THIS DEBENTURE,  AND THE SECURITIES INTO WHICH IT IS CONVERTIBLE  (COLLECTIVELY,
THE  "SECURITIES"),  HAVE NOT BEEN REGISTERED WITH THE UNITED STATES  SECURITIES
AND  EXCHANGE  COMMISSION  OR  THE  SECURITIES  COMMISSION  OF  ANY  STATE.  THE
SECURITIES ARE BEING OFFERED PURSUANT TO A SAFE HARBOR FROM  REGISTRATION  UNDER
REGULATION  D  PROMULGATED  UNDER THE  SECURITIES  ACT OF 1933,  AS AMENDED (THE
"ACT").  THE SECURITIES ARE  "RESTRICTED"  AND MAY NOT BE OFFERED OR SOLD UNLESS
THE  SECURITIES  ARE  REGISTERED  UNDER THE ACT OR SOLD PURSUANT TO AN AVAILABLE
EXEMPTION  FROM THE  REGISTRATION  REQUIREMENTS  OF THE ACT AND IN SUCH CASE THE
COMPANY WILL BE PROVIDED  WITH AN OPINION OF COUNSEL AND OTHER SUCH  INFORMATION
AS IT MAY  REASONABLY  REQUIRE TO CONFIRM THAT SUCH  EXEMPTIONS  ARE  AVAILABLE.
FURTHER HEDGING TRANSACTIONS  INVOLVING THE SECURITIES MAY NOT BE MADE EXCEPT IN
COMPLIANCE WITH THE ACT.

                             COMPENSATION DEBENTURE

                              ATC HEALTHCARE, INC.

                            5% CONVERTIBLE DEBENTURE

                               DUE APRIL 19, 2007

No.  ___                                                                $140,000

      This  Secured  Debenture  is issued by ATC  HEALTHCARE,  INC.,  a Delaware
corporation (the "Company"),  to CORNELL CAPITAL PARTNERS, LP (together with its
permitted  successors  and assigns,  the "Holder")  pursuant to exemptions  from
registration under the Securities Act of 1933, as amended.

                                   ARTICLE I.

      SECTION 1.01  PRINCIPAL AND  INTEREST.  For value  received,  on April 19,
2004,  the Company  hereby  promises to pay to the order of the Holder in lawful
money of the United  States of America and in  immediately  available  funds the
principal sum of One Hundred Forty Thousand Dollars (US $140,000), together with
interest on the unpaid  principal of this  Debenture at the rate of five percent
(5%) per year  (computed  on the basis of a  365-day  year and the  actual  days
elapsed)  from the date of this  Debenture  until  the first  (1st)  anniversary
thereof and at zero percent (0%) until paid. At the Company's option, the entire
principal amount and all accrued interest shall be either (a) paid to the Holder
on the third (3rd) year  anniversary  from the date hereof or (b)  converted  in
accordance with Section 1.02 herein,  provided,  however, that in no event shall
the Holder be  entitled  to  convert  this  Debenture  for a number of shares of
Common  Stock in excess of that  number of shares of Common  Stock  which,  upon
giving effect to such conversion,  would cause the aggregate number of shares of


<PAGE>

Common Stock beneficially owned by the Holder and its affiliates to exceed 4.99%
of the outstanding shares of the Common Stock following such conversion.

      SECTION 1.02 OPTIONAL CONVERSION.  The Holder is entitled,  at its option,
to convert,  every thirty (30)  calendar days after the day hereof up to a total
principal amount of and/or accrued but unpaid interest of Fifty Thousand Dollars
($50,000),  until  the  outstanding  principal  amount of this  Debenture,  plus
accrued  but unpaid  interest  is paid in fill,  into  shares  (the  "Conversion
Shares")  of the  Company's  Class A common  stock,  $.01 par  value  per  share
("Common Stock"),  at the price per share (the "Conversion  Price") equal to one
hundred  percent  (100%) of the lowest Closing Bid Price of the Common Stock for
the three (3) trading days immediately preceding the Conversion Date (as defined
herein).  As used  herein,  "Principal  Market"  shall mean the  American  Stock
Exchange.  If the Common Stock is not traded on a Principal Market,  the Closing
Bid Price shall mean,  the reported  Closing Bid Price for the Common Stock,  as
furnished by the National  Association  of  Securities  Dealers,  Inc.,  for the
applicable  periods.  No fraction of shares or scrip  representing  fractions of
shares will be issued on conversion,  but the number of shares issuable shall be
rounded to the nearest whole share.  To convert this Debenture in whole or part,
the Holder shall deliver  written notice thereof,  substantially  in the form of
Exhibit "A" to this Debenture,  with  appropriate  insertions  (the  "Conversion
Notice"), to the Company at its address as set forth herein. The date upon which
the conversion shall be effective (the "Conversion  Date") shall be deemed to be
the date set forth in the Conversion Notice,  which shall be no earlier than the
date the notice is delivered to the Company.

      SECTION 1.03 RIGHT OF REDEMPTION. The Company at its option shall have the
right to redeem for cash,  with thirty (30) calendar days advance written notice
(the  "Redemption  Notice"),  a portion of or all of the  outstanding  principal
amount of this  Debenture.  The  redemption  price shall be equal to one hundred
twenty  percent  (120%)  multiplied  by the portion of the  principal  sum being
redeemed,  plus any accrued and unpaid interest.  Once the Holder has received a
Redemption  Notice, the Investor can not exercise a conversion of this Debenture
with  respect  to  the  principal  amount  outlined  in  a  Redemption   Notice.
Notwithstanding  the  foregoing  in the  event the  Company  has not paid to the
Investor the redemption  price within thirty (30) calendar days from the date of
delivery of a Redemption  Notice to the Investor the Investor  shall be entitled
to exercise a conversion of this Debenture with respect to the principal  amount
outlined in a Redemption Notice without limitation.

      SECTION 1.04  RESERVATION  OF COMMON STOCK.  The Company shall reserve and
keep available out of its authorized but unissued shares of Common Stock, solely
for the purpose of effecting the  conversion of this  Debenture,  such number of
shares of Common Stock as shall from time to time be  sufficient  to effect such
conversion,  based upon the last  Conversion  Price.  If at any time the Company
does not have a sufficient number of Conversion Shares authorized and available,
then the  Company  shall  call and hold a special  meeting  of its  stockholders
within  sixty  (60) days of that time for the sole  purpose  of  increasing  the
number of authorized  shares of Common Stock.  Management shall recommend to the
stockholders  of the  Company  to vote in  favor of  increasing  the  number  of
authorized shares of Common Stock.  Management shall also vote all of its shares
of Common Stock in favor of increasing the number of authorized shares of Common
Stock.


                                       2
<PAGE>

      SECTION 1.05 REGISTRATION RIGHTS. The Company is obligated to register the
resale of the  Conversion  Shares under the  Securities Act of 1933, as amended,
pursuant to the terms of a Registration  Rights  Agreement,  between the Company
and  the  Holder  of even  date  herewith  (the  "Investor  Registration  Rights
Agreement").

      SECTION 1.06 INTEREST  PAYMENTS.  The interest  payable  hereunder will be
paid at the time of  maturity  or  conversion  to the  person in whose name this
Debenture is registered.  At the time such interest is payable,  the Holder,  in
its sole  discretion,  may  elect to  receive  the  interest  in cash  (via wire
transfer  or  certified  funds) or in the form of shares of Common  Stock.  Such
election  shall be made in writing to the  Company ad must be  received at least
four (4) trading  days  before the  payment is due. In the event of default,  as
described in Article III Section 3.01  hereunder,  the Holder may elect that the
interest be paid in cash (via wire  transfer or certified  funds) or in the form
of Common Stock.  If paid in the form of shares of Common  Stock,  the number of
shares of Common Stock to be issued will be calculated as follows:  the price of
the  shares of stock  shall be the  Closing  Bid Price on:  (i) the third  (3rd)
trading  day  prior to the  date the  interest  payment  is due;  or (ii) if the
interest  payment is not made when due,  the third (3rd)  trading day before the
date the  interest  payment is made.  A number of shares of Common  Stock with a
value equal to the amount of  interest  due shall be issued as set forth in this
section. No fractional shares will be issued;  therefore,  in the event that the
value of the Common Stock per share does not equal the total  interest  due, the
Company will pay the balance in cash.

      SECTION 1.07 PAYING AGENT AND REGISTRAR.  Initially,  the Company will act
as paying  agent and  registrar.  The  Company  may  change  any  paying  agent,
registrar,  or  Company-registrar  by giving  the  Holder not less than ten (10)
business  days' written  notice of its election to do so,  specifying  the name,
address, telephone number and facsimile number of the paying agent or registrar.
The Company may act in any such capacity.

                                  ARTICLE II.

      SECTION 2.01  AMENDMENTS  AND WAIVER OF DEFAULT.  The Debenture may not be
amended  without the written consent of the Holder.  Notwithstanding  the above,
without  the  consent of the Holder,  the  Debenture  may be amended to cure any
ambiguity,  defect or inconsistency,  to provide for assumption of the Company's
obligations  to the Holder or to make any change that does not adversely  affect
the rights of the Holder.

                                  ARTICLE III.

      SECTION 3.01 EVENTS OF DEFAULT. An Event of Default is defined as follows:
(a) failure by the Company to pay amounts due hereunder within fifteen (15) days
of the date of maturity of this Debenture;  (b) failure by the Company to comply
with the terms of the Irrevocable  Transfer Agent  Instructions  attached to the
Standby Equity Distribution Agreement of even date herewith entered into between
the Company and the Holder (the "Standby Equity  Distribution  Agreement");  (c)
failure by the Company's  transfer  agent to issue shares of Common Stock to the
Holder within five (5) days of the receipt by the Company of the attached Notice
of  Conversion  from Holder;  (d) failure by the Company for ten (10) days after
notice to it to comply with any of its other  obligations  under this Debenture;
(e) the occurrence of an event of bankruptcy or  insolvency,  which is not cured
within 30 days of its occurrence; (f) a breach by the Company of its obligations


                                       3
<PAGE>

under the Standby  Equity  Distribution  Agreement  or the  Registration  Rights
Agreement  which is not cured by the Company  within ten (10) days after receipt
of written  notice  thereof.  Upon the  occurrence  of an Event of Default,  the
Holder may, in its sole discretion, accelerate full repayment of the outstanding
principal  amount of the Debentures and all accrued but unpaid interest  thereon
or may,  notwithstanding any limitations  contained in this Debenture and/or the
Standby Equity Distribution Agreement,  convert the outstanding principal amount
of the  Debentures  and all accrued but unpaid  interest  thereon into shares of
Common Stock by following the procedures  set forth in Section 1.02 herein.  The
Company acknowledges that failure to honor a Notice of Conversion issued in such
a situation would cause irreparable harm to the Holder.

                                  ARTICLE IV.

      SECTION 4.01 RE-ISSUANCE OF DEBENTURE. When the Holder elects to convert a
part of the  Debenture,  then the Company  shall  reissue a new Debenture in the
same  form as this  Debenture  to  reflect  the new  principal  amount  upon the
surrender to it of the old Debenture.

      SECTION 4.02  TERMINATION  OF  CONVERSION  RIGHTS.  The Holder's  right to
convert the Debenture  into shares of Common Stock in accordance  with paragraph
4.01 shall terminate on the date that is the third (3rd) year  anniversary  from
the date hereof and this Debenture shall be automatically converted on that date
in  accordance  with the  formula  set forth in  Section  4.01  hereof,  and the
appropriate  shares of Common Stock and amount of interest shall be delivered to
the Holder.

                                   ARTICLE V.

      SECTION  5.01  ANTI-DILUTION.  In the event that the Company  shall at any
time subdivide the  outstanding  shares of Common Stock,  or shall issue a stock
dividend  on the  outstanding  Common  Stock,  the  Conversion  Price in  effect
immediately  prior to such subdivision or the issuance of such dividend shall be
proportionately  decreased,  and in the event that the Company shall at any time
combine the outstanding  shares of Common Stock,  the Conversion Price in effect
immediately  prior  to such  combination  shall  be  proportionately  increased,
effective at the close of business on the date of such subdivision,  dividend or
combination as the case may be.

                                  ARTICLE VI.

      SECTION 6.01 NOTICE. Notices regarding this Debenture shall be sent to the
parties at the following  addresses,  unless a party notifies the other parties,
in writing, of a change of address:

If to the Company, to:                 ATC Healthcare, Inc.
                                       1983 Marcus Avenue
                                       Lake Success, NY 11042
                                       Attention:        Andrew Reiben
                                       Telephone:        (516) 750-1600
                                       Facsimile:        (516) 750-1754


                                       4
<PAGE>

With a copy to:                        DKW Law Group, LLC
                                       US Steel Tower - 58th Floor
                                       600 Grant Street
                                       Pittsburg, PA 15219
                                       Attention:        David Hirsch, Esq.
                                       Telephone:        (412) 355-2960
                                       Facsimile:        (412) 355-2609

If to the Holder:                      Cornell Capital Partners, LP
                                       101 Hudson Street, Suite 3606
                                       Jersey City, New Jersey 07302
                                       Telephone:        (201) 985-8300
                                       Facsimile:        (201) 985-8266

With a copy to:                        Butler Gonzalez LLP
                                       1416 Morris Avenue - Suite 207
                                       Union, New Jersey 07083
                                       Attention:        David Gonzalez, Esq.
                                       Telephone:        (908) 810-8588
                                       Facsimile:        (908) 810-0973

      SECTION 6.02  GOVERNING  LAW.  This  Debenture  shall be deemed to be made
under  and  shall be  construed  in  accordance  with  the laws of the  State of
Delaware  without  giving effect to the  principals of conflict of laws thereof.
Each of the parties  consents to the  jurisdiction  of the U.S.  District  Court
sitting in the  District  of the State of New Jersey or the state  courts of the
State of New Jersey sitting in Hudson County,  New Jersey in connection with any
dispute  arising under this Debenture and hereby  waives,  to the maximum extent
permitted by law, any  objection,  including  any  objection  based on forum non
conveniens to the bringing of any such proceeding in such jurisdictions.

      SECTION 6.03 SEVERABILITY. The invalidity of any of the provisions of this
Debenture shall not invalidate or otherwise  affect any of the other  provisions
of this Debenture, which shall remain in full force and effect.

      SECTION 6.04 ENTIRE  AGREEMENT AND AMENDMENTS.  This Debenture  represents
the entire  agreement  between  the parties  hereto with  respect to the subject
matter  hereof  and there are no  representations,  warranties  or  commitments,
except as set forth herein.  This Debenture may be amended only by an instrument
in writing executed by the parties hereto.

      IN  WITNESS  WHEREOF,  with the  intent to be legally  bound  hereby,  the
Company as executed this Debenture as of the date first written above.

                                                ATC HEALTHCARE, INC.

                                                By: /s/ Andrew Reiben
                                                    ----------------------------
                                                Name: Andrew Reiben
                                                Title: Chief Financial Officer


                                       5
<PAGE>

                                   EXHIBIT "A"

                              NOTICE OF CONVERSION

           (TO BE EXECUTED BY THE HOLDER IN ORDER TO CONVERT THE NOTE)

TO:

      The undersigned  hereby  irrevocably  elects to convert $ of the principal
amount  of the  above  Debenture  into  Shares  of Class A  Common  Stock of ATC
Healthcare, Inc. in accordance with the provisions therein.



CONVERSION DATE:
                                             -----------------------------------
APPLICABLE CONVERSION PRICE:
                                             -----------------------------------
AMOUNT TO BE CONVERTED:                     $
                                             -----------------------------------
AMOUNT OF DEBENTURE UNCONVERTED:            $
                                             -----------------------------------
CONVERSION PRICE PER SHARE:                 $
                                             -----------------------------------
NUMBER OF SHARES OF COMMON
STOCK TO BE ISSUED:
                                             -----------------------------------
PLEASE ISSUE THE SHARES OF
COMMON STOCK IN THE FOLLOWING
NAME AND TO THE FOLLOWING ADDRESS:
                                             -----------------------------------
ISSUE TO:
                                             -----------------------------------
ADDRESS:
                                             -----------------------------------
AUTHORIZED SIGNATURE:
                                             -----------------------------------
NAME:
                                             -----------------------------------
TITLE:
                                             -----------------------------------
PHONE NUMBER:
                                             -----------------------------------
BROKER DTC PARTICIPANT CODE:
                                             -----------------------------------
ACCOUNT NUMBER:
                                             -----------------------------------


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