of the Company, filed June 6, 1994. (A)

3.7   Certificate of Amendment of Restated  Certificate of  Incorporation of the
      Company, filed August 23, 1994. (A)

3.8   Certificate of Amendment of Restated  Certificate of  Incorporation of the
      Company, filed October 26, 1995. (C)

3.9   Certificate of Amendment of Restated  Certificate of  Incorporation of the
      Company, filed December 19, 1995. (D)

3.10  Certificate of Amendment of Restated  Certificate of  Incorporation of the
      Company, filed December 19, 1995 (D)

3.11  Amended and Restated By-Laws of the Company. (A)

3.12  Certificate  of  Amendment  of  Certificate  of   Incorporation  of  Staff
      Builders, Inc., filed August 2, 2001 (X)

4.1   Specimen Class A Common Stock Certificate. (E)

4.2   Specimen Class B Common Stock Certificate. (F)

10.8  1986 Non-Qualified Stock Option Plan of the Company. (H)

10.9  First Amendment to the 1986 Non-Qualified Stock Option Plan,  effective as
      of May 11, 1990. (A)

10.10 Amendment to the 1986 Non-Qualified Stock Option Plan, dated as of October
      27, 1995. (I)

10.11 Resolutions  of  the  Company's  Board  of  Directors  amending  the  1983
      Incentive Stock Option Plan and the 1986 Non-Qualified  Stock Option Plan,
      dated as of June 3, 1991. (A)



                                       54
<PAGE>

EXHIBIT NO.                     DESCRIPTION

10.12 1993 Stock Option Plan of the Company. (A)

10.13 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 Commission on August 27, 1998).

10.14 Amended and Restated 1993 Employee Stock Purchase Plan of the Company (J)

10.15 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 Commission on August 27, 1998).

10.18 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 Commission on July 27, 1994).

10.19 Stock Option  Agreement,  dated as of March 28, 1990,  under the Company's
      1986  Non-Qualified  Stock  Option  Plan  between  the Company and Stephen
      Savitsky. (A)

10.20 Stock Option  Agreement,  dated as of June 17, 1991,  under the  Company's
      1986  Non-Qualified  Stock  Option  Plan  between  the Company and Stephen
      Savitsky. (A)

10.21 Stock Option  Agreement,  dated December 1, 1998, under the Company's 1993
      Stock Option Plan between the Company and Stephen Savitsky. (K)

10.22 Stock Option  Agreement,  dated December 1, 1998, under the Company's 1994
      Performance-Based  Stock  Option  Plan  between  the  Company  and Stephen
      Savitsky. (A)

10.23 Stock Option  Agreement,  dated as of March 28, 1990,  under the Company's
      1986  Non-Qualified  Stock  Option  Plan  between  the  Company  and David
      Savitsky. (A)

10.24 Stock Option  Agreement,  dated as of June 17, 1991,  under the  Company's
      1986  Non-Qualified  Stock  Option  Plan  between  the  Company  and David
      Savitsky. (A)

10.25 Stock Option  Agreement,  dated December 1, 1998, under the Company's 1993
      Stock Option Plan between the Company and David Savitsky. (K)

10.26 Stock Option  Agreement,  dated December 1, 1998, under the Company's 1994
      Performance-Based   Stock  Option  Plan  between  the  Company  and  David
      Savitsky. (K)

10.27 Stock Option  Agreement,  dated December 1, 1998, under the Company's 1993
      Stock Option Plan, between the Company and Edward Teixeira. (K)

See Notes to Exhibits


                                       55
<PAGE>

EXHIBIT NO.                      DESCRIPTION

10.29 Stock Option  Agreement,  dated December 1, 1998, under the Company's 1994
      Performance-Based  Stock  Option  Plan,  between  the  Company  and Edward
      Teixeira. (K)

10.30 Stock Option  Agreement,  dated December 1, 1998, under the Company's 1998
      Stock Option Plan, between the Company and Edward Teixeira. (K)

10.39 Employment  Agreement,  dated as of June 1, 1987,  between the Company and
      Stephen Savitsky. (A)

10.40 Amendment,  dated as of October  31,  1991,  to the  Employment  Agreement
      between the Company and Stephen Savitsky. (A)

10.41 Amendment,  dated as of  December  7, 1992,  to the  Employment  Agreement
      between the Company and Stephen Savitsky. (A)

10.42 Employment  Agreement,  dated as of June 1, 1987,  between the Company and
      David Savitsky. (A)

10.43 Amendment,  dated as of October  31,  1991,  to the  Employment  Agreement
      between the Company and David Savitsky. (A)

10.44 Amendment,  dated as of  January  3,  1992,  to the  Employment  Agreement
      between the Company and David Savitsky. (A)

10.45 Amendment,  dated as of  December  7, 1992,  to the  Employment  Agreement
      between the Company and David Savitsky. (A)


10.54 Amended and Restated Loan and Security  Agreement,  dated as of January 8,
      1997, between the Company, its subsidiaries and Mellon Bank, N.A. (M)





                                       56
<PAGE>


EXHIBIT NO.                   DESCRIPTION

10.55 First Amendment to Amended and Restated Loan and Security  Agreement dated
      as of April 27, 1998,  between the Company,  its  subsidiaries  and Mellon
      Bank, N.A. (G)

10.56 Master Lease Agreement  dated as of December 4, 1996,  between the Company
      and Chase Equipment Leasing, Inc. (M)

10.57 Premium Finance  Agreement,  Disclosure  Statement and Security  Agreement
      dated as of December 26, 1996,  between the Company and A.I.  Credit Corp.
      (M)

10.58 Agreement  of  Lease,  dated as of  October  1,  1993,  between  Triad III
      Associates and the Company. (A)

10.59 First Lease  Amendment,  dated October 25, 1998,  between  Matterhorn USA,
      Inc. and the Company.

10.60 Supplemental  Agreement  dated as of January  21,  1994,  between  General
      Electric Capital Corporation, Triad III Associates and the Company (A)

10.61 Agreement  of  Lease,  dated  as of  June  19,  1995,  between  Triad  III
      Associates and the Company. (D)

10.62 Agreement  of Lease,  dated as of February  12,  1996,  between  Triad III
      Associates and the Company. (D)

10.63 License  Agreement,  dated as of April 23, 1996,  between  Matterhorn One,
      Ltd. and the Company (M)

10.64 License  Agreement,  dated as of January 3, 1997,  between Matterhorn USA,
      Inc. and the Company (M)

10.65 License  Agreement,  dated as of January 16, 1997, between Matterhorn USA,
      Inc. and the Company . (M)

10.66 License Agreement,  dated as of December 16, 1998, between Matterhorn USA,
      Inc. and the Company. (S)

10.71 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. (N)

10.73 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. (L)


See Notes to Exhibits


                                       57
<PAGE>

EXHIBIT NO.          DESCRIPTION

10.74 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 (L)

10.75 Shareholders  Agreement  between Raymond T. Sheerin and Michael Altman and
      Stephen Fleischner and the Company and Chelsea Computer Consultants, Inc.,
      dated September 24, 1996. (L)

10.76 Amendment  No.  1  to  Shareholders   Agreement  among  Chelsea   Computer
      Consultants,  Inc.,  Raymond T. Sheerin,  Michael  Altman and the Company,
      dated October 30, 1997 (L)

10.77 Indemnification  Agreement,  dated as of  September  1, 1987,  between the
      Company and Stephen Savitsky. (A)

10.78 Indemnification  Agreement,  dated as of  September  1, 1987,  between the
      Company and David Savitsky. (A)

10.79 Indemnification  Agreement,  dated as of  September  1, 1987,  between the
      Company and Bernard J. Firestone. (A)

10.80 Indemnification  Agreement,  dated as of  September  1, 1987,  between the
      Company and Jonathan Halpert. (A)

10.81 Indemnification  Agreement,  dated as of May 2, 1995,  between the Company
      and Donald Meyers. (M)

10.82 Indemnification  Agreement,  dated as of May 2, 1995,  between the Company
      and Edward Teixeira. (A)

10.84 Form of Medical Staffing Services Franchise Agreement (D)

10.89 Confession of Judgment, dated January 27, 2000, granted by a subsidiary of
      the Company, to Roger Jack Pleasant.First  Lease Amendment,  dated October
      28, 1998, between Matterhorn USA, Inc. and the Company. (B)

10.91 Forbearance and Acknowledgement  Agreement, dated as of February 22, 2000,
      between TLCS's subsidiaries, the Company and Chase Equipment Leasing, Inc.
      Agreement and Release, dated February 28, 1997, between Larry Campbell and
      the Company. (C)

10.92 Distribution agreement,  dated as of October 20, 1999, between the Company
      and TLCS.(O)

10.93 Tax Allocation agreement dated as of October 20, 1999, between the Company
      and TLCS. (O)

See Notes to Exhibits



                                       58
<PAGE>

EXHIBIT NO.         DESCRIPTION

10.94    Transitional Services agreement,  dated as of October 20, 1999, between
         the Company and TLCS. (O)

10.95    Trademark License agreement,  dated as of October 20, 1999, between the
         Company and TLCS. (O)

10.96    Sublease,  dated as of October 20, 1999,  between the Company and TLCS.
         (O)

10.97    Employee Benefits agreement,  dated as of October 20, 1999, between the
         Company and TLCS. (O)

10.98    Amendment,  dated as of October 20, 1999, to the  Employment  agreement
         between the Company and Stephen Savitsky. (P)

10.99    Amendment,  dated as of October 20, 1999, to the  Employment  agreement
         between the Company and David Savitsky. (P)

10.105   Second Amendment to ATC Revolving  Credit Loan and Security  Agreement,
         dated October 20, 1999 between the Company and Mellon Bank, N.A. (P)

10.106   Master Lease dated November 18, 1999 between the Company  andTechnology
         Integration Financial Services. (Q)

10.107   Loan and Security  Agreement  between the Company and  Copelco/American
         Healthfund Inc. dated March 29, 2000. (Q)

10.108   Loan and Security  Agreement  First  Amendment  between the Company and
         Healthcare    Business   Credit   Corporation    (formerly   known   as
         Copelco/American Health fund Inc.) dated July 31, 2000. (R)

10.109   Employment  agreement dated August 1, 2000 between the Company and Alan
         Levy (R)

10.110   Equipment  lease  agreements  with  Technology   Integration  Financial
         Services, Inc. (R)

10.111   Loan and Security Agreement dated April 6, 2001 between the Company and
         HFG Healthco-4 LLC (W)

10.112   Receivables Purchase and Transfer Agreement dated April 6, 2001 between
         the Company and HFG Healthco-4 LLC (W)

10.113   Asset purchase agreement dated October 5, 2001, between the Company and
         Doctors' Corner and Healthcare Staffing, Inc. (U)

10.114   Asset purchase  agreement  dated January 31, 2002,  between the Company
         and Direct Staffing, Inc. and DSS Staffing Corp. (V)

10.115   Amendment to Employment  agreement  dated November 28, 2001 between the
         Company and Stephen Satisfy (Y)

10.116   Amendment to Employment  agreement  dated November 28, 2001 between the
         Company and David Savitsky (Y)

10.117   Amendment to Employment  agreement  dated December 18, 2001 between the
         Company and Edward Teixeira (Y)

10.118   Amendment  to  Employment  agreement  dated May 24,  2002  between  the
         Company and Alan Levy (Y)

10.119   Loan and Security  Agreement dated November 7, 2002 between the Company
         and HFG Healthco-4 LLC (Z)




                                       59
<PAGE>

EXHIBIT NO.                DESCRIPTION

21.      Subsidiaries of the Company. *

23.1     Consent of Goldstein Golub Kessler LLP*

23.2     Consent of PricewaterhouseCoopers LLP*

24.      Powers of Attorney. *

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

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





---------------------------
See Notes to Exhibits


                                       60
<PAGE>

                                NOTES TO EXHIBITS

(A)   Incorporated  by reference to the  Company's  exhibit  booklet to its Form
      10-K for the Fiscal year ended February 28, 1995 (File No. 0-11380), filed
      with the Commission on May 5, 1995.

(B)   Incorporated by reference to the Company's  Registration Statement on Form
      S-1 (File No. 33-43728), dated January 29, 1992.

(C)   Incorporated  by reference to the Company's  Form 8-K (file No.  0-11380),
      filed with the Commission on October 31, 1995.

(D)   Incorporated by reference to the Company's exhibit booklet to it Form 10-K
      for the Fiscal year ended February 28, 1996 (file No. 0-11380), filed with
      the Commission on May 13, 1996.

(E)   Incorporated  by reference to the Company's  Form 8-A (file No.  0-11380),
      filed with the Commission on October 24, 1995.

(F)   Incorporated  by reference to the Company's  Form 8-A (file No.  0-11380),
      filed with the Commission on October 24, 1995.

(G)   Incorporated  by reference to the  Company's  exhibit  booklet to its Form
      10-K for the Fiscal year ended February 28, 1998 (File No. 0-11380), filed
      with the Commission on May 28, 1998.

(H)   Incorporated by reference to the Company's  Registration Statement on Form
      S-4, as amended (File No. 33-9261), dated April 9, 1987.

(I)   Incorporated by reference to the Company's  Registration Statement on Form
      S-8 (File No. 33-63939), filed with the Commission on November 2, 1995.

(J)   Incorporated by reference to the Company's  Registration Statement on Form
      S-1 (File No. 3371974), filed with the Commission on November 19, 1993.

(K)   Incorporated  by reference to the  Company's  Form 10-Q for the  quarterly
      period  ended  November  30,  1997  (File  No.  0-11380),  filed  with the
      Commission on January 19, 1999.

(L)   Incorporated  by reference to the  Company's  Form 10-Q for the  quarterly
      period  ended  November  30,  1997  (File  No.  0-11380),  field  with the
      Commission on January 14, 1998.

(M)   Incorporated  by reference to the  Company's  exhibit  booklet to its Form
      10-K for the Fiscal year ended February 28, 1997 (File No. 0-11380), filed
      with the Commission on May 27, 1997.



                                       61
<PAGE>


                                NOTES TO EXHIBIT

(N)   Incorporated  by reference to the  Company's  Form 10-Q for the  quarterly
      period  ended  November  30,  1996  (File  No.  0-11380),  filed  with the
      Commission on January 14, 1997.

(O)   Incorporated  by  reference  to Tender  Loving Care  Health Care  Services
      Inc.'s Form 10-Q for the quarterly  period ended August 31, 1999 (File No.
      0-25777) filed with the Commission on October 20, 1999.

(P)   Incorporated  by reference to the  Company's  Form 10-Q for the  quarterly
      period ended August 31, 1999 (File No.  0-11380) filed with the Commission
      on October 20, 1999.

(Q)   Incorporated  by reference to the  Company's  Form 10-K for the year ended
      February 29, 2000 (File No. 0-11380) filed with the Commission on July 17,
      2000.

(R)   Incorporated  by reference to the  Company's  Form 10-Q for the  quarterly
      period ended August 31, 2000 (File No.  0-11380) filed with the Commission
      on October 16, 2000.

(S)   Incorporated  by reference to the  Company's  Form 10-K for the year ended
      February 28, 1999 (File No. 0-11380) filed with the Commission on June 11,
      1999.

(T)   Incorporated  by reference to the  Company's  exhibit  booklet to its Form
      10-K for the Fiscal year ended February 28, 1994 (File No. 0-11380), filed
      with the Commission on May 13, 1994.

(U)   Incorporated  by reference to the  Company's  Form 10-Q for the  quarterly
      period ended August 31, 2001 (File No.  0-11380) filed with the Commission
      on October 15, 2001.

(V)   Incorporated  by reference to the  Company's  Form 8-K (File No.  0-11380)
      filed with the Commission on February 19, 2002.

(W)   Incorporated  by reference to the Company's Form 10-K/A (File No. 0-11380)
      filed with the Commission on June 28, 2001.

(X)   Incorporated by reference to the Company's Form Def 14A (File No. 0-11380)
      filed with the Commission on June 27, 2001.

(Y)   Incorporated  by reference to the  Company's  Form 10-K for the year ended
      February 28, 2002 (File No. 0-11380) filed with the Commission on June 10,
      2002.

(Z)   Incorporated by reference to the Company's Form 10-Q for the quarter ended
      November 30, 2002 (File No.  0-11380) filed with the Commission on January
      21, 2003

*     Incorporated herein



                                       62
<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:  ________, 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                    _________, 2004
------------------
David Savitsky                               (Principal Executive
                                             Officer) and Director

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

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


*_________________                           Director                                   ________, 2004
Bernard J. Firestone, Ph. D.

*_________________                           Director                                   ________, 2004
Jonathan Halpert, Ph. D.

*_________________                           Director                                   ________, 2004
Martin Schiller

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


                                       63