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

                                    FORM 10-K


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

         For the fiscal year ended February 28, 2006
                                   -----------------

                                       OR

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

         For the Transition Period from ________________  to ___________________

                         Commission File Number: 0-11380

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

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

     1983 Marcus Avenue, Lake Success, 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 11, 2006, the approximate aggregate market value of voting stock held
by non-affiliates of the registrant was $14,675,095 based on a closing sale
price of $0.38 per share. The number of shares of Class A and B Common Stock
outstanding on May 11, 2006 was 38,618,600.

<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 2006, which information
is incorporated herein by reference. All references to "we", "us," "our," or
"ATC" in this Report on Form 10-K means ATC Healthcare, Inc.

Part I.
-------

ITEM 1.   Business
          --------

General

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

Operations

We provide supplemental staffing to health care facilities through our network
of 54 offices in 31 states, of which 42 are operated by 31 licensees and 12 are
owned and operated by us. We offer our clients qualified health care associates
in over 60 job categories ranging from the highest level of specialty nurse,
including critical care, neonatal and labor and delivery, to medical
administrative staff, including third party billers, administrative assistants,
claims processors, collection personnel and medical records clerks. The nurses
provided to clients include registered nurses, licensed practical nurses and
certified nursing assistants. Other services include allied health staffing
which includes mental health technicians, a variety of therapists (including
speech, occupational and physical), radiology technicians and phlebotomists.

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

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

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
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Licensee Program

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

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

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

For fiscal 2006, 2005, and 2004, total staffing licensee distributions net of
discontinued operations were approximately $6.1 million, $6.0 million, and $6.6
million, respectively.

Personnel, Recruiting and Training

We employ approximately 6,000 individuals who render staffing services and
approximately 100 full time administrative and management personnel.
Approximately 70 of these administrative employees are located at the branch
offices and 30 are located at the administrative office in Lake Success, New
York.

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

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


                                       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 health care facilities
in a local area. Cold calls and referrals are often used to generate leads. Once
granted an interview, the representative is instructed to emphasize the
highlights of our services.

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 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.

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 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), 2005, and 2004 as a discontinued operation.


                                       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.


                                       6
<PAGE>








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

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

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

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

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

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


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

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


                                       7
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HEALTHCARE REFORM COULD NEGATIVELY IMPACT OUR BUSINESS  OPPORTUNITIES,  REVENUES
AND MARGINS.

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

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

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

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.


                                       8
<PAGE>



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.

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. We have not completed any acquisitions since February 2003.

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.


                                       9
<PAGE>


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.

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, 2006, 2005 and
2004 was $2.1 million, $1.9 million and $2.8 million, respectively. The
corresponding gross margin for the same time periods were 23.5%, 19.4% and
22.2%, 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 and the price of our common stock.

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

Except for a few states that require workers compensation through their state
fund, we provide workers compensation coverage through a program that is
partially self-insured. Zurich Insurance Company provides specific excess
reinsurance of $300,000 per occurrence as well as aggregate coverage for overall
claims borne by the group of companies that participate in the program. The
program also provides for risk sharing among members for infrequent, large
claims over $100,000. If we become subject to substantial uninsured workers
compensation liabilities, our financial results may be adversely affected.


                                       10
<PAGE>


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, 2006, we had $5.4 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,
2006, 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 not be amortized, but rather that it be reviewed annually for
impairment. In the event impairment is identified, a charge to earnings would be
recorded. We have adopted the provisions of SFAS No. 141 and SFAS No. 142 as of
March 1, 2002. Although it does not affect our cash flow, an impairment charge
to earnings has the effect of decreasing our earnings. If we are required to
take a charge to earnings for goodwill impairment, our stock price could be
adversely affected.

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

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

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

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,
2006 and February 28, 2005 we had approximately $10.5 million and $18.8 million,
respectively, outstanding under the revolving credit line (of which $9.2 million
was reflected in assets held for sale at February 28, 2005) with HFG Healthco-4
LLC with additional borrowing capacity of $0.4 million and $0.1 million,
respectively. 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.


                                       11
<PAGE>


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

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

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

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

ITEM 2.           PROPERTIES
                  ----------

The Company's business leases its administrative facilities in Lake Success, New
York. The Lake Success office lease for approximately 14,305 square feet of
office space expires in December 2010 provides for a current annual rent of
$0.39 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 54 staffing offices in 31 states, of which 12 are operated
by the Company and 42 licensee staffing offices are operated by 31 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.


                                       12
<PAGE>


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 seeks 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 has counterclaimed that CNA mishandled claims, overstated invoices, and
in fact owes the Company a substantial sum of money. The parties will be
submitting the dispute to mediation in June 2006. If the mediation does not
result in a settlement, fact discovery is scheduled to be completed in the fall
of 2006 with a trial expected in early 2007. At the present stage of the
litigation, the Company is unable to accurately predict the likelihood of an
unfavorable outcome to this lawsuit, and is unable to make a reasonable estimate
of possible loss or range of loss or of a possible gain on its counterclaims.

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


Not applicable.


                                       13
<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,
2006, as reported by the American Stock Exchange.

--------------------------------------------------------------------------------
Fiscal Year ended February 28, 2005             High                 Low
--------------------------------------------------------------------------------
1st quarter ended May 31, 2004            $0.64               $0.50
--------------------------------------------------------------------------------
2nd quarter ended August 31, 2004         $0.59               $0.25
--------------------------------------------------------------------------------
3rd  quarter ended November 30, 2004      $0.64               $0.41
--------------------------------------------------------------------------------
4th quarter ended February 28, 2005       $0.52               $0.26
--------------------------------------------------------------------------------

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


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, 2006, there were approximately 287 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.


                                       14
<PAGE>


(D)      Securities Authorized for Issuance Under Equity Compensation Plans

<TABLE>
<CAPTION>

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

--------------  ----------------------------   --------------------   ----------------------------------
     <S>                      <C>                      <C>                        <C>
Equity
compensation
plans approved
by
security
holders                           3,726,882    $             0.59                             2,039,235
--------------  ----------------------------   --------------------   ----------------------------------

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

Total                             4,126,882    $             0.63                             4,639,235
--------------  ----------------------------   -------------------    ----------------------------------
</TABLE>


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

(E)      Recent Sales of Unregistered Securities

The following is certain information concerning the sale by the Company of
securities which were not registered under the Securities Act of 1933 during the
fiscal year ended February 28, 2006. Those sales were made under the exemption
from registration contained in Section 4(2) of the Securities Act and Rule 152
of the Securities and Exchange Commission issued under that Section.

On April 19, 2004, we entered into a Standby Equity Distribution Agreement with
Cornell Capital Partners, L.P. Under the Agreement, we may, at our discretion,
periodically sell to Cornell Capital Partners shares of our Class A Common Stock
for a total purchase price of up to $5.0 million. For each share purchased,
Cornell must pay us 97% of the lowest closing bid price during the five
consecutive trading days immediately following the notice date. Further, we must
pay Cornell 5% of the proceeds of the sale.

Upon execution of the Standby Equity Distribution Agreement, we issued a
Convertible Debenture in the principal amount of $0.14 million to Cornell
Capital Partners as a commitment fee. We retired the Debenture in Fiscal 2006.

In November 2004 our registration statement covering the resale by Cornell
Capital Partners, of shares that it purchases from us under the Agreement became
effective. We amended the registration statement in November 2005 to update the
information in it.

From time to time since November 2004 we have issued promissory notes to Cornell
Capital Partners to evidence loans made to us by Cornell, the proceeds of which
we have used to fund our general working capital needs. It has been contemplated
that those Notes would be repaid from the proceeds of sales of Class A Common
Stock to Cornell under the Standby Equity Distribution Agreement. During the
fiscal year ended February 28, 2006, we sold to Cornell Capital Partners
5,615,512 shares under the Agreement and the Convertible Debenture for purchase
prices between $0.18 and $0.41 per share. We used the proceeds from the sales to
reduce our promissory note obligation to Cornell Capital Partners and fund
current operations.

At February 28, 2006 the amount remaining available under the agreement was $2.5
million.


                                       15
<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, 2006 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.


<TABLE>
<CAPTION>

                                        Feb 28, 2006  Feb 28, 2005  Feb 29, 2004  Feb 28, 2003  Feb 28, 2002

CONSOLIDATED OPERATIONS DATA:
(all amounts in thousands except per
 share data)
             <S>                             <C>            <C>          <C>           <C>           <C>
Revenues:                               $    71,528   $    67,937   $    81,210   $    98,877   $    94,482
                                         -----------   -----------   -----------   -----------   -----------

Loss from continuing operations              (1,755)       (8,459)       (7,872)       (5,010)        1,075
                                         -----------   -----------   -----------   -----------   -----------
(Loss) Income from discontinued
 operations                                    (577)       (1,945)        1,692         2,177         2,518
                                         -----------   -----------   -----------   -----------   -----------

Net (loss) income                       $    (2,332)  $   (10,404)  $    (6,180)  $    (2,833)  $     3,593
                                         -----------   -----------   -----------   -----------   -----------

(Loss) income Earnings Per Share:
(Loss) income  from continuing
 operations:
(Loss) income per common share Basic    $     (0.06)  $     (0.34)  $     (0.32)  $     (0.21)  $      0.04
                                         -----------   -----------   -----------   -----------   -----------
(Loss) income per common share Diluted  $     (0.06)  $     (0.34)  $     (0.32)  $     (0.21)  $      0.04
                                         -----------   -----------   -----------   -----------   -----------
(Loss) income from discontinued
 operations:
(Loss) income per common share Basic    $     (0.02)  $     (0.08)  $      0.07   $      0.09          0.11
                                         -----------   -----------   -----------   -----------   -----------
(Loss) income per common share Diluted  $     (0.02)  $     (0.08)  $      0.07   $      0.09          0.11
                                         -----------   -----------   -----------   -----------   -----------
Net (loss):
(Loss) per common share Basic           $     (0.08)  $     (0.42)  $     (0.25)  $     (0.12)  $      0.15
                                         -----------   -----------   -----------   -----------   -----------
(Loss) per common share Diluted         $     (0.08)  $     (0.42)  $     (0.25)  $     (0.12)  $      0.15
                                         -----------   -----------   -----------   -----------   -----------

Weighted Average common shares
 outstanding:
   Basic                                     31,955        25,113        24,468        23,783        23,632
   Diluted                                   31,955        25,113        24,468        23,783        23,632


CONSOLIDATD BALANCE SHEET DATA:

Total Assets                            $    25,196   $    23,211   $    29,195   $    33,007   $    27,831
Long-term debt and other liabilities         10,848         9,026        20,320        22,363        20,206
Total Liabilities                            20,307        30,590        31,029        32,437        27,041
Stockholders' equity (deficiency)             3,682        (5,186)        5,053        10,546        13,220
Total Assets Held for Sale                       --        37,098        45,532        45,608        47,498
Long-term debt and other non-current
 liabilities held  for sale                      --        21,108        35,424        34,799        31,650
Total Liabilities held for sale                  --        33,768        37,578        36,411        36,747


Prior to the Company purchasing AllCare Nursing in January 2002, AllCare Nursing
was a Licensee of the Company for the twelve months ended February 28, 2002.

ATC  Healthcare,  Inc. did not pay any cash dividends on its common stock during
any of the periods set forth in the table above.
Amortization expense of $533 was included in fiscal year 2002 net income.
Fiscal 2002 included loss on extinguishment of debt of $854.
</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,  2006  ("FISCAL  2006") to Year  Ended
February 28, 2005 ("FISCAL 2005").

Revenues: In the fiscal year ended February 28, 2006, revenue increased 5.3% to
$71.5 million as compared to revenue for Fiscal 2005 of $67.9 million. For
fiscal year ended February 28, 2006 we sold nine new licensees and closed two
Company owned stores as compared to Fiscal 2005 when we opened one Company owned
store, sold nine licensees and closed five Company owned stores. In addition,
four and seven licensees closed for the years ended February 28, 2006 and 2005,
respectively. Office revenue for locations open during the last two fiscal years
increased $1.1 million. Since late 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 could be jeopardized.

Service Costs: Service costs were 76.5% of total revenues in Fiscal 2006 as
compared to 80.6% of total revenues in Fiscal 2005. The decrease in the
percentage in service costs can be attributed to the Company being able to
negotiate more favorable terms for its malpractice and general liability
insurance as well as lower worker compensation losses due to the Company's new
risk management controls. Service costs represent the direct costs of providing
services to patients or clients, including wages, payroll taxes, travel costs,
insurance costs, the cost of medical supplies and the cost of contracted
services.

General and Administrative Expenses: General and administrative expenses were
$15.8 million in Fiscal 2006 as compared to $17.0 million in Fiscal 2005.
General and administrative costs, expressed as a percentage of revenues, were
22.1% and 25.1% for Fiscal 2006 and Fiscal 2005 respectively. The reduction in
general and administrative expenses in Fiscal 2006 is the result of initiatives
undertaken by the Company in late Fiscal 2005 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 $0.7 million in fiscal 2005. The reduction in the current year is
due to certain depreciable assets being fully depreciated as well as certain
customer lists from acquisitions being fully amortized in the prior year.

Office Closing and Restructuring Charge: For fiscal 2005 the Company recorded an
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 less than $0.1 million
of remaining costs accrued mainly for lease costs which will be paid through the
term of the related leases which expire 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.


                                       17
<PAGE>


Interest Expense, net: Interest expense, net was $2.2 million and $2.2 million
in Fiscal 2006 and 2005 respectively. Interest for Fiscal 2006 was impacted by
the increased interest rates associated with its revolving line of credit and
decline in the principal balances of notes payable.

Other Income, net: Other income was less than $0.1 million during fiscal 2006 as
compared to $0.9 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, the Company was
contingently liable on $2.3 million of obligations owed by TLCS which was
payable over eight years. The assets of TLCS were sold by the bankruptcy court
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 $0.1 million on a pretax loss of $1.7 million. As
compared to recording an income tax expense of $3.5 million on a pretax loss of
$4.9 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 TLC 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 All Care 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 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 the 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.


                                       18
<PAGE>



AllCare Nursing had a loss from operations for the year ended February 28, 2006
of approximately $.6 million. This compares to 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 All Care nursing
declined from $37.8 million in fiscal 2005 to $5.5 million for Fiscal 2006 or
85.5%. As the sale was consummated on April 22, 2005, the decrease was primarily
due to the 2006 period representing approximately one sixth the number of days
comprising a normal fiscal year reporting period.

Comparison of Year ended February 28, 2005 ("FISCAL 2005") to Year Ended
February 29, 2004 ("FISCAL 2004").

Revenues: In the fiscal year ended February 28, 2005, revenue declined 16.4% to
$67.9 million as compared to revenue for Fiscal 2004 of $81.2 million. For
fiscal year ended February 28, 2005 we opened one Company owned store and sold
nine new licensees as well as closed five Company owned stores as compared to
Fiscal 2004 when we opened two Company owned stores, sold two licensee and
closed ten Company owned stores. In addition, seven and eight licensees closed
for the year ended February 28, 2005 and February 29, 2004, respectively. Office
revenue for locations open during the last two fiscal years decreased $9.7
million due to the fact that demand for temporary nurses is going through a
period of contraction as hospitals continue to experience flat to declining
admission rates. We also closed 12 offices due to poor performance during Fiscal
2005. These offices accounted for $14.6 million in revenue during Fiscal 2004.
Until the demand for temporary nurses returns to prior levels we may continue to
see revenue decline in our existing businesses which would continue our trend of
losses. If revenues were to significantly decline our ability to continue
operations could be jeopardized. To offset the decline in per diem nursing, we
are actively recruiting new licensees as well as looking into other areas of
revenue generation such as Vendor on Premise and Pharmacy staffing.

Service Costs: Service costs were 80.6% of total revenues in Fiscal 2005 as
compared to 77.8% of total revenues in Fiscal 2004. The increase in service
costs can be attributed to the competitive environment that exist in the
industry which is pressuring fees that clients are willing to pay for services.
In addition, the rise in costs for malpractice and general liability insurance
has also caused an increase to our service costs. Service costs represent the
direct costs of providing services to patients or clients, including wages,
payroll taxes, travel costs, insurance costs, the cost of medical supplies and
the cost of contracted services.

General and Administrative Expenses: General and administrative expenses were
$17.0 million in Fiscal 2005 as compared to $19.2 million in Fiscal 2004.
General and administrative costs, expressed as a percentage of revenues, were
25.1% and 23.7% for Fiscal 2005 and Fiscal 2004 respectively. The reduction in
general and administrative expenses in Fiscal 2005 is the result of the
reduction in royalty payments to licensees due to decreased revenues as well as
initiatives undertaken by us to reduce the size of or close marginally
performing offices and a reduction of back office support staff.

Depreciation and Amortization: Depreciation and amortization expenses relating
to fixed assets and intangible assets was $0.7 million in fiscal 2005 as
compared to $1.4 million in fiscal 2004. 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 an
impairment to goodwill and other intangibles in the amount of $1.4 million. In
the third quarter of fiscal 2004 the Company recorded a charge associated with
the closing of certain offices in the amount of $2.6 million.


                                       19
<PAGE>


The components of the charges are as follows:

--------------------------------------------------------------------------------
         Components              Amount (in thousands)     Amount (in thousands)
--------------------------------------------------------------------------------
                                     Fiscal 2005               Fiscal 2004
--------------------------------------------------------------------------------
Write-off of fixed assets                  -                      $892
--------------------------------------------------------------------------------
Write-off of related goodwill            $1,431                    889
--------------------------------------------------------------------------------
Severance costs and other benefits         -                       608
--------------------------------------------------------------------------------
Other                                      -                       200
                                                                   ---
--------------------------------------------------------------------------------
Total Restructuring Charge               $1,431                 $2,589
--------------------------------------------------------------------------------

Through February 28, 2005, the Company has paid $0.7 million of severance and
other costs associated with the office closings. As of February 28, 2005 the
Company's accounts payable and accrued expenses included $0.1 million of
remaining costs accrued, mainly for lease costs which will be paid through the
term of the related leases which expire 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 and $1.9 million
in Fiscal 2005 and 2004 respectively. Interest expense increased $0.3 million in
Fiscal 2005 from Fiscal 2004 primarily due to interest costs associated with the
Company's term loan facility and to increased interest rates associated with its
revolving line of credit.

Other Income, net: Other income was $0.9 million during fiscal 2005 as compared
to $0.1 million in fiscal 2004. 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 assets of TLCS were sold by the bankruptcy court
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 2005 the Company recorded an
expense for income taxes of $3.5 million on a pretax loss of $4.9 million. As
compared to recording an income tax expense of $0.9million on a pretax loss of
$6.9 million in Fiscal 2004. The current 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
TLC 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 All Care 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 valuation allowance.


                                       20
<PAGE>


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 the 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. This compares to income from operations of approximately $1.7
million for the year ended February 29, 2004. Net sales for All Care nursing
declined from $49.2 million in fiscal 2004 to $37.8 million for fiscal 2005 or
23.2%. The decrease was due to the decreased demand for nurses in the New York
metropolitan area.

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 $6.0 million during the year ended
February 28, 2006 as compared to cash provided by operating activities of $3.5
million and cash used in operating activities of $0.4 million for the years
ended February 28, 2005 and February 29, 2004 respectively. Cash provided by
investing activities was $4.0 million during the year ended February 28, 2006
compared to cash used in investing activities of $0.1 million and cash used in
investing activities of $0.1 million during the year ended February 28, 2005 and
February 29, 2004, respectively. Cash provided by financing activities was $1.9
million in Fiscal 2006 as compared to cash used in financing activities of $3.0
million in Fiscal 2005 and Cash provided by financing activities of $0.5 in
Fiscal 2004.

Cash used in operating activities during Fiscal 2006 was primarily used to fund
the growth in accounts receivable due to the increase in revenue, fund the
collateral requirements in the Company's self funded workers compensation plan
and fund discontinued operations. Cash provided by operating activities during
Fiscal 2005 was mainly due to collections on accounts receivable in the AllCare
Nursing business due to a decline in sales in that business. Cash used in
operating activities during Fiscal 2004 was primarily used to fund our workers
compensation plan. 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 and 2004 was mainly used on capital expenditures. Cash
provided by financing activities during the year ended February 28, 2006 of $1.9
million 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. Cash provided by financing activities in Fiscal
2004 was mainly from borrowings under the Company credit facility.


                                       21
<PAGE>



The Company entered into a Financing Agreement, as amended with a lending
institution, HFG Healthco-4, 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, 2006 and February 29, 2005 the outstanding balance on
the revolving credit facility was $10,516 and $18,772, respectively. At February
28, 2005, the outstanding balances on the revolving credit facility and the term
loan included in liabilities held for sale was $9,112 and $2,073, respectively.

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.

The Company had working capital of $9.5 million at February 28, 2006, as
compared to a working capital deficiency of $8.2 million at February 28, 2005.

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 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
by the use of funds from the Standby Equity Distribution Agreement with Cornell
Capital Partners, a loan to the Company by the wife of one of the executive
officers of the Company, our sale of convertible debentures, 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 a combination of operating cash flows and funds
available under the $15 million revolving loan facility and under the Agreement
with Cornell.


                                       22
<PAGE>



We do not have enough capital to operate the business without our revolving loan
facility. It is likely that we will also use additional funds from the Standby
Equity Distribution Agreement with Cornell Capital Partners, as available. If
our financing facility became unavailable to us we would have to look to
alternative means such as the sale of stock or the sale of certain assets to
finance operations. There can be no assurance that additional financing will be
available if required, or, if available, will be available on satisfactory
terms.

On April 19, 2004, we entered into a Standby Equity Distribution Agreement with
Cornell Capital Partners, L.P. Pursuant to the Agreement, we may, at our
discretion, periodically sell to Cornell Capital Partners shares of common stock
for a total purchase price of up to $5,000,000. For each share of common stock
purchased under the Agreement, Cornell Capital Partners will pay us 97% of the
lowest closing bid price of the common stock during the five consecutive trading
days immediately following the notice date. Further, we have agreed to pay
Cornell Capital Partners 5% of the proceeds that we receive under the Agreement.
The Agreement is subject to us maintaining an effective S-1 registration
statement. In November 2004, the Securities and Exchange Commission declared our
S-1 effective. In November 2005 we updated the information in the S-1. We issued
5,455,512 shares to Cornell Capital during Fiscal 2006 at sales prices of $0.18
to $0.41 per share. The Company received proceeds of $1.6 million net of
expenses. From time to time we have issued promissory notes to Cornell Capital
Partners 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.

INDEBTEDNESS AND CONTRACTUAL OBLIGATIONS OF THE COMPANY

The following are  contractual  cash  obligations of the Company at February 28,
2006 :

Payments due by period (amounts in thousands):

                            Less than  1-2    3-4
                    Total   One Year  Years  Years      Thereafter
------------------------------------------------------------------
Bank Financing    $10,516  $      -   $  -   $ 10,516   $       -
Debt                1,879     1,629    250          -           -
Operating leases    2,740       702    674        967         397
                  ------------------------------------------------
Total             $15,135  $  2,331   $924   $ 11,483   $     397
==================================================================

BUSINESS TRENDS

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


                                       23
<PAGE>


CRITICAL ACCOUNTING POLICIES

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

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

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

Revenue Recognition
A substantial portion of the Company's service revenues are derived from a
unique form of franchising under which independent companies or contractors
("licensees") represent the Company within a designated territory. These
licensees assign Company personnel, including registered nurses and therapists,
to service clients using the Company's trade names and service marks. The
Company pays and distributes the payroll for the direct service personnel who
are all employees of the Company, administer all payroll withholdings and
payments, bill the customers and receive and process the accounts receivable.
The revenues and related direct costs are included in the Company's consolidated
service revenues and operating costs. The licensees are responsible for
providing an office and paying related expenses for administration, including
rent, utilities and costs for administrative personnel. The Company pays a
monthly distribution or commission to Company's domestic licensees based on a
defined formula of gross profit generated. Generally, the Company pays a
licensee approximately 55% (60% for certain licensees who have longer
relationships with us). There is no payment to the licensees based solely on
revenues. For Fiscal 2006, 2005 and 2004, total licensee distributions were
approximately $6,069, $6,000 and $9,600, respectively, and are included in the
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. Employees
assigned to particular customers may be changed at the customer's request or at
the Company's initiation. A provision for uncollectible and doubtful accounts is
provided for amounts billed to customers which may ultimately be uncollectible
due to documentation disputes or the customer's inability to pay.


                                       24
<PAGE>


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

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

In accordance with SFAS 142 the Company tested goodwill impairment at the end of
the third and fourth quarters of Fiscal 2006 and 2005. 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 which were acquired through acquisitions. In addition to those write
offs, 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 which the Company had 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 2006 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 additional write-off of goodwill was required.

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

Income Taxes
The Company accounts for income taxes in accordance with the Financial
Accounting Standards Board ("FASB") statement 109, Accounting for Income Taxes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax bases, and
net operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered. The Company records a valuation allowance against deferred tax assets
for which utilization of the asset is not likely.


                                       25
<PAGE>


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
Except for a few states that require workers compensation through their state
fund, the Company provides workers compensation coverage through a program that
is partially self-insured. Zurich Insurance Company provides excess reinsurance
for all claims over $300,000 per occurrence as well as aggregate coverage for
overall claims borne by the group of companies that participate in the program.
The program also provides for risk sharing among members for infrequent, large
claims over $100,000 but less then $300,000. 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.

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

EFFECT OF INFLATION

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

RECENT ACCOUNTING PRONOUNCEMENTS


December 2004, the FASB issued SFAS No. 123 (revised 2004) "Share-Based Payment"
(SFAS 123R), which requires the measurement of all share-based payments to
employees, including grants of employee stock options, using a fair-value-based
method and the recording of such expense in an entity's statement of income. The
accounting provisions of SFAS 123R are effective for annual reporting periods
beginning after June 15, 2005. The Company is required to adopt the provisions
of SFAS 123R in the quarter ending May 31, 2006. The pro forma disclosures
previously permitted under SFAS 123 no longer will be an alternative to
financial statement recognition. Although the Company has not yet determined
whether the adoption of SFAS 123R will result in amounts that are similar to the
current pro forma disclosures under SFAS 123, the Company is evaluating the
requirements under SFAS 123R and expects the adoption to have a material impact
on the consolidated statements of operations and net income (loss) per share.

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


                                       26
<PAGE>


FORWARD LOOKING STATEMENTS

Certain statements in this Annual Report on Form 10-K/A constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. From time to time, the Company also provides
forward-looking statements in other materials it releases to the public as well
as oral forward-looking statements. These statements are typically identified by
the inclusion of phrases such as "the Company anticipates", "the Company
believes" and other phrases of similar meaning. These forward looking statements
are based on the Company's current expectations. Such forward-looking statements
involve known and unknown risks, uncertainties, and other factors that may cause
the actual results, performance or achievements expressed or implied by such
forward-looking statements. The potential risks and uncertainties which would
cause actual results to differ materially from the Company's expectations
include, but are not limited to, those discussed in the section entitled
"Business - Risk Factors". Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's opinions only as of
the date hereof. The Company undertakes no obligation to 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 2007.


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 weighted average interest rate
is 10.05% At February 28, 2006, drawings on the Facility were $10.5 million.
Assuming variable rate debt at February 28, 2006, a one point change in interest
rates would impact annual net interest payments by $105 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, 2006 and February 28, 2005                               F-2

     Consolidated Statements of Operations
      for the Fiscal Years ended February 28, 2006, February 28, 2005
      and February 29, 2004                                                 F-3

     Consolidated Statements of Stockholders' Equity (Deficiency)
      for the Fiscal Years ended February 28, 2006, February 28, 2005
      and February 29, 2004                                                 F-4

     Consolidated Statements of Cash Flows
      for the Fiscal Years ended February 28, 2006, February 28, 2005
      and February 29, 2004                                                 F-5

     Notes to Consolidated Financial Statements                             F-6

FINANCIAL STATEMENT SCHEDULE FOR THE FISCAL YEARS ENDED February 28, 2006,
  February 28, 2005 and February 29, 2004


     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.

<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, 2006 and 2005 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, 2006.
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, 2006 and 2005 and the results of their
operations and their cash flows for each of the years in the period ended
February 28, 2006 in conformity with U.S. generally accepted accounting
principles.

The information included on Schedule II is the responsibility of management, and
although not considered necessary for a fair presentation of financial position,
results of operations, and cash flows is presented for additional analysis and
has been subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements. In our opinion, the information included on
Schedule II relating to the years ended February 28, 2006, February 28, 2005 and
February 29, 2004 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
   April 28, 2006


                                       F-1
<PAGE>


ATC HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------
                                                                                    February   February
                                                                                      28,        28,
ASSETS                                                                               2006       2005
-------------------------------------------------------------------------------------------------------
CURRENT ASSETS:
                 <S>                                                                   <C>        <C>
     Cash and cash equivalents                                                     $    984   $  1,042
     Accounts receivable, less allowance for doubtful accounts of
           $247 and $464, respectively.                                              11,777     10,022
     Prepaid expenses and other current assets                                        6,168      4,416
     Current assets held for sale                                                         -     10,567
                                                                                   --------------------
               Total current assets                                                  18,929     26,047
                                                                                   --------------------

     Fixed assets, net                                                                  207        450
     Intangibles                                                                        411        616
     Goodwill                                                                         5,357      5,397
     Other assets                                                                       292      1,268
     Non-current assets held for sale                                                     -     26,531
                                                                                   --------------------
               Total assets                                                        $ 25,196   $ 60,309
                                                                                   ====================

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY):
CURRENT LIABILITIES:
     Accounts payable                                                              $  1,691   $  2,170
     Accrued expenses                                                                 5,062      5,431
     Book overdraft                                                                   1,077      1,489
     Current portion of notes payable (including $1,100 and $1,330
     from related parties as of February 28, 2006 and 2005)                           1,629      2,814
     Due under bank financing                                                             -      9,660
     Current liabilities held for sale                                                    -     12,660
                                                                                   --------------------
               Total current liabilities                                              9,459     34,224

     Notes payable (including $250 and $500 from related parties as of
       February 28, 2006 and 2005)                                                      250      8,849
     Due under bank financing                                                        10,516
     Other liabilities                                                                   82        177
     Non-current liabilities held for sale                                                -     21,108
                                                                                   --------------------
               Total liabilities                                                     20,307     64,358
                                                                                   --------------------


Commitments and contingencies

Convertible Series A Preferred Stock ($.01 par value 4,000 shares authorized,
2,000 shares issued and outstanding at February 28, 2006
and February 28, 2005)                                                                1,207      1,137
                                                                                   --------------------

STOCKHOLDERS EQUITY (DEFICIENCY):
     Convertible Series B Preferred Stock-$1.00 par value;10,000 shares
     authorized 4,050 shares issued and outstanding; liquidation value of
     $2,000 per share ($8,100)                                                            4

     Class A Common Stock - $.01 par value; 75,000,000 shares authorized;
     37,449,820 and 26,581,437 shares issued and outstanding at February 28, 2006
     and February 28, 2005, respectively                                                374        266

     Class B Common Stock - $.01 par value; 1,554,936 shares authorized;
     186,658 and 190,417 shares issued and outstanding February 28, 2006 and
     February 28, 2005, respectively                                                      2          2

     Additional paid-in capital                                                      25,999     14,638
     Accumulated deficit                                                            (22,697)   (20,092)
                                                                                   --------------------
               Total stockholders' equity (deficiency)                                3,682     (5,186)
                                                                                   --------------------
               Total liabilities and stockholders' equity
                (deficiency)                                                       $ 25,196   $ 60,309
-------------------------------------------------------------------------------------------------------
</TABLE>


                 See notes to consolidated financial statements


                                       F-2
<PAGE>


ATC HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except earnings per share data)
<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------------------------------
                                                                         For the Fiscal Years Ended
                                                         February 28, 2006    February 28, 2005   February 28, 2004
--------------------------------------------------------------------------------------------------------------------

REVENUES:
              <S>                                                   <C>                <C>              <C>
     Service revenues                                    $           71,528   $          67,937    $         81,210
                                                         -----------------------------------------------------------

COSTS AND EXPENSES:
     Service costs                                                   54,721              54,732              63,205
     General and administrative expenses                             15,830              17,033              19,207
     Depreciation and amortization                                      517                 700               1,419
     Office closing and restructuring charge                              -               1,431               2,589
                                                         -----------------------------------------------------------
        Total operating expenses                                     71,068              73,896              86,420
                                                         -----------------------------------------------------------

INCOME (LOSS) FROM OPERATIONS:                                          460              (5,959)             (5,210)
                                                         -----------------------------------------------------------

INTEREST AND OTHER EXPENSES (INCOME):
     Interest expense, net                                            2,188               2,191               1,863
     Other  (income) expense, net                                       (23)               (914)               (139)
     Provision (reversal) related to TLCS guarantee                       -              (2,293)                  -
                                                         -----------------------------------------------------------
       Total interest and other expenses                              2,165              (1,016)              1,724
                                                         -----------------------------------------------------------

LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES                  (1,705)             (4,943)             (6,934)
                                                         -----------------------------------------------------------

INCOME TAX PROVISION                                                     50               3,516                 938
                                                         -----------------------------------------------------------

LOSS FROM CONTINUING OPERATIONS                          $           (1,755)  $          (8,459)  $          (7,872)
                                                         -----------------------------------------------------------

DISCONTINUED OPERATIONS:
  (Loss) Income from discontinued operations net of tax
   (benefit) provision of                                $             (577)  $          (1,945)  $           1,692
                                                         ------------------------------------------------------------
   0, ($1,452), and $1,053 in 2006, 2005 and 2004
    respectively.

NET LOSS                                                 $           (2,332)  $         (10,404)  $          (6,180)
                                                         -----------------------------------------------------------

DIVIDENDS ACCRETED                                                      273                  70                  67
                                                         -----------------------------------------------------------

NET LOSS AVAILABLE TO COMMON SHAREHOLDERS                            (2,605)            (10,474)             (6,247)
                                                         ===========================================================

(Loss) Income Earnings Per Share:
Loss from continuing operations:
(Loss) per common share Basic                            $            (0.06)  $           (0.34)  $           (0.32)
                                                         -----------------------------------------------------------
(Loss) per common share Diluted                          $            (0.06)  $           (0.34)  $           (0.32)
                                                         -----------------------------------------------------------
(Loss) income from discontinued operations:
(Loss) income per common share Basic                     $            (0.02)  $           (0.08)  $            0.07
                                                         -----------------------------------------------------------
(Loss) income per common share Diluted                   $            (0.02)  $           (0.08)  $            0.07
                                                         -----------------------------------------------------------
Net (loss):
(Loss) per common share Basic                            $            (0.08)  $           (0.42)  $           (0.25)
                                                         -----------------------------------------------------------
(Loss) per common share Diluted                          $            (0.08)  $           (0.42)  $           (0.25)
                                                         -----------------------------------------------------------

Weighted Average common shares outstanding:
   Basic                                                         31,955,483          25,113,624          24,468,000
                                                         -----------------------------------------------------------
   Diluted                                                       31,955,483          25,113,624          24,468,000
--------------------------------------------------------------------------------------------------------------------
</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 share data)

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
                                       Class B             Class A            Class B        Additional
                                  Preferred Stock       Common Stock        Common Stock      Paid-In    Accumulated
                                 Shares       Amount   Shares     Amount  Shares     Amount   Capital      Deficit        Total
--------------------------------------------------------------------------------------------------------------------------------
             <S>                  <C>          <C>      <C>        <C>      <C>       <C>      <C>            <C>          <C>
Balances, February 28, 2003                           23,582,552     235 256,191          3  13,679            (3,371)   10,546

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

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

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


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

Accrued dividends on
 Preferred stock                                                                                                  (67)      (67)

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

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

Exchange of Class B for Class
 A Common Stock                                           55,000       1 (55,000)        (1)      -                 -         -

Issuance of shares through
 Employee Stock
 Purchase Plan                                            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, February 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 shares for Debt        4,050            4                                          8,096                       8,100

Common Stock issued on the
 conversion of debt
 (net of issuance costs of $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  37,449,820 $   374 186,658 $        2 $25,999  $        (22,697) $  3,682
--------------------------------================================================================================================
</TABLE>

                 See notes to consolidated financial statements


                                       F-4

<PAGE>


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

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
                                                                   For the Fiscal Years Ended
                                                               February 28, February 28, February 29,
                                                                   2006        2005         2004
------------------------------------------------------------------------------------------------------

CASH FLOWS FROM OPERATING ACTIVITIES:
                      <S>                                            <C>         <C>          <C>
    Net loss                                                   $    (2,332)  $  (10,404) $     (6,180)
    Income (Loss) on discontinued operations                   $      (577)  $   (1,945) $      1,692
                                                               ---------------------------------------
    Net loss on continuing operations                          $    (1,755)  $   (8,459) $     (7,872)

    Adjustments to reconcile net loss to net cash provided by
     (used in) operations:
             Depreciation and amortization                              517         700         1,419
             Amortization of debt financing costs                        50         284           267
             Amortization of discount on convertible debenture                       40
             In kind interest                                           124
             Fair value of warrants issued                               98
             Provision for doubtful accounts                           (217)        188          (543)
             Provision (reversal) related to TLCS guarantee                      (2,293)            -
             Deferred income taxes                                                3,477           838
             Impairment of fixed assets                                                           892
             Impairment of goodwill                                      40       1,431           889

    Changes in operating assets and liabilities, net of
     effects of acquisitions:
             Accounts receivable                                     (1,538)      1,050         2,257
             Prepaid expenses and other current assets               (1,650)        323        (1,602)
             Other assets                                               976        (765)          (34)
             Accounts payable and accrued expenses                   (1,051)       (140)        1,075
             Other long-term liabilities                                (95)       (330)          293
             Net cash provided by discontinued operations            (1,450)      8,021         1,742
                                                               ---------------------------------------
                  Net cash (used in) provided by operating
                   activites                                         (5,951)      3,527          (379)
                                                               ---------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Capital expenditures                                                (69)        (77)         (243)
    Acquisition of businesses                                                                     150
    Net cash used in discontinued operations                          4,089                       (20)
                                                               ---------------------------------------
                  Net cash (used in) provided by investing
                   activities                                         4,020         (77)         (113)
                                                               ---------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Repayment of borrowings of notes and capital lease
     obligation                                                        (709)        767        (3,851)
    Repayment of term loan facility                                     856      (1,568)       (1,363)
    Issuance of notes payable                                                     1,500
    (Decrease) increase in book overdraft                              (412)       (753)         (338)
    Debt financing costs                                               (152)        (67)          (87)
    Issuance of common and preferred stock, net of issuance
     costs of $16 in 2006                                               249         185         1,157
    Costs related to issuance of common stock                          (173)
    Borrowings under new credit facility                                            800         1,838
    Issuance of convertible notes and warrants                        2,100         590
    Net cash provided by (used in) discontinued operations              114      (4,405)        3,094
                                                               ---------------------------------------
                   Net cash (used in) provided by financing
                    activities                                        1,873      (2,951)          450
                                                               ---------------------------------------
NET INCREASE (DECREASE) IN CASH                                         (58)        499           (42)
                                                               =======================================
------------------------------------------------------------------------------------------------------
CASH, BEGINNING OF YEAR                                               1,042         543           585
------------------------------------------------------------------------------------------------------
CASH, END OF YEAR                                              $        984   $   1,042   $       543
------------------------------------------------------------------------------------------------------
</TABLE>

                 See notes to consolidated financial statements


                                       F-5

<PAGE>



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

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
------------------------------------------------------------------------------------------------------
                 <S>                                                <C>           <C>         <C>
Supplemental disclosure of cash flow information:
     Interest Paid                                             $      3,349   $   2,844   $     2,490
     Taxes Paid                                                $         20   $     100   $        43


     Shares issued for future services                         $          -   $      50   $         -
     Conversion of debt to common stock                        $      3,170   $       -   $         -
     Conversion of debt to Preferred Class B                   $      8,100   $       -   $         -
     Forgiveness of Debt                                       $     17,344   $       -   $         -
     Dividends                                                 $        273   $      70   $        67
------------------------------------------------------------------------------------------------------
</TABLE>


                 See notes to consolidated financial statements

                                       F-6

<PAGE>


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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

1.  Organization And Basis Of  Presentation

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

The Company has shown 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, 2006 the company had
stockholders' equity of $3.7 million. Management has a plan whereby they will
continue to reduce costs while adding licensees, which it believes, will return
the Company to profitability.

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). Accordingly, the Company's Financial
Statements at February 28, 2005 reflect the related assets and liabilities of
operations as Assets and Liabilities Held For Sale in the accompanying balance
sheets and Discontinued Operations in the accompanying statement of operations
presented.

2.  Summary Of Significant Accounting Policies

Consolidation

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

Revenue Recognition

A substantial portion of the Company's service revenues is derived from a unique
form of franchising under which independent companies or contractors
("licensees") represent the Company within a designated territory. These
licensees assign Company personnel, including registered nurses and therapists,
to service clients using the Company's trade names and service marks. The
Company pays and distributes the payroll for the direct service personnel who
are all employees of the Company, administers all payroll withholdings and
payments, bills the customers and receives and processes the accounts
receivable. The revenues and related direct costs are included in the Company's
consolidated service revenues and operating costs. The licensees are responsible
for providing an office and paying related expenses for administration,
including rent, utilities and costs for administrative personnel.

The Company pays a monthly distribution or commission to its domestic licensees
based on a defined formula of gross profit generated. Generally, the Company
pays a licensee approximately 55% of gross profit (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>



Revenue Recognition (continued)

For Fiscal 2006, 2005 and 2004, total licensee staffing distributions net of
discontinued operations were approximately $6,069, $6,000 and $6,600
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 and initial licensee fees are
recognized upon signing of the license agreement, if collectibility of such
amounts is reasonably assured, since the Company has performed substantially all
of its obligations under its licensee agreements by such date. In circumstances
where a reasonable basis does not exist for estimating collectability of the
proceeds of the sales of licensees and initial license fees, such amounts are
deferred and recognized as collections are made, or until such time that
collectability is reasonably assured. The Company does not have recurring fees
from its licensees. The Company recorded revenue from licensee fees of $501,
$935 and $448 for fiscal 2006, 2005 and 2004 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
collectability 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.


                                       F-8

<PAGE>


Fixed Assets

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

Impairment of Long-Lived Assets

In accordance with Statement of Financial Accounting Standards Board ("SFAS")
No. 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 fixed assets to determine if any impairment
exists based upon projected, undiscounted net cash flows of the Company. As of
February 28, 2006 the Company believes that no impairment of long-lived assets
exists. During fiscal 2004, the Company charged operations $892 for fixed assets
that were impaired.

Goodwill and Intangible Assets

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

In accordance with SFAS 142, the Company performed a transitional impairment
test as of March 1, 2002 and its annual impairment test at the end of each year
for its unamortized goodwill. As a result of the impairment tests performed, the
Company charged operations $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 and February 29, 2004, respectively, for goodwill and
intangibles the Company determined was impaired. No other impairment was noted
at the date of the adoption of SFAS 142 or at February 28, 2006, February 28,
2005 and February 29, 2004. 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. During fiscal 2004, the
Company's net goodwill decreased by $1,193 as a result of an impairment charge
of $889 and $304 of final purchase price allocations.

Goodwill and other intangibles are as follows:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Goodwill and other Intangibles
                                   February 28, 2006              February 28, 2005
-------------------------------------------------------------------------------------------------------------
                             Gross Carrying  Accumulated   Gross Carrying  Accumulated       Amortization
                             --------------  -----------   --------------  -----------       ------------
                                Amount       Amortization     Amount       Amortization         Period
                                ------       ------------     ------       ------------         ------
          <S>                      <C>            <C>            <C>            <C>               <C>
Goodwill                     $       5,357   $         -   $       5,397   $         -           none
Covenants not to compete               500           307             500           235            10
Other intangibles                      674           456             674           323           3-10
                             ----------------------------------------------------------
  Subtotal                           6,531           763           6,571           558
Included in assets held for
 sale                                    -             -          28,415         1,965
                             ----------------------------------------------------------
                             $       6,531   $       763   $      34,986   $     2,523
                             ==========================================================
-------------------------------------------------------------------------------------------------------------
</TABLE>



                                      F-9
<PAGE>


Goodwill and Intangible Assets (continued)

Included in assets held for sale at February 28, 2005 is $21,689 of Goodwill.

Amortization expense was $205, $279 and $273 for fiscal years 2006, 2005 and
2004, respectively. Amortization in assets held for sale was $665 for both
fiscal years 2005 and 2004.

Estimated amortization expense for the next four fiscal years is as follows:

                              --------------------
                              Amortization Expense
                              --------------------

                              2007             205
                              2008             147
                              2009              51
                              2010               8
                              --------------------


Insurance Costs

The Company is obligated for certain costs under various insurance programs,
including workers' compensation. The Company recognizes its obligations
associated with these policies in the period the claim is incurred. The Company
records an estimate of the ultimate cost of, and reserve for, workers
compensation based on actuarial computations using the Company's loss history as
well as industry statistics. Zurich Insurance Company provides excess
reinsurance for all claims over $300,000 per occurrence as well as aggregate
coverage for overall claims borne by the group of companies that participate in
the program. The program also provides for risk sharing among members for
infrequent, large claims over $100,000 but less then $300,000. 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 a goodwill impairment in the amount of
$1,431 excluding the write off which resulted form the sale of the AllCare
Nursing business, discussed in note 3. In the third quarter of fiscal 2004 the
Company recorded a charge associated with the closing of certain offices in the
amount of $2,589. The components of the charges are as follows:

--------------------------------------------------------------------------------
      Components                   February 28, 2005       February 29, 2004
--------------------------------------------------------------------------------
Write-off of fixed assets                                       $  892
--------------------------------------------------------------------------------
Write-off of related goodwill          $1,431                      889
--------------------------------------------------------------------------------
Severance costs and other
benefits                                                           608
--------------------------------------------------------------------------------
Other exit costs                                                   200
--------------------------------------------------------------------------------
 Total restructuring charge            $1,431                   $2,589
--------------------------------------------------------------------------------


Through February 28, 2006, the Company has paid $781 of severance and other
costs associated with the office closings. As of February 28, 2006, the
Company's accounts payable and accrued expenses included $27 of remaining costs
accrued consisting mainly of lease costs. The remaining lease costs will be paid
through the term of the related leases that expire through January 2007.


                                      F-10

<PAGE>


Income Taxes

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

Earnings (Loss) per Share

Basic earnings (loss) per share is computed using the weighted average number of
common shares outstanding for the applicable period. Diluted earnings per share
is computed using the weighted average number of common shares plus potential
common shares outstanding, unless the inclusion of such potential common
equivalent shares would be anti-dilutive. In Fiscal 2006, 2005 and 2004,
19,165,600, 13,216,909 and 6,002,583 common stock equivalents, respectively,
have been excluded from the earnings per share calculation, as their inclusion
would have been anti-dilutive.

Fair Value of Financial Instruments

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

Advertising

Advertising costs, which are expensed as incurred, were $206, $500 and $571 in
Fiscal 2006, 2005 and 2004, respectively, and are included in general and
administrative expenses.

Stock Based Compensation

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


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
                                                               Fiscal Year Ended
                                            February 28, 2006 February 28, 2005 February 28, 2004
--------------------------------------------------------------------------------------------------
          <S>                                       <C>                <C>                  <C>
Net loss, as reported                       $         (2,332) $        (10,404) $          (6,180)
Less:  Fair value method of stock based
 compensation, net of tax                               (488)           (1,014)              (384)
                                            ------------------------------------------------------
Net loss, pro forma                         $         (2,820)        $ (11,418) $          (6,564)
                                            ======================================================

Basic net loss per share as reported        $          (0.08)        $   (0.42) $           (0.25)
Proforma basic net loss income per share    $          (0.09)        $   (0.45) $           (0.27)
Diluted net loss per share as reported      $          (0.08)        $   (0.42) $           (0.25)
Proforma diluted net loss income per share  $          (0.09)        $   (0.45) $           (0.27)
--------------------------------------------------------------------------------------------------
</TABLE>


The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for
grants in Fiscal 2004. Risk-free interest rate of 4.4%; dividend yield of 0%;
expected lives of 10 years and volatility of 96%. There was no issuance of stock
options during Fiscal 2005 or Fiscal 2006.


                                      F-11

<PAGE>


Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123 (revised 2004) "Share-Based
Payment" (SFAS 123R), which requires the measurement of all share-based payments
to employees, including grants of employee stock options, using a
fair-value-based method and the recording of such expense in an entity's
statement of income. The accounting provisions of SFAS 123R are effective for
annual reporting periods beginning after June 15, 2005. The Company is required
to adopt the provisions of SFAS 123R in the quarter ending May 31, 2006. The pro
forma disclosures previously permitted under SFAS 123 no longer will be an
alternative to financial statement recognition. Although the Company has not yet
determined whether the adoption of SFAS 123R will result in amounts that are
similar to the current pro forma disclosures under SFAS 123, the Company is
evaluating the requirements under SFAS 123R and expects the adoption to have a
material impact on the consolidated statements of operations and net income
(loss) per share.

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

3.  Acquisitions

During Fiscal 2003, the Company purchased substantially all of the assets and
operations of eight temporary medical staffing companies totaling $3,041, of
which $2,071 was paid in cash and the remaining balance is payable under notes
payable with maturities through January 2007.

The notes bear interest at rates between 6% to 8% per annum. The purchase prices
were allocated primarily to goodwill (approximately $2,282). In April 2003, the
Company sold its interest in one of these temporary medical staffing companies
to its franchisee for $130.

The acquisitions were accounted for under the purchase method of accounting,
and, accordingly, the accompanying consolidated financial statements include the
results of the acquired operations from their respective acquisition dates.

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 liabilities 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. ("DSI") and DSS Staffing Corp. ("DSS") (together "Direct Staffing"), in
January 2002 for $30.2 million. The purchase price was evidenced by two series
of promissory notes issued to each of the four owners of DSS and DSI. The first
series of notes (the "First Series"), in the aggregate principal amount of
$12,975, bore interest at 5% per annum and was payable in 36 consecutive equal
monthly installments of principal, together with interest thereon, with the
first installment having become due on March 1, 2002. The second series of notes
(the "Second Series"), in the aggregate principal amount of $17,220, bore
interest at the rate of 5% per annum and was payable as follows: $11 million,
together with interest thereon, on April 30, 2005 (or earlier if certain capital
events occur prior to such date) and the balance in 60 consecutive equal monthly
installments of principal, together with interest thereon, with the first
installment becoming due April 30, 2005.


                                      F-12

<PAGE>


Discontinued Operations (continued)

If the contingent purchase price adjustment was triggered on April 30, 2005,
then the aggregate principal balance of the Second Series was to be increased by
such contingent purchase price. Payment of the First Series and the Second
Series was collateralized by a second lien on the assets of the acquired
licensees (see Note 9). In June 2003, the notes were modified.

The Company was required to use the 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 of which $17.3 million was
forgiveness of debt and is included as a reduction of loss in discontinued
operations. On August 30, 2005, the remaining $8.1 million on 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 the 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, 2005, and 2004.

The components of Assets and Liabilities Held For Sale for fiscal 2005 are
presented in the chart below:


--------------------------------------------------------------------------------
                                                   February 28, 2005
                                                   -----------------
--------------------------------------------------------------------------------
Assets Held For Sale
--------------------------------------------------------------------------------
Accounts receivable net                               $10,464
--------------------------------------------------------------------------------
Prepaid expenses                                          103
--------------------------------------------------------------------------------
Fixed Assets                                               41
--------------------------------------------------------------------------------
Intangibles                                             4,761
--------------------------------------------------------------------------------
Goodwill                                               21,689
--------------------------------------------------------------------------------
Other assets                                               40
                                                      -------
--------------------------------------------------------------------------------
    Total Assets Held For Sale                        $37,098
                                                      -------
--------------------------------------------------------------------------------

Liabilities Held For Sale
--------------------------------------------------------------------------------
Accounts payable                                      $   231
--------------------------------------------------------------------------------
Accrued expenses                                          685
--------------------------------------------------------------------------------
Due under bank Financing                               11,185
--------------------------------------------------------------------------------
Notes payable                                          21,667
                                                      -------
--------------------------------------------------------------------------------
    Total Liabilities Held for Sale                   $33,768
                                                      -------
--------------------------------------------------------------------------------

Net Assets Held For Sale                              $ 3,330
                                                      =======
--------------------------------------------------------------------------------


                                      F-13

<PAGE>


Discontinued Operations (continued)

Revenue and (Loss) Income for discontinued operations for fiscal 2006
(only through date of disposition of April 22, 2006), 2005 and 2004 is presented
in the chart below:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
                                February 28, 2006            February 28, 2005            February 29, 2004
                                -----------------            -----------------            -----------------
-----------------------------------------------------------------------------------------------------------------------
        <S>                       <C>                           <C>                         <C>
Revenue                         $5,480                       $37,373                      $49,191
                                ------                       -------                      -------
-----------------------------------------------------------------------------------------------------------------------

 (Loss) income                  $(577)                       $ (1,945)                    $  1,692
                                ------                       ---------                    --------
-----------------------------------------------------------------------------------------------------------------------
</TABLE>


Interest expense included in discontinued operations is $443, $2,253 and $2,288
for fiscal year end February 28, 2006, February 28, 2005 and February 29, 2004
respectively.

5.       Fixed Assets
Fixed assets consist of the following:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
                                                Estimated Useful                February 28,
                                                 Life in Years        2006                       2005
--------------------------------------------------------------------------------------------------------------
            <S>                                      <C>                <C>                        <C>
Computer equipment and software                    3 to 5         $         872          $                810
Office equipment, furniture and fixtures             5                       72                            69
Leasehold improvements                               5                      158                           154
                                                                  --------------------------------------------
                                                                          1,102                         1,033
Less: accumulated depreciation
 and amortization                                                           895                           583
                                                                  --------------------------------------------
Total                                                             $         207          $                450
--------------------------------------------------------------------------------------------------------------
</TABLE>


As of February 28, 2006 and February 28, 2005, fixed assets include amounts for
equipment acquired under capital leases with an original cost of $262.
Depreciation expense was $312, $436 and $1,168 in 2006, 2005 and 2004,
respectively. The accumulated amortization on equipment acquired under capital
lease obligations was $249 and $223 as of February 28, 2006 and February 28,
2005, respectively.

6.       Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following:

--------------------------------------------------------------------------
                                                            February 28,
                                                          2006       2005
--------------------------------------------------------------------------
Prepaid workers compensation expense               $     3,498  $   3,398
Other                                                    2,670      1,018
                                                   -----------------------
Total                                              $     6,168  $   4,416
                                                   =======================
--------------------------------------------------------------------------


                                      F-14

<PAGE>


7.  Accrued Expenses

Accrued expenses consist of the following:

--------------------------------------------------------------------------------
                                                         February 28,
                                                 2006                 2005
--------------------------------------------------------------------------------
Payroll and related taxes                    $      1,412       $         939
Accrued licensee payable                            1,195                 998
Insurance accruals                                  1,683               2,173
Interest payable                                       72                  23
Other                                                 700               1,298
                                             -----------------------------------
Total                                        $      5,062       $       5,431
                                             ===================================
--------------------------------------------------------------------------------

8.  Financing Arrangements

Debt financing payable consists of the following:

--------------------------------------------------------------------------------
                                                         February 28,
                                                 2006                2005
--------------------------------------------------------------------------------

Financing Agreement                          $     10,516       $       9,660

   Less: current portion                                -               9,660
                                             -----------------------------------

Total                                        $     10,516       $           -
--------------------------------------------------------------------------------

(a) The Company entered into a Financing Agreement, as amended, with a lending
institution, HFG Healthco-4, 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 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, 2006, and February 29, 2005 the outstanding balance
on the revolving credit facility was $10,516 and $18,772, respectively. At
February 28, 2005, the outstanding balances on the revolving credit facility and
the term loan included in liabilities held for sale was $9,112 and $2,073,
respectively.

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.


                                      F-15

<PAGE>


8.  Financing Arrangements (continued)

(b) Annual maturities of debt financing payable discussed above are as follows:

           ---------------------------------------------------------
           Year Ending February 28,
           ---------------------------------------------------------
           2007                                                -
           2008                                                -
           2009                                           10,516

                                                    ------------
           Total                                    $     10,516

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


9.  Notes and Guarantee Payable

Notes and guarantee payable consist of the following:

--------------------------------------------------------------------------------
                                                        February 28,
                                                 2006                2005
--------------------------------------------------------------------------------

Notes payable to DSS and DSI (a)             $       120        $         8,430
Other (b)                                            244                    473
Notes from related parties (c)                     1,230                  1,500
Convertible debentures (d)                           285                  1,260
                                             -----------------------------------
                                                   1,879                 11,663
      Less: current portion                        1,629                  2,814
                                             -----------------------------------
                                             $       250        $         8,849
                                             -----------------------------------

      Liabilities held for sale              $         -        $        21,688
                                             ===================================
--------------------------------------------------------------------------------



(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, which was shown in notes payable long-term, and $13,589, which
was shown in liabilities held for sale at February 28, 2005.

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 are to be made in 120 monthly
installments, commencing no earlier than May 2006 and being made only if and
when certain financial targets are achieved. The Notes are secured by a
subordinated security interest in the accounts, equipment, fixtures, goods and
inventory of ATC Healthcare Services, Inc. On August 30, 2005 the $8,100 in
notes were converted to Series B Preferred Stock.

The three owners also hold Notes in the aggregate principal amount of $330 that
matured on October 31, 2005 and are subject to the subordination agreement
between the owner and the Company's senior lender. The Notes bear interest at
the rate of 8% per annum. They are 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
is contemplated that the Notes will 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 remains outstanding on these notes.


                                      F-16

<PAGE>


Notes and Guarantee Payable (continued)

(b) The Company issued various notes payable bearing interest at rates ranging
from 6% and 12% per annum, in connection with various acquisitions with
maturities through January 2007.

(c) 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 bears interest at 15% per annum and matures on January 15, 2007. It is
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 may be 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 which is equal to the average of the five days closing bid
price up to December 15, 2004. The note continues to be subordinated to
borrowings under the Company's credit facility.

(d) 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 Capital Partners as a Commitment fee. The Convertible Debenture has a
term of three years, accrues interest at 5% and is 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 promissory note. 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 are 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 February 18, 2005, the Company issued a Promissory Note to Cornell Capital
Partners L.P. in the principal amount of $820. As was contemplated, the Note is
to be repaid through Issuances of Class A Common stock to Cornell Capital
Partners under the Standby Equity Distribution Agreement between the Company and
Cornell Capital Partners. The Note was paid in full in July 2005. Proceeds from
this advance were used to fund general working capital needs.

On May 25, 2005, the Company issued a Promissory Note to Cornell Capital
Partners L.P. in the principal amount of $850. As was contemplated, the Note is
to be repaid through issuances of Class A Common stock to Cornell Capital
Partners under the Standby Equity Distribution Agreement between the Company and
Cornell Capital Partners. The Company has placed a certificate evidencing shares
of its class A Common Stock in escrow in connection with the Note and the
Standby Equity Distribution Agreement, which are not deemed issued and
outstanding until released form the escrow. As of February 28, 2006, $285
remained outstanding on this note and 794,522 shares are held in escrow.


                                      F-17

<PAGE>


Notes and Guarantee Payable (continued)

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," 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%.

(e) Guarantee of Tender Loving Care Services, ("TLCS") Liability - The Company
is contingently liable on $2.3 million of obligations owed by TLCS which is
payable over eight years. On November 8, 2002, TLCS filed a petition for relief
under Chapter 11 of the United States Bankruptcy Code. As a result, the Company
had recorded a provision of $2.3 million representing the balance outstanding on
the related TLCS obligations. The Bankruptcy Court has approved the plan for
concluding the TLCS Bankruptcy. The plan provides for, among other things, that
claims falling within this guarantee should be paid in full. The assets of TLCS
have been sold by the bankruptcy court and the Company has been advised that the
sale price is sufficient to cover the claims of TLCS creditors. The Company is
entitled to be indemnified by TLCS if it has to pay any monies on the guarantee
and has filed claims for such indemnification in the TLCS Bankruptcy case. Those
claims have not been disputed. Based on the above facts, the Company and its
legal counsel have concluded that it is no longer probable that the Company will
be liable for any amounts under the guarantee and in November 2004 the Company
reversed the provision for such guarantee.

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

            ----------------------------------------------------
            Year Ending February 28,
            ----------------------------------------------------
            2007                             $            1,629
            2008                                            250
                                             -------------------
            Total                            $            1,879
                                             ===================
            ----------------------------------------------------


                                      F-18

<PAGE>


10.  Income Taxes

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

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
                                                                Fiscal Year Ended
                                              February 28, 2006  February 28, 2005  February 29, 2004
------------------------------------------------------------------------------------------------------

Current:
       <S>                                          <C>                   <C>                <C>
     Federal                                  $               -  $               -  $               -
     State                                                   50                 39                 55
                                              --------------------------------------------------------
                                                             50                 39                 55
                                              --------------------------------------------------------
Deferred
     Federal                                                  -              3,477                836
     State                                                    -                  -                 47
                                              -------------------------------------------------------
                                                              -              3,477                883
                                              -------------------------------------------------------

Total income tax provision                    $              50  $           3,516  $             938
                                              =======================================================
-----------------------------------------------------------------------------------------------------
</TABLE>


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

--------------------------------------------------------------------------------
                                                   2006        2005         2004
--------------------------------------------------------------------------------
Federal statutory rate                          (34.0%)     (34.0%)      (34.0%)
State and local income taxes, net
 of federal income tax benefit                    2.9%        1.6%         0.7%
Valuation allowance increase (decrease)          34.0%      103.3%        48.1%
Other                                             0.0%        0.2%        (3.4%)
                                             -----------------------------------
Effective rate                                    2.9%       71.1%        13.5%
--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------
                                          February 28, 2006   February 28, 2005
--------------------------------------------------------------------------------
Current:
     Allowance for doubtful accounts    $                99   $             608
     Accrued expenses                                   762               1,007
                                        ----------------------------------------
                                                        861               1,615
                                        ----------------------------------------
    Valuation allowance                                (861)             (1,615)
                                        ----------------------------------------
                                                          -                   -
                                        ----------------------------------------
Non-current:
     Net operating loss carryforward                  7,125               6,048
    Accumulated depreciation and
     amortization                                       993                 542
     Other                                               (7)                  -
                                        ----------------------------------------
                                                      8,111               6,590
                                        ----------------------------------------
    Valuation allowance                              (8,111)             (6,590)
--------------------------------------------------------------------------------
                                        $                 -   $               -
----------------------------------------========================================


                                      F-19

<PAGE>


Income Taxes (continued)

For the years ended February 28, 2006 and 2005, income tax expense is due
primarily to the changes in valuation allowance provided in those periods.
During the third quarter of fiscal 2004, it became apparent that the hospital
patient volumes were not returning as anticipated and the Company would not
return to profitable operations in fiscal 2004. Due to its continued losses in
fiscal 2005 the Company provided a valuation allowance for the remaining
deferred tax asset. The Company intends to maintain its valuation allowance
until such time as positive evidence exists to support reversal of the valuation
allowance. Income tax expense recorded in the future will be reduced to the
extent of offsetting reductions in the Company valuation allowance.

At February 28, 2006, the Company has a federal net operating loss of
approximately $20,956, which expires in 2020 through 2026.

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, 2006 are as follows:

                  ---------------------------------------
                        Year Ending February 28,
                  ---------------------------------------

                        2007                        702
                        2008                        674
                        2009                        504
                        2010                        463
                        2011                        397
                                               --------
                  Total minimum lease payments   $2,740
                  -----------------------------========


Certain operating leases contain escalation clauses with respect to real estate
taxes and related operating costs. Rental expense was approximately $1,055,
$1,676 and $1,702 in Fiscal 2006, 2005 and 2004, 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 another officer of the Company, under which he receives an annual base
salary of $185, with a $10 increase per annum.

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


                                      F-20

<PAGE>


Commitments and Contingencies (continued)

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 seeks 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 has counterclaimed that CNA mishandled claims, overstated invoices, and
in fact owes the Company a substantial sum of money. The parties will be
submitting the dispute to mediation in June 2006. If the mediation does not
result in a settlement, fact discovery is scheduled to be completed in the fall
of 2006 with a trial expected in early 2007. At the present stage of the
litigation, the Company is unable to accurately predict the likelihood of an
unfavorable outcome to this lawsuit, and is unable to make a reasonable estimate
of possible loss or range of loss or of a possible gain on its counterclaims.

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 Offering:

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

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


                                      F-21
<PAGE>


Stockholders' Equity (continued)

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.

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 is obligated to register these shares as they are
released to each individual.

Common Stock - Recapitalization and Voting Rights:

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

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

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

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

On April 19, 2004, The Company entered into a Standby Equity Distribution
Agreement with Cornell Capital Partners, L.P. Pursuant to the Standby Equity
Distribution Agreement, the Company may, at its discretion, periodically sell to
Cornell Capital Partners 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 Capital Partners 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 Capital Partners, L.P. 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 is
subject to the Company filing and maintaining an effective S-1 registration.


                                      F-22

<PAGE>


Stockholders' Equity (continued)

In November 2004, the Securities and Exchange Commission declared the Company's
S-1 effective. As of February 28, 2006, the Company has issued 7,279,434 shares
(of which 5,615,512 were issued in Fiscal 2006) to Cornell Capital Partners
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.
Subsequent to February 28, 2006 and through April 28, 2006 the Company has
issued 697,567 shares under the Agreement.

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, 55,000 shares of Class A Common Stock were issued upon the
conversion of the same number of Class B Common Stock.

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 2006, 3,759 shares of Class A Common Stock were issued upon the
conversion of the same number of Series 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 Capital .

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, 2006.


                                      F-23

<PAGE>


Stockholders' Equity (continued)

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 2,757,382 remain outstanding at February 28, 2006.

1998 Stock Option Plan

During Fiscal 1999, the Company adopted a stock option plan (the "1998 Stock
Option Plan") under which an aggregate of two million shares of Common Stock are
reserved for issuance. Options granted under the 1998 Stock Option Plan may be
ISO's or NQSO's (Non Qualified Stock Options). 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 170,500 remain
outstanding at February 28, 2006.

2000 Stock Option Plan

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

A total of 400,000 stock options were granted under the 2000 Stock Option Plan
at an exercise price of $1.02, of which all are outstanding as of February 28,
2006.


                                      F-24

<PAGE>


Stockholders' Equity (continued)

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

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
                                                Stock Option    Option Price      Weighted-Average
                                                  Activity                         Exercise Price
----------------------------------------------------------------------------------------------------
                <S>                                <C>                <C>               <C>
Options outstanding as of February 28, 2003     5,071,182       $.25 - $2.40           $0.59
 Granted                                        3,916,382        $.59 - $.79           $0.60
 Exercised                                        (56,500)       $.23 - $.50           $0.30
 Terminated                                    (4,304,182)      $.50 - $2.40           $0.57
                                               -----------
Options outstanding as of February 29, 2004     4,626,882       $.25 - $2.40           $0.63
 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
                                               ===========
----------------------------------------------------------------------------------------------------
</TABLE>

Included in the outstanding options are 400,000 NQSOs, which were exercisable at
February 28, 2006.


The following table summarizes information about stock options outstanding at
February 28, 2006:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
                        Options Outstanding                                       Options Exercisable

                                    Weighted-Average                                            Weighted
                                    Remaining           Weighted                                Average
   Range of           Number        Contractual Life    Average                 Number          Exercise
Exercise Prices    Outstanding      (In Years)          Exercise Price          Exercisable     Price
----------------------------------------------------------------------------------------------------------
      <S>                <C>                <C>               <C>                   <C>            <C>
 $.25 to $.58          55,000                 3.6            $0.48                 55,000         $0.48
        $0.59       3,561,882                 2.8            $0.59                794,000         $0.59
$.60 to $1.02         510,000                 6.5            $1.00                474,166         $0.97
                  ----------------------------------------------------------------------------------------
                    4,126,882                 3.3            $0.63              1,323,166         $0.73
------------------========================================================================================
</TABLE>



Employee Stock Purchase Plan

The Company has an employee stock purchase plan under which eligible employees
may purchase common stock of the Company at 90% of the lower of the closing
price of the Company's Common Stock on the first and last day of the three-month
purchase period. Employees elect to pay for their stock purchases through
payroll deductions at a rate of 1% to 10% of their gross payroll. 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 which is administered by the Company. All regular, full-time
employees are eligible for voluntary participation upon completing one year of
service and having attained the age of 21. The plan provides for growth in
savings through contributions and income from investments. It is subject to the
provisions of the Employee Retirement Income Security Act of 1974, as amended.
Plan participants are allowed to contribute a specified percentage of their base
salary. However, the Company retains the right to make optional contributions
for any plan year. For fiscal 2006 and 2005 the Company contributed $15 and $16
respectively, to the plan. Optional contributions were not made in fiscal 2004.


                                      F-25

<PAGE>


14. Licensee Sales

The Company includes in its service revenues, service costs and general and
administrative costs revenues and costs associated with its licensee's.
Summarized below is the detail associated with the above discussed items for the
years ended February 28, 2006 February 28, 2005 and February 29, 2004,
respectively.


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
                                           Year Ended              Year Ended              Year Ended
                                       February 28, 2006       February 28, 2005       February 29, 2004
------------------------------------------------------------------------------------------------------------
                <S>                           <C>                        <C>                  <C>
         Company Service Revenue              $19,872                 $17,693                 $24,720
------------------------------------------------------------------------------------------------------------
         Licensee Service Revenue             $51,656                 $50,244                 $56,490
------------------------------------------------------------------------------------------------------------
         Total Revenue                        $71,528                 $67,937                 $81,210
------------------------------------------------------------------------------------------------------------
         Company Service Costs                $13,961                 $13,135                 $17,506
------------------------------------------------------------------------------------------------------------
         Licensee Service Costs               $40,760                 $41,597                 $45,699
------------------------------------------------------------------------------------------------------------
         Total Service Costs                  $54,721                 $54,732                 $63,205
------------------------------------------------------------------------------------------------------------
         Company General and
         administrative costs                 $ 8,879                 $11,068                 $12,605
------------------------------------------------------------------------------------------------------------
         Licensee Royalty                     $ 6,951                 $5,965                  $6,602
------------------------------------------------------------------------------------------------------------
         Total General and
         administrative costs                 $15,830                 $17,033                 $19,207
------------------------------------------------------------------------------------------------------------
</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, which 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 in 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 which is greater than the Travel Division's revenues in
fiscal 2006.


                                      F-26

<PAGE>


Related Party Transactions (continued)

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. In connection with the sale by the Company of
its All Care Nursing business in April 2005, the Company agreed not to conduct a
per diem medical staffing business in the New York City area until 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 All Care sale noncompetition agreement expires.

During the fourth quarter of fiscal 2006, the Company entered into license
agreements with three limited liability companies for Oak Park, Illinois,
Newport, Rhode Island and Pasadena, California. Stephen Savitsky owns 17% and
David Savitsky owns 8% of the limited liability companies. The Company received
a licensee fee totaling $88 which has been included in revenue. In each case,
the limited liability company has hired a manager with experience in medical
staffing as its manager and has provided equity and other incentives to the
manager. The terms of each of the license agreements are the same as those in
effect between the Company and its other licensees and are accordingly no less
favorable to the Company than the terms that could have been obtained from
unrelated third parties. The Company may from time to time in the future enter
into other license agreements with other companies owned in part by Stephen
Savitsky and/or David Savitsky. In each case the terms will be no less favorable
than the Company could obtain from unrelated third parties.


                                      F-27

<PAGE>


16.     Quarterly Financial Data (Unaudited)

Summarized unaudited quarterly financial data for Fiscal 2006 and 2005 are as
follows (in thousands, except per share data) Fiscal 2005 has been restated to
reflect the AllCare Nursing business as Discontinued Operations.:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
Year ended February 28, 2006                 First Quarter  Second Quarter   Third Quarter   Fourth Quarter
--------------------------------------------------------------------------------------------------------------
        <S>                                       <C>            <C>            <C>              <C>
Total revenues                               $     17,010   $      17,932    $     18,219    $         18,367
                                             -----------------------------------------------------------------

Net loss available to common stockholders on
continuing operations                        $       (834)  $        (511)   $       (389)   $           (294)
                                             =================================================================

Net income (loss) available to common
stockholders on Discontinued Operations      $       (577)  $           -    $          -    $              -
                                             -----------------------------------------------------------------

Total Net loss available to common
stockholders                                 $     (1,411)  $        (511)   $       (389)   $           (294)
                                             -----------------------------------------------------------------

Basic and diluted (loss) earnings  per share
Loss from continuing operations              $      (0.03)  $       (0.02)   $      (0.01)   $          (0.01)
                                             =================================================================
Income (loss) from discontinued operations   $      (0.02)  $           -    $          -    $              -
                                             =================================================================

Net loss per common share-basic and diluted  $      (0.05)  $       (0.02)   $      (0.01)   $          (0.01)
                                             =================================================================


--------------------------------------------------------------------------------------------------------------
Year ended February 28, 2005                 First Quarter  Second Quarter   Third Quarter   Fourth Quarter
--------------------------------------------------------------------------------------------------------------

Total revenues                               $     18,683   $      17,571    $     16,000  $           15,683
                                             -----------------------------------------------------------------

Net loss available to common stockholders on
continuing operations                        $       (476)  $        (668)   $     (1,241) $           (6,144)
                                             =================================================================

Net income (loss) available to common
stockholders on Discontinued Operations      $        421   $         403    $        (74) $        (2,695)(2)
                                             -----------------------------------------------------------------

Total Net loss available to common
stockholders                                 $        (55)  $        (265)   $  (1,315)(1) $        (8,839)(2)
                                             -----------------------------------------------------------------

Basic and diluted (loss) earnings  per share
Loss from continuing operations              $      (0.02)  $       (0.03)   $      (0.05) $            (0.24)
                                             =================================================================
Income (loss) from discontinued operations   $       0.02   $        0.02    $      (0.01) $            (0.11)
                                             =================================================================

Net loss per common share-basic and diluted  $          -   $       (0.01)   $      (0.06) $            (0.35)
                                             =================================================================
--------------------------------------------------------------------------------------------------------------
</TABLE>


(1) In the third  quarter  of Fiscal  2005,  the  Company  recorded  a charge of
approximately $449 for a write-down of Goodwill and a credit to income of $2,300
for the reversal of the TLC guarantee.
(2) In the  fourth  quarter of Fiscal  2005,  the  Company  recorded a charge of
approximately  $4,825  for a  write-down  of  Goodwill  of which  $3,845 was for
discontinued operations,  $1,400 for workers' compensation liabilities, and $700
for a reserve for bad debt associated with its discontinued operations.


                                      F-28

<PAGE>



ATC HEALTHCARE, INC. AND SUBSIDIARIES
-------------------------------------
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(In thousands)

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
                                                            Fiscal Year Ended
                                          February 28, 2006  February 28, 2005  February 29, 2004
--------------------------------------------------------------------------------------------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
           <S>                                     <C>                 <C>               <C>
Balance, beginning of period              $            464   $          276     $             819

Additions charged to costs and expenses                  -              430                     7

Write off of Bad Debts                                (217)            (242)                 (550)
                                          --------------------------------------------------------

Balance, end of period                    $            247   $           464    $             276
                                          ========================================================

Included in assets held for sale          $              -   $         1,397    $             461
                                          ========================================================

--------------------------------------------------------------------------------------------------
Total                                     $            247   $         1,861    $             737
                                          ========================================================
--------------------------------------------------------------------------------------------------
</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 on this evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and
procedures are effective.

(b) During the last Fiscal quarter, there were no changes in the Company's
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Company's 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 Proxy
Statement, which will be filed with the Securities Exchange Commission on or
before June 28, 2006 and is incorporated by reference herein.

ITEM 11.    EXECUTIVE COMPENSATION
            ----------------------

The information required by this section will be included in the Company's Proxy
Statement, which will be filed with the Securities and Exchange Commission on or
before June 28, 2006 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, 2006 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, 2006 and is incorporated by reference herein.


                                       28
<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, 2006 were as follows:

         Audit fees-Goldstein Golub Kessler LLP billed an aggregate of $95,000
in fees for services rendered for the annual audit of the Company's consolidated
financial statements for the fiscal year ended February 28, 2006 and $104,197
for audit related fees consisting of quarterly reviews and professional services
related to an S-1 amendment and S-3 filing

         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.


                                       29
<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.


                                       30
See Notes to Exhibits
<PAGE>


D. EXHIBIT INDEX

Exhibit No.                                Description
-----------                                -----------

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

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

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

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

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

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

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

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

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

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

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

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

3.13           Certificate of Designation of 5% Convertible Series B
               Preferred Stock. (BB)

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)


                                       31
See Notes to Exhibits
<PAGE>


Exhibit No.                                Description
-----------                                -----------

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)

10.1           1986 Non-Qualified Stock Option Plan of the Company. (H)

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

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

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

10.5           1993 Stock Option Plan of the Company. (A)

10.6           1998 Stock Option Plan of the Company (incorporated by
               reference to Exhibit C to the Company's Proxy Statement dated
               August 27, 1998, filed with the Commission on August 27, 1998).

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

10.8           1998 Employee Stock Purchase Plan of the Company (incorporated by
               reference to Exhibit D to the Company's Proxy Statement dated
               August 27, 1998, filed with the Commission on August 27, 1998).

10.9           1994 Performance-Based Stock Option Plan of the Company
               (incorporated by reference to Exhibit B to the Company's Proxy
               Statement, dated July 18, 1994, filed with the Commission on
               July 27, 1994).

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

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

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


                                       32
See Notes to Exhibits
<PAGE>


Exhibit No.                                Description
-----------                                -----------


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

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

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

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

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

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

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

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

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

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

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

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

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

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


                                       33
See Notes to Exhibits
<PAGE>


Exhibit No.                                Description
-----------                                -----------


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

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

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

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

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

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

10.33          First Lease  Amendment,  dated  October 25,  1998,  between
               Matterhorn USA, Inc. and the Company. (A)

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

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

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

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

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

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

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

10.41          Asset Purchase and Sale Agreement, dated as of September 6,
               1996, by and among ATC Healthcare Services,  Inc. and the Company
               and William  Halperin  and All Care  Nursing  Service,  Inc.  (N)
               Exhibit No. Description


                                       34
See Notes to Exhibits
<PAGE>


Exhibit No.                                Description
-----------                                -----------


10.42          Stock  Purchase  Agreement  by and among the  Company  and
               Raymond  T.  Sheerin,  Michael  Altman,  Stephen  Fleischner  and
               Chelsea Computer Consultants, Inc., dated September 24, 1996. (L)

10.43          Amendment No. 1 to Stock  Purchase  Agreement by and among
               the Company  and  Raymond T.  Sheerin,  Michael  Altman,  Stephen
               Fleischner  and  Chelsea   Computer   Consultants,   Inc.,  dated
               September 24, 1996. (L)

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

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

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

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

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

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

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

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

10.52          Form of Medical Staffing Services Franchise Agreement. (D)

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

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

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


                                       35
See Notes to Exhibits
<PAGE>


Exhibit No.                                Description
-----------                                -----------

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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


                                       36
See Notes to Exhibits
<PAGE>


Exhibit No.                                Description
-----------                                -----------

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.

21             Subsidiaries of the Company. *

23.1           Consent of Goldstein Golub Kessler LLP*

24             Powers of Attorney. *

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.*
               -----------------------------------------------------------


                                       37
See Notes to Exhibits
<PAGE>


                                  NOTES TO EXHIBITS
                                  -----------------

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

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

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

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

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

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

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

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

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

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

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

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

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


                                       38
<PAGE>


                                NOTES TO EXHIBIT
                                ----------------

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

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

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

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

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

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

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

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

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

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

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


                                       39
<PAGE>


                                NOTES TO EXHIBIT
                                ----------------

(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.

*                  Incorporated herein


                                       40
<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 26, 2006

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

    SIGNATURE                          TITLE                           DATE
    ---------                          -----                           ----

/S/ DAVID SAVITSKY            Chief Executive Officer              May 26, 2006
------------------            (Principal Executive
David Savitsky                Officer) and Director


/S/ ANDREW REIBEN             Senior Vice President, Finance,      May 26, 2006
------------------            Chief Financial Officer and
Andrew Reiben                 Treasurer (Principal Financial
                              and Accounting Officer)

/S/ STEPHEN SAVITSKY          President and Chairman of the        May 26, 2006
---------------------         Board
Stephen Savitsky


*                             Director                             May 26, 2006
 --------------------
Bernard J. Firestone, Ph. D.

*                             Director                             May 26, 2006
 --------------------
Jonathan Halpert, Ph. D.

*                             Director                             May 26, 2006
 --------------------
Martin Schiller


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