**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-K/A**


(Amendment
      No. 1)


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





For
                the fiscal year ended**February
                28, 2007**





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: 001-31271





**ATC
      HEALTHCARE, INC****.**


(Exact
      name of Registrant as specified in its charter)





**DELAWARE**
            
            **11-2650500**(State
                or other jurisdiction of incorporation or organization)
            
            (I.R.S.
                Employer Identification No.)**1983
                Marcus Avenue, Lake Success, New York**
            
            **11042**(Address
                of Principal executive offices)
            
            (Zip
                Code)Registrant’s
                telephone number, including area code:
            
            **(516)
                750-1600**










Title
                of Each Class
            
            Name
                of Exchange
              on
                Which RegisteredSecurities
                registered pursuant to Section 12 (b) of the Act: Class A Common
                Stock,
                $.01 par value
            
            American
                Stock Exchange




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





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.


Yes  ̈   No þ


Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.


Yes  ̈   No þ





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 þ  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. þ





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filed” in Rule 12b-2 of the Exchange Act. (Check
      one):


Large
      accelerated filer  ̈    Accelerated
      filer  ̈   Non-accelerated
      filer þ





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act.)


Yes  ̈   No þ





As
      of May
      22, 2007, the approximate aggregate market value of voting stock held by
      non-affiliates of the registrant was $13,998,941 based on a closing sale price
      of $0.30 per share. The number of shares of Class A and B Common Stock
      outstanding on May 22, 2007 was 46,663,138.





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 2007, which information
        is
        incorporated herein by reference. All references to "we”, "us," "our," or "ATC"
        in this Report on Form 10-K mean 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**
 
 We
        provide
        supplemental staffing to health care facilities through our network of 52
        offices in 31 states, of which 45 are operated by 30 licensees and 7 are
        owned
        and operated by us. We offer our clients qualified health care associates
        in
        over 50 job categories ranging from the highest level of specialty nurse,
        including critical care, neonatal and labor and delivery, to medical
        administrative staff, including third party billers, administrative assistants,
        claims processors, collection personnel and medical records clerks. The nurses
        provided to clients include registered nurses, licensed practical nurses
        and
        certified nursing assistants. Other services include allied health staffing
        which includes mental health technicians, a variety of therapists (including
        speech, occupational and physical), radiology technicians and phlebotomists.
 
 Clients
        rely on us to provide a flexible labor force to meet fluctuations in census
        and
        business and to help them acquire health care associates with specifically
        needed skills. Our medical staffing professionals also fill in for absent
        employees and enhance a client's core staff with temporary workers during
        peak
        seasons.
 
 Clients
        benefit from their relationship with us because of our expertise in providing
        properly skilled medical staffing employees to a facility in an increasingly
        tight labor market. We have developed a skills checklist for clients to provide
        information concerning a prospective employee's skill level. Clients also
        benefit from no longer having to concern themselves with the payment of employee
        wages, benefits, payroll taxes, workers compensation and unemployment insurance
        for staff since these are paid through our Company.
 
 We
        also
        operate a Travel Nurse Program whereby qualified nurses, physical therapists
        and
        occupational therapists are recruited on behalf of the clients who require
        such
        services on a long-term basis. These individuals are recruited from the United
        States and foreign countries, including India and the Philippines to perform
        services on a long-term basis in the United States. We have contracted with
        a
        number of management entities for the recruitment of foreign nurses. The
        management entities arrange for the nurses' and therapists' immigration and
        licensing certifications so that they can be employed in the United States.
 
 We
        have
        expanded our client base to include nursing homes, physician practice management
        groups, managed care facilities, insurance companies, surgery centers, community
        health centers and schools. By diversifying our client list, we believe it
        lessens the risk that regulatory or industry sector shifts in staffing usage
        will materially affect our staffing revenues.
 2


**Licensee
      Program**





Our
      licensing program is one of the principal factors differentiating us from most
      of our competition. After agreeing to pay an initial license fee in exchange
      for
      a grant of an exclusive territory, the licensee is paid a royalty of
      approximately 55% (60% for certain licensees who have longer relationships
      with
      us) of gross margin (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. We must approve all
      locations prior to the licensee signing a lease for a location. Various
      management reports are provided to the licensees to assist them with ongoing
      analysis of their medical staffing operations. We pay and distribute the payroll
      for the direct service personnel who are all employees of our Company,
      administer all payroll withholdings and payments, invoice the customers and
      process and collect the accounts receivable. The licensees are responsible
      for
      providing an office and paying administrative expenses, including rent,
      utilities, telephone and costs of administrative personnel.





For
      Fiscal
      2007, 2006 and 2005, total licensee distributions, net of discontinued
      operations, were approximately $7.1 million, $7.0 million, and $6.0 million,
      respectively.





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





Sales
      of
      licenses are subject to compliance with federal and state franchise laws. If
      we
      fail to comply with the franchise laws, rules and regulations of the particular
      state relating to offers and sales of franchises, we will be unable to engage
      in
      offering or selling licenses in or from such state. To offer and sell licenses,
      the Federal Trade Commission requires us to furnish to prospective licensees
      a
      current franchise offering disclosure document. We have used a Uniform Franchise
      Offering Circular ("UFOC") to satisfy this disclosure obligation. We must update
      our UFOC annually or upon the occurrence of certain material events. If a
      material event occurs, we must stop offering and selling franchises until the
      UFOC is updated. In addition, certain states require us to register or file
      our
      UFOC with such states and to provide prescribed disclosures. We are required
      to
      obtain an effective registration of our franchise disclosure document in New
      York State and certain other states. We are currently able to offer new
      franchises in 39 states.





**Personnel,
      Recruiting and Training**





We
      employ
      approximately 7,000 individuals who render staffing services and approximately
      74 full time administrative and management personnel. Approximately 43 of these
      administrative employees are located at branch offices and 31 are located at
      the
      headquarters in Lake Success, New York.





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





It
      is
      essential for us to constantly recruit and retain a qualified staff of
      associates who are available to be placed on assignment as needed. Besides
      advertising in the local classifieds, utilizing local office web sites and
      participating in local and regional job fairs, we offer a variety of benefit
      programs to assist in recruiting high quality medical staffing professionals.
      This package provides employees’ access to medical, dental, life and disability
      insurance, a 401(k) plan, opportunities for Continuing Education


Credits,
      partnerships with various vendors for discount programs (e.g., uniforms,
      vacations and cruises, credit cards, appliances and cars), recognition programs
      and referral bonus programs. In addition, we provide our licensees a
      full-service human resources department to support the offices with policies
      and
      procedures as well as assist with the day-to-day issues of the field
      staff.


3


**Sales
      and Marketing**





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





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





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





**Recent
      Acquisitions And Dispositions**




**Discontinued
      Operations**





In
      December 2004, after reviewing the significant debt obligations of the Company
      and the alternatives thereto, the Board of Directors of the Company concluded
      and authorized the Company to sell its AllCare Nursing business. On April 22,
      2005, the Company sold substantially all of the assets of its AllCare Nursing
      Services business, which consisted primarily of goodwill and accounts
      receivable, to Onward Healthcare, Inc. (“Onward”) of Norwalk, Connecticut, for
      approximately $20.0 million in cash, of which $1.2 million was placed in escrow
      pending the collection of the accounts receivable. AllCare Nursing was located
      in Melville, New York, with offices in Union, New Jersey, and in Stratford,
      Connecticut, and provided supplemental staffing and travel nurses to healthcare
      facilities in the greater New York City metropolitan area, northern New Jersey,
      and Connecticut.





The
      Company originally purchased AllCare Nursing, then known as Direct Staffing
      Inc.
      and DSS Staffing Corp. (together “Direct Staffing”), in January 2002 for $30.2
      million in five percent interest-bearing promissory notes. The Company used
      the
      funds that it received from Onward to retire approximately $13.0 million in
      bank
      debt and to repay and restructure the $28.1 million in promissory notes
      outstanding to the sellers of Direct Staffing. In connection with obtaining
      its
      lender’s consent to the sale and paying down its bank debt, the Company’s
      revolving credit facility was permanently reduced from $35.0 million to $15.0
      million. As a result of the repayment and restructuring of the Direct Staffing
      promissory notes, those obligations were reduced from $28.1 million to $8.1
      million.





The
      Company recorded a goodwill impairment of $3.8 million as of February 28, 2005,
      which represents the difference in the sales price of AllCare Nursing at
      February 28, 2005 and the value of the net assets including goodwill that the
      Company had on its consolidated financial statements as of that
      date.


4


The
      Company’s consolidated financial statements reflect the financial results of the
      AllCare Nursing business for the Fiscal years 2006 (through April 22, 2005
      the
      date of disposition) and 2005 as discontinued operations.


**Competition**
 
 The
        medical staffing industry is extremely fragmented, with numerous local and
        regional providers nationwide providing nurses and other staffing solutions
        to
        hospitals and other health care providers. We compete with full-service staffing
        companies and with specialized temporary staffing agencies as well as small
        local and regional healthcare staffing organizations. There are three dominant
        healthcare staffing companies that we compete with, including Medical Staffing
        Network, American Mobile Nursing and Cross Country Nursing.
 
 We
        compete
        with these firms to attract our temporary healthcare professionals and to
        attract hospital and healthcare facility clients. We compete for temporary
        healthcare professionals on the basis of the compensation package and benefit
        package offered as well as the diversity and quality of assignments available.
        We compete for hospital and healthcare facility clients on the basis of the
        quality of our temporary healthcare professionals, price of our services
        and the
        timely availability of our professionals with the requisite skills.
 
 As
        HMOs
        and other managed care groups expand, so too must the medical staffing companies
        that service these customers. In addition, momentum for consolidation is
        increasing among smaller players, often venture capital-backed, who are trying
        to win regional and even national accounts. Because the temporary staffing
        industry is dominated generally by large national companies that do not
        specialize in medical staffing, management believes that its specialization
        will
        give it a competitive edge. In addition, our licensee program gives each
        licensee an incentive to compete actively in his or her local marketplace.
 
 **Service
        Marks**
 
 We
        believe
        that our service trademark and the ATC(R) logo have significant value and
        are
        important to the marketing of our supplemental staffing services. These marks
        are registered with the United States Patent and Trademark Office. The ATC(R)
        trademark will remain in effect through January 9, 2010 for use with nursing
        care services and healthcare services. These marks are each renewable for
        an
        additional ten-year period, provided we continue to use them in the ordinary
        course of business.
 
 **Regulatory
        Issues**
 
 In
        order
        to service our client facilities and to comply with OSHA and Joint Commission
        on
        Accreditation of Healthcare Organizations standards, we have developed a
        risk
        management program. The program is designed to protect against the risk of
        negligent hiring by requiring a detailed skills assessment from each healthcare
        professional. We conduct extensive reference checks and credential verifications
        for the nurses and other healthcare professionals that we might hire.
 
 **Professional
        Licensure and Corporate Practice**
 
 Nurses
        and
        other healthcare professionals employed by us are required to be individually
        licensed or certified under applicable state law. In addition, the healthcare
        professionals that we hire frequently are required to have been certified
        to
        provide certain medical care, such as CPR and anesthesiology, depending on
        the
        positions in which they are placed. Our comprehensive compliance program
        is
        designed to ensure that our employees possess all necessary licenses and
        certifications, and we believe that our employees, including nurses and
        therapists, have obtained the necessary licenses and certification required
        to
        comply with all applicable state laws.
 5


**Business
      Licenses**


A
        number
        of states require state licensure for businesses that, for a fee, employ
        and
        assign personnel, including healthcare personnel, to provide services on-site
        at
        hospitals and other healthcare facilities to support or supplement the
        hospitals' or healthcare facilities' work force. A number of states also
        require
        state licensure for businesses that operate placement services for individuals
        attempting to secure employment. Failure to obtain the necessary licenses
        could
        interrupt business operations in a specific locale. We believe we have all
        of
        the required state licenses to allow us to continue our business as currently
        conducted.
 
 **Regulations
        Affecting Our Clients**
 
 Many
        of
        our clients are reimbursed under the federal Medicare program and state Medicaid
        programs for the services they provide. In recent years, federal and state
        governments have made significant changes in these programs that have reduced
        reimbursement rates. Future federal and state legislation or evolving commercial
        reimbursement trends may further reduce, or change conditions for, our clients'
        reimbursement. Such limitations on reimbursement could reduce our clients'
        cash
        flows, hampering their ability to pay us.
 
 **Risk
        Factors**
 
 *CURRENTLY
        WE ARE UNABLE TO RECRUIT ENOUGH NURSES TO MEET OUR CLIENTS’ DEMANDS FOR OUR
        NURSE STAFFING SERVICES, LIMITING THE POTENTIAL GROWTH OF OUR STAFFING BUSINESS.*
 
 We
        rely
        substantially on our ability to attract, develop and retain nurses and other
        healthcare personnel who possess the skills, experience and, as required,
        licenses necessary to meet the specified requirements of our healthcare staffing
        clients. We compete for healthcare staffing personnel with other temporary
        healthcare staffing companies, as well as actual and potential clients, some
        of
        which seek to fill positions with either regular or temporary employees.
        Currently, there is a shortage of qualified nurses in most areas of the United
        States and competition for nursing personnel is increasing. Demand for temporary
        nurses over the last year has declined due to lower hospital emissions and
        nurses working full time for hospitals rather than working through temporary
        staffing agencies. Accordingly, when our clients request temporary nurse
        staffing we must recruit from a smaller pool of available nurses, which our
        competitors also recruit from. At this time we do not have enough nurses
        to meet
        our clients' demands for our nurse staffing services. This shortage has existed
        since approximately 2000. This shortage of nurses limits our ability to grow
        our
        staffing business. Furthermore, we believe that the aging of the existing
        nurse
        population and declining enrollments in nursing schools will further exacerbate
        the existing nurse shortage. To remedy the shortage we have increased
        advertising on our website and other industry visited websites to attract
        new
        nurses to work for us. We also offer a variety of benefits to our employees
        such
        as life insurance, medical and dental insurance, a 401 (k) plan, as well
        as
        sign-on bonuses for new employees and recruitment bonuses for current employees
        who refer new employees to us. In addition, we have recently started recruiting
        nurses from foreign countries, including India and the Philippines.
 
 *THE
        COSTS OF ATTRACTING AND RETAINING QUALIFIED NURSES AND OTHER HEALTHCARE
        PERSONNEL HAVE RISEN.*
 
 We
        compete
        with other healthcare staffing companies for qualified nurses and other
        healthcare personnel. Because there is currently a shortage of qualified
        healthcare personnel, competition for these employees is intense. To induce
        healthcare personnel to sign on with them, our competitors have increased
        hourly
        wages and other benefits. In response to such increases by our competitors,
        we
        raised the wages and increased benefits that we offer to our personnel. Because
        we were not able to pass the additional costs to certain clients, our margins
        declined and we were forced to close some of our offices that could no longer
        operate profitably.
 6


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





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





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





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




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





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





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





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





State
      governments have also attempted to control increasing healthcare costs. For
      example, the state of Massachusetts has 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 also has 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.


7


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.





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





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





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




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





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





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





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





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


8


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





Our
      business strategy includes increasing our market share and presence in the
      temporary healthcare staffing industry through strategic acquisitions of
      companies that complement or enhance our business. Between March 2001 and
      February 2003, we acquired nine unaffiliated companies. These companies had
      an
      aggregate of approximately $11.8 million in revenue at the time they were
      purchased. From February 2003 to February 2007, we only completed one
      acquisition with expected annual revenues of approximately $8-$10 million.





We
      have
      historically faced competition for acquisitions. While to date such competition
      has not affected our growth and expansion, in the future such competition could
      limit our ability to grow by acquisitions or could raise the prices of
      acquisitions and make them less attractive to us.





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





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





While
      to
      date, we have generally not experienced problems, 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. Further, our revolving
      loan agreement with HFG Healthco-4 LLC requires that we obtain the written
      consent of HFG Healthco-4 LLC before engaging in any investing activities not
      in
      the ordinary course of business, including but not limited to any mergers,
      consolidations and acquisitions. The restrictive covenants of the


revolving
      loan agreement with HFG Healthco-4 LLC may make it difficult for us to expand
      our operations through acquisitions and other investments if we are unable
      to
      obtain their consent.





Our
      January 2002 acquisition for $30.2 million of our AllCare Nursing business
      did
      not produce the results we anticipated, resulting in our decision to sell that
      business. In April 2005 we sold the AllCare Nursing business for approximately
      $20.0 million. In addition, the Company recorded a goodwill impairment of $3.8
      million as of February 28, 2005. For a discussion of the benefits we derived
      from the sale see “ Recent Acquisitions and Dispositions” above.





*SIGNIFICANT
      LEGAL ACTIONS COULD SUBJECT US TO SUBSTANTIAL UNINSURED LIABILITIES.*





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


9


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





The
      costs
      related to obtaining and maintaining workers compensation, professional and
      general liability insurance and health insurance for healthcare providers has
      been increasing as a percentage of revenue. Our cost of workers compensation,
      professional and general liability and health insurance for healthcare providers
      for the Fiscal Years ending February
      28, 2007, 2006 and 2005 was $3.2 million, $2.3 million and $1.9 million,
      respectively. The corresponding gross margin for the same time periods was
      21.3%, 23.5% and 19.4%, respectively.  If the
      cost of carrying this insurance continues to increase significantly, we will
      recognize an associated increase in costs that may negatively affect our
      margins. This could have an adverse impact on our financial condition.





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





Except
      for
      a few states that require workers compensation through their state fund, we
      provide workers compensation coverage through a program that is partially
      self-insured. Zurich Insurance Company provides specific excess reinsurance
      of
      $400,000 per occurrence as well as aggregate coverage for overall claims borne
      by the group of companies that participate in the program. The program also
      provides for risk sharing among members for infrequent, large claims over
      $100,000. If we become subject to substantial uninsured workers compensation
      liabilities, our financial results may be adversely affected.





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





As
      of
      February 28, 2007, we had $6.1 million of goodwill on our balance sheet. The
      goodwill represents the excess of the total purchase price of our acquisitions
      over the fair value of the net assets acquired. At February 28, 2007, goodwill
      represented 21% 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, beginning on March 1, 2002, goodwill
      is not to 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 would
      have
      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.


10


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





We
      have an
      asset-based revolving credit line with HFG Healthco-4 LLC that currently has
      a
      maximum borrowing amount of $15.0 million. As of February 28, 2007 and February
      28, 2006 we had approximately $13.9 million and $10.5 million, respectively,
      outstanding under the revolving credit line with HFG Healthco-4 LLC. On April
      22, 2005 we sold our AllCare Nursing business and applied approximately $13.0
      million of the proceeds to repayment of our credit line. In connection with
      the
      transaction, the credit line was extended until April 2008. At that time
      approximately $7.1 million was outstanding and we had additional borrowing
      capacity of $1.8 **** million.
      Our ability to borrow under the credit facility is based upon, and thereby
      limited by, the amount of our accounts receivable. Any material decline in
      our
      service revenues could reduce our borrowing base, which could cause us to lose
      our ability to borrow additional amounts under the credit facility. In such
      circumstances, the borrowing availability under the credit facility may not
      be
      sufficient for our capital needs.





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





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





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





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





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





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


11


**ITEM
      2.** **PROPERTIES**





The
      Company 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 and provides for a current annual rent of $0.42 million
      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 31 states, of which seven are operated by
      the
      Company and 45 licensee staffing offices are operated by 30 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.





***Transportation
      Insurance Company, Continental Casualty Company and CNA Claim Plus, Inc. v.
      ATC
      Healthcare Services, Inc. and ATC Healthcare, Inc.*** **(United
      States District Court for the Eastern District of New York No. CV
      04-4323).**  Plaintiff
      insurance companies (collectively “CNA”) filed this action in 2004 to recover
      insurance premiums, claims reimbursements, claims handling fees, taxes and
      interest alleged to be owed by the Company and by its wholly-owned subsidiary
      ATC Healthcare Services, Inc. (collectively the “Company”) to CNA under
      1999-2003 workers compensation insurance programs. CNA sought over $3 million
      in
      damages, “subject to change as additional claims are paid under the policies, as
      future computations are undertaken, and as additional claim reimbursement and
      claim service billings are prepared.” Following an analysis and accounting by
      the Company’s expert of whether CNA properly dispatched its claim-handling
      duties and whether its invoices were fair and reasonable, the Company
      counterclaimed that CNA mishandled claims, overstated invoices, and in fact
      owes
      the Company a substantial sum of money. In April 2007, the parties settled
      the
      lawsuit, including all claims and counterclaims, and in May 2007 dismissed
      the
      case in its entirety. As part of their settlement, the parties entered into
      a
      confidentiality agreement covering the settlement terms. As a result of this
      settlement, the Company recorded a loss on litigation settlement of $342 in
      its
      consolidated financial statements for the fiscal year ended February 28,
      2007.





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





Not
      applicable.


12


**PART
      II.**


**ITEM
                5.**
              
              **MARKET
                FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND 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 28, 2007,
      as
      reported by the American Stock Exchange.


Fiscal
                Year ended February 28, 2006
              High
              Low1stquarter ended May 31, 2005
              $0.46
              $0.282ndquarter ended August 31, 2005
              $0.43
              $0.223rdquarter ended November 30, 2005
              $0.50
              $0.294thquarter ended February 28, 2006
              $0.46
              $0.31Fiscal
                Year ended February 28, 2007
              High
              Low1stquarter ended May 31, 2006
              $0.45
              $0.372ndquarter ended August 31, 2006
              $0.50
              $0.333rdquarter ended November 30, 2006
              $0.43
              $0.334thquarter ended February 28, 2007
              $0.38
              $0.30


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 28, 2007, there were approximately 292 holders of record of Class
        A
        Common Stock (including brokerage firms holding stock in “street name” and other
        nominees) and 358 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.
 13




Plan
                  Category
              Number
                  of Securities to be issued Upon Exercise of Outstanding Options,
                  Warrants and Rights (column (a))
              Weighted-Average
                  ExercisePrice of Outstanding Options,Warrants and
                  Rights
              Number
                  of Securities Remaining Available forFuture Issuance under Equity
                  CompensationPlans (excluding securities reflected in column
                  (a))Equity
                  compensationplans approved bysecurity holders
              4,426,882
              $0.59
              139,500Equity
                  compensation
                plans
                  not approved by
                security
                  holders (1)
              2,470,000
              $0.36
              2,470,000Total
              6,896,882
              $0.51
              2,609,500




(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**
 
 None.
 
 **(F)**  **Common
        Stock Performance**
 
 The
        following graph compares, for each of the periods indicated, the percentage
        change in the Company’s cumulative total stockholder return on the Company's
        Class A Common Stock with the cumulative total return of a) an index consisting
        of the AMEX Composite Index of companies and b) a peer group index.
 
 ATC
        HEALTHCARE, INC. COMPARATIVE CUMULATIVE TOTAL RETURN
 
 ASSUMES
        $100 INVESTED ON MARCH 1, 2001
 ASSUMES
        DIVIDEND REINVESTED
 FISCAL
        YEAR ENDING FEBRUARY 28
 **2002**
                **2003**
                **2004**
                **2005**
                **2006**
                **2007****ATC
                    Healthcare, Inc.**
                
                **100.00**
                **30.95**
                **30.48**
                **16.67**
                **18.10**
                **16.67****AMEX
                    Composite**
                
                **100.00**
                **79.18**
                **128.75**
                **149.03**
                **167.22**
                **177.69****Peer
                    Group**
                
                **100.00**
                **79.35**
                **137.00**
                **143.07**
                **138.57**
                **158.86**
  14





***Assumes
      $100 invested on March 1, 2001, reinvestment of dividends, and fiscal year
      ending February 28.**


**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 28, 2007 and reflects the results of operations and net assets of
        the
        AllCare Nursing business as discontinued operations for the periods presented.
        The data has been derived from the Company’s audited financial statements and
        related notes and “Management’s Discussion and Analysis of Financial Condition
        and Results of Operations” which is contained in this report.
 15


**2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003****CONSOLIDATED
                OPERATIONS DATA:**
              (all
                amounts in thousands except per share data)Revenues:
            
            $
            89,401
            
            $
            71,528
            
            $
            67,937
            
            $
            81,210
            
            $
            98,877Loss
                from continuing operations
            
            
            (2,159
            )
            
            (1,755
            )
            
            (8,459
            )
            
            (7,872
            )
            
            (5,010
            )(Loss)
                income from discontinued operations
            
            
            -
            
            
            (577
            )
            
            (1,945
            )
            
            1,692
            
            
            2,177Net
                (loss)
            
            $
            (2,159
            )
            $
            (2,332
            )
            $
            (10,404
            )
            $
            (6,180
            )
            $
            (2,833
            )**(Loss)
                Earnings Per Share:**(Loss)
                from continuing operations:(Loss)
                per common share- basic
            
            $
            (0.07
            )
            $
            (0.06
            )
            $
            (0.34
            )
            $
            (0.32
            )
            $
            (0.21
            )(Loss)
                per common share - diluted
            
            $
            (0.07
            )
            $
            (0.06
            )
            $
            (0.34
            )
            $
            (0.32
            )
            $
            (0.21
            )(Loss)
                income from discontinued operations:(Loss)
                income per common share - basic
            
            $
            -
            
            $
            (0.02
            )
            $
            (0.08
            )
            $
            0.07
            
            $
            0.09(Loss)
                income per common share- diluted
            
            $
            -
            
            $
            (0.02
            )
            $
            (0.08
            )
            $
            0.07
            
            $
            0.09Net
                (loss):(Loss)
                per common share -basic
            
            $
            (0.07
            )
            $
            (0.08
            )
            $
            (0.42
            )
            $
            (0.25
            )
            $
            (0.12
            )(Loss)
                per common share- diluted
            
            $
            (0.07
            )
            $
            (0.08
            )
            $
            (0.42
            )
            $
            (0.25
            )
            $
            (0.12
            )Weighted
                Average common shares outstanding:Basic
            
            
            39,394
            
            
            31,955
            
            
            25,113
            
            
            24,468
            
            
            23,783Diluted
            
            
            39,394
            
            
            31,955
            
            
            25,113
            
            
            24,468
            
            
            23,783**CONSOLIDATD
                BALANCE SHEET DATA:**Total
                Assets
            
            $
            28,767
            
            $
            25,196
            
            $
            23,211
            
            $
            29,195
            
            $
            33,007Long-term
                debt and other liabilities
            
            
            1,173
            
            
            10,848
            
            
            9,026
            
            
            20,320
            
            
            22,363Total
                Liabilities
            
            
            24,046
            
            
            20,307
            
            
            30,590
            
            
            31,029
            
            
            32,437Stockholders'
                equity (deficiency)
            
            
            3,444
            
            
            3,682
            
            
            (5,186
            )
            
            5,053
            
            
            10,546Total
                Assets Held for Sale
            
            
            --
            
            
            --
            
            
            37,098
            
            
            45,532
            
            
            45,608Long-term
                debt and other non-current liabilities held for sale
            
            
            --
            
            
            --
            
            
            21,108
            
            
            35,424
            
            
            34,799Total
                liabilities held for sale
            
            
            --
            
            
            --
            
            
            33,768
            
            
            37,578
            
            
            36,411ATC
                Healthcare, Inc. did not pay any cash dividends on its common stock
                during
                any of the periods set forth in the table above.




16


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




**RESULTS
        OF OPERATIONS**
 
 Management’s
        discussion of results of operations below accounts for the sale of the Company’s
        AllCare Nursing business, which occurred on April 22, 2005 as a discontinued
        operation for the Fiscal Years discussed.
 
 **Comparison
        of Year ended February 28, 2007 (“Fiscal 2007”) to Year Ended February 28, 2006
        (“Fiscal 2006”).**
 
 **Revenues:** Total
        revenues for Fiscal 2007 were $89.4 million, an increase of $17.9 million
        or
        25.0% from total revenues of $71.5 million for Fiscal 2006. In June 2006,
        we
        acquired Critical Nursing Solutions, Inc (“CNS”). The revenue generated by CNS
        since the date of acquisition was $7.5 million. The remaining increase of
        $10.3
        million in revenues resulted primarily from organic growth in both licensed
        offices and Company-owned offices. Since Fiscal 2006 there has been an increase
        in demand for temporary nurses. The Company believes that the increase in
        demand
        for temporary nurses will continue in Fiscal 2008. If demand for temporary
        nurses was to decline our ability to continue operations will be impacted.
 
 **Service
        Costs:** Service
        costs were 78.7% of total revenues in Fiscal 2007 as compared to 76.5% of
        total
        revenues in Fiscal 2006. Service costs represent the direct costs of providing
        services to patients and clients, including wages, payroll taxes, travel
        costs,
        insurance costs, medical supplies and the cost of contracted services. The
        increase as a percentage of total revenues was due primarily to higher wages
        and
        benefits paid to nurses as dictated by market conditions. The Company believes
        that it can increase margins, therefore decrease its cost of services as
        a
        percentage of revenues, by pursuing higher margin business during Fiscal
        2008.
 
 **General
        and Administrative Expenses:** General
        and administrative expenses for Fiscal 2007 were $17.9 million, an increase
        of
        $2.1 million or 13.3% as compared to $15.8 million in Fiscal 2006. General
        and
        administrative costs, expressed as a percentage of revenues, were 20.0% and
        22.1% for Fiscal 2007 and Fiscal 2006, respectively. The increase in general
        and
        administrative expenses were due primarily to higher royalty payments to
        licensees of $1.0 million resulting from increased revenue, the inclusion
        of $.4
        million in stock-based compensation expense and an increase in legal expense
        of
        $.4 million. The Company believes that legal expense will decrease, primarily
        due to the litigation settlement discussed below, and stock-based compensation
        will decrease in Fiscal 2008.
 
 **Depreciation
        and Amortization:** Depreciation and amortization expenses relating to fixed assets and intangible
        assets were $0.5 million in Fiscal 2007 and 2006, respectively.  The
        Company anticipates that depreciation and amortization may increase in Fiscal
        2008 as a result of possible acquisitions and additions to fixed
        assets.
 
 **Loss
        on Litigation Settlement:** As
        noted
        in ITEM 3. above, in April 2007, the parties in the CNA litigation settled
        the
        lawsuit, including all claims and counterclaims. In May 2007 the case was
        dismissed in its entirety. As a result of this settlement, the Company recorded
        a loss on litigation settlement of $342 in its consolidated financial statements
        for Fiscal 2007.
 
 **Interest
        Expense, net:**  Interest
        expense, net was $2.3 million in Fiscal 2007 and $2.2 million in Fiscal 2006.
        Increased interest rates and higher accounts receivable balances impacted
        interest expense in Fiscal 2007. This increase fully offset the reduction
        in
        interest resulting from a decline in principal balances of notes payable.
 
 **Other
        Expense, net:** Other
        expense was $0.1 million during Fiscal 2007 and $0 in 2006.
 17


**(Benefit)/Provision
        for Income Taxes:** For
        Fiscal
        2007, the Company recorded a benefit for income taxes of $47K, as compared
        to
        recording an income tax provision of $50K in Fiscal 2006. The current provision
        provides for state and local income taxes representing minimum taxes due
        to
        certain states.
 
 **Discontinued
        Operations:**
 
 See
        below
        regarding the sale of the Allcare Nursing business in April 2005.
 
 **Comparison
        of Year ended February 28, 2006 (“FISCAL 2006”) to Year Ended February 28, 2005
        (“FISCAL 2005”).**
 
 **Revenues:** Total
        revenues for Fiscal 2006 were $71.5 million, an increase of $3.6 million
        or 5.3%
        from total revenues of $67.9 million for Fiscal 2005. For Fiscal 2006, we
        sold
        nine new licenses and closed two Company-owned stores as compared to Fiscal
        2005
        when we opened one Company-owned store, sold nine licenses and closed five
        Company-owned stores. In addition, four and seven licensees closed their
        offices
        for Fiscal 2006 and 2005, respectively. Since early Fiscal 2006, there has
        been
        an increase in demand for temporary nurses. The Company believes that the
        increase in demand for temporary nurses will continue in Fiscal 2007. If
        demand
        for temporary nurses was to decline our ability to continue operations will
        be
        impacted.
 
 **Service
        Costs:** Service
        costs were 76.5% of total revenues in Fiscal 2006 as compared to 80.6% of
        total
        revenues in Fiscal 2005. 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. The decrease in the of service costs can be attributed to the decrease
        in malpractice and general liability insurance as well as lower workers
        compensation costs due to the Company’s risk management controls.
 
 **General
        and Administrative Expenses:** General
        and administrative expenses for Fiscal 2006 were $15.8 million, a decrease
        of
        $1.2 million or 7.0% as compared to $17.0 million in Fiscal 2005. General
        and
        administrative costs, expressed as a percentage of revenues, were 22.1% and
        24.9% for Fiscal 2006 and 2005, respectively. The reduction in general and
        administrative expenses in Fiscal 2006 is the result of initiatives undertaken
        by the Company to reduce the size of, or close, marginally performing offices
        and to reduce back office support staff.
 
 **Depreciation
        and Amortization:** Depreciation and amortization expenses relating to fixed assets and intangible
        assets was $0.5 million in Fiscal 2006 as compared to $.7 million in Fiscal
        2005. The reduction in depreciation expense is due to the write off of fixed
        assets in the prior year as well as certain customer lists from acquisitions
        being fully amortized.
 
 **Office
        Closing and Restructuring Charge:** For
        Fiscal
        2005 the Company recorded impairment to goodwill and other intangibles in
        the
        amount of $1.4 million. The Company did not record a restructuring charge
        in
        Fiscal 2006.
 
 Through
        February 28, 2006, the Company has paid $0.8 million of severance and other
        costs associated with the office closings. As of February 28, 2006 the Company’s
        accounts payable and accrued expenses included $0.1 million of remaining
        costs
        accrued, mainly for lease costs, which were paid through the term of the
        related
        leases which expired at various dates through January 2007. In the third
        quarter
        of Fiscal 2005, the Company recorded a goodwill impairment of $0.4 million
        and
        in the fourth quarter of Fiscal 2005 the Company recorded a goodwill impairment
        of $0.9 million and an impairment of other intangibles of $0.1 million
        associated with offices closed during the year.
 
 **Interest
        Expense, net:**  Interest
        expense, net was $2.2 million in both Fiscal 2006 and 2005. Interest for
        Fiscal
        2006 was impacted by increased interest rates associated with its revolving
        line
        of credit and the decline in the principal balances of notes
        payable.


18


**Other
      Income, net:** Other
      income was less than $0.1 million during Fiscal 2006 as compared to $.09 million
      in Fiscal 2005. Other income in 2005 was generated by sale of licensee rights
      to
      new licensees for approximately $0.5 million and the settlement of various
      disputes with the Company’s Atlanta licensee for net proceeds of approximately
      $0.4 million.





**Provision
      Related to TLCS Guarantee:** In
      Fiscal
      2005 and 2004, the Company was contingently liable on $2.3 million of
      obligations owed by TLCS which was payable over eight years. The bankruptcy
      court sold the assets of TLCS and the Company was advised that the sale price
      was sufficient to cover the claims of TLCS creditors. At November 30, 2004
      the
      Company reversed the provision for such guarantee.





**Provision
      (Benefit) for Income Taxes:** For
      Fiscal
      2006, the Company recorded an expense for income taxes of less than $0.1
      million, as compared to recording an income tax provision of $3.5 million in
      Fiscal 2005. The current provision provides for state and local income taxes
      representing minimum taxes due to certain states. The Fiscal 2005 provision
      provides for state and local income taxes representing minimum taxes due to
      certain states as well as the reduction in deferred taxes of $0.9 million that
      pertains to the reversal of the TLCS guarantee and a $2.5 million valuation
      allowance.





For
      the
      year ended February 28, 2005, income tax expense is due primarily to the change
      in the valuation allowance provided in that period. In the third quarter of
      2005, it became apparent that the hospital patient volumes were not returning
      as
      anticipated and the Company would not return to profitable operations during
      Fiscal 2006 in addition in the fourth quarter of 2005 it became clear that
      the
      Company would not have a gain on the sale of its AllCare division. 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’s valuation allowance.





**Discontinued
      Operations:**





In
      December 2004, after reviewing the significant debt obligations of the Company
      and the alternatives thereto, the Board of Directors of the Company concluded
      and authorized the Company to sell its AllCare Nursing business.





On
      April
      22, 2005, the Company sold substantially all of the assets of its AllCare
      Nursing business, which consisted primarily of goodwill and accounts receivable,
      to Onward Healthcare, Inc. (“Onward”) of Norwalk, Connecticut, for approximately
      $20.0 million in cash, of which $1.2 million was placed in escrow pending the
      collection of the accounts receivable. AllCare Nursing was located in Melville,
      New York, with offices in Union, New Jersey, and in Stratford, Connecticut,
      and
      provided supplemental staffing and travel nurses to healthcare facilities in
      the
      greater New York City metropolitan area, northern New Jersey, and
      Connecticut.





The
      Company originally purchased AllCare Nursing, then known as Direct Staffing
      Inc.
      and DSS Staffing Corp. (together “Direct Staffing”), in January 2002 for $30.2
      million in five percent interest-bearing promissory notes. The Company used
      funds, which it received from Onward to retire approximately $13.0 million
      in
      bank debt and to repay and restructure the $28.1 million in promissory notes
      outstanding to the sellers of Direct Staffing. In connection with obtaining
      its
      lender’s consent to the sale and paying down its bank debt, the Company’s
      revolving credit facility was permanently reduced from $35.0 million to $15.0
      million. As a result of the repayment and restructuring of the Direct Staffing
      promissory notes, those obligations were reduced from $28.1 million to $8.1
      million.





AllCare
      Nursing had a loss from operations for the year ended February 28, 2005 of
      approximately $1.9 million, which includes a goodwill impairment charge of
      $3.8
      million. Net sales for AllCare nursing revenues declined for Fiscal 2005. This
      was due to the decreased demand for nurses in the New York metropolitan
      area.


19


**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 $3.1 million during the year ended February 28,
      2007
      as compared to cash used by operating activities of $6.0 million for the year
      ended February 28, 2006. Cash used in investing activities was $1.1 million
      during the year ended February 28, 2007 compared to cash provided by investing
      activities of $4.0 million during the year ended February 28, 2006. Cash
      provided by financing activities was $3.5 million in Fiscal 2007 as compared
      to
      cash provided by financing activities of $1.9 million in Fiscal
      2006.





Cash
      used
      in operating activities during Fiscal 2007 was primarily used to fund the growth
      in accounts receivable due to the increase in revenue, fund the loss from
      continuing operations, which was offset in part by depreciation and amortization
      and stock-based compensation expense. Cash provided by operating activities
      during Fiscal 2006 was primarily used to fund the growth in accounts receivable
      due to an increase in revenue, fund the collateral requirements in the Company’s
      self-funded workers compensation plan and to fund discontinued operations.
      Cash
      provided by operating activities during Fiscal 2005 was primarily due to
      collections on accounts receivable in the AllCare Nursing business.





Cash
      used
      by investing activities during Fiscal 2007 was primarily due to capital
      expenditures as well as the purchase of CNS. Cash provided by investing
      activities during Fiscal 2006 was due to the sale of the rsmiAllCare business
      and cash used in investing activities during Fiscal 2005 was mainly used on
      capital expenditures.





Cash
      provided by financing activities during Fiscal 2007 was primarily due to the
      issuance of Preferred and Common Stock, net of issuance costs, as well as
      borrowings under the Company’s revolving credit facility. Cash provided by
      financing activities during Fiscal 2006 was primarily from the sale of
      convertible notes. Cash used by financing activities in Fiscal 2005 was
      primarily used to pay down the revolving credit facility with HFG Healthco-4LLC.





The
      Company entered into a Financing Agreement, as amended with a lending
      institution, HFG Healthco-4, (“HFG”) whereby the lender agreed to provide a
      revolving credit facility and term loan facility. The revolving credit facility
      was for up to $35 million, but was amended in connection with the sale of
      AllCare on April 22, 2005, reducing the amount of the facility to $15 million.
      Subsequently on November 7, 2005 the facility further amended to modify certain
      financial ratio covenants as of November 30, 2005 and increasing availability
      from 80% of receivables to 85%, and extending the revolving loan term from
      April
      2008 to November 2008. As amended, availability under the credit facility is
      based on a formula of eligible receivables as defined in the Financing
      Agreement. On April 22, 2005 in connection with the sale of AllCare, the
      liability due on the Company’s revolving line of credit was paid down by the
      amount of $12,123 and the outstanding term loan balance of $1,888 was
      extinguished.





Interest
      accrues at rate of 5.41% over LIBOR on the revolving credit facility and accrued
      at a rate of 6.37% over LIBOR on the term loan facility until its termination
      on
      April 22, 2005. An annual fee of 0.5% is required based on any unused portion
      of
      the total loan availability. The agreement contains various restrictive
      covenants that, among other requirements, restrict additional indebtedness.
      The
      covenants also require the Company to meet certain financial ratios. As of
      February 28, 2007 and February 28, 2006, the outstanding balance on the
      revolving credit facility was $13,914 and $10,516, respectively. HFG has granted
      us a waiver regarding the covenants that were not met as of February 28, 2007,
      that expires on June 5, 2007. In addition, the Company is in an over-advance
      position based on the calculations required by the agreement. The Company and
      HFG are discussing turning the over-advance position into a term loan. HFG
      has
      granted us a waiver regarding the over-advance position that expires on June
      5,
      2007.


20


On
      July
      14, 2004, October 13, 2004, January 14, 2005, June 8, 2005, and October 14,
      2005
      amendments to the revolving credit facility were entered into modifying certain
      financial ratio covenants as of May 31, 2004, August 31, 2004, November 30,
      2004, February 28, 2005, June 30, 2005 and August 31, 2005
      respectively.





On
      June 8,
      2005, the modifications in the revolving credit facility required the Company
      to
      have new covenants in place by June 30, 2005. At that time the Company was
      in
      negotiations with the lending institutions on new covenants for the facility,
      but those covenants had not been finalized. As such, the Company would have
      not
      been in compliance with the existing covenants after February 28, 2005.
      Accordingly, at February 28, 2005 the amount due under the revolving credit
      facility was included in current liabilities.





As
      noted
      above, as of February 28, 2007, the Company is not in compliance with all the
      existing covenants. As such, the outstanding loan balance of $13,914 has been
      classified as a current liability until compliance is regained.





The
      Company had a working capital deficit of $1.4 million at February 28, 2007,
      as
      compared to working capital of $9.5 million at February 28, 2006. Since we
      are
      in default of certain financial covenants, the amount due under the revolving
      credit facility was included in current liabilities as of February 28, 2007.





We
      anticipate that capital expenditures for furniture and equipment, including
      improvements to our management information and operating systems during the
      next
      twelve months will be approximately $0.4 million.





Operating
      cash flows and the issuance of Capital Stock and Notes have been our primary
      source of liquidity, but historically they have not been sufficient to fund
      our
      working capital, capital expenditures, and internal business expansion and
      debt
      service.





Our
      cash
      flow has been aided primarily by the use of funds from the private sale of
      equity securities, the Standby Equity Distribution Agreement with Cornell
      Capital Partners, L.P. (“Cornell”), our sale of our AllCare Nursing business,
      and our revolving loan facility. We believe that our capital resources are
      sufficient to meet our working capital requirements for the next twelve months.
      Our existing cash and cash equivalents are not sufficient to sustain our
      operations for any length of time; however, we expect to meet our future working
      capital, capital expenditure, internal business expansion, and debt service
      from
      operating cash flows, including those generated from organic revenue growth
      and
      acquisitions and funds available under the $15 million revolving loan facility.





On
      April
      19, 2004, we entered into a Standby Equity Distribution Agreement with Cornell.
      Pursuant to the Agreement, we were able to, at our discretion, periodically
      sell
      to Cornell shares of Class A Common Stock for a total purchase price of up
      to
      $5,000,000. For each share of Common Stock purchased under the Agreement,
      Cornell was to pay us 97% of the lowest closing bid price of the Common Stock
      during the five consecutive trading days immediately following the notice date.
      Further, we agreed to pay Cornell 5% of the proceeds that we received under
      the
      Agreement. In November 2004, the Securities and Exchange Commission declared
      our
      S-1 effective. In November 2005 we updated the information in the effective
      S-1.
      We sold 2,026,307 shares to Cornell during Fiscal 2007 at sales prices of $0.32
      to $0.39 per share. The Company received proceeds of $402 net of expenses for
      Fiscal 2006. From time to time, we issued promissory notes to Cornell to
      evidence loans made to us by Cornell, the proceeds of which were used to fund
      our general working capital needs. The proceeds from these sales under the
      Agreement were used to repay the promissory notes due to Cornell. On October
      9,
      2006, the Company repaid the balance due under the last of the notes and, as
      a
      result, no further shares of Common Stock will be issued under the Standby
      Equity Distribution Agreement See Notes 9 and 12 to Consolidated Financial
      Statements included elsewhere herein.


21


**INDEBTEDNESS
      AND CONTRACTUAL OBLIGATIONS OF THE COMPANY**


The
        following are contractual cash obligations of the Company, including interest,
        at February 28, 2007:
 
 Payments
        due by period (amounts in thousands):
 **Less
                    than**
                
                **1-2**
                
                **3-4****Total**
                
                **One
                    Year**
                
                **Years**
                
                **Years**
                
                **Thereafter**Bank
                    Financing (1)
                
                $
                13,914
                
                $
                13,914
                
                $
                -
                
                $
                -
                
                $
                -Debt
                    (2)
                
                
                1,052
                
                
                -
                
                
                1,052
                
                
                -
                
                
                -Operating
                    leases
                
                
                2,039
                
                
                675
                
                
                967
                
                
                397
                
                
                -Total
                
                $
                17,005
                
                $
                14,589
                
                $
                2,019
                
                $
                397
                
                $
                -
  (1)
                    This represents amounts due under the Company’s accounts receivable
                    financing Agreement. Interest is paid daily and is computed at
                    Libor plus
                    541 basis points, as Libor moves.
                  (2)
                    Interest is computed at rates between 8% and 16%.
 **BUSINESS
          TRENDS**
  There
          have
          been times in the past when sales and margins have come under pressure
          as demand
          for temporary nurses has gone through a period of contraction. At that
          time,
          hospitals experienced flat to declining admission rates and placed greater
          reliance on full-time staff overtime and increased nurse patient loads.
          As of
          now, this trend has reversed but there is no guarantee that this will be
          sustainable without interruption in the future. 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. This trend, as of now, is certainly coming to
          fruition. Prospects for the medical staffing industry should continue to
          improve
          as hospitals experience higher admission rates and increasing shortages
          of
          healthcare workers.
  **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. Note 2
          to the
          consolidated financial statements included herein, contains a summary of
          the
          significant accounting policies and methods used in the preparation of
          the
          Company’s consolidated financial statements.
 
 The
          Company makes certain estimates and assumptions that affect the reported
          amounts
          of the assets and liabilities and the reported amounts of revenues and
          expenses.
          However, the accounting policies described below are those the Company
          considers
          most critical in preparing its consolidated financial statements. The following
          is a review of those accounting policies that include significant judgments
          made
          by management using information available at the time the estimates are
          made. As
          previously discussed, if different assumptions were used, these estimates
          could
          change materially.
 22


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**





The
      Company’s service revenues are derived primarily from a form of franchising
      under which independent companies or contractors ("licensees") represent the
      Company within a designated territory. These licensees assign Company personnel,
      including registered nurses and therapists, to service clients using the
      Company’s trade names and service marks. The Company pays and distributes the
      payroll for the direct service personnel who are all employees of the Company,
      administer all payroll withholdings and payments, bill the customers and receive
      and process the accounts receivable. The revenues and related direct costs
      are
      included in the Company’s consolidated service revenues and operating costs. The
      licensees are responsible for providing an office and paying related expenses
      for administration, including rent, utilities and costs for administrative
      personnel. The Company pays a monthly distribution or commission to licensees
      based on a defined formula of gross margin generated. Generally, the Company
      pays a licensee approximately 55% (60% for certain licensees who have longer
      relationships with us) of gross margin. There is no payment to the licensees
      based solely on revenues.





The
      Company recognizes revenue as the related services are provided to customers
      and
      when the customer is obligated to pay for such completed services. Service
      revenue adjustments occur when billing errors occur and are immaterial. Such
      billing errors are usually detected within a week or so and are corrected.
      An
      allowance for doubtful accounts is provided for amounts billed to customers,
      which may ultimately be uncollectible due to the customer's inability to pay.





**ALLOWANCE
      FOR DOUBTFUL ACCOUNTS**





The
      allowance for doubtful accounts represents adjustments to accounts receivable
      for amounts deemed partially or entirely uncollectible. Management believes
      the
      accounting estimate related to the allowance for doubtful accounts is a
“critical accounting estimate” because significant changes in the assumptions
      used to develop the estimate could materially affect key financial measures,
      including general and administrative expenses, net income and accounts
      receivable. In addition, the allowance requires a degree of judgment since
      it
      involves estimation of the impact of both current and future economic factors
      in
      relation to its customers’ ability to pay amounts owed to the
      Company.





The
      Company has procedures to mitigate its risk of exposure to losses from bad
      debts. Revenue is recognized provided that: there are no uncertainties regarding
      customer acceptance; persuasive evidence of an agreement exists documenting
      the
      specific terms of the transaction; the sales price is fixed or determinable,
      and
      collectibility is reasonably assured at the levels set for each customer.
      Extensive evaluations are performed on an ongoing basis throughout the fiscal
      year of each customer’s financial performance, cash generation, financing
      availability and liquidity status. In making credit evaluations, in addition
      to
      analyzing and anticipating, where possible, the specific cases of slow pay
      customers are considered. We also consider the general collection risks with
      trends in our industry. We also establish credit limits for our customers and
      perform ongoing credit evaluations to minimize the risk of loss.





We
      generally follow a policy of reserving for receivables when the aging of slow
      paying clients exceeds our guidelines or if a client files for bankruptcy.
      The
      reserve established is based upon estimates of ultimate collectibility. The
      initial allowance is adjusted either higher or lower when additional information
      is available to permit a more accurate estimate of an accounts
      collectibility.


23


Summarized
      below for the fiscal years ended February 28, 2007 and 2006, respectively,
      are
      the aggregate account balances for the allowance criteria noted above, net
      write-offs, bad debt provision and allowance for doubtful accounts (in
      thousands):


Fiscal
                  Year Ended
              Aggregate
                  Account
                Balances
                  of Slow
                Payers
                  and Clients in
                Bankruptcy
              Net
                  Write-Offs
              Bad
                  Debt Provision
              Allowance
                  for Doubtful Accounts2007
              $920
              $(35)
              $0
              $2122006
              $824
              $(217)
              $0
              $247


At
        February 28, 2007, we identified accounts totaling $920 that require an
        allowance based on potential impairment or lose in value. An allowance totaling
        $212 was provided for these accounts at such date. Our write-offs in Fiscal
        2007
        represented one-fifth of 1% of our accounts receivable balance. If our projected
        collections, based on experience, were 10% less, the related increase to
        our
        allowance would decrease income by $21.
 
 **GOODWILL
        IMPAIRMENT**
 
 Management
        believes that the accounting estimate related to the valuation of its goodwill
        is a “critical accounting estimate” because significant changes in the
        assumptions used to develop the estimate could materially affect key financial
        measures, including net income and noncurrent assets, specifically goodwill.
        The
        valuation of goodwill involves a high degree of judgment since the first
        step of
        the impairment test required by SFAS No. 142 consists of a comparison of
        the
        fair value of a reporting unit with its book value. Based on the assumptions
        underlying the valuation, impairment is determined by estimating the fair
        value
        of a reporting unit and comparing that value to the reporting unit’s book value.
        If the fair value is more than the book value of the reporting unit, an
        impairment loss is not recognized. If an impairment exists, the fair value
        of
        the reporting unit is allocated to all of its assets and liabilities excluding
        goodwill, with the excess amount representing the fair value of goodwill.
        An
        impairment loss is measured as the amount by which the book value of the
        reporting unit’s goodwill exceeds the estimated fair value of that
        goodwill.
  In
        accordance with SFAS 142 the Company tests goodwill for impairment. . The
        Company wrote off $0.4 million of goodwill in the third quarter of 2005 and
        an
        additional $1.0 million of goodwill in the fourth quarter of 2005 associated
        with the closing of offices that were acquired through acquisitions. In addition
        , the Company recorded a goodwill impairment of $3.8 million as of February
        28,
        2005, to discontinued operations, which represents the difference in the
        sales
        price of AllCare Nursing at February 28, 2005 and the value of the net assets
        including goodwill, that the Company had recorded on its financial statements
        as
        of that date. When performing this test, the Company reviewed the current
        operations of the ongoing offices. In addition, The Company reviewed the
        anticipated cash flows of each acquisition. The goodwill remaining at the
        end of
        Fiscal 2007 is made up of various acquisitions all of which have continued
        to
        provide positive cash flow. The Company utilized the following methodologies
        for
        evaluating impairment of goodwill: The income approach discounted cash flow
        method, where the value of the subject investment is equal to the present
        value
        of the cash flow streams that can be expected to be generated by the Company
        in
        the future and the market approach merger and acquisition method where the
        value
        of the subject investment is determined from transactions involving mergers
        and
        acquisitions of comparable companies. Based on the impairment testing, the
        Company determined that no write-off of goodwill was required in Fiscal 2007.
 
 If
        management's expectations of future operating results change, or if there
        are
        changes to other assumptions, the estimate of the fair value of our goodwill
        could change significantly. Such change could result in additional goodwill
        impairment charges in future periods, which could have a significant impact
        on
        our consolidated financial statements.
 24


**INCOME
      TAXES**





The
      Company accounts for income taxes in accordance with the Financial Accounting
      Standards Board (“FASB”) statement 109, Accounting for Income Taxes. The
      Company’s income tax benefit/provision and related deferred tax assets and
      liabilities are based on actual and expected future income, US statutory income
      tax rates, and tax regulations and planning opportunities in the various
      jurisdictions in which The Company operates. Management believes that the
      accounting estimate related to income taxes is a “critical accounting estimate”
because significant judgment is required in interpreting tax regulations in
      the
      US, and assessing the likelihood of realizing certain tax benefits. Actual
      results could differ materially from those judgments, and changes in judgments
      could materially affect key financial measures, including the provision for
      income taxes, net income, and deferred income tax assets and
      liabilities.





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. ****





**WORKERS
      COMPENSATION RESERVES**





Management
      believes the accounting estimate related to Workers Compensation Revenues is
      a
“critical accounting estimate”. Except for a few states that require workers
      compensation through their state fund, the Company provides workers compensation
      coverage through a program that is partially self-insured. Zurich Insurance
      Company provides excess reinsurance for all claims over $400,000 per occurrence
      as well as aggregate coverage for overall claims borne by the group of companies
      that participate in the program. The program also provides for risk sharing
      among members for infrequent, large claims over $100,000 but less than $400,000.
      The Company is responsible for all claims under $100,000. The Company records
      its estimate of the ultimate cost of, and reserve for, workers compensation
      and
      professional liability benefits based on actuarial computations using the
      Company’s loss history as well as industry statistics. Furthermore, in
      determining its reserves, the Company includes reserves for estimated claims
      incurred but not reported. The ultimate cost of workers compensation will depend
      on actual costs incurred to settle the claims and may differ from the amounts
      reserved by the Company for those claims. As such, significant changes in the
      assumption used in determining the reserve amount could have a material impact
      on the financial statements.





Inherent
      in recording the liability to be established at any balance sheet date for
      workers compensation insurance, is an estimate of incurred but not recorded
      claims (“IBNR”). The Company has been estimating that an additional 50% of total
      reserves established should be added to cover these items. Management believes
      this estimate to be reasonable and will continue to perform ongoing analysis
      and
      adjust the reserve based on historical experience and any changing conditions.
      If an additional 10%, or 60% had been used for IBNR, the related increase to
      our
      liability would decrease income by $39.





**EFFECT
      OF INFLATION**





The
      impact
      of inflation on the Company’s sales and income from continuing operations was
      immaterial during Fiscal 2007. 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
      September 2006, the FASB issued SFAS No. 158, EMPLOYERS' ACCOUNTING FOR DEFINED
      BENEFIT PENSION AND OTHER POSTRETIREMENT PLANS - an amendment of FASB Statements
      No. 87, 88, 106 and 132(R) ("SFAS 158"). SFAS 158 requires that employers
      recognize the funded status of their defined benefit pension and other
      postretirement plans on their consolidated balance sheet and recognize as a
      component of other comprehensive income, net of tax, the gains or losses and
      prior service costs or credits that arise during the period but are not
      recognized as components of net periodic benefit cost. SFAS No. 158 also require
      additional disclosures in the notes to financial statements. SFAS No. 158 had
      no
      impact to the Company’s consolidated financial statements.


25


In
      September 2006, the FASB issued SFAS No. 157, FAIR VALUE MEASUREMENTS ("SFAS
      157"), which defines fair value, establishes a framework for measuring fair
      value and expands the related disclosure requirements. Adoption is required
      as
      of the beginning of the first fiscal year that begins after November 15, 2007.
      SFAS No. 157 applies under other accounting pronouncements that require or
      permit fair value measurements and does not require any new fair value
      measurements. SFAS No. 157 is not expected to have an impact on the Company's
      consolidated financial statements.





In
      September 2006, the SEC issued Staff Accounting Bulletin ("SAB") No. 108,
      CONSIDERING THE EFFECTS OF PRIOR YEAR MISSTATEMENTS WHEN QUANTIFYING
      MISSTATEMENTS IN CURRENT YEAR FINANCIAL STATEMENTS ("SAB No. 108") to provide
      guidance on the consideration of the effects of prior year misstatements in
      quantifying current year misstatements for the purpose of a materiality
      assessment. Under SAB No. 108, companies should evaluate a misstatement based
      on
      its impact on the current year income statement, as well as the cumulative
      effect of correcting such misstatements that existed in prior years existing
      in
      the current year's ending balance sheet. The Company adopted SAB No. 108 for
      the
      year ended February 28, 2007 with no impact to the Company’s consolidated
      financial statements.





In
      June
      2006, the FASB issued FASB Interpretation No. ("FIN") 48, ACCOUNTING FOR
      UNCERTAINTY IN INCOME TAXES - an Interpretation of SFAS No. 109, which clarifies
      the accounting for uncertainty in income taxes recognized in the financial
      statements in accordance with SFAS No. 109, ACCOUNTING FOR INCOME TAXES. FIN
      48
      prescribes a recognition threshold and measurement attribute for the financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken in a tax return. Any change in the net assets or liabilities recognized
      as
      a result of adopting the provisions of FIN 48 would be recorded as an adjustment
      to the opening balance of retained earnings. FIN 48 is effective for the Company
      as of March 1, 2007. Management is currently evaluating the impact, if any;
      the
      adoption of FIN 48 will have on the Company's consolidated financial
      statements.





**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 2008.


26


**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 Credit Facility described above.
      Under
      the Credit Facility, the average interest rate is approximately 11%. At February
      28, 2007, drawings on the Credit Facility were $13.9 million. Assuming variable
      rate debt at February 28, 2007, a one-point change in interest rates would
      impact annual net interest payments by $139 thousand. The Company does not
      use
      derivative financial instruments to manage interest rate risk .




27


**FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA**


**ATC
      HEALTHCARE, INC. AND SUBSIDIARIES**


**INDEX**


**Page**Report
                  of Independent Registered Public Accounting Firm
              F-1CONSOLIDATED
                  FINANCIAL STATEMENTS:Consolidated
                  Balance Sheets as ofFebruary
                  28, 2007 and 2006
              F-2Consolidated
                  Statements of Operationsfor
                  the Fiscal Years ended February 28, 2007, 2006 and 2005
              F-3Consolidated
                  Statements of Stockholders’ Equity (Deficiency)for
                  the Fiscal Years ended February 28, 2007, 2006 and 2005
              F-4Consolidated
                  Statements of Cash Flowsfor
                  the Fiscal Years ended February 28, 2007, 2006 and 2005
              F-5Notes
                  to Consolidated Financial Statements
              F-7FINANCIAL
                  STATEMENT SCHEDULE FOR THE FISCAL YEARS ENDED
                February
                  28, 2007, 2006 and 2005II
                  -
                  Valuation and Qualifying Accounts
              F-29


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.


Report
      of Independent Registered Public Accounting Firm


To
        the
        Board of Directors
 ATC
        HEALTHCARE, INC.
 
 We
        have
        audited the accompanying consolidated balance sheets of ATC Healthcare, Inc.
        and
        Subsidiaries as of February 28, 2007 and 2006 and the related consolidated
        statements of operations, stockholders' equity (deficiency), and cash flows
        for
        each of the three years in the period ended February 28, 2007. These financial
        statements are the responsibility of the Company's management. Our
        responsibility is to express an opinion on these financial statements based
        on
        our audits.
 
 We
        conducted our audits in accordance with 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 audits provide 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 28, 2007 and 2006 and the results of their
        operations and their cash flows for each of the years in the period ended
        February 28, 2007 in conformity with U.S. generally accepted accounting
        principles.
 
 As
        discussed in Note 2 to the consolidated financial statements, ATC Healthcare,
        Inc. and Subsidiaries changed the manner in which it accounts for share-based
        compensation effective March 1, 2006.
 
 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 years ended February 28, 2007, 2006 and 2005
        are
        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
 May
        14,
        2007
  F-1


**ATC
      HEALTHCARE, INC. AND SUBSIDIARIES**


**CONSOLIDATED
        BALANCE SHEETS**
 **(dollars
        in thousands, except per share data)**


February
                  28,
                2007
              
              February
                  28,
                2006**ASSETS:****CURRENT
                  ASSETS:**Cash
                  and cash equivalents
              
              $
              298
              
              $
              984Accounts
                  receivable, less allowance for doubtful accounts of$212
                  and $247, respectively.
              
              
              15,024
              
              
              11,777Prepaid
                  expenses and other current assets
              
              
              6,196
              
              
              6,168Total
                  current assets
              
              
              21,518
              
              
              18,929Fixed
                  assets, net
              
              
              286
              
              
              207Intangibles,
                  net
              
              
              513
              
              
              411Goodwill
              
              
              6,134
              
              
              5,357Other
                  assets
              
              
              316
              
              
              292Total
                  assets
              
              $
              28,767
              
              $
              25,196**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY:****CURRENT
                  LIABILITIES:**Accounts
                  payable
              
              $
              1,231
              
              $
              1,691Accrued
                  expenses
              
              
              6,583
              
              
              5,062Book
                  overdraft
              
              
              881
              
              
              1,077Due
                  under bank financing
              
              
              13,914
              
              
              -Current
                  portion of notes payable (including $0 and $1,330from
                  related parties as of February 28 2007 and 2006,
                  respectively)
              
              
              56
              
              
              1,629Total
                  current liabilities
              
              
              22,665
              
              
              9,459Notes
                  payable (including $1,052 and $250 from related parties as ofFebruary
                  28, 2007 and 2006, respectively)
              
              
              1,131
              
              
              250Due
                  under bank financing
              
              
              -
              
              
              10,516Other
                  liabilities
              
              
              42
              
              
              82Total
                  liabilities
              
              
              23,838
              
              
              20,307Commitments
                  and contingenciesConvertible
                  Series A Preferred Stock - $1.00 par value; 4,000 shares
                  authorized,2,000
                  shares issued and outstanding at February 28, 2007 and 2006,
                  respectively
              
              
              1,277
              
              
              1,207Convertible
                  Series B Preferred Stock - $1.00 par value; 9,984 sharesauthorized;
                  4,050 shares issued and outstanding; liquidation value of$2,000
                  per share ($8,100)
              
              
              4
              
              
              4Convertible
                  Series C Preferred Stock - $1.00 par value; 516 sharesauthorized,
                  issued and outstanding at February 28, 2007
              
              
              1
              
              
              -Class
                  A Common Stock - $0.01 par value; 75,000,000 shares
                  authorized;41,476,582
                  and 37,449,820 shares issued and outstanding atFebruary
                  28, 2007 and 2006, respectively
              
              
              415
              
              
              374Class
                  B Common Stock - $0.01 par value; 1,554,936 shares
                  authorized;186,558
                  and 186,658 shares issued and outstanding at February 28, 2007
                  and2006
                  respectively
              
              
              2
              
              
              2Additional
                  paid-in capital
              
              
              28,612
              
              
              25,999Accumulated
                  deficit
              
              
              (25,382
              )
              
              (22,697
              )Total
                  stockholders’ equity
              
              
              3,652
              
              
              3,682Total
                  liabilities and stockholders’ equity
              
              $
              28,767
              
              $
              25,196




F-2


**ATC
          HEALTHCARE, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
          STATEMENTS OF OPERATIONS**
 **(dollars
          in thousands, except per share data)**
  **For
                    the Fiscal Years Ended****February
                    28, 2007**
                
                **February
                    28, 2006**
                
                **February
                    28, 2005**REVENUES:Service
                    revenues
                
                $
                89,401
                
                $
                71,528
                
                $
                67,937COSTS
                    AND EXPENSES:Service
                    costs
                
                
                70,394
                
                
                54,721
                
                
                54,732General
                    and administrative expenses
                
                
                17,896
                
                
                15,830
                
                
                17,033Depreciation
                    and amortization
                
                
                510
                
                
                517
                
                
                700Loss
                    on litigation settlement
                
                
                342
                
                
                -
                
                
                -Office
                    closing and restructuring charge
                
                
                -
                
                
                -
                
                
                1,431Total
                    operating expenses
                
                
                89,142
                
                
                71,068
                
                
                73,896INCOME
                    (LOSS) FROM OPERATIONS:
                
                
                259
                
                
                460
                
                
                (5,959
                )INTEREST
                    AND OTHER EXPENSE (INCOME):Interest
                    expense, net
                
                
                2,292
                
                
                2,188
                
                
                2,191Other
                    expense (income), net
                
                
                173
                
                
                (23
                )
                
                (914
                )Reversal
                    related to TLCS guarantee
                
                
                -
                
                
                -
                
                
                (2,293
                )Total
                    interest and other expense (income)
                
                
                2,465
                
                
                2,165
                
                
                (1,016
                )LOSS
                    FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
                
                
                (2,206
                )
                
                (1,705
                )
                
                (4,943
                )INCOME
                    TAX (BENEFIT) PROVISION
                
                
                (47
                )
                
                50
                
                
                3,516NET
                    LOSS FROM CONTINUING OPERATIONS
                
                
                (2,159
                )
                
                (1,755
                )
                
                (8,459
                )DISCONTINUED
                    OPERATIONS:Loss
                    from discontinued operations net of tax benefit of$1,452
                    in 2005
                
                
                -
                
                
                (577
                )
                
                (1,945
                )NET
                    LOSS
                
                $
                (2,159
                )
                $
                (2,332
                )
                $
                (10,404
                )DIVIDENDS
                    ACCRETED TO PREFERRED STOCKHOLDERS'
                
                
                526
                
                
                273
                
                
                70NET
                    LOSS AVAILABLE TO COMMON STOCKHOLDERS'
                
                $
                (2,685
                )
                $
                (2,605
                )
                $
                (10,474
                )Loss
                    Per Share:Loss
                    from continuing operations:Loss
                    per basic and diluted common share
                
                $
                (0.07
                )
                $
                (0.06
                )
                $
                (0.34
                )Loss
                    from discontinued operations:Loss
                    per basic and diluted common share
                
                $
                -
                
                $
                (0.02
                )
                $
                (0.08
                )Net
                    loss:Loss
                    per basic and diluted common share
                
                $
                (0.07
                )
                $
                (0.08
                )
                $
                (0.42
                )Weighted
                    average basic and dilute common shares outstanding
                
                
                39,394,123
                
                
                31,955,483
                
                
                25,113,624




See
        notes
        to consolidated financial statements
 F-3


**ATC
      HEALTHCARE, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIENCY)**


**(dollars
      in thousands, except per share data)**


See
        notes
        to consolidated financial statements
  Class
                  B
              
              
              
              Class
                  C
              
              
              
              Class
                  A
              
              
              
              Class
                  B
              
              
              
              AdditionalPreferred
                  Stock
              
              
              
              Preferred
                  Stock
              
              
              
              Common
                  Stock
              
              
              
              Common
                  Stock
              
              
              
              Paid-In
              
              AccumulatedShares
              
              Amount
              
              Shares
              
              Amount
              
              Shares
              
              Amount
              
              Shares
              
              Amount
              
              Capital
              
              Deficit
              
              TotalBalances,
                  Feb. 29, 2004
              
              
              -
              
              $
              -
              
              
              -
              
              $
              -
              
              
              24,665,537
              
              $
              247
              
              
              245,417
              
              $
              3
              
              $
              14,421
              
              $
              (9,618
              )
              $
              5,053Exchange
                  of Class B for Class A Common Stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              55,000
              
              
              1
              
              
              (55,000
              )
              
              (1
              )
              
              -
              
              
              -
              
              
              -Issuance
                  of shares through Employee Stock Purchase
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              13,796
              
              
              1
              
              
              -
              
              
              -
              
              
              8
              
              
              -
              
              
              9Sale
                  of Common stock, net of issuance costs of $358
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,682,104
              
              
              16
              
              
              -
              
              
              -
              
              
              160
              
              
              -
              
              
              176Common
                  Stock issued for services
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              165,000
              
              
              1
              
              
              -
              
              
              -
              
              
              49
              
              
              -
              
              
              50Accrued
                  dividends on Preferred Stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (70
              )
              
              (70
              )Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (10,404
              )
              
              (10,404
              )Balances,
                  Feb. 28, 2005
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              26,581,437
              
              
              266
              
              
              190,417
              
              
              2
              
              
              14,638
              
              
              (20,092
              )
              
              (5,186
              )Exchange
                  of Class B for Class A Common stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              3,759
              
              
              -
              
              
              (3,759
              )
              
              -
              
              
              -
              
              
              -
              
              
              -Issuance
                  of Series B Preferred Stock for Debt
              
              
              4,050
              
              
              4
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              8,096
              
              
              -
              
              
              8,100Common
                  Stock issued on the conversion of debt net issuance costs -
                  $173
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              9,909,379
              
              
              99
              
              
              -
              
              
              -
              
              
              2,898
              
              
              -
              
              
              2,997Sale
                  of Common stock, net of issuance costs of $16
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              844,359
              
              
              8
              
              
              -
              
              
              -
              
              
              241
              
              
              -
              
              
              249Interest
                  satisfied by Common Stock issuances
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              110,886
              
              
              1
              
              
              -
              
              
              -
              
              
              28
              
              
              -
              
              
              29Issuance
                  of Common Stock warrants
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              98
              
              
              -
              
              
              98Accrued
                  dividends on Preferred Stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (273
              )
              
              (273
              )Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (2,332
              )
              
              (2,332
              )Balances,
                  February 28, 2006
              
              
              4,050
              
              
              4
              
              
              0
              
              
              0
              
              
              37,449,820
              
              
              374
              
              
              186,658
              
              
              2
              
              
              25,999
              
              
              (22,697
              )
              
              3,682Exchange
                  of Class B for Class A Common Stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              100
              
              
              -
              
              
              (100
              )
              
              -
              
              
              -
              
              
              -
              
              
              -Issuance
                  of Series C Preferred Stock, net of fees of $78
              
              
              -
              
              
              -
              
              
              516
              
              
              1
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              921
              
              
              -
              
              
              922Stock-Based
                  Compensation
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              416
              
              
              -
              
              
              416Sale
                  of Common Stock and warrants net of issuance costs of $110
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              3,287,666
              
              
              34
              
              
              -
              
              
              -
              
              
              913
              
              
              -
              
              
              947Common
                  Stock issued for conversion of debt
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              738,996
              
              
              7
              
              
              -
              
              
              -
              
              
              258
              
              
              -
              
              
              265Issuance
                  of Common Stock warrants
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              68
              
              
              -
              
              
              68Beneficial
                  Conversion
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              5
              
              
              (5
              )
              
              -Accrued
                  dividends on Preferred Stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              32
              
              
              (521
              )
              
              (489
              )Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (2,159
              )
              
              (2,159
              )Balances,
                  February 28, 2007
              
              
              4,050
              
              $
              4
              
              
              516
              
              $
              1
              
              
              41,476,582
              
              $
              415
              
              
              186,558
              
              $
              2
              
              $
              28,612
              
              $
              (25,382
              )
              $
              3,652




F-4


**ATC
      HEALTHCARE, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS (in thousands)**


**For
                  the Fiscal Years Ended****February
                  28,**
              
              **February
                  28,**
              
              **February
                  28,****2007**
              
              **2006**
              
              **2005**CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  loss
              
              
              
              
              $
              (2,332
              )
              $
              (10,404
              )Loss
                  from discontinued operations
              
              
              -
              
              
              (577
              )
              
              (1,945
              )Net
                  loss from continuing operations
              
              
              (2,159
              )
              
              (1,755
              )
              
              (8,459
              )Adjustments
                  to reconcile net loss to net cash (used in) provided byoperations:Depreciation
                  and amortization
              
              
              510
              
              
              517
              
              
              700Amortization
                  of debt financing costs
              
              
              124
              
              
              50
              
              
              284Amortization
                  of discount on convertible debenture
              
              
              -
              
              
              -
              
              
              40In
                  kind interest
              
              
              5
              
              
              124
              
              
              -Stock
                  based compensation
              
              
              416
              
              
              -
              
              
              -Fair
                  value of warrants issued for services
              
              
              -
              
              
              98
              
              
              -Provision
                  for doubtful accounts
              
              
              (35
              )
              
              (217
              )
              
              188Reversal
                  related to TLCS guarantee
              
              
              -
              
              
              -
              
              
              (2,293
              )Deferred
                  income taxes
              
              
              -
              
              
              -
              
              
              3,477Impairment
                  of goodwill
              
              
              -
              
              
              40
              
              
              1,431Changes
                  in operating assets and liabilities, net of effects of
                  acquisitions:Accounts
                  receivable
              
              
              (2,200
              )
              
              (1,538
              )
              
              1,050Prepaid
                  expenses and other current assets
              
              
              (89
              )
              
              (1,650
              )
              
              323Other
                  assets
              
              
              (24
              )
              
              976
              
              
              (765
              )Accounts
                  payable and accrued expenses
              
              
              358
              
              
              (1,051
              )
              
              (140
              )Other
                  long-term liabilities
              
              
              (40
              )
              
              (95
              )
              
              (330
              )Net
                  cash (used in) provided by discontinued operations
              
              
              -
              
              
              (1,450
              )
              
              8,021Net
                  cash (used in) provided by operating activities
              
              
              (3,134
              )
              
              (5,951
              )
              
              3,527CASH
                  FLOWS FROM INVESTING ACTIVITIES:Capital
                  expenditures
              
              
              (243
              )
              
              (69
              )
              
              (77
              )Acquisition
                  of business
              
              
              (583
              )
              
              -
              
              
              -Purchase
                  of intangibles
              
              
              (245
              )
              
              -
              
              
              -Net
                  cash provided by discontinued operations
              
              
              -
              
              
              4,089
              
              
              -Net
                  cash (used in) provided by investing activities
              
              
              (1,071
              )
              
              4,020
              
              
              (77
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:(Repayment
                  of) proceeds from borrowings of notes and capital lease
                  obligation
              
              
              (540
              )
              
              (709
              )
              
              767Proceeds
                  from (repayment of) term loan facility
              
              
              3,398
              
              
              856
              
              
              (1,568
              )Issuance
                  of notes payable
              
              
              -
              
              
              -
              
              
              1,500Payment
                  of debt assumed in acquisitions
              
              
              (1,012
              )
              
              -
              
              
              -Decrease
                  in book overdraft
              
              
              (196
              )
              
              (412
              )
              
              (753
              )Debt
                  financing costs
              
              
              -
              
              
              (152
              )
              
              (67
              )Issuance
                  of common stock, net of issuance costs of $139 in 2007 and $189
                  in
                  2006
              
              
              947
              
              
              76
              
              
              185Issuance
                  of preferred stock, net of issuance costs of $78 in 2007
              
              
              922
              
              
              -
              
              
              -Borrowings
                  under new credit facility
              
              
              -
              
              
              -
              
              
              800Issuance
                  of convertible notes and warrants
              
              
              -
              
              
              2,100
              
              
              590Net
                  cash provided by (used in) discontinued operations
              
              
              -
              
              
              114
              
              
              (4,405
              )Net
                  cash provided by (used in) financing activities
              
              
              3,519
              
              
              1,873
              
              
              (2,951
              )NET
                  (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
              
              
              (686
              )
              
              (58
              )
              
              499CASH
                  AND CASH EQUIVALENTS, BEGINNING OF YEAR
              
              
              984
              
              
              1,042
              
              
              543CASH
                  AND CASH EQUIVALENTS, END OF YEAR
              
              $
              298
              
              $
              984
              
              $
              1,042




F-5


**ATC
      HEALTHCARE, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS (in thousands)**


**(Continued)**




**Supplemental
                  Data:**
              
              **2007**
              
              **2006**
              
              **2005**Interest
                  Paid
              
              $
              1,825
              
              $
              3,349
              
              $
              2,844Taxes
                  Paid
              
              
              23
              
              
              20
              
              
              100Shares
                  issued for future services
              
              $
              -
              
              $
              -
              
              $
              50Conversion
                  of debt to common stock
              
              
              265
              
              
              3,170
              
              
              -Conversion
                  of debt to preferred class B
              
              
              -
              
              
              8,100
              
              
              -Forgiveness
                  of debt
              
              
              -
              
              
              17,344
              
              
              -Warrants
                  issued for extension of debt agreement
              
              
              68
              
              
              -
              
              
              -Capital
                  lease obligations incurred
              
              
              113
              
              
              -
              
              
              -In
                  kind & beneficial conversion dividends
              
              
              37
              
              
              -
              
              
              -Accrued
                  dividends
              
              
              489
              
              
              273
              
              
              70




See
        notes
        to consolidated financial statements


F-6


**ATC
      HEALTHCARE, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Dollars
      in Thousands, Except Share Amounts)**





**1.
      Organizations And Basis Of Presentation**





ATC
      Healthcare, Inc. and Subsidiaries, including ATC Healthcare Services, Inc.,
      Critical Nursing Solutions (“CNS”) and ATC Staffing Services, Inc.,
      (collectively, the “Company”), are providers of supplemental staffing to
      healthcare facilities. In August 2001, the Company changed its name from Staff
      Builders, Inc. to ATC Healthcare, Inc. The Company offers a skills list of
      qualified health care associates in over 50 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.





The
      Company has incurred losses from operations for the past three years and, until
      the conversion of $8.1 million of debt to Preferred B Stock on August 31, 2005,
      had a stockholders’ deficiency. As of February 28, 2007, the Company had
      stockholders’ equity of $3.7 million. In addition, as of February 28, 2007, the
      Company failed to comply with all its covenants with respect to its revolving
      loan agreement, for which it has received a waiver. Management has implemented
      a
      plan whereby they will continue to add licensees, which they believe will return
      the Company to profitability. It should be noted that the Company sold in a
      private transaction common stock totaling $1..5 million in gross proceeds,
      subsequent to the balance sheet date.





On
      April
      22, 2005, the Company sold substantially all of the assets and liabilities
      of
      its AllCare Nursing Services business, which consisted primarily of goodwill
      and
      accounts receivable, to Onward Healthcare, Inc. (“Onward”), see Note 4
“Discontinued Operations”.





**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**





The
      majority of the Company’s service revenues are derived from a form of
      franchising under which independent companies or contractors (“licensees”)
      represent the Company within a designated territory. These licensees assign
      Company medical staffing personnel to service clients under the Company’s
      contracts, trade names and service marks. The Company pays and distributes
      the
      payroll for these direct service personnel who are all employees of the Company.
      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 service revenues and service
      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 licensees based on
      a
      defined formula of gross margin generated. Generally, the Company pays a
      licensee approximately 55% of gross margin (60% for certain licensees who have
      longer relationships with the Company). There is no payment to the licensees
      based solely on revenues.




F-7


For
      Fiscal
      2007, 2006 and 2005, total licensee distributions net of discontinued
      operations, were $7,122, $6,951 and $5,965 respectively, and are included in
      general and administrative expenses.





The
      Company recognizes revenue as the related services are provided to customers
      and
      when the customer is obligated to pay for such completed services. The Company
      bills its customers an hourly rate for the services performed by our nurses
      on a
      weekly basis. Terms of payment are net 30 days. Employees assigned to particular
      customers may be changed at the customer’s request or at the Company’s
      initiation. A provision for uncollectible and doubtful accounts is provided
      for
      amounts billed to customers, which may ultimately be uncollectible due to
      documentation disputes or the customer’s inability to pay.





Revenues
      generated from the sales of licenses in the form of initial licensee fees are
      recognized upon signing of the related agreement if collection of such amounts
      is reasonably assured. The earnings process is complete since the Company has
      performed substantially all of its obligations under the agreements by such
      date. The Company does not have recurring fees from its licensees. The Company
      recorded revenue from licensee fees of $283, $501 and $935 for Fiscal 2007,
      2006
      and 2005, respectively.





**Use
      of Estimates**





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





**Cash
      and Cash Equivalents**





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





**Concentrations
      of Credit Risk**




Concentrations
      of credit risk with respect to trade accounts receivable are limited due to
      the
      large number of customers and their dispersion across a number of geographic
      areas. However, essentially all trade receivables are concentrated in the
      hospital and healthcare sectors in the United States and, accordingly, the
      Company is exposed to their respective business, economic and location-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 that 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.
      144, *Accounting
      for the Impairment or Disposal of Long-Lived Assets* ,
      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 long-lived assets to determine if any
      impairment exists based upon projected, undiscounted net cash flows of the
      Company. As of February 28, 2007 the Company believes that no impairment of
      long-lived assets exists.


F-8


**Goodwill
      and Intangible Assets**





Goodwill
      represents the excess of purchase price over the fair value of identifiable
      net
      assets of companies acquired. The Company adopted SFAS No. 141, *Business
      Combinations* ,
      ("SFAS
      141") and SFAS No. 142, *Goodwill
      and Intangible Assets* ,
      ("SFAS
      142") as of March 1, 2002. SFAS 141 provides specific criteria for the initial
      recognition and measurement of intangible assets apart from goodwill. SFAS
      142
      requires that (1) goodwill and intangible assets with indefinite useful lives
      should no longer be amortized, (2) goodwill and intangibles must be reviewed
      for
      impairment annually (or more often if certain events occur which could impact
      their carrying value), and (3) the Company's operations be formally identified
      into reporting units for the purpose of assessing impairments of goodwill.
      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 performs an annual impairment test at
      the
      end of each year for its unamortized goodwill and other intangible assets.
      As a
      result of the impairment tests performed, the Company charged operations $40
      for
      the year ended February 28, 2006 and $5,274 (of which $3,843 pertains to
      discontinued operations) and $889 for the years ended February 28, 2005,
      respectively, for goodwill and intangibles the Company determined were impaired.
      No impairment was required to be recorded at February 28, 2007. During Fiscal
      2006 the Company’s net goodwill decreased by $40 as a result of the impairment
      charge. During Fiscal 2005, the Company’s net goodwill decreased by $5,172 and
      the Company’s net intangibles decreased by $102 as a result of impairment
      charges.





Goodwill
      and other intangibles are as follows:


**February
                  28, 2007**
              
              **February
                  28, 2006**Gross
                  Carrying Amount
              
              Accumulated
                  Amortization
              
              Gross
                  Carrying Amount
              
              Accumulated
                  Amortization
              
              Amortization
                  PeriodGoodwill
              
              $
              6,134
              
              $
              -
              
              $
              5,357
              
              $
              -
              
              
              noneCovenants
                  not to compete
              
              
              590
              
              
              401
              
              
              500
              
              
              307
              
              
              10Other
                  intangibles
              
              
              920
              
              
              596
              
              
              674
              
              
              456
              
              
              3-10$
              7,644
              
              $
              997
              
              $
              6,531
              
              $
              763


Amortization
        expense was $233, $205 and $279 for Fiscal Years 2007, 2006 and 2005,
        respectively.
 
 Estimated
        amortization expense for the next five Fiscal Years is as
        follows:
 **Amortization
                    Expense**2008
                $
                    2252009
                1302010
                572011
                492012
                41






F-9


**Insurance
      Costs**


The
        Company is obligated for certain costs under various insurance programs,
        including workers’ compensation. The Company recognizes their obligation
        associated with these policies in the period the claim is incurred. The Company
        records an estimate of the ultimate cost of, and reserve for, workers
        compensation based on actuarial computations using the Company’s loss history as
        well as industry statistics. Zurich Insurance Company provides excess
        reinsurance for all claims over $400,000 per occurrence as well as aggregate
        coverage for overall claims borne by the group of companies that participate
        in
        the program. The program also provides for risk sharing among members for
        infrequent, large claims over $100,000 but less then $400,000. The Company
        is
        responsible for all claims under $100,000. Furthermore, in determining reserves,
        the Company includes reserves for estimated claims incurred but not reported.
        Such estimates and the resulting reserves are reviewed and updated periodically,
        and any adjustments resulting there from are reflected in earnings currently.
 
 **Office
        Closings and Restructure Charges**
 
 For
        Fiscal
        2005, the Company recorded goodwill impairment in the amount of $1,431 excluding
        the write off which resulted from the sale of the AllCare Nursing business
        discussed in Note 3. This resulted from office closings during Fiscal 2005.
        Through February 28, 2006, the Company paid $781 of severance and other costs
        associated with the office closings. Certain lease costs have been paid through
        the term of the related leases for those closed offices that expired through
        January 2007. All amounts have been paid as of February 28, 2007.
 
 **Income
        Taxes**
 
 The
        Company accounts for income taxes in accordance with SFAS 109, ACCOUNTING
        FOR
        INCOME TAXES. Deferred tax liabilities and assets are determined based on
        the
        difference between the financial statement carrying amounts and the tax basis
        of
        assets and liabilities using the enacted statutory rates in effect at the
        balance sheet date. The Company records a valuation allowance to reduce its
        deferred tax assets when uncertainty regarding their realizability exists.
        The
        current tax provisions for Fiscal year’s 2007 and 2006 consist entirely of state
        and local income taxes representing minimum taxes due to certain states.
 
 **Earnings
        (Loss) per Share**
 
 The
        basic
        per share calculation is computed using the weighted average number of common
        shares outstanding for the applicable period. Diluted per share calculations
        is
        computed using the weighted average number of common shares plus common
        equivalent shares outstanding, unless the inclusion of such common equivalent
        shares would be anti-dilutive.  In Fiscal 2007, 2006 and 2005, 24,048,599,
        19,165,600 and 13,216,909 common stock equivalents, respectively, have been
        excluded from the earnings per share calculation, as their inclusion would
        have
        been anti-dilutive.
 
 **Fair
        Value of Financial Instruments**
 
 The
        carrying amount of cash and cash equivalents, accounts receivable, accounts
        payable, amounts due under bank financing and notes payable, approximate
        fair
        value.
 
 **Advertising**
 
 Advertising
        costs, which are expensed as incurred, were $282, $206 and $500 in Fiscal
        2007,
        2006 and 2005, respectively, and are included in general and administrative
        expenses.
 F-10


**Share-Based
        Payments**
 
 Effective
        March 1, 2006, the Company adopted the provisions of Statement of Financial
        Accounting Standards No. 123(R) (Revised 2004), "SHARE-BASED PAYMENT" (SFAS
        No.
        123(R)), which establishes the accounting for transactions in which an entity
        exchanges its equity instruments for goods or services. Under the provisions
        of
        SFAS No. 123(R), share-based payment compensation is measured at the grant
        date,
        based on the fair value of the award, and is recognized as an expense over
        the
        requisite employee service period (generally the vesting period). The Company
        adopted SFAS No. 123(R) using the modified prospective method and, as a result,
        periods prior to March 1, 2006 have not been restated. Prior to the adoption
        of
        SFAS No. 123(R), the Company accounted for stock-based compensation using
        the
        intrinsic-value based method under Accounting Principles Board (APB) Opinion
        No.
        25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations,
        and
        provided applicable pro-forma disclosures required by Statement of Financial
        Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
        Accordingly, prior to March 1, 2006, the Company recorded employee stock-based
        compensation expense only if, on the date of grant, the market price of the
        underlying stock on the date of grant exceeded the exercise price.
 
 As
        a
        result of this change in accounting policy, during Fiscal 2007 the Company
        recorded $416 of stock-based compensation expense, which is included in general
        and administrative expenses.
 
 **Recent
        Accounting Pronouncements**
  In
        September 2006, the FASB issued SFAS No. 158, EMPLOYERS' ACCOUNTING FOR DEFINED
        BENEFIT PENSION AND OTHER POSTRETIREMENT PLANS - an amendment of FASB Statements
        No. 87, 88, 106 and 132(R) ("SFAS 158"). SFAS 158 requires that employers
        recognize the funded status of their defined benefit pension and other
        postretirement plans on their consolidated balance sheet and recognize as
        a
        component of other comprehensive income, net of tax, the gains or losses
        and
        prior service costs or credits that arise during the period but are not
        recognized as components of net periodic benefit cost. SFAS No. 158 also
        require
        additional disclosures in the notes to financial statements. SFAS No. 158
        had no
        impact to the Company’s consolidated financial statements.
 
 In
        September 2006, the FASB issued SFAS No. 157, FAIR VALUE MEASUREMENTS ("SFAS
        157"), which defines fair value, establishes a framework for measuring fair
        value and expands the related disclosure requirements. Adoption is required
        as
        of the beginning of the first fiscal year that begins after November 15,
        2007.
        SFAS No. 157 applies under other accounting pronouncements that require or
        permit fair value measurements and does not require any new fair value
        measurements. SFAS No. 157 is not expected to have an impact on the Company's
        consolidated financial statements.
 
 In
        September 2006, the SEC issued Staff Accounting Bulletin ("SAB") No. 108,
        CONSIDERING THE EFFECTS OF PRIOR YEAR MISSTATEMENTS WHEN QUANTIFYING
        MISSTATEMENTS IN CURRENT YEAR FINANCIAL STATEMENTS ("SAB No. 108") to provide
        guidance on the consideration of the effects of prior year misstatements
        in
        quantifying current year misstatements for the purpose of a materiality
        assessment. Under SAB No. 108, companies should evaluate a misstatement based
        on
        its impact on the current year income statement, as well as the cumulative
        effect of correcting such misstatements that existed in prior years existing
        in
        the current year's ending balance sheet. The Company adopted SAB No. 108
        for the
        year ended February 28, 2007 with no impact to the Company’s consolidated
        financial statements.
 
 In
        June
        2006, the FASB issued FASB Interpretation No. ("FIN") 48, ACCOUNTING FOR
        UNCERTAINTY IN INCOME TAXES - an Interpretation of SFAS No. 109, which clarifies
        the accounting for uncertainty in income taxes recognized in the financial
        statements in accordance with SFAS No. 109, ACCOUNTING FOR INCOME TAXES.
        FIN 48
        prescribes a recognition threshold and measurement attribute for the financial
        statement recognition and measurement of a tax position taken or expected
        to be
        taken in a tax return. Any change in the net assets or liabilities recognized
        as
        a result of adopting the provisions of FIN 48 would be recorded as an adjustment
        to the opening balance of retained earnings. FIN 48 is effective for the
        Company
        as of March 1, 2007. Management is currently evaluating the impact, if any;
        the
        adoption of FIN 48 will have on the Company's consolidated financial
        statements.
 F-11


**3.
        Acquisitions**
 
 On
        June
        12, 2006, the Company completed the acquisition of certain assets of Critical
        Nursing Solutions, Inc. (“CNS”), a leading provider of per-diem and
        travel-nursing services in the Arizona market. The purchase price is up to
        $850
        including possible earn-out amounts that are more than likely to be earned.
        As
        part of the transaction we obtained three locations of CNS in Arizona. The
        results of operations of CNS are included in the consolidated financial
        statements from the date of acquisition.
 
 In
        addition, as part of the acquisition the Company assumed $1,012 in accounts
        receivable that was used to offset the debt of CNS, which was paid by the
        Company. The accounts receivable was collected in full during the months
        of July
        and August 2006.
 
 The
        purchase price of CNS totaling $867, including $17 of acquisition costs,
        has
        been allocated to assets as follows:
 Goodwill
                $
                    777Covenant
                    not to compete
                90Accounts
                    receivable
                1,012Debt
                    assumed in the acquisition
                (1,012)$867
  Goodwill
        of $777 is deductible for tax purposes.
 The
          purchase price includes an earn-out in the form of a contingent purchase
          price
          totaling $500. This earn-out is to be earned over a 14 month period following
          the date of acquisition. The covenant not to compete of $90 is being amortized
          over 3 years. Accumulated amortization at February 28, 2007 is $23.
 
 Pro
          Forma
          Financial Information **** -
          The
          following unaudited pro forma summary reflects the Company’s results as if the
          acquisition of CNS had occurred at the beginning of each period presented.
          These
          pro forma results have been prepared for comparative purposes only and
          are not
          indicative of what would have occurred had the acquisition been made at
          the
          beginning of the respective periods, or of the results which may occur
          in the
          future.
 **Fiscal**
                    **Year
                      Ended**
                  **Fiscal**
                    **Year
                      Ended****February
                      28, 2007**
                  **February
                      28, 2006**Revenues
                      as reported
                  $89,401
                  $71,528Revenues
                      pro forma
                  $92,088
                  $79,362Net
                      loss attributable to common stockholders, as reported
                  $
                      (2,685)
                  $(2,605)Net
                      loss attributable to common stockholders, pro forma
                  $(2,554)
                  $(2,443)Net
                      loss per basic and diluted shares as reported
                  $(.07)
                  $(.08)Net
                      loss per basic and diluted shares pro forma
                  $(.06)
                  $(.08)






F-12


**4.**  **Discontinued
      Operations**




In
      December 2004, after reviewing the significant debt obligations of the Company
      and the alternatives thereto, the Board of Directors of the Company concluded
      and authorized the Company to sell its AllCare Nursing business. On April 22,
      2005, the Company sold substantially all of the assets of its AllCare Nursing
      Services business, which assets consisted primarily of goodwill and accounts
      receivable, and its liabilities to Onward of Norwalk, Connecticut, for
      approximately $20.0 million in cash, of which $1.2 million was placed in escrow
      pending the collection of the accounts receivable. AllCare Nursing was located
      in Melville, New York, with offices in Union, New Jersey, and in Stratford,
      Connecticut, and provided supplemental staffing and travel nurses to healthcare
      facilities in the greater New York City metropolitan area, northern New Jersey,
      and Connecticut.





The
      Company was required to use the funds that it received from the sale to Onward
      to retire approximately $13.0 million in bank debt and to repay and restructure
      the $28.1 million in promissory notes outstanding to the sellers of Direct
      Staffing. In connection with obtaining its lender’s consent to the sale and
      paying down its bank debt, the Company’s revolving credit facility was
      permanently reduced from $35.0 million to $15.0 million. As a result of the
      repayment and restructuring of the Direct Staffing promissory notes, those
      obligations were reduced from $28.1 million to $8.1 million of which $17.3
      million was forgiveness of debt and is included as a reduction of loss on
      discontinued operations. On August 30, 2005, the remaining $8.1 million in
      promissory notes were converted into 2,050 shares of Series B Preferred
      stock.





The
      Company wrote-off goodwill of $3.8 million as of February 28, 2005, which
      represents the difference in the sales price of AllCare Nursing and the book
      value of its net assets including goodwill. The Company’s consolidated financial
      statements reflect AllCare Nursing as discontinued operations in the financial
      results of the Company for Fiscal Years 2006 and 2005.




Revenue
      and loss from discontinued operations for Fiscal 2006 (only through date of
      disposition of April 22, 2005), and 2005 is presented in the chart
      below:


**February
                  28,****2006**
              **February
                  28,****2005****Revenue**
              $
                  5,480
              $
                  37,373**(Loss)**
              $
                  (577)
              $
                  (1,945)


Interest
        expense included in discontinued operations was $443 and $2,253 for Fiscal
        Years
        ended February 28, 2006 and 2005, respectively.
 
 **5.**
            **Fixed
                Assets** 
 Fixed
        assets consist of the following:
 **Estimated
                    Useful**
                
                **February
                    28,****Life
                    in Years**
                
                **2007**
                
                **2006**Computer
                    equipment and software
                
                
                3
                    to 5
                
                $
                1,150
                
                $
                872Office
                    equipment, furniture and fixtures
                
                
                5
                
                
                144
                
                
                72Leasehold
                    improvements
                
                
                5
                
                
                158
                
                
                1581,452
                
                
                1,102Less:
                    accumulated depreciationand
                    amortization
                
                
                
                
                
                1,166
                
                
                895Total
                
                
                
                
                $
                286
                
                $
                207
 Depreciation
          expense was $277, $312 and $436 in Fiscal 2007, 2006 and 2005, respectively.
          As
          of February 28, 2007 and 2006, fixed assets include amounts for equipment
          acquired under capital leases with an original cost of $710 and $262,
          respectively. The accumulated amortization on equipment acquired under
          capital
          lease obligations was $268 and $249 as of February 28, 2007 and 2006,
          respectively.
 F-13


**6.**  **Prepaid
      Expenses and Other Current Assets**


Prepaid
        expenses and other current assets consist of the following:
 **February
                    28,****2007**
                
                **2006**Prepaid
                    workers compensation expense
                
                $
                3,808
                
                $
                3,498Other
                
                
                2,388
                
                
                2,670Total
                
                $
                6,196
                
                $
                6,168
 **7.
          Accrued Expenses**
 
 Accrued
          expenses consist of the following:
 **February
                      28,****2007**
                  
                  **2006**Payroll
                      and related taxes
                  
                  $
                  1,970
                  
                  $
                  1,412Accrued
                      licensee distributions payable
                  
                  
                  1,121
                  
                  
                  1,195Accrued
                      insurance
                  
                  
                  1,962
                  
                  
                  1,683Dividends
                      payable
                  
                  
                  608
                  
                  
                  202Earnout
                      payable on CNS acquisition
                  
                  
                  267
                  
                  
                  -Other
                  
                  
                  655
                  
                  
                  570**Total**
                  
                  **$**
                  **6,583**
                  
                  **$**
                  **5,062**
 **8.
            Financing Arrangements**
 
 The
            Company entered into a Financing Agreement, as amended, with a lending
            institution, HFG Healthco-4 (“HFG”), whereby the lender agreed to provide a
            revolving credit facility and term loan facility. The revolving credit
            facility
            was for up to $35 million, but was amended in connection with the sale
            of
            AllCare on April 22, 2005, reducing the amount of the facility to $15
            million.
            Subsequently on November 7, 2005 the facility was further amended to
            modify
            certain financial ratio covenants as of November 30, 2005 and to increase
            availability from 80% of receivables to 85%, and to extend the revolving
            loan
            term from April 2008 to November 2008. As amended, availability under
            the credit
            facility is based on a formula of eligible receivables as defined in
            the
            Financing Agreement. On April 22, 2005 in connection with the sale of
            AllCare,
            the liability due on the Company’s revolving line of credit was paid down by the
            amount of $12,123 and the outstanding term loan balance of $1,888 was
            extinguished.
 
 Interest
            accrues at a rate of 5.41% over LIBOR on the revolving credit facility
            and
            accrued at a rate of 6.37% over LIBOR on the term loan facility until
            its
            termination on April 22, 2005. An annual fee of 0.5% is required based
            on any
            unused portion of the total loan availability. The agreement contains
            various
            restrictive covenants that, among other requirements, restrict additional
            indebtedness. The covenants also require the Company to meet certain
            financial
            ratios. As of February 28, 2007, and 2006 the outstanding balance on
            the
            revolving credit facility was $13,914 and $10,516, respectively. The
            Company has
            not met all its covenants as of February 28, 2007. As such, the outstanding
            loan
            balance of $13,914 has been classified as a current liability. HFG has
            granted
            us a waiver regarding the covenants that were not met as of February
            28, 2007,
            that expires on June 5, 2007. In addition, the Company is in an over-advance
            position based on the calculations required by the agreement. The Company
            and
            HFG are discussing turning the over-advance position into a term loan.
            HFG has
            granted us a waiver regarding the over-advance position that expires
            on June 5,
            2007.
 
 On
            July
            14, 2004, October 13, 2004, January 14, 2005, June 8, 2005, and October
            14, 2005
            amendments to the revolving credit facility were entered into modifying
            certain
            financial ratio covenants as of May 31, 2004, August 31, 2004, November
            30,
            2004, February 28, 2005, June 30, 2005 and August 31, 2005
            respectively.
 F-14


**9.
      Notes Payable**





Notes
      payable consist of the following:


**February
                  28,****2007**
              
              **2006**Notes
                  payable to DSS and DSI (a)
              
              $
              -
              
              $
              120Others
              
              
              135
              
              
              244Notes
                  from related parties (b)
              
              
              1,052
              
              
              1,230Convertible
                  debentures (c)
              
              
              -
              
              
              2851,187
              
              
              1,879Less:
                  current portion
              
              
              56
              
              
              1,629$
              1,131
              
              $
              250




(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) in the aggregate
        amount for $30,195. The notes, as amended, were combined into one note and
        in
        connection with the April 22, 2005 sale of AllCare, the Company sold the
        assets
        collateralizing the above-mentioned notes and through a combination of repayment
        and restructuring of the notes reduced the amount outstanding on the notes
        to
        $8,100.
  As
        part of
        the repayment and restructuring of the notes, the obligations of one former
        owner were discharged entirely. The notes of the three other owners were
        modified to provide for interest at the rate of 4% per annum for one year
        and 5%
        per annum thereafter, with the first payment being due and payable in May
        2006.
        Principal payments under the restructured notes were to be made in 120 monthly
        installments, commencing no earlier than May 2006 and to be made only if
        and
        when certain financial targets were achieved. The notes were secured by a
        subordinated security interest in the accounts, equipment, fixtures, goods
        and
        inventory of a subsidiary of the Company. On August 30, 2005 the $8,100 in
        notes
        were converted to Series B Preferred Stock.
  The
        three
        owners held notes in the aggregate principal amount of $330 that matured
        on
        October 31, 2005 and were subject to the subordination agreement between
        the
        owner and the Company’s senior lender. The notes bore interest at the rate of 8%
        per annum. They were convertible at the option of the holders into Class
        A
        Common Stock of the Company based on the average closing price of the stock
        for
        the three trading days immediately preceding the conversion date. It was
        contemplated that the Notes would be repaid from funds released from the
        escrow
        created as a part of the Company’s sale of its AllCare Nursing business. As of
        February 28, 2006, $120 remained outstanding on these notes, which were repaid
        during Fiscal 2007.
  (b) On
        December 15, 2004 the Company entered into a $1.5 million 15% convertible
        subordinated note with the wife of one of the executive officers of the Company.
        The note bore interest at 15% per annum and matured on January 15, 2007.
        The
        note was to be repaid in eight equal installments commencing April 15, 2005,
        subject to restrictions on the sources of such payment. At the option of
        the
        holder, all or a portion of the note could have been converted at any time,
        plus
        accrued but unpaid interest, into shares of Class A Common Stock at a per
        share
        price equal to $0.38 cents per share. On January 15, 2007, the note’s due date,
        the holder agreed to delay repayment of the remaining principal of $1,052
        to
        January 15, 2009. The note is subordinated to borrowings under the Company’s
        credit facility and remains convertible at $0.38 per share. In conjunction
        with
        the extension of the note due date, the holder was issued five-year warrants
        to
        acquire 350,000 shares of the Company’s Class A common stock at $0.50 per share.
        The fair value of the warrants totaling $68 was estimated using the
        Black-Scholes option-pricing model with the following assumptions: no dividends;
        risk free interest rate of 4.69%; the expected life of 5 years and volatility
        of
        83%. The fair value of the warrants is being amortized to interest expense
        over
        the two-year note extension period. Interest expense of $5 was recorded during
        the year ended February 28, 2007.
 (c)
        On May
        25, 2005, the Company issued a Promissory Note to Cornell Capital Partners
        L.P.
        (“Cornell”) in the principal amount of $850. As was contemplated, the Note was
        to be repaid through issuances of Class A Common Stock to Cornell under the
        Standby Equity Distribution Agreement between the Company and Cornell. On
        October 9, 2006, the Company repaid the balance due under the note and, as
        a
        result, no further shares of Common Stock will be issued under the Standby
        Equity Distribution Agreement. See Note 12 included herein.
 F-15


On
      April
      19, 2004 upon execution of the Standby Equity Distribution Agreement, a
      Convertible Debenture in the principal amount of $140 was issued to Cornell
      as a
      Commitment fee. The Convertible Debenture had a term of three years, accrued
      interest at 5% and was convertible into the Company’s Common Stock at a price
      per share of 100% of the lowest closing bid price for the three days immediately
      preceding the conversion date. At February 28,
      2005,
      $90 was outstanding on the Convertible Debenture. The note was paid in full
      during the year ended February 28, 2006.





In
      April
      2004, the Company issued $500 of Convertible Notes due April 2, 2005 and
      warrants to purchase 250,000 shares of Class A Common Stock at $0.75 per share.
      The Convertible Notes do not bear interest and were to be repaid in Common
      Stock
      of the Company priced at the effective price at which Common Stock or securities
      convertible into Common Stock of the Company was sold between October 2, 2004
      and April 2, 2005. These notes were converted in September 2005.





For
      financial reporting purposes the warrants were accounted for as a liability.
      The
      fair value of the warrants, which amounted to $95 on the date of grant, was
      recorded as a reduction to the April Maturity Notes. The warrant liability
      was
      reclassified to equity on September 30, 2005 the effective date of the
      registration statement, evidencing the non-impact of these adjustments on the
      Company’s financial position and business operations.





The
      fair
      value of the warrants was estimated using the Black-Scholes option-pricing
      model
      with the following assumptions: no dividends; risk free interest rate of 4%;
      the
      expected life of 4 years and volatility of 111%.





On
      and
      after September 14, 2005, the Company sold $1,250 of its Convertible Notes
      due
      September 14, 2006 to 19 purchasers. Those notes were convertible into shares
      of
      the Company’s Class A Common Stock, at the rate of $0.37 per share, and bore
      interest at the rate of 12 percent (12%) per year in shares of Common Stock.
      Each Note was accompanied by a warrant to purchase one share of Common Stock
      for
      each four shares into which the Note was convertible. The warrants are
      exercisable at $0.60 per share for a period of five (5) years. The Company
      was
      obligated to register the shares into which the Notes were convertible as well
      as the shares subject to the warrants .





By
      their
      terms, the Convertible Notes were converted into 3,397,260 shares of Common
      Stock on September 30, 2005, when the Company’s registration statement became
      effective. There are 849,315 shares covered by the warrants.





In
      accordance with EITF 00-19, "Accounting for Derivative Financial Instruments
      Indexed To, and Potentially Settled In a Company's Own Stock," (EITF 00-19”) and
      the terms of the warrants and the transaction documents, the warrants were
      accounted for as a liability. The fair value of the warrants, which amounted
      to
      $98 on date of grant, was recorded as a reduction to the Maturity of the Notes.
      The warrant liability was reclassified to equity in September 2005 on the
      effective date of the registration statement, and a charge to interest expense
      in the amount of $98 was taken representing the additional value of the warrants
      provided in the transaction, which was originally recorded as discount to the
      notes.





The
      fair
      value of the warrants was estimated using the Black-Scholes option-pricing
      model
      with the following assumptions: no dividends; risk-free interest rate of 5%;
      the
      expected life of 5 years and volatility of 45.79%.





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


**Fiscal
                  Year Ending**2008
              
              $
              562009
              
              
              1,0822010
              
              
              282011
              
              
              21Total
              
              $
              1,187




F-16


**10.
      Income Taxes**


The
        (benefit) provision for income taxes consists of the following:
 **Fiscal
                    Year Ended****February
                    28, 2007**
                
                **February
                    28, 2006**
                
                **February
                    28, 2005**Current:Federal
                
                $
                -
                
                $
                -
                
                $
                -State
                
                
                (47
                )
                
                50
                
                
                39(47
                )
                
                50
                
                
                39DeferredFederal
                
                
                -
                
                
                -
                
                
                3,477State
                
                
                -
                
                
                -
                
                
                --
                
                
                -
                
                
                3,477Total
                    income tax (benefit) provision
                
                $
                (47
                )
                $
                50
                
                $
                3,516
 The
          income
          tax benefit for 2007 results primarily from an adjustment to minimum state
          taxes
          payable. A reconciliation of the differences between income taxes computed
          at
          the federal statutory rate and the (benefit) provision for income taxes
          as a
          percentage of pretax income from continuing operations for each Fiscal
          Year is
          as follows:
 **2007**
                  
                  **2006**
                  
                  **2005**Federal
                      statutory rate
                  
                  
                  (34.0
                  %)
                  
                  (34.0
                  %)
                  
                  (34.0
                  %)State
                      and local income taxes, net
                  
                  
                  (4.8
                  %)
                  
                  2.9
                  %
                  
                  1.6
                  %of
                      federal income tax benefitValuation
                      allowance increase
                  
                  
                  34.8
                  %
                  
                  34.0
                  %
                  
                  103.3
                  %Other
                  
                  
                  1.9
                  %
                  
                  0.0
                  %
                  
                  .2
                  %Effective
                      rate
                  
                  
                  (2.1
                  %)
                  
                  2.9
                  %
                  
                  71.1
                  %
  The
            Company’s net deferred tax assets are comprised of the
            following:
 **February
                      28, 2007**
                  
                  **February
                      28, 2006**Current:Allowance
                      for doubtful accounts
                  
                  $
                  83
                  
                  $
                  99Accrued
                      expenses
                  
                  
                  933
                  
                  
                  7621,016
                  
                  
                  861Valuation
                      allowance
                  
                  
                  (1,016
                  )
                  
                  (861
                  )-
                  
                  
                  -Non-current:Net
                      operating loss carryforward
                  
                  
                  7,620
                  
                  
                  7,125Accumulated
                      depreciation and amortization
                  
                  
                  925
                  
                  
                  993Others
                  
                  
                  131
                  
                  
                  (7
                  )8,676
                  
                  
                  8,111Valuation
                      allowance
                  
                  
                  (8,676
                  )
                  
                  (8,111
                  )$
                  -
                  
                  $
                  -
  F-17


Due
      to its
      continuing losses, the Company provided a valuation allowance for its deferred
      taxes. The Company intends to maintain its valuation allowance until such time
      as positive evidence exists to support reversal of the valuation allowance.
      Income tax provision recorded in the future will be reduced to the extent of
      offsetting reductions in the Company’s valuation allowance.





At
      February 28, 2007, the Company has a federal net operating loss of approximately
      $22,412, which expires in 2020 through 2027.





**11.
      Commitments and Contingencies**





**Lease
      Commitments** :





Future
      minimum rental payments under non-cancelable 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 28, 2007 are as follows:


**Fiscal
                  Year Ending**2008
              
              $
              8232009
              
              
              5982010
              
              
              5362011
              
              
              435Total
                  minimum lease payments
              
              $
              2,392


Certain
        operating leases contain escalation clauses with respect to real estate taxes
        and related operating costs. Rental expense was $992, $1,055 and $1,676 in
        Fiscal 2007, 2006 and 2005, respectively.
 
 **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 an officer of the Company, under which he receives an annual base salary
        of
        $185, with a $10 increase per annum. This agreement was terminated in July
        2006.
 
 In
        August
        2006, the Company entered into a three-year employment agreement with an
        officer
        of the Company, under which he receives an annual base salary of $227, $240
        and
        $252 in successive fiscal years.
 
 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.
  F-18


**Litigation** :





***Transportation
      Insurance Company, Continental Casualty Company and CNA Claim Plus, Inc. v.
      ATC
      Healthcare Services, Inc. and ATC Healthcare, Inc.*** **(United
      States District Court for the Eastern District of New York No. CV
      04-4323).**  Plaintiff
      insurance companies (collectively “CNA”) filed this action in 2004 to recover
      insurance premiums, claims reimbursements, claims handling fees, taxes and
      interest alleged to be owed by the Company and by its wholly-owned subsidiary
      ATC Healthcare Services, Inc. (collectively the “Company”) to CNA under
      1999-2003 workers compensation insurance programs. CNA sought over $3 million
      in
      damages, “subject to change as additional claims are paid under the policies, as
      future computations are undertaken, and as additional claim reimbursement and
      claim service billings are prepared.” Following an analysis and accounting by
      the Company’s expert of whether CNA properly dispatched its claim-handling
      duties and whether its invoices were fair and reasonable, the Company
      counterclaimed that CNA mishandled claims, overstated invoices, and in fact
      owes
      the Company a substantial sum of money. In April 2007, the parties settled
      the
      lawsuit, including all claims and counterclaims, and in May 2007 dismissed
      the
      case in its entirety. As part of their settlement, the parties entered into
      a
      confidentiality agreement covering the settlement terms. As a result of this
      settlement, the Company recorded a loss on litigation settlement of $342 in
      its
      consolidated financial statements for the fiscal year ended February 28,
      2007.





In
      addition, 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.





**12.
      Stockholders’ Equity**





**Series
      A Convertible Preferred Stock:**




On
      February 26, 2003, the Company announced it was offering to sell 4,000 shares
      of
      7% Convertible Series A Preferred Stock at a cost of $500 per share to certain
      accredited investors in an offering exempt from registration under the
      Securities Act of 1933, as amended. Each share of the Preferred Stock may be
      converted at any time by the holder after April 30, 2003 at a conversion price
      equal to the lower of (i) 120% of the weighted average closing price of the
      Company's common stock on the American Stock Exchange during the 10 trading
      day
      period ending April 30, 2003, and (ii) 120% of the weighted average closing
      price of the Company's common stock on the American Stock Exchange during the
      10
      trading day period ending on the date the Company accepts a purchaser's
      subscription for shares, subject in either case to adjustment in certain events.
      As of May 2, 2003, 2,000 shares were sold with conversion prices of $.73 to
      $.93
      per share.




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




**Series
      B Convertible Preferred Stock:**





On
      August
      31, 2005, the three subordinated promissory notes representing the remaining
      consideration due from the Company to the sellers of the Company’s AllCare
      Nursing Services business (who are considered related parties) were converted
      into shares of the Company’s Series B Convertible Preferred Stock. Each of the
      three promissory notes was dated April 22, 2005, was in the principal amount
      of
      $2.7 million from two of the Company’s subsidiaries, and was converted into
      1,350 shares of Preferred Stock on the basis of one share for every $2,000.00
      of
      principal amount.





The
      Series
      B Convertible Preferred Stock has a dividend rate of 5%, a liquidation
      preference of $2,000 per share ($8.1 million in aggregate) and is convertible
      into Class A Common Stock at a conversion rate of $0.90 per share. The Preferred
      Stock is held in rabbi trusts established by the Company for the benefit of
      the
      note holders.


F-19


Under
      the
      terms of each trust, 664 shares will be released to the individual in
      installments on the third through the seventh anniversaries of August 31, 2005.
      The 686 shares remaining in each trust will be released to the individual on
      the
      earlier of the time immediately prior to the occurrence of a change in control
      of the Company, as defined in the trust agreement, or the tenth anniversary
      of
      September 1, 2005. The Company has registered the underlying shares of Common
      Stock and fulfilled all other requirements of the issuance.





**Series
      C Convertible Preferred Stock:**





On
      May 31,
      2006, the Company sold 500 shares of its 6% Convertible Series C Preferred
      Stock
      (the “Series C Preferred Stock”) to one accredited investor for $1
      million.  Each Series C Preferred share is convertible into the Company’s
      Class A Common Stock at $0.45 per common share.  As part of the sale, for
      every $1.35 invested, the purchaser also received a warrant to purchase one
      share of the Company’s Class A Common Stock at $0.60 over a five-year period,
      for a total of 741,000 shares subject to the warrants.  The fair value of
      the warrants is equal to $139 based on the fair value method of accounting
      using
      a Black-Scholes valuation model. The Company paid the placement agent a
      seven percent commission of $78 and granted the agent a warrant to purchase
      155,000 shares of the Company’s Class A Common Stock for $0.60 per share. The
      fair value of the placement agent warrant is equal to $29 based on the fair
      value method of accounting using a Black-Scholes valuation model.




Pursuant
      to the terms of the registration rights agreement entered in connection with
      the
      transaction, the Company is required to file with the Securities and Exchange
      Commission (the “SEC”) a registration statement under the Securities Act of
      1933, as amended, covering the resale of the common stock underlying the Series
      C Preferred Stock purchased and the common stock underlying the warrants. This
      registration statement was filed and declared effective by the SEC in the second
      quarter of Fiscal 2007.





In
      accordance with EITF 00-19 and the terms of the warrants and the transaction
      documents, the warrants were initially accounted for as a liability due to
      a
      substantial penalty for failing to file, and have declared effective, a
      Registration Statement covering the underlying shares. The fair value of the
      warrants, which amounted to $139 on the date of grant, was recorded as a
      reduction in Additional Paid In Capital. The warrant liability was reclassified
      to equity on the effective date of the registration statement, evidencing the
      non-impact of these adjustments on the Company’s financial position and results
      of operations.





The
      fair
      value of the warrants was estimated using the Black-Scholes option-pricing
      model
      with the following assumptions: no dividends; risk-free interest rate of 5.11%;
      the expected life of 5 years and volatility of 64%.





In
      addition, in accordance with EITF 00-27, the Company recorded a dividend for
      the
      beneficial conversion of $5 based on the difference between the effective
      conversion price of Series C and the fair value of the Company’s Common Stock.
      The beneficial conversion is included in accreted dividends.





As
      of
      February 28, 2007, the Company issued dividends, as required, on the Series
      C
      Preferred Stock. This resulted in the issuance of an additional 16 shares in
      the
      form of a dividend, to the holders. As a result, there are 516 shares
      outstanding at February 28, 2007.





**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.


F-20


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.





**Issuance
      of Common Stock:**





On
      January
      16, 2007, the Company sold to one accredited investor for $600, 2,000,000 shares
      of the Company's Class A Common Stock and a warrant to acquire 1,000,000 shares
      of Class A Common Stock at $0.45 per share, exercisable over a five-year period.
      The Company paid a finder a seven percent commission of $42 and granted the
      finder 140,000 five-year warrants to purchase shares of Class A Common Stock
      for
      $0.45 per share. See Note 17., included elsewhere herein, for a discussion
      of
      the sale of additional Class A Common Stock subsequent to February 28,
      2007.





In
      connection with the warrants, there is a penalty provision if the underlying
      shares are not registered.


In
      accordance with FSP EITF 00-19-2, the likelihood of a penalty being incurred
      for
      failure to receive approval on the Registration Statement is remote, no accrual
      is deemed necessary for any penalty. In accordance with the agreement, penalties
      for failure to register timely amount to $15 per month and will incur on a
      pro-rata basis.





The
      fair
      value of the warrants was $208 and the fair value of the finder warrants was
      $29. This was calculated using the Black-Scholes option-pricing model with
      the
      following assumptions: no dividends; risk-free interest rate of 4.51%; the
      expected life of 5 years and volatility of 83%.





As
      noted
      above, on May 31, 2006, the Company sold to the same accredited investor, 500
      shares of its 6% Convertible Series C Preferred Stock for $1.0 million. The
      Series C Preferred Shares were convertible into Class A Common Stock at $0.45
      per common share. As part of the sale, the purchaser also received 741,000
      warrants to purchase shares of Class A Common Stock at $0.60 per share over
      a
      five-year period. In connection with the sale of Class A Common Stock on January
      16, 2007, the per common share conversion price of the Series C Preferred shares
      sold to the purchaser in the May 31, 2006 transaction was reduced from $0.45
      to
      $0.40, and the per share exercise price of the warrants granted to that
      purchaser was reduced from $0.60 to $0.45. The effect of these modifications
      were immaterial to the consolidated financial statements taken as a
      whole.





As
      previously noted, on April 19, 2004, the Company entered into a Standby Equity
      Distribution Agreement with Cornell. Pursuant to the Standby Equity Distribution
      Agreement, the Company may, at its discretion, periodically sell to Cornell
      shares of Common Stock for a total purchase price of up to $5,000. For each
      share of Common Stock purchased under the Standby Equity Distribution Agreement,
      Cornell will pay the Company 97% of the lowest closing bid price of the Common
      Stock during the five consecutive trading days immediately following the notice
      date. Further, the Company has agreed to pay Cornell 5% of the proceeds that
      the
      Company receives under the Standby Equity Distribution Agreement, and issued
      a
      Convertible Debenture in the principal amount of $140 as a commitment fee.
      The
      Agreement was subject to the Company filing and maintaining an effective S-1
      registration.





In
      November 2004, the Securities and Exchange Commission declared the Company’s S-1
      effective. As of February 28, 2006, the Company issued 7,279,434 shares (of
      which 5,615,512 were issued in Fiscal 2006) to Cornell under the Agreement
      and a
      $140 Convertible Debenture (and to pay a fee to Arthurs Lestrange & Company,
      Inc., as a private placement agent) with sales prices of $0.18 to $0.41 per
      share. The 5,615,512 shares issued consisted of 4,660,272 issued upon the
      conversion of debt 844,359 shares issued for cash and 110,886 shares issued
      for
      the payment of interest. The Company received net proceeds of $1,927 (net of
      expenses of $358) from the sale of these securities.





During
      Fiscal 2007, the Company issued 1,287,666 shares to Cornell for cash and 738,996
      shares upon the conversion of debt. The Company received cash of $455 and
      converted debt of $265. The Agreement was terminated in October 2006 and no
      further shares will be issued.


F-21


On
      and
      after September 14, 2005, the Company sold $1,250 of its Convertible Notes
      due
      September 14, 2006 to 19 purchasers. Those notes were convertible into shares
      of
      the Company’s Class A Common Stock and bore interest at the rate of 12 percent
      (12%) per year in shares of Common Stock, at the rate of $0.37 per share. Each
      Note was accompanied by a warrant to purchase one share of Common Stock for
      each
      four shares into which the Note was convertible. The warrants are exercisable
      at
      $0.60 per share for a period of five (5) years. The Company was obligated to
      register the shares into which the Notes were convertible as well as the shares
      subject to the warrants. By their terms, the Convertible Notes were converted
      into 3,397,260 shares of Common Stock on September 30, 2005, when the Company’s
      registration statement became effective. There are 849,315 shares covered by
      the
      warrants.





On
      September 30, 2005, the Company issued 1,851,518 shares under the conversion
      of
      the April 2004 notes. In April 2004, the Company issued $500 of Convertible
      Notes due April 2, 2005 and warrants to purchase 250,000 shares of Class A
      Common Stock at $0.75 per share. The Convertible Notes do not bear interest
      and
      were to be repaid in Common Stock of the Company priced at the effective price
      at which Common Stock or securities convertible into Common Stock of the Company
      was sold between October 2, 2004 and April 2, 2005.





During
      Fiscal 2005, the Company issued 13,796 shares of Class A Common Stock pursuant
      to the Employee Stock Purchase Plan.





During
      Fiscal 2005, The Company issued 165,000 shares of Class A Common Stock at $0.30
      per share for consulting services.





During
      Fiscal 2007, 2006 and 2005, Class A Common Stock totaling 100, 3,759 and 55,000
      shares, respectively, were issued upon the conversion of the same number of
      Class B Common Stock.





During
      Fiscal 2006, the Company issued 110,886 shares of Class A Common Stock at
      $0.26-$0.30 per share in lieu of cash interest payments on convertible notes
      due
      Cornell.





Common
      Stock Warrants:





All
      of the
      Company’s common stock warrants have a five-year term and are exercisable upon
      issuance. Information regarding the Company’s common stock warrants is
      summarized below:


**Stock
                  Warrant**
              
              **Warrant
                  Exercise**
              
              **Weighted
                  Average****Activity**
              
              **Price**
              
              **Exercise
                  Price**Warrants
                  outstanding as of March 1, 2004
              
              
              57,363
              
              $
              0.01
              
              $
              0.01Issued
              
              
              250,000
              
              $
              0.75
              
              $
              0.75Exercised
              
              
              -
              
              
              -
              
              
              -Expired
              
              
              -
              
              
              -
              
              
              -Warrants
                  outstanding as of February 28, 2005
              
              
              307,363
              
              $
              0.01
                  - $0.75
              
              $
              0.61Issued
              
              
              849,315
              
              $
              0.60
              
              $
              0.60Exercised
              
              
              -
              
              
              -
              
              
              -Expired
              
              
              -
              
              
              -
              
              
              -Warrants
                  outstanding as of February 28, 2006
              
              
              1,156,678
              
              $
              0.01
                  - $0.75
              
              $
              0.60Issued
              
              
              2,386,000
              
              $
              0.45
                  - $0.60
              
              $
              0.51Exercised
              
              
              -
              
              
              -
              
              
              -Expired
              
              
              -
              
              
              -
              
              
              -Warrants
                  outstanding as of February 28, 2007
              
              
              3,542,678
              
              $
              0.01
                  - $0.75
              
              $
              0.54




F-22


**Common
      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.





A
      total of
      3,021,750 stock options were granted under the 1993 Stock Option Plan, at prices
      ranging from $0.50 to $3.87, of which 799,000 remain outstanding at February
      28,
      2007.





**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”) that 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 28, 2007.





**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 860,500 remain outstanding
      at February 28, 2007.





**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
      930,000 stock options were granted under the 2000 Stock Option Plan at an
      exercise prices ranging from $0.35 to $1.02, of which 530,000 are outstanding
      as
      of February 28, 2007.


F-23


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


**Stock
                  Option Activity**
              
              **Option
                  Price**
              
              **Weighted-Average**
                **Exercise
                  Price**Options
                  outstanding as of March 1, 2004
              
              
              4,626,882
              
              $
              .25
                  - $2.40
              
              $
              0.63Granted
              
              
              -
              
              
              -
              
              
              -Exercised
              
              
              -
              
              
              -
              
              
              -Terminated
              
              
              -
              
              
              -
              
              
              -Options
                  outstanding as of February 28, 2005
              
              
              4,626,882
              
              $
              .25
                  - $2.40
              
              $
              0.63Granted
              
              
              -
              
              
              -
              
              
              -Exercised
              
              
              -
              
              
              -
              
              
              -Terminated
              
              
              (500,000
              )
              $
              .34-
                  $2.40
              
              $
              0.59Options
                  outstanding as of February 28, 2006
              
              
              4,126,882
              
              $
              .25
                  - $1.02
              
              $
              0.63Granted
              
              
              1,330,000
              
              $
              .35
                  - $0.36
              
              $
              0.36Exercised
              
              
              -
              
              
              -
              
              
              -Terminated
              
              
              (500,000
              )
              $
              .79-
                  $1.02
              
              $
              0.97Options
                  outstanding as of February 28, 2007
              
              
              4,956,882
              
              $
              .25
                  - $0.85
              
              $
              0.51


During
        Fiscal Year 2007, the Company recorded $416 of stock-based compensation expense,
        which is included in general and administrative expenses. All options
        outstanding at November 30, 2006 are either vested or expected to vest. Because
        the Company only issues options to senior personnel, it expects the forfeiture
        rate to be deminimus. The aggregate intrinsic value as of February 28, 2007
        is
        less than $1 .
 
 The
        following table summarizes information about stock options outstanding at
        February 28, 2007:


**Options
                  Outstanding**
              
              **Options
                  Exercisable****Range
                  of**
                **Exercise
                  Prices**
              
              **Number**
                **Outstanding**
              
              **Weighted-Average**
                **Remaining**
                **Contractual
                  Life**
                **(In
                  Years)**
              
              **Weighted**
                **Average**
                **Exercise
                  Price**
              
              **Number**
                **Exercisable**
              
              **Weighted**
                **Average**
                **Exercise**
                **Price**$.25
                  to $.58
              
              
              2,179,500
              
              
              6.8
              
              $
              0.41
              
              
              1,069,500
              
              $
              0.47$0.59
              
              
              2,767,382
              
              
              2.8
              
              $
              0.59
              
              
              1,383,691
              
              $
              0.59$.60
                  to $0.85
              
              
              10,000
              
              
              5.7
              
              $
              0.78
              
              
              10,000
              
              $
              0.78**4,956,882**
              
              
              **4.6**
              
              **$**
              **0.51**
              
              
              **2,463,191**
              
              **$**
              **0.54**


A
        summary
        of the Company’s nonvested shares as of February 28, 2007, and changes during
        the year then ended is presented below:


**Options**
              
              **Weighted
                  Average**
                **Grant
                  Date Fair Value**Nonvested
                  options outstanding, beginning of period
              
              
              1,417,024
              
              $
              0.50Granted
              
              
              1,110,000
              
              
              0.36Vested
              
              
              -
              
              
              -Terminated
              
              
              (33,333
              )
              
              0.68Nonvested
                  options outstanding, end of period
              
              
              2,493,691
              
              $
              0.43


As
        of
        February 28, 2007, there was $171 of total unrecognized compensation expense
        related to nonvested share-based compensation, as well as current period
        grants
        of stock options expense. This cost will be recognized through August
        2009.
 F-24


The
      Company accounted for its employee incentive stock option plans in prior years
      using the intrinsic value method in accordance with the recognition and
      measurement principles of Accounting Principles Board Opinion No. 25 Accounting
      for Stock Issued to Employees,” as permitted by SFAS No. 123. Had the Company
      determined compensation expense at February 28, 2006 and February 28, 2005,
      based on the fair value at the grant dates for those awards consistent with
      the
      method of SFAS 123, the Company’s net loss per share would have been the
      following pro forma amounts:


**February
                  28, 2006**
              
              **February
                  28, 2005**Net
                  loss, as reported
              
              $
              (2,332
              )
              $
              (10,404
              )Less:
                  Fair value method of stock based compensation, net of tax
              
              
              (488
              )
              
              (1,014
              )Net
                  loss, pro forma
              
              $
              (2,820
              )
              $
              (11,418
              )Basic
                  net loss per share as reported
              
              $
              (0.08
              )
              $
              (0.42
              )Proforma
                  basic net loss per share
              
              $
              (0.09
              )
              $
              (0.45
              )Diluted
                  net loss per share as reported
              
              $
              (0.08
              )
              $
              (0.42
              )Proforma
                  diluted net loss per share
              
              $
              (0.09
              )
              $
              (0.45
              )


**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. The employee stock
        purchase plan was frozen as of March 2005.
 
 **13.**  **Employee 401(k) Savings Plan**
 
 The
        Company maintains an Employee 401(k) Savings Plan. The plan is a defined
        contribution plan that 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. For Fiscal 2007, 2006 and 2005 the Company contributed
        $29,
        $15 and $16 respectively, to the plan.
 
 **14.** **** **Licensee
        Financial Data**
 The
        Company’s consolidated financial statements include service revenues and service
        costs associated with its licensees. In addition, royalties paid to licensees
        are included in general and administrative expenses. Summarized below is
        the
        breakdown between licensee and Company generated items for the periods
        presented:


F-25




**Year
                  Ended**
                **February
                  28, 2007**
              
              **Year
                  Ended**
                **February
                  28, 2006**
              
              **Year
                  Ended**
                **February
                  28, 2005**Company
                  Service Revenue
              
              $
              26,594
              
              $
              19,872
              
              $
              17,693Licensee
                  Service Revenue
              
              
              62,807
              
              
              51,656
              
              
              50,244**Total
                  Revenue**
              
              **$**
              **89,401**
              
              **$**
              **71,528**
              
              **$**
              **67,937**Company
                  Service Costs
              
              $
              20,890
              
              $
              13,961
              
              $
              13,135Licensee
                  Service Costs
              
              
              49,504
              
              
              40,760
              
              
              41,597**Total
                  Service Costs**
              
              **$**
              **70,394**
              
              **$**
              **54,721**
              
              **$**
              **54,732**Company
                  General and administrative costs
              
              $
              10,784
              
              $
              8,879
              
              $
              11,068Licensee
                  Royalty
              
              
              7,112
              
              
              6,951
              
              
              5,965**Total
                  General and Administrative Expenses**
              
              **$**
              **17,896**
              
              **$**
              **15,830**
              
              **$**
              **17,033**




In
        Fiscal
        2005 the Company settled various disputes with its Atlanta Licensee by selling
        its Licensor rights to the licensee for $875. The purchase price is evidenced
        by
        a note which is payable over 60 months at an interest rate of 4.75%. In
        addition, various other issues that were being disputed through litigation
        with
        the licensee, were settled resulting in an offset to the note in the amount
        of
        $170. The note due to the Company, which is guaranteed by the licensee, is
        reflected in notes receivable. All amounts due the licensee were paid prior
        to
        February 28, 2005. The Company recorded other income in February 2005, the
        net
        amount of $444.
 
 On
        February 13, 2006, the Company and the Atlanta Licensee settled the outstanding
        balance of the note $588, for a lump sum payment of $469. The Company charged
        the remaining balance of $119 to other income at February 28, 2006.
 
 **15.
        Related Party Transactions**
 
 In
        February 2006, ATC Healthcare Services, Inc., a wholly-owned subsidiary of
        the
        Company, entered into a Management Agreement (the “Travel Management Agreement”)
        with Travel Healthcare Solutions, LLC, a New York limited liability company
        (“Travel Healthcare”), 33.33% of which is owned by Stephen Savitsky and 16.67%
        of which is owned by David Savitsky. Under the Travel Management Agreement,
        Travel Healthcare is responsible for managing and overseeing the Company’s
        Travel Nurse Division (the “Travel Division”). The Travel Division places
        healthcare professionals with clients nationwide for long-term assignments.
        Under the Travel Management Agreement, Travel Healthcare paid the Company
        a fee
        of $240 (which has been included in revenue at February 28, 2006) for the
        Company’s proprietary system of operating the Travel Division. Travel Healthcare
        will receive management fees under the Agreement equal to 50% of the gross
        margin realized on the Travel Division’s revenues to the extent they exceed a
        baseline amount that is greater than the Travel Division’s revenues Fiscal 2007.
        The Company was not required to make any payments to the Travel Division
        for
        Fiscal 2007.
 
 The
        Travel
        Management Agreement has an initial term of 10 years and automatically renews
        for subsequent five-year renewal terms unless the Company exercises its right
        to
        purchase Travel Healthcare’s assets and rights under the Travel Management
        Agreement for a purchase price equal to 50% of the amount by which net sales
        of
        the Travel Division for the trailing 12 month period exceed the baseline
        revenue
        amount or, if the Company elects not to exercise the right, Travel Healthcare
        elects to purchase the Division for an amount equal to the baseline revenue
        amount plus 50% of the amount by which Net Sales of the Division for the
        trailing 12 month period exceed the baseline revenue amount. The Company
        also
        has early termination rights if certain sales thresholds are not achieved.
        Under
        the Agreement, the Company is responsible to paying general and administrative
        costs of the Division in an amount substantially equivalent to the amount
        expended by the Company to operate the Travel Division with revenue below
        the
        baseline amount.
  F-26
 In
          connection with the sale by the Company of its AllCare Nursing business
          in April
          2005, the Company agreed not to conduct a per diem medical staffing business
          in
          the New York City area until Fiscal 2008.
 
 Under
          the
          Travel Management Agreement, the Company, subject to certain conditions,
          granted
          the Travel Healthcare an option to conduct a per diem medical staffing
          business
          under the Company’s then standard license agreement in the New York City area
          when the AllCare non-compete agreements expires during Fiscal 2008.
 
 During
          Fiscal 2007 and 2006, the Company entered into license agreements with
          eight
          limited liability companies (“Investment Companies”). Stephen Savitsky, our
          Chairman of the Board, owns 17% and David Savitsky, our Chief Executive
          Officer,
          owns 8%, of such Investment Companies. In each case, the Investment Company
          hired a manager with experience in medical staffing and has provided equity
          and
          other incentives to the manager. During Fiscal 2007, a total of four Investment
          Companies were closed because they did not meet performance expectations.
          Stephen Savitsky and David Savitsky have discontinued the formation of
          Investment Companies, focusing instead on making the remaining Investment
          Companies profitable. The Company received license fees of $89 and $88,
          respectively, for the Fiscal Years ended in 2007 and 2006 from Investment
          Companies.
 
 Subsequent
          to February 28, 2007, the Company acquired two of the remaining Investment
          Companies territories and immediately resold them to an existing licensee.
          No
          gain or loss will be recorded on the sales.
  **16.
          Quarterly Financial Data (Unaudited)**
 
 Summarized
          unaudited quarterly financial data for Fiscal 2007 and 2006 are as follows
          (in
          thousands, except per share data). Fiscal 2006 has been restated to reflect
          the
          AllCare Nursing business as Discontinued Operations.
 **Year
                      ended February 28, 2007**
                  
                  **First
                      Quarter**
                  
                  **Second
                      Quarter**
                  
                  **Third
                      Quarter**
                  
                  **Fourth
                      Quarter**Total
                      revenues
                  
                  $
                  19,855
                  
                  $
                  23,063
                  
                  $
                  22,627
                  
                  $
                  23,856Total
                      net loss available to common stockholders
                  
                  $
                  (354
                  )
                  $
                  (500
                  )
                  $
                  (596
                  )
                  $
                  (1,235
                  )Net
                      loss per common share-basic and diluted
                  
                  $
                  (0.01
                  )
                  $
                  (0.01
                  )
                  $
                  (0.02
                  )
                  $
                  (0.03
                  )**Year
                      ended February 28, 2006**
                  
                  
                  **First
                      Quarter**
                  
                  
                  **Second
                      Quarter**
                  
                  
                  **Third
                      Quarter**
                  
                  
                  **Fourth
                      Quarter**Total
                      revenues
                  
                  $
                  17,010
                  
                  $
                  17,932
                  
                  $
                  18,219
                  
                  $
                  18,367Net
                      loss available to common stockholders fromcontinuing
                      operations
                  
                  $
                  (834
                  )
                  $
                  (511
                  )
                  $
                  (389
                  )
                  $
                  (294
                  )Net
                      loss available to common stockholders fromDiscontinued
                      Operations
                  
                  $
                  (577
                  )
                  $
                  -
                  
                  $
                  -
                  
                  $
                  -Total
                      net loss available to common stockholders
                  
                  $
                  (1,411
                  )
                  $
                  (511
                  )
                  $
                  (389
                  )
                  $
                  (294
                  )Basic
                      and diluted loss per share:Loss
                      from continuing operations
                  
                  $
                  (0.03
                  )
                  $
                  (0.02
                  )
                  $
                  (0.01
                  )
                  $
                  (0.01
                  )Loss
                      from discontinued operations
                  
                  $
                  (0.02
                  )
                  $
                  -
                  
                  $
                  -
                  
                  $
                  -Net
                      loss per common share-basic and diluted
                  
                  $
                  (0.05
                  )
                  $
                  (0.02
                  )
                  $
                  (0.01
                  )
                  $
                  (0.01
                  )




-
            The
                results of operations of CNS are included above from June 6, 2006,
                the
                date of acquisition. -
            The
                fourth quarter of 2007 included a loss on litigation settlement of
                $342. -
            Included
                in the fourth quarter are write-downs to fair value of certain receivables
                totaling $272.






F-27


**17.
      Subsequent Events**





On
      March
      5, 2007, in a private transaction, the Company raised $1.5 million through
      the
      sale of 5,000,000 shares of the Company's Class A Common Stock and warrants
      to
      acquire up to 2,500,000 shares of Class A Common Stock at $0.45 per share over
      a
      five-year period. If the Company should later sell shares of its Class A Common
      Stock at less than $0.45 per share, the exercise price of the warrants would
      automatically decrease to the lower per share sale price. That change in the
      exercise price would not affect the number of shares that could be purchased
      under the warrants.





In
      connection with the sale, the Company paid a placement agent a seven percent
      commission of $105 and granted the agent 350,000 warrants to purchase shares
      of
      Class A Common Stock for $0.45 per share. There is no price protection in the
      warrants issued to the placement agent.





The
      sale
      requires that the Company register with the Security and Exchange Commission
      the
      Class A Common Stock and the underlying warrant shares of the Class A Common
      warrants by June 1, 2007. The net proceeds of the sale will be used primarily
      to
      continue to expand the Company's licensee base and for general working capital
      purposes.





In
      connection with the warrants, there is a penalty provision if the underlying
      shares are not registered.




In
      accordance with FSP EITF 00-19-2, the likelihood of a penalty being incurred
      for
      failure to receive approval on the Registration Statement is remote, no accrual
      is deemed necessary for any penalty. In accordance with the agreement, penalties
      for failure to register timely amount to $15 per month and will incur on a
      pro-rata basis.





The
      fair
      value of the warrants was $543 and the fair value of the finder warrants was
      $76. This was calculated using the Black-Scholes option-pricing model with
      the
      following assumptions: no dividends; risk-free interest rate of 4.48%; the
      expected life of 5 years and volatility of 83%.




F-28


**ATC
      HEALTHCARE, INC. AND SUBSIDIARIES**


**SCHEDULE
      II VALUATION AND QUALIFYING ACCOUNTS**


**(In
      thousands)**




**Fiscal
                  Year Ended****February
                  28, 2007**
              
              **February
                  28, 2006**
              
              **February
                  28, 2005**ALLOWANCE
                  FOR DOUBTFUL ACCOUNTS:Balance,
                  beginning of period
              
              $
              247
              
              $
              464
              
              $
              276Additions
                  charged to costs and expenses
              
              
              -
              
              
              -
              
              
              430Write
                  off of bad debts
              
              
              (35
              )
              
              (217
              )
              
              (242
              )Balance,
                  end of period
              
              $
              212
              
              $
              247
              
              $
              464Included
                  in assets held for sale
              
              $
              -
              
              $
              -
              
              $
              1,397Total
              
              $
              212
              
              $
              247
              
              $
              1,861






F-29


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


**None.**
 **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 upon this evaluation, our Chief Executive Officer and Chief
        Financial Officer have concluded that, as of that date, our disclosure controls
        and procedures were effective to ensure (i) that material information required
        to be disclosed by us in the reports we file with or submit to the Securities
        and Exchange Commission is recorded, processed, summarized, and reported
        within
        the time periods specified in the Securities and Exchange Commission rules
        and
        forms, and (ii) that such information is accumulated and communicated to
        our
        management, including our Chief Executive Officer and Chief Financial Officer,
        as appropriate, to allow timely decisions regarding required
        disclosure.
 
 (b)
        During
        the last Fiscal quarter, there were no changes in our internal control over
        financial reporting that have materially affected, or are reasonably likely
        to
        materially affect, our internal control over financial reporting.
  **ITEM
        9B.** **OTHER
        INFORMATION**
 
 None.
 
 **PART
        III**
 
 **ITEM
        10.**  **DIRECTORS
        AND EXECUTIVE OFFICERS OF THE REGISTRANT**
 
 The
        information required by this section will be included in the Company’s
        definitive Proxy Statement, which will be filed with the Securities Exchange
        Commission on or before June 28, 2007 and is incorporated by reference
        herein.
 
 **ITEM
        11.**  **EXECUTIVE
        COMPENSATION**
 
 The
        information required by this section will be included in the Company’s
        definitive Proxy Statement, which will be filed with the Securities and Exchange
        Commission on or before June 28, 2007 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, 2007 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, 2007 and is incorporated by reference herein.
  29


**ITEM
      14.**  **PRINCIPAL
      ACCOUNTANT FEES AND SERVICES**





Fees
      billed to the Company by Goldstein Golub Kessler LLP during the fiscal year
      ended February 28, 2007 were as follows:





Audit
      fees-Goldstein Golub Kessler LLP billed an aggregate of $115,000 in fees for
      services rendered for the annual audit of the Company’s consolidated financial
      statements for the fiscal year ended February 28, 2007 and $82,995 for audit
      related fees consisting of quarterly reviews and professional services related
      to an amendment to an S-1 and to a two S-3 Registration Statements.





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.




30


**PART
      IV**





**ITEM
      15.**  **EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES**





**(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)
      Exhibits**





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





**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.
                  (A)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 Series 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)







3.13
              Certificate
                  of Designation of 5% Convertible Series B Preferred Stock.
                  (BB)3.14
              Certificate
                  of Designation of 6% Convertible Series C Preferred Stock dated
                  May 30,
                  2006. (DD)3.15
              Certificate
                  of Amendment of Restated Certificate of Incorporation of the Company
                  dated
                  August 21, 2006. (EE)3.16
              Certificate
                  of Amendment of Certificate of Stock Designation of 6% Series C
                  Convertible Preferred Stock dated January 12, 2007.
                  (GG)4.1
              Specimen
                  Class A Common Stock Certificate. (E)4.2
              Specimen
                  Class B Common Stock Certificate. (F)4.3
              Grantor
                  Trust Agreement dated August 31, 2005. (BB)4.4
              Registration
                  Rights Agreement dated August 31, 2005. (BB)4.5
              Form
                  of Subscription Agreement and Letter of Investment Intent.
                  (BB)4.6
              Form
                  of Convertible Note dated September 12, 2005. (BB)4.7
              Form
                  of Warrant to Purchase Shares of Class A Common Stock.
                  (BB)4.8
              Form
                  of Finder’s Warrant to Purchase Shares of Class A Common Stock.
                  (BB)4.9
              Registration
                  Rights Agreement dated September 14, 2005. (BB)4.10
              Form
                  of Warrant to Purchase Shares of Class A Common Stock dated March
                  5, 2007.
                  (FF)4.11
              Registration
                  Rights Agreement dated March 5, 2007 among the Company and Enable
                  Growth
                  Partners LP, Enable Opportunity Partners LP, and Pierce Diversified
                  Strategy Master Fund LLC, Ena. (FF)4.12
              Form
                  of Warrant to Purchase Shares of Class A Common Stock dated January
                  12,
                  2007. (GG)4.13
              Registration
                  Rights Agreement dated January 12, 2007 between the Company and
                  Roaring
                  Fork Capital SBIC, L.P.(GG)10.1
              1986
                  Non-Qualified Stock Option Plan of the Company. (H)10.2
              First
                  Amendment to the 1986 Non-Qualified Stock Option Plan, effective
                  as of May
                  11, 1990. (A)10.3
              Amendment
                  to the 1986 Non-Qualified Stock Option Plan, dated as of October
                  27, 1995.
                  (I)10.4
              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)
  
  10.5
                1993
                    Stock Option Plan of the Company. (A)10.6
                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).10.7
                Amended
                    and Restated 1993 Employee Stock Purchase Plan of the Company.
                    (J)10.8
                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).10.9
                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).10.10
                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)10.11
                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)10.12
                Stock
                    Option Agreement, dated December 1, 1998, under the Company’s 1993 Stock
                    Option Plan between the Company and Stephen Savitsky.
                    (K)10.13
                Stock
                    Option Agreement, dated December 1, 1998, under the Company’s 1994
                    Performance-Based Stock Option Plan between the Company and Stephen
                    Savitsky. (A)10.14
                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)10.15
                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)10.16
                Stock
                    Option Agreement, dated December 1, 1998, under the Company’s 1993 Stock
                    Option Plan between the Company and David Savitsky. (K)10.17
                Stock
                    Option Agreement, dated December 1, 1998, under the Company’s 1994
                    Performance-Based Stock Option Plan between the Company and David
                    Savitsky. (K)10.18
                Stock
                    Option Agreement, dated December 1, 1998, under the Company’s 1993 Stock
                    Option Plan, between the Company and Edward Teixeira.
                    (K)
  10.19
                Stock
                    Option Agreement, dated December 1, 1998, under the Company’s 1994
                    Performance-Based Stock Option Plan, between the Company and
                    Edward
                    Teixeira. (K)
  
  10.20
              Stock
                  Option Agreement, dated December 1, 1998, under the Company’s 1998 Stock
                  Option Plan, between the Company and Edward Teixeira.
                  (K)10.21
              Employment
                  Agreement, dated as of June 1, 1987, between the Company and Stephen
                  Savitsky. (A)10.22
              Amendment,
                  dated as of October 31, 1991, to the Employment Agreement between
                  the
                  Company and Stephen Savitsky. (A)10.23
              Amendment,
                  dated as of December 7, 1992, to the Employment Agreement between
                  the
                  Company and Stephen Savitsky. (A)10.24
              Employment
                  Agreement, dated as of June 1, 1987, between the Company and David
                  Savitsky. (A)10.25
              Amendment,
                  dated as of October 31, 1991, to the Employment Agreement between
                  the
                  Company and David Savitsky. (A)10.26
              Amendment,
                  dated as of January 3, 1992, to the Employment Agreement between
                  the
                  Company and David Savitsky. (A)10.27
              Amendment,
                  dated as of December 7, 1992, to the Employment Agreement between
                  the
                  Company and David Savitsky. (A)10.28
              Amended
                  and Restated Loan and Security Agreement, dated as of January 8,
                  1997,
                  between the Company, its subsidiaries and Mellon Bank, N.A.
                  (M)10.29
              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)10.30
              Master
                  Lease Agreement dated as of December 4, 1996, between the Company
                  and
                  Chase Equipment Leasing, Inc. (M)10.31
              Premium
                  Finance Agreement, Disclosure Statement and Security Agreement
                  dated as of
                  December 26, 1996, between the Company and A.I. Credit Corp.
                  (M)10.32
              Agreement
                  of Lease, dated as of October 1, 1993, between Triad III Associates
                  and
                  the Company. (A)10.33
              First
                  Lease Amendment, dated October 25, 1998, between Matterhorn USA,
                  Inc. and
                  the Company. (A)10.34
              Supplemental
                  Agreement dated as of January 21, 1994, between General Electric
                  Capital
                  Corporation, Triad III Associates and the Company. (A)10.35
              Agreement
                  of Lease, dated as of June 19, 1995, between Triad III Associates
                  and the
                  Company. (D)10.36
              Agreement
                  of Lease, dated as of February 12, 1996, between Triad III Associates
                  and
                  the Company. (D)
  
  10.37
              License
                  Agreement, dated as of April 23, 1996, between Matterhorn One,
                  Ltd. and
                  the Company. (M)10.38
              License
                  Agreement, dated as of January 3, 1997, between Matterhorn USA,
                  Inc. and
                  the Company. (M)10.39
              License
                  Agreement, dated as of January 16, 1997, between Matterhorn USA,
                  Inc. and
                  the Company. (M)10.40
              License
                  Agreement, dated as of December 16, 1998, between Matterhorn USA,
                  Inc. and
                  the Company. (S)10.41
              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)10.42
              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)10.43
              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)10.44
              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)10.45
              Amendment
                  No. 1 to Shareholders Agreement among Chelsea Computer Consultants,
                  Inc.,
                  Raymond T. Sheerin, Michael Altman and the Company, dated October
                  30,
                  1997. (L)10.46
              Indemnification
                  Agreement, dated as of September 1, 1987, between the Company and
                  Stephen
                  Savitsky. (A)10.47
              Indemnification
                  Agreement, dated as of September 1, 1987, between the Company and
                  David
                  Savitsky. (A)10.48
              Indemnification
                  Agreement, dated as of September 1, 1987, between the Company and
                  Bernard
                  J. Firestone. (A)10.49
              Indemnification
                  Agreement, dated as of September 1, 1987, between the Company and
                  Jonathan
                  Halpert. (A)10.50
              Indemnification
                  Agreement, dated as of May 2, 1995, between the Company and Donald
                  Meyers.
                  (M)10.51
              Indemnification
                  Agreement, dated as of May 2, 1995, between the Company and Edward
                  Teixeira. (A)10.52
              Form
                  of Medical Staffing Services Franchise Agreement. (D)
  
  10.53
              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)10.54
              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)10.55
              Distribution
                  agreement, dated as of October 20, 1999, between the Company and
                  TLCS.(O)10.56
              Tax
                  Allocation agreement dated as of October 20, 1999, between the
                  Company and
                  TLCS. (O)10.57
              Transitional
                  Services agreement, dated as of October 20, 1999,between the company
                  and
                  TLCS. (O)10.58
              Trademark
                  License agreement, dated as of October 20, 1999, between the Company
                  and
                  TLCS. (O)10.59
              Sublease,
                  dated as of October 20, 1999, between the Company and TLCS.
                  (O)10.60
              Employee
                  Benefits agreement, dated as of October 20, 1999, between the Company
                  and
                  TLCS. (O)10.61
              Amendment,
                  dated as of October 20, 1999, to the Employment agreement between
                  the
                  Company and Stephen Savitsky. (P)10.62
              Amendment,
                  dated as of October 20, 1999, to the Employment agreement between
                  the
                  Company and David Savitsky. (P)10.63
              Second
                  Amendment to ATC Revolving Credit Loan and Security Agreement,
                  dated
                  October 20, 1999 between the Company and Mellon Bank, N.A.
                  (P)10.64
              Master
                  Lease dated November 18, 1999 between the Company andTechnology
                  Integration Financial Services. (Q)10.65
              Loan
                  and Security Agreement between the Company and Copelco/American
                  Healthfund
                  Inc. dated March 29, 2000. (Q)10.66
              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)10.67
              Employment
                  agreement dated August 1, 2000 between the Company and Alan Levy.
                  (R)10.68
              Equipment
                  lease agreements with Technology Integration Financial Services,
                  Inc.
                  (R)10.69
              Loan
                  and Security Agreement dated April 6, 2001 between the Company
                  and HFG
                  Healthco-4 LLC. (W)
  
  10.70
              Receivables
                  Purchase and Transfer Agreement dated April 6, 2001 between the
                  Company
                  and HFG Healthco-4 LLC. (W)10.71
              Asset
                  purchase agreement dated October 5, 2001, between the Company and
                  Doctors’
                  Corner and Healthcare Staffing, Inc. (U)10.72
              Asset
                  purchase agreement dated January 31, 2002, between the Company
                  and Direct
                  Staffing, Inc. and DSS Staffing Corp. (V)10.73
              Amendment
                  to Employment agreement dated November 28, 2001 between the Company
                  and
                  Stephen Satisfy. (Y)10.74
              Amendment
                  to Employment agreement dated November 28, 2001 between the Company
                  and
                  David Savitsky. (Y)10.75
              Amendment
                  to Employment agreement dated December 18, 2001 between the Company
                  and
                  Edward Teixeira. (Y)10.76
              Amendment
                  to Employment agreement dated May 24, 2002 between the Company
                  and Alan
                  Levy. (Y)10.77
              Loan
                  and Security Agreement dated November 7, 2002 between the Company
                  and HFG
                  Healthco-4 LLC. (Z)10.78
              Asset
                  Purchase Agreement dated April 13, 2005 among the Company, ATC
                  Staffing
                  Services, Inc. and Onward Healthcare, Inc. (AA)10.79
              Agreement
                  dated August 31, 2005, among the Company, Stuart Savitsky, Shabsi
                  Schreier, and Steven Weiner. (BB)10.80
              Management
                  Agreement dated February 2006 between ATC Healthcare Services,
                  Inc., a
                  wholly-owned subsidiary of the Company, and Travel Healthcare Solutions,
                  LLC. (CC)10.81
              Subscription
                  Agreement and Letter of Investment Intent dated May 31, 2006 between
                  the
                  Company and Roaring Fork Capital SBIC, L.P. (DD)10.82
              Registration
                  Rights Agreement dated June 9, 2006 between the Company and Roaring
                  Fork
                  Capital SBIC, L.P. (DD)







10.83
            Stock
                Option Agreement dated August 21, 2006 between the Company and Stephen
                Savitsky. (EE)10.84
            Stock
                Option Agreement dated August 21, 2006 between the Company and David
                Savitsky. (EE)10.85
            Common
                Stock and Warrant Purchase Agreement dated March 5, 2007 among the
                Company
                and Enable Growth Partners LP, Enable Opportunity Partners LP, and
                Pierce
                Diversified Strategy Master Fund LLC, Ena. (FF)10.86
            Common
                Stock and Warrant Purchase Agreement dated January 12, 2007 between
                the
                Company and Roaring Fork Capital SBIC, L.P.(GG)21
            Subsidiaries
                of the Company. (GG)23
            Consent
                of Goldstein Golub Kessler LLP(GG)23.1
            Consent
                of Goldstein Golub Kessler LLP *24
            Powers
                of Attorney. (GG)31.1
            Certification
                pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934,
                as
                amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley
                Act of
                2002. (GG)31.2
            Certification
                pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934,
                as
                amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley
                Act of
                2002.(GG)31.3
            Certificationpursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934,
                as
                amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley
                Act of
                2002.*31.4
            Certification
                pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934,
                as
                amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley
                Act of
                2002.*




32.1
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002.*32.2
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002.*32.3
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002.*32.4
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002.*




**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.
  
  **NOTES
                    TO EXHIBITS**
 (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.(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.
  
  **NOTES
                    TO EXHIBITS**
 (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 itsForm
                  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.(AA)
              Incorporated
                  by reference to the Company’s Form 8-K (File No. 0-11380) filed with the
                  Commission on April 26, 2005.(BB)
              Incorporated
                  by reference to the Company’s Form 10-Q (File No. 0-11380) filed with the
                  Commission on October 15, 2005.(CC)
              Incorporated
                  by reference to the Company’s Form 10-K (File No. 0-11380) filed with the
                  Commission on May 30, 2006.(DD)
              Incorporated
                  by reference to the Company’s Form 10-Q (File No. 0-11380) filed with the
                  Commission on July 17, 2006.(EE)
              Incorporated
                  by reference to the Company’s Form 10-Q (File No. 0-11380) filed with the
                  Commission on January 16, 2007.(FF)
              Incorporated
                  by reference to the Company’s Form 8-K (File No. 0-11380) filed with the
                  Commission on March 6, 2007.(GG)
              Incorporated
                  by reference to the Company’s Form 10-K (file No. 001-312-71) filed with
                  the Commission on May 29, 2007.*
              Incorporated
                  herein.







**SIGNA** **TURES**





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.Date: May
              31, 2007
            By:
            /s/ David
              SavitskyDavid
                SavitskyChief
                Executive Officer




Pursuant
        to the requirements of the Securities Exchange Act of 1934, this report has
        been
        signed below by the following persons on behalf of the Registrant and in
        the
        capacities and on the dates indicated.
  **SIGNATURE**
                **TITLE**
                **DATE**/S/
                    DAVID SAVITSKY
                  David
                    Savitsky
                Chief
                    Executive Officer
                  (Principal
                    Executive
                  Officer)
                    and Director
                May
                    31, 2007/S/
                    DANIEL PESS
                  Daniel
                    Pess
                Senior
                    Vice President, Finance,
                  Chief
                    Financial Officer and Treasurer (Principal Financial and Accounting
                    Officer)
                May
                    31, 2007/S/
                    STEPHEN SAVITSKY
                  Stephen
                    Savitsky
                President
                    and Chairman of the Board
                May
                    31, 2007*_________________
                  Bernard
                    J. Firestone, Ph. D.
                Director
                May
                    31, 2007*_________________
                  Jonathan
                    Halpert, Ph. D.
                Director
                May
                    31, 2007*_________________
                  Martin
                    Schiller
                Director
                May
                    31, 2007




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