<PAGE>
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C. 20549
                                    
                                Amendment No. 1
                                      on

                                   FORM 10-K/A      

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

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

               For The Fiscal Year Ended February 28, 1998

                  Commission File Number:     Not Applicable

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

                        ATC GROUP SERVICES INC.

                        -----------------------
        (Exact name of Registrant as specified in its charter)

            Delaware                                         46-0399408
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(State or other jurisdiction of                          (I.R.S. Employer
incorporation or organization)                           Identification No.)


104 East 25th Street, 10th Floor
     New York, New York                                         10010
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(Address of principal executive offices)                     (Zip Code)

   Registrant's telephone number, including area code:   (212)  353-8280

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

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

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 (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [ ] Not applicable
                                                  --------------

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) 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. [ ]

All of the voting stock is held by the Company's parent, Acquisition Holdings,
Inc.

The number of shares outstanding of the Registrant's Common Stock, par value
$0.01 per share, as of June 12, 1998 was 1,000.

    
This report is being filed voluntarily with the Securities and Exchange
Commission (the "Commission") pursuant to the Registrant's contractual
obligation to file with the Commission all information that would be required to
be filed on Form 10-K, Form 10-Q or Form 8-K. The Registrant is not required to
file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange
Act of 1934.     

    
This Amendment No. 1 on Form 10-K/A to the Annual Report on Form 10-K originally
filed with the Commission on May 29, 1998 (the "Form 10-K"), is being filed for
the purpose of amending information previously disclosed.      
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                                     PART 1

Item 1.  Business.
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         ATC is a leading national provider of professional consulting,
engineering and testing services within the environmental and construction
materials industries. Management believes the Company is also a leading provider
of integrated environmental information management technology services. The
Company provides a broad range of services to a diverse client base of over
8,000 customers, and management believes that domestic businesses and non-
federal government entities represented over 95.0% of the Company's gross
revenues for the year ended February 28, 1998 ("fiscal 1998"). No single
customer represented more than 1.7% of the Company's gross revenues during
fiscal 1998. In addition, the Company's ten largest customers taken together
accounted for less than 12.4% of the Company's gross revenues during fiscal
1998. The Company provides its services through a network of 74 branch offices
located in 35 states covering virtually every major market of the United States.
    
         Asset preservation, liability and health related considerations have
increasingly driven demand in the environmental services industry, whereas
regulation has decreased as a driver over time. As a result of these market
dynamics, environmental administration has become an integral component of
day-to-day property management activities. Management believes that ATC is
well-positioned to take advantage of certain rapidly growing sectors of the
approximately $16.0 billion environmental services industry. In addition, the
industry is highly fragmented and management believes that the industry presents
many favorable opportunities for growth through acquisitions.

         In 1993, the Company initiated a strategy of controlled growth through
acquisitions to build a national infrastructure and to broaden its range of
technical services. The Company has created a national infrastructure through
the completion of 12 acquisitions since May 1993. ATC has thereby also expanded
its service mix by adding construction materials testing and engineering, lead
risk management, indoor air quality management, water and wastewater management
and information management technology services. As a result of this growth and
diversification strategy, net revenues increased to $119.4 million in fiscal
1998 from $15.4 million in fiscal 1993.

Recent Developments
    
     During fiscal 1998, the Company completed three acquisitions and secured
new financing facilities in May 1997 for acquisitions which were completed in
fiscal 1997 and fiscal 1998. During the final quarter of fiscal 1998, the
Company's common stock, par value $.01 per share (the "Common Stock") was
acquired in a tender offer and merger transaction at which time new bank
facilities were established and then existing senior indebtedness was
refinanced. These transactions were as follows:     
    
         Offering of 12% Senior Subordinated Notes due 2008. On January 29,
1998, the Company consummated the offering (the "Note Offering") of $100.0
million aggregate principal amount of its 12% Senior Subordinated Notes due 2008
(the "Notes"), all of which principal amount is currently outstanding. The Notes
were issued pursuant to an indenture, dated as of January 29, 1998, as amended
and supplemented, and are guaranteed by the Company and its subsidiaries on a
senior subordinated basis. The proceeds of the Note Offering were used to
consummate the Tender Offer (as defined herein).     
    
         Tender Offer and Merger. The Company, Acquisition Holdings, Inc.
("Holdings"), the Company's parent, and Acquisition Corp., a wholly-owned
subsidiary of Holdings, entered into a merger agreement, dated as of November
26, 1997 (the "Merger Agreement"), pursuant to which Acquisition Corp. offered
to purchase all of the outstanding shares of Common Stock of the Company in
accordance with the terms of an offer to purchase, dated December 4, 1997, as
amended (the "Offer to Purchase"), at a price of $12.00 per share, net to the
seller in cash (the "Tender Offer"). Holdings is a Delaware corporation owned by
affiliates of Weiss, Peck & Greer, L.L.C. ("Weiss Peck") and other investors,
including ATC management. See "Security Ownership of Certian Beneficial Owners
and Management." Acquisition Corp. acquired ownership in excess of 90% of the
outstanding shares of Common Stock pursuant to the Tender Offer, which was
consummated on January 29, 1998, and the subsequent purchase in the open market
of approximately 15,000 shares of Common Stock.     

         On February 5, 1998, pursuant to the terms of the Merger Agreement and
upon the satisfaction of the other conditions set forth in the Merger Agreement
and in accordance with the requirements of the Delaware General Corporation Law
(the "DGCL"), Acquisition Corp. merged with and into the Company (the "Merger"
and, together with the Offering, the Tender Offer and the refinancing of
approximately $42.8 million aggregated principal amount of indebtedness of ATC
upon consummation of the Merger and related agreements, the "Transactions") with
the Company as the surviving corporation of the Merger. As a result of the
Merger, the Company became a wholly-owned subsidiary of Holdings.

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         Acquisition Corp. used approximately $158.2 million to consummate the
Transactions. These funds were provided by (i) the proceeds of a $20.0 million
term loan (the "Term Loan") entered into by the Company upon the consummation of
the Tender Offer and funded at the time of the Merger, (ii) proceeds of $100.0
million from the sale of the Notes, (iii) a $32.5 million capital contribution
(the "Holdings Contribution") to Acquisition Corp. from Holdings, including a
$2.0 million committed equity investment by management in the form of foregone
bonuses, options and cash and (iv) borrowings of approximately $5.7 million
under a revolving credit facility, which reflects a $2.0 million committed
equity investment by management in the form of foregone bonuses, options and
cash, entered into upon consummation of the Tender Offer (the "Revolving Credit
Facility" and together with the Term Loan, the "New Credit Facility"). For a
discussion of the New Credit Facility, see "Management's Discussion and Analysis
of Financial Conditions and Results of Operations Liquidity and Capital
Resources."     
    
         The Holdings Contribution was provided by (a) an equity investment of
approximately $19.9 million in the common stock of Holdings by affiliates of
Weiss Peck, (b) an equity investment of $0.5 million in the common stock of
Holdings by Jackson National Life Insurance Company, together with its
affiliates ("JNL"), (c) the issuance to JNL of preferred stock of Holdings,
having an original aggregate liquidation value of $10.0 million and expected to
accrue dividends through the issuance of additional shares of preferred stock
at a compounded rate of 8.0% per annum (the "Holdings Preferred Stock"),
(c) warrants entitling JNL to purchase 6.0% of the shares of common stock of
Holdings on a fully diluted basis and (d) a committed investment of
approximately $2.0 million in common stock of Holdings by ATC management and
employees (including the economic value of Holdings employee stock options which
replaced existing ATC options).     
    
         Acquisitions. On November 26, 1997, the Company completed the purchase
of all of the outstanding stock of Bing Yen & Associates, Inc. ("Bing Yen").
Bing Yen provides geotechnical and structural forensic services to a wide
variety of clients in the western United States. The acquisition was accounted
for as a purchase. The purchase price totaled $4.3 million, consisting of $2.2
million paid at closing, $0.6 million in the form of a short-term, interest
bearing promissory note, $1.2 million in unsecured, three-year, interest bearing
notes and the assumption of liabilities and transaction costs of $0.4 million.
In addition a maximum aggregate principal amount of $1.5 million in unsecured
contingent achievement promissory notes will be issued if certain minimum net
revenue levels are achieved resulting in a maximum purchase price to the seller
of $5.4 million.     
    
         On November 4, 1997, the Company purchased 100% of the outstanding
preferred stock and 90.9% of the outstanding common stock of Environmental
Warranty, Inc. ("EWI"), a property and casualty insurance brokerage firm
specializing in environmental insurance with property and casualty licenses,
including excess and surplus lines in 43 states and with license applications
pending in an additional five states. EWI sells insurance products covering
environmental liabilities to large property owners and municipal government
clients. The acquisition was accounted for as a purchase. The purchase price
totaled approximately $1.7 million, consisting of $218,750 (includes $68,750 for
partial payment of the assumed payments commitments totaling $275,000) in cash
at closing, $582,424 (net of imputed interest) in contingent three-year,
non-interest bearing notes (subject to certain set-offs), $206,250 of
unconditional payment commitments due in three annual installments, 33,000
shares of unregistered Common Stock of the Company (valued at $11-1/16 per
share) and the assumption of liabilities and transaction costs of $339,811. 
     
         On August 20, 1997, the Company purchased certain assets and assumed
certain liabilities of the Engineering Division of Smith Technology Corporation
("Smith Technology") which operated primarily as BCM Engineers, Inc. ("BCM").
BCM is a leading environmental engineering and consulting firm that provides
services in water and wastewater treatment, natural resources management,
environmental compliance and site investigation, remedial design and
engineering, and asbestos and air quality management. The acquisition of BCM was
accounted for as a purchase. The purchase price totaled $12.5 million consisting
of $5.4 million in cash, $2.8 million in short-term notes payable that are
subject to set-offs and assumed liabilities and transaction costs of $4.3
million, including working capital liabilities.

Business Strategy

         In 1993, the Company began the implementation of a strategy, the key
elements of which were designed to (i) establish a national infrastructure of
branch office locations and (ii) diversify its service offerings. Management
believes that the Company has achieved these strategic, structural objectives
and now intends to focus on the following strategies to build on this foundation
to improve its market position and to grow operating earnings:

         Cross-Sell Services. As a result of its acquisition strategy, the
Company has expanded its service offerings and client portfolio. This has
resulted in many cross-selling successes for the Company because ATC has been
able to sell additional services to existing clients and newly acquired clients.
Management expects these cross-selling opportunities to continue at an
accelerated rate as a result of its acquired service capabilities in the
construction materials testing and engineering, lead risk management, water and

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wastewater management and information management technology services.
Additionally, the Company's national infrastructure provides opportunities for
cross-selling expanded services to existing customers that currently receive
more limited services on a local or regional basis.

         Focus on High-Growth Services and Sectors. The successful
implementation of strategies designed to increase service offerings has resulted
in the Company's ability to capitalize on many high-growth market opportunities.
ATC is well-positioned to take advantage of the niche markets of indoor air
quality, water and wastewater management, risk assessment, Brownfield
development and environmental information management technology services, each
of which management believes has high growth potential. In addition, management
intends to take advantage of trends such as the outsourcing of specialized
technical services by national and multi-national corporations.

         Expand National Sales Programs and Develop International Opportunities.
Since 1995, ATC has implemented six national programs, which have been highly
successful in generating new business from existing clients and from specific
industries with growth potential. Existing programs focus on incremental
revenues from clients in the lead risk management, hazardous waste/Brownfield
development, PCS/wireless communications industry, national commercial account
management programs, federal programs and petroleum markets. In the Asia-Pacific
markets, the Company is in the early stages of its long-term effort to take
advantage of a developing demand for environmental services. ATC is currently
providing asbestos management services to Mitsui Fudosan in Japan and is
providing design services for a wastewater treatment facility in China for a
multi-national corporation. The Company intends to use such relationships to
pursue other opportunities in these markets.

         Pursue Tactical Acquisitions. ATC has developed significant expertise
in identifying, completing and integrating acquisitions. ATC plans to apply its
expertise in assimilating acquired companies' personnel and branch operations
into ATC's existing infrastructure and expanding acquired companies' service and
product offerings to existing clients. Management intends to strengthen its
position as a leading industry consolidator through tactical acquisitions which
meet operating, financial and geographic criteria. Management believes that its
existing national infrastructure provides a platform for "tuck-in" acquisitions
of regional and local companies. According to management estimates, there are
3,500 companies whose businesses are complementary to those of the Company.
Management believes that a significant number of those companies could be
operated more profitably as part of ATC's operations.

         Emphasis on Business Fundamentals. Management believes industry
participants typically have management teams with predominantly technical
orientations. In contrast, ATC has distinguished itself by focusing on business
fundamentals to complement its technical expertise. ATC intends to continue to
emphasize a disciplined approach to such basic business fundamentals as selling
and marketing, customer service, cost management, overtime minimization and
collection of receivables.

Industry Overview

Environmental Services Industry
-------------------------------

         Unlike the 1970's and 1980's, when new environmental regulations were
frequently promulgated by federal and state agencies and regulatory compliance
was the primary market driver, the demand for environmental services has shifted
and is now driven by economic and liability management considerations. In the
early 1990's, public awareness also heightened concerns for environmental
issues. Today many companies insist that environmental improvement expenditures
not only satisfy regulatory compliance, but also be justifiable on other
grounds-such as protecting assets, increasing workplace safety, reducing health
risks, improving public relations, minimizing waste, preventing pollution and
reducing financial liabilities.

         Customer needs and demands have also changed. Many customers have
become more sophisticated in their expectations of environmental service
providers. Cost and image considerations have become key drivers in the
environmental services industry. In addition, management believes that customers
are looking for service providers that can provide a broad range of integrated
services, can deliver these services on a national basis and can provide an
adequate level of insurance coverage. Through its service diversification and
geographic expansion, ATC has positioned itself to respond to these new market
demands. ATC's national sales and technical programs (the "National Programs")
focus on providing services to targeted market segments where these new demands
create increased revenues and market share and higher pricing opportunities. The
Company believes that these trends will continue to create new and more
profitable opportunities for serving major commercial and industrial clients.

         The municipal water and wastewater services market is currently driven
by the deterioration of existing utilities and treatment facilities and the
expansion of new water and sewer facilities to developing areas. Regulatory
agencies play a secondary market driver role through placing construction

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moratoriums on developments and utilities that do not meet existing water
quality criteria. Management believes that this market also presents revenue
growth opportunities for other integrated ATC services such as construction
materials testing and engineering and geotechnical engineering. In a recent
report to Congress, the U.S. Environmental Protection Agency (the "EPA")
estimated that approximately $140 billion in expenditures would be needed over
the next twenty years to meet expected municipal wastewater requirements.

         Two independent market evaluations, one by the Environmental Business
Journal ("EBJ") and the other by the independent marketing firm of Richard K.
Miller & Associates, Inc. ("RKM&A"), estimate the size of the environmental
consulting and engineering services market for 1996 at between $15.0 and $17.0
billion. Annual growth is projected at 3.0% to 5.0% through the next three to
four years. Generally, the environmental consulting and engineering services
industry is viewed as having stabilized, with declining market demand in some
sectors being offset by growth in others. Over the last three years, the market
for federal agency contracts has declined, and those service firms dependent on
revenues from this sector have been negatively affected. ATC has experienced
more stable market conditions over the last three years due to its focus on the
commercial and industrial market segments. Certain companies in the
environmental services industry have been required to reduce size and revenues
in an effort to improve operating performance. During this period, ATC has
maintained its position as an industry leader in financial performance, while
increasing its market share through internal growth and acquisitions.

         Management believes that, for the next few years, growth in demand from
municipal clients, private sector clients (commercial and industrial) and in
certain service areas will exceed the expected average growth rate of the
overall environmental service industry. These service areas include lead risk
management, indoor air quality consulting services, occupational health and
industrial hygiene services, environmental risk management consulting, hazardous
waste consulting, water and wastewater design services, environmental insurance
and environmental information management technology. The Company also believes
that there will be significant opportunities in: (i) outsourcing of
environmental management and due diligence services to clients with large
portfolios of real estate holdings; (ii) providing environmental, geotechnical
and construction materials testing services to the PCS/Wireless industry; and
(iii) providing environmental insurance, assessment services, remediation design
and site development engineering of certain environmentally impaired but
otherwise valuable properties, which can be returned to the market place with a
"clean" status. Such sites are known as "Brownfield" sites.

         Industry observers believe that the asbestos market will show little
growth and the hazardous waste services market will experience some decline in
the coming years. The Company believes, based on the significant size of these
markets, that there are opportunities for continued revenues from existing
client relationships, increased market share through acquisitions and the
Company's ability to penetrate the market with competitive pricing and reliable
services. Furthermore, while governmental expenditures are expected to grow more
slowly in coming years as a result of changes in political priorities, private
sector spending on environmental services is expected to increase, particularly
in certain sectors.

         Within the past three years, regulations have been promulgated which
have created new business opportunities within certain sectors of the
environmental consulting and engineering services industry. In February 1994,
the United States Department of Labor promulgated new asbestos regulations for
the construction industry, which are more stringent than the previous
regulations. Lead-based paint is another area of increasing regulatory activity,
partially in response to the provisions of Title X of the Housing and Community
Development Act of 1992, as amended in 1997, and partially as a result of
increasing concern arising from evidence of the severe health effects of
childhood lead poisoning. A U.S. study has documented serious lead dust hazards
caused by conventional remodeling and painting practices in residential
properties and another federal study documented the problem of "take home" lead,
wherein unprotected construction workers expose their families to lead dust
transported home from the work place. Organizations, including the EPA and
Occupational Safety and Health Administration ("OSHA"), have placed a high
priority on enforcing these standards.

         In the late 1970's and early 1980's, several significant environmental
regulations were promulgated: (i) the Clean Water Act, (ii) the Clean Air Act,
(iii) the Resource Conservation and Recovery Act ("RCRA"), (iv) the
Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA")
and (v) the Asbestos Hazard Emergency Response Act. While regulatory matters may
continue to diminish generally as a market driver, the Company believes that
clarification and enhancement of laws in some areas, such as lead regulation,
can create new business opportunities. For example, the U.S. Department of
Housing and Urban Development ("HUD") operates the Lead-Based Paint Hazard
Control Grant Program established by Title X of the Housing and Community
Development Act of 1992, as amended in 1997, known as the Residential Lead-Based
Paint Hazard Reduction Act. The primary purpose of the HUD program is to reduce
the exposure of young children to lead-based paint hazards in their homes. Lead
in paint, drinking water and soil is a major threat to human health and the
environment. Lead is known to be toxic to the human body, even at relatively low
doses. In children, excessive exposures to lead can result in brain damage
leading to learning disabilities and, in some cases, retardation. Adult
exposures to excessive amounts of lead can cause reproductive, hematological and
nervous system disorders.

         The HUD program  provides  grants between $1.0 million and $4.0 million

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to state and local governments for control of lead-based paint hazards in
privately owned, low income owner-occupied and rental housing. As part of this
effort, HUD also provides grants between $1.0 million and $4.0 million for
conducting lead-based paint hazard control in low income, privately owned
housing units on or near Superfund or Brownfield sites. All grants are designed
to stimulate the development of a trained and certified hazard evaluation and
control industry. Evaluation and hazard control work under the program must be
conducted by contractors who are certified and workers who are trained through a
state-accredited program. In awarding grants, HUD promotes the use of
cost-effective approaches to hazard control that can be replicated across the
nation. Since 1993, $335.0 million has been awarded to 70 grantees in 26 states
and is currently being spent by such agencies. An additional $50 million is
programmed for award in 1998.

         Additional opportunities are presented by federal regulations under
Title X of the Housing and Community Development Act of 1992 which, among other
things, (i) established a national requirement for training and certification of
all lead contractor workers and supervisors, inspectors, risk assessors, project
designers and other individuals involved in lead paint activities and (ii)
established new disclosure requirements applicable to all property transactions
affecting residential properties built prior to 1978.

         While historical growth in the demand for environmental services has
been stimulated by regulatory compliance concerns, management believes that
future growth will, in large part, be driven by private litigation, asset
preservation and productivity considerations. As companies have become
increasingly sensitive to the potential adverse consequences of environmental
problems and the potential impact of environmental liabilities, they have taken
an active approach to managing environmental health and safety risks and
liabilities, whether or not they are subject to regulations. This trend is
observed in such areas as steel structure repainting projects, real estate
transaction assessments and indoor air quality initiatives.

         For example, bridge and tunnel authorities undertaking the removal of
lead-based paint from large steel structures are seeking to establish monitoring
systems to prevent the dispersion of lead dust into the environment, which could
lead to future liabilities. The Company believes that such actions are motivated
in large part by concerns regarding the potential liabilities associated with
lead contamination. Similarly, concerns over environmental liability risks have
made environmental assessments an integral component of the due diligence
process for commercial real estate transactions. Financial institutions
frequently require environmental assessments prior to loan origination,
refinancing, and foreclosure activities, while insurance companies increasingly
require environmental assessments before issuing environmental insurance
liability policies. All of these factors create opportunities and markets for
ATC to provide its integrated environmental services.

Construction Materials Testing and Engineering Industry
-------------------------------------------------------

         Numerous specialty services are provided to the construction and the
related engineering and architectural design industries. ATC provides services
in the areas of construction materials testing and engineering, geotechnical and
civil engineering services, site surveying, roofing system inspections, on-site
client construction services and development of material specifications.

         Construction of a significant structure or improvement represents a
major permanent investment for any owner, whether commercial or governmental.
The primary driver for materials testing, inspection services and geotechnical
services (soil and earth analysis) is an owner's concern that this investment be
protected by quality construction materials that meet design specifications.
Architects and engineering firms require that the quality of construction
materials and on-site soil conditions be monitored in order to ensure that the
project design conditions are being met.

         Contractors, architects and engineers hire materials testing and
geotechnical consultants to test materials such as concrete, structural and
reinforcing steel, soil and geosynthetic liners both prior to commencing design
and during the construction phase of a project. The quality of materials and
their ability to conform to design specifications are critical to the future
life and constructability of the facility. Three common types of construction
materials and geotechnical tests are (i) soil tests for moisture content and
compaction density, (ii) concrete tests for compressive strength and (iii)
structural and reinforcing steel tests for tensile strength and connection
strength.

         The construction materials testing and engineering industry is driven
by national and local economic conditions. Most of the construction materials
testing and engineering services provided by ATC are for projects generally
within 200 miles of the office where the service is provided. Geotechnical
consulting and engineering services are less sensitive to geographical
constraints. For these reasons, the ATC offices providing construction materials
testing and engineering services are located in metropolitan areas identified
with current and ongoing construction activities. Construction activities can
develop from commercial, industrial, institutional and governmental entities.
ATC currently offers construction materials testing and engineering services
from offices in: Miami, Florida; Nashville, Tennessee; Atlanta, Georgia; Dallas,
Texas; Washington D.C./Baltimore, Maryland; Boston, Massachusetts; Cincinnati,
Ohio; Indianapolis, Indiana; Chicago, Illinois; Detroit, Michigan; Louisville,

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Kentucky; St. Louis, Missouri; Orange County, California; Birmingham, Alabama;
and San Antonio, Texas. Based on anticipated demand for construction materials
testing and engineering services, offices in the markets serving Charlotte,
North Carolina, New York, New York and Mobile, Alabama are currently being
considered as expansion opportunities. Construction materials testing and
engineering services are considered mature markets, and a project award is
generally based on service reputation, price, client relationship and local
competition. Delivery of services on a national basis through a network of
offices is a factor considered by national clients. Expansion of ATC's
construction materials testing and engineering services to new markets can be
achieved through tactical acquisitions of local service firms.

         Except for state licensure requirements for the engineering component,
there is little regulation of the construction materials testing and engineering
or geotechnical consulting service industries. Industry standards are set by
agencies such as the American Society of Testing Material, the American
Association of State Highway & Transportation Officials, the American Concrete
Institute, the American Welding Society and several others. Construction
projects themselves, however, are governed by state and local building codes,
the stringency of which varies by location. In general, independent third party
materials testing and inspection for construction projects are required by
owners on all new commercial and public construction projects over $1.0 million.
Frequently, testing and inspection requirements also apply to renovation and
repair projects as well.

Information Management Technology Industry
------------------------------------------

         Information management technology services are driven by the desire for
businesses and government agencies to more efficiently manage complex
operational information utilizing the latest technologies. Economic benefits of
information management technology services are realized when the ability to
manage information maintains or creates a competitive market position for a
business. Government agencies look to information management technology services
as a means of cutting costs for many agency operations. Knowledge and skills in
the latest technological advances, along with quality service, enable ATC to be
a leading service provider in this market.

         Over the last five years, the increased development and use of
technology by businesses and governmental agencies has led to a dramatic rise in
the demand for information management technology services including, project
support, software development and other computer-related services. To meet their
needs, many businesses and governmental agencies are seeking the services of
consulting firms for technical staff to supplement internal resources for the
management of complex projects and for expertise in leading edge technologies.

         The information management technology services market grew by almost
25.0% to a total of $24.7 billion during 1996 according to a special study by
Input Information Technology Intelligence Services ("INPUT") conducted for the
Updata Group, Inc. This market was expected to grow from 1996 at an annual
compounded rate of 17.3% to a total of $55.0 billion by the year 2001. In
similar studies conducted since 1993, actual industry growth has exceeded INPUT
estimates in every year. INPUT estimated in 1996 that the consulting services
segment of the industry, which is the industry's leading growth segment, would
grow at an annual rate of 21.1% to reach aggregate revenue of $18.3 billion by
2001.

         The Company believes that the demand for Internet/intranet system
development services will grow at a much faster rate as companies use the
Internet to provide their business partners with access to corporate data.

         ATC provides information management technology services in general
consulting services, Internet/intranet applications development and on-site
staffing support or outsourcing.

Service and Product Offerings

         The Company's core service groups are (i) Environmental Services, (ii)
Construction Materials Testing and Engineering Services and (iii) Information
Management Technology Services. Other non-core services offered by ATC are
environmental analytical laboratory services, environmental insurance, building
condition surveys, construction management services, environmental training and
outsourcing of professional staff. A description of each service group follows:

Environmental Services
----------------------

         The majority of ATC's project activities within this segment focus on
identifying potential environmental hazards and risk exposures and developing
regulatory and technical solutions for such problems. The major service areas
within this group are (i) Environmental Engineering and Consulting, (ii)
Industrial Hygiene, (iii) Water and Wastewater Management, (iv) Lead Risk
Management and (v) Health and Safety Training.

         Environmental Engineering and Consulting.  Management believes that ATC

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is one of the largest providers in the environmental services industry of Phase
I and Phase II assessments of commercial and industrial properties. In addition,
ATC occasionally provides Phase III and Phase IV monitoring and testing on these
properties. The Company has a significant presence in the Phase I and II
markets, particularly Phase I work associated with property transfer
transactions. In addition, ATC effectively utilizes its national infrastructure
of offices to conduct Phase I assessments on large, multi-site property
portfolios under the direction of ATC's National Commercial Accounts Program.

         Phase I assessments generally involve a visual inspection of the site,
an examination of aerial photographs, an investigation of past land uses and a
review of other sources of site data that may be appropriate. As a result of its
research and visual inspections, further investigation under a Phase II may be
recommended. Phase I assessments are now required in the majority of commercial
real estate transactions. Under standards promulgated by the American Society of
Testing and Materials, a minimum amount of environmental due diligence must be
performed by a commercial real estate buyer to qualify for the "innocent
landowner defense" as outlined under CERCLA. If necessary, Phase II testing
involves sampling of soil, water and other materials from a site utilizing ATC's
analytical laboratories to identify and quantify the presence of specific
compounds.

         ATC provides hazardous waste consulting services to corporate and
governmental clients. Many of these clients are large regional and national
corporations with multi-site consulting needs. The market for these services are
primarily driven by client relationships and quality of service delivery.
Regulatory drivers are RCRA and CERCLA plus state-specific hazardous waste
regulations. Prerequisites for inspection by a client are strong regulatory
experience at both the federal and state level as well as expertise in site
investigation strategies and site remediation. Under the RCRA Corrective Action
Guidelines, tasks required on hazardous waste projects may include regulatory
strategy development, site investigations, corrective measure studies, remedial
design and remedial construction management. Similar tasks are required under
the CERCLA regulatory process. In addition to hourly consulting fees, project
revenues come from site drilling services and analytical services, which are
also provided by ATC. In order to coordinate and develop the technical resources
of ATC in this complex service area and to provide a mechanism for nurturing
long-term client relationships with targeted clients, ATC's Hazardous
Waste/Brownfield Development Program was created. New market opportunities exist
in the areas of site characterization, regulatory strategy development,
environmental insurance, remedial design and remediation management of
Brownfield sites. ATC has formed business relationships with three firms
specializing in this market.

         ATC provides environmental compliance services to industrial,
commercial and governmental clients. These services include environmental
compliance audits, wetland delineation and mitigation, environmental impact
studies, air quality permits, ambient air quality modeling and sampling,
continuous emission monitoring system design and solid waste landfill design and
permitting. Market drivers for these services are state and federal regulatory
requirements for compliance. Demand for these services varies by state depending
on the progress made by a particular state in promulgating and enforcing
regulations. Air quality permitting and consulting services are currently in
demand by many corporations.

         ATC also offers a hydrocarbon environmental service to companies
engaged in exploration, refining, distributing and retailing of petroleum
products. Typical facilities requiring these services are drilling operations,
pipelines, terminals, refineries, bulk storage facilities, convenience stores
and gas stations, and truck stops. Typical projects may include site
assessments, risk assessments, regulatory strategy development, above-ground and
underground tank testing, remediation design and construction, on-site recovery
and maintenance and state funding recovery. Market drivers are state and federal
regulatory mandates; however, clients are sensitive to value-added pricing and
the quality of services. For the reasons noted above, the petroleum industry
tends to award large volume contracts to a select number of service providers
that can meet these requirements. ATC's National Petroleum Industry Program is
focused on maintaining client relationships, ensuring quality service delivery
and coordinating internal pricing strategies. ATC's success and commitment to
the petroleum industry has made it a leading service provider in this market.
Management believes that targeted clients in this industry can generate annual
revenues for ATC in excess of $10.0 to $15.0 million over the next five years.
Other integrated services offered by ATC to petroleum clients include Phase I
and Phase II assessments for property transactions, environmental insurance,
geotechnical engineering, construction materials testing and engineering,
analytical laboratory services and construction management.

         Industrial Hygiene Services. The Company offers a variety of industrial
hygiene services, including asbestos management, industrial hygiene
investigations and analyses, indoor air quality services and industrial hygiene
laboratory services, each as described below.

         ATC provides asbestos management services including comprehensive
asbestos testing and consulting. These services may begin with a survey of
facilities to determine the condition, type, quantity and location of asbestos.
After gathering field samples, the Company may utilize polarized light
microscopy, phase contrast microscopy and transmission electron microscopy to
analyze asbestos fibers. Other services include risk assessment, remediation
design for asbestos abatement, industrial hygiene services before, during and
after the asbestos removal process, development of operations and maintenance
training programs for facilities personnel and asbestos awareness seminars for
client personnel.

                                       8
<PAGE>
 
         ATC's services are designed to enable building owners and operators to
comply with federal, state and local regulations for asbestos control by
providing a comprehensive approach for controlling or removing asbestos.
Management believes that ATC is one of the largest providers of asbestos
management services in the United States and that ATC will continue to gain
market share in the industry because small regional competitors will be unable
to meet the demands of national, multiple-site projects. ATC's technical
personnel include registered architects, professional engineers, certified
industrial hygienists, certified safety professionals and asbestos specialists,
all with extensive experience in managing asbestos materials. Such personnel are
licensed and certified by federal, state and local agencies.

         As part of the services related to industrial hygiene investigations
and analyses, ATC evaluates potential health hazards in occupational settings,
including hazards arising from exposure to chemical or biological substances.
Potential hazards include corrosive chemicals, solvents, gases, toxic dusts,
radiation, lasers, noise, lighting, heat, bacteria and other pathogenic
organisms. Results of these evaluations determine the extent of exposure to
potentially hazardous substances, and methods can then be developed to control
and minimize associated risks. Field measurements are used to determine
compliance with governmental regulations and other standards. After corrective
measures are designed and implemented, ATC provides follow-up monitoring which
is designed to ensure that workplace exposures are minimized.

         Healthy indoor air quality is recognized as an essential factor in
promoting comfort and welfare. ATC's indoor air quality specialists conduct
investigations designed to identify (i) sources of indoor air pollution and (ii)
possible effects on occupants. A thorough building system investigation
evaluates mechanical and ventilation systems. An inventory of chemicals, air
contaminants, office equipment, plants, harmful sub-chemicals, air contaminants
and maintenance practices are part of the evaluation. ATC typically recommends
solutions that are customized to each specific facility and problem. Market
drivers are related to workplace environment and productivity issues.

         ATC's laboratory services utilize in-house analytical testing
facilities capable of detecting and quantifying a wide variety of materials,
including asbestos-containing materials and hazardous substances. These
laboratories are certified in states where ATC's industrial hygiene services are
offered. ATC provides industrial hygiene services to commercial, institutional
and industrial clients and governmental entities. Compliance with federal, state
and local regulations is a market driver; however, general concern for human
health and the environment, along with potential liabilities, are also
significant incentives for clients requesting these services.

         Water and Wastewater Management. Due to the acquisition of BCM, ATC has
the ability to provide water and wastewater services for municipal and
industrial clients. For municipal water clients, these services include the
design, operation, maintenance and construction management of water supply
systems and reservoirs, water treatment plants, water pumping systems, pipelines
and elevated storage tanks. Municipal sewerage system services include the
design, operation and maintenance, financial rate analysis and construction
management of sewers, lift stations and wastewater treatment systems. Market
drivers for these services are the demand for new or upgraded water and sewerage
systems in developing residential and commercial areas. Furthermore, old water
and sewerage systems constructed prior to the 1980's are deteriorating and often
require upgrading. Regulatory requirements for meeting water quality criteria
and local moratoriums on area developments are often drivers for these services.
Municipal client relationships generally require a significant effort to
develop; however, once established, such relationships can provide long-term
demand for repeat services by a provider.

         Industrial water and wastewater services are more client-specific with
regard to the types of services required. Prerequisite qualifications for
selection by an industrial client are knowledge and experience with various
manufacturing processes along with expertise in a variety of biological and
physical/chemical processes. Client relationship development and quality service
delivery are key factors in maintaining repeat business with industrial clients.
Typical project tasks may include wastewater characterization studies,
permitting and regulatory strategy development, process water and material
balances, waste treatability studies, water and wastewater treatment system
design, system operation and maintenance and construction management. Market
drivers include the need to expand an industrial facility's production rates and
compliance with treated effluent discharge criteria established by state and
federal regulatory agencies. Other integrated ATC services may include hazardous
waste management services, analytical laboratory services, construction
materials testing and engineering and environmental insurance.

         Lead Risk Management Services. ATC was one of the first companies to
provide national lead risk management services because it had the first
state-accredited lead risk management training institute in the United States.
ATC is a co-founder of the National Lead Abatement Council, the first trade
organization representing contractors, inspectors, vendors, attorneys and public
officials engaged in managing lead risks. ATC maintains a high degree of
visibility and credibility in the lead services arena through participation in
professional and standard-setting organizations and through publishing articles
in trade publications.

                                       9
<PAGE>
 
         Until recently, lead risk management services were sought primarily to
establish compliance with lead poisoning prevention regulations. However, the
market is now expanding as clients increasingly seek voluntary risk reduction
programs and defend against a proliferation of lead poisoning lawsuits.

         Federal law requires lead paint testing of all federally assisted
public housing authority projects nationwide and comprehensive abatement of lead
paint identified in these projects. ATC has provided lead paint testing and
abatement project management services to numerous public-housing authorities
throughout the United States. ATC is currently pursuing opportunities created by
federally funded programs.

         Management believes that the market for lead risk management services
has a potential for high growth rates over the next five to ten years. In order
to focus and develop its technical resources in this area of specialization and
provide a program dedicated to marketing these services to targeted groups, ATC
formed the Lead Risk Management Program in 1996.

         ATC's lead risk management services are comprised of corporate lead
risk management services, steel structure and industrial compliance services and
residential lead paint testing and project management services.

         ATC develops corporate lead risk management programs, policies and
procedures catering primarily to insurance companies, lending institutions, law
firms and large real estate managers. Policy development typically entails an
examination of a client's real estate with respect to potential lead
liabilities. Working closely with corporate legal and technical divisions, ATC
recommends policies and procedures to ensure lead-safe management of properties
and compliance with applicable lead poisoning prevention regulations. The
Company's corporate lead risk management services also include designing and
implementing compliance training seminars and workshops.

         ATC also offers lead paint litigation support services exclusively in
support of property owners, managers, lending institutions and insurers. These
services include case consultation, regulatory analysis, document and deposition
review, expert testimony, as well as site investigation and testing services.

         ATC provides comprehensive environmental monitoring of surface
preparation activities that include the removal of lead and associated coatings
from steel structures. Nationwide, hundreds of thousands of petroleum storage
tanks, water tanks, transportation bridges and other major structures are made
of steel and painted with coats of lead-based paints and lead primers. These
structures require periodic maintenance, including full removal of the lead
paint and primers followed by re-painting to prevent corrosion. ATC employs
trained engineers and prepares abatement specifications to guide major customers
through lead removal activities in accordance with all federal, state and local
regulations.

         ATC provides residential property owners and managers with testing and
project management services for the analysis and abatement of lead contamination
in paint, soil, air and drinking water. Consultation services include conducting
surveys to identify lead problems, and designing optimal procedures for the
removal of lead paint. Project management services include providing
construction monitoring of lead projects to prevent exposure to lead dust.

         Health and Safety Training. The Company has established several health
and safety training and advisory programs. ATC operates training schools under
the name The Environmental Institute, as well as under ATC Associates.
Management believes that the Environmental Institute is a leading environmental
services learning center. The Company develops and presents public and private
training courses each year for those involved in environmental, asbestos, lead,
hazardous materials and safety and health issues. "Right-to-Know" programs in
accordance with mandates by OSHA, the EPA and some state regulations are
designed to communicate information regarding the hazards of chemicals to
workers and communities. ATC routinely customizes courses to meet specific
client needs. The Environmental Institute also provides basic technical training
for ATC's professionals.

Construction Materials Testing and Engineering Services
-------------------------------------------------------

         ATC provides testing and client representative services related to
soil, concrete and steel materials used in the construction industry. These
services are divided between two broad categories (i) construction materials
testing and engineering and (ii) geotechnical testing and engineering. From the
preconstruction stage of evaluating materials to the completion of the project,
ATC's range of services supporting construction projects include quality
assurance and quality control, construction specifications, test evaluations,
materials performance documentation and problem solving. These services are
conducted in ATC's laboratories prior to and during construction, in the
fabrication plant and at the construction site.

                                       10
<PAGE>
 
         ATC's expertise in these areas provide valuable assistance to clients
in the construction of foundations, highways, railroads, dams, bridges,
transmission towers, buildings, airports, industrial plants, water supply
facilities, wastewater treatment facilities, dock and waterway facilities, solid
waste landfills, power plants and many other structures. Potential clients
include architects, engineers, contractors, commercial developers, local and
federal government agencies and corporations.

         ATC provides state-of-the-art testing of concrete and structural and
reinforcing steel. Through proven systematic methods and procedures of quality
control management, ATC customizes project work to meet the specific needs of
the client. As a result of its national presence, ATC is able to deliver
materials testing services on-site for the duration of a construction project,
giving it a competitive advantage over regional and local providers.
    
         Concrete is tested during and after placement to measure the mixture
and strength of concrete. Specifications are developed by the architect or
engineer and are customized for the design of the structure or foundation.      
    
         Steel structures are tested for deficiencies in two main areas, the
beam welds and the fastening bolts. While many steel tests are performed at the
project site, tests are also done at the steel fabrication plant, where the
process can be monitored and imperfections can be corrected more efficiently.
     
         Concrete and steel samples collected in the field are transported back
to a local ATC laboratory for analysis. Field representatives are deployed to
the job site from the nearest area office providing these services. Typically, a
200-mile proximity to the job site is the most economically feasible distance
for providing these services. Therefore, ATC only provides these services in
areas with construction activities to support the necessary operational
resources. Periodically, field offices are established to accommodate large
projects.

         Geotechnical Engineering and Consulting Services. ATC's geotechnical
engineering and consulting services involve the analysis of soil data and design
of structures supported on or within the earth. Geotechnical services begin with
the project planning and design phase of a project, extend through construction,
and often continue through the service life of a structure. Geotechnical
engineers, geologists and earth scientists conduct geotechnical, subsurface
explorations to ascertain the behavior of soil, rock and groundwater as affected
by existing geologic features and new construction activities. ATC's
professionals have expertise in soil and rock mechanics, geophysics and
earthquake engineering. The design of a subsurface program requires familiarity
with local geology and a thorough knowledge of economical construction methods.
ATC provides expertise to customers through its extensive geographic
distribution of offices staffed by professionals with expertise in a wide
variety of soil conditions and physiographic provinces.

         Soil tests are performed to determine soil compaction characteristics
both before foundation design and after excavation or soil placement have taken
place. The purpose of these tests is to determine the stability and load-bearing
characteristics of a soil before, during and after construction. ATC uses the
expertise of its geotechnical engineers, geologists and experienced field
drilling personnel to design a field exploratory program. The field data and
samples are brought to certified ATC soils laboratories for further testing and
evaluation. The information obtained during the field exploration and laboratory
testing is used to provide the client with cost-effective designs for high-rise
building foundations, site improvements, tunnels, dams, manufacturing
facilities, landfills, bridges and many other structures. ATC also provides
specific recommendations to avoid delays and cost overruns during construction,
particularly in the weather-dependent site preparation phase of a project. An
engineering report is prepared under the direction and review of a licensed
professional engineer familiar with the particular geologic conditions and
engineering practices of the project area.

Information Management Technology Services
------------------------------------------

         ATC's information management technology services encompass all phases
of information system design, development, maintenance and management in client
server and mainframe-based environments. The Company also provides support to
clients in maintaining computer systems and in areas such as help desk
management and other system and network support services. The Company's
information management technology services fall into the following four
categories: (i) general information technology consulting services; (ii)
Internet/intranet applications development; (iii) outsourcing services; and (iv)
environmental information management technology services.

         The Company's general information management technology consulting
services are designed to provide highly trained technical personnel to meet
clients' supplemental staffing needs. Such personnel typically provide services
in the areas of design, programming, testing, implementation, maintenance,
support, data conversions and the evaluation of networks, databases and
operating systems. These services are generally provided on an hourly billing
rate basis.

         Through its Internet/intranet applications development services, the
Company provides leading-edge technology design and implementation services in

                                       11
<PAGE>
 
the development of dynamic database applications that operate over clients'
customized intranets or through the Internet. These services can include web
site hosting services, where appropriate, which are used to segregate the
applications database from a client's internal data base systems.

         As part of its outsourcing services, ATC offers outsourcing staff
support services to provide staffing and management of all aspects of an
information management technology project or service within guidelines
established by the Company and the client. The Company's outsourcing service
offerings include help desk support, remote network administration and Internet
site development, hosting, maintenance and support.

         ATC provides information management technology services related to
environmental data, data storage and access and regulatory compliance
documentation. This capability, along with ATC's core environmental services,
national infrastructure, depth of professional expertise and environmental
insurance products, has been a competitive advantage in winning certain national
contracts.

         Market demand for these services is high, and pricing strategies
typically allow high labor rate multipliers. This is especially the case for
critically needed expertise by a client when information management technology
systems are inoperable due to software or hardware problems. Prospective clients
for ATC's information management technology services include corporations,
institutions and governmental agencies.

Other ATC Products and Services
-------------------------------

         In addition to the core services described above, ATC maintains
specialized services that can be integrated with the overall needs of its
clients. This is part of ATC's overall business strategy to build and maintain
client relationships while adjusting to the market demand for professional
services. Most of these services have either developed within the last five
years or been obtained through recent acquisitions. The following is a
description of some of the non-core services offered by ATC to complement its
core business.

         Environmental Laboratory Analytical Services. ATC provides
environmental laboratory analytical services to outside clients as well as to
internal operations. Full-service analytical laboratories are located in
Atlanta, Georgia; Indianapolis, Indiana; Woburn, Massachusetts; and Dallas,
Texas and cover organic and inorganic analyses of soil, water, waste and gas
media. These laboratories as well as various other ATC offices also provide
analysis of asbestos materials. State and federal certifications are maintained
by ATC's laboratories for conducting tests under strict audits established by
state and federal agencies' quality assurance protocols. Annual recertification
procedures are typically required to ensure that laboratories continue to
operate under the latest standards of practice. Laboratory service clients are
comprised of commercial, industrial, municipal and federal government clients.
On many occasions, these services are provided as support to other internal
projects and services offered by ATC. However, due to market demand, ATC's
laboratories obtain over half of their revenues from outside clients, many of
which are direct competitors of ATC.

         Environmental Insurance. As a result of the recent acquisition of EWI,
ATC can now offer environmental insurance products to existing and new clients.
In the last two years, numerous new insurance products have been developed to
meet the increasing demand by owners or operators for liability protection and
risk limitation against environmental problems. Examples of new insurance
products include: (i) environmental risk transfer insurance for sellers and
buyers of real estate; (ii) lender protection insurance; and (iii) remedial cost
cap insurance. Management believes that the ability to offer innovative
environmental insurance products to its clients is a distinct advantage in the
environmental services industry that will allow ATC to further meet the special
needs of its clients. Prospective clients for these products are lending
organizations, commercial developers, real estate holding companies,
municipalities and large corporations. Insurance premiums can vary from several
thousand dollars to several hundred thousand dollars, depending upon the extent
and amount of coverage required. These costs, although significant, are seen as
reasonable risk management tools by a client when spread across a portfolio or
when necessary to close a transaction or avoid carrying or incurring a major
liability on a corporate balance sheet.

         Building Condition Surveys. As part of its integrated service strategy
for commercial and industrial clients, ATC also offers building condition
surveys. As a general rule, building condition surveys involve an evaluation of
the facility's heating, ventilation and lighting systems, water services,
roofing system and structural/ architectural construction. This service is
frequently associated with the purchase of real estate where the purchaser
requires an evaluation of operation and maintenance exposures of property prior
to closing. These services are also integrated with other ATC commercial and
industrial project services such as Phase I and Phase II assessments, asbestos
assessments, indoor air quality consulting and lead risk management. ATC is in
the process of promoting and developing building condition surveys on a national
level.

         Construction  Management  Services.  Through  its  effort  to serve its
clients' needs and generate additional  profitable revenue sources,  ATC extends

                                       12
<PAGE>
 
its services to include construction management services. These services range
from serving as the client's field representative during construction to
complete management and responsibility for project construction. The role of the
client representative is to ensure that the construction is done according to
the plans and specifications developed by either ATC or the architect/engineer.
These services are typically billed on either daily rates or hourly rates plus
expense reimbursement.

         An example of such services includes the oversight of construction of a
water or wastewater treatment facility for a client. Such projects are generally
long duration assignments. Other client opportunities may occur when a client
desires to have a project completed on a "turnkey" basis, which covers not only
the facility design but also its construction and startup operation.

Marketing and Sales

         Marketing, Environmental and Construction Materials and Engineering
Testing Services. The Company provides its professional consulting, engineering
and testing services in the environmental and construction industries to Fortune
500 companies, small companies, real estate property owners and managers and
federal, state and local governments. The Company's contracts are obtained by
its professional sales staff through relationship building followed by proposals
and bidding. Referrals from existing and former clients, architects and
engineers are a significant source of contract leads. The Company has been able
to sell both environmental services and construction materials testing and
engineering services to the same clients.

         Consistent with trends towards focusing on litigation, liability and
cost management, there is an increasing tendency for companies to obtain a
greater share of their environmental services from a smaller number of large
national service providers. Industry observers attribute this trend to (i) the
need for broader services, (ii) the desire to reduce the number of consultants
used and (iii) secondary issues such as minimizing liability exposure through
the use of large firms carrying greater insurance and indemnity coverage. The
Company believes that this trend presents a significant opportunity for firms,
such as ATC, that have the service diversity, the technical skills, branch
office coverage, team mobilization capabilities and financial resources to
perform the services and provide the insurance and indemnity protection demanded
by large corporate and governmental clients.

         To take advantage of this trend, ATC's overall marketing strategy is a
combined national and regional approach. National efforts are directed by senior
professionals of the Company, while regional efforts are typically directed
either by a regional or branch manager or by a sales and marketing professional.
The Company's regional sales and marketing departments generate leads, act as
proposal administrators, perform technical writing and generally support the
Company's sales efforts. In addition, senior technical and sales staff have been
assigned to market specialized services to specific sectors such as the
PCS/Wireless communications industry and Brownfield initiatives.

         ATC presently markets its environmental services and construction
materials testing and engineering services through its network of branch offices
located in 35 states. Direct marketing is accomplished by technical sales
representatives, technical personnel and management personnel who routinely call
on prospective clients. ATC also utilizes government and industry publications
to identify potential services and requests for project proposals for submission
of competitive bids. In addition, ATC markets its services through its
environmental seminars and training courses for existing and potential clients.

         Marketing, Information Management Technology Services. The Company
provides information management technology consulting services to Fortune 500
and other clients, including major companies in the telecommunications,
financial services and pharmaceutical industries. A significant majority of the
Company's information management technology service revenue is derived from its
existing client base. The Company obtains new clients through personal sales
presentations, telemarketing, referrals from other clients and referrals from
current and former staff. In addition, ATC has found that a significant need for
information management technology services exists among its present
environmental services and construction materials testing and engineering
clients and as a result, cross selling between these areas has been
advantageous.

         National Technical and Sales Programs. Recent trends in the engineering
and consulting market require that a service provider commit considerable
resources toward maintaining and developing client relationships. This shift
from project-specific to long-term client relationship partnering requires a
service provider to dedicate both technical and marketing resources toward
tailoring services for a client. It also requires the provider to maintain a
broad range of responsive, quality services. The rewards of such client
relationship partnering and quality, service-focused programs are continued
revenues from repeat customers and, in many instances, sole source solicitation
and award of work to the firm.

         ATC's two initial national programs were the National Commercial
Accounts Program, started in November 1995, and the Lead Risk Management
Program, started in March 1996. Revenues from the National Commercial Accounts
Program are derived primarily from real estate assessment services provided to
banks, insurance companies, real estate management companies and retailers. The
Lead Risk Management Program's revenues are derived primarily from local and
state housing authorities, municipalities and financial institutions.

                                       13
<PAGE>
 
    
         In May 1996, ATC established the Hazardous Waste Management/Brownfield
Development Program. This program was created to develop, coordinate and market
ATC's hazardous waste consulting services primarily targeted at large industrial
clients. In response to the emerging Brownfield redevelopment market, ATC also
established business relationships with firms specializing in the
identification, purchase and resale of environmentally impaired properties.
Since April 1997, when these relationships were formed, ATC has been awarded
four Brownfield projects.      

         In August 1996, ATC established the Federal Program, which is focused
on procurement initiatives from the U.S. Postal Services, the Army Corps of
Engineers, the Veterans Administration and several other small federal
government agencies. Much of this work is derived from subcontracting or team
relationships with larger federal government contractors. The purpose of this
program is to coordinate and maximize ATC's efforts to obtain business from the
federal government.

         In March 1997, ATC initiated the PCS/Wireless Communication Program. In
1995, it was anticipated that up to 100,000 towers would be needed by the year
2000 to deploy networks for mobile radio and PCS services. As of June 30, 1997,
there were over 38,000 operating sites. ATC services required for each tower
installation include environmental, geotechnical, structural and construction
materials testing and engineering. Since its inception, the program has received
project awards from six nationally known communication companies.

         In July 1997, ATC formally established the Petroleum Services Program
to focus on coordinating and expanding ATC's services to existing and targeted
retail and fully integrated petroleum companies. Eligible facilities for ATC
services include underground and aboveground storage tank installations,
terminals, pipelines and refineries. Currently, eleven nationally known
petroleum companies are managed by the program.

         In order to capitalize on emerging high growth markets and services,
ATC plans to continue adding new National Programs. One program under
consideration is an international business development program. The Company
intends to expand its operations into international markets, beginning with the
Asia-Pacific region. ATC is currently providing asbestos management services to
Mitsui Fudosan in Japan and is designing a wastewater treatment facility for a
U.S. multi-national corporation in China. The Company intends to use these and
other relationships to pursue new opportunities in the Asia-Pacific region and,
if appropriate, establish an international business development program. As part
of its acquisition strategy, ATC will also consider candidate firms with
existing operations or business relationships in attractive international
markets.

Key Client Sectors

         ATC's services and products are applicable to a full range of business,
manufacturing, institutional and governmental sectors. However, based on demand
for its services, existing relationships and revenue generation potential, ATC
has targeted eight key client sectors for development under its national and
regional sales activities. Those key client sectors, in order of priority, are:

1. Petroleum Industry
2. Chemical Industry
3. Financial Institutions
4. Real Estate Management and Development Firms
5. Municipalities
6. Public School Systems
7. Public Housing Authorities
8. U.S. Army Corps of Engineers

Competition

         The environmental services, construction materials testing and
engineering and information management technology consulting industries in which
the Company operates are subject to intense competition. In addition to the
thousands of small environmental consulting and testing firms operating in the
United States, ATC competes with several national environmental engineering and
consulting firms including Law Companies Group, Inc., Dames & Moore, Inc. and
Professional Service Industries, Inc. In the information management technology
consulting market, ATC competes with many small and medium-sized firms as well
as large temporary staffing companies, including The Olsten Corporation,
Corestaff, Inc. and Accustaff Incorporated, among others, and large systems
consulting firms.

         Certain  of ATC's  present  and  future  competitors  may have  greater
financial,  technical  and personnel  resources  than ATC. It is not possible to

                                       14
<PAGE>
 
predict the extent of competition that ATC will encounter in the near future as
the environmental services, construction materials testing and engineering and
information management technology consulting services industries continue to
mature and consolidate. Historically, competition has been based primarily on
the quality, timeliness and costs of services. The ability of ATC to compete
successfully will depend upon its marketing efforts, its ability to accurately
estimate costs, the quality of the work it performs, its ability to hire and
train qualified personnel and the availability of insurance.

Organization

         ATC is a Delaware corporation and was incorporated in 1987 as ATC
Environmental, Inc. ATC's organizational structure consists of five operating
regions and corporate support operations in Sioux Falls, South Dakota; New York,
New York; and Woburn, Massachusetts. ATC's principal executive offices are
located in New York, New York. Branch offices within each region are encouraged
to share projects and technical resources to accomplish common deadlines and
goals. Profits and losses are measured at the branch level to ensure
profitability of all operations. Operational management and performance
incentives, however, are maintained at the regional level to foster coordination
of effort and technical resources in broad geographic areas.

Office and Support Services

         ATC operates through 74 branches located in 35 states. The branch is
the basic economic and functional unit of the Company through which all services
are provided. Personnel located in each office are experienced in developing and
implementing solutions, which meet the requirements of local regulations. The
Company monitors all branches with an experienced staff of regional vice
presidents. ATC specialists are responsible for introducing new services to
customers, managing projects within budget and meeting pre-established quality
control standards. Each region also has dedicated sales and marketing staff and
a financial controller. ATC has created systems and controls at the branch level
through the use of standardized operating procedures.

         The Company intends to relocate all administrative functions located in
Sioux Falls, South Dakota, consisting primarily of accounting, human resources
and MIS support, to Woburn, Massachusetts. Severance costs associated with the
relocation are expected to be nominal. It is anticipated that the relocation
will be complete by the end of fiscal 1999.

Personnel

         As of May 1998, ATC employed approximately 2,043 employees, 1,619 of
which were full-time employees and 424 of which were part-time staff members.
ATC's employees consist of 1,602 technical and professional personnel, 60 sales
and marketing persons and 381 administrative employees inclusive of executive
officers. The backgrounds of ATC's technical and professional staff include,
among other disciplines, environmental engineering, information management
technology, industrial hygiene, hydrogeology, chemistry, biology and geology.
ATC from time to time hires additional personnel on a temporary basis.

Insurance
    
         ATC has secured a "claims made" professional liability insurance
policy, including contractor's pollution liability coverage. The professional
liability insurance policy has a two-year term, ending on June 1, 2000, which is
subject to biennial renewal, with a per-claim limit of $10.0 million, an
aggregate limit of $20.0 million and a self-insured retention of $150,000 per
claim. Increased limits have been obtained on a specific endorsement basis to
meet the needs of particular clients or contracts. A "claims made" policy only
insures against claims filed during the period in which the policy is in effect.
This policy covers both errors and omissions. Under the policy, the self-insured
retention payable in respect of a claim decreases to $50,000 per claim for the
balance of the policy term, once the Company has paid an aggregate of $600,000
during the policy term. Although various claims have been made in the past
against the Company's professional liability/contractor's pollution policy, to
date no such claim has ever resulted in an insured loss. The Company has paid
$0, $25,000 and $16,000, respectively, for fiscal 1996, fiscal 1997 and fiscal
1998, for uninsured professional liability and pollution claims (i.e., claims
that have not exceeded the $250,000 deductible) under the policy in effect prior
to renewal. In the three months ended November 30, 1997, the Company recognized
a $250,000 charge related to a probable loss for the uninsured portion of a
claim made under the Company's prior year's professional liability insurance
policy. ATC also carries an occurrence form general liability insurance policy
in the amount of $1.0 million, with a $10.0 million umbrella. This coverage
includes products/completed operations. The general liability insurance policy
has a one-year term, ending on June 1, 1999, and is subject to annual renewal.
ATC's policies have been renewed in each of the years that they have been in
effect. In addition, the Company maintains a claims made directors and officers'
liability insurance policy with an aggregate limit of $10.0 million. This policy
has a one-year term which expires February 4, 1999. The Company also has
procured a six-year extended reporting period for the directors and officers'
liability insurance policy that was in effect prior to the current policy. The
Company can make no assurance that insurance coverage will continue to be
renewed or available in the future or offered at rates similar to those under
the current policy.      

                                       15
<PAGE>
 
Item 2.  Properties.
-------  -----------
    
         ATC leases office space, laboratory facilities, temporary housing
facilities and storage space under operating lease agreements, which have
varying dates of expiration. ATC utilizes all of its leased facilities near
maximum capacity. However, ATC does not foresee any difficulty in leasing
adequate supplementary facilities, if necessary, and therefore does not believe
any of its leases are material. The Company leases the facility housing its
principal executive, administrative, operations and laboratory facilities,
aggregating approximately 40,000 square feet located at 104 East 25th Street,
New York, New York at a base rate of $362,700 per annum with a term ending on
September 30, 2001. ATC has three separate lease and sublease agreements which,
on an aggregate basis, cover the premises housing its consulting and laboratory
operations at 600 West Cummings Park, Woburn, Massachusetts, comprised of
approximately 24,567 square feet at an aggregate base rent of approximately
$310,844, with lease terms expiring at the end of the summer in 2002. ATC
entered into three leases with the Mann Realty Company in connection with its
acquisition of the assets of American Testing and Engineering Corporation
("ATEC"). These leases for the premises located in Indianapolis, Indiana,
Dallas, Texas and Atlanta, Georgia cover 15,827 square feet, 12,150 square feet
and 18,700 square feet, respectively, at annual rents of $193,512, $117,540 and
$209,936, respectively. Each of the three leases has a ten-year term, all of
which commenced on May 24, 1996. In addition, each of the three leases have
renewal options, with the Dallas and Indiana options terminating after four
years upon the occurrence of certain specified events, and the Atlanta option
terminating on May 24, 2003 upon the occurrence of certain specified events.
Although the Company believes it can lease similar space, no assurance can be
given that the Company will obtain leases at the same locations and at the same
lease rates.     
    
         In addition, ATC utilizes various laboratory, field and computer
equipment, which is owned or leased. ATC also rents equipment on a
project-by-project basis.      

Item 3.  Legal Proceedings.
-------  ------------------

General Litigation

         Irv Richter v. ATC Group Services, Inc., et al, Civ. Action No.
16007-NC, Court of Chancery, New Castle County, Delaware. Joseph I. Peters v.
George Rubin, et al, Civ. Action No. 16026-NC, Court of Chancery, New Castle
County, Delaware. On or about November 5, 1997, a summons and complaint were
filed in the Court of Chancery of the State of Delaware in and for New Castle
County (the "Delaware Court") on behalf of Irvin Richter, as plaintiff (the
"Richter Complaint"). The Richter Complaint named the Company and the members of
the Company's board of directors as defendants. On or about December 18, 1997,
counsel for Mr. Richter filed with the Delaware Court a Notice of Dismissal
Without Prejudice of the Richter Complaint. On or about November 12, 1997,
another summons and complaint were filed in the Delaware Court on behalf of
Joseph I. Peters, as plaintiff (the "Peters Action"). On or about December 18,
1997, an amended complaint was filed in the Peters Action (the "Amended
Complaint"). The Amended Complaint names the Company, the members of the
Company's board of directors, Weiss Peck and the WPG Corporate Development
Associates V, L.P., a Weiss Peck affiliate, as defendants. The Amended Complaint
challenges the Tender Offer and Merger. The Amended Complaint seeks class action
status on behalf of the stockholders of the Company. The plaintiff in the Peters
Action claims that the offer price for the Company's Common Stock is inadequate
and that the defendants have breached their fiduciary duties to the plaintiff
and other stockholders of the Company. The plaintiff seeks, among other things,
to enjoin the Transactions or compensatory damages. On January 7, 1998, a motion
to dismiss was filed by Weiss Peck and WPG Corporate Development Associates V,
L.P, a Weiss Peck affiliate. On January 13, 1998, answers to the complaint were
filed by the Company and the remaining defendants. The parties to the Peters
Action are currently conducting discovery. The Company believes the allegations
contained in the Amended Complaint are without merit and intends to defend the
Peters Action vigorously; however, there can be no assurance of the outcome.

         First Fidelity Bank, N.A., et al v. Hill International, Inc. et al.,
Superior Court of New Jersey, Law Division, Burlington County, Docket No.
Bur-L-03400-95, filed December 19, 1995. Irvin E. Richter, et al v. ATC Group
Services Inc., et al. United States District Court, District of New Jersey, Civ.
No. 96 CV 5818 (JBS) filed December 6, 1996. On December 19, 1995, a second
amended complaint was filed in the above-entitled action which joined the
Company as a defendant and included a count against the Company seeking recovery
of certain assets purchased from Hill on the grounds that plaintiff banks held
security interests in the assets and that Hill was in default under the security
agreement creating such alleged security interests. The original plaintiffs in
this action were First Fidelity Bank, N.A. and United Jersey Bank, N.A. The
primary defendants were Hill and certain of its subsidiaries, and Irvin Richter,
David Richter, Janice Richter and William Doyle. Irvin Richter and David Richter
are officers and stockholders of Hill. In April 1996, the Company filed a
cross-claim against Hill, Irvin Richter and David Richter alleging breach of
contract and fraud, among other allegations, and seeking unspecified damages,
including punitive damages, and equitable relief. In August, 1996, Hill and the
Richters filed an answer denying ATC's cross-claims, a cross-claim against ATC
and a third party claim against certain members of ATC's management and an
employee. The cross-claim and third party claim seek unspecified damages,
including punitive damages, for defamation, breach of the Richters'
non-competition agreements and securities fraud. The defamation claims are based
(i) on plaintiff banks' allegation of fraud against Hill and the Richters in

                                       16
<PAGE>
 
their amended complaint, which Hill and the Richters allege was based on
defamatory statements made by ATC in settlement discussions with the plaintiff
banks and (ii) on a letter alleged to contain defamatory statements which was
sent to an account debtor of the Company by an employee. In its answer, the
Company both denies that it made defamatory statements and asserts that the
defamation allegations fail to state legally valid claims. The breach of
contract and securities claims are based on allegations that ATC made
representations concerning a registration rights agreement to be provided in
connection with options issued to the Richters as consideration for their
non-competition agreements. In its answer, the Company denies that an agreement
concerning registration rights was ever reached and asserts that any such rights
were forfeited or suspended by the Richters in any case as a result of their
conduct in connection with the asset purchase. ATC also disputes that the
Richters sustained damages on the grounds, among others, that the options were
non-transferable and because ATC's stock price never exceeded the exercise price
at any point where the options would have been exercisable. These related cases
are in the discovery phase. In January, 1997, the plaintiff banks dismissed
their claim against ATC. On December 6, 1996, Hill and the Richters commenced an
action against ATC and the same officers and employees of ATC alleging
essentially the same claims in federal court as in the state action. This action
is entitled Irwin E. Richter et al. v. ATC Group Services, et al., Civ. No.
96-5818 (JBS), U.S. District Court for the District of New Jersey, December 6,
1996. ATC has answered, raising the same defenses and additional defenses
related to the timeliness of the federal securities claims. The case is
currently in the discovery phase. It does not create a risk of double recovery.
In the Company's opinion, the outcome of this matter will not have a significant
effect on the Company's financial position or future results of operations and
cash flows, although no assurance can be given in this regard.
    
         Commonwealth of Massachusetts v. TLT Construction Corp. et al., Civ.
Action No. 96-02281 F, Superior Court of Middlesex County, Massachusetts. This
is an action brought by the Commonwealth of Massachusetts in April 1996, against
the architects and general contractor on a renovation and construction project
on the Suffolk County Courthouse in Massachusetts. The basis of the lawsuit is
that one or more damp-proofing products specified by the architect defendants
and installed by the contractor defendant made employees in the courthouse ill
because of the off-gassing of harmful vapors. Dennison Environmental Services
Inc., ("Dennison") an ATC subsidiary, was joined on August 13, 1996, as a third
party defendant by TLT Construction Corporation, the general contractor, because
Dennison performed some air quality testing of the air in the courthouse for the
Commonwealth of Massachusetts during the construction process. The contractor
alleges that it acted in reliance on these tests in continuing to install the
material after the test report was given to it by the state. ATC's position is
that it did not commit any error or omission in this case, that ATC made no
representation to the contractors or material supplier and had no privity with
them and that Dennison's opinion concerning short term, during-construction
health effects of the off-gassing could not be justifiably relied upon with
respect to the long-term performance and health effects of the product or its
installation. This case is in the discovery phase. At this point, ATC considers
the case to be without merit, and ATC intends to vigorously defend the action.
Notice of this claim has been made to ATC's professional liability insurer. At
the time that notice of this claim was filed, the Company had in effect a
professional liability insurance policy in the amount of $10.0 million with a
deductible of $250,000. In the Company's opinion, the outcome of this matter
will not have a significant effect on the Company's financial position or future
results of operations and cash flows, although no assurance can be given in
this regard.     
    
     Barrett-Moeller et al. v. ATC Associates Inc., Civ. Action No. 97-01037D,
Superior Court of Middlesex County, Massachusetts. This is an action arising out
of the same set of occurrences as gave rise to Commonwealth of Massachusetts v.
TLT Construction, Corp. described above. The action was brought by a group of
employees who worked in the Suffolk County Courthouse during the period in which
the off-gassing of harmful vapors was alleged to have occurred. The suit seeks
damages for personal injury in an unspecified amount. Notice of this claim has
been made to ATC's professional liability insurer. At the time that notice of
this claim was filed, the Company had in effect a professional liability
insurance policy in the amount of $10.0 million with a deductible of $250,000.
        
     Joan Spencer v. TLT Construction et al., Civ. Action No. 97-4161C, Superior
Court of Middlesex County, Massachusetts. This is an action arising out of the
same set of occurrences as gave rise to Commonwealth of Massachusetts v. TLT
Construction, Corp. described above. The action was brought by an employee who
worked in the Suffolk County Courthouse during the period in which the off-
gassing of harmful vapors was alleged to have occurred. The suit seeks damages
for personal injury in an unspecified amount. Notice of this claim has been made
to ATC's professional liability insurer. At the time that notice of this claim
was filed, the Company had in effect a professional liability insurance policy
in the amount of $10.0 million with a deductible of $250,000.     

         Cambridge Housing Authority v. CON-TEST, Inc. and ATC Group Services
Inc., Superior Court of Middlesex County, Massachusetts. This action was brought
on October 1, 1997 for damages in excess of $1,000,000 alleging that Con-Test,
Inc. breached its contract with Cambridge Housing Authority and was negligent in
performing asbestos survey work preparatory to a housing project
re-modernization project. ATC was joined as a party on the theory of continuous
business enterprise successor liability. ATC has filed an answer denying that it
was a successor to Con-Test under Massachusetts's law and asserting that it
should therefore have no liability for Con-Test's alleged acts or omissions. The
Company believes that the case is without merit because ATC does not meet the
definition of successor liability in the State of Massachusetts. ATC has filed a
notice of claim with Con-Test's insurance company which has assumed the defense
of the action.

                                       17
<PAGE>
 
         State of New York Department of Taxation and Finance. The Company has
received a notice of audit from the New York State Department of Taxation and
Finance ("NYDTF") for the three fiscal years 1993, 1994 and 1995. The agent has
issued a preliminary audit report, which is expected to be the basis of a formal
assessment estimated to be approximately $200,000. ATC's most recent
communications with the NYDTF indicate that it is probable that ATC will incur a
liability for back taxes in an approximate amount of $200,000 which the Company
has recorded as a liability as of February 28, 1998.

     Professional Service Industries, Inc. v. ATC Group Services Inc. and Thomas
Bowker, Superior Court, Norfolk County, Massachusetts, June 19, 1997, Civ. No.
97-01146. The complaint alleges that ATC interfered with a non-competition
agreement between Mr. Bowker, currently an ATC employee, and PSI. An injunction
has been issued by the court against ATC and Mr. Bowker prohibiting them from
competitive acts within certain geographic areas. The case is currently on hold
pending mediation between the parties in an attempt to settle the case. If
settlement is not achieved through the mediation process, ATC intends to
continue to vigorously defend the claim.
    
     Etzel Place II, L.P. v. ATC Environmental, Inc., Action No. 982-01473, 
Missouri Circuit Court, Twenty-second Judicial Circuit (St. Louis City). This 
action was brought on June 2, 1998 and alleges that ATC Environmental, Inc. 
breached its contract with Etzel Place II, L.P. and was negligent in performing 
asbestos survey work in connection with an asbestos removal project. The Company
intends to vigorously defend the action.      

Administrative Violations
    
         Indiana Department of Environmental Management v. ATC Associates Inc.
ATC received a Notice of Violation ("NOV") and Proposed Agreed Order, EPA I.D.
No. IND 004939765, dated June 9, 1997, on June 12, 1997 and a revised NOV and
Proposed Agreed Order on April 22, 1998. The revised Proposed Agreed Order seeks
a penalty in the amount of $78,400 for alleged violations of the federal
hazardous waste regulations and Indiana hazardous waste regulations arising out
of the handling of hazardous waste at ATC's Indianapolis laboratory. ATC and the
Indiana Department of Environmental Management ("IDEM") are currently engaged in
settlement discussions. As a result of this settlement process, the Company
believes that this penalty will be reduced although there can be no assurance in
this regard. ATC has entered into a settlement agreement with ATEC pursuant to
which ATEC will be responsible for payment one-half of the penalty.     
Probable Claims

         One Parkway Project. ATC has received notice of related potential
claims by R.M. Shoemaker Co., a Pennsylvania construction firm, and four of its
workers arising out of ATC's performance of asbestos abatement survey, design
and project monitoring services. The services were performed by ATC's
Burlington, New Jersey office on a project known as the One Parkway Project. The
claims allege that ATC: (i) failed to locate certain asbestos-containing
materials in a high rise building during its inspection of the facility; (ii)
failed to include these undiscovered materials in the design specifications for
an asbestos abatement project in connection with a renovation project on the
building; and (iii) failed to properly clearance inspect and test the areas on
which abatement had been performed prior to demobilization of the asbestos
abatement project. The claimants allege that ATC's acts or omissions resulted in
additional corrective actions including remobilization of certain areas, delays
of the renovation project and exposure of construction workers to asbestos
contamination. R.M. Shoemaker has alleged that it sustained damages in the
amount of $1,500,000 for additional abatement costs plus additional damages for
delay. The workers' exposure claims have not been quantified. No suit has been
filed.

         At this point, the Company believes that it was not responsible for the
alleged problems on this project. ATC's responsibilities on the project were
limited, and ATC believes that the alleged omissions which allegedly resulted in
the alleged losses were outside the scope of the Company's contractual
responsibilities. The Company has served notice of these claims upon its
professional liability insurer. This coverage is subject to a $250,000
deductible.
   
         Bob Moore Construction/Garden Ridge, Inc. ATC has received notice of a
potential claim arising out of ATC's performance of soil compaction testing for
Bob Moore Construction, Inc., the general contractor on a retaining wall
construction project for Garden Ridge, Inc., a garden supply chain, in Norcross,
Georgia. The retaining wall eventually failed. Independent consultants performed
investigations and prepared reports to determine the cause of failure. Reports
initially concluded that the failure was due to a flaw in the design prepared by
the wall manufacture and installation firm. Both consultants concluded that the
soil work was properly performed. Since then, consultants have prepared
follow-up reports, and the contractor has requested ATC's involvement in
mediation discussions regarding the responsibility for repairs with respect to
the various parties involved in the project. Total costs to repair the project
currently total $960,000. ATC is evaluating the follow-up reports to determine
ATC's potential liability or responsibility, if any. ATC currently believes that
it performed all services properly and that it should have no liability. In any
case, ATC believes its share of liability should amount to only a small portion
of the total costs. Notice of this claim has been made under ATC's professional
liability insurance policy. The professional liability insurance is subject to a
$250,000 deductible. Although the Company believes this claim will not result in
a material loss, no assurance in this regard can be given.    
    
         Argosy  Casino,  Lawrenceburg,  Indiana.  ATC has  received  notice  of
potential claims arising out of geotechnical analyses for which ATEC      

                                       18
<PAGE>
 
    
originally provided the geotechnical analyses and on which ATC subsequently
performed the design of a Tensar/soil stabilized earth slope. The stabilized
earth/geogrid engineered slope failed at the interface between the compacted
subgrade and the first geogrid layer. A tentative settlement reached among the
parties to this claim would result in ATC's payment of $266,000 in corrective
costs, of which ATC expects contribution from other parties in an amount of not
less than $80,000. Notice of this claim has been made under ATC's professional
liability insurance policy. The professional liability insurance is subject to a
$250,000 deductible.      

 .

Item 4.  Submission of Matters to a Vote of Security Holders.
-------  ----------------------------------------------------
   
         Not applicable.     

                                       19
<PAGE>
 
                                     PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters.
-------  ----------------------------------------------------------------------
    
         The Company's Common Stock and Class C Common Stock Purchase Warrants
("Class C Warrants") were listed on the Nasdaq National Market under the symbols
"ATCS" and "ATCSL," respectively, through February 5, 1998. Since February 5,
1998, there has been no public market for the Company's Common Stock or the
Class C Warrants. The following table sets forth, for the quarters indicated,
the high and low bid prices of the Company's Stock on Nasdaq National Market.
     
<TABLE>
<CAPTION>

                                  Common Stock

<S>                                                                                                   <C>            <C>

         Fiscal Year Ended February 28, 1997:                                                           HIGH           LOW
         -----------------------------------                                                            ----           ---
              First Quarter .....................................................................     $ 15-7/8      $ 11-7/8
              Second Quarter.....................................................................       15-3/8        12-1/4
              Third Quarter......................................................................       13-3/4        10-3/8
              Fourth Quarter.....................................................................       10-5/8         7-1/4

         Fiscal Year Ended February 28, 1998:

              First Quarter .....................................................................     $ 15-7/8      $ 11-7/8
              Second Quarter ....................................................................       15-3/8        12-1/4
              Third Quarter......................................................................       13-3/4        10-3/8
              Fourth Quarter  (through February 5, 1998).........................................       12            11-11/16

                                Class C Warrants

         Fiscal Year Ended February 28, 1997:                                                           HIGH           LOW
         -----------------------------------                                                            ----           ---
              First Quarter......................................................................     $ 5-7/8       $ 3-1/4
              Second Quarter.....................................................................       5-3/8         2-3/8
              Third Quarter......................................................................       4-1/2         2-1/4
              Fourth Quarter.....................................................................       2-1/2         7/8

         Fiscal Year Ended February 28, 1998:

              First Quarter......................................................................     $ 3-1/4       $ 1-3/8
              Second Quarter.....................................................................       3-3/16        1-13/16
              Third Quarter......................................................................       3             1-1/8
              Fourth Quarter (through February 5, 1998)..........................................       2             1-1/2
</TABLE>
    
         The quotations in the table above reflect inter-dealer prices without
retail markups, markdowns or commissions.     

         On February 5, 1998, the last reported sales price for the Company's
Common Stock and Class C Warrants on the Nasdaq National Market were $12.00 and
$2.00, respectively.
       
        As of June 12, 1998, the sole record holder of the Company's Common 
Stock was Holdings, its parent.     

         No cash dividends have been paid by ATC on its Common Stock and no such
payment is anticipated in the foreseeable future.

                                       20
<PAGE>
 
Item 6.  Selected Financial Data.
-------  ------------------------
    
         The following table sets forth, for the periods and at the dates
indicated, selected historical consolidated financial data of the Company. The
selected consolidated historical financial data has been derived from the
audited historical consolidated financial statements of the Company and should
be read in conjunction with such financial statements and the notes thereto
included elsewhere in this Annual Report. The Predecessor 1998 period reflects
the period March 1, 1997 through February 4, 1998. The Successor 1998 period
reflects the period February 5, 1998, the date of the Merger (the "Merger
Date"), through February 28, 1998.    
<TABLE>    
<CAPTION>
----------------------- ---------------------------------------------------------------------------------------------------------
                                                             Years Ended February 28 (29),
                                                                                                 Predecessor       Successor
Statement of                  1994              1995             1996              1997             1998              1998
Operations Data:             (1)(2)             (3)             (4)(5)          (7)(8)(9)       (11)(12)(13)          (14)
----------------------- ----------------- ----------------- ---------------- ----------------- ---------------- -----------------
<S>                     <C>               <C>               <C>              <C>                <C>              <C>
Net Revenues                 $24,379,811     $  33,269,746     $ 40,113,691     $  95,901,469     $109,472,612     $   9,949,086

Income (loss)before
  income taxes                 3,077,048         5,300,520        5,670,998        10,397,734        4,755,930        (2,754,145)

Net income (loss)              1,867,048         3,256,520        3,865,998         6,307,734        2,638,003        (1,789,418)

Cash dividends
  per share                          -0-               -0-              -0-               -0-              -0-               -0-
----------------------- ---------------------------------------------------------------------------------------------------------
                                                                   February 28 (29),
----------------------- ----------------- ----------------- ---------------- ----------------- ----------------------------------
                                                                                                           Successor
Balance Sheet Data:           1994              1995             1996              1997                      1998
                             (1)(2)             (3)          (4)(5)(6)(7)        (8)(9)(10))           (11)(12)(13) (14)
----------------------- ----------------- ----------------- ---------------- ----------------- ----------------------------------
Working capital            $   6,049,013     $   8,113,738    $  24,977,316     $  27,701,694            $  29,440,478            
                                                                                                                                  
Long-term debt, less                                                                                                              
  current maturities           2,182,119         3,892,766          361,944        22,123,344              120,419,684            
                                                                                                                                  
Total assets                  14,156,887        25,009,222       46,684,600        86,293,657              189,055,007            
                                                                                                                                  
Stockholders' equity       $   7,659,485     $  13,813,194    $  39,192,414     $  45,439,303            $  26,636,181             
</TABLE>     
-----------
    
(1)  ATC rescinded the agreement for the purchase of Bio-West, Inc. effective
     June 10, 1992.     
    
(2)  ATC acquired certain assets of BSE Management, Inc. ("BSE"), effective
     April 30, 1993.    
    
(3)  ATC acquired certain assets of Con-Test, Inc. ("Contest"), effective
     October 1, 1994.    
      
(4)  ATC and its parent, Aurora Environmental Inc.("Aurora"), were merged
     effective June 29, 1995, with ATC as the surviving corporation. Net income
     includes a one-time tax benefit of $350,000 from the utilization of
     Aurora's net operating loss carryforward.     
   
(5)  ATC acquired certain assets of Hill International Inc.'s environmental
     consulting and laboratory operations (the "Hill Businesses"), effective
     November 10, 1995.    
   
(6)  Working capital and stockholders' equity increased by $21,554,461, which is
     the amount of net proceeds received by the Company from a public offering 
     of its Common Stock in 1996.     
    
(7)  ATC acquired certain assets of Applied Geosciences Inc. ("AGI"), effective
     February 29, 1996.    
   
(8)  ATC acquired certain assets of ATEC, effective May 24, 1996.    
   
(9)  ATC acquired certain assets of 3D Information Services, Inc. ("3D"),
     effective May 28, 1996.    
    
(10) Long-term debt increased due to bank borrowings made in connection with the
     acquisitions of ATEC and 3D.     

(11) ATC acquired certain assets of BCM Engineers, Inc., effective August 20,
     1997.
    
(12) ATC acquired 90.9% of EWI, effective November 4,
     1997.     

(13) ATC acquired Bing Yen effective November 26, 1997. 
    
(14) Total assets, long-term debt and stockholders' equity reflect the goodwill
     from the Tender Offer and Merger, the issuance of the Notes and the new
     capital investment from Holdings. See Note B-, Merger and Business
     Acquisitions - Merger, Note Offering and Tender Offer of the notes to the
     consolidated financial statements.     

                                       21
<PAGE>
 
Item 7.  Management's Discussion and Analysis of Financial Condition and Results
-------  -----------------------------------------------------------------------
         of Operations.
         --------------
   
  The following discussion and analysis should be read in conjunction with the
"Selected Historical Financial Data" and the audited Consolidated Financial
Statements of the Company and the notes thereto appearing elsewhere in this
Prospectus.
 
RECENT DEVELOPMENTS
 
  Tender Offer and Merger. The Company became a wholly owned subsidiary of
Holdings, upon the Merger of ATC with Acquisition Corp., with ATC being the
surviving corporation. The Tender Offer was consummated using the proceeds
from the issuance of the Notes, borrowings under the New Credit Facility and
new equity investments. The accompanying statement of operations for the
Company from February 5, 1998 through the fiscal year-end, February 28, 1998
(the "Successor Period"), are attributable to operations of the Company under
the successor ownership of Holdings. The predecessor statement of operations,
representing the period March 1, 1997 through February 4, 1998 (the
"Predecessor Period"), relates to the previous ownership of the Company. In
connection with the Transactions, the Company had entered into two separate
Severance, Consulting and Noncompetition Agreements (the "Severance
Agreements") with two officers of the Company. See "Certain Relationships and
Related Transactions." The Severance Agreements provided for the resignation
of the officers upon completion of the Merger and the terms of a non-compete
agreement.

  The Company has acquired twelve businesses since 1993. The three most recent
acquisitions which have been consummated include: (i) the purchase by the
Company of all of the stock of Bing Yen on November 26, 1997; (ii) the
purchase by the Company of substantially all of the stock of EWI on November
4, 1997; and (iii) the purchase by the Company of certain assets and the
assumption by the Company of certain liabilities on August 20, 1997 of the
Engineering Division of Smith Technology Corporation which operated primarily
as BCM.

  As a result of the Merger, the consolidated financial statements for the
Successor Period are presented on a different basis of accounting than that of
the Predecessor Period and are therefore not directly comparable.

OVERVIEW
 
  General. ATC is a leading national provider of professional consulting,
engineering and testing services within the environmental and construction
materials industries. Management believes the Company is also a leading
provider of integrated environmental information management technology
services. The Company provides a broad range of services to a diverse client
base of over 8,000 customers, and management believes that domestic businesses
and non-federal government entities represented over 95.0% of the Company's
gross revenues for fiscal 1998. No single customer represented more than 1.7%
of the Company's gross revenues during fiscal 1998. In addition, the Company's
ten largest customers taken together accounted for less than 12.4% of the
Company's gross revenues during fiscal 1998. The Company provides its services
through a network of 74 branch offices located in 35 states covering every
major market of the United States.
 
  In 1993, the Company initiated a strategy of controlled growth through
acquisitions to build a national infrastructure and to broaden its range of
technical services. The Company has created a national infrastructure through
the completion of 12 acquisitions since May 1993. ATC has thereby also
expanded its service mix by adding construction materials testing and
engineering, lead risk management, indoor air quality management, water and
wastewater management and information management technology services. As a
result of this growth and diversification strategy, net revenues increased to
$119.4 million in fiscal 1998, from $15.4 million in fiscal 1993.
 
  The Company's rapid growth is primarily attributable to the acquisition of
assets of ATEC in May 1996 and the acquisition of assets of BCM in August
1997. Management believes that at the time of the respective    

                                       22
<PAGE>
 
    
acquisitions, each of the acquired companies was an underdeveloped operating
asset with strong client relationships in their respective markets. ATEC, with
its large network of regional and branch offices, positioned the Company as a
national provider of professional environmental consulting, testing and
engineering services. As a result of the BCM acquisition, ATC has become a
high-quality provider of consulting, engineering and design services in water
supply and treatment, wastewater systems, air quality management, traditional
environmental site investigations, site assessments and storage tank
management services. Subsequent to each acquisition that it has made, the
Company has implemented cost reduction measures, including integration of
offices, introduction of flexible staffing programs and reduction of
duplicative corporate overhead costs.
 
  The Company has experienced substantial increases in net revenues and net
income over the past three fiscal years. ATC's net revenues were $40.1
million, $95.9 million and $119.4 million, respectively, in fiscal 1996, 1997
and 1998, principally attributable to acquisitions which were accounted for on
a purchase basis. ATC's net income (loss) was $3.9 million, $6.3 million, $2.6
million and $(1.8) million, respectively, in fiscal 1996 and 1997 and for the
Predecessor Period and Successor Period, respectively.
 
  Profitability was negatively impacted during the fourth quarter ended
February 28, 1998 as a result of higher general and administrative charges,
partially related to the Tender Offer and Merger, legal expenses, and higher
goodwill and interest costs resulting from the Tender Offer and Merger, and
new management decisions with respect to operational matters and the resulting
charges to expenses. Such charges included settlements of executive bonus
claims, losses for pending state tax claims, the establishment of reserves for
expected write-offs from the expected settlement of certain disputed trade
receivables and work in process, and impairment of goodwill associated with a
laboratory operation sold during the quarter ended May 31, 1998. The Company
also anticipated the implementation of a new accounting and project management
system which began during fiscal 1998 and was scheduled to be completed in
April 1998. The system installation encountered several delays resulting in
additional employee costs from duplicative personnel now existing in the
corporate and regional offices. The system, once installed, will eliminate
many corporate accounting functions by shifting such functions to the regional
offices.      

                                       23
<PAGE>
 
    
RESULTS OF OPERATIONS
 
  The following table sets forth, net for the periods indicated, certain
statements of operations data of the Company expressed as a percentage of net
revenues.
 
<TABLE>
<CAPTION>
                                             FISCAL YEAR
                                                ENDED
                                             FEBRUARY 28
                                                (29)
                                             ------------
                                                           PREDECESSOR SUCCESSOR
                                             1996   1997      1998       1998
                                             -----  -----  ----------- ---------
<S>                                          <C>    <C>    <C>         <C>
Revenues.................................... 112.1% 118.7%    118.1%     122.4%
  Reimbursable costs........................  12.1   18.7      18.1       22.4
                                             -----  -----     -----      -----
Net revenues................................ 100.0  100.0     100.0      100.0
Cost of net revenues........................  49.0   56.0      55.1       57.6
                                             -----  -----     -----      -----
    Gross profit............................  51.0   44.0      44.9       42.4
Operating expenses:
  Selling...................................   3.8    3.3       3.8        4.5
  General and administrative................  32.0   27.4      32.5       47.4
  Provision for bad debts...................   0.7    1.1       1.8        5.5
                                             -----  -----     -----      -----
    Operating income (loss).................  14.4   12.2       6.8      (14.9)
Non-operating expense (income):
  Interest expense..........................   0.9    1.6       2.6       13.3
  Interest income...........................  (0.7)  (0.2)     (0.2)      (0.4)
  Other.....................................   0.1    --        --        (0.2)
                                             -----  -----     -----      -----
    Income (loss) before income taxes.......  14.1   10.8       4.3      (27.7)
Income tax expense (benefit)................   4.5    4.3       1.9       (9.7)
                                             -----  -----     -----      -----
Net income (loss)...........................   9.6%   6.6%      2.4%     (18.0)%
                                             =====  =====     =====      =====
</TABLE>
--------
Note: Numbers may not add due to rounding.
 
  Revenues. The Company derives its revenues primarily from specialized
environmental engineering and consulting services, including industrial
hygiene services and construction materials testing and engineering, and to a
lesser extent from environmental information management technology services.
The Company sets the pricing of the different components of its services and
products in accordance with its national and regional marketing strategies,
taking competitive factors into account.
 
  Reimbursable Costs. Reimbursable costs associated with the Company's
environmental engineering and consulting services consist primarily of costs
associated with outside drilling, laboratory services, materials handling and
transportation, excavation and certain specialized technical services.
Generally, the costs associated with a particular project can be billed
directly to environmental engineering and consulting services clients.
Services that have a large component of subcontracted services have a larger
portion of reimbursable costs as a percentage of revenues.
 
  Cost of Net Revenues. Cost of Net Revenues consists of professional field
staff costs, depreciation of field and laboratory equipment, contract
maintenance costs, and other project related costs. The Company's field labor
is generally fixed in the short-term, except for certain variable costs
relating to the Company's flexible staffing program. Typically, the Company
does not own large capital intensive equipment.
 
  Operating Expenses. Operating expenses include selling expenses, general and
administrative expenses and provision for bad debts as described below:
 
  Selling Expenses. Selling expenses consist of costs associated primarily
with (i) compensation and benefits for its sales and marketing professionals
throughout the Company's network of branch offices and (ii) advertising and
promotional efforts.      

                                       24
<PAGE>
 
   
  General and Administrative Expenses. General and administrative expenses
consist primarily of: (i) employee compensation and benefit expenses, (ii)
travel and other administrative costs and (iii) general corporate overhead,
including rent for the Company's facilities, insurance, legal and accounting
and amortization of intangible assets.
 
  Provision For Bad Debts. The Company maintains an allowance for bad debts
based on its past bad debt experience. It has been the Company's experience
that such allowance has been sufficient to cover the costs actually incurred
for bad debts.

  Non-operating Expense. Non-operating expense consists of interest expense,
interest income and other similar expenses or income.

FISCAL 1998 COMPARED WITH FISCAL 1997
 
  Revenues. Revenues in fiscal 1998 increased by approximately $27.6 million,
or 24.2%, to $141.4 million, compared with $113.9 million in fiscal 1997. This
increase was primarily attributable to revenues associated with the BCM
acquisition, which was consummated on August 20, 1997, the acquisitions of EWI
and Bing Yen which were completed in November 1997, and the contribution of
one full fiscal year of revenues from the acquisitions of ATEC and 3D, which
were completed in May 1996. Revenues attributable to the acquisition of
certain assets of BCM totaled $12.5 million, or 8.8% of revenues, for fiscal
1998. Revenues attributable to the acquisition of EWI and Bing Yen totaled
$1.2 million, or 0.9% of revenues, for fiscal 1998. Revenues associated with
the acquisitions of ATEC and 3D totaled $70.3 million and $9.0 million,
respectively, for fiscal 1998, compared to $57.7 million and $7.2 million,
respectively, in fiscal 1997. Revenues were not affected by the Transactions.
 
  Revenues in fiscal 1998 from ATC's branch offices having comparable
operations in fiscal 1997 decreased 2.2% to $108.2 million, compared with
$110.6 million, in fiscal 1997. Comparable revenues included revenues of ATEC
and 3D for the nine months ended February 28, 1998 and 1997, respectively, but
excluded first quarter revenues as these acquisitions were made during the
first quarter of fiscal 1997. Comparable revenues decreased in part, due to a
large project representing $2.0 million in revenue for the prior fiscal period
during which time the project was completed.
 
  Reimbursable Costs. For fiscal 1998, reimbursable costs increased by
approximately $4.1 million, or 22.6%, to $22.0 million compared with $18.0
million, in fiscal 1997. Reimbursable costs as a percentage of revenues
decreased to 15.6% in fiscal 1998 compared with 15.8% in fiscal 1997.
Reimbursable costs decreased in part due to a decrease in such costs
associated with the acquired BCM operations. Reimbursable costs were not
affected by the Transactions.
 
  Cost of Net Revenues. Cost of net revenues in fiscal 1998 increased by
approximately $12.3 million, or 22.9%, to $66.1 million compared with $53.8
million in fiscal 1997. Cost of net revenues as a percentage of net revenue
decreased to 55.3% in fiscal 1998 compared with 56.0% in fiscal 1997. In the
prior year, the Company benefited from higher than normal productivity in the
first quarter of fiscal 1997. Higher productivity in the first quarter of
fiscal 1997 is attributable to increased workloads in that quarter, resulting
from work which was delayed the last quarter of fiscal 1996 and carried over
into the first quarter of fiscal 1997 due to adverse weather conditions
primarily in the northeast. At that time, such amounts constituted over 60.0%
of ATC's revenue stream. The Company also reduced cost of net revenues as a
percentage of net revenues in fiscal 1998 due to improved labor utilization,
due in part to the Company's use of flexible and part time staffing. Cost of
net revenues were not affected by the Transactions.
 
  Gross Profit. For the reasons set forth above, gross profit in fiscal 1998
increased by approximately $11.2 million, or 26.6%, to $53.3 million compared
with $42.2 million in fiscal 1997.     

                                       25
<PAGE>
 
     
  Operating Expenses. Operating expenses in fiscal 1998 increased by
approximately $17.0 million, or 55.7%, to $47.4 million, compared with $30.4
million in fiscal 1997. Operating expenses increased as a percentage of net
revenues to 39.7% in fiscal 1998, compared to 31.7% in fiscal 1997. The
increase in operating expenses as a percentage of net revenue for fiscal 1998
fully reflects the ATEC service mix and integration of its operations
including additional labor and administrative costs. The increase was due
primarily to structural adjustments in ATC's operating infrastructure to
accommodate the integration of ATEC's and BCM's operations. The structural
adjustments consisted primarily of the creation of a regional management
infrastructure to manage the larger, more geographically and technically
diverse business resulting from the ATEC acquisition. Such structural
investments required the Company to add higher-level operations management
employees, including regional management and financial personnel. The Company
has also chosen to increase its investment in its national sales programs,
which have experienced considerable success in generating new business.
 
  In addition, executive and employee compensation levels increased during the
latter part of fiscal 1997 due in part to the payment of certain additional
bonuses during the quarter ended November 30, 1997 in excess of amounts
previously accrued. Employee costs, consisting of wage costs and related
payroll taxes and health benefits and temporary employment personnel,
increased 66.2% to $20.6 million, or 17.2% of net revenues, in fiscal 1998
compared to $12.4 million, or 12.9% of net revenues, in fiscal 1997. These
increases in total cost were due to employees hired in connection with the
expansion of ATC's operations. Other increases in operating expenses resulted
from legal expenses, which totaled $1.4 million in fiscal 1998 compared to
$0.2 million in fiscal 1997, and administrative expenses resulting from the
growth in operations and increased employee levels. Additionally, in fiscal
1998, amortization of goodwill and intangibles increased to $2.4 million,
compared to $1.2 million in fiscal 1997 reflecting the additional goodwill
amortization resulting from the Acquisitions and the Tender Offer and Merger.
In the Successor Period, amortization of goodwill associated with the Tender
Offer and Merger and amortization of the recorded cost of the non-compete
agreement included in the Severance Agreements totaled approximately $230,000.
On a pro forma basis, such expense would have totaled approximately $3.5
million for fiscal 1998.
 
  Operating expenses for the Successor Period as a percentage of net revenues
increased to 57.3% compared with the Predecessor Period at 38.1%. Earnings
during this period were impacted by additional expenses of approximately $2.0
million which are not expected in future periods. These additional expenses
resulted from determinations by new management and directors of the Company to
make certain operational decisions which are expected to benefit future
operations. Such decisions related to the disposition of or use of more
aggressive approaches with respect to resolving pending claims and litigation,
the collection of disputed trade receivables and the disposition of marginally
profitable assets and operations. Specifically, such charges included: (i) a
liability for the resolution of previously disputed executive bonus claims of
$1.1 million, which were resolved when the executives settled for $336,000
plus restricted common stock of Holdings, the value of which will be charged
to operating expenses in future periods as such shares vest; (ii) a $400,000
addition to the allowances for trade receivables for receivables due from a
client disputing payment claiming the work performed under a contract exceeded
contract requirements; and (iii) a charge to goodwill amortization of $250,000
for the estimated impairment of goodwill resulting from the sale of one of the
Company's laboratory operations subsequent to year-end. Operating expenses as
a percentage of net revenue were also affected by the lower than average net
revenues during February 1998 since operating expenses remain relatively
constant each month and do not fluctuate proportionally with net revenues over
short-term periods. Net revenues also were impacted in part due to seasonality
factors.
 
  In the Successor Period, no compensation expense was recognized for certain
officers of the Company who resigned their positions pursuant to the Severance
Agreements. See "Certain Relationships and Related Transactions." Such
compensation expense totaled approximately $865,000 during the Predecessor
Period. In addition, the new executive officers of the Company will be
compensated under employment agreements executed in February 1998. Under these
agreements, the executive's base compensation will increase by a total of
$100,000 per year commencing March 1, 1998 and additional bonuses will be
awarded to the executive for achieving specified financial income targets.
Based on the fiscal 1998 performance, no bonuses would have been earned. See
"Management--Employment Agreements."      

                                       26
<PAGE>
 
      
  Operating Income. For the reasons set forth above, operating income in
fiscal 1998 decreased by approximately $5.8 million, or 49.3%, to $5.9
million, compared to $11.7 million in fiscal 1997. Operating income decreased
as a percentage of net revenues to 5.0% in fiscal 1998, compared to 12.2% in
fiscal 1997. 
  
  Non-operating Expense. Non-operating expense in fiscal 1998 increased by
approximately $2.6 million to $3.9 million compared to $1.3 million in fiscal
1997. The increase in non-operating expense is primarily attributable to
increased interest expense due to increased notes payable and bank debt
outstanding since May 1996 when the ATEC and 3D acquisitions were consummated,
the senior secured notes (the "8.18% Senior Secured Notes") were issued, the
Notes were issued and the Term Loan was drawn down in January 1998 and
February 1998, respectively. Interest expense in the Successor Period
resulting from the issuance of the Notes, the issuance of 8.18% Senior Secured
Notes and the incurrence of bank debt, including amortization of issuance
costs, totaled approximately $1.2 million. On a pro forma basis such costs
would have been approximately $16.1 million for fiscal 1998 reflecting the
outstanding debt and expected bank borrowings to complete the Tender Offer. 
  
  Income Tax Expense. Income tax expense in fiscal 1998 was $1.2 million,
compared to $4.1 million in fiscal 1997. During fiscal 1998 and 1997, the
Company's effective tax rates were 57.6% and 39.3%, respectively. In the
Successor Period, the Company determined it necessary to provide additional
income tax expense to cover probable losses associated with a pending state
tax audit and related penalties and interest estimated to total $0.3 
million. 
 
  Net Income. As a result of the foregoing, net income in fiscal 1998
decreased by approximately $5.5 million, or 86.5%, to $0.8 million, compared
with $6.3 million in fiscal 1997. Net income decreased as a percentage of net
revenues to 0.7% in fiscal 1998, compared to 6.6% in fiscal 1997.
 
FISCAL 1997 COMPARED WITH FISCAL 1996
  
  Revenues. Revenues in fiscal 1997 increased by approximately $68.9 million,
or 153.2%, to $113.9 million compared with $45.0 million in fiscal 1996. This
increase was primarily attributable to $57.7 million and $7.2 million, of
revenues, associated with the acquisitions of ATEC and 3D, respectively in May
1996 and reflects a full year's revenue contribution from the acquisition of
the Hill Businesses ($3.4 million) and AGI ($2.6 million) which were completed
in November 1995 and February 1996, respectively. Revenues attributable to the
acquisitions of certain assets of the ATEC, 3D, Hill Businesses and AGI
totaled $70.9 million, or 62.3% of revenues, for fiscal 1997. 
  
  Revenues in fiscal 1997, from ATC's branch offices having comparable
operations in fiscal 1996, increased 3.6% to $42.9 million, compared with
$41.4 million in fiscal 1996.
 
  Reimbursable Costs. For fiscal 1997, reimbursable costs increased by
approximately $13.1 million, or 270.1%, to $18.0 million, compared with $4.9
million in fiscal 1996. Reimbursable costs as a percentage of revenues
increased to 15.8% in fiscal 1997 compared with 10.8% in fiscal 1996. ATEC's
environmental and traditional consulting services, consisting of drilling,
laboratory services, materials testing and subcontracting services, utilize
higher amounts of outside services and direct project expenses compared to
those consulting services being provided prior to the ATEC acquisition. Higher
amounts of outside services and direct project expenses result in a higher
percentage of reimbursable costs. For the year ended December 31, 1995, ATEC's
reimbursable costs were approximately 21.0% of revenues.
 
  Cost of Net Revenues. Cost of net revenues in fiscal 1997 increased by
approximately $34.1 million, or 173.3%, to $53.8 million, compared with $19.7
million in fiscal 1996. Cost of net revenues as a percentage of net revenues
increased to 56.0% in fiscal 1997 compared with 49.0% in fiscal 1996. The
increase was due to lower margins earned on certain of ATEC's geotechnical
engineering services. In addition, cost of net revenues increased because
approximately $0.3 million of final project costs incurred to complete a large
fixed-price contract could not be billed to a client. Cost of net revenues
were also negatively impacted because in certain price competitive regions
where the Company experienced lower net revenues, costs could not be reduced
proportionately.     

                                       27
<PAGE>
 
    
  Gross Profit. For the reasons set forth above gross profit in fiscal 1997
increased by approximately $21.7 million, or 106.1%, to $42.2 million,
compared with $20.4 million in fiscal 1996. Gross profit as a percentage of
net revenues decreased to 44.0% in fiscal 1997, compared with 51.0% in fiscal
1996.
 
  Operating Expenses. Operating expenses in fiscal 1997 increased by
approximately $15.8 million, or 107.7%, to $30.4 million, compared with $14.7
million in fiscal 1996. Operating expenses decreased as a percentage of net
revenues to 31.7% in fiscal 1997, compared with 36.5% in fiscal 1996. The
decrease in operating expenses as a percentage of net revenues is the result
of the additional net revenues from the ATEC and other acquisitions without
corresponding increases in general and administrative costs. Employee costs
increased 66.8% to $12.4 million, or 12.9% of net revenues in fiscal 1997,
compared with $7.4 million, or 18.5% of net revenues, in fiscal 1996. These
increases in total cost were due to employees hired in connection with the
expansion of ATC's operations. Other increases in operating expenses resulted
from higher facility costs and administrative expenses resulting from the
growth in operations and increased employee levels. Additionally, in fiscal
1997, amortization of goodwill and intangibles increased to $1.2 million,
compared with $0.4 million in fiscal 1996, reflecting the additional goodwill
amortization resulting from acquisitions.
 
  Operating Income. For the reasons set forth above, operating income in
fiscal 1997 increased by approximately $5.9 million, or 102.1%, to $11.7
million, compared with $5.8 million in fiscal 1996. Operating income decreased
as a percentage of net revenues to 12.2% in fiscal 1997, compared with 14.4%
in the fiscal 1996.
 
  Non-operating Expense. Non-operating expense in fiscal 1997, increased to
$1.3 million compared with $0.1 million in fiscal 1996. The increase in
nonoperating expense is primarily attributable to increased interest expense
on bank debt outstanding since May 1996, when the ATEC and 3D acquisitions
were completed, and to a lesser extent from lower interest income.
 
  Income Tax Expense. Income tax expense in fiscal 1997 was $4.1 million,
compared with $1.8 million in fiscal 1996. The income tax expense for fiscal
1996 reflects a one-time benefit of $0.4 million resulting from the merger of
Aurora into ATC (the "Aurora Merger") which allowed ATC to utilize Aurora's net
operating loss carryforward as offsets to future taxable income. During fiscal
1997 and 1996, after adjusting for the one-time tax benefit, the Company's
effective tax rates were 39.3% and 38.0%, respectively.
 
  Net Income. As a result of the foregoing, net income for fiscal 1997,
increased by approximately $2.4 million, or 63.2%, to $6.3 million compared
with $3.9 million in fiscal 1996. Excluding the impact of the one-time tax
benefit of $0.4 million, net income would have been $3.5 million.
 
INFORMATION SYSTEMS AND THE YEAR 2000
 
  The Company is in the process of addressing Year 2000 issues. The Company is
currently engaged in a comprehensive project to convert its accounting and
management information system to a system consisting of new hardware and
packaged software recently purchased from a large vendor who has represented
that these systems are Year 2000 compliant. The Company's information
technology segment, which provides information system support services to both
the Company and the Company's clients, is currently operating on systems that
are Year 2000 compliant. ATC's remaining operations are generally dependent
only on personal computers and off-the-shelf commercial word processing,
drafting, spreadsheet and engineering software. Year 2000 compliant versions
of these systems are currently available, and the Company will convert to
these compliant systems over the next year and a half as the Company upgrades
its operational personal computer systems in the ordinary course to the most
recently issued software releases.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  The Company's principal sources of liquidity are cash flow from operations
and available borrowings under the Revolving Credit Facility. The Revolving
Credit Facility provides the Company with an aggregate of up to      

                                       28
<PAGE>
 
     
$30.0 million of senior secured financing to be used for working capital and
general corporate purposes (including permitted acquisitions). As of May 28,
1998, the Company had approximately $24.3 million of availability under the
Revolving Credit Facility. It is expected that the Company's principal uses of
liquidity will be to provide working capital, finance capital expenditures,
fund costs associated with acquisitions and meet debt service requirements. As
a result of the consummation of the Transactions, the Company is highly
leveraged. Except to the extent set forth below, there will be no mandatory
payments of principal on the Notes scheduled prior to their maturity. Based
upon current operations, anticipated cost savings and future growth, the
Company believes that its cash flow from operations, together with available
borrowings under the Revolving Credit Facility will be adequate to meet its
anticipated requirements for working capital, capital expenditures and
scheduled principal and interest payments, although the Company believes that
its ability to repay the Notes and amounts outstanding under the New Credit
Facility at maturity will require additional financing. There can be no
assurance, however, that any such additional financing will be available at
such time to the Company, or that any such available financing will be on
terms favorable to the Company. Furthermore, there can be no assurance that the
Company's business will continue to generate cash flow at or above current
levels or that estimated cost savings or growth can be achieved.
 
  The Notes impose certain limitations on the ability of the Company and its
subsidiaries to, among other things, incur additional indebtedness, incur
liens, pay dividends or make certain other restricted payments, consummate
certain asset sales, enter into certain transactions with affiliates, issue
preferred stock, merge or consolidate with any other person or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of
the assets of the Company and its subsidiaries. In addition, the New Credit
Facility contains other and more restrictive covenants effectively prohibiting
the Company from prepaying the Notes. The New Credit Facility also requires
the Company to maintain specified financial ratios and satisfy certain
financial tests. The Company's ability to meet such financial ratios and tests
will be affected by events beyond its control; there can be no assurance that
the Company will be able to meet such tests. See "Description of the New
Credit Facility."
 
  The Company conducts part of its operations through its subsidiaries. As a
result, the Company relies, in part, upon payment from its subsidiaries for
the funds necessary to meet its obligations, including the payment of interest
on and principal of the Notes. The ability of the subsidiaries to make such
payments will be subject to, among other things, applicable state laws. Claims
of creditors of the Company's subsidiaries will generally have priority as to
the assets of such subsidiaries over the claims of the Company.
 
  The Company has historically financed its operations through internally
generated funds, public and private equity and debt financings and borrowings
under its credit facilities. As of February 28, 1998, working capital was
$29.4 million, compared with working capital of $27.7 million at February 28,
1997, an increase of $1.7 million. The increase in working capital was
primarily due to the net proceeds from the offering of the 8.18% Senior
Secured Notes in May 1997 after repayment of bank debt and fees, and the
purchase of certain assets of BCM including accounts receivable and unbilled
receivables. As a result of the Tender Offer and Merger and the Company's
acquisition of BCM and additional costs incurred in connection with the ATEC
acquisition, the Company has a negative tangible net worth, primarily as a
result of goodwill amounts recognized in connection with these transactions.
 
  During fiscal 1998, net cash flows used in operating activities were $3.7
million, primarily due to the increase in refundable income taxes and in
billed and unbilled receivables and decreases in accounts payable and other
liabilities, representing payments of property facility rentals, non-compete
consideration and assumed liabilities of ATEC and other acquisitions. Net cash
flows used in investing activities were $11.9 million, resulting from cash
used in connection with the acquisitions of BCM, EWI, Bing Yen and ATEC and
purchases of property and equipment. Net cash flows provided by financing
activities were $18.8 million, primarily representing the proceeds from the
Notes, the Term Loan, the Holdings Contribution and the proceeds from the 8.18%
Senior Secured Notes less payments for the purchase of the Company's Common
Stock pursuant to the Merger and repayment of outstanding debt.     

                                      29
<PAGE>
 
     
  During fiscal 1997 and fiscal 1996, net cash flows used in operating
activities were $6.7 million and $0.8 million, respectively, primarily due to
income generated from operations and increases in billed and unbilled
receivables, which were offset in fiscal 1997 by reductions of accounts
payable and other liabilities, including assumed liabilities associated with
acquisitions. Net cash flows used in investing activities were $13.1 million
and $4.6 million, respectively, in each of the periods, resulting from the
acquisitions of ATEC and 3D and purchases of property and equipment in fiscal
1997 and the acquisitions of the Hill Businesses, AGI, Con-Test and R.E.
Blattert and Associates ("R.E. Blattert"), additional contingent purchase
obligations in connection with the BSE and R.E. Blattert acquisitions and
purchases of property and equipment in fiscal 1996. Net cash flows provided by
financing activities were $8.4 million and $17.5 million, respectively,
representing the proceeds of a bridge credit facility, less payments made on
long-term debt and notes payable assumed from ATEC in fiscal 1997 and
representing the net offering proceeds of the Company's 1996 secondary offering
of Common Stock plus proceeds from a $2.6 million increase in debt primarily
under the Company's prior credit facilities, less payments made on long-term
debt and notes payable of $6.7 million in fiscal 1996.
 
SEASONALITY
 
  ATC typically experiences a slow down in business activities during the
winter months and an increase in business activities during the summer months.
This is due to seasonal fluctuations in construction and remediation
activities. As a result, operating results may vary from period to period. For
fiscal 1998 and 1997, comparable quarterly revenues as a percentage of
relevant annual revenues were 24.6%, 26.6%, 25.0% and 23.8% and 26.8%, 25.7%,
23.8% and 23.7%, respectively.      

                                       30
<PAGE>
 
Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.
-------   -----------------------------------------------------------

         The Company is not required to disclose such information until its
fiscal year ended February 28, 1999.

Item 8.  Financial Statements and Supplementary Data.
-------  --------------------------------------------
    
     The information required by Item 8 and an index thereto, appears on page 
F-1 of this Annual Report, which follows this page.      

Item 9.  Changes in and Disagreements With Accountants on Accounting and
-------  ---------------------------------------------------------------
         Financial Disclosure.
         ---------------------

         Not applicable.

                                      31
<PAGE>
 
ATC GROUP SERVICES INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED FEBRUARY 28, 1998

-------------------------------------------------------------------------------
                                                                           Page

INDEPENDENT AUDITORS' REPORT ...........................................    F-2

FINANCIAL STATEMENTS:
     Consolidated Balance Sheets
       February 28, 1997 and 1998.......................................    F-3
    
     Consolidated Statements of Operations
       For the Years Ended February 28(29), 1996 and 1997 and the Periods 
       Ended February 4, 1998 and February 28, 1998.....................    F-4
         
     Consolidated Statements of Stockholders' Equity
       For the Years Ended February 28(29), 1996 and 1997 and the Periods 
       Ended February 4, 1998 and February 28, 1998.....................    F-5
         
     Consolidated Statements of Cash Flows
       For the Years Ended February 28(29), 1996 and 1997 and the Periods 
       Ended February 4, 1998 and February 28, 1998.....................    F-6
         
     Notes to Consolidated Financial Statements for the Years Ended 
       February 28 (29), 1996 and 1997 and the Periods Ended 
       February 4, 1998 and February 28, 1998...........................    F-7
     
    All financial statement schedules are omitted because they are not
applicable, not required, or because the required information is included
elsewhere herein.

                                      F-1
<PAGE>
 
INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
ATC Group Services Inc. and Subsidiaries

     We have audited the accompanying consolidated balance sheets of ATC Group
Services Inc. and subsidiaries (the "Company") as of February 28, 1997 and 1998,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years ended February 29, 1996 and February 28, 1997, the 341
days ended February 4, 1998 ("Predecessor" period) and the 24 days ended
February 28, 1998 ("Successor" period). 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 generally accepted auditing
standards. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of February 28,
1997 and 1998 and the results of its operations and its cash flows for the years
ended February 29, 1996 and February 28, 1997, the 341 days ended February 4,
1998 ("Predecessor" period) and the 24 days ended February 28, 1998 ("Successor"
period), in conformity with generally accepted accounting principles.
    
     As discussed in Note B to the consolidated financial statements, all of the
issued and outstanding shares of common stock of the Company were purchased by
Acquisition Corp., a wholly-owned subsidiary of Acquisition Holdings, Inc., in
a business combination accounted for as a purchase on February 5, 1998. As a
result of the acquisition, the consolidated financial statements for the
Successor period are presented on a different basis of accounting than that of
the Predecessor period, and are therefore not directly comparable.      

/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP

Omaha, Nebraska
May 29, 1998

                                      F-2
<PAGE>
 
                    ATC GROUP SERVICES INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
                           FEBRUARY 28, 1997 AND 1998
 
<TABLE>
<CAPTION>
                                                      PREDECESSOR   SUCCESSOR
                                                          1997         1998
                                                      ------------ ------------
<S>                                                   <C>          <C>
ASSETS
CURRENT ASSETS:
 Cash and cash equivalents..........................  $  2,003,890 $  5,268,708
 Trade accounts receivable, less allowance for
  doubtful accounts ($1,455,716 in 1997 and
  $3,077,829 in 1998) (Note K)......................    34,406,026   39,934,302
 Costs in excess of billings on uncompleted
  contracts.........................................     5,191,569   10,196,397
 Prepaid expenses and other current assets..........     2,934,193    2,422,523
 Deferred income taxes (Note H).....................       790,400    2,041,200
 Refundable income taxes............................       118,340    4,232,505
                                                      ------------ ------------
  Total current assets..............................    45,444,418   64,095,635
PROPERTY AND EQUIPMENT, Net (Note C)................     3,784,633    5,793,928
GOODWILL, net of accumulated amortization
 ($1,478,876 in 1997 and $3,261,108 in 1998) (Note
 B).................................................    35,587,076  106,829,231
COVENANTS NOT TO COMPETE, net of accumulated
 amortization ($455,316 in 1997 and $774,589 in
 1998) (Note B).....................................       632,184    5,162,911
DEBT ISSUANCE COSTS, net of accumulated amortization
 ($107,570 in 1998).................................           --     5,808,246
OTHER ASSETS........................................       845,346    1,365,056
                                                      ------------ ------------
                                                      $ 86,293,657 $189,055,007
                                                      ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
 Short-term debt (Note D)...........................  $    300,000 $    300,000
 Current maturities of long-term debt (Note D)......     1,986,730    1,420,816
 Accounts payable...................................     7,440,024    7,738,433
 Accrued compensation...............................     3,789,233    5,096,880
 Accrued payment obligations--ATEC acquisition (Note
  B)................................................     1,721,594      589,026
 Tender Offer liability (Note B)....................           --    14,278,838
 Other accrued expenses.............................     2,505,143    5,231,164
                                                      ------------ ------------
  Total current liabilities.........................    17,742,724   34,655,157
LONG-TERM DEBT, less current maturities (Note D)....    22,123,344  120,419,684
OTHER LIABILITIES (Note E)..........................       270,386    2,737,185
DEFERRED INCOME TAXES (Note H)......................       717,900    4,606,800
                                                      ------------ ------------
  Total liabilities.................................    40,854,354  162,418,826
                                                      ------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes B and E)
STOCKHOLDERS' EQUITY (Notes B, D, F, and G):
 Common stock, par value $.01 per share; authorized
  20,000,000 shares in 1997; par value $.01 per
  share; authorized 10,000 shares in 1998; issued
  and outstanding 7,800,187 shares in 1997 and 1,000
  shares in 1998....................................        78,002           10
 Additional paid-in capital.........................    28,996,627   28,425,589
 Retained earnings (deficit)........................    16,364,674   (1,789,418)
                                                      ------------ ------------
  Total stockholders' equity........................    45,439,303   26,636,181
                                                      ------------ ------------
                                                      $ 86,293,657 $189,055,007
                                                      ============ ============
</TABLE>
 
See notes to consolidated financial statements.
 
                                      F-3
<PAGE>
 
                    ATC GROUP SERVICES INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
          FOR THE YEARS ENDED FEBRUARY 28 (29), 1996 AND 1997 AND THE
              PERIODS ENDED FEBRUARY 4, 1998 AND FEBRUARY 28, 1998
 
<TABLE>
<CAPTION>
                                         PREDECESSOR                       SUCCESSOR
                          ------------------------------------------- -------------------
                                                     MARCH 1, 1997 TO FEBRUARY 5, 1998 TO
                             1996          1997      FEBRUARY 4, 1998  FEBRUARY 28, 1998
                          -----------  ------------  ---------------- -------------------
<S>                       <C>          <C>           <C>              <C>
REVENUES................  $44,964,897  $113,855,364    $129,260,984       $12,175,693
 Reimbursable Costs.....    4,851,206    17,953,895      19,788,372         2,226,607
                          -----------  ------------    ------------       -----------
NET REVENUES............   40,113,691    95,901,469     109,472,612         9,949,086
COST OF NET REVENUES....   19,663,968    53,750,707      60,352,326         5,726,571
                          -----------  ------------    ------------       -----------
    Gross Profit........   20,449,723    42,150,762      49,120,286         4,222,515
                          -----------  ------------    ------------       -----------
OPERATING EXPENSES:
 Selling................    1,513,222     3,118,926       4,144,165           449,652
 General and
  administrative........   12,850,874    26,299,172      35,595,493         4,712,200
 Provision for bad
  debts.................      290,165     1,021,631       1,956,803           546,815
                          -----------  ------------    ------------       -----------
                           14,654,261    30,439,729      41,696,461         5,708,667
                          -----------  ------------    ------------       -----------
    Operating Income
     (loss).............    5,795,462    11,711,033       7,423,825        (1,486,152)
NON-OPERATING EXPENSE
 (INCOME):
 Interest expense.......      376,621     1,569,043       2,891,279         1,326,974
 Interest income........     (272,463)     (230,610)       (170,421)          (39,405)
 Other..................       20,306       (25,134)        (52,963)          (19,576)
                          -----------  ------------    ------------       -----------
                              124,464     1,313,299       2,667,895         1,267,993
                          -----------  ------------    ------------       -----------
    Income (loss) before
     income taxes.......    5,670,998    10,397,734       4,755,930        (2,754,145)
INCOME TAX EXPENSE (Note
 H).....................    1,805,000     4,090,000       2,117,927          (964,727)
                          -----------  ------------    ------------       -----------
NET INCOME (LOSS).......  $ 3,865,998  $  6,307,734    $  2,638,003       $(1,789,418)
                          ===========  ============    ============       ===========
</TABLE>
 
See notes to consolidated financial statements.
 
                                      F-4
<PAGE>
 
                    ATC GROUP SERVICES INC. AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
          FOR THE YEARS ENDED FEBRUARY 28 (29), 1996 AND 1997 AND THE
              PERIODS ENDED FEBRUARY 4, 1998 AND FEBRUARY 28, 1998
<TABLE>
<CAPTION>
                             COMMON STOCK
                          -------------------
                                                                NOTES
                                                ADDITIONAL   RECEIVABLE-
                                                 PAID-IN       COMMON      RETAINED
                            SHARES    AMOUNT     CAPITAL        STOCK      EARNINGS       TOTAL
                          ----------  -------  ------------  ----------- ------------  ------------
<S>                       <C>         <C>      <C>           <C>         <C>           <C>
BALANCE, February 28,
 1995...................   5,738,018   57,380     7,484,453    (15,000)     6,286,361    13,813,194
Issuance of common stock
 in public offering at
 $12.00
 per share less
 expenses...............   1,970,000   19,700    21,534,761        --             --     21,554,461
Sale of common stock at
 $1.83 to $10.50 per
 share,
 upon exercise of stock
 options and warrants...      39,613      396       100,223        --             --        100,619
Net issuance of common
 stock and adjustments
 in connection with the
 merger of Aurora
 Environmental Inc. into
 ATC (Note B)...........      83,356      834        60,283    (30,000)           --         31,117
Common stock recovered
 in connection with the
 Con-Test, Inc.
 acquisition (Note B)...     (33,130)    (331)     (139,682)       --             --       (140,013)
Other capital
 transactions...........      (1,280)     (13)       (9,849)       --         (23,100)      (32,962)
Net income of
 predecessor............         --       --            --         --       3,865,998     3,865,998
                          ----------  -------  ------------   --------   ------------  ------------
BALANCE, February 29,
 1996...................   7,796,577   77,966    29,030,189    (45,000)    10,129,259    39,192,414
Sale of common stock at
 $1.85 to $10.00 per
 share,
 upon exercise of stock
 options and warrants...      15,930      159        74,998        --             --         75,157
Common stock received as
 consideration for sale
 of assets..............     (12,320)    (123)      (51,990)       --         (72,319)     (124,432)
Other capital
 transactions...........         --       --        (56,570)    45,000            --        (11,570)
Net income of
 predecessor............         --       --            --         --       6,307,734     6,307,734
                          ----------  -------  ------------   --------   ------------  ------------
BALANCE, February 28,
 1997...................   7,800,187   78,002    28,996,627        --      16,364,674    45,439,303
Sale of common stock at
 $1.88 to $10.00 per
 share,
 upon exercise of stock
 options and warrants...     668,802    6,688     2,830,294        --             --      2,836,982
Issuance of common stock
 in connection with the
 acquisition of Environ-
 mental Warranty Inc.
 (Note B)...............      33,000      330       364,733        --             --        365,063
Other capital transac-
 tions..................         --       --        (61,484)       --             --        (61,484)
Net income of predeces-
 sor....................         --       --            --         --       2,638,003     2,638,003
                          ----------  -------  ------------   --------   ------------  ------------
BALANCE, February 4,
 1998...................   8,501,989   85,020    32,130,170        --      19,002,677    51,217,867
Purchase of common stock
 and adjustments in
 connection with the
 Tender Offer and Merger
 (Note B)...............  (8,501,989) (85,020)  (32,130,170)       --     (19,002,677)  (51,217,867)
Sale of common stock to
 Parent.................       1,000       10    30,714,639        --             --     30,714,649
Predecessor basis
 adjustment.............         --       --     (2,289,050)       --             --     (2,289,050)
Net loss of successor...         --       --            --         --      (1,789,418)   (1,789,418)
                          ----------  -------  ------------   --------   ------------  ------------
BALANCE, February 28,
 1998...................       1,000  $    10  $ 28,425,589   $    --    $ (1,789,418) $ 26,636,181
                          ==========  =======  ============   ========   ============  ============
</TABLE>
 
See notes to consolidated financial statements.
 
 
                                      F-5

<PAGE>
 
                    ATC GROUP SERVICES INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
          FOR THE YEARS ENDED FEBRUARY 28, (29), 1996 AND 1997 AND THE
              PERIODS ENDED FEBRUARY 4, 1998 AND FEBRUARY 28, 1998
 
<TABLE>    
<CAPTION>
                                       PREDECESSOR                       SUCCESSOR
                         ------------------------------------------ -------------------
                                                   MARCH 1, 1997 TO FEBRUARY 5, 1998 TO
                            1996         1997      FEBRUARY 4, 1998  FEBRUARY 28, 1998
                         -----------  -----------  ---------------- -------------------
<S>                      <C>          <C>          <C>              <C>
CASH FLOWS FROM
 OPERATING ACTIVITIES:
 Net income (loss).....  $ 3,865,998  $ 6,307,734    $  2,638,003      $ (1,789,418)
 Adjustments to
  reconcile net income
  (loss) to net cash
  from operating
  activities:
 Depreciation and
  leasehold
  amortization.........      776,917      882,803       1,168,481           141,693
 Amortization of
  goodwill and
  covenants............      437,254    1,216,008       1,911,473           441,931
 Provision for bad
  debts................      290,165    1,021,631       1,956,803           546,815
 Deferred income taxes.     (191,700)     171,300       2,912,020           414,071
 Other.................     (132,700)    (143,981)        101,259          (297,869)
 Changes in operating
  assets and
  liabilities, net of
  amounts acquired in
  acquisitions:
  Receivables..........   (4,168,658)  (3,861,601)     (2,266,127)         (420,476)
  Prepaid expenses and
   other assets........     (434,890)    (143,679)     (1,574,328)        1,661,624
  Accounts payable and
   other liabilities...   (1,199,278) (12,210,762)     (7,223,793)          137,104
  Income taxes
   refundable/payable..      (85,750)      75,858      (2,221,936)       (1,892,197)
                         -----------  -----------    ------------      ------------
   Net cash flows from
    operating
    activities.........     (842,642)  (6,684,689)     (2,598,145)       (1,056,722)
                         -----------  -----------    ------------      ------------
CASH FLOWS FROM
 INVESTING ACTIVITIES:
 Purchase of BCM
  Engineers, Inc........          --           --      (5,425,539)               --
 Purchase of Bing Yen &
  Associates, Inc., net
   of cash acquired.....          --           --      (2,036,320)               --
 Purchase of
  Environmental
  Warranty, Inc., net
  cash acquired.........          --           --          19,350                --
 Purchase of American
  Testing and
  Engineering Corp.,
  net of cash acquired..          --   (8,965,952)     (2,420,766)               --
 Purchase of 3D
  Information Services,
  Inc., net of cash
  acquired..............          --   (2,926,681)             --                --
 Purchase of Hill
  Businesses............  (2,517,949)          --              --                --
 Purchase of Applied
  Geosciences, Inc.
  (Note B)..............    (589,060)     (22,324)             --                --
 Other acquisitions.....    (556,711)          --         (61,675)               --
 Purchase of property
  and equipment.........    (946,206)  (1,285,695)     (1,976,605)         (134,316)
 Other..................      22,987       56,328         127,234             6,018
                         -----------  -----------    ------------      ------------
   Net cash flows from
    investing
    activities.........   (4,586,939) (13,144,324)    (11,774,321)         (128,298)
                         -----------  -----------    ------------      ------------
CASH FLOWS FROM
 FINANCING ACTIVITIES:
 Proceeds from issuance
  of common stock, net
  of expenses..........   21,655,080       75,157       2,821,481        30,730,150
 Proceeds from issuance
  of long-term debt and
  notes payable........    2,585,125   22,270,297      41,950,000       114,084,004
 Principal payments on
  long-term debt.......   (6,663,581) (13,925,424)    (27,155,820)      (42,133,928)
 Purchase of Common
  Stock................           --           --              --      (101,412,099)
 Other capital
  transactions.........      (55,462)     (56,570)        (60,234)           (1,250)
                         -----------  -----------    ------------      ------------
   Net cash flows from
    financing
    activities.........   17,521,162    8,363,460      17,555,427         1,266,877
                         -----------  -----------    ------------      ------------
   Net change in cash
    and cash
    equivalents........   12,091,581  (11,465,553)      3,182,961            81,857
CASH AND CASH
 EQUIVALENTS, Beginning
 of year...............    1,377,862   13,469,443       2,003,890         5,186,851
                         -----------  -----------    ------------      ------------
CASH AND CASH
 EQUIVALENTS, End of
 year..................  $13,469,443  $ 2,003,890    $  5,186,851      $  5,268,708
                         ===========  ===========    ============      ============
</TABLE>    
 
See notes to consolidated financial statements.
 
                                      F-6
<PAGE>
 
                   ATC GROUP SERVICES INC. AND SUBSIDIARIES
 
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
         FOR THE YEARS ENDED FEBRUARY 28, (29), 1996 AND 1997 AND THE
             PERIODS ENDED FEBRUARY 4, 1998 AND FEBRUARY 28, 1998
 
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  ACQUISITION OF THE COMPANY BY ACQUISITION HOLDINGS, INC.--ATC Group
Services Inc. and subsidiaries ("ATC" or the "Company") became a wholly owned
subsidiary of Acquisition Holdings, Inc. ("Holdings") effective February 5,
1998 (the "Merger Date") upon the merger of the Company with Acquisition
Corp., a wholly owned subsidiary of Holdings, with ATC being the surviving
corporation (the "Merger"). Holdings, through Acquisition Corp., completed an
offer to purchase the outstanding common stock of ATC at $12.00 per share
using the proceeds from the issuance of 12% senior subordinated notes (the
"Notes"), bank borrowings (the "Bank Credit Facilities") and new equity
investments. The accompanying statement of operations for the Company from
February 5, 1998 through the fiscal year-end, February 28, 1998 (the
"Successor Period"), are attributable to operations of the Company under the
successor ownership of Holdings. The predecessor statement of operations,
representing the period March 1, 1997 through February 4, 1998 (the
"Predecessor Period"), relates to the previous ownership of the Company.
     
  PRINCIPALS OF CONSOLIDATION--The consolidated financial statements include
the accounts of ATC Group Services Inc. (formerly ATC Environmental Inc.) and
its wholly owned subsidiaries ATC New England Corp., ATC Blattert Inc., Hygeia
Laboratories Inc., ATC Management Inc., ATC InSys Technology Inc., ATC
Contraction Services Inc., ATC Environmental Inc., Bing Yen & Associates Inc.
and Environmental Warranty Inc. All significant inter-company accounts and
transactions have been eliminated.     
 
  NATURE OF BUSINESS--The Company is a national business services firm
providing technical and project management services relating to environmental
consulting (the "environmental consulting and engineering" segment) and
information technology consulting services (the "information technology
consulting" segment). The Company's environmental consulting and engineering
segment provides environmental and geotechnical engineering services,
architectural engineering services, construction materials testing and
analytical testing. The Company's information technology consulting segment
provides analysis and design services and system programming services to
assist clients in building new or modifying existing computer systems. This
business unit also provides support to clients in maintaining computer
systems.
 
  REVENUE RECOGNITION--The Company generally contracts for services to
customers on the basis of a fixed fee per procedure or services performed.
Revenue is recognized as services are performed in accordance with the terms
of the contract.
 
  COSTS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS--Costs in excess of
billings on uncompleted contracts represent unbilled services and reimbursable
expenses associated with ongoing projects.
 
  SIGNIFICANT CUSTOMER--In fiscal 1997 and 1998 there were no revenues from a
single customer exceeding 5%. In fiscal 1996, revenues from a single customer
comprised approximately 6.0% of total revenues.
 
  PROPERTY AND EQUIPMENT--Property and equipment are carried at cost.
Depreciation is computed on either the straight-line or declining balance
method over the estimated useful lives of the assets, as follows:
 
<TABLE>
      <S>                                                      <C>
      Office equipment........................................           5 years
      Transportation equipment................................         4-5 years
      Laboratory and field equipment..........................         5-7 years
      Leasehold improvements.................................. life of the lease
</TABLE>
 
  AMORTIZATION OF INTANGIBLE ASSETS--Goodwill, which represents the excess of
cost over the fair market value of net assets acquired in the Company's
acquisitions, is being amortized on a straight-line basis over a 30 year
period. The carrying value of goodwill is periodically evaluated on the basis
of management's estimates of
 
                                      F-7
<PAGE>
 
                   ATC GROUP SERVICES INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
         FOR THE YEARS ENDED FEBRUARY 28, (29), 1996 AND 1997 AND THE
             PERIODS ENDED FEBRUARY 4, 1998 AND FEBRUARY 28, 1998
 
future undiscounted operating income associated with the acquired businesses.
The covenants not to compete are being amortized over the terms of the
agreements, which are 1 to 7 year periods.
 
  INCOME TAXES--ATC and its wholly owned subsidiaries file a consolidated
income tax return. The liability method is used to measure deferred tax assets
and liabilities based on temporary differences between financial and taxable
income existing at each balance sheet date using enacted tax rates.
 
  CREDIT RISK AND FINANCIAL INSTRUMENTS--Financial instruments which
potentially subject the Company to concentrations of credit risk are primarily
temporary investments and accounts receivable. The Company places its
temporary investments in highly rated financial institutions and investment
grade short-term debt instruments. Concentrations of credit risk with respect
to accounts receivable are limited due to the large number of customers, the
proportion of receivables from governmental entities, generally short payment
terms and dispersion across geographic areas.
 
  FAIR VALUES OF FINANCIAL INSTRUMENTS--Fair values of financial instruments
have been estimated based on market prices of similar instruments and/or
valuation techniques using market assumptions. The Company assumes that the
carrying amount of short-term financial instruments approximates their fair
value. For these purposes, short-term is defined as any item that matures or
represents a cash transaction between willing parties within six months or
less of the measurement date. Unless otherwise noted, the carry value of
financial instruments approximates fair value.
 
  CASH AND CASH EQUIVALENTS--For purposes of reporting cash flows, the Company
considers all commercial paper, money market funds and certificates of deposit
purchased with a maturity of three months or less at acquisition to be cash
equivalents.
 
  USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
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. Actual results could differ from those estimates.
 
  RECLASSIFICATIONS--Certain reclassifications have been made to the prior
years' financial statements to conform to the current year's presentation.
 
B. MERGER AND BUSINESS ACQUISITIONS
 
  MERGER, NOTE OFFERING, AND TENDER OFFER TRANSACTIONS--Acquisition Holdings,
Inc. ("Holdings" or "Parent") and its wholly owned subsidiary, Acquisition
Corp. ("Issuer"), were organized to effect the acquisition of the Company
under the terms and conditions of a Merger Agreement dated November 26, 1997
(the "Merger Agreement").
 
 Pursuant to the Merger Agreement, the Issuer offered (the "Tender Offer") to
purchase all the issued and outstanding shares of the Company's Common Stock
at a price of $12.00 per share. The Tender Offer was conditioned upon Issuer
issuing $100,000,000 of Senior Subordinated Notes (the "Notes"; see Note D)
and obtaining sufficient bank financing necessary to consummate the Tender
Offer. Effective February 5, 1998, (the "Merger Date") upon satisfaction of
the necessary conditions, the Issuer was merged into ATC, with ATC being the
surviving corporation (the "Merger").
 
                                      F-8
<PAGE>
 
                   ATC GROUP SERVICES INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
         FOR THE YEARS ENDED FEBRUARY 28, (29), 1996 AND 1997 AND THE
             PERIODS ENDED FEBRUARY 4, 1998 AND FEBRUARY 28, 1998
 
 
  The Merger Agreement followed the execution of a stockholders agreement (the
"Stockholders Agreement") with George Rubin and Morry F. Rubin (collectively
the "Stockholders") requiring the Stockholders to vote 14.8% of their interest
in the Company in favor of the Merger. In connection with the Stockholders
Agreement, the Stockholders each agreed to and entered into Severance
Consulting and Non-Competition Agreements (the "Severance Agreements"). Under
these agreements, the Stockholders resigned from their officer positions,
agreed to provide certain consulting services as requested by the Company for
a period of three years following the consummation of the transactions, and
agreed to restrict the Stockholders from competing with the Company's business
and restricting certain other activities for a period ranging from three to
four years from the effective date of the Merger. In consideration of the
Severance Agreements, the Company paid the Stockholders $3.1 million on the
Merger Date and will pay $553,430 on each of the next six succeeding quarters
commencing April 1, 1998.
 
  In connection with the Merger and Tender Offer, the Company, through the
Issuer, entered into a new bank credit agreement which provided for a
$20,000,000 Term Loan and $30,000,000 Revolving Credit Facility (collectively
the "Bank Credit Facilities"). The proceeds of the Term Loan along with the
proceeds of the Notes and equity investments in Holdings were used to finance
the Tender Offer, repay certain indebtedness including related accrued
interest and prepayment penalties, pay a portion of the Severance Agreement
consideration, and to pay financing costs and expenses.
 
  The acquisition of the Company by Holdings has been accounted for as a
purchase. The excess of the purchase cost over the historical book value of
the net assets acquired was allocated to the Severance Agreements and the
remainder, to goodwill, is being amortized over 30 years.
 
  The accompanying consolidated balance sheet reflects the following sources
and uses of funds related to the Tender Offer, Merger, Stockholders Agreement
and the Bank Credit Facilities (collectively the "Transactions").
 
<TABLE>    
      <S>                                                          <C>
      Sources of Funds:
        Notes.....................................................  $100,000,000
        Bank Term Loan............................................    20,000,000
        Equity investment from Holdings...........................    30,714,639
        Tender Offer obligations to be funded from cash on hand
         and revolving credit borrowings. (The outstanding balance
         at February 28, 1998 was $14,278,838)....................    16,082,850
                                                                   -------------
                                                                   $ 166,797,489
                                                                   =============
      Uses of Funds:
        Purchase of common stock, warrants and stock options.....  $ 105,473,603
      Repay existing debt:
        Principal................................................     42,076,461
        Accrued interest.........................................        577,345
        Accrued ATEC obligations.................................        754,250
      Shareholder Agreement Consideration:
        Amount paid at Merger Date...............................      3,100,002
        Amounts payable in quarterly installments................      3,320,578
        Financing costs and expenses, including debt prepayment
         penalty.................................................     11,495,250
                                                                   -------------
                                                                   $ 166,797,489
                                                                   =============
</TABLE>     
 
                                     F-9
<PAGE>
 
                   ATC GROUP SERVICES INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
         FOR THE YEARS ENDED FEBRUARY 28, (29), 1996 AND 1997 AND THE
             PERIODS ENDED FEBRUARY 4, 1998 AND FEBRUARY 28, 1998
 
 
  The total consideration paid in connection with the Transactions and
allocation of the consideration to the historical book value of assets,
covenant not to compete and goodwill is as follows:
 
<TABLE>    
      <S>                                                          <C>
      Consideration:
        Purchase price of common stock, warrants, and stock
         options.................................................. $105,473,603
        Severance Agreements consideration........................    6,420,580
        Financing costs and expenses less amount related to debt
         issuance.................................................    4,828,614
                                                                   ------------
                                                                    116,722,797
      Allocation of Consideration:
        Net assets acquired.......................................   51,214,836
      Fair value adjustments:
        Non-compete agreement.....................................    4,700,000
        Other.....................................................    (301,537)
                                                                   ------------
      Excess purchase consideration...............................   61,109,498
      Predecessor basis adjustment................................  (2,289,050)
                                                                   ------------
        Goodwill.................................................. $ 58,820,448
                                                                   ============
</TABLE>     
 
  Holdings is not engaged in any activities other than those related to its
ownership interest in ATC. A majority interest in Holdings is owned by
affiliates of Weiss, Peck & Greer, L.L.C. ("Weiss Peck"), who was also a party
to the Merger Agreement. Other actual and beneficial owners of Holdings
include ATC management and employees who made equity contributions or elected
to receive options to purchase common stock of Holdings in replacement of
their "in-the-money' ATC stock options.
 
  Weiss Peck is a private investment firm, founded in 1970, which manages in
excess of $14 billion in public equities and fixed-income securities for
institutional and individual clients worldwide. In addition to its money
management activities, the firm has a twenty-seven year history as an investor
of equity capital in over 200 venture capital and private equity transactions.
Investments of its Private Equity Group are made through affiliated funds with
$230 million of committed capital.
 
  BUSINESS ACQUISITIONS--The following acquisitions have been accounted for as
purchases. The acquired company's assets and liabilities are included in the
accompanying consolidated balance sheets at fair value at the date of
purchase. The acquired company's operations subsequent to the acquisition are
included in the accompanying consolidated statements of operations. The
preliminary purchase price allocation for the fiscal 1998 acquisitions are
subject to change when additional information concerning asset and liability
valuations is obtained. Therefore, the final allocation may differ from the
preliminary allocation.
 
 Fiscal 1998
 
  BING YEN & ASSOCIATES, INC.--On November 26, 1997 ATC purchased all of the
outstanding stock of Bing Yen & Associates, Inc. ("Bing Yen"). Bing Yen
provides geotechnical and structural forensic services to a wide variety of
clients in the western United States and is located in Tustin, California.
 
                                     F-10
<PAGE>
 
                   ATC GROUP SERVICES INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
         FOR THE YEARS ENDED FEBRUARY 28, (29), 1996 AND 1997 AND THE
             PERIODS ENDED FEBRUARY 4, 1998 AND FEBRUARY 28, 1998
 
 
  The purchase price was comprised of the following consideration:
 
<TABLE>
      <S>                                                            <C>
      Amounts paid to seller:
        Cash........................................................ $2,200,000
        Note payable at 8% due January 2, 1998......................    550,000
        Notes payable at 8% due in three annual installments
         commencing January 1999....................................  1,150,000
                                                                     ----------
                                                                      3,900,000
      Liabilities assumed:
        Current liabilities.........................................    313,254
        Direct expenses of transaction..............................     50,000
                                                                     ----------
                                                                     $4,263,254
                                                                     ==========
</TABLE>
  In addition, a maximum aggregate principal amount of $1,500,000 in unsecured
contingent achievement promissory notes will be issued if certain minimum net
revenue levels are achieved, resulting in a maximum total consideration to
seller of $5,400,000.
 
  The notes payable of $1,150,000 are subject to setoffs if actual net assets
as of the closing date are below warranted amounts, for trade receivables not
collected within one year of the closing date and under certain other
specified conditions.
 
  The preliminary purchase price allocation is as follows:
 
<TABLE>
      <S>                                                            <C>
      Cash.......................................................... $  163,680
      Accounts receivable, net......................................  2,292,191
      Work in process...............................................      5,122
      Prepaid expense...............................................     10,746
      Property and equipment........................................    142,241
      Covenant not to compete.......................................     50,000
      Goodwill......................................................  1,595,324
      Other assets..................................................      3,950
                                                                     ----------
                                                                     $4,263,254
                                                                     ==========
</TABLE>
 
  ENVIRONMENTAL WARRANTY, INC.--On November 4, 1997, ATC purchased 90.9% of
the outstanding stock of Environmental Warranty, Inc. ("E.W.I."), a property
and casualty insurance brokerage firm specializing in environmental insurance
products.
 
  The purchase price was comprised of the following consideration:
 
<TABLE>
      <S>                                                            <C>
      Amounts paid to sellers:
        Cash........................................................ $  150,000
        Notes payable, net of imputed interest at 8.0%..............    582,424
        Payment commitments.........................................    275,000
        ATC Common Stock (33,000 shares)............................    365,062
                                                                     ----------
                                                                      1,372,486
      Liabilities assumed:
        Current liabilities.........................................    314,811
        Direct expenses of transaction..............................     25,000
                                                                     ----------
                                                                     $1,712,297
                                                                     ==========
</TABLE>
 
                                     F-11
<PAGE>
 
                   ATC GROUP SERVICES INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
         FOR THE YEARS ENDED FEBRUARY 28, (29), 1996 AND 1997 AND THE
             PERIODS ENDED FEBRUARY 4, 1998 AND FEBRUARY 28, 1998
 
 
  The notes payable are due in three annual installments commencing November
1998 and are subject to certain setoffs. The payment commitments are also due
in three installments commencing November 1999. ATC issued 33,000 shares of
restricted common stock valued at 11 1/16 per share.
    
  The preliminary purchase price allocation is as follows:     
 
<TABLE>
   <S>                                                               <C>
   Cash and equivalents............................................. $  169,350
   Receivables......................................................    158,391
   Prepaid and other current assets.................................      2,875
   Property and other...............................................     15,384
   Goodwill.........................................................  1,366,297
                                                                     ----------
                                                                     $1,712,297
                                                                     ==========
</TABLE>
 
  BCM ENGINEERS, INC.--On August 20, 1997 ATC purchased certain assets and
assumed certain liabilities of the environmental consulting and engineering
services division of the Smith Technology Corporation, which operated
primarily as BCM Engineers, Inc. ("BCM"). BCM is a leading municipal water and
wastewater environmental engineering firm and provides services in water,
environmental compliance and site investigations, remedial design and
engineering, asbestos, and air quality management. BCM serves major industrial
clients in the chemical, petrochemical, oil and gas manufacturing, water
supply, commercial development and utilities industries from multiple
locations in the east and Gulf Coast.
 
  The purchase price was comprised of the following consideration:
 
<TABLE>   
   <S>                                                              <C>
   Amounts paid to seller or to others on behalf of seller:
     Cash.......................................................... $ 5,425,539
     Notes payable.................................................   2,950,000
     Less note payable offset......................................    (200,000)
                                                                    -----------
                                                                      8,175,539
   Liabilities assumed:
     Current liabilities...........................................   2,833,665
     Non current liabilities.......................................   1,356,151
     Direct expenses related to acquisition........................     112,133
                                                                    -----------
                                                                    $12,477,488
                                                                    ===========
</TABLE>     
    
  Notes payable includes a $200,000 note which became due September 20, 1997
and was subject to offset for reductions in net assets and for unrecorded
liabilities arising through the closing date of the transaction. Based on the
closing balance sheet provided by the Seller, the Company will offset the
$200,000 in full. In addition, based on unrealized work in process warranted
by the seller and other claims, an additional $2,750,000 has been reflected as
an offset of short-term debt in the accompanying consolidated balance sheet.    
 
  The preliminary purchase price allocation is summarized as follows:
 
<TABLE>
   <S>                                                              <C>
   Accounts receivable, net of allowance........................... $ 4,710,960
   Work in process.................................................   3,684,939
   Other current assets............................................       7,357
   Other assets....................................................   1,327,270
   Covenants not to compete........................................     100,000
   Goodwill........................................................   2,646,962
                                                                    -----------
                                                                    $12,477,488
                                                                    ===========
</TABLE>
 
                                     F-12
<PAGE>
 
                   ATC GROUP SERVICES INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
         FOR THE YEARS ENDED FEBRUARY 28, (29), 1996 AND 1997 AND THE
             PERIODS ENDED FEBRUARY 4, 1998 AND FEBRUARY 28, 1998
 
 
 Fiscal 1997
 
  AMERICAN TESTING AND ENGINEERING CORPORATION--On May 24, 1996 ATC purchased
certain assets and assumed certain liabilities of American Testing and
Engineering Corporation ("ATEC"), a national environmental consulting firm.
ATEC provides environmental engineering and consulting services through a
large network of branch and regional offices.
 
  Under the original purchase agreement, the Company was contingently liable
to ATEC for additional purchase consideration up to $10,750,000 if certain
conditions were met. The seller since met certain of these contingent
consideration requirements in the quarter ended May 31, 1997 and the Company
began to amortize the associated goodwill in this period. In addition, in
connection with the issuance of the Senior Secured Notes on May 29, 1997, the
Company and the seller executed an amendment to the original purchase
agreement and agreed to remove or modify the remaining contingent
consideration requirements. As a result of the foregoing, the Company paid
$2,420,766 on May 30, 1997 and is obligated to make monthly payments through
February 1999. Additionally, the Company has the option to purchase certain
properties from the seller for $1,700,000 in fiscal 2002.
 
  The purchase price as amended was comprised of the following consideration:
 
  Amounts paid to seller and a majority owner:
<TABLE>
   <S>                                                              <C>
     Cash.......................................................... $ 9,000,000
     Payment obligations, for property and facility rentals and
      non-compete consideration....................................   6,001,000
     Contingent/additional consideration under amended purchase
      agreement....................................................   9,049,000
                                                                    -----------
                                                                     24,050,000
   Liabilities assumed:
     Current liabilities...........................................  15,731,076
     Bank debt.....................................................  10,750,000
     Direct expenses related to acquisition........................     139,438
                                                                    -----------
                                                                    $50,670,514
                                                                    ===========
</TABLE>
 
  The purchase price allocation reflecting the additional consideration is
summarized as follows:
 
<TABLE>
   <S>                                                             <C>
   Accounts receivable and work in process, net of allowances..... $ 18,957,768
   Other current assets...........................................    2,023,996
   Other assets...................................................    1,428,617
   Covenants not to compete.......................................      430,000
   Goodwill.......................................................   27,830,133
                                                                   ------------
                                                                   $ 50,670,514
                                                                   ============
</TABLE>
 
  As a result of sellers warranties of purchased trade receivables and work in
process that were not realized, the Company is entitled to set-offs of
$618,835 against the option price to acquire certain properties in fiscal
2002. If the Company does not exercise its option, the set-offs will be
refunded by the seller. Amounts are included in other non-current assets in
the accompanying consolidated balance sheet as of February 28, 1998.
 
  In connection with the purchase agreement, the Company has issued an
irrevocable letter of credit in the amount of $500,000 to secure the Company's
performance of its payment obligations. The letter of credit is renewable by
the seller until such time the Company has paid the purchase obligations in
full. No amounts have been drawn against the letter of credit.
 
                                     F-13
<PAGE>
 
                   ATC GROUP SERVICES INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
         FOR THE YEARS ENDED FEBRUARY 28, (29), 1996 AND 1997 AND THE
             PERIODS ENDED FEBRUARY 4, 1998 AND FEBRUARY 28, 1998
 
 
  3D INFORMATION SERVICES, INC.--On May 28, 1996, ATC purchased certain assets
and assumed certain liabilities of 3D Information Services, Inc. ("3D"), a New
Jersey based information services company providing technical information
consulting services in all phases of information system design, development,
maintenance and management in client server and mainframe based environments.
The purchase price was comprised of the following consideration:
 
  Amounts paid to seller:
 
<TABLE>
   <S>                                                               <C>
   Cash............................................................. $3,000,000
   Note payable.....................................................  2,500,000
                                                                     ----------
                                                                      5,500,000
   Assumed liabilities..............................................    247,905
   Direct expenses related to acquisition...........................     23,149
                                                                     ----------
                                                                     $5,771,054
                                                                     ==========
</TABLE>
 
  The initial purchase price allocation is summarized as follows:
 
<TABLE>
   <S>                                                               <C>
   Accounts receivable.............................................. $1,163,981
   Work in process..................................................    279,047
   Property and equipment...........................................     77,381
   Other current assets.............................................     77,560
   Covenant not to compete..........................................    100,000
   Goodwill.........................................................  4,073,085
                                                                     ----------
                                                                     $5,771,054
                                                                     ==========
</TABLE>
 
 Fiscal 1996
 
  HILL BUSINESSES--In November 1995, ATC purchased certain assets and assumed
certain liabilities of Kaselaan & D'Angelo Associates, Inc., Hill
Environmental, Inc. (formerly the environmental division of Gibbs & Hill,
Inc.) and Particle Diagnostics, Inc., wholly owned subsidiaries of Hill
International, Inc. (collectively the "Hill Businesses").
 
  The Hill Businesses provide environmental consulting and engineering
services, including asbestos management, industrial hygiene and indoor air
quality consulting, environmental auditing and permitting, environmental
regulatory compliance, water and wastewater engineering, solid waste landfill
management and analytical laboratory services. The purchase price was
comprised of the following consideration.
 
<TABLE>
   <S>                                                               <C>
   Amounts paid to seller:
   Cash............................................................. $2,517,949
   Letter of credit, net of imputed interest (Note E)...............    700,000
   Note payable at 8.75% interest (Note E)..........................    300,000
                                                                     ----------
                                                                      3,517,949
   Liabilities assumed..............................................    907,884
   Direct expenses related to acquisition...........................    885,538
                                                                     ----------
                                                                     $5,311,371
                                                                     ==========
</TABLE>
 
  Direct expenses related to acquisition includes costs incurred in order to
obtain proper title to the assets from Sellers bank as described further in
Note E.
 
                                     F-14
<PAGE>
 
                   ATC GROUP SERVICES INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
         FOR THE YEARS ENDED FEBRUARY 28, (29), 1996 AND 1997 AND THE
             PERIODS ENDED FEBRUARY 4, 1998 AND FEBRUARY 28, 1998
 
 
  The purchase price allocation is summarized as follows:
 
<TABLE>
   <S>                                                              <C>
   Costs in excess of billings on uncompleted contracts, net of
    unrealizable amounts............................................. $  620,000
   Property and equipment............................................    175,000
   Other assets......................................................     30,572
   Covenants not to compete..........................................     37,500
   Goodwill..........................................................  4,448,299
                                                                      ----------
                                                                      $5,311,371
                                                                      ==========
</TABLE>
 
  In addition, the Company issued to certain selling shareholders, 50,000
stock options to purchase restricted common stock at $13.875 per share as
consideration for non-compete agreements.
 
  The Company is contingently liable to reimburse up to $150,000 of certain
facility lease costs if incurred by Hill International, Inc. The payment of
the contingent liability, which the Seller claims is now due, certain other
liabilities and the $300,000 note is being withheld pending the outcome of the
litigation (Note E).
 
  APPLIED GEOSCIENCES, INC.--Effective February 29, 1996, ATC purchased
certain assets and assumed certain liabilities of Applied Geosciences, Inc.
("AGI"), a California based environmental consulting company having offices in
San Diego, Tustin and San Jose, California
    
  The purchase price was comprised of the following consideration. In addition,
AGI will receive contingent consideration of up to $190,000 subject to actual
collections of the purchased trade receivables in excess of a minimum amount
established under the agreements.    
<TABLE>    
   <S>                                                                 <C>
   Amounts paid to seller or to others on behalf of seller:
   Cash to seller.................................................... $147,546
   Contingent consideration earned to date...........................   22,324
   Cash to secured creditors of seller...............................  441,514
                                                                      --------
                                                                       611,384
   Liabilities assumed...............................................  225,538
   Direct expenses related to acquisition............................   31,246
                                                                      --------
                                                                      $868,168
                                                                      ========
</TABLE>     
 
  The purchase price allocation is summarized as follows:
 
<TABLE>
   <S>                                                                <C>
   Accounts receivable, net.......................................... $ 474,973
   Property and equipment............................................   115,060
   Covenants not to compete..........................................    30,000
   Goodwill..........................................................   248,135
                                                                      ---------
                                                                      $ 868,168
                                                                      =========
</TABLE>
 
 Other Acquisitions
     
  R.E. BLATTERT & ASSOCIATES--On January 13, 1995, ATC acquired substantially
all of the assets and liabilities of R.E. Blattert & Associates ("R.E.
Blattert"), an environmental consulting firm having geologic, environmental
engineering and water resource expertise with offices in Indiana and Iowa. The
purchase agreement provides for the seller to receive additional purchase
consideration based on achieving agreed upon earnings targets. At February 28,
1997, $200,000 of additional purchase consideration had been earned and recorded
as goodwill. In fiscal 1998, the Company and Seller agreed to certain
modifications to the purchase agreement, which limits the contingent
consideration to amounts earned through February 28, 1997.    
 
                                     F-15
<PAGE>
 
                   ATC GROUP SERVICES INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
         FOR THE YEARS ENDED FEBRUARY 28, (29), 1996 AND 1997 AND THE
             PERIODS ENDED FEBRUARY 4, 1998 AND FEBRUARY 28, 1998
 
 
  MICROBIAL ENVIRONMENTAL SERVICES, INC.--On January 4, 1995, ATC acquired
certain operations of Microbial Environmental Services, Inc. ("MES"). ATC
agreed to assume service performance obligations under certain contracts and a
lease obligation of MES and MES assigned its accounts receivable to ATC. ATC
additionally purchased certain field and laboratory equipment from MES and
paid a finder's fee to an unrelated party.
 
  CON-TEST, INC.--On October 1, 1994, ATC acquired substantially all of the
assets and liabilities of Con-Test, Inc. ("Con-Test"), a Massachusetts based
environmental consulting company having branch offices in the New England
states, New York and Pennsylvania. The seller guaranteed the net receivables
purchased resulting in the Company reacquiring 33,130 shares of its restricted
common stock in fiscal 1996. Effective March 31, 1996, the Company sold its
East Longmeadow, MA laboratory, originally part of the operations acquired
from Con-Test, back to the Seller in exchange for cash, 12,320 shares of the
Company's restricted common stock, and the assumption of certain liabilities
and facility lease obligations. The assets sold included property and
equipment, leasehold improvements, and intangible assets including contract
rights, accreditation rights, customer lists, and the use of the Con-Test
business name and logo.
 
  BSE MANAGEMENT, INC.--In fiscal 1994, ATC acquired certain assets and
liabilities of BSE Management, Inc. ("BSE"), a California based environmental
consulting holding company and those of its subsidiaries, Diagnostic
Environmental Inc., Hygeia Environmental Laboratories and The Environmental
Institute Inc. The acquisition was accomplished by purchasing certain BSE
assets at a foreclosure sale, acquiring certain BSE unsecured debt from its
holder, entering into consulting and employment contracts and non-compete
agreements with certain key BSE employees, and assuming specified liabilities
of BSE. The purchase agreement provided for additional purchase consideration
contingent upon future cash receipts of the ongoing business over five years.
These contingent payments totaled $1,355,165 and have been fully earned as of
February 29, 1996 and recorded as goodwill.
 
  AURORA ENVIRONMENTAL INC. MERGER--Effective June 29, 1995, ATC and Aurora
Environmental Inc. ("Aurora") merged, with ATC as the surviving corporation.
ATC exchanged .545 of a share of ATC common stock for each share of Aurora
stock. ATC common shares held by Aurora of 3,258,000 were canceled. The merger
has been accounted for in a manner similar to a pooling of interests. Under
this method of accounting, recorded assets and liabilities of Aurora were
combined with ATC and the results of operations of ATC and Aurora were
combined on the date the merger became effective. As a result of the merger,
ATC utilized Aurora's net operating loss carryforward, which was $970,000 as
of the date of the merger. In addition, ATC's liability to Aurora was canceled
at the merger date.
 
  PRO FORMA FINANCIAL INFORMATION (UNAUDITED)--The following unaudited pro
forma information sets forth the results of operations of ATC as if the Merger
and the Tender Offer and ATC's purchases of ATEC, 3D, BCM, EWI and Bing Yen
had occurred on March 1, 1996, the beginning of fiscal 1997.
 
<TABLE>
<CAPTION>
                                                            PRO FORMA
                                                     YEAR ENDED FEBRUARY 28,
                                                    --------------------------
                                                        1997          1998
                                                    ------------  ------------
   <S>                                              <C>           <C>
   Revenues........................................ $182,444,389  $160,628,928
   Operating Income................................   15,449,440     3,336,993
   Interest Expense................................   15,527,717    16,126,197
   Income (loss) before income taxes...............     (293,495)  (12,494,568)
   Net income (loss)............................... $   (136,515) $ (7,913,810)
</TABLE>
 
                                     F-16
<PAGE>
 
                   ATC GROUP SERVICES INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
         FOR THE YEARS ENDED FEBRUARY 28, (29), 1996 AND 1997 AND THE
             PERIODS ENDED FEBRUARY 4, 1998 AND FEBRUARY 28, 1998
 
 
C. PROPERTY AND EQUIPMENT
 
  Property and equipment as of February 28 consists of:
 
<TABLE>
<CAPTION>
                                                             1997       1998
                                                          ---------- ----------
   <S>                                                    <C>        <C>
     Office equipment.................................... $3,339,049 $5,345,109
     Laboratory and field equipment......................  3,335,721  3,967,605
     Transportation equipment............................    207,857    582,524
     Leasehold improvements..............................    849,700  1,111,823
                                                          ---------- ----------
                                                           7,732,327 11,007,061
     Less accumulated depreciation.......................  3,947,694  5,213,133
                                                          ---------- ----------
     Property and equipment, net......................... $3,784,633 $5,793,928
                                                          ========== ==========
</TABLE>
 
D. DEBT AND CREDIT AGREEMENTS
 
  SHORT TERM DEBT--The February 28, 1997 and 1998 balance consists of a 8.75%,
$300,000 note payable issued in connection with the Company's purchase of the
Hill Businesses. The Company has withheld payment on the note and interest
accrued through the original maturity date, April 30, 1996, pending the
outcome of the litigation with Hill as discussed in Note E.
 
  As consideration for the purchase of the assets of BCM Engineers, Inc. from
BCM's parent company (the "Seller"), the Company issued a prime based $200,000
note payable due September 19, 1997, a non-interest bearing $2,750,000 note
payable due March 30, 1998 and assumed a $22,000 remaining note obligation.
Under the terms of the purchase agreement, the Company is entitled to and
served notice to the Seller of a purchase price adjustment. As allowed under
the purchase agreement, the Company elected to recover a portion of the
purchase price adjustment as a set-off against the $200,000 note payable and
reconveying the assumed $22,000 note obligation to the seller. Accordingly,
these short-term debt obligations have been offset in full. The Company is
also entitled to and served notice to the Seller of allowable set-offs
relating to uncollected purchased accounts receivable and work in process,
losses incurred by the Company for unrecorded contract obligations and other
liabilities. The Company has recorded an offset for the full amount of the
$2,750,000 note payable. The Company and Seller are disputing several matters
under the purchase agreement as discussed in Note E, including the recorded
offsets to short-term debt. Accordingly, the final purchase price and amount
of short-term debt are subject to the final outcome of the pending disputes.
 
 
                                     F-17
<PAGE>
 
                   ATC GROUP SERVICES INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
         FOR THE YEARS ENDED FEBRUARY 28, (29), 1996 AND 1997 AND THE
             PERIODS ENDED FEBRUARY 4, 1998 AND FEBRUARY 28, 1998
 
 
  Long-Term Debt--Long term debt as of February 28 consists of:
 
<TABLE>
<CAPTION>
                                                          1997         1998
                                                       ----------- ------------
<S>                                                    <C>         <C>
Term loan under the Company's Bank Credit Facilities.
 Interest rate at February 28, 1998 was 7.875%.
 Interest is payable monthly. Quarterly principal
 payments of $750,000 commence February 1999 and
 increase through the loan maturity on January 29,
 2003................................................          --  $ 20,000,000
12% Senior Subordinated Notes due January 15, 2008.
 Interest payable semi- annually.....................          --   100,000,000
Notes payable issued in connection with the purchase
 of Bing Yen &Associates with a fixed interest rate
 of 8.0%. The principal is payable in three install-
 ments commencing January 1999.......................          --     1,150,000
Note payable issued in connection with the purchase
 of Environmental Warranty, Inc, net of imputed in-
 terest at 8.00%. The note is payable in three in-
 stallments of $226,000 commencing October 1998......          --       597,955
Borrowings from banks under the prior bridge credit
 facility............................................   20,850,000          --
Note payable issued in connection with the purchase
 of 3D Information Services, Inc. with a fixed inter-
 est rate of 8.25%. .................................    1,931,193          --
Insurance premium financing obligation payable in
 fixed monthly installments of principal and interest
 through April, 1998. Interest accrued at 6.4%.......      781,188       57,749
Note payable issued in connection with the purchase
 of Con-Test, payable in three annual installments
 through September 30, 1997. Interest accrued at 8.5%
 and is payable quarterly............................      178,333          --
Notes payable issued in connection with other asset
 acquisitions due in installments through May 1998.
 Interest rates range from the prime rate, (8.25% at
 February 28, 1997) to 9.0%..........................      146,272       25,000
Note payable assumed in connection with the purchase
 of ATEC. Interest accrued at the prime rate plus 2%
 (10.25% at February 28, 1997).......................      127,095          --
Notes payable issued in connection with the purchase
 of MES, with interest at prime (8.25% at February
 28, 1997) payable through February, 1998............       66,667          --
Other notes with interest rates ranging from 7.25% to
 12.4% due in monthly installments through October,
 2001................................................       29,326        9,796
                                                       ----------- ------------
                                                        24,110,074  121,840,500
Less current maturities..............................    1,986,730    1,420,816
                                                       ----------- ------------
Long-term debt, less current maturities..............  $22,123,344 $120,419,684
                                                       =========== ============
</TABLE>
 
  BANK CREDIT FACILITIES--On January 29, 1998, a credit facility with various
lending institutions was established providing the Company senior secured
credit facilities consisting of a $20 million Term Loan and a $30 million
Revolving Credit Facility (the "Bank Credit Facilities").
 
  The Revolving Credit Facility is available to the Company for working
capital, general corporate purposes, including certain permitted acquisitions.
Revolving loans mature on January 29, 2003. At the Company's option, revolving
loans will accrue interest at either (a) an adjusted rate based on the
Eurodollar rate plus a margin of 2.25% or (b) the base rate (effectively the
prime rate) plus a margin of 1.25%. The loan margins are subject to quarterly
decreases based upon improvements in the Company's leverage ratio. Interest is
payable monthly and the Company pays a revolving loan commitment fee of 1/2 of
1% on a quarterly basis. As of February 28, 1998,
 
                                     F-18
<PAGE>
 
                   ATC GROUP SERVICES INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
         FOR THE YEARS ENDED FEBRUARY 28, (29), 1996 AND 1997 AND THE
             PERIODS ENDED FEBRUARY 4, 1998 AND FEBRUARY 28, 1998
 
the Company had approximately $29.5 million of availability under the
Revolving Credit Facility due to outstanding letters of credit.
 
  The Term Loan amortizes quarterly commencing in February 1999 initially at
$750,000 per quarter, increasing to $1,000,000 per quarter in February 2000,
$1,500,000 per quarter in February 2001 and $1,750,000 per quarter in February
2002 with the final loan maturity on January 29, 2003. The initial interest
rate for the Term Loan was set at the base rate plus 1.25% (7.875% at February
28, 1998) and since year-end has been converted to a Eurodollar rate loan.
 
  The Bank Credit Facilities will require the Company to meet certain
financial tests, including minimum interest coverage and maximum leverage
ratios beginning as of and for the quarter ended May 31, 1998. The Bank Credit
Facilities will also contain covenants which, among other things, limit the
ability of the Company to incur additional indebtedness, pay dividends, enter
into transactions with affiliates, form subsidiaries, enter into sale-
leaseback transactions, make capital expenditures, loans, investments or lease
payments, merge, consolidate or acquire or dispose of assets, voluntary prepay
or amend other indebtedness, incur liens and encumbrances and other matters
customarily restricted in loan agreements of this type.
 
  The Bank Credit Facilities contain customary events of default, including
payment defaults, breach of representations and warranties, covenant defaults,
cross defaults, certain events of bankruptcy and insolvency, ERISA, judgement
defaults, failure of any guarantee or security agreement supporting the
Company's obligations under the Bank Credit Facilities to be in full force and
effect, and a change of control of the Company's Parent or the Company.
 
  The obligations of the Company under the Bank Credit Facilities are
unconditionally guaranteed by the Company's Parent and any direct or indirect
subsidiaries of the Company. In addition, the obligations of the Company under
the Bank Credit Facilities are secured by substantially all of the assets of
the Company.
 
  12% SENIOR SUBORDINATED NOTES DUE 2008--The 12% Senior Subordinated Notes
due 2008 were issued January 29, 1998 pursuant to an indenture agreement and
became obligations of the Company as of the Merger Date. Interest accrues at
12% per annum and is payable semiannually in arrears on each January 15 and
July 15, commencing July 15, 1998. The Notes are unsecured obligations of the
Company, ranking subordinate in right of payment to all senior indebtedness
(as defined) as of the Merger Date, and ranking pari passu in right of payment
with any future senior subordinated indebtedness and senior in right of
payment to all other subordinated obligations of the Company. The Notes will
be redeemable, in whole of in part, at the Company's option on or after
January 15, 2003 at redemption prices set forth in the Note indenture
agreement. Up to 35% of the aggregate principal amount of the Notes may be
redeemed on or prior to January 15, 2001 with the net cash proceeds of a
public offering at redemption prices and terms in accordance with the Note
indenture agreement. The Note indenture agreement provides noteholders the
option to have their notes purchased in the event of a change in control. In
addition, the Note indenture contains covenants restricting the incurrence of
additional indebtedness, payment of dividends, sales of assets, incurrence of
liens, mergers and acquisitions and conduct of the business to existing
businesses.
 
  8.18% SENIOR SECURED NOTES--On May 29, 1997, the Company issued $32,500,000
of 8.18% Senior Secured Notes to a group of financial institutions. The
proceeds were used in part to repay the Company's outstanding bridge credit
facility outstanding as of the February 28, 1997. Accordingly, at February 28,
1997, the Company classified its $20,850,000 outstanding bridge loan facility
as long-term debt. In connection with the issuance of the 8.18% Senior Secured
Notes, the Company had entered into a bank credit agreement providing a
$15,000,000 revolving line of credit. Amounts outstanding under the bank
revolver and the 8.18%
 
                                     F-19
<PAGE>
 
                   ATC GROUP SERVICES INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
         FOR THE YEARS ENDED FEBRUARY 28, (29), 1996 AND 1997 AND THE
             PERIODS ENDED FEBRUARY 4, 1998 AND FEBRUARY 28, 1998
 
Senior Secured Notes were repaid in full using proceeds of the 12% Senior
Subordinated Notes due 2008 and the Bank Credit Facilities.
 
  AGGREGATE MATURITIES--Aggregate maturities of long-term debt as of February
28, 1998 are as follows: fiscal 1999--$1,420,816; fiscal 2000--$3,827,091;
fiscal 2001--$5,092,593; fiscal 2002--$6,250,000, fiscal 2003--$5,250,000 and
thereafter $100,000,000.
 
E. COMMITMENTS AND CONTINGENCIES
    
  OPERATING LEASE COMMITMENTS--The Company leases office space, laboratory
facilities, temporary housing facilities and automobiles under operating lease
agreements, which expire at varying dates through September 2007. The Company
also rents equipment on a job-by-job basis. Minimum annual rental commitments
as of February 28, 1998 are as follows: fiscal 1999--$4,776,616; fiscal 2000--
$3,828,324; fiscal 2001--$2,221,522; fiscal 2002--$1,259,135; fiscal 2003--
$844,845 and thereafter $2,173,808 (total $15,104,250).     
 
  Rental expense associated with facility and equipment operating leases for
fiscal years 1996, 1997 and 1998 for the Predecessor and Successor Periods was
$1,389,865, $3,009,675, $3,683,058 and $426,160, respectively.
   
  OTHER LIABILITIES--Other liabilities consist primarily consist of long-term
lease commitments and other long-term contractual obligations assumed in
connection with business acquisitions. Contractual obligations expected to be
realized during the next fiscal year are included within other accrued
expenses.    
 
  LITIGATION--GENERAL LITIGATION--Irv Richter v. ATC Group Services, Inc., et
al, Civ. Action No. 16007-NC, Court of Chancery, New Castle County, Delaware.
Joseph I. Peters v. George Rubin, et al, Civ. Action No. 16026-NC, Court of
Chancery, New Castle County, Delaware. On or about November 5, 1997, a summons
and complaint were filed in the Court of Chancery of the State of Delaware in
and for New Castle County (the "Delaware Court") on behalf of Irvin Richter,
as plaintiff (the "Richter Complaint"). The Richter Complaint named the
Company and the members of the Company's board of directors as defendants. On
or about December 18, 1997, counsel for Mr. Richter filed with the Delaware
Court a Notice of Dismissal Without Prejudice of the Richter Complaint. On or
about November 12, 1997, another summons and complaint were filed in the
Delaware Court on behalf of Joseph I. Peters, as plaintiff (the "Peters
Action"). On or about December 18, 1997, an amended complaint was filed in the
Peters Action (the "Amended Complaint"). The Amended Complaint names the
Company, the members of the Company's board of directors, Weiss Peck and the
WPG Corporate Development Associates V, L.P., a Weiss Peck affiliate, as
defendants. The Amended Complaint challenges the Tender Offer and Merger. The
Amended Complaint seeks class action status on behalf of the stockholders of
the Company. The plaintiff in the Peters Action claims that the offer price
for the Company's Common Stock is inadequate and that the defendants have
breached their fiduciary duties to the plaintiff and other stockholders of the
Company. The plaintiff seeks, among other things, to enjoin the Transactions
or compensatory damages. On January 7, 1998, a motion to dismiss was filed by
Weiss Peck and WPG Corporate Development Associates V, L.P, a Weiss Peck
affiliate. On January 13, 1998, answers to the complaint were filed by the
Company and the remaining defendants. The parties to the Peters Action are
currently conducting discovery. The Company believes the allegations contained
in the Amended Complaint are without merit and intends to defend the Peters
Action vigorously; however, there can be no assurance of the outcome.
 
  First Fidelity Bank, N.A., et al v. Hill International, Inc. et al.,
Superior Court of New Jersey, Law Division, Burlington County, Docket No. Bur-
L-03400-95, filed December 19, 1995. Irvin E. Richter, et al v. ATC Group
Services Inc., et al. United States District Court, District of New Jersey,
Civ. No. 96 CV 5818 (JBS) filed
 
                                     F-20
<PAGE>
 
                   ATC GROUP SERVICES INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
         FOR THE YEARS ENDED FEBRUARY 28, (29), 1996 AND 1997 AND THE
             PERIODS ENDED FEBRUARY 4, 1998 AND FEBRUARY 28, 1998
 
December 6, 1996. On December 19, 1995, a second amended complaint was filed
in the above-entitled action which joined the Company as a defendant and
included a count against the Company seeking recovery of certain assets
purchased from Hill on the grounds that plaintiff banks held security
interests in the assets and that Hill was in default under the security
agreement creating such alleged security interests. The original plaintiffs in
this action were First Fidelity Bank, N.A. and United Jersey Bank, N.A. The
primary defendants were Hill and certain of its subsidiaries, and Irvin
Richter, David Richter, Janice Richter and William Doyle. Irvin Richter and
David Richter are officers and stockholders of Hill. In April 1996, the
Company filed a cross-claim against Hill, Irvin Richter and David Richter
alleging breach of contract and fraud, among other allegations, and seeking
unspecified damages, including punitive damages, and equitable relief. In
August, 1996, Hill and the Richters filed an answer denying ATC's cross-
claims, a cross-claim against ATC and a third party claim against certain
members of ATC's management and an employee. The cross-claim and third party
claim seek unspecified damages, including punitive damages, for defamation,
breach of the Richters' non-competition agreements and securities fraud. The
defamation claims are based (i) on plaintiff banks' allegation of fraud
against Hill and the Richters in their amended complaint, which Hill and the
Richters allege was based on defamatory statements made by ATC in settlement
discussions with the plaintiff banks and (ii) on a letter alleged to contain
defamatory statements which was sent to an account debtor of the Company by an
employee. In its answer, the Company both denies that it made defamatory
statements and asserts that the defamation allegations fail to state legally
valid claims. The breach of contract and securities claims are based on
allegations that ATC made representations concerning a registration rights
agreement to be provided in connection with options issued to the Richters as
consideration for their non-competition agreements. In its answer, the Company
denies that an agreement concerning registration rights was ever reached and
asserts that any such rights were forfeited or suspended by the Richters in
any case as a result of their conduct in connection with the asset purchase.
ATC also disputes that the Richters sustained damages on the grounds, among
others, that the options were non-transferable and because ATC's stock price
never exceeded the exercise price at any point where the options would have
been exercisable. These related cases are in the discovery phase. In January,
1997, the plaintiff banks dismissed their claim against ATC. On December 6,
1996, Hill and the Richters commenced an action against ATC and the same
officers and employees of ATC alleging essentially the same claims in federal
court as in the state action. This action is entitled Irwin E. Richter et al.
v. ATC Group Services, et al., Civ. No. 96-5818 (JBS), U.S. District Court for
the District of New Jersey, December 6, 1996. ATC has answered, raising the
same defenses and additional defenses related to the timeliness of the federal
securities claims. The case is currently in the discovery phase. It does not
create a risk of double recovery. In the Company's opinion, the outcome of
this matter will not have a significant effect on the Company's financial
position or future results of operations and cash flows, although no
assurances can be given in this regard.
 
  Commonwealth of Massachusetts v. TLT Construction Corp. et al., Civ. Action
No. 96-02281 F, Superior Court of Middlesex County, Massachusetts. This is an
action brought by the Commonwealth of Massachusetts in April 1996, against the
architects and general contractor on a renovation and construction project on
the Suffolk County Courthouse in Massachusetts. The basis of the lawsuit is
that one or more damp-proofing products specified by the architect defendants
and installed by the contractor defendant made employees in the courthouse ill
because of the off-gassing of harmful vapors. Dennison Environmental Services
Inc., ("Dennison") an ATC subsidiary, was joined on August 13, 1996, as a
third party defendant by TLT Construction Corporation, the general contractor,
because Dennison performed some air quality testing of the air in the
courthouse for the Commonwealth of Massachusetts during the construction
process. The contractor alleges that it acted in reliance on these tests in
continuing to install the material after the test report was given to it by
the state. ATC's position is that it did not commit any error or omission in
this case, that ATC made no representation to the contractors or material
supplier and had no privity with them and that Dennison's opinion
 
                                     F-21
<PAGE>
 
                   ATC GROUP SERVICES INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
         FOR THE YEARS ENDED FEBRUARY 28, (29), 1996 AND 1997 AND THE
             PERIODS ENDED FEBRUARY 4, 1998 AND FEBRUARY 28, 1998
 
concerning short term, during-construction health effects of the off-gassing
could not be justifiably relied upon with respect to the long-term performance
and health effects of the product or its installation. This case is in the
discovery phase. At this point, ATC considers the case to be without merit,
and ATC intends to vigorously defend the action. The Company currently has in
force a professional liability insurance policy in the amount of $10,000,000
with a deductible of $250,000. Notice of this claim has been made to ATC's
professional liability insurer. At the time that notice of this claim was
filed, the Company had in effect a professional liability insurance policy in
the amount of $10.0 million with a deductible of $250,000.
 
  Barrett-Moeller et al. v. ATC Associates Inc., Civ. Action No. 97-01037D,
Superior Court of Middlesex County, Massachusetts. This is an action arising
out of the same set of occurrences as gave rise to Commonwealth of
Massachusetts v. TLT Construction, Corp. described above. The action was
brought by a group of employees who worked in the Suffolk County Courthouse
during the period in which the off-gassing of harmful vapors was alleged to
have occurred. The suit seeks damages for personal injury in an unspecified
amount. Notice of this claim has been made to ATC's professional liability
insurer. At the time that notice of this claim was filed, the Company had in
effect a professional liability insurance policy in the amount of $10.0
million with a deductible of $250,000.
 
  Joan Spencer v. TLT Construction et al., Civ. Action No. 97-4161C, Superior
Court of Middlesex County, Massachusetts. This is an action arising out of the
same set of occurrences as gave rise to Commonwealth of Massachusetts v. TLT
Construction, Corp. described above. The action was brought by an employee who
worked in the Suffolk County Courthouse during the period in which the off-
gassing of harmful vapors was alleged to have occurred. The suit seeks damages
for personal injury in an unspecified amount. Notice of this claim has been
made to ATC's professional liability insurer. At the time that notice of this
claim was filed, the Company had in effect a professional liability insurance
policy in the amount of $10.0 million with a deductible of $250,000.
 
  Cambridge Housing Authority v. CON-TEST, Inc. and ATC Group Services Inc.,
Superior Court of Middlesex County, Massachusetts. This action was brought on
October 1, 1997 for damages in excess of $1,000,000 alleging that Con-Test,
Inc. breached its contract with Cambridge Housing Authority and was negligent
in performing asbestos survey work preparatory to a housing project re-
modernization project. ATC was joined as a party on the theory of continuous
business enterprise successor liability. ATC has filed an answer denying that
it was a successor to Con-Test under Massachusetts's law and asserting that it
should therefore have no liability for Con-Test's alleged acts or omissions.
The Company believes that the case is without merit because ATC does not meet
the definition of successor liability in the State of Massachusetts. ATC has
filed a notice of claim with Con-Test's insurance company which has assumed
the defense of the action.
 
  State of New York Department of Taxation and Finance. The Company has
received a notice of audit from the New York State Department of Taxation and
Finance ("NYDTF") for the three fiscal years 1993, 1994 and 1995. The agent
has issued a preliminary audit report, which is expected to be the basis of a
formal assessment estimated to be approximately $200,000. ATC's most recent
communications with the NYDTF indicate that it is probable that ATC will incur
a liability for back taxes in an approximate amount of $200,000 which the
Company has recorded as a liability as of February 28, 1998.
 
  Professional Service Industries, Inc. v. ATC Group Services Inc. and Thomas
Bowker, Superior Court, Norfolk County, Massachusetts, June 19, 1997, Civ. No.
97-01146. The complaint alleges that ATC interfered with a non-competition
agreement between Mr. Bowker, currently an ATC employee, and PSI. An
injunction has been issued by the court against ATC and Mr. Bowker prohibiting
them from competitive acts within certain
 
                                     F-22
<PAGE>
 
                   ATC GROUP SERVICES INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
         FOR THE YEARS ENDED FEBRUARY 28, (29), 1996 AND 1997 AND THE
             PERIODS ENDED FEBRUARY 4, 1998 AND FEBRUARY 28, 1998
 
geographic areas. The case is currently on hold pending mediation between the
parties in an attempt to settle the case. If settlement is not achieved
through the mediation process, ATC intends to continue to vigorously defend
the claim.
 
ADMINISTRATIVE VIOLATIONS
     
  Indiana Department of Environmental Management v. ATC Associates Inc. ATC
received a Notice of Violation ("NOV") and Proposed Agreed Order, EPA I.D. No.
IND 004939765, dated June 9, 1997, on June 12, 1997 and a revised NOV and
Proposed Agreed Order on April 22, 1998. The revised Proposed Agreed Order seeks
a penalty in the amount of $78,400 for alleged violations of the federal
hazardous waste regulations and Indiana hazardous waste regulations arising out
of the handling of hazardous wastes at ATC's Indianapolis laboratory. ATC and
the Indiana Department of Environmental Management ("IDEM") are currently
engaged in settlement discussions. As a result of this settlement process, the
Company believes that this penalty will be reduced although there can be no
assurances in this regard. ATC has entered into a settlement agreement with ATEC
pursuant to which ATEC will be responsible for payment of one-half of the
penalty.    
 
PROBABLE CLAIMS
 
  One Parkway Project. ATC has received notice of related potential claims by
R.M. Shoemaker Co., a Pennsylvania construction firm, and four of its workers
arising out of ATC's performance of asbestos abatement survey, design and
project monitoring services. The services were performed by ATC's Burlington,
New Jersey office on a project known as the One Parkway Project. The claims
allege that ATC: (i) failed to locate certain asbestos-containing materials in
a high rise building during its inspection of the facility; (ii) failed to
include these undiscovered materials in the design specifications for an
asbestos abatement project in connection with a renovation project on the
building; and (iii) failed to properly clearance inspect and test the areas on
which abatement had been performed prior to demobilization of the asbestos
abatement project. The claimants allege that ATC's acts or omissions resulted
in additional corrective actions including remobilization of certain areas,
delays of the renovation project and exposure of construction workers to
asbestos contamination. R.M. Shoemaker has alleged that it sustained damages
in the amount of $1,500,000 for additional abatement costs plus additional
damages for delay. The workers' exposure claims have not been quantified. No
suit has been filed.
 
  At this point, the Company believes that it was not responsible for the
alleged problems on this project. ATC's responsibilities on the project were
limited, and ATC believes that the alleged omissions which allegedly resulted
in the alleged losses were outside the scope of the Company's contractual
responsibilities. The Company has served notice of these claims upon its
professional liability insurer. This coverage is subject to a $250,000
deductible.
 
  Bob Moore Construction/Garden Ridge, Inc. ATC has received notice of a
potential claim arising out of ATC's performance of soil compaction testing
for Bob Moore Construction, Inc., the general contractor on a retaining wall
construction project for Garden Ridge, Inc., a garden supply chain, in
Norcross, Georgia. The retaining wall eventually failed. Independent
consultants performed investigations and prepared reports to determine the
cause of failure. Reports initially concluded that the failure was due to a
flaw in the design prepared by the wall manufacture and installation firm.
Both consultants concluded that the soil work was properly performed. Since
then, consultants have prepared follow-up reports, and the contractor has
requested ATC's involvement in mediation discussions regarding the
responsibility for repairs with respect to the various parties involved in the
project. Total costs to repair the project currently total $960,000. ATC is
evaluating the
 
                                     F-23
<PAGE>
 
                   ATC GROUP SERVICES INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
         FOR THE YEARS ENDED FEBRUARY 28, (29), 1996 AND 1997 AND THE
             PERIODS ENDED FEBRUARY 4, 1998 AND FEBRUARY 28, 1998
 
follow-up reports to determine ATC's potential liability or responsibility, if
any. ATC currently believes that it performed all services properly and that
it should have no liability. In any case, ATC believes its share of liability
should amount to only a small portion of the total costs. Notice of this claim
has been made under ATC's professional liability insurance policy. The
professional liability insurance is subject to a $250,000 deductible. Although
the Company believes this claim will not result in a material loss, no
assurance in this regard can be given.
     
  Argosy Casino, Lawrenceburg, Indiana. ATC has received notice of potential
claims arising out of geotechnical analyses for which American Testing and
Engineering Corporation originally provided the geotechnical analyses and on
which ATC subsequently performed the design of a Tensar/soil stabilized earth
slope. The stabilized earth/geogrid engineered slope failed at the interface
between the compacted subgrade and the first geogrid layer. A tentative
settlement reached among the parties to this claim would result in ATC's
payment of $266,000 in corrective costs, of which ATC expects contribution from
other parties in an amount of $40,000 to $80,000. The Company has recorded a
reserve of the minimum expected loss in the accompanying consolidated balance
sheet. Notice of this claim has been made under ATC's professional liability
insurance policy. The professional liability insurance is subject to a $250,000
deductible.    
 
  Smith Technology Acquisition Claims. ATC has filed two claims for recoupment
against Smith Technology Corporation ("Smith") arising out of the Agreement
for Sale and Purchase of Business Assets of August 19, 1998, between ATC and
Smith ("the Agreement"). The first claim asserted a recoupment against the
full amount of the $200,000 30-day note and a return of conditionally assumed
liabilities in the total amount of $135,000. These remedies were asserted to
partially recoup a deficiency in the Adjusted Equity Value as stated on
Smith's closing Engineering Division Balance Sheet from that warranted in the
purchase agreement.
 
  On March 27, 1998, ATC asserted a second set of recoupment claims arising
under the Agreement for various value, liability, and loss issues in the
amount of $5,127,859 against the $2,750,000 note payable to Smith which had
been assigned to Chase Manhattan Bank. On April 13, 1998, ATC served a
corrective amendment to this claim asserting an additional claim amount of
$21,475. This resulted in a total claim amount of $5,149,334. The amount of
claim outstanding after set-off of the full amount of the note is $2,499,334.
Of this amount, ATC believes that $850,000 of the amount claimed for third
party liability claims should be covered by insurance, resulting in non-
recoverable claim in the amount of $1,649,334 net of a $100,000 non-refundable
payment. A portion of this unrecoverable claim has been expensed in the
accompanying consolidated statement of operations, and the balance is expected
to be recorded as an additional cost associated with the acquisition as
amounts are incurred.
 
F. STOCK OPTIONS
 
  The Company established stock option plans in 1988, 1993 and 1995 providing
for the granting of 200,000, 1,000,000, and 81,750 shares, respectively, to
employees and certain other participants. Pursuant to the Tender Offer, all
issued shares became exercisable. Employees elected to either receive cash for
the difference between the offering price of $12.00 per share and the option
exercise price or to receive an equivalent option to purchase common stock of
Holdings having the same exercise price and vesting schedule as the original
grant. Non-employees with stock options were paid cash for the value of their
options.
 
  Key employees of the Company will be eligible to receive future stock option
grants for the purchase of common stock of Holdings. Such grants are expected
to be issued at fair market value at the date of grant. All grants will be
subject to approval by Holdings' Board of Directors.
 
 
                                     F-24
<PAGE>
 
                   ATC GROUP SERVICES INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
         FOR THE YEARS ENDED FEBRUARY 28, (29), 1996 AND 1997 AND THE
             PERIODS ENDED FEBRUARY 4, 1998 AND FEBRUARY 28, 1998
 
  The changes in the outstanding stock options under the 1988, 1993 and 1995
plans during fiscal years 1996, 1997 and 1998 are summarized as follows:
 
<TABLE>
<CAPTION>
                                                               WEIGHTED AVERAGE
                                                     OPTIONS   PRICE PER SHARE
                                                     --------  ----------------
<S>                                                  <C>       <C>
BALANCE, February 28, 1995..........................  291,420       $6.03
  Granted...........................................  334,500        9.44
  Exercised.........................................   (6,400)       5.56
  Expired...........................................  (34,800)      10.09
                                                     --------       -----
BALANCE, February 29, 1996..........................  584,720        8.51
  Granted...........................................  407,400        9.85
  Exercised.........................................  (14,030)       4.00
  Expired........................................... (257,750)      12.62
                                                     --------       -----
BALANCE, February 28, 1997..........................  720,340        7.89
  Granted...........................................   90,050       10.30
  Exercised......................................... (188,370)       4.20
  Expired...........................................  (27,000)      10.90
  Acceleration and elimination of options pursuant
   to the Tender Offer.............................. (595,020)       9.29
                                                     --------       -----
BALANCE, February 5, 1998, the Merger Date..........      -0-       $ -0-
                                                     ========       =====
Options exercisable at:
  February 29, 1996.................................  307,950
  February 28, 1997.................................  457,550
  February 28, 1998.................................   None
</TABLE>
     
  Options granted in fiscal 1996 include 50,000 non-plan options issued in
connection with the acquisition of the Hill Businesses (Note B).     
 
  The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS
No. 123"). SFAS No. 123 defines a fair market value based method of accounting
for stock based employee compensation plans and encourages all entities to
adopt that method of accounting. However, it also allows an entity to continue
to measure compensation cost for those plans using the intrinsic value based
method of accounting in accordance with Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees.
   
  The Company has decided to continue to apply the intrinsic value based method
of accounting for its stock-based employee compensation plans. If compensation
cost for the Company's employee stock-based compensation plans had been
determined based on the fair value at the grant dates for awards under the plans
consistent with the method of SFAS No. 123, Accounting for Stock Based
Compensation, the Company's net income would have been reduced to the pro forma
amounts indicated below:     
 
<TABLE>
<CAPTION>
                                                        PREDECESSOR  SUCCESSOR
                                     1996       1997       1998        1998
                                  ---------- ---------- ----------- -----------
<S>                               <C>        <C>        <C>         <C>
Net income (loss):
  As reported.................... $3,865,998 $6,307,734 $2,638,003  $(1,789,418)
  Pro forma...................... $3,791,472 $6,129,810 $2,259,100  $(1,797,007)
</TABLE>
 
                                     F-25
<PAGE>
 
                   ATC GROUP SERVICES INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
         FOR THE YEARS ENDED FEBRUARY 28, (29), 1996 AND 1997 AND THE
             PERIODS ENDED FEBRUARY 4, 1998 AND FEBRUARY 28, 1998
 
 
  The Pro forma loss for the Successor Period includes options granted to
Company employees by Holdings.
 
  For purpose of determining the disclosures required by SFAS No. 123, the
fair values of stock options on their grant dates were measured using the
Black-Scholes option pricing model. Key assumptions used to apply this pricing
model were as follows:
 
<TABLE>
<CAPTION>
                                                          PREDECESSOR SUCCESSOR
                                           1996    1997      1998       1998
                                          ------- ------- ----------- ---------
<S>                                       <C>     <C>     <C>         <C>
  Risk-free interest rate................    7.8%    5.4%      6.0%       6.0%
  Expected life of option grants......... 5 years 5 years   5 years    5 years
  Expected volatility of underlying
   stock.................................     48%     48%       46%         0%
</TABLE>
 
  The weighted average fair value of stock options granted for the year ended
February 28(29), 1996, 1997 and 1998 were $5.01, $4.36 and $4.97,
respectively.
 
G. COMMON STOCK WARRANTS
 
  As of the Merger Date, February 5, 1998, all of the then outstanding Class C
warrants holders became eligible to receive $2.00 per warrant representing the
Tender Offer price per a share of common stock of $12.00 less the Class C
Warrant exercise price of $10.00 per share.
 
H. INCOME TAXES
 
  Income tax expense (benefit) for the years ended February 28 (29), 1996 and
1997 and 1998 for the Predecessor and Successor Period consists of the
following:
 
<TABLE>
<CAPTION>    
                                           FEDERAL    STATE & LOCAL    TOTAL
                                         -----------  ------------- -----------
<S>                                      <C>          <C>           <C>
1996:
  Current............................... $ 1,700,400    $ 296,300   $ 1,996,700
  Deferred..............................    (161,700)     (30,000)     (191,700)
                                         -----------    ---------   -----------
    Total............................... $ 1,538,700    $ 266,300   $ 1,805,000
                                         ===========    =========   ===========
1997:
  Current............................... $ 3,207,100    $ 711,600   $ 3,918,700
  Deferred..............................     168,100        3,200       171,300
                                         -----------    ---------   -----------
    Total............................... $ 3,375,200    $ 714,800   $ 4,090,000
                                         ===========    =========   ===========
1998--Predecessor Period:
  Current............................... $  (912,940)   $ 118,847   $  (794,093)
  Deferred..............................   2,486,300      425,720     2,912,020
                                         -----------    ---------   -----------
    Total............................... $ 1,573,360    $ 544,567   $ 2,117,927
                                         ===========    =========   ===========
1998--Successor Period:
  Current............................... $(1,112,275)   $(266,523)  $(1,378,798)
  Deferred..............................    (233,644)     (40,276)     (273,920)
  Tax benefit allocated to goodwill.....     593,491       94,500       687,991
                                         -----------    ---------   -----------
    Total............................... $  (752,428)   $(212,299)  $  (964,727)
                                         ===========    =========   ===========
</TABLE>     
 
                                     F-26
<PAGE>
 
                   ATC GROUP SERVICES INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
         FOR THE YEARS ENDED FEBRUARY 28, (29), 1996 AND 1997 AND THE
             PERIODS ENDED FEBRUARY 4, 1998 AND FEBRUARY 28, 1998
 
 
  The predecessor Company made Federal and State income tax payments of
approximately $2,077,000, $4,062,000 and $1,941,000 in fiscal 1996, 1997 and
1998, respectively.
 
  A reconciliation of the statutory US Federal tax rate and effective tax rate
for the years ended February 28 (29), 1996 and 1997 and 1998 for the
Predecessor and Successor Period is as follows:
 
<TABLE>
<CAPTION>
                                                          PREDECESSOR SUCCESSOR
                                              1996  1997     1998       1998
                                              ----  ----  ----------- ---------
<S>                                           <C>   <C>   <C>         <C>
Statutory US Federal rate.................... 34.0% 34.0%    34.0%      (34.0%)
State income taxes, net of federal benefit...  4.3   4.5      7.6       (5.1)
Tax benefit of Aurora's net operating loss
 carry forward............................... (6.2)  --       --         --
Tax exempt interest income................... (2.4) (1.3)    (3.6)      (1.4)
Non-deductible expenses, primarily goodwill..  2.1   2.1      6.5        5.5
                                              ----  ----     ----       ----
                                              31.8% 39.3%    44.5%      (35.0%)
                                              ====  ====     ====       ====
</TABLE>
 
  During fiscal 1996, ATC utilized a one-time tax benefit of $350,000 to
offset taxable income relating to Aurora's net operating loss carryforward at
the time of the ATC and Aurora merger.
 
  The tax effects of temporary differences that give rise to a significant
portion of the deferred tax assets and liabilities as of February 28 consist
of the following:
 
<TABLE>    
<CAPTION>
                                                           1997       1998
                                                        ---------- -----------
<S>                                                     <C>        <C>
Deferred tax assets:
  Nondeductible liabilities............................ $  682,900 $ 1,159,100
  Nondeductible bad debt reserve.......................    453,800     988,900
                                                        ---------- -----------
                                                         1,136,700   2,148,000
                                                        ---------- -----------
Deferred tax liabilities:
  Property and equipment...............................     95,800      47,900
  Prepaid expenses.....................................    346,400     106,800
  Intangible assets....................................    622,000   4,558,900
                                                        ---------- -----------
                                                         1,064,200   4,713,600
                                                        ---------- -----------
  Net deferred tax (liability) asset .................. $   72,500 $(2,565,600)
                                                        ========== ===========
</TABLE>     
 
  The current portion of net deferred tax assets of $790,400 and $2,041,200 at
February 28, 1997 and 1998 is classified in the consolidated balance sheets in
current assets. The non-current portion is classified in non-current
liabilities.
 
I. EMPLOYEE BENEFIT PLANS
 
  The Company has an employee savings plan, which allows for voluntary
contributions into designated investment funds by eligible employees. The
Company may, at the discretion of its Board of Directors, make additional
contributions on behalf of the Plan's participants. No Company contributions
were made in fiscal years 1996, 1997, and 1998.
 
                                     F-27
<PAGE>
 
                    ATC GROUP SERVICES INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
          FOR THE YEARS ENDED FEBRUARY 28, (29), 1996 AND 1997 AND THE
              PERIODS ENDED FEBRUARY 4, 1998 AND FEBRUARY 28, 1998
 
 
J. INDUSTRY SEGMENT DATA
 
  The Company provides services through its environmental consulting and
engineering segment and its information technology consulting segment. Segment
data for fiscal 1996 is not presented as the Company only operated in the
Environmental and Engineering Segment.
 
<TABLE>    
<CAPTION>
                          ENVIRONMENTAL  INFORMATION ADJUSTMENTS &
                          & ENGINEERING  TECHNOLOGY  ELIMINATIONS     TOTAL
                          -------------  ----------- ------------- ------------
YEAR ENDED FEBRUARY 28,
1997:
-----------------------
<S>                       <C>            <C>         <C>           <C>
  Revenues............... $106,661,312   $7,228,755   $   (34,703) $113,855,364
  Operating income.......   11,323,277      387,756           --     11,711,033
  Depreciation and
   amortization..........    1,949,711      149,100           --      2,098,811
  Capital expenditures...    1,244,756       40,939           --      1,285,695
  Identifiable assets as
   of February 28, 1997.. $ 83,604,591   $6,080,060   $(3,390,994) $ 86,293,657
<CAPTION>
YEAR ENDED FEBRUARY 28,
1998:
-----------------------
PREDECESSOR PERIOD:
-------------------
<S>                       <C>            <C>         <C>           <C>
  Revenues............... $121,457,521   $8,106,871   $  (303,408) $129,260,984
  Operating income.......    6,986,775      437,050           --      7,423,825
  Depreciation and
   amortization..........    3,039,310       40,644           --      3,079,954
  Capital expenditures...    1,937,379       39,226           --      1,976,605
<CAPTION>
SUCCESSOR PERIOD:
-----------------
<S>                       <C>            <C>         <C>           <C>
  Revenues............... $ 11,327,031   $  848,662   $       --   $ 12,175,693
  Operating income
   (loss)................   (1,565,483)      79,331           --     (1,486,152)
  Depreciation and
   amortization..........      578,362        5,262           --        583,624
  Capital expenditures...      117,472       16,844           --        134,316
  Identifiable assets as
   of February 28, 1998.. $188,567,430   $5,768,741   $(5,281,164) $189,055,007
</TABLE>     
 
K. SUPPLEMENTAL INFORMATION
 
  Supplemental cash flow information--Supplemental cash flow information for
the years ended February 28 (29), 1996 and 1997 and 1998 for the Predecessor
and Successor Period is as follows:
 
<TABLE>
<CAPTION>
                                                       PREDECESSOR  SUCCESSOR
                                    1996       1997       1998        1998
                                  --------- ---------- ----------- -----------
<S>                               <C>       <C>        <C>         <C>
Cash paid for interest........... $ 374,466 $1,515,432 $2,092,973  $   617,692
Noncash investing and financing
 activities:
  Liabilities assumed in
   connection with business
   combinations..................   640,082 26,728,981  9,392,367          --
  Common stock issued in
   connection with business
   combinations..................       --         --     365,063          --
  Common stock recovered in
   connection with the Con-Test,
   Inc. acquisition..............   140,013        --         --           --
  Common stock issued in
   connection with the Aurora
   Merger........................    61,117        --         --           --
  Common stock received as
   consideration for sale of
   assets........................       --     124,432        --           --
  Notes payable issued in
   connection with business
   combinations.................. 1,000,000  2,589,086  5,054,643
  Notes payable issued in
   connection with the Tender
   Offer and Merger..............       --         --         --   120,000,000
</TABLE>
 
 
                                      F-28
<PAGE>
 
                   ATC GROUP SERVICES INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
         FOR THE YEARS ENDED FEBRUARY 28, (29), 1996 AND 1997 AND THE
             PERIODS ENDED FEBRUARY 4, 1998 AND FEBRUARY 28, 1998
 
  Supplemental analysis of valuation and qualifying accounts--Changes in the
allowance for doubtful accounts for the years ended February 28 (29), 1996 and
1997 and 1998 for the Predecessor and Successor Period is as follows:
 
<TABLE>
<CAPTION>
                                                        PREDECESSOR  SUCCESSOR
                                    1996       1997        1998         1998
                                  --------  ----------  -----------  ----------
<S>                               <C>       <C>         <C>          <C>
BALANCE, beginning of period..... $535,886  $  383,220  $1,455,716   $2,532,493
  Provision for bad debts........  290,165   1,021,631   1,956,803      546,815
  Amounts written-off, net of
   recoveries.................... (309,932)   (452,836) (1,402,940)      (1,479)
  Adjustment for allowance for
   doubtful accounts recorded on
   net acquired (rescinded)
   accounts receivable........... (132,899)    503,701     522,914          --
                                  --------  ----------  ----------   ----------
BALANCE, end of period........... $383,220  $1,455,716  $2,532,493   $3,077,829
                                  ========  ==========  ==========   ==========
</TABLE>
 
L. QUARTERLY FINANCIAL DATA (UNAUDITED)
 
  The Company's unaudited quarterly results of operations for fiscal 1997 and
1998 are as follows:
 
<TABLE>
<CAPTION>
                                               THREE MONTHS ENDED
                                -------------------------------------------------
                                  MAY 31,   AUGUST 31,  NOVEMBER 30, FEBRUARY 28,
FISCAL 1997                        1996(1)     1996         1996         1997
-----------                     ----------- ----------- ------------ ------------
<S>                             <C>         <C>         <C>          <C>
Revenues....................... $16,645,983 $33,922,028 $32,848,840  $30,438,513
Net revenues...................  14,024,405  28,844,545  27,193,068   25,839,451
Gross profit...................   7,282,012  12,529,814  11,287,563   11,051,373
Income before income taxes.....   2,772,303   3,485,493   2,433,278    1,706,660
Net income.....................   1,718,303   2,101,493   1,506,278      981,660
</TABLE>
 
<TABLE>
<CAPTION>
                                              THREE MONTHS ENDED
                         -------------------------------------------------------------
                                                                    FEBRUARY 28
                                                              ------------------------
                           MAY 31,   AUGUST 31,  NOVEMBER 30, PREDECESSOR   SUCCESSOR
FISCAL 1998                 1997        1997(2)     1997(2)       1998      1998 (3)(4)
-----------              ----------- ----------- ------------ -----------  -----------
<S>                      <C>         <C>         <C>          <C>          <C>
Revenues................ $31,374,666 $34,722,201 $38,166,478  $24,997,639  $12,175,693
Net revenues............  26,918,833  28,816,537  32,653,637   21,083,605    9,949,086
Gross profit............  12,257,212  13,065,475  15,125,776    8,671,823    4,222,515
Income (loss) before
 income taxes...........   1,946,316   2,063,039   2,020,710   (1,274,135)  (2,754,145)
Net income (loss).......   1,176,316   1,248,039   1,179,710     (966,062)  (1,789,418)
</TABLE>
--------
  The Company's operations are seasonal in nature, with a larger percentage of
income earned in the second quarter.

(1) Reflects the acquisition of American Testing and Engineering Corporation
    and 3D Information Services, Inc. effective May 24, 1996 and May 28, 1996,
    respectively.
    
(2) Reflects the acquisition of BCM Engineers Inc. effective August 19, 1997,
    the acquisition of Environmental Warranty, Inc. effective November 4, 1997
    and the acquisition of Bing Yen & Associates, Inc. effective November 26, 
    1997.     

(3) Reflects the issuance of the 12% Senior Subordinated Notes Due 2008 and
    Bank Term Loan issued January 29, 1998 and February 5, 1998, respectively.
    
(4) Reflects losses and expenses associated with the settlement of executive
    bonus claims, expected loss for pending state tax claims, reserves
    established for expected write-offs of certain trade receivables and work
    in process, and the impairment of goodwill associated with a laboratory
    operation sold during the quarter ended May 31, 1998.     
 
                                     F-29
<PAGE>
 
                                    PART III

Item 10.  Directors and Executive Officers of the Registrant.
-------   ---------------------------------------------------
    
         The following table sets forth the name, age and position of each of
the persons who were directors and executive officers of the Company and of key
employees of the Company as of February 28, 1998.      

   Name                      Age  Position
   ----------------------   ----- ---------------------------------------------

   Nicholas J. Malino.........47 Chief Executive Officer, President and Director
   Christopher P. Vincze......36 Chief Operating Officer and Director
   Wayne A. Crosby............44 Controller
   Wesley W. Lang, Jr.........40 Director
   Nora E. Kerppola...........33 Director
   Benjamin J. James..........41 Director
   Donald W. Beck.............39 Senior Vice President

   Key Employee:

   John J. Smith, Esq.........47 General Counsel and Secretary
    
         Each of the directors were appointed on February 5, 1998 and will serve
as directors until their successors are duly elected and appointed. Each of the
officers will serve in their respective capacities for such time and in such a
manner as determined by the Board of Directors from time to time.      
    
     Nicholas J. Malino. Mr. Malino became Chief Executive Officer, President
and director of the Company following consummation of the Merger. From May 1993
to the consummation of the Merger, Mr. Malino served as Senior Vice President,
Financial and General Operations of ATC and has been an employee of ATC since
October 1992. Mr. Malino has over fourteen years of experience in managing
professional service organizations. From February 1991 to September 1993, Mr.
Malino was the New York Regional Manager of Kemron Inc., a hazardous waste
consulting company headquartered in McLean, Virginia. From August 1989 to
January 1991, he was the Operations Manager for the New York City branch of
Professional Service Industries, Inc.

     Christopher P. Vincze. Mr. Vincze became Chief Operating Officer and
director of the Company following consummation of the Merger. From July 1993 to
the consummation of the Merger, Mr. Vincze served as Senior Vice President,
Financial and General Operations of ATC. Mr. Vincze has served as a regional
manager of ATC since July 1991 and Vice President of a subsidiary of ATC since
1992. Mr. Vincze joined Dennison Environmental, Inc. in 1984 as an industrial
hygienist and served as Vice President of Marketing and Operations from 1987 to
July 1991.    
    
     Wayne A. Crosby. Mr. Crosby has served as Controller of ATC since October,
1997, served as Chief Financial Officer of ATC between July 1995 and October
1997 and served as region controller of ATC from December 1993 to July 1995.
Prior to joining ATC, Mr. Crosby was the Chief Financial Officer of BSE
Management, Inc. from 1991 to 1993, and Chief Financial Officer of Compex
Systems, Inc. from 1986 through 1990. Mr. Crosby is a certified public
accountant and was employed by Deloitte Haskins & Sells for eight years. Mr.
Crosby will be terminating his employment with the Company effective September
30, 1998.     
   
     Wesley W. Lang, Jr. Mr. Lang became a director of ATC following
consummation of the Tender Offer. Mr. Lang has been a principal of Weiss Peck
since 1985. Prior to joining Weiss Peck, Mr. Lang was employed by Manufacturers
Hanover Trust Company, where he specialized in acquisition financing. Mr. Lang
serves as a director of Chyron Corporation.

     Nora E. Kerppola. Ms. Kerppola became a director of ATC following the
consummation of the Tender Offer. Ms. Kerppola is a principal of WPG Private
Equity Partners II, L.P., an affiliate of WPG Partners II. Prior to joining WPG
Private Equity Partners II, L.P. in 1994, Ms. Kerppola was employed as a private
equity investor at Investor International (U.S.), a subsidiary of Weden's
Wallenberg Group since 1990. Prior to 1990, Ms. Kerppola was an associate in the
Investment Banking Department of Credit Suisse First Boston Corporation.

     Benjamin J. James. Mr. James became a director of ATC following
consummation of the Merger. For the last five years, Mr. James has been employed
at PPM America, Inc. ("PPM"), agent and investment manager for JNL, as Managing
Director since 1997 and as Vice President since May 1991. Mr. James serves on
the advisory boards of certain private equity funds. Mr. James presently serves
as an observer for JNL at various companies during their board meetings.     

                                      32
<PAGE>
 
    
         Donald W. Beck. Mr. Beck has been Senior Vice President of ATC since
April 1990 and Vice President since January 1988. Mr. Beck is responsible for
managing the operations of certain ATC offices. Mr. Beck also served as a
director of ATC Laboratories, Inc., a predecessor company of ATC, from November
1985 until January 1988, President of ATC Laboratories, Inc. from May 1986 until
January 1988, and as Vice President of ATC Laboratories, Inc., from November
1985 until May 1986. Mr. Beck has been a full-time employee of ATC (and formerly
ATC Laboratories, Inc.) since May 1982.    

         John J. Smith, Esq. Mr. Smith has been General Counsel since August
1989 and served as a Vice President of ATC from September 1990 through December
1993. Following consummation of the Merger, Mr. Smith assumed the position of
Secretary of the Company. Prior to joining ATC, from 1986 to 1989, Mr. Smith was
the Secretary of the South Dakota Department of Water and Natural Resources, a
cabinet level position responsible for managing all of the State's environmental
and natural resource development programs.

Employment Agreements
    
     In connection with the transactions surrounding the Merger, the Company
entered into employment agreements with Nicholas J. Malino and Christopher P.
Vincze. See "Item 11 - Executive Compensation - Employment Agreements.     

Directors Compensation

         During both fiscal 1996 and fiscal 1997, ATC granted options to
purchase 7,500 shares to each of Julia S. Heckman and Richard S. Greenberg,
Esq., ATC's two outside directors. In fiscal 1997, ATC's Board approved the
grant of replacement options to both outside directors to extend the term of the
options and lower the exercise price. The replacement options were subsequently
exercised by each of Ms. Heckman and Mr. Greenberg. Other than $35,000 earned by
each of Ms. Heckman and Mr. Greenberg for their services as members of the
Special Committee of the Board of Directors appointed to review and consider the
Merger in fiscal 1998, no other compensation was paid to ATC's directors for
serving in the capacity of director. There are no current arrangements for
future compensation of directors.

                                       33
<PAGE>
 
Item 11.  Executive Compensation.
--------  -----------------------
    
         Summary Compensation Table. The following table summarizes the
principal components for the Company's Chief Executive Officer (CEO) and its
four most highly compensated executive officers, other than the CEO, who were
serving as executive officers at the end of fiscal 1998.      

<TABLE>    
<CAPTION>

                                                  SUMMARY COMPENSATION TABLE
----------------------------------------------------------------------------------- ----------------------------------- ---------
                                                                                          Long Term Compensation
                               Annual Compensation                                           Awards           Payouts
----------------------------------------------------------------------------------- ------------------------- --------- ---------
             (a)                   (b)          (c)           (d)          (e)          (f)          (g)        (h)       (i)

                                                                                                   Secur-                All
                                                                          Other                    ities                 Other
                                  Year                                   Annual      Restricted     Under-      LTIP      Com-
          Name and                Ended                                  Compen        Stock        lying     Payouts     pen-
          Principal             February       Salary        Bonus       sation       Award(s)     Options      ($)      sation
          Position               28 (29)        ($)           ($)          ($)          ($)          (#)                  ($)
------------------------------ ------------ ------------- ------------ ------------ ------------- ----------- --------- ---------
<S>                            <C>           <C>           <C>         <C>          <C>            <C>         <C>       <C>

Morry F. Rubin(1)                 1998        281,096         -0-       2,239,712       -0-          -0-        -0-       -0-
President and                     1997        268,750       259,943        -0-          -0-          -0-        -0-       -0-
Chief Executive Officer           1996        225,000       141,774        -0-          -0-          (3)        -0-       -0-
------------------------------ ------------ ------------- ------------ ------------ ------------- ----------- --------- ---------

George Rubin(2)                   1998        281,096         -0-        860,290        -0-          -0-        -0-       -0-
Chairman of the Board             1997        268,750       259,943        -0-          -0-          -0-        -0-       -0-
and Secretary                     1996        225,000       141,774        -0-          -0-          (4)        -0-       -0-
------------------------------ ------------ ------------- ------------ ------------ ------------- ----------- --------- ---------

Nicholas J. Malino,               1998        192,521       226,730        -0-          -0-          -0-        -0-       -0-
President                         1997        170,000       100,000        -0-          -0-         57,500      -0-       -0-
                                  1996        142,308         -0-          -0-          -0-         30,000      -0-       -0-

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

Christopher P. Vincze,            1998        192,521       200,000     6,125(5)        -0-          -0-        -0-       -0-
Chief Operating                   1997        170,000       100,000     6,000(5)        -0-         37,500      -0-       -0-
Officer                           1996        142,308         -0-       6,000(5)        -0-         30,000      -0-       -0-

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

John J. Goodwin                   1998        140,000       64,652         -0-          -0-          -0-        -0-       -0-
President and Director            1997        140,000       51,335         -0-          -0-          -0-        -0-       -0-
ATC InSys Technology Inc.         1996        140,000         -0-          -0-          -0-          -0-        -0-       -0-


------------------------------ ------------ ------------- ------------ ------------ ------------- ----------- --------- ---------
Donald W. Beck                    1998        119,835         -0-          -0-          -0-          -0-        -0-       -0-
Senior                            1997         89,473       29,600         -0-          -0-          -0-        -0-       -0-
Vice President                    1996         88,140       28,000         -0-          -0-          -0-        -0-       -0-

------------------------------ ------------ ------------- ------------ ------------ ------------- ----------- --------- ---------
Wayne A. Crosby                   1998         80,000       28,500         -0-          -0-          -0-        -0-       -0-
Controller                        1997         80,000       10,000         -0-          -0-          -0-        -0-       -0-
                                  1996         75,000       13,461         -0-          -0-          -0-        -0-       -0-
------------------------------ ------------ ------------- ------------ ------------ ------------- ----------- --------- ---------
</TABLE>     

                                       34
<PAGE>
 
------------
    
 (1)     Morry F. Rubin is no longer employed by the Company and resigned as
         President, Chief Executive Officer and director in connection with the
         consummation of the transactions surrounding the Merger. Mr. Morry F.
         Rubin has agreed to provide consulting services to the Company on the
         terms and conditions set forth in his Severance Agreement (as defined
         herein). "Other Annual Compensation" represents severance paid in
         connection with the Severance Agreements.      
    
 (2)     George Rubin is no longer employed by the Company and resigned as
         Chairman of the Board and Secretary in connection with the consummation
         of the transactions surrounding the Merger. Mr. George Rubin has agreed
         to provide consulting services to the Company on the terms and
         conditions set forth in his Severance Agreement (as defined herein).
         "Other Annual Compensation" represents severance paid in connection
         with the Severance Agreements.      

(3)      Does not include options to purchase 81,750 shares of ATC Common Stock
         issued in replacement of previously held options of Aurora
         Environmental Inc. ("Aurora"), ATC's former parent company which was
         merged into ATC in June, 1995, with ATC the surviving corporation.
    
(4)      Does not include 490,500 warrants to purchase ATC Common Stock issued
         in replacement of previously held warrants of Aurora Environmental Inc.
         ("Aurora").      
    
(5)      Represents compensation relating to a car allowance.      

                                       35
<PAGE>
 
    
         Options Grants Table. The following table provides information with
respect to individual grants of stock options by ATC during fiscal 1998 to each
of the executive officers named in the preceding summary compensation table. 
     

<TABLE>
<CAPTION>

                        OPTION GRANTS IN LAST FISCAL YEAR
----------------------------------------------------------------------------------------------- ---------------------------------
                                                                                                              Potential
                                                                                                          Realized Value at
                                                                                                           Assumed Annual
                                                                                                         Rates of Stock Price
                                                                                                             Appreciation
                                                                                                         for Option Term
                                                                                                         Individual Grants
                                                                                                               (2)
--------------------------- --------------- ----------------- -------------- ------------------ ----------------- ---------------
           (a)                   (b)              (c)              (d)              (e)               (f)              (g)
<S>                          <C>             <C>              <C>             <C>                <C>               <C>
                                                  % of
                              Number of          Total
                              Securities        Options
                              Underlying       Granted to
                               Options         Employees        Exercise
                               Granted         in Fiscal          Price         Expiration

           Name                  (#)            Year (1)         ($/Sh)            Date              5% ($)          10% ($)
--------------------------- --------------- ----------------- -------------- ------------------ ----------------- ---------------


Morry  F. Rubin                  -0-              -0-              N/A              N/A               -0-              -0-
--------------------------- --------------- ----------------- -------------- ------------------ ----------------- ---------------


George Rubin                     -0-              -0-              N/A              N/A               -0-              -0-
--------------------------- --------------- ----------------- -------------- ------------------ ----------------- ---------------


Christopher P. Vincze            -0-              -0-              N/A              N/A               -0-              -0-
-------------------------- --------------- ----------------- -------------- ------------------ ----------------- ---------------


Nicholas  J. Malino              -0-              -0-              N/A              N/A               -0-              -0-
-------------------------- --------------- ----------------- -------------- ------------------ ----------------- ---------------


John J. Goodwin                  -0-              -0-              N/A              N/A               -0-              -0-
--------------------------- --------------- ----------------- -------------- ------------------ ----------------- ---------------


Donald W. Beck                   -0-              -0-              N/A              N/A               -0-              -0-
--------------------------- --------------- ----------------- -------------- ------------------ ----------------- ---------------


Wayne A. Crosby                  -0-              -0-              N/A              N/A               -0-              -0-
--------------------------- --------------- ----------------- -------------- ------------------ ----------------- ---------------
</TABLE>

         N/A - not applicable

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

(1)      The "% of Total Options Granted to Employees in Fiscal Year" (Column
         (c)) is based upon options granted to ATC employees only and excludes
         options granted to non-employees.

(2)      The potential realizable value of each grant of options assumes that
         the market price of ATC's Common Stock appreciates in value from the
         date of grant to the end of the option term at annualized rates of 5%
         and 10%, respectively, after subtracting out the applicable exercise
         price.

                                       36
<PAGE>

     
         Aggregated Option Exercises and Fiscal Year-End Option Table. The
following table provides information with respect to each exercise of stock
options during fiscal 1998 by each of the executive officers named in the
preceding summary compensation table and the fiscal year-end value of
unexercised options.      

<TABLE>   
<CAPTION>

                         AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR - END OPTION VALUES
--------------------------- ------------------------- ------------------------ ------------------------- -------------------------
           (a)                        (b)                       (c)                      (d)                       (e)
                                                                                      Number of                              
                                                                                      Securities                 Value of    
                                                                                      Underlying               Unexercised   
                                                                                     Unexercised               In-the-Money  
                                     Shares                                           Options at                 Options     
                                  Acquired on                  Value                  FY-End (#)              at FY-End ($)  
                                  Exercise (1)             Realized (1)              Exercisable/              Exercisable/
           Name                       (#)                       ($)               Unexercisable (2)         Unexercisable (1)(2)
--------------------------- ------------------------- ------------------------ ------------------------- -------------------------
<S>                         <C>                       <C>                      <C>                       <C>

Morry F. Rubin                      161,750                  1,222,390                -0-  /  -0-             -0-   /  -0-
--------------------------- ------------------------- ------------------------ ------------------------- -------------------------


George Rubin                          -0-                       -0-                   -0-  /  -0-             -0-   /  -0-
--------------------------- ------------------------- ------------------------ ------------------------- -------------------------


Nicholas J. Malino                   69,500                   321,750                 -0-  /  -0-             -0-   /  -0-
--------------------------- ------------------------- ------------------------ ------------------------- -------------------------


Christopher P. Vincze                65,000                   380,618                  -0-  /  -0-             -0-   /  -0-
--------------------------- ------------------------- ------------------------ ------------------------- -------------------------


John J. Goodwin                       -0-                       -0-                   -0-  /  -0-             -0-   /  -0-
--------------------------- ------------------------- ------------------------ ------------------------- -------------------------


Donald W. Beck                       10,000                   57,500                  -0-  /  -0-             -0-   /  -0-
--------------------------- ------------------------- ------------------------ ------------------------- -------------------------


Wayne A. Crosby                      10,000                   45,750                  -0-  /  -0-             -0-   /  -0-
--------------------------- ------------------------- ------------------------ ------------------------- -------------------------
</TABLE>    

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

(1)      The  aggregate  dollar  values in column (c) and (e) are  calculated by
         determining the difference  between the fair market value of the Common
         Stock  underlying  the options and the exercise price of the options at
         the date of exercise. ATC's last sale price at the close of business on
         February 5, 1998 was $12.00.  "Shares Acquired on Exercise"  relates to
         the exercise of stock options only and excludes warrant exercises,  but
         includes stock options  replaced with stock options for Holdings common
         stock.

(2)      ATC's stock option plans were discontinued in connection with the
         Tender Offer and Merger.

                                       37
<PAGE>
 
Compensation of Directors
    
         There are no current arrangements for future compensation of directors.
See Item "10 - Directors and Executive Officers of the Registrant - Directors
Compensation."      
    
Employment Agreement      

     Prior to February 5, 1998, George Rubin, Morry F. Rubin, Nicholas J. Malino
and Christopher P. Vincze received annual salaries of approximately $300,000,
$300,000, $200,000 and $200,000, respectively. Salaries of all executive
officers of ATC (6 persons) aggregated $865,000 as of February 5, 1998. Prior to
February 5, 1998, ATC had no employment contracts with its executive officers,
and all salaries and bonuses were at the discretion of the Board of Directors.
    
     In connection with the transactions surrounding the Merger, the Company
entered into employment agreements with each of Nicholas J. Malino and
Christopher P. Vincze (each employment agreement is referred to as the
"Employment Agreement," and both the employment agreements are collectively
referred to as the "Employment Agreements." Messrs. Malino and Vincze are
referred to as an "Executive" and collectively as the "Executives"). The
Employment Agreements are for a term, which commenced on February 16, 1998 and
which expire on February 28, 2001. Pursuant to the Employment Agreements, each
of the Executives will receive (i) a base salary of $200,000 per year until
March 1, 1998, and thereafter an annual salary of not less than $250,000, to be
increased at a rate equal to the percentage increase of the Consumer Price Index
and (ii) an incentive bonus of up to $250,000, which will be performance based.
In addition, the Employment Agreements provide for the grant to each of the
Executives options for 3.41% of the fully diluted common equity of Holdings
following the consummation of the transactions surrounding the Merger. Fifty
percent of the options granted to each of the Executives are time-vested and
fifty percent of the options vest upon the Company's attaining certain operation
targets established in the Employment Agreements. In addition, pursuant to the
Employee Agreements, each Executive will receive 33,896 restricted shares of
Common Stock of Holdings which will be subject to a time-vesting schedule, and a
special cash bonus of $168,000. The Employment Agreements also grant certain
registration rights to each Executive in connection with his securities and
contain termination provisions.     

         Upon consummation of the Merger, the Company entered into two separate
Severance Agreements (as defined herein), with George Rubin and Morry F. Rubin,
pursuant to which George Rubin resigned his position as Chairman of the Board
and Secretary of the Company and Morry F. Rubin resigned his position as
President and Chief Executive Office of the Company. See "Item 13 Certain
Relationships and Related Transactions."

         ATC pays John J. Goodwin a bonus based upon a percentage of pretax
operating profits of ATC Insys Technology, Inc.

     During fiscal 1990, ATC approved a 401(k)-employee savings plan (the
"401(k) Plan") which allows voluntary contributions by eligible employees into
designated investment funds. ATC may, at the discretion of the Board of
Directors, make additional contributions on behalf of the Plan's participants.
No contributions were made by the Company in fiscal years 1996, 1997 and 1998.
The 401(k) Plan continued in effect following the consummation of the Merger.

         ATC has no other annuity, pension or retirement benefits for its
employees. ATC provides life, dental and health insurance, which is available to
all full-time employees. ATC has not afforded any of its executive officers any
personal benefits, the value of which exceeds $100,000, which are not directly
related to job performance or provided generally to all salaried employees.

                                       38
<PAGE>

     
         Ten-Year Option Repricing. The following table provides information
with respect to adjustments or amendments to previously awarded stock options to
the executive officers named in the preceding summary compensation table.      

<TABLE>   
<CAPTION>

                                                         TEN-YEAR OPTION REPRICINGS
--------------------------------- ----------- ---------------- ---------------- ---------------- --------------- ----------------
              (a)                    (b)            (c)              (d)              (e)             (f)              (g)
                                                  Number           Market          Exercise                         Length of
                                                    of            Price of           Price                          Original
                                                Securities        Stock at            at                           Option Term
                                                Underlying          Time              time                          Remaining
                                                  Options            of               of                           at Date of
                                                 Repriced         Repricing        Repricing          New           Repricing
                                                    or          or Amendment          or            Exercise      or Amendment
                                                  Amended            ($)         Amendment ($)       Price             (1)
              Name                   Date           (#)                                                ($)
--------------------------------- ----------- ---------------- ---------------- ---------------- --------------- ----------------
<S>                               <C>         <C>              <C>              <C>              <C>             <C>

Morry F. Rubin
President and
Chief Executive Officer              N/A            N/A              N/A              N/A             N/A              N/A
--------------------------------- ----------- ---------------- ---------------- ---------------- --------------- ----------------

George Rubin,
Chairman   of  the   Board   and
Secretary                            N/A            N/A              N/A              N/A             N/A              N/A
--------------------------------- ----------- ---------------- ---------------- ---------------- --------------- ----------------

Nicholas J. Malino
President                            N/A            N/A              N/A              N/A             N/A              N/A
--------------------------------- ----------- ---------------- ---------------- ---------------- --------------- ----------------

Christopher P. Vincze
Chief Operating
Officer                              N/A            N/A              N/A              N/A             N/A              N/A
--------------------------------- ----------- ---------------- ---------------- ---------------- --------------- ----------------

John J. Goodwin
President and Director
ATC InSys Technology Inc.            N/A            N/A              N/A              N/A             N/A              N/A
--------------------------------- ----------- ---------------- ---------------- ---------------- --------------- ----------------

Donald W. Beck
Senior
Vice President                       N/A            N/A              N/A              N/A             N/A              N/A
--------------------------------- ----------- ---------------- ---------------- ---------------- --------------- ----------------

Wayne A. Crosby
Controller                           N/A            N/A              N/A              N/A             N/A              N/A
--------------------------------- ----------- ---------------- ---------------- ---------------- --------------- ----------------
</TABLE>     

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

(1)  The length of original option term remaining represents the number of
     months determined as of February 28, 1998

                                       39
<PAGE>
 
Compensation Committee Interlocks and Insider Participation
    
     Prior to February 5, 1995, the Board of Directors of ATC was composed of
five members, namely, George Rubin, Chairman of the Board, Morry F. Rubin, ATC's
Chief Executive Officer, Richard L. Pruitt, Vice President, Principal Accounting
Officer, Julia S. Heckman, Managing Director with Rodman and Renshaw, Inc.'s
Investment Banking Group and Richard S. Greenberg Esq., a director of the
Environmental Management Group at Coopers & Lybrand. The Board of Directors had
an Audit Committe and a Compensation Committe consisting of three directors
including Morry F. Rubin and outside directors Richard S. Greenberg, and Julia
S. Heckman. The Audit Committe was responsible, among other things, for
approving any transactions between the Company and any of its executive officers
of the Company and for granting any further options of purchase Common Stock.
Prior to August 1995, the Board had sole resonsibility for reviewing and
determining the annual salary, bonuses, stock options grants and other
compensation of the executive officers of ATC.     
    
     Prior to February 5, 1998, George Rubin and Morry F. Rubin were officers
and directors of certain ATC's subsidiaries. Morry F. Rubin and George Rubin
each received all of their respective cash compensation through ATC.     
         
    
     Following the Merger on February 5, 1998, the Board of Directors of ATC has
had sole responsibility for reviewing and determining the annual salary,
bonuses, stock option grants and other compensation of the executive officers of
ATC, limited by the provisions of the Employment Agreements with Nicholas Malino
and Christopher Vincze.      

Compensation Committee Report on Executive Compensation
    
     Prior to February 5, 1998, the Compensation Committee was composed of three
members, namely, Morry F. Rubin, Chief Executive Officer, and outside directors
Julia S. Hechman and Richard S. Greenberg. The Compensation Committee was
responsible for reviewing and determining the annual salary, bonuses, stock
option grants and other compensation of the executive officers of ATC.     
    
     Following the Merger on February 5, 1998, all compensation determinations
has been and will be made by the Board of Directors of ATC. At the time of this
report, the Board of Directors has not yet established a separate policy and has
continued to implement the policy that had been established by the Compensation
Committee prior to the Merger.      

Comparative Performance by ATC

         ATC is presenting a chart comparing the cumulative total stockholder
return on its Common Stock with the cumulative Stockholder return of (1) a broad
equity market index, and (2) a published industry index or peer group for the
past five years. Such chart compares the performance of the ATC's Common Stock
with (1) the Nasdaq Stock Market Index and (2) a group of publish companies each
of whom are listed in the peer group sanitary and other services and assumes an
investment of $100 in ATC's Common Stock and on March 1, 1992 an investment of
$100 in each of the stock comprising the Nasdaq Stock Market Index and the
stocks of the peer group sanitary and other services.

                                      40
<PAGE>
 
    
Comparison of Five Year. Cumulative Total Returns Performance Graph for ATC
Environmental Inc.      

             Prepared by the Center for Research in Security Prices
                 Produced on 05/29/98 including data to 02/27/98

            Company     Market    Market     Peer     Peer
  Date       Index      Index     Count     Index     Count
--------    -------    -------    -----    -------    -----
02/26/93,   100.000,   100.000,    3947,   100.000,     35
03/31/93,    92.188,   102.894,    3972,    98.782,     35
04/30/93,    76.563,    98.503,    4007,    90.770,     35
05/28/93,   110.938,   104.385,    4035,    90.266,     34
06/30/93,   142.188,   104.865,    4071,    85.616,     34
07/30/93,   156.250,   104.990,    4103,    86.816,     32
08/31/93,   127.344,   110.415,    4138,    82.397,     31
09/30/93,   150.000,   113.704,    4173,    83.023,     31
10/29/93,   168.750,   116.260,    4220,    83.255,     32
11/30/93,   190.625,   112.794,    4303,    82.906,     32
12/31/93,   178.125,   115.940,    4375,    81.349,     32
01/31/94,   168.750,   119.459,    4399,    85.422,     33
02/28/94,   171.875,   118.343,    4438,    83.742,     33
03/31/94,   212.500,   111.065,    4490,    77.118,     33
04/29/94,   250.000,   109.624,    4519,    71.883,     33
05/31/94,   290.625,   109.891,    4562,    68.232,     33
06/30/94,   265.625,   105.872,    4576,    65.573,     30
07/29/94,   262.500,   108.043,    4594,    63.237,     30
08/31/94,   237.500,   114.931,    4612,    63.717,     30
09/30/94,   250.000,   114.637,    4615,    66.886,     31
10/31/94,   340.625,   116.890,    4637,    68.598,     31
11/30/94,   431.250,   113.013,    4653,    65.608,     32
12/30/94,   406.250,   113.329,    4658,    66.875,     32
01/31/95,   364.063,   113.965,    4648,    67.270,     32
02/28/95,   331.250,   119.992,    4650,    66.080,     31
03/31/95,   353.125,   123.550,    4644,    65.805,     32
04/28/95,   434.375,   127.440,    4655,    68.119,     32
05/31/95,   375.000,   130.728,    4654,    81.651,     32
06/30/95,   375.000,   141.323,    4671,    87.007,     32
07/31/95,   403.125,   151.711,    4690,   103.209,     32
08/31/95,   375.000,   154.787,    4713,   103.281,     32
09/29/95,   375.000,   158.346,    4709,   107.772,     33
10/31/95,   343.750,   157.439,    4747,   103.812,     32
11/30/95,   312.500,   161.135,    4779,   114.073,     33
12/29/95,   293.750,   160.276,    4819,   128.348,     33
01/31/96,   318.750,   161.066,    4809,   124.173,     33
02/29/96,   306.250,   167.196,    4839,   122.427,     33
03/29/96,   312.500,   167.751,    4878,   127.739,     34
04/30/96,   315.625,   181.668,    4923,   133.957,     34
05/31/96,   381.250,   190.010,    4981,   179.695,     32
06/28/96,   328.125,   181.445,    5034,   195.413,     32
07/31/96,   356.250,   165.288,    5066,   159.449,     32
08/30/96,   321.875,   174.549,    5090,   174.166,     33
09/30/96,   321.875,   187.900,    5096,   194.037,     33
10/31/96,   271.875,   185.825,    5138,   200.967,     33
11/29/96,   262.500,   197.312,    5180,   210.379,     31
12/31/96,   231.250,   197.134,    5177,   203.159,     30
01/31/97,   196.875,   211.145,    5162,   254.331,     29
02/28/97,   206.250,   199.472,    5171,   223.866,     29
03/31/97,   221.875,   186.450,    5169,   216.716,     29
04/30/97,   221.875,   192.279,    5156,   170.562,     29
05/30/97,   278.125,   214.077,    5149,   173.565,     27
06/30/97,   287.500,   220.628,    5133,   192.151,     27
07/31/97,   275.000,   243.915,    5128,   195.227,     27
08/29/97,   273.438,   243.544,    5117,   198.613,     26
09/30/97,   264.063,   257.954,    5107,   238.287,     26
10/31/97,   276.563,   244.594,    5115,   242.092,     25
11/28/97,   281.250,   245.819,    5131,   250.902,     25
12/31/97,   290.625,   241.959,    5079,   267.432,     25
01/30/98,   298.438,   249.567,    5051,   249.966,     25
02/27/98,   292.188,   272.938,    5030,   253.085,     25


                                      41
<PAGE>
 
Stock Option Plans
    
         Prior to the Transactions, the Company maintained (i) a Stock Option
Plan which was adopted by the Company's Board of Directors and ratified by
stockholders on January 12, 1988, (ii) the 1993 Incentive and Non-Qualified
Stock Option Plan and (iii) the 1995 Stock Option Plan (collectively, the "Old
Plans"). Options had been awarded to a number of individuals under each of the
Old Plans (the "Old Options"). In connection with the consummation of the
Transactions, all Old Options outstanding which were not fully vested were
accelerated and became immediately exercisable.    

         Holdings offered individuals who had been awarded Old Options with an
exercise price below twelve dollars ($12.00) per share at the time of the
consummation of the Merger the opportunity either (i) to receive a cash payment
in full settlement of their Old Options, (ii) to exchange Old Options for
options to purchase shares of common stock of Holdings (the "Holdings Options"),
    
                                       42     
<PAGE>

     
with the number of shares covered thereby and at an exercise price per share to
be determined pursuant to a formula designed to cause the economic value (i.e.,
the difference between the aggregate fair market value of the shares of common
stock of Holdings subject to such options and the aggregate per share exercise
price thereof) of the Holdings Options immediately after the Merger to be the
same as the economic value of the Old Options immediately prior to Merger in a
substitution transaction described in Section 424(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), or (iii) to receive a combination of cash
settlements and substituted options. Holdings intends to effect such substitute
grants pursuant to a new stock option plan to be adopted by it (the "1998 Stock
Option Plan"). To the extent so elected by the optionees, non-qualified options
under the Old Plans will be substituted with non-qualified options under the
1998 Stock Option Plan and incentive stock options ("ISOs") under the Old Plans
will be substituted with ISOs under the 1998 Stock Option Plan. Holdings also
intends to grant non-qualified stock options and ISOs to employees of Holdings
and its subsidiaries and non-qualified stock options to directors of Holdings in
the future under the 1998 Stock Option Plan.      

         The 1998 Stock Option Plan authorizes the Board of Directors of
Holdings to grant options to purchase Common Stock of Holdings at an exercise
price (the "option price") determined by the Board of Directors of Holdings,
except in the case of ISOs, which are awarded at an option price equal to the
fair market value of the Common Stock (110% of the fair market value in the case
of ISOs granted to ten (10%) percent shareholders of Common Stock).
   
         The 1998 Stock Option Plan will be administered by Holdings' Board of
Directors. Shares available under the 1998 Stock Option Plan may be allocated
between non-qualified options and ISOs among the participants as the Board of
Directors of Holdings deems appropriate. Awards may be granted for such terms as
the Board of Directors of Holdings may determine, except that the term of an ISO
may not exceed ten years from its date of grant.     
    
         The terms under which all options may be exercised are determined by
Holdings' Board of Directors. No option granted under the 1998 Stock Option Plan
shall be exercisable until approval and ratification of the Plan has been
obtained from the stockholders. No option may be exercised after the expiration
of its term, which in the case of an ISO may not exceed 10 years from the date
of grant. In addition, the Plan will contain provisions relating to when an
option may be exercised in the event of death, disability or other termination
of employment.     

         The 1998 Stock Option Plan will provide that, in the event of any
change in the outstanding Common Stock by reason of a stock dividend or
distribution, recapitalization, merger, consolidation, split-up, combination,
exchange of shares or the like, the Board of Directors of Holdings may
appropriately adjust the number of shares of Common Stock which may be issued
under the 1998 Stock Option Plan, the number of shares of Common Stock subject
to options previously granted, the exercise price of options previously granted,
and any and all other matters it deems appropriate.

Limitation of Directors' Liability; Indemnification

         As permitted by the Delaware General Corporation Law, ATC's certificate
of incorporation provides that a director of ATC will not be personally liable
to ATC or its stockholders for monetary damages for breach of the fiduciary duty
of care as a director, except under certain circumstances, including breach of
the director's duty of loyalty to ATC or its stockholders or any transaction
from which the director derived an improper personal benefit.

         ATC's by-laws provide for the indemnification of ATC's officers and
directors to the fullest extent permitted by Delaware law. In this respect,
Holdings intends to enter into indemnification agreements with certain of its
officers and directors to hold them harmless and to indemnify each person from
and against all fines, amounts paid in settlements and expenses, including
attorneys' fees incurred as a result of or in connection with any threatened,
pending or completed action, suit or proceeding, whether civil, criminal or
administrative or investigative, by reason of the fact that the person was a
director and/or officer of Holding or its subsidiaries, including ATC, or served
any other corporation in any capacity at the request of Holdings, in the manner
and to the extent permitted by law.

         ATC has been advised that it is the position of the Securities and
Exchange Commission that insofar as the foregoing provisions may be invoked to
disclaim liability for damages arising under the federal securities laws, such
provisions are against public policy as expressed in the federal securities laws
and are therefore unenforceable.

                                      43
<PAGE>
 
Item 12.  Security Ownership of Certain Beneficial Owners and Management.
--------  ---------------------------------------------------------------
    
         The Company is a wholly owned subsidiary of Holdings. The following
table sets forth certain information concerning ownership of shares of common
stock, par value $0.01 per share of Holdings (the "Holdings Common Stock") and
the Holdings Preferred Stock, par value $0.01 per share owned beneficially as of
February 28, 1998, by (i) each director, (ii) each of the named executive
officers of the Company, (iii) all executive officers and directors as a group,
and (iv) each person who is the beneficial owner of more than five percent of
the shares of each class of Holdings capital stock.     
<TABLE>
<CAPTION>

------------------------------------------------ -------------------------------------- ---------------------------------------
                                                         Holdings Common Stock                 Holdings Preferred Stock
                     Name,
                  Address and
                   Position
                      (1)
------------------------------------------------ ------------------ ------------------- ------------------- -------------------
                                                                       Approximate                             Approximate
                                                      Number            Percent of            Number            Percent of
                                                        Of              Beneficial              Of              Beneficial
                                                      Shares            Ownership             Shares            Ownership
                                                                       Of Class (2)                              Of Class
------------------------------------------------ ------------------ ------------------- ------------------- -------------------
<S>                                              <C>                <C>                 <C>                 <C>

Nicholas J. Malino                                       *                  *                   -                   -
President, Director (3)
------------------------------------------------ ------------------ ------------------- ------------------- -------------------
Christopher P.Vincze                                     *                  *                   -                   -
Chief Operating Officer, Director(3)
------------------------------------------------ ------------------ ------------------- ------------------- -------------------
Wesley W. Lang Jr.                                   1,661,253            97.55%                -                   -
Director (4)
------------------------------------------------ ------------------ ------------------- ------------------- -------------------
Nora E. Kerppola                                     1,661,253            97.55%                -                   -
Director (4)
------------------------------------------------ ------------------ ------------------- ------------------- -------------------
WPG Corporate Development Associates V, L.P.         1,661,253            97.55%                -                   -
and certain related parties
One New York Plaza
New York, NY  10004
------------------------------------------------ ------------------ ------------------- ------------------- -------------------
Jackson National Life Insurance Company               187,771             10.16%             100,000              100.0%
c/o PPM America, Inc. (5)
225 West Wacker Drive,
Suite 1200, Chicago, Illinois 60606
------------------------------------------------ ------------------ ------------------- ------------------- -------------------
All directors and officers as a group (3) (6)            *                  *                   -                   -
------------------------------------------------ ------------------ ------------------- ------------------- -------------------
</TABLE>

--------------
* Represents less than one percent.

(1)  Each person has sole voting power and investment power with respect to the
     number of shares indicated as owned. Except as otherwise indicated, the
     business address for each of the parties listed in the table above is: c/o
     ATC Group Services Inc., 104 East 25th St., 10th Floor, New York, NY 10010.

(2)  Based upon 1,702,920 shares of Holdings Common Stock outstanding as of
     February 28, 1998.
    
(3)  In addition, directors, officers and certain employees of ATC will own an
     equity stake in Holdings, the parent of ATC, equal to approximately 23.9%,
     reflecting a committed investment by management of $2.0 million and options
     representing 11.9% of the fully diluted ownership of Holdings Common Stock.
     
(4)  Includes 1,661,253 shares of Holdings Common Stock owned by certain
     affiliates of Weiss Peck of which Mr. Lang and Ms. Kerppola are principals.
     Mr. Lang and Ms. Kerppola disclaim beneficial ownership of such shares of
     Holdings Common Stock.

(5)  The beneficial ownership of shares of Holdings Common Stock indicated above
     includes warrants to purchase 146,104 shares of Holdings Common Stock
     granted to Jackson National Life Insurance Company in connection with its
     investment in the Holdings Preferred Stock; the warrants are currently
     exercisable.

(6)  Excludes  1,661,253 shares of Holdings Common Stock  beneficially  owned by
     certain  affiliates of Weiss Peck,  which may be deemed to be  beneficially
     owned by Wesley W. Lang, Jr. and Nora E. Kerppola.

                                       44
<PAGE>
 
Item 13.  Certain Relationships and Related Transactions.
--------  -----------------------------------------------

         Upon consummation of the Merger, the Company entered into two separate
Severance, Consulting and Noncompetition Agreements (the "Severance Agreements")
with George Rubin and Morry F. Rubin, pursuant to which George Rubin resigned
his position as Chairman of the Board and Secretary of the Company and Morry
Rubin resigned his position as President and Chief Executive Officer of the
Company. Pursuant to the Severance Agreements, Messrs. George and Morry Rubin
have agreed to provide certain consulting services as requested by the Company
for a period of three years following the consummation of the Transactions. The
Severance Agreements restrict Messrs. George and Morry Rubin for a period
ranging from three to four years from (i) competing in any aspect of the
Company's business as conducted on the effective date of the Merger (the
"Effective Date") anywhere in the United States, (ii) requesting or causing any
employee of the Company to terminate employment with the Company, (iii)
competing with ATC InSys Technology Inc. ("InSys") or 3D Information Services,
Inc., anywhere in the State of New Jersey and (iv) soliciting certain customers
of InSys within New York City. In consideration for the Severance Agreements,
the Company paid to the Rubins $3.1 million in the aggregate upon the Effective
Date and is required to pay $553,430 on each of the six calendar quarters
thereafter, in addition to the continuance of certain other benefits currently
provided by the Company.

         ATC has in the past, and may in the future, enter into transactions
with officers, directors and other affiliates which may be deemed to be
non-arms-length transactions (i.e. transactions between related parties). Any
new transactions would be approved by a majority of disinterested Board of
Directors and would be expected to be made on terms no less favorable to ATC
than could be arranged with independent third parties.

                                     PART IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form  8-K.
-------   ------------------------------------------------------------------

         (a) (1)  Financial Statements
                  --------------------
    
         A list of the financial statements filed as a part of this Annual
Report appears on Page F-1 herein; which list is incorporated herein by
reference.     

         (a) (2)  Financial Statement Schedules
                  -----------------------------

         No financial statement schedules are in this Annual Report because the
information required is contained in the financial statements incorporated by
reference in (a) (1) above.

         (a) (3)  Exhibits
                  --------
    
     A list of exhibits required by Item 601 of Regulation S-K and an index
thereto appears at the end of this Annual Report.      

         (b)      Reports on Form 8-K
                  -------------------

         No reports on Form 8-K were filed during the three months ended
February 28, 1998.
    
         (c)      Exhibits
                  --------

         A list of exhibits required by Item 601 of Regulation S-K and an index 
thereto appears at the end of this Annual Report.      
     

                                      45
<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 GROUP SERVICES INC.
                 (Registrant)

    
/s/  NICHOLAS J. MALINO                                           June 22, 1998
------------------------------------------------                  ------------
     NICHOLAS J. MALINO                                               (Date)
     President     

         Pursuant to the requirements of the Securities 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.
    
      /s/  NICHOLAS J. MALINO                                     June 22, 1998
      ------------------------------------------                  ------------
      Nicholas J. Malino                                              (Date)
      President (Principal Executive Officer)     
    
      /s/ WAYNE A. CROSBY                                         June 22, 1998
      ------------------------------------------                  ------------
      Wayne A. Crosby                                                 (Date)
      Controller (Principal Financial Officer)     
    
      /s/ WESLEY W. LANG, JR.       .                             June 22, 1998
      ------------------------------------------                  ------------
      Wesley W. Lang, Jr.                                             (Date)
      Director     
    
      /s/ NORA KERPPOLA                                           June 22, 1998
      ------------------------------------------                  ------------
      Nora Kerppola                                                   (Date)
      Director     
    
      /s/ BENJAMIN J. JAMES                                       June 22, 1998
      ------------------------------------------                  ------------
      Benjamin J. James                                               (Date)
      Director     


                                      46
<PAGE>
 
EXHIBIT INDEX

--------------------------------------------------------------------------------
<TABLE>    
<CAPTION>

Exhibit         Description
-----------     -----------------------------------------------------------------------------------------------------------------
<S>             <C>

1*              Purchase Agreement, dated as of January 22, 1998, between Acquisition Corp. and BT Alex Brown Incorporated

2.1             Agreement and Plan of Merger to reincorporate in Delaware (contained in Exhibits 3.1 and 3.2, (1)

2.2             Agreement and Plan of Merger between ATC Environmental Inc. and Aurora Environmental Inc. (5)

2.3             Merger Agreement pursuant to section 7(m) of  The Purchase Agreement, dated November 26, 1997

3.1*            Articles of Incorporation of Registrant

3.2*            By-Laws of the Registrant 

4.1*            Indenture,  dated as of January 29, 1998 among Acquisition Corp. and the State Street bank and Trust Company, as
                trustee.

4.2*            First Supplemental Indenture, dated as of February 5, 1998, by and among ATC Group Services  Inc., the
                Guarantors named therein and State Street Bank and Trust Company.

4.3*            Form of Exchange Note (included in Exhibit 4.1)

4.4*            Registration Rights Agreement, dated as of January 29, 1998, between Acquisition Corp., the Guarantors named
                therein and BT Alex. Brown Incorporated.

10.1            Employee Savings (401(k)) Plan (2)

10.2            New York City Lease (3)

10.3            Form of Indemnity Agreement (9)

10.4            Irrevocable  Letter of Credit  executed by Atlantic  Bank of New York on November 8, 1995,  and delivered by ATC
                Environmental  Inc. on November 10, 1995,  payable on or after May 1, 1996, to Hill  International,  Inc. in the
                amount of $730,625.00 (4)

10.5            Agreement  for Sale and Purchase of Business  Assets on May 24, 1996,  among ATC  Environmental  Inc.,  American
                Testing and Engineering Corporation d/b/a ATEC Associates, Inc. and Gerald D. Mann. (10)

10.6            Assumption  of  Liabilities  Agreement on May 24,  1996,  among ATC  Environmental  Inc.,  American  Testing and
                Engineering Corporation and Gerald D. Mann. (10)

10.7            Master  Equipment  Lease  Agreement on May 24, 1996,  between ATC  Environmental  Inc. and American  Testing and
                Engineering Corporation. (10)

10.8            Master Sublease Agreement on May 24, 1996, between ATC Environmental Inc. and American Testing and Engineering
                Corporation covering premises leases at Indianapolis, IN, Atlanta, GA and Dallas, TX. (10)

10.9            Non-Competition  Agreement on May 24, 1996,  between ATC Environmental Inc. and American Testing and Engineering
                Corporation. (10)
</TABLE>     

                                       1
<PAGE>
 
EXHIBIT INDEX (continued)

--------------------------------------------------------------------------------
<TABLE>    
<CAPTION>

Exhibit         Description
-----------     -----------------------------------------------------------------------------------------------------------------
<S>             <C>

10.10           Mann Non-Competition Agreement on May 24, 1996, between ATC Environmental Inc. and Gerald D. Mann. (10)

10.11           Security Agreement on May 24, 1996, among ATC Environmental Inc.,  American Testing and Engineering  Corporation
                and Gerald D. Mann. (10)

10.12           $500,000  Letter of Credit on May 24, 1996, from Chemical Bank,  N.A.  against the account of ATC  Environmental
                Inc. in favor of American Testing and Engineering Corporation. (10)

10.13           Agreement  for Sale and  Purchase  of Business  Assets on May 28,  1996,  among ATC InSys  Technology  Inc.,  3D
                Information Services Inc. and Ciro De Saro. (10)

10.14           Assumption  of  Liabilities  Agreements  on May 28, 1996,  between ATC InSys  Technology  Inc.,  3D  Information
                Services Inc. and Ciro De Saro. (10)

10.15           Stockholders  Non-Competition  Agreement on May 28, 1996, between ATC InSys Technology Inc. and the stockholders
                of 3D Information Services Inc. (10)

10.16           Three-year,  $2,500,000  Promissory Note on May 29, 1996, from ATC Environmental Inc. to 3D Information Services
                Inc. (10)

10.17*          Employment Agreement, dated as of February 16, 1998, between ATC Group Services Inc.,
                Acquisition Holdings, Inc. and Nicholas J. Malino.

10.18*          Employment Agreement, dated as of February 16, 1998, between ATC Group Services Inc.,
                Acquisition Holdings, Inc. and Christopher P. Vincze.

10.19*          Credit Agreement, dated as of January 29, 1998, among Acquisition Holdings, Inc., Acquisition
                Corp., various banks and Bankers Trust Company, as agent.

10.20*          First Amendment, dated as of February 5, 1998, among Acquisition Holdings, Inc., ATC Group Services Inc., the
                lenders party to the Credit Agreement (Exhibit 4.1) and Bankers Trust Company, as
                agent.

10.21*          Second Amendment, dated as of February 27, 1998, among Acquisition Holdings, Inc., ATC Group Services Inc., the
                banks party to the Credit Agreement (Exhibit 4.1), Bankers Trust Company, as agent, and each of the lenders
                listed on Schedule A thereto.

10.22*          Severance, Consulting and Non-Competition Agreement, dated as of February 5, 1998, by and between ATC Group
                Services Inc. and George Rubin.

10.23*          Severance, Consulting and Non-Competition Agreement, dated as of February 5, 1998, by and between ATC Group
                Services Inc. and Morry F. Rubin.

10.24*          Agreement for Sale and Purchase of Business Assets, dated August 18, 1997, by and among ATC Group Services
                Inc., Smith Technology Corporation, BCM Engineers Inc. (DE. Corp.), BCM Engineers Inc. (PA. Corp.), BCM
                Engineers Inc. (AL. Corp.) and BCM Engineers Inc.  (W. VA. Corp.)

10.25*          Stock Purchase Agreement, dated November 26, 1998, between ATC Group Services Inc., Bing  Yen & Associates,
                Inc. and Glenn Tofani.

10.26*          Stock Purchase Agreement, dated as of November 4, 1997, by and among ATC Group Services Inc., Conning Insurance
                Capital Limited Partnership II, Conning Insurance Capital International Partners II, Cullinane & Donnelly Venture
                Partners, Limited Partnership, Lawyers Title Environmental Insurance Services Agency, Inc. and Charles L. Perry, Jr.

</TABLE>    

                                     2
<PAGE>
 
EXHIBIT INDEX (continued)

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

Exhibit         Description
-----------     ----------------------------------------------------------------

21* **          Subsidiaries of Registrant

27*             Financial Data Schedule

99.1            1988 Stock Option Plan (6)

99.2            1993 Stock Option Plan (7)

99.3            Amendment to 1993 Stock Option Plan (8)

99.4            1995 Stock Option Plan (8)

------------------
    
*    Previously filed.      
    
**   During the fiscal year ended February 28, 1998, ATC had nine operating
     subsidiaries, namely, Hygeia Laboratories Inc. ("Hygeia"), ATC Management
     Inc. ("Management Co."), ATC New England Corp. ("ATC New England"), ATC
     Blattert Inc. ("Blattert"), ATC InSys Technology Inc. ("ATC InSys"), ATC
     Construction Services Inc. ("ATC Construction"), ATC Environmental Inc.
     ("ATC Environmental"), Bing Yen & Associates Inc. ("Bing Yen"), and
     Environmental Warranty Inc. ("EWI"). Hygeia, Management Co., ATC New
     England, Blattert, ATC InSys, ATC Construction, ATC Environmental, Bing
     Yen, and EWI are formed under the laws of the States of Delaware, South
     Dakota, Delaware, South Dakota, Delaware, Massachusetts, Delaware,
     California, and Connecticut, respectively. Effective, February 28, 1998,
     the Board of Directors of ATC and the respective Boards of Management Co.
     and Blattert have approved the dissolution of Management Co. and Blattert
     and the distribution of all remaining assets to ATC in accordance with
     South Dakota law. The Boards determined that maintaining separate
     subsidiaries is no longer in the best interests of the Company and that
     dissolving these subsidiaries eliminates unnecessary administrative and
     legal expenses. The Company filed with the Secretary of State of the State
     of South Dakota, Articles of Dissolution for Management Co. and Blattert on
     June 3, 1998.     

                                       3
<PAGE>
 
EXHIBIT INDEX (continued)

Exhibits incorporated by reference from previously filed documents are as
follows:
    
     (1)  Incorporated by reference to the Registrant's Registration Statement 
          on Form S-1 File No. 33-19889, as amended, which was filed with the 
          Securities and Exchange Commission.    
    
     (2)  Incorporated by reference to the Registrant's Form 10-K for the fiscal
          year ended February 28, 1990, which was filed with the Securities and
          Exchange Commission.    
    
     (3)  Incorporated by reference to the Registrant's Form 10-K for the fiscal
          year ended February 29, 1992, which was filed with the Securities and
          Exchange Commission.    
    
     (4)  Incorporated by reference to the Registrant's Form 8-K, dated November
          10, 1995, as amended, which was filed with the Securities and Exchange
          Commission.    
    
     (5)  Incorporated by reference to the Registrant's Form S-4 Registration
          Statement, File No. 33-88380, which was filed with the Securities and
          Exchange Commission.    
   
     (6)  Incorporated by reference to the Registrant's Form S-8 Registration
          Statement, File No. 33-55592, which was filed with the Securities and
          Exchange Commission.    
    
     (7)  Incorporated by reference is made to the Registrant's Form S-8
          Registration Statement, File No. 33-77578, which was filed with the
          Securities and Exchange Commission.    
    
     (8)  Incorporated by reference to the Registrant's Form 10-K for its fiscal
          year ended February, 28, 1995, which was filed with the Securities and
          Exchange Commission.    
    
     (9)  Incorporated by reference to the Registrant's Form 10-K for its fiscal
          year ended February 28, 1995, which was filed with the Securities and
          Exchange Commission.    
   
    (10)  Incorporated by reference to the Registrant's Form 8-K dated May 24,
          1996, as amended, which was filed with the Securities and Exchange
          Commission.    
                                       4