UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


|X|     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             (I.R.S. Employer Identification No.)
 incorporation or organization)


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


                                                      Name of Exchange
        Title of Each Class                          on Which Registered
        -------------------                          -------------------
Securities 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 |X|

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 |X|

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed  by  Section  13 or 15 (d) of the  Securities  Exchange  Act of 1934
during  the  preceding  12  months  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes |X| No |_|

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

Indicate by 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 |X|

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act.) Yes |_|          No |X|

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.

<PAGE>
                       DOCUMENTS INCORPORATED BY REFERENCE

The  information  required by Part III is included in the  Company's  definitive
Proxy Statement for the Annual Meeting of Shareholders  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
<PAGE>
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 $5.9
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
<PAGE>
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.

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.

                                       4
<PAGE>
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
<PAGE>
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.

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.

                                       6
<PAGE>
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
<PAGE>

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.

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

                                       8
<PAGE>
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:

     o    potential loss of key employees or clients of acquired companies;
     o    difficulties integrating acquired personnel and distinct cultures into
          our business;
     o    difficulties   integrating  acquired  companies  into  our  operating,
          financial  planning and financial  reporting  systems;  o diversion of
          management attention from existing operations; and
     o    assumption of  liabilities  and exposure to unforeseen  liabilities of
          acquired companies,  including liabilities for their failure to comply
          with healthcare regulations.

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

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
<PAGE>

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

The  costs  related  to  obtaining   and   maintaining   workers   compensation,
professional and general liability insurance and health insurance for healthcare
providers has been  increasing  as a percentage of revenue.  Our cost of workers
compensation,  professional  and  general  liability  and health  insurance  for
healthcare  providers  for the Fiscal Years ending  February 28, 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.

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

                                       10
<PAGE>
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
<PAGE>
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
<PAGE>
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    Low
        -----------------------------------------------------
        1st quarter ended May 31, 2005          $0.46   $0.28
        -----------------------------------------------------
        2nd quarter ended August 31, 2005       $0.43   $0.22
        -----------------------------------------------------
        3rd quarter ended November 30, 2005     $0.50   $0.29
        -----------------------------------------------------
        4th quarter ended February 28, 2006     $0.46   $0.31
        -----------------------------------------------------
        Fiscal Year ended February 28, 2007     High    Low
        -----------------------------------------------------
        1st quarter ended May 31, 2006          $0.45   $0.37
        -----------------------------------------------------
        2nd quarter ended August 31, 2006       $0.50   $0.33
        -----------------------------------------------------
        3rd quarter ended November 30, 2006     $0.43   $0.33
        -----------------------------------------------------
        4th quarter 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.

(D)     Securities Authorized for Issuance Under Equity Compensation Plans
<TABLE>
<CAPTION>
<S>                             <C>                        <C>                    <C>
      Plan Category
                                                                             Number of Securities
                                                                            Remaining Available for
                         Number of Securities to                             Future Issuance under
                          be issued Upon Exercise Weighted-Average Exercise   Equity Compensation
                          of Outstanding Options,   Price of Outstanding       Plans (excluding
                            Warrants and Rights     Options, Warrants and   securites reflected in
                                (column (a))                Rights                column (a))
----------------------------------------------------------------------------------------------------
Equity compensation plans
 approved by security
 holders                        4,426,882                  $0.59                   139,500
----------------------------------------------------------------------------------------------------
Equity compensation plans
 not approved by security
 holders (1)                    2,470,000                  $0.36                  2,470,000
----------------------------------------------------------------------------------------------------
Total                           6,896,882                  $0.51                  2,609,500
----------------------------------------------------------------------------------------------------
</TABLE>

                                       13
<PAGE>

(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
<TABLE>
<CAPTION>
<S>                                <C>             <C>            <C>             <C>            <C>             <C>
        ---------------------------------------------------------------------------------------------------------------
                                   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
        ---------------------------------------------------------------------------------------------------------------
</TABLE>

                                       14
<PAGE>



ITEM 6.

SELECTED FINANCIAL DATA (in thousands, except per share data)

The following table provides selected historical  consolidated financial data of
the Company as of and for each of the fiscal years in the five year period ended
February 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
<PAGE>
<TABLE>
<CAPTION>
<S>                                         <C>         <C>         <C>         <C>         <C>
                                               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  $   98,877
                                        ---------------------------------------------------------------

Loss from continuing operations                 (2,159)     (1,755)     (8,459)     (7,872)     (5,010)
                                        ---------------------------------------------------------------
(Loss) income from discontinued
 operations                                          -        (577)     (1,945)      1,692       2,177
                                        ---------------------------------------------------------------

   Net (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  $     0.09
                                        ---------------------------------------------------------------
Net (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      23,783
  Diluted                                       39,394      31,955      25,113      24,468      23,783

CONSOLIDATD BALANCE SHEET DATA:

Total Assets                                $   28,767  $   25,196  $   23,211  $   29,195  $   33,007
Long-term debt and other liabilities             1,173      10,848       9,026      20,320      22,363
Total Liabilities                               23,838      20,307      30,590      31,029      32,437
Stockholders' equity (deficiency)                3,652       3,682      (5,186)      5,053      10,546
Total Assets Held for Sale                          --          --      37,098      45,532      45,608
Long-term debt and other non-current
 liabilities held for sale                          --          --      21,108      35,424      34,799
Total liabilities held for sale                     --          --      33,768      37,578      36,411


ATC Healthcare, Inc. did not pay any cash dividends on its common stock during any of the periods set
 forth in the table above.
</TABLE>

                                       16
<PAGE>

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
<PAGE>

(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
<PAGE>
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
<PAGE>
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 AllCare  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
<PAGE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
<S>            <C>  <C>           <C>           <C>           <C>           <C>
                                 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    $        -
=======================================================================================

</TABLE>
     (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

                                       22
<PAGE>

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.

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
<PAGE>

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):

                    Aggregate Account
Fiscal Year Ended   Balances of Slow                                 Allowance
                    Payers and Clients                  Bad Debt    for Doubtful
                     in Bankruptcy     Net Write-Offs  Provision     Accounts
--------------------------------------------------------------------------------
  2007                  $920              $(35)           $0            $212
--------------------------------------------------------------------------------
  2006                  $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
<PAGE>
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. The Company adopted
SFAS  No.  158 and  with  no  impact  to the  Company's  consolidated  financial
statements.

                                       25
<PAGE>

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
<PAGE>
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest  Rate  Sensitivity:  The  Company's  primary  market  risk  exposure is
interest  rate  risk.  The  Company's  exposure  to market  risk for  changes in
interest  rates  relates  to its debt  obligations  under  its  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
<PAGE>
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ATC HEALTHCARE, INC. AND SUBSIDIARIES
INDEX

                                                                            Page
                                                                            ----
Report of Independent Registered Public Accounting Firm                      F-1

CONSOLIDATED FINANCIAL STATEMENTS:

     Consolidated Balance Sheets as of
       February 28, 2007 and 2006                                            F-2

     Consolidated Statements of Operations
        for the Fiscal Years ended February 28, 2007, 2006 and 2005          F-3

     Consolidated Statements of Stockholders' Equity (Deficiency)
        for the Fiscal Years ended February 28, 2007, 2006 and 2005          F-4

     Consolidated Statements of Cash Flows
        for the Fiscal Years ended February 28, 2007, 2006 and 2005          F-5

     Notes to Consolidated Financial Statements                              F-7

FINANCIAL STATEMENT SCHEDULE FOR THE FISCAL YEARS ENDED
     February 28, 2007, 2006 and 2005

     II - 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.


                                       28
<PAGE>
             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
<PAGE>
ATC HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
<S>                                                                             <C>                   <C>
                                                                                February 28,          February 28,
                                                                                   2007                   2006
ASSETS:
CURRENT ASSETS:
     Cash and cash equivalents                                                  $         298         $         984
     Accounts receivable, less allowance for doubtful accounts of
       $212 and $247, respectively.                                                    15,024                11,777
     Prepaid expenses and other current assets                                          6,196                 6,168
                                                                                -----------------------------------
                Total current assets                                                   21,518                18,929

Fixed assets, net                                                                         286                   207
Intangibles, net                                                                          513                   411
Goodwill                                                                                6,134                 5,357
Other assets                                                                              316                   292
                                                                                -----------------------------------
                Total assets                                                    $      28,767         $      25,196
                                                                                ===================================

LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:

Accounts payable                                                                $       1,231         $       1,691
Accrued expenses                                                                        6,583                 5,062
Book overdraft                                                                            881                 1,077
Due under bank financing                                                               13,914                     -
Current portion of notes payable (including $0 and $1,330
     from related parties as of February 28 2007 and 2006, respectively)                   56                 1,629
                                                                                -----------------------------------
                Total current liabilities                                              22,665                 9,459

Notes payable (including $1,052 and $250 from related parties as of
     February 28, 2007 and 2006, respectively)                                          1,131                   250
Due under bank financing                                                                    -                10,516
Other liabilities                                                                          42                    82
                                                                                -----------------------------------
                Total liabilities                                                      23,838                20,307
                                                                                -----------------------------------

Commitments and contingencies
Convertible 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                 1,207
                                                                                -----------------------------------

Convertible Series B Preferred Stock - $1.00 par value; 9,984 shares
     authorized; 4,050 shares issued and outstanding; liquidation value of
     $2,000 per share ($8,100)                                                              4                     4
Convertible Series C Preferred Stock - $1.00 par value; 516 shares
     authorized, 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 at
     February 28, 2007 and 2006, respectively                                             415                   374
Class 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
     and 2006 respectively                                                                  2                     2
Additional paid-in capital                                                             28,612                25,999
Accumulated deficit                                                                   (25,382)              (22,697)
                                                                                -----------------------------------
                Total stockholders' equity                                              3,652                 3,682
                                                                                -----------------------------------
                Total liabilities and stockholders' equity                      $      28,767         $      25,196
                                                                                ===================================

                 See notes to consolidated financial statements
</TABLE>
                                       F-2
<PAGE>
ATC HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
<S>                                         <C>                 <C>                 <C>
                                                         For the Fiscal Years Ended
                                         February 28, 2007   February 28, 2006   February 28, 2005
                                        ------------------------------------------------------------
REVENUES:
  Service revenues                          $        89,401     $        71,528     $        67,937
                                        ------------------------------------------------------------

COSTS AND EXPENSES:
  Service costs                                      70,394              54,721              54,732
  General and administrative expenses                17,896              15,830              17,033
  Depreciation and amortization                         510                 517                 700
  Loss on litigation settlement                         342                   -                   -
  Office closing and restructuring
   charge                                                 -                   -               1,431
                                        ------------------------------------------------------------
    Total operating expenses                         89,142              71,068              73,896
                                        ------------------------------------------------------------

INCOME (LOSS) FROM OPERATIONS:                          259                 460              (5,959)
                                        ------------------------------------------------------------

INTEREST AND OTHER EXPENSE (INCOME):
  Interest expense, net                               2,292               2,188               2,191
  Other 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               3,516
                                        ------------------------------------------------------------

NET 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                  70
                                        ------------------------------------------------------------

NET 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
                                        ============================================================
</TABLE>
                 See notes to consolidated financial statements

                                       F-3
<PAGE>
ATC HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
<S>            <C> <C>                     <C>             <C> <C>             <C>  <C>          <C>  <C>       <C>        <C>
                              Class B         Class C           Class A             Class B         Additional
                              Preferred Stock Preferred Stock      Common Stock       Common Stock   Paid-In      Accumulated
                               Shares  Amount  Shares  Amount    Shares     Amount   Shares  Amount  Capital   Deficit    Total

Balances, Feb. 29, 2004             -      $-       -      $-  24,665,537      $247 245,417      $3   $14,421   $(9,618)   $5,053

Exchange 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         -         9

Sale of Common stock, net of
 issuance costs of $358             -       -       -       -   1,682,104        16       -       -       160         -       176

Common Stock issued for
 services                           -       -       -       -     165,000         1       -       -        49         -        50

Accrued 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         -     8,100

Common Stock issued on the
 conversion of debt net
 issuance costs - $173              -       -       -       -   9,909,379        99       -       -     2,898         -     2,997

Sale of Common stock, net of
 issuance costs of $16              -       -       -       -     844,359         8       -       -       241         -       249

Interest satisfied by Common
 Stock issuances                    -       -       -       -     110,886         1       -       -        28         -        29

Issuance of Common Stock
 warrants                           -       -       -       -           -         -       -       -        98         -        98

Accrued 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)    3,682

Exchange of Class B for Class
 A Common Stock                     -       -       -       -         100         -    (100)      -         -         -         -

Issuance of Series C Preferred
 Stock, net of fees of $78          -       -     516       1           -         -       -       -       921         -       922

Stock-Based Compensation            -       -       -       -           -         -       -       -       416         -       416

Sale of Common Stock and
 warrants net of issuance
 costs of $139                      -       -       -       -   3,287,666         -       -       -       912         -       912

Common Stock issued for
 conversion of debt                 -       -       -       -     738,996         7       -       -       258         -       265

Issuance of Common Stock
 warrants                           -       -       -       -           -        35       -       -        68         -       103


Beneficial 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
                              ====================================================================================================
</TABLE>
                 See notes to consolidated financial statements

                                       F-4
<PAGE>
ATC HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
<TABLE>
<CAPTION>
<S>                                                                             <C>          <C>
                                                                  For the Fiscal Years Ended
                                                          February 28, February 28,   February 28,
                                                             2007            2006           2005

CASH FLOWS FROM OPERATING ACTIVITIES:
     Net loss                                             $    (2,159)    $   (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 by operations:
          Depreciation and amortization                           510            517            700
          Amortization of debt financing costs                    124             50            284
          Amortization of discount on convertible
           debenture                                                -              -             40
          In kind interest                                          5            124              -
          Stock based compensation                                416              -              -
          Fair value of warrants issued                             -             98              -
          Provision for doubtful accounts                         (35)          (217)           188
          Reversal related to TLCS guarantee                        -              -         (2,293)
          Deferred income taxes                                     -              -          3,477
          Impairment of goodwill                                    -             40          1,431
     Changes in operating assets and liabilities,
       net of effects of acquisitions:
          Accounts receivable                                  (2,200)        (1,538)         1,050
          Prepaid expenses and other current assets              (225)        (1,650)           323
          Other assets                                            (24)           976           (765)
          Accounts payable and accrued expenses                   529         (1,051)          (140)
          Other long-term liabilities                             (40)           (95)          (330)
          Net cash (used in) provided by discontinued
           operations                                               -         (1,450)         8,021
                                                          ------------------------------------------
            Net cash (used in) provided by operating
             activities                                        (3,099)        (5,951)         3,527
                                                          ------------------------------------------
CASH 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)           767
     Proceeds from (repayment of) term loan facility            3,398            856         (1,568)
     Issuance of notes payable                                      -              -          1,500
     Payment 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                               912             76            185
     Issuance of preferred stock, net of issuance costs of
      $78 in 2007                                                 922              -              -
     Borrowings under new credit facility                           -              -            800
     Issuance of convertible notes and warrants                     -          2,100            590
     Net cash provided by (used in) discontinued
      operations                                                    -            114         (4,405)
                                                          ------------------------------------------
            Net cash provided by (used in) financing
             activities                                         3,484          1,873         (2,951)
                                                          ------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS             (686)           (58)           499
                                                          ------------------------------------------
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                      984          1,042            543
                                                          ------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR                    $       298     $      984     $    1,042
                                                          ==========================================
</TABLE>
                                       F-5
<PAGE>
ATC HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
(Continued)
<TABLE>
<CAPTION>
<S>                                                                             <C>          <C>
Supplemental Data:                                           2007            2006           2005

     Interest Paid                                        $     1,825     $    3,349     $    2,844
     Taxes Paid                                                    23             20            100
                                                          ------------------------------------------

     Shares issued for future services                    $         -     $        -     $       50
     Conversion 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              -              -
     Dividends                                                    526            273             70
</TABLE>
                 See notes to consolidated financial statements

                                       F-6
<PAGE>
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 $1,500 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
<PAGE>
For Fiscal 2007, 2006 and 2005, total licensee distributions 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
<PAGE>
Goodwill and Intangible Assets

Goodwill  represents  the  excess  of  purchase  price  over the  fair  value of
identifiable net assets of companies acquired. The Company adopted SFAS No. 141,
Business  Combinations,  ("SFAS 141") and SFAS No. 142,  Goodwill and Intangible
Assets,  ("SFAS 142") as of March 1, 2002. SFAS 141 provides  specific  criteria
for the initial  recognition  and  measurement  of intangible  assets apart from
goodwill.  SFAS 142  requires  that (1)  goodwill  and  intangible  assets  with
indefinite  useful  lives  should no  longer  be  amortized,  (2)  goodwill  and
intangibles  must be reviewed for impairment  annually (or more often if certain
events occur which could impact their  carrying  value),  and (3) the  Company's
operations  be  formally  identified  into  reporting  units for the  purpose of
assessing impairments of goodwill.  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:
<TABLE>
<CAPTION>
<S>                          <C>            <C>            <C>            <C>
                               February 28, 2007             February 28, 2006
                         ------------------------------------------------------------
                         Gross Carrying  Accumulated   Gross Carrying  Accumulated    Amortization
                              Amount      Amortization      Amount      Amortization      Period
                         ---------------------------------------------------------------------------
Goodwill                     $    6,134     $        -     $    5,357     $        -      none
Covenants not to compete            590            401            500            307       10
Other intangibles                   920            596            674            456      3-10
                         ------------------------------------------------------------
                             $    7,644     $      997     $    6,531     $      763
                         ============================================================
</TABLE>

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 Expenses
                             ---------------------
                             2008           $ 225
                             2009            130
                             2010             57
                             2011             49
                             2012             41


                                       F-9
<PAGE>
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
<PAGE>
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. The Company adopted
SFAS  No.  158 and  with  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
<PAGE>
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                   $   777
     Covenant not to compete         90
     Accounts receivable          1,012
     Debt assumed in the
       acquisition               (1,012)
                                 -------
                                $   867
                                 =======

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.
<TABLE>
<CAPTION>
<S>                                                                  <C>               <C>
     ----------------------------------------------------------------------------------------------
                                                                      Fiscal            Fiscal
                                                                    Year Ended        Year Ended
                                                                February 28, 2007 February 28, 2006
                                                                -----------------------------------
     Revenues as reported                                            $89,401           $71,528
     Revenues pro forma                                              $92,088           $79,362

     Net 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)
     ----------------------------------------------------------------------------------------------
</TABLE>

                                      F-12
<PAGE>
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,  February 28,
                     2006          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:
<TABLE>
<CAPTION>
<S>                                       <C>  <C>         <C>            <C>
                                     Estimated Useful           February 28,
                                      Life in Years           2007           2006

Computer equipment and software           3 to 5           $    1,150     $      872
Office equipment, furniture and
 fixtures                                   5                     144             72
Leasehold improvements                      5                     158            158
                                                       ------------------------------
                                                                1,452          1,102
Less: accumulated depreciation
   and amortization                                             1,166            895
                                                       ------------------------------
Total                                                      $      286     $      207
-------------------------------------------------------------------------------------
</TABLE>

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
<PAGE>
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     $    3,498
Other                                       2,388          2,670
                                        -------------------------
Total                                   $   6,196     $    6,168
                                        =========================

7.   Accrued Expenses

Accrued expenses consist of the following:

                                              February 28,
                                           2007          2006
                                        -------------------------
Payroll and related taxes               $    1,970    $    1,412
Accrued licensee distributions payable       1,121         1,195
Accrued insurance                            1,962         1,683
Dividends payable                              608           202
Earnout 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
<PAGE>
9.   Notes Payable

Notes payable consist of the following:

                                         February 28,
                                      2007          2006
                                    ------------------------

Notes payable to DSS and DSI (a)   $       -     $      120
Others                                   135            244
Notes from related parties (b)         1,052          1,230
Convertible debentures (c)                 -            285
                                   -------------------------
                                       1,187          1,879
      Less: 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
<PAGE>
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           $    56
        2009             1,082
        2010                28
        2011                21
                       -------
        Total          $ 1,187
                       =======

                                      F-16
<PAGE>
10.  Income Taxes

The (benefit) provision for income taxes consists of the following:
<TABLE>
<CAPTION>
<S>                                     <C>                     <C>                 <C>
                                                             Fiscal Year Ended
                                        ------------------------------------------------------------
                                         February 28, 2007   February 28, 2006   February 28, 2005
Current:
     Federal                            $                 -     $             -     $             -
     State                                              (47)                 50                  39
                                        ------------------------------------------------------------
                                                        (47)                 50                  39
                                        ------------------------------------------------------------
Deferred
     Federal                                              -                   -               3,477
     State                                                -                   -                   -
                                        ------------------------------------------------------------
                                                          -                   -               3,477
                                        ------------------------------------------------------------
Total income tax (benefit) provision    $               (47)    $            50     $         3,516
                                        ============================================================
</TABLE>

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 benefit
Valuation 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     $            99
   Accrued expenses                                     933                 762
                                        ----------------------------------------
                                                      1,016                 861
                                        ----------------------------------------
   Valuation allowance                               (1,016)               (861)
                                        ----------------------------------------
                                                          -                   -
                                        ----------------------------------------
   Non-current:
   Net operating loss carryforward                    7,620               7,125
   Accumulated depreciation and
    amortization                                        925                 993
   Others                                               131                  (7)
                                        ----------------------------------------
                                                      8,676               8,111
                                        ----------------------------------------
   Valuation allowance                               (8,676)             (8,111)
                                        ----------------------------------------
                                        $                 -     $             -
                                        ========================================

                                      F-17
<PAGE>
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                    $   842
        2009                        672
        2010                        631
        2011                        397
                                -------
        Total minimum
          lease payments        $ 2,542
                                =======

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
<PAGE>
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
<PAGE>
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.  Adjustments  to the carrying value of
the liability are a component of current  operations.  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
<PAGE>
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 $600,000,
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
$42,000 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 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.

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
<PAGE>
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:
<TABLE>
<CAPTION>
<S>                              <C>                 <C>                  <C>                 <C>
                                              Stock Warrant   Warrant Exercise    Weighted Average
                                                Activity           Price           Exercise Price

Warrants outstanding as of March 1, 2004             57,363               $0.01               $0.01
 Issued                                             250,000               $0.75               $0.75
 Exercised                                                -                   -                   -
 Expired                                                  -                   -                   -
                                             ---------------
Warrants outstanding as of February 28, 2005        307,363       $0.01 - $0.75               $0.61
 Issued                                             849,315               $0.60               $0.60
 Exercised                                                -                   -                   -
 Expired                                                  -                   -                   -
                                             ---------------
Warrants outstanding as of February 28, 2006      1,156,678       $0.01 - $0.75               $0.60
 Issued                                           2,386,000       $0.45 - $0.60               $0.51
 Exercised                                                -                   -                   -
 Expired                                                  -                   -                   -
                                             ---------------
Warrants outstanding as of February 28, 2007      3,542,678       $0.01 - $0.75               $0.54
                                             ===============
</TABLE>
                                      F-22
<PAGE>
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
<PAGE>

Information regarding the Company's stock option activity is summarized below:
<TABLE>
<CAPTION>
<S>                             <C>              <C>           <C>    <C>              <C>
                                              Stock Option                       Weighted-Average
                                                 Activity       Option Price       Exercise Price

Options outstanding as of March 1, 2004          4,626,882     $.25 - $2.40            $0.63
 Granted                                                 -           -                   -
 Exercised                                               -           -                   -
 Terminated                                              -           -                   -
                                             --------------
Options outstanding as of February 28, 2005      4,626,882     $.25 - $2.40            $0.63
 Granted                                                 -           -                   -
 Exercised                                               -           -                   -
 Terminated                                       (500,000)     $.34- $2.40            $0.59
                                             --------------
Options outstanding as of February 28, 2006      4,126,882     $.25 - $1.02            $0.63
 Granted                                         1,330,000     $.35 - $0.36            $0.36
 Exercised                                               -           -                   -
 Terminated                                       (500,000)     $.79- $1.02            $0.97
                                             --------------
Options 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
-----------------------------------------------------------------------------------------------
                               Weighted-Average                                    Weighted
   Range of                        Remaining         Weighted                       Average
   Exercise        Number       Contractual Life      Average        Number        Exercise
     Prices      Outstanding       (In Years)      Exercise Price  Exercisable       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:

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

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
<PAGE>
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,     February 28,
                                                   2006            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
<PAGE>
<TABLE>
<CAPTION>
<S>                                          <C>                     <C>                     <C>
                                                  Year Ended            Year Ended              Year Ended
                                              February 28, 2007     February 28, 2006       February 28, 2005

Company Service Revenue                      $            26,594     $            19,872     $            17,693
Licensee Service Revenue                                  62,807                  51,656                  50,244
Total Revenue                                $            89,401     $            71,528     $            67,937
Company Service Costs                        $            20,890     $            13,961     $            13,135
Licensee 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     $            11,068
Licensee Royalty                                           7,112                   6,951                   5,965
Total General and Administrative Expenses    $            17,896     $            15,830     $            17,033
-----------------------------------------------------------------------------------------------------------------
</TABLE>

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
<PAGE>
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.
<TABLE>
<CAPTION>
<S>                                                        <C>            <C>            <C>            <C>
Year ended February 28, 2007                            First Quarter Second Quarter  Third Quarter Fourth Quarter

Total revenues                                             $   19,855     $   23,063     $   22,627     $   23,856
                                                       ------------------------------------------------------------
Total 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     $   18,367
                                                       ------------------------------------------------------------
Net loss available to common stockholders from
continuing operations                                      $     (834)    $     (511)    $     (389)    $     (294)
                                                       ============================================================
Net loss available to common stockholders from
Discontinued 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)
                                                       ============================================================
</TABLE>
Note - included in the fourth  quarter are  write-downs to fair value of certain
receivables totaling $272.

                                      F-27
<PAGE>
17.  Subsequent Events

On March 5, 2007, in a private  transaction,  the Company  raised $1,500 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 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.

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
<PAGE>
ATC HEALTHCARE, INC. AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
<S>                                         <C>                 <C>                 <C>
                                                             Fiscal Year Ended
                                        ------------------------------------------------------------
                                         February 28, 2007   February 28, 2006   February 28, 2005

ALLOWANCE FOR DOUBTFUL ACCOUNTS:

Balance, beginning of period                $           247     $           464     $           276
Additions charged to costs and expenses                   -                   -                 430
Write off of bad debts                                  (35)               (217)               (242)
                                        ------------------------------------------------------------
Balance, end of period                      $           212     $           247     $           464
                                        ============================================================
Included in assets held for sale            $             -     $             -     $         1,397
                                        ============================================================
Total                                       $           212     $           247     $         1,861
                                        ============================================================
</TABLE>

                                      F-29
<PAGE>

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
definitiveProxy  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
<PAGE>
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
<PAGE>
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)

See Notes to Exhibits
<PAGE>
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.*

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.*

4.13    Registration Rights Agreement dated January 12, 2007 between the Company
        and Roaring Fork Capital SBIC, L.P.*

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)

See Notes to Exhibits
<PAGE>

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)

See Notes to Exhibits
<PAGE>

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)

See Notes to Exhibits
<PAGE>

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)

See Notes to Exhibits
<PAGE>

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)

See Notes to Exhibits
<PAGE>

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)

See Notes to Exhibits
<PAGE>

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.*

21      Subsidiaries of the Company. *

23      Consent of Goldstein Golub Kessler LLP*

24      Powers of Attorney. *

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.

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.

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.*

                                NOTES TO EXHIBITS

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

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

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

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

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

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

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

(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.

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

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

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

(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.

*       Incorporated herein.

<PAGE>
                                   SIGNATURES

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


                                        ATC HEALTHCARE, INC.

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


Dated: May 25, 2007

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S>                                                                                 <C> <C>
        SIGNATURE               TITLE                                           DATE
        ---------               -----                                           ----

/S/ DAVID SAVITSKY              Chief Executive Officer                         May 25, 2007
---------------------           (Principal Executive
David Savitsky                  Officer) and Director

/S/ DANIEL PESS                 Senior Vice President, Finance,                 May 25, 2007
---------------------           Chief Financial Officer and Treasurer
Daniel Pess                     (Principal Financial and Accounting Officer)

/S/ STEPHEN SAVITSKY            President and Chairman of the Board             May 25, 2007
---------------------
Stephen Savitsky


*                               Director                                        May 25, 2007
---------------------
Bernard J. Firestone, Ph. D.

*                               Director                                        May 25, 2007
---------------------
Jonathan Halpert, Ph. D.

*                               Director                                        May 25, 2007
---------------------
Martin Schiller

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