<PAGE>
 
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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
 
                               ----------------
                                   FORM 10-K
                               ----------------
 
(Mark One)
 
[_] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 
OR
 
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
For the transition period from March 28, 1998 to December 25, 1998
 
                         Commission file number 1-9037
 
                               The IT Group, Inc.
             (Exact name of registrant as specified in its charter)
 
                Delaware                               33-0001212
    (State or other jurisdiction of                 (I.R.S. Employer
     incorporation or organization)               Identification No.)
 
          2790 Mosside Boulevard, Monroeville, Pennsylvania 15146-2792
    (Address of principal executive                    (Zip Code)
                offices)
 
Registrant's telephone number, including area code: (412) 372-7701
 
Securities registered pursuant to Section 12(b) of the Act:
 
<TABLE>
<CAPTION>
          Title of each class         Name of each exchange on which registered
          -------------------         -----------------------------------------
   <S>                                <C>
   Common Stock, $.01 Par Value       New York Stock Exchange; Pacific Exchange
   Preferred Stock Depositary Shares  New York Stock Exchange; Pacific Exchange
</TABLE>
 
Securities registered pursuant to Section 12(g) of the Act: None
 
   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 X No
                                      -    -
 
   Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
 
   The aggregate market value of the registrant's voting common stock held by
non-affiliates of the registrant at March 5, 1999, was approximately
$264,868,334 (based upon the closing sale price of its common stock on the New
York Stock Exchange as reported by The Wall Street Journal on such date.)
 
   At March 5, 1999 the registrant had issued and outstanding an aggregate of
22,637,858 shares of its common stock, including 44,949 shares held in
treasury.
 
                      Documents Incorporated by Reference
 
   Certain information included in the registrant's definitive proxy statement
to be filed with the Securities and Exchange Commission for the Annual Meeting
of Stockholders of the registrant to be held on May 19, 1999 is incorporated by
reference into Part III hereof.
 
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
 
                               THE IT GROUP, INC.
                           ANNUAL REPORT ON FORM 10-K
                  FOR THE NINE MONTHS ENDED DECEMBER 25, 1998
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
 Item                                                                     Page
 ----                                                                     ----
 <C>  <S>                                                                 <C>
                                    PART I
 1    Business..........................................................    3
      General...........................................................    3
      Industry Overview and Trends......................................    4
      Acquisitions......................................................    5
      Recent Events.....................................................    6
      Benefits of the Acquisitions......................................    7
      Operations........................................................    7
      General...........................................................    7
      Engineering and Construction......................................    7
      Consulting and Ventures...........................................    8
      Outsourced Services...............................................    9
      International.....................................................    9
      Clients...........................................................   10
      Backlog...........................................................   11
      Technology Development and Patents................................   11
      Contracts.........................................................   12
      Competition.......................................................   12
      Regulatory........................................................   13
      Environmental Contractor Risks....................................   16
      Insurance.........................................................   17
      Concentration of Revenues.........................................   17
      Government Contractor Risks.......................................   17
      Fixed-Price Contracts.............................................   18
      Closure of Inactive Disposal Sites and Potential CERCLA
      Liabilities.......................................................   18
      Substantial Leverage..............................................   19
      Ability to Service Debt...........................................   20
      History of Losses.................................................   20
      Fluctuations in our Quarterly Operating Results...................   21
      Management of Growth..............................................   21
      Risks of Achievement of Cost Savings and Integration of
      Operations........................................................   22
      Control of Board of Directors.....................................   22
      International Operations..........................................   22
      Reliance on Key Personnel.........................................   23
      Discontinued Operations...........................................   23
      Employees.........................................................   23
 2    Properties........................................................   24
 3    Legal Proceedings.................................................   24
 4    Submission of Matters to a Vote of Shareholders...................   24
                               ----------------
 4A   Executive Officers of the Company.................................   25
</TABLE>
 
 
                                       1
<PAGE>
 
<TABLE>
<CAPTION>
 Item                                                                     Page
 ----                                                                     ----
 <C>  <S>                                                                 <C>
                                    PART II
 5    Market for the Registrant's Common Stock and Related Shareholder
      Matters...........................................................   26
 6    Selected Financial Data...........................................   27
 7    Management's Discussion and Analysis of Results of Operations and
      Financial Condition...............................................   27
 8    Financial Statements and Supplementary Data.......................   44
 9    Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure..............................................   76
 
                                   PART III
 10   Directors and Executive Officers of the Registrant................   76
 11   Executive Compensation............................................   79
 12   Security Ownership of Certain Beneficial Owners and Management....   80
 13   Certain Relationships and Related Transactions....................   83
 
                                    PART IV
 14   Exhibits, Financial Statement Schedule and Reports on Form 8-K....   88
</TABLE>
 
                                       2
<PAGE>
 
                                     PART I
 
ITEM 1. BUSINESS.
 
GENERAL
 
   The IT Group, Inc. (we or IT or the Company) is a leading provider of
diversified, value-added services in the areas of environmental consulting,
engineering and construction and remediation. In addition, we are leveraging
our core project management competencies to offer our clients a variety of
outsourcing services such as facilities management. We have a strong reputation
for both the high quality of our work and the breadth of the services we
provide.
 
   We provide services through four business platforms: Engineering &
Construction, Consulting & Ventures, Outsourced Services and International. The
following table provides a brief overview of our four operating platforms. For
more information on our platforms, see "Business--Operations".
 
<TABLE>
<CAPTION>
                                   Percentage of
                  Revenue for       Revenue for
                   the Nine          the Nine
                 Months Ended      Months Ended
 Platform      December 25, 1998 December 25, 1998          Clients           Primary Services Provided
 --------      ----------------- -----------------          -------           -------------------------
                 (In millions)
 <C>           <C>               <C>               <C>                        <S>
 Engineering &      $597.9             78.9%       DOD                        Assessment, planning and
 Construction                                      DOE                        execution for:
                                                   EPA                        Hazardous waste design
                                                   State and local agencies   and remediation
                                                   Private sector             Decontamination and
                                                                              decommissioning remedial
                                                                              construction
 
 Consulting &        $79.4             10.5%       Private sector clients     Remedial investigations
 Ventures                                          U.S. Government clients    Feasibility studies
                                                                              Environmental permitting
                                                                              Facility siting and
                                                                              design
                                                                              Environmental compliance
                                                                              auditing
                                                                              Risk
                                                                              assessment/management
                                                                              Health and safety
                                                                              program design
 
 Outsourced          $70.4              9.3%       DOD                        Facilities, operation,
 Services                                          State and local facilities maintenance and
                                                   Private sector clients     construction
                                                                              Construction management
                                                                              services
 International        $9.8              1.3%       U.S. and international     Engineering, remediation
                                                   governments                and consulting
                                                   Private sector             Wastewater
                                                                              treatment/design
                                                                              Infrastructure,
                                                                              engineering
                                                                              and construction
</TABLE>
 
   Our clients are federal, state, and local governments in the U.S. and
commercial businesses worldwide. We obtained 69% of our revenues for the nine
months ended December 25, 1998 from the federal government under more than 100
contracts that range in length from one to ten years. In addition, we serve
more than 1,500 commercial clients on projects which range in length from one
month to more than one year. As of December 25, 1998 we employed over 5,600
persons in a network of over 80 domestic and over ten international offices.
Approximately 90% of our backlog at December 25, 1998 was under federal
government programs and approximately 82% is expected to be charged to our
clients on a cost-reimbursable basis. Many of our commercial contracts are
evergreen contracts that are typically not part of our backlog.
 
                                       3
<PAGE>
 
Industry Overview and Trends
 
   According to industry sources, from 1993 to 1997, the portion of the
domestic environmental services industry in which we compete grew from
approximately $25.4 billion in 1993 revenues to approximately $26.5 billion in
1997 revenues, which equates to a compound annual growth rate of approximately
1.1%.
 
   Demand for our environmental services is driven by a number of factors,
including:
 
  .  the needs of the U.S. Department of Defense and Department of Energy to
     restore sites formerly used for weapons production or military bases;
 
  .  the need to comply with federal, state and municipal environmental
     regulation and enforcement regarding the quality of the environment;
 
  .  the need to bring aging production facilities into compliance with
     current environmental regulations;
 
  .  the need to minimize waste generation on an ongoing basis; and
 
  .  the need to reduce or forestall liability associated with pollution-
     related injury and damage.
 
   A significant portion of future DOD and DOE environmental expenditures will
be directed to cleaning up hundreds of military bases and to restore former
nuclear weapons facilities. DOD has stated that there is an urgent need to
ensure that the hazardous wastes present at these sites, often located near
population centers, do not pose a threat to the surrounding population, and, in
connection with the closure of many military bases, there is an economic
incentive to make sure that the environmental restoration enables these sites
to be developed commercially by the private sector. DOE has long recognized the
need to stabilize and safely store nuclear weapons materials and to clean up
areas contaminated with hazardous and radioactive waste. According to federal
government publications, the DOD's budget for environmental remediation will be
approximately $2.5 billion annually for the next five years and the DOE's
budget will be approximately $5.7 billion annually for the same period.
 
   Significant environmental laws have been enacted in the U.S. in response to
public concern about the environment. These laws and the implementing
regulations affected nearly every industrial activity, and efforts to comply
with the requirements of these laws create demand for our services. The
principal federal legislation that has created a substantial market for us, and
therefore has the most significant effect on our business, includes the
following:
 
  .  The Comprehensive Environmental Response, Compensation and Liability Act
     of 1980, or CERCLA, established the Superfund program to clean up
     existing, often abandoned, hazardous waste sites and provides for
     penalties and significant damages for noncompliance with EPA orders. As
     of September 1998, the EPA identified approximately 1,370 sites as being
     significantly contaminated with hazardous materials and, therefore,
     named them as Superfund sites. Only approximately 41% of these sites
     have been remediated.
 
  .  The Resource Conservation and Recovery Act of 1976, or RCRA, provides a
     comprehensive scheme for the regulation of hazardous waste from the time
     of generation to its ultimate disposal, and sometimes thereafter, as
     well as the regulation of persons engaged in the treatment, storage and
     disposal of hazardous waste.
 
  .  The Clean Air Act as amended in 1970 empowered the EPA to establish and
     enforce National Ambient Air Quality Standards, National Emission
     Standards for Hazardous Air Pollutants and limits on the emission of
     various pollutants. The 1990 amendments to the Clean Air Act
     substantially increased the number of sources emitting a regulated air
     pollutant which will be required to obtain an operating permit; the
     amendments also addressed the issues of acid rain and ozone protection.
 
  .  The Clean Water Act of 1972, established a system of standards, permits
     and enforcement procedures for the discharge of pollutants to surface
     water from industrial, municipal and other wastewater sources.
 
                                       4
<PAGE>
 
   For more discussion of the regulatory environment in which we operate, see
"Business--Operations--Regulatory".
 
   In recent years, our industry has experienced a slowing in revenue growth,
which is principally attributable to spending patterns of commercial customers.
We attribute this slowdown to, among other things:
 
  .  decreased federal, state and local enforcement of regulations, and
 
  .  delay in the reauthorization of CERCLA.
 
   These factors have been partially offset by an increased desire on the part
of commercial clients for strategic environmental services, which:
 
  .  provide an integrated, proactive approach to environmental issues, and
 
  .  are driven by economic, as opposed to legal or regulatory concerns.
 
   In addition, there is a growing international market arising from the
increased awareness on the part of foreign governments and private sector
entities of the need for additional and/or initial environmental regulations,
studies and remediation.
 
   Traditionally DOD has maintained most of its own facilities and performed
its own facility activities, but it is now in the process of transferring many
of these responsibilities to private contractors and private owners. The
privatization market has been created by the government's selling an asset or
revenue stream, such as military housing and electric, water and wastewater
utilities on a military base, to a private company, which is then responsible
for maintenance and operation. The outsourcing market has been created by
private contractors' taking over site activities currently conducted by
government, often military, personnel.
 
   From 1991 to 1998, our industry has experienced substantial consolidation.
According to industry sources, the top ten firms in the environmental services
industry accounted for approximately 46% of the industry measured by 1998
revenue, up from approximately one third in 1991. This consolidation has been
driven by:
 
  .  the benefits of economies of scale;
 
  .  growing demand for full service business oriented solutions;
 
  .  the shift from commercial to government procurement of environmental
     services as a result of the conversion of military sites to peaceful
     uses.
 
Acquisitions
 
   Since March 1996, we have acquired eight firms representing an aggregate
$770.0 million in revenue at the time of acquisition.
 
                                       5
<PAGE>
 
   The following table provides some basic information on these acquisitions.
 
<TABLE>
<CAPTION>
                                                                                      Most Recent
                                                                                      Fiscal Year
                                                                                       Revenues
 Date of                                                                               Prior to
 Acquisition         Name               Location(s)                Business           Acquisition
 -----------         ----               -----------                --------           -----------
                                                                                          (In
                                                                                       millions)
 <C>         <C>                  <C>                      <S>                        <C>
 Mar. 1996   Gradient             Massachusetts            Environmental/human             $5
             Corporation                                   health risk assessment
                                                           Litigation support
 
 Nov. 1996   Chi Mei IT           Taiwan                   Wastewater treatment           $12
                                                           design/build
 
 May 1997    PHR                  California               Historical pollution            $3
             Environmental        Washington, DC           liability research and
             Consultants, Inc.                             investigation
 
 Sept. 1997  Pacific              California               Environmental consulting       $10
             Environmental                                 and engineering services
             Group, Inc.
 
 Jan. 1998   Jellinek, Schwartz & Washington, DC           Science-based                  $12
             Connolly, Inc.       Colorado                 environmental consulting
                                  England                  and advocacy services
 
 Mar. 1998   LandBank, Inc.       Colorado                 Real estate acquisition         $3
                                                           and restoration company
 
 Feb. and    OHM Corporation      Over 30 regional offices Leading diversified           $525
 June 1998                                                 services firm providing
                                                           a broad range of
                                                           services for
                                                           governmental and private
                                                           sector clients
                                                           Leading provider of
                                                           operations, maintenance
                                                           and construction
                                                           outsourcing services
 
 Dec. 1998   Fluor Daniel         Over 30 offices in       Broad-based                   $200
             GTI, Inc.            North America            environmental services
                                  Europe and               firm
                                  Australia
</TABLE>
 
Recent Events
 
   On February 5, 1999, we signed an agreement to acquire all of the issued and
outstanding capital stock of Roche Limited Consulting Group (Roche) for an
initial payment of $10.0 million in cash, plus two potential earnout payments.
Roche, an engineering, construction and consulting company based in Canada, is
primarily focused on infrastructure development including transportation and
water/wastewater treatment facilities. Roche also has completed projects in the
pulp and paper and mining markets. Roche operates exclusively outside the U.S.,
and has current project experience in more than 20 countries. We have
collaborated with Roche on projects during the past two years, and we believe
that this acquisition will add to our strategic consulting capabilities and
experience and expertise in international markets. Roche has approximately 700
employees and had revenue of $28.3 million in its most recent year ended
December 31, 1998. The acquisition is expected to close in April 1999.
 
   On March 8, 1999, we signed an agreement to acquire specified assets and
assume specified liabilities of the Environment and Facilities Management Group
(EFM Group) of ICF Kaiser International, Inc. (Kaiser) for a purchase price of
$82.0 million reduced by $8.0 million representing working capital retained by
Kaiser. The
 
                                       6
<PAGE>
 
EFM Group provides environmental remediation, program management and technical
support for United States Government agencies including the DOD, National
Aeronautics and Space Administration (NASA) and the DOE as well as private
sector environmental clients. The EFM Group has approximately 500 employees and
had revenue of approximately $106 million for the calendar year ended December
31, 1998. The acquisition is expected to close in April 1999.
 
   At the same time we announced the EFM acquisition, we announced that our
obligation to complete the purchase of EFM was subject to financing, and we
have begun the sale of $200.0 million in senior subordinated notes in a private
placement (the Notes). Concurrently with the filing on this Report on Form 10-
K, the Company is filing a Report on Form 8-K to make information from the
offering memorandum for the Notes publicly available, including pro forma
financial information, financial statements from the acquired companies, and a
description of our business, as though the acquisitions had been completed at
the beginning of calender year 1998.
 
Benefits of the Acquisitions
 
   We believe our recent acquisitions add capabilities that are complementary
to our existing services, and offer us cost savings and other synergies. We
also believe that our matrix organization and our comprehensive management
information system allow us to:
 
  .  efficiently integrate acquired operations,
 
  .  eliminate duplicative costs,
 
  .  centralize common functions,
 
  .  consolidate locations that serve the same common areas and
 
  .  use our low cost structure to bid successfully on new projects.
 
   In connection with the OHM acquisition, we implemented a cost reduction
program that eliminated approximately $32.0 million in costs on an annualized
basis within six months of acquiring the business, principally through
headcount reduction and duplicative facilities closures. In connection with the
GTI acquisition, we executed a similar plan that has resulted in approximately
$18.7 million of annualized cost savings being realized.
 
OPERATIONS
 
General
 
   We provide services through four platforms: Engineering & Construction,
Consulting & Ventures, Outsourced Services and International. We do not own or
operate facilities involved in the on-going commercial disposal of hazardous
waste.
 
 Engineering & Construction
 
   Most of our business is the management of complex hazardous waste
remediation projects. These projects involve the assessment, planning and
execution of the decontamination and restoration of property, plant and
equipment that have been contaminated by hazardous substances. These projects
usually require the cleanup of land sites where hazardous or radioactive
substances have been disposed. These sites can pose threats to adjacent
buildings, production facilities and storage sites and the surrounding rivers,
streams and groundwater. These projects require considerable technical
engineering and analysis to identify the substances involved, the extent of the
contamination, the appropriate alternatives for containing or removing the
contamination, and the selection of the technologies for treatment to perform
the cleanup of the site. They also require strong project management and
construction and remediation skills to control costs and to meet required
schedules.
 
                                       7
<PAGE>
 
   Our Engineering & Construction platform provides full-service DOD and DOE
delivery order program management, engineering and design services, remedial
construction, specialized equipment and decontamination/decommissioning
capabilities. Remedial construction services offered by this platform include:
 
   .  excavation and isolation,
 
   .  installation of subsurface recovery systems,
 
   .  bioremediation approaches,
 
   .  chemical treatment,
 
   .  soil washing,
 
   .  fixation or stabilization,
 
   .  facility or site closures,
 
   .  solidification,
 
   .  landfill cell construction and
 
   .  slurry wall and cap installation
 
We use our Engineering & Construction skills to develop partnering
arrangements with clients in which we become the primary supplier of all
client environmental management services and assist clients in innovatively
reducing total environmental costs.
 
   The following is an example of the type of project performed by our
Engineering & Construction platform. We completed an approximately $70.0
million site remediation and restoration project for the DOD at Fort Ord in
Monterey, California as part of the DOD's base closure program. The project
site consisted of an 8,000 acre military site. We provided a range of services
at this site, including:
 
   .  removal of lead and copper from 3.2 miles of beach;
 
   .  removal and transportation of over 2.0 million cubic yards of soils and
waste;
 
   .  consolidation and closure of four landfills totaling 144 acres;
 
   .  restoration of a 44 acre site for a municipal park; and
 
   .  revegetation of 100 acres of disturbed property with native species.
 
 Consulting & Ventures
 
   Our Consulting & Ventures platform helps clients comply with environmental
and/or health and safety regulations. This platform also assists clients in
developing corporate policies and procedures in areas such as pollution
prevention and waste minimization so that they integrate environmental
regulations into their business decisions.
 
   Our Consulting & Ventures platform provides a wide range of consulting
services including the following:
 
   .  environmental permitting,
 
   .  facility siting and design,
 
   .  strategic environmental management,
 
   .  environmental compliance/auditing,
 
   .  risk assessment/management,
 
   .  air quality assessment/management,
 
 
                                       8
<PAGE>
 
   .  pollution prevention and waste minimization,
 
   .  environmental information systems,
 
   .  data management and
 
   .  industrial hygiene.
 
   The following is an example of the type of project performed by our
Consulting & Ventures platform. Under a $6.0 million contract with a large,
diversified manufacturing company, we conducted a remedial
investigation/feasibility study on a Superfund site located at a 95-acre coke
plant in Ironton, Ohio. After conducting the study, we prepared a remedial
design/action plan, which included construction services and the design of
facilities and bioremediation and groundwater management. Our plan resulted in
substantial savings for the client.
 
 Outsourced Services
 
   Through our Outsourced Services platform, we have broad capabilities for
operations, maintenance, management and construction at federal facilities and
in the private sector. This platform is a leading provider of project, program
and construction management services to the DOD and state and local government
agencies. As a result of the OHM acquisition, we are leveraging our core
competencies into new, high-growth service areas, especially toward outsourcing
and privatization occurring in federal, state and local governments. These core
competencies meet facilities management needs in the private sector as well.
Our Outsourced Services platform also offers recurring services that are not
dependent on regulatory enforcement.
 
   The following is an example of the type of project performed by our
Outsourced Services platform. We have been awarded a third consecutive contract
by the Air Force for construction management services over a five year period
at Hill Air Force Base in Utah. The value of this contract is approximately
$95.0 million, and involves projects ranging from small renovation and
replacement work to the installation of sophisticated centrifuge technology. We
also are coordinating the activities of several subcontractors that are
performing on-going construction activities.
 
 International
 
   We are building our International platform to meet the global environmental
needs of our U.S.-based clients. In November 1996, we bought 50.1% of the stock
of Chi Mei Scientech/Entech, a Taiwan-based wastewater treatment design/build
firm, now doing business as Chi Mei IT. As a part of our purchase of GTI, we
acquired GTI's subsidiaries in Australia, Italy and the United Kingdom. We also
entered into a four-year marketing agreement with Fluor Daniel, Inc. that is
expected to provide us project diversification on a worldwide basis. In
February 1999, we signed an agreement to acquire Roche, a 700 employee firm
based in Canada. Roche has current project experience in over 20 countries.
Also, we have in the past, and may in the future, enter into joint venture
agreements or investments for international projects. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition--
Results of Operations--Continuing Operations--Revenues."
 
   The following is an example of the type of project performed by our
International platform. We were appointed to design, install and operate a soil
vapor extraction system to remediate a former gasworks site in London, England,
under a contract for approximately (Pounds)500,000 (or approximately $800,000).
Under a detailed design, created to speed installation and minimize
commissioning time, we were able to treat an area of 43,000 square meters.
During the course of the project, we bioremediated or volatillised over 100
tons of contaminated soil. The site will now be redeveloped as a major
exhibition site.
 
 
                                       9
<PAGE>
 
Clients
 
   Our clients are federal, state and local governments and commercial
businesses worldwide.
 
 Federal, State and Local Governmental Clients
 
   Due to our technical expertise, project management experience and full-
service capabilities, we have successfully bid on and executed CERCLA and RCRA-
related contracts for many federal and other government agencies. See
"Business--Operations--Regulations."
 
   Federal government contracts are typically awarded through competitive
bidding pursuant to federal procurement regulations and involve several
bidders. After a successful bidder is selected, there is usually a period for
contract negotiations. Government contracts also typically have annual funding
limitations and are limited by public sector budgeting constraints. Some of
these contracts provide a maximum amount of services that may be performed by
us, and specific services are authorized from time to time through a series of
task orders under the master contract.
 
   Many of these government contracts are multi-year Indefinite Delivery Order
(IDO) agreements. These programs provide estimates of what the agency expects
to spend, and our program management and technical staffs work closely with the
client to define the scope and amount of work required. While these contracts
do not initially provide us with any specific amount of work, as projects are
defined, the work is awarded to us without further formal competitive bidding.
Approximately 40% of our revenues for the nine months ended December 25, 1998
were from IDOs.
 
   Although we generally serve as the prime contractor on our federal
government contracts, or as a part of a joint venture which is the prime
contractor, we also serve as a subcontractor to other prime contractors on some
federal government programs. As has become typical in the environmental
industry, we have entered and may continue to enter into joint venture or
teaming arrangements with competitors when bidding on the largest, most complex
contracts.
 
   The table below sets forth the percentage of revenues we receive from
federal, state and local government contracts as a percentage of our
consolidated revenues.
 
<TABLE>
<CAPTION>
                               Twelve Months Ended           Nine Months Ended
                               -------------------------     -----------------
                               March 28,      March 27,        December 25,
                                  1997           1998              1998
Source                         ---------      ---------        ------------
<S>                            <C>            <C>            <C>
Federal government:
  DOD........................             42%            47%         52%
  DOE........................             14              9          10
  Other federal agencies.....              3              2           7
                                  ----------     ----------         ---
                                          59             58          69
State and local governments..              8              5           5
                                  ----------     ----------         ---
  Total......................             67%            63%         74%
                                  ==========     ==========         ===
</TABLE>
 
 Bidding Process
 
   We have a set of company-wide estimating and proposal development procedures
designed to provide consistency across all operating platforms during the
preparation of both commercial and government proposals. Our shared services
group implements these procedures and provides resources to our business
platforms for preparation of cost estimates, proposals and bid submittals. Each
of our platforms has responsibility for responding to customer solicitations.
The final decision requires coordination between operations management,
business development personnel and corporate management. Before our bid is
submitted to a client, the approach and pricing are reviewed by operations and
estimating management, which
 
                                       10
<PAGE>
 
performs a risk evaluation of commercial terms and conditions and technical
aspects of the bid opportunity. Pricing then is established in accordance with
an authority limits matrix that is issued by our legal department.
 
 Commercial Clients
 
   We serve numerous commercial clients including chemical, petroleum and other
manufacturing firms, utilities, real estate and transportation service
companies and law firms. Much of our commercial work represents new contracts
awarded by existing clients. No single commercial client accounted for 10% or
more of our consolidated revenues in the nine months ended December 25, 1998,
or during fiscal years 1998 or 1997. Although in recent years enforcement of
CERCLA has diminished, clients are still seeking strategic, integrated
solutions to their environmental problems, which we seek to provide.
 
Backlog
 
   As of December 25, 1998, we had existing backlog of $3.5 billion including
approximately $0.9 billion of funded backlog, of which $0.7 billion is expected
to be completed during 1999. Approximately 90% of our backlog at December 25,
1998 was under government programs, for which funds have already been
appropriated. In addition, approximately 82% of our backlog is expected to be
charged to our clients on a cost-reimbursable basis. Many of our commercial
contracts are evergreen contracts and are typically not part of our backlog.
The predictability and stability of our backlog permits us to manage our fixed
costs appropriately, minimize our overhead and bid selectively on new work.
 
Technology Development and Patents
 
   Our technology development program focuses on innovative applications to
client projects of new and existing technologies and methods. The program has
four principal goals:
 
  .  to support project managers and clients to ensure successful application
     of environmental technologies,
 
   .  to continue to improve technologies developed in-house through use on
client projects,
 
  .  to evaluate and implement technologies developed by others that present
     commercial opportunities for us, and
 
   .  to improve third party technologies for enhanced client value.
 
   We emphasize several technologies including bioremediation. For example, we
have used naturally occurring organisms in our patented BIOFAST(R) system to
clean a number of sites. We have licensed from a third party "barrier wall and
reactive gate technology," which assists in the decomposition of contaminants,
and continue to apply it to client projects. The EPA has also extended for a
third year our contract to operate its Test & Evaluation Facility in
Cincinnati, Ohio, which is available for private party sponsored technology
evaluations. It also provides treatability testing and process development
services on contaminated waste waters, sludges and soils. Major efforts this
year focused on safe drinking water and water treatment processes including
filtration and disinfection technologies. We also have improved our
environmental information management technologies. We have received extensive
patent coverage for the Manage IT system, which we use to manage and track
hazardous waste at client sites. Through the use of proprietary and other
environmental information management systems, we have become a leading user of
advanced data base management technology to serve clients' needs.
 
   We hold over 20 patents for various environmental technologies. Two specific
patents cover certain design features of equipment used in our on-site
remediation business. The first patent is for a filtration system to remove
pollutants from flowing creeks and streams and the second, known as a Portable
Method for Decontaminating Earth, is for a decontamination system to remove
contaminants from the soil through a
 
                                       11
<PAGE>
 
process commonly known as soil vapor extraction. We also have the X*TRAX(R) and
LT*X(R) thermal desorption processes. The X*TRAX(R) and LT*X(R) systems are
waste treatment processes that thermally separate organic contaminants from
soils or solids and then treat the resulting organic vapor stream.
 
Contracts
 
   We enter into various types of contracts with our clients, including fixed-
price and cost-reimbursable plus fixed fee and award fee contracts. For the
nine months ended December 25, 1998, 20% of our revenue was derived from fixed-
price contracts and 80% from cost-reimbursable plus fixed fee and award fee
contracts. Under a fixed-price contract, the client agrees to pay a specified
price for our performance of the entire contract. Under a cost-plus contract,
we charge clients negotiated rates based on our direct and indirect costs plus
a fee component. Our ability to perform profitably under fixed-price and other
types of contracts often depends on our ability to identify, manage and recover
on claims for differing and unanticipated conditions and other changes. For a
description of the risks we face with our fixed-price contracts, see
"Business--Operations--Fixed-Price Contracts" and "Business--Operations--
Government Contractor Risks."
 
   We provide our services under contracts, purchase orders or retainer
letters. We bill all of our clients periodically based on costs incurred, on
either an hourly-fee basis or on a percentage of completion basis, as the
project progresses. Generally, our contracts do not require that we provide
performance bonds, although we typically require our subcontractors to post a
bond. A performance bond, issued by a surety company, guarantees the
contractor's performance under the contract. If the contractor defaults under
the contract, the surety will, in its discretion, step in to finish the job or
pay the client the amount of the bond. We have signed indemnity agreements with
our two sureties to indemnify them from obligations under bonds that arise from
our failure to perform under contracts for which bonds are issued. If, however,
the contractor does not have a performance bond and defaults in the performance
of a contract, the contractor is responsible for all damages resulting from the
breach of contract. These damages include the cost of completion, together with
possible consequential damages such as lost profits. To date, we have not
incurred material damages beyond the coverage of any performance bond, and we
have never had a bond called where the surety has been required to take over a
project or pay damages.
 
   For the nine months ended December 25, 1998 subcontractor costs comprised
approximately 30% of our revenues. The absence of qualified subcontractors with
whom we have a satisfactory relationship could adversely affect the quality of
our services and our ability to perform under some of our contracts.
 
Competition
 
   We believe that the principal competitive factors in all areas of our
business are:
 
  .  technical proficiency,
 
  .  operational experience,
 
  .  price,
 
  .  breadth of services offered, and
 
  .  local presence.
 
   We compete with a diverse array of small and large organizations including
the following:
 
  .  national or regional environmental management firms;
 
  .  national, regional and local architectural, engineering and construction
     firms;
 
 
                                       12
<PAGE>
 
  .  environmental management divisions or subsidiaries of international
     engineering, construction and systems companies; and
 
  .  hazardous waste generators that have developed in-house capabilities.
 
   Increased competition, combined with changes in client procurement
procedures, has resulted in, among other things:
 
  .  lower contract margins,
 
  .  more fixed-price or unit-price contracts, and
 
  .  contract terms that increasingly require us to indemnify our clients
     against damages or injuries to third parties and property and
     environmental fines and penalties.
 
   The entry of large systems contractors and international engineering and
construction firms into the environmental services industry has increased
competition for major federal government contracts and programs, which have
been our primary source of revenue in recent years. In addition, our industry
recently has been subject to intense consolidation. We are participating
actively in this consolidation to support our growth and diversification
strategy. However, we cannot assure that we will be able to compete
successfully given the intense competition and trends in our industry.
 
Regulatory
 
   Our clients and we are subject to extensive and evolving environmental laws
and regulations. The level of enforcement of these laws and regulations affects
the demand for many of our services and creates certain significant risks and
potential opportunities for us in providing our services. Regulatory
enforcement and changes may also affect our inactive disposal sites in Northern
California. See "Business--Operations-- Environmental Contractor Risks" and our
"Notes to Consolidated Financial Statements--Discontinued Operations."
 
   Over the past several years, interested parties have proposed a number of
significant changes to existing environmental laws. Most of the proposed
changes have been delayed in Congress. The proposals would overhaul the
government regulatory process, require regulatory risk assessments and cost-
benefit analyses and reduce requirements for reporting to the government.
Although the impact of these proposed changes upon our business cannot yet be
fully predicted, the proposed changes in regulations and the perception that
enforcement of current environmental laws has been reduced, appear to have
decreased the demand for some of our services, as clients anticipate and adjust
to the potential changes. Proposed changes could result in increased or
decreased demand for some of our services. For example, if regulatory changes
decrease the cost of remediation projects or result in more funds being spent
for actual remediation, that portion of our business could increase while
amounts spent for studies could decrease. The ultimate impact of the proposed
changes will depend upon a number of factors, including the overall strength of
the U.S. economy and clients' views on the cost-effectiveness of remedies
available under the changed regulations.
 
   The principal environmental legislation and proposed changes in those laws
affecting us and our clients is described below:
 
   Comprehensive Environmental Response, Compensation and Liability Act of
1980. CERCLA governs the cleanup of sites at which there have been or may be
releases or threatened releases of hazardous substances into the environment.
CERCLA provides that any person who (1) currently or at the time of disposal of
a hazardous substance, owned or operated any facility at which hazardous
substances were released, (2) arranged for disposal, treatment, or
transportation of hazardous substances by others or (3) accepted hazardous
substances for transport to facilities or sites from which there is a release
or threatened release of hazardous substances, is liable for the costs of
cleanup and damages to natural resources. These persons are called potentially
responsible parties (PRPs). CERCLA provides that the federal government can
either clean up these sites itself or order the PRPs to do so. CERCLA created
the Hazardous Substance Superfund to be used by
 
                                       13
<PAGE>
 
the federal government to pay for certain cleanup efforts. When the federal
government expends Superfund money for remedial activities, it must seek
reimbursement from the PRPs. CERCLA generally imposes strict, joint and several
retroactive liability upon PRPs.
 
   CERCLA's Superfund taxing authority expired in December 1995, and CERCLA's
authority to expend funds originally expired in September 1994. However,
Congress has extended the EPA's authority to use funds on an interim basis.
Congress to date has linked long-term reinstatement of Superfund's taxing and
spending authority to comprehensive reauthorization and revision of CERCLA. The
Congressional Budget Office estimates that the Superfund trust fund has
sufficient funds for the CERCLA program through the year 2001.
 
   A number of changes in CERCLA have been proposed. The suggested changes
include changes in cleanup standards, remedy selection, the amount of funds
available for cleanup, and CERCLA's provision for allocating responsibility for
cleanups. We believe Congress' failure to reauthorize CERCLA, and continuing
uncertainty concerning the details of the legislation, have resulted in project
delays and/or the failure of clients to initiate projects. Arguments over state
participation in CERCLA programs and provisions for damages to natural
resources make passage of a bill reauthorizing CERCLA more uncertain. Potential
exhaustion of the monies in the Superfund trust may accelerate the passage of
legislation reauthorizing CERCLA.
 
   In response to Congressional and private sector pressure and, in part, to
avoid more sweeping changes by Congress, the EPA has relaxed regulatory
requirements and enforcement. For example, the EPA has attempted, through
various regulatory initiatives, to make it easier to redevelop "brownfields,"
i.e., lightly to moderately contaminated urban sites. Brownfields sites
nationally have been estimated to number in the hundreds of thousands. Similar
legislation has also been introduced, and a number of states have initiated
similar programs. The EPA is currently attempting to raise funds for
brownfields programs through bond programs. While we believe such programs
offer additional opportunities, we cannot predict the ultimate impact of these
programs.
 
   Resource Conservation and Recovery Act of 1976. RCRA restricts the land
disposal of certain wastes, prescribes more stringent management standards for
hazardous waste disposal sites, sets standards for underground storage tank
(UST) management and provides for corrective action procedures. RCRA also
imposes liability and stringent management standards on generators or
transporters of hazardous waste and owners or operators of waste treatment,
storage or disposal facilities.
 
   RCRA's requirement that USTs be upgraded to double-walled tanks with leak
detection systems became effective on December 22, 1998, with some 250,000
tanks estimated to remain in violation nationwide. We believe that increased
state and EPA enforcement actions for UST noncompliance will prompt increased
repair or replacement of these tanks. Further, in November 1998, the EPA
adopted its new Hazardous Waste Identification Rule regulation, allowing more
flexible and cost-effective approaches to site cleanups. In particular, the
final rule streamlines permitting, treatment and technological requirements for
waste remediation.
 
   Clean Air Legislation. The Clean Air Act requires compliance with National
Ambient Air Quality Standards for specific pollutants and empowers the EPA to
establish and enforce limits on the emission of various pollutants from
specific types of facilities. The Clean Air Act Amendments of 1990 modified the
Clean Air Act in a number of significant areas. Among other changes, these
amendments
 
  .  established emissions allowances for sulfur and nitrogen oxides,
 
  .  established strict requirements applicable to emissions of air toxics,
 
  .  established a facility-wide operating permit program for all major
     sources of regulated pollutants,
 
  .  established requirements for management of accidental releases of toxic
     air pollutants, and
 
  .  created significant new penalties, both civil and criminal, for
     violations of the Clean Air Act.
 
 
                                       14
<PAGE>
 
   Although the EPA recently promulgated regulations significantly tightening
standards for ozone and particulate emissions, and these regulations might
eventually increase demand for our air quality services, the proposals have met
with substantial opposition (including court challenges) and their ultimate
fate and impact remain uncertain. Also, while world leaders recently agreed to
the "Kyoto Protocol" (treaty) to reduce greenhouse gas emissions, and these
proposals could increase demand for our air quality services, they have also
met with substantial opposition, and their ultimate fate remains uncertain.
Also uncertain are the fate and impact of proposals for tax credits for
greenhouse gas emission reductions as an alternative to the Kyoto Protocol.
 
   The Price Anderson Act (PAA). Approximately 11% of our $3.5 billion in
backlog consists of projects in our energy and nuclear services business. We
service the need of the DOE in converting its weapons facilities to civilian
purposes and the need of the nuclear power industry in the decontamination and
decommissioning of nuclear power plants. We expect this portion of our business
to continue to grow as up to 35 operating commercial power plants reach the end
of their useful lives over the next 20 years.
 
   The PAA promotes and regulates the nuclear power industry in the U.S. The
PAA comprehensively regulates the manufacture, use and storage of radioactive
materials, and promotes the nuclear power industry by offering broad
indemnification to nuclear power plant operators and DOE contractors. While the
PAA's indemnification provisions are broad, it has not been determined whether
they apply to all liabilities that might be incurred by a radioactive materials
cleanup contractor such as us. Also, the PAA expires in 2002. Because nuclear
power remains controversial and no new nuclear plants are planned in the U.S.,
it is not clear that the PAA and its indemnification provisions will be
extended beyond 2002. Our business could be adversely affected if the PAA were
not extended beyond 2002.
 
   The Food Quality Protection Act (FQPA) of 1996. FQPA has created an
increased demand for agricultural chemical registration and defense services.
JSC, one of our recent acquisitions, is a leading supplier of these services.
Also, the regulatory initiatives incorporated in FQPA, including more
comprehensive risk evaluation and management for hazardous chemicals, are
likely to influence future EPA policies and practices. Such regulatory
developments may increase demand for our services.
 
   Other Federal and State Environmental Laws. Our clients also use our
services in complying with, and our operations are subject to regulation under,
among others, the following federal laws:
 
   .  the Toxic Substances Control Act,
 
   .  the Clean Water Act,
 
   .  the Safe Drinking Water Act,
 
   .  the Occupational Safety and Health Act, and
 
   .  the Hazardous Materials Transportation Act.
 
   Many states also have passed Superfund-type legislation and other
regulations and policies to cover more detailed aspects of hazardous materials
management. This legislation addresses such topics as:
 
   .  air pollution control,
 
   .  UST and aboveground storage tank (AST) management,
 
   .  water quality,
 
   .  solid waste,
 
   .  hazardous waste,
 
   .  surface impoundments,
 
 
                                       15
<PAGE>
 
   .  site cleanup, and
 
   .  wastewater discharge.
 
Environmental Contractor Risks
 
   Although we believe that we generally benefit from increased environmental
regulation, and from enforcement of those regulations, increased regulation,
enforcement and private litigation also create significant risks for us. These
risks include potentially large civil and criminal liabilities from violations
of environmental laws and regulations and liabilities to clients and to third
parties for damages arising from performing services for clients. Our failure
to observe the laws or the terms and conditions of licenses and permits we hold
could adversely impact our ability to carry on our business as presently
conducted.
 
 Liabilities Arising out of Environmental Laws and Regulations
 
   Our operations are subject to regulation by a number of federal and other
laws and agencies. As such, we may be held directly liable for failure to abide
by these laws. Any such failure could lead to our debarment or suspension as a
government contractor. Companies that are subject to environmental liabilities
have also sought to expand the reach of the Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA) or (Superfund), the Resource
Conservation and Recovery Act (RCRA) and similar state statutes to make
contractor firms responsible for cleanup costs. These companies claim that
environmental contractors are owners or operators of hazardous waste facilities
or that they arranged for treatment, transportation or disposal of hazardous
substances. If we are held responsible under CERCLA or RCRA for damages caused
while performing services or otherwise, we may be forced to bear this liability
by ourselves, notwithstanding the potential availability of contribution or
indemnification from other parties. Further, one of our businesses involves the
purchase and redevelopment of environmentally impaired property. As the owner
of such properties, we may be required to clean up all contamination at these
sites, even if we did not place it there. We use insurance and other risk
mitigation techniques to manage these risks but we cannot guarantee the
adequacy of those measures.
 
 Potential Liabilities to Clients and Third Parties
 
   In performing services for our clients, we could become liable for breach of
contract, personal injury, property damage, negligence and other causes of
action. The damages available to a client are potentially large and could
include consequential damages.
 
   Many potential clients, particularly in connection with projects involving
large scale cleanups, try to shift to contractors the risk of completing the
project, if the contamination is either more extensive or difficult to resolve
than they anticipated. In this competitive market, clients increasingly try to
pressure contractors to accept greater risks of performance, liability for
damage or injury to third parties or property and liability for fines and
penalties. We have from time to time been involved in claims and litigation
involving disputes over such issues.
 
   Environmental management contractors also potentially face liabilities to
third parties for property damage or personal injury stemming from a release of
toxic substances resulting from a project performed for clients. These
liabilities could arise long after completion of a project.
 
   Over the past several years, the EPA and other federal agencies have
constricted significantly the circumstances under which they will indemnify
their contractors against liabilities incurred in connection with CERCLA
projects and continue their attempts to renegotiate previously agreed
indemnities.
 
 
                                       16
<PAGE>
 
Insurance
 
   We maintain liability insurance programs that are structured to provide
coverage for major and catastrophic losses. We self insure against losses that
may occur in the ordinary course of business. Effective April 1, 1998, our
liability insurance program provides for coverage of up to $75.0 million. This
coverage has a $500,000 deductible. We also carry pollution liability insurance
with policy limits of up to $35.0 million. This coverage has a $1.0 million
deductible. However, we cannot assure that any future claims will not exceed
our coverages.
 
   In preceding years, our insurance program required us to self-insure for the
first $5.0 million retention for each of its general liability, automobile
liability and contractor's pollution liability coverages. We are obligated to
indemnify our insurance carriers against liabilities and costs of defense,
subject to certain limitations for each of these kinds of coverage, up to that
$5.0 million limit. Letters of credit support this indemnity commitment.
 
   Although we believe our insurance program is appropriate for the management
of our risks, our insurance policies may not fully cover our operations. Policy
coverage exclusions, retaining risks through deductible and self-insured
retention programs, or losses in excess of the coverage may cause all or a
portion of one or more losses not to be covered by our insurance.
 
Concentration of Revenues
 
   Agencies of the federal government are among our most significant clients.
For the nine months ended December 25, 1998, approximately 69% of our net
revenue was derived from federal agencies as follows:
 
   .  52% from the DOD;
 
   .  10% from the DOE; and
 
   .  7% from other federal agencies.
 
   Many of our contracts with federal government agencies require annual
funding approval and may be terminated at their discretion. A reduction in
spending by federal government agencies could limit the continued funding of
our existing contracts with them and could limit our ability to obtain
additional contracts. These limitations, if significant, could have a material
adverse effect on our business.
 
Government Contractor Risks
 
   As a major provider of services to governmental agencies, we face the risks
associated with government contracting, which include the risk of substantial
civil and criminal fines and penalties for violations of applicable regulations
and the risk of public scrutiny of our performance at high profile sites.
Government contracting requirements are complex, highly technical and subject
to varying interpretations. As a result of our government contracting business,
we have been, are and expect in the future to be, the subject of audits and
investigations by governmental agencies, including the Defense Contract Audit
Agency (the DCAA) and the EPA's Office of Inspector General (EPAOIG). During
the course of an audit, the DCAA or EPAOIG may disallow costs if it determines
that we improperly accounted for such costs in a manner inconsistent with Cost
Accounting Standards. Under the type of "cost reimbursable" government
contracts that we typically perform, only those costs that are reasonable,
allocable and allowable are recoverable under the Federal Acquisition
Regulations and Cost Accounting standards. At present, there are several
unresolved and/or ongoing audits of our billings dating back to 1995 (and, in
some instances, earlier years as well). A disallowance of a significant amount
of our costs could have a material adverse effect on our business.
 
   In addition to the damage to our business reputation, the failure to comply
with the terms of one or more of our government contracts could also result in
our suspension or debarment from future government contract projects for a
significant period of time. This could result in a material adverse effect on
our business. On or
 
                                       17
<PAGE>
 
about September 2, 1998, OHM Corporation, one of its subsidiaries, and The IT
Group entered into a Compliance Agreement with the EPA to address alleged past
practices by OHM that, according to the EPA, may constitute a basis for our
suspension and/or debarment. A breach of the Compliance Agreement by us or any
of our subsidiaries is potentially cause for our immediate suspension from work
and/or debarment. In this regard, EFM also has several open audits by EPAOIG
and investigations involving both the Department of Justice and EPAOIG.
 
Fixed-Price Contracts
 
   We enter into various types of contracts with our clients, including fixed-
price contracts. For the nine months ended December 25, 1998, approximately 20%
of our net revenue was derived from fixed-price contracts. Fixed-price
contracts protect clients but expose us to a number of risks. These risks
include:
 
   .  underestimation of costs;
 
   .  problems with the appropriate choice of technologies;
 
   .  unforeseen costs or difficulties;
 
   .  delays beyond our control; and
 
   .  economic and other changes that may occur during the contract period.
 
   The risks we face under fixed-price contracts could have a material adverse
effect on our business.
 
Closure of Inactive Disposal Sites and Potential CERCLA Liabilities
 
   Before 1987, we were a major provider of hazardous waste transportation,
treatment and disposal operations in California. In December 1987, we adopted a
strategic restructuring program that included a formal plan to divest our
transportation, treatment and disposal operations and we stopped taking new
business. Closure plans for all four of these facilities have now been approved
by all applicable regulatory agencies. Closure construction has been completed
at three of these facilities (Montezuma Hills, Benson Ridge and Vine Hill). At
December 25, 1998, our consolidated balance sheet included accrued liabilities
of approximately $7.9 million to complete the closure and post-closure of our
disposal facilities and the potentially responsible party (PRP) matters, net of
certain trust fund and annuity investments, restricted to closure and post-
closure use and net of anticipated insurance settlements.
 
 Impact of Uncertainty in Closure Cost Estimates
 
   Closure and post-closure costs associated with our inactive disposal sites
are incurred over a significant number of years and are subject to a number of
variables. We have estimated the impact of these costs in our provision for
loss on disposition of discontinued operations. However, closure and post-
closure costs could be higher than estimated if regulatory agencies were to
require procedures significantly different than those in the plans developed by
us or if there are additional delays in the closure plan approval process.
Since recording our initial provision for loss, we have been required to make
four upward adjustments to the provision. During each of the three fiscal years
ended December 25, 1998, we funded accrued costs of $11.1 million, $14.9
million and $15.7 million relating to our closure plans and construction and
PRP matters. We expect to incur costs over the next several years; however, we
expect the nature of the costs to change from closure design and construction
to post-closure monitoring.
 
   Closure plans for our Panoche facility, the final facility to be closed,
were approved on March 18, 1998. The approved plans provide for submittal of
technical studies that will be utilized to determine final aspects, details and
costs of closure construction and monitoring programs. While we believe that
the approved closure
 
                                       18
<PAGE>
 
plans substantially reduce future cost uncertainties, the ultimate costs will
depend upon the results of the technical studies called for in the approved
plans. Closure construction under the plans is scheduled for completion in the
fall of 2000.
 
 Uncertainties in Carrying Value of Long-Term Assets
 
   The carrying value of our long-term assets of transportation, treatment and
disposal discontinued operations of $40.0 million at December 25, 1998 is
principally comprised of unused residual land at the inactive disposal
facilities and assumes that sales will occur at market prices estimated by us
based on certain assumptions about entitlements, development agreements and
other factors. A portion of the residual land is the subject of a local
community review of our development strategy, which will be the subject of
public hearings and City Council deliberation through the second quarter of
1999. We can make no assurances as to the timing of development or sales of any
of our residual land, or our ability to ultimately liquidate the land for the
sale prices assumed. If our assumptions are not realized, the value of the land
could be materially different from the current carrying value.
 
 Impact of Possible PRP Liabilities
 
   As a major provider of hazardous waste transportation, treatment and
disposal operations in California prior to the December 1987 adoption of our
strategic restructuring program, we have been named a PRP at a number of other
sites including the GBF Pittsburg Superfund site, and may from time to time be
so named at additional sites, and also may face damage claims by third parties
for alleged releases or discharges of contaminants or pollutants arising out of
our transportation, treatment and disposal discontinued operations.
 
 Summary
 
   Our provision for loss on disposition of transportation, treatment and
disposal discontinued operations is based on various assumptions and estimates,
including those discussed above. We periodically reevaluate the adequacy of
this provision in light of developments since our adoption of the divestiture
plan, and we believe that the provision as adjusted is reasonable. However, the
ultimate effect of the divestiture on our consolidated financial condition,
liquidity and results of operations is dependent on future events, the outcome
of which we cannot determine at this time. Closure and post-closure costs could
be higher than estimated if regulatory agencies were to require closure and/or
post-closure procedures significantly different than those in the approved
plans, or if we are required to perform unexpected remediation work at the
facilities in the future or to pay penalties for alleged noncompliance with
regulations or permit conditions. Outcomes significantly different from those
used to estimate the provision for loss could result in a material adverse
effect on our business.
 
   For additional information about our discontinued operations, see the "Notes
to the Consolidated Financial Statements--Discontinued Operations".
 
Substantial Leverage
 
   We have now and, after the Note offering, will continue to have a
significant amount of indebtedness. The following chart shows certain important
credit statistics as of the dates or at the beginning of the periods specified
below without giving effect to the Note offering or the EFM or Roche
acquisitions:
 
<TABLE>
<CAPTION>
                                                            At December 25, 1998
                                                            --------------------
<S>                                                         <C>
Total indebtedness.........................................       $422,662
Stockholders' equity.......................................       $238,168
Debt to equity ratio.......................................          1.8:1
</TABLE>
 
 
                                       19
<PAGE>
 
   Our substantial indebtedness could have important consequences. For example,
it could:
 
  .  increase our vulnerability to general adverse economic conditions;
 
  .  limit our ability to pursue our acquisition business strategy;
 
  .  limit our ability to obtain necessary financing or bonding, fund future
     working capital, capital expenditures and other general corporate
     requirements;
 
  .  require us to dedicate a substantial portion of our cash flow from
     operations to payments on our indebtedness, thereby reducing the
     availability of our cash flow to fund working capital, capital
     expenditures and other general corporate purposes;
 
  .  limit our flexibility in planning for, or reacting to, changes in our
     business and the environmental services industry;
 
  .  place us at a competitive disadvantage compared to our competitors that
     have less debt; and
 
  .  limit, along with the financial and other restrictive covenants in our
     indebtedness, our ability to borrow additional funds. And, failing to
     comply with those covenants could result in an event of default which,
     if not cured or waived, could have a material adverse effect on us.
 
   We may be able to incur substantial additional indebtedness in the future.
During 1998, we amended and restated our credit facilities so that they now
provide for a $228.0 million eight-year term loan and a $185.0 million six-year
revolving credit facility. At December 25, 1998, we had outstanding $225.8
million of borrowings under the term loan and $143.0 million under the
revolving credit facility. If new debt is added to our current debt levels, the
related risks that we now face could increase.
 
   For more information on our indebtedness, see "Notes to Consolidated
Financial Statements--Long-term debt" and "Management's Discussion and Analysis
of Results of Operations and Financial Condition--Liquidity and Capital
Resources".
 
Ability to Service Debt
 
   Our ability to make payments on and to refinance our indebtedness and to
fund planned capital expenditures and any future acquisitions will depend on
our ability to generate cash in the future. Our success is dependent upon our
results of operations, which are heavily dependent on various factors,
including managing utilization of our professional staff, properly executing
projects and successfully bidding new contracts at adequate margin levels.
This, to a certain extent, is also subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control.
 
   Based on our current level of operations and anticipated cost savings and
operating improvements, we believe our cash flow from operations, available
cash and available borrowings under our credit facilities will be adequate to
meet our future liquidity needs, excluding acquisitions, for the next twelve
months.
 
   We can make no assurance, however, that our business will generate
sufficient cash flow from operations or that future borrowings will be
available to us under our credit facilities in an amount sufficient to enable
us to pay our indebtedness or to fund our other liquidity needs.
 
History of Losses
 
   The following table shows the losses we have incurred in our five most
recent fiscal periods. We cannot assure you that we will not continue to incur
losses. For a more detailed discussion of our operating results and special
charges, see "Management's Discussion and Analysis of Results of Operations and
Financial Condition."
 
                                       20
<PAGE>
 
<TABLE>
<CAPTION>
                                   Twelve Months Ended
                         ------------------------------------------ Nine Months Ended
                         March 31,  March 29, March 28,  March 27,    December 25,
                           1995       1996      1997        1998          1998
                         ---------  --------- ---------  ---------- -----------------
                                               (In thousands)
<S>                      <C>        <C>       <C>        <C>        <C>
Net loss applicable to
 common stock........... $(18,483)   $(3,654) $(13,693)   $(23,193)     $(12,091)
Net income (loss)
 applicable to common
 stock, excluding
 special charges........ $  7,000    $ 4,600  $ (5,300)   $  2,800      $ 11,200
</TABLE>
 
Fluctuations in our Quarterly Operating Results
 
   Our quarterly revenues, expenses and operating results may fluctuate
significantly due to a number of factors, including:
 
  .  the seasonality of the spending cycle of our public sector clients,
     notably the federal government;
 
  .  employee hiring and utilization rates;
 
  .  the number and significance of client projects commenced and completed
     during a quarter;
 
  .  delays incurred in connection with a project;
 
  .  the ability of our clients to terminate projects without penalties;
 
  .  weather conditions.
 
   Variations in any of these factors could cause significant fluctuations in
our operating results from quarter to quarter and could result in net losses.
 
Management of Growth
 
   We are growing rapidly through acquisitions. Our revenues were $400.0
million for the twelve months ended March 29, 1996 and since that time, we have
acquired eight companies representing an aggregate of $770.0 million in annual
revenue at the time of acquisition. Our growth presents numerous managerial,
administrative, operational and other challenges.
 
   Furthermore, our business strategy calls for continued growth and
diversification through acquisitions. Identifying and pursuing future
acquisition opportunities requires a significant amount of management time and
skill. Additionally, acquisitions involve certain risks that could cause our
actual growth or operating results to differ from our or others' expectations.
For example:
 
  .  We may not be able to identity suitable acquisition candidates or to
     acquire additional companies on favorable terms;
 
  .  We may not be able to obtain the necessary financing, on favorable terms
     or at all, to finance any of our potential acquisitions;
 
  .  We may fail to successfully integrate or manage these acquired companies
     due to differences in business backgrounds or corporate cultures or
     inadequate internal systems or controls;
 
                                       21
<PAGE>
 
  .  These acquired companies may not perform as we expect;
 
  .  If we fail to successfully integrate any acquired company or are unable
     to improve our internal systems and controls fast enough to accommodate
     our growth, our reputation could be damaged. This could make it more
     difficult to market our services or to acquire additional companies in
     the future;
 
  .  The acquisition and integration process could take significant time away
     from management's responsibilities for supervising the ongoing business.
 
Risks of Achievement of Cost Savings and Integration of Operations
 
   Our future success depends in part on our ability to achieve cost savings
from our acquisitions. We cannot guarantee that we will realize any cost
savings or other benefits from our recent acquisitions other than those already
realized, or that we will realize any cost savings or other benefits from
future acquisitions.
 
Control of Board of Directors
 
   In November 1996, The Carlyle Group and some of its affiliates acquired
45,000 shares of our 6% cumulative convertible participating preferred stock
and warrants to purchase 1,250,000 shares of our common stock. As a result of
paid-in-kind dividends, paid through December 25, 1998, Carlyle now holds
46,095 shares of convertible preferred stock, which totals approximately 21%,
or approximately 24% assuming the warrants are exercised, of the voting power
of the Company. The terms of our convertible preferred stock provide that until
November 20, 2001, the holders of our convertible preferred stock have the
right to elect a majority of the Board of Directors, as long as they continue
to hold at least 20% of the voting power of the Company. In addition, the sale
by Carlyle of its interests under specific conditions constitute events of
default under our credit facilities. For more information on our relationship
with Carlyle, see "Management--Board of Directors," "Description of Capital
Stock" and our "Notes to Consolidated Financial Statements--Preferred Stock--
Carlyle Investment."
 
International Operations
 
   For the nine months ended December 25, 1998, approximately 1.3% of our
revenues came from international operations. Our international operations in
general are subject to a number of risks including:
 
  .  foreign currency risks,
 
  .  differences in accounting practices,
 
  .  work stoppages,
 
  .  transportation delays and interruptions,
 
  .  political instability,
 
  .  expropriation and nationalization,
 
   .  tariffs and import and export controls,
 
                                       22
<PAGE>
 
   .  differing licensing and permit requirements,
 
   .  conflicting U.S. and foreign laws.
 
   We cannot predict what effect, if any, these risks would have on our
business.
 
Reliance on Key Personnel
 
   Our future success is significantly dependent on our senior management team,
which has significant experience. We have entered into employment agreements
with a number of our senior executives. The loss of the services of our senior
executives could have a material adverse effect on our business. In addition,
we also are dependent on the continuing contributions of our platform and
project managers, scientists and other professionals and other key personnel,
particularly those employees who maintain close relationships with our clients,
which relationships are extremely important to our continued success. Our
failure to attract and retain key personnel also could have a material adverse
effect on our business.
 
DISCONTINUED OPERATIONS
 
   At December 25, 1998, our consolidated balance sheet included accrued
liabilities of $7.9 million to complete the closure and post-closure of our
disposal facilities and the PRP matters, net of trust fund and annuity
investments, restricted to closure and post-closure use and anticipated
insurance settlement proceeds. In December 1987, we adopted a strategic
restructuring program which included a formal plan to divest the
transportation, treatment and disposal operations through sale of some
facilities and closure of others. Subsequent to this date, we ceased obtaining
new business for these operations. We have funded previously accrued costs of
$11.1 million for the nine months ended December 25, 1998, $14.9 million in the
twelve months ended March 27, 1998 and $15.7 million in the twelve months ended
March 28, 1997 relating to our closure plans and construction and PRP matters.
We expect to incur costs over the next several years, but the nature of the
costs will change from closure design and construction to post-closure
monitoring. See "Business--Operations--Closure of Inactive Disposal Sites and
Potential CERCLA Liabilities," "Management's Discussion and Analysis of Results
of Operations and Financial Condition--Liquidity and Capital Resources" and our
"Notes to Consolidated Financial Statements--Discontinued Operations" for more
information on the financial implications of our discontinued operations.
 
EMPLOYEES
 
   At December 25, 1998, without giving effect to the EFM and Roche
acquisitions, we employed approximately 5,600 employees. Many of these are
professional level employees, including over 700 engineers, 300 environmental
scientists, 300 geologists and 500 other specialists in related fields. In
addition, our professional employees hold in the aggregate over 950 masters
degrees and 150 PhD's. Our ability to retain, expand and utilize our staff,
including those employees that have primary responsibility for maintaining
client relationships, will be a significant factor in our future success. None
of our employees are represented by labor unions under Company-wide collective
bargaining agreements. However, we do employ union labor from time to time on a
project-specific basis. We consider our relations with our employees to be
good.
 
                                       23
<PAGE>
 
ITEM 2. PROPERTIES.
 
   We own or lease property in 36 states, the District of Columbia, the United
Kingdom, Italy and Australia. Excluding discontinued operations, we own
approximately 54 acres and lease approximately 1.8 million square feet of
property for various uses, including
 
   .  regional and project offices,
 
   .  technology and process development laboratories,
 
   .  field remediation support service facilities, and
 
   .  corporate offices.
 
   We consider these facilities adequate for our present and anticipated
activities.
 
   Additionally, we own approximately 2,800 acres related to discontinued
operations, principally in Northern California, of which approximately 900
acres were used for hazardous waste disposal facilities and approximately 1,900
are adjacent to those facilities, but were never used for waste disposal.
 
ITEM 3. LEGAL PROCEEDINGS.
 
 Continuing Operations Legal Proceedings
 
   We are subject from time to time to a number of different types of claims
arising in the ordinary course of our business, including contractual disputes
with clients, subcontractors and suppliers, claims for professional negligence,
environmental claims, governmental audits and investigations and claims for
personal injuries and property damage. We do not believe that any of these
claims will have a material adverse effect on our business. See our "Notes to
Consolidated Financial Statements--Commitments and Contingencies--
Contingencies" for information regarding the legal proceedings related to our
continuing operations.
 
 Discontinued Operations Legal Proceedings
 
   We have been, are and may in the future be subject from time to time to a
number of different types of claims arising out of our discontinued operations
including environmental claims for recovery of all or a portion of the cleanup
costs at sites we previously owned or operated or to which we took our or a
client's wastes, including claims for personal injuries and property damage. We
do not believe any of these claims will have a material adverse effect on our
business. See our "Notes to Consolidated Financial Statements--Discontinued
Operations" for information regarding the legal proceedings related to our
transportation, treatment and disposal discontinued operations.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS.
 
   We submitted one matter to a vote of our shareholders during the quarter
ended December 25, 1998.
 
   Pursuant to a Consent Statement dated October 23, 1998, we requested that
our stockholders grant their written consent in lieu of voting at a special
meeting to the amendment of the Company's Certificate of Incorporation to
change its name to "The IT Group, Inc." As of November 16, 1998, the initial
date through which we announced we would continue the solicitation, we received
the approval of approximately 89% of the shares entitled to consent. On October
22, 1998, the record date for soliciting consents, there were outstanding
 
                                       24
<PAGE>
 
and entitled to vote 22,628,433 shares of common stock, and 45,819 shares of 6%
Convertible Preferred Stock convertible into 6,036,653 shares of common stock,
for a total of 28,665,086 shares of common stock entitled to consent on an as-
converted basis, and they approved the name change as follows:
 
<TABLE>
<CAPTION>
       For                       Against & Withheld                                   Non-votes
       ---                       ------------------                                   ---------
   <S>                           <C>                                                  <C>
    25,519,802                         24,472                                         3,120,812
</TABLE>
 
   In addition, all 45,819 shares of 6% Convertible Preferred Stock, voting as
a single class, approved the name change.
 
   On December 23, 1998, we filed with the Delaware Security State the
Certificate of Amendment of our Certificate of Incorporation finally changing
our name to "The IT Group, Inc."
 
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY.
 
   The following table provides information as of December 25, 1998 regarding
our executive officers and the positions they hold. The officers are appointed
annually by the Board of Directors to serve at the discretion of the Board.
 
<TABLE>
<CAPTION>
                                                                                          First elected
                                                                                           officer of
Name                     Age                           Position                            the Company
----                     ---                           --------                           -------------
<S>                      <C> <C>                                                          <C>
Anthony J. DeLuca.......  51 Chief Executive Officer and President                            1990
David L. Backus.........  57 Senior Vice President, Outsourced Services and International     1998
James G. Kirk...........  60 Vice President, General Counsel and Secretary                    1996
James R. Mahoney........  60 Senior Vice President, Consulting and Ventures                   1991
Raymond J. Pompe........  64 Senior Vice President, Engineering and Construction              1988
Philip O. Strawbridge...  44 Senior Vice President, Chief Administrative Officer              1998
</TABLE>
 
   Mr. DeLuca was named Chief Executive Officer and President of the Company on
July 22, 1997 and President and Acting Chief Executive Officer and a director
of the Company as of July 1, 1996. Prior thereto, Mr. DeLuca had been Senior
Vice President and Chief Financial Officer of the Company since March 1990.
Before joining the Company Mr. DeLuca had been a partner at the public
accounting firm Ernst & Young LLP.
 
   Mr. Backus joined us as Senior Vice President, Outsourced Services and
International in December 1998 in connection with the GTI acquisition. Mr.
Backus joined GTI in 1992 as Vice President of GTI's Western Operations. Prior
to joining GTI, Mr. Backus was employed by Morrison Knudsen Corporation from
1975 to 1992 in various executive positions, including Group Vice President of
Morrison Knudsen's Environmental Group. From 1972 to 1975, Mr. Backus was the
Director of Business Development for M.K. Ferguson Company. Prior to that, Mr.
Backus was involved in the construction business.
 
   Mr. Kirk, who joined the Company as General Counsel, Eastern Operations, in
1991, was named Vice President, General Counsel and Secretary in September
1996. Prior to joining the Company, Mr. Kirk served as Vice President and
General Counsel for Limbach Constructors from 1978 to 1991. From 1973 to 1978,
Mr. Kirk was Assistant General Counsel for Dravo Corporation.
 
   Mr. Mahoney, who joined the Company in January 1991 as Senior Vice President
and Director of Technology, was named Senior Vice President, Corporate
Development and Sales in April 1992, Senior Vice President, Technical
Operations and Corporate Development in March 1995, and Senior Vice President,
Consulting and Ventures in July 1996. Prior to joining the Company, Mr. Mahoney
was Director of the National Acid Precipitation Assessment Program, a U.S.
government research and assessment program, from 1988 to 1991. From 1984 to
1987, Mr. Mahoney served in various environmental managerial capacities with
Bechtel Group, Incorporated, a major engineering and construction firm.
 
 
                                       25
<PAGE>
 
   Mr. Pompe joined the Company in 1988 as Vice President, Construction and
Remediation, was named Senior Vice President, Project Operations, in March
1995, and Senior Vice President, Engineering and Construction in July 1996.
Prior to joining the Company, Mr. Pompe was employed by Dravo Corporation, a
major construction firm, from 1956 to 1988 in various executive capacities,
most recently as Senior Vice President responsible for construction projects.
 
   Mr. Strawbridge joined the Company through the Company's acquisition of OHM
Corporation ("OHM") in May 1998 as Senior Vice President and Chief
Administrative Officer. Mr. Strawbridge joined OHM Corporation in February 1996
as Senior Vice President, Chief Financial and Administrative Officer and was
given the additional responsibility of President of OHM's wholly owned
subsidiary OHM Energy Services in October, 1996. Prior to joining OHM, Mr.
Strawbridge was employed by Fluor Corporation from 1988 to 1996 in various
managerial capacities including Senior Director of Contracts and Finance and
acting Vice President of Fluor Daniel Fernald. From 1976 to 1988, Mr.
Strawbridge was employed by the U.S. Government in various management and
executive capacities.
 
                                    PART II
 
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
        MATTERS.
 
   Our common stock is listed on the New York Stock Exchange (NYSE) and Pacific
Stock Exchange under the symbol ITX. The following table sets forth the high
and low sale prices of the common stock, as reported by the NYSE for the
periods indicated.
 
<TABLE>
<CAPTION>
Quarter ended                                                   High      Low
-------------                                                 -------- ---------
<S>                                                           <C>      <C>
June 27, 1997................................................ $  8 1/4 $ 6 3/8
September 26, 1997...........................................   9 1/4    6 13/16
December 26, 1997............................................   9 9/16   7
March 27, 1998...............................................  10 5/8    7 3/8
June 26, 1998................................................  11 1/2    8 7/8
September 25, 1998...........................................  10 1/4    5
December 25, 1998............................................  11 1/2    5 1/2
</TABLE>
 
   On March 5, 1999, the closing sale price of the common stock on the NYSE as
reported by The Wall Street Journal was $13.9375 per share. On that date there
were 2,020 stockholders of record.
 
   We have not paid a cash dividend on our common stock for the nine months
ended December 25, 1998, the twelve months ended March 27, 1998 and the twelve
months ended March 28, 1997. We have no present intention to pay cash dividends
on our common stock in the foreseeable future in order to retain all earnings
for investment in our business. Our credit agreements prohibit cash dividends
on common stock.
 
 
                                       26
<PAGE>
 
ITEM 6. SELECTED FINANCIAL DATA.
 
   The following table sets forth income statement information for the
Company's continuing operations and other financial information for the nine
months ended December 25, 1998 (the transition period as a result of our change
in fiscal year) and the periods ended March 27, 1998, March 28, 1997, March 29,
1996 and March 31, 1995. Share and per share data have been restated to reflect
the one-for-four reverse stock split effective November 21, 1996.
 
<TABLE>
<CAPTION>
                         Nine Months            Twelve Months Ended
                            Ended     ------------------------------------------
                         December 25, March 27,  March 28,  March 29,  March 31,
                             1998       1998       1997       1996       1995
                         ------------ ---------  ---------  ---------  ---------
                                (In thousands, except per share data)
<S>                      <C>          <C>        <C>        <C>        <C>
INCOME STATEMENT
 INFORMATION
Revenues................   $757,435   $442,216   $362,131   $400,042   $423,972
Gross margin............     90,961     51,090     38,138     58,152     61,916
Special charges.........     24,971     14,248      8,403         --         --
Loss from continuing
 operations (net of
 preferred stock
 dividends).............    (12,091)   (12,527)   (13,693)    (3,654)    (7,880)
Loss per common share
 from continuing
 operations.............      (0.63)     (1.28)     (1.48)     (0.41)     (0.89)
Weighted average shares
 outstanding............     19,149      9,737      9,227      8,982      8,889
OTHER FINANCIAL
 INFORMATION
Working capital.........   $120,260   $ 74,924   $110,705   $ 89,174   $ 73,838
Costs in excess of net
 assets of acquired
 businesses.............    356,619    211,878      9,363      8,770      7,728
Total assets............    948,606    709,217    342,531    315,314    362,152
Long-term debt..........    405,059    284,697     65,874     65,611     80,189
Long-term accrued
 liabilities............     31,979     27,528     15,184     30,223     45,207
Stockholders' equity....    238,168    148,150    168,853    140,865    145,921
</TABLE>
 
   No cash dividends were paid on common shares for any period.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
        FINANCIAL CONDITION.
 
RESULTS OF OPERATIONS
 
 Overview
 
   We are a leading provider of diversified, value-added services in the areas
of environmental consulting, engineering and construction and remediation. In
addition, we are leveraging our core project management competencies to offer
our clients a variety of outsourcing services such as facilities management. We
have a strong reputation for both the high quality of our work and the breadth
of the services we provide.
 
   Our clients are federal, state and local governments in the U.S. and
commercial businesses worldwide. We obtained 69% of our revenues for the nine
months ended December 25, 1998 from the federal government under more than 100
contracts that range in length from one to ten years. In addition, we serve
1,500 commercial clients on projects which range in length from one month to
more than one year. For the nine months ended December 25, 1998, our revenues
were $757.4 million. Approximately 90% of our backlog at December 25, 1998 was
under federal government programs, and approximately 82% is expected to be
charged to our clients on a cost-reimbursable basis. Many of our commercial
contracts are evergreen contracts and are typically not part of our backlog.
 
   In the course of providing our services, we routinely subcontract services.
These subcontractor costs are passed through to clients and, in accordance with
industry practice, are included in our revenue. Our cost of
 
                                       27
<PAGE>
 
revenue includes subcontractor costs, salaries, direct and indirect overhead
costs such as rents, utilities and travel directly attributable to projects.
Our selling, general and administrative expenses are comprised primarily of
costs related to the executive offices, corporate accounting, information
technology, marketing and bid and proposal costs. These costs are generally
unrelated to specific client projects. In addition, we include in these
expenses amortization of intangible assets such as goodwill resulting from
acquisitions.
 
 Acquisitions
 
   Since 1996, we have made eight acquisitions to expand and diversify our
business to meet our strategic objectives. The following table provides some
information on these acquisitions.
 
 
<TABLE>
<CAPTION>
                                                                                          Most Recent
                                                                                          Fiscal Year
 Date of                                                                                    Revenues
 Acquisition         Name               Location(s)                Business           Prior to Acquisition
 -----------         ----               -----------                --------           --------------------
                                                                                         (In millions)
 <C>         <C>                  <C>                      <S>                        <C>
 Mar. 1996   Gradient             Massachusetts            Environmental/human                  $5
             Corporation                                   health risk assessment
                                                           Litigation support
 
 Nov. 1996   Chi Mei IT           Taiwan                   Wastewater treatment                $12
                                                           design/build
 
 May 1997    PHR                  California               Historical pollution                 $3
             Environmental        Washington, DC           liability research and
             Consultants, Inc.                             investigation
 
 Sept. 1997  Pacific              California               Environmental consulting            $10
             Environmental                                 and engineering services
             Group, Inc.
 
 Jan. 1998   Jellinek, Schwartz & Washington, DC           Science-based                       $12
             Connolly, Inc.       Colorado                 environmental consulting
                                  England                  and advocacy services
 
 Mar. 1998   LandBank, Inc.       Colorado                 Real estate acquisition              $3
                                                           and restoration company
 
 Feb. and    OHM Corporation      Over 30 regional offices Leading diversified                $525
 June 1998                                                 services firm providing
                                                           a broad range of
                                                           services for
                                                           governmental and private
                                                           sector clients
                                                           Leading provider of
                                                           operations, maintenance
                                                           and construction
                                                           outsourcing services
 
 Dec. 1998   Fluor Daniel         Over 30 offices in       Broad-based                        $200
             GTI, Inc.            North America,           environmental services
                                  Europe and               firm
                                  Australia
</TABLE>
 
   On February 5, 1999, we signed an agreement to acquire all of the
outstanding common stock of Roche Limited Consulting Group (Roche) for an
initial payment of $10.0 million in cash, plus two potential earnout payments.
Roche is based in Quebec City, Canada and provides engineering and construction
services to wastewater, paper, mining and transportation industries worldwide.
Roche has approximately 700 employees and had revenue of $28.3 million in its
most recent year ended December 31, 1998. The acquisition is expected to close
in April 1999.
 
 
                                       28
<PAGE>
 
   On March 8, 1999, we signed an agreement to acquire specified assets of the
Environment and Facilities Management Group (EFM Group) of ICF Kaiser
International, Inc. (Kaiser) for a purchase price of $82.0 million reduced by
$8.0 million representing working capital retained by Kaiser. We also agreed to
assume specified liabilities. The EFM Group provides environmental remediation,
program management and technical support for United States Government agencies
including the DOD, National Aeronautics and Space Administration (NASA) and the
DOE as well as private sector environmental clients. The EFM Group has
approximately 500 employees and had revenue of $105.9 million for the calendar
year ended December 31, 1998. The acquisition is expected to close in April
1999.
 
 Change in Fiscal Year
 
   In June 1998, we changed our fiscal year-end from the last Friday in March
to the last Friday in December of each year effective with the nine months
ended December 25, 1998. Accordingly, the following discussion compares
financial results for a nine-month period to a full twelve-month year.
Likewise, the financial results for the nine-month period ended December 25,
1998 include OHM's results for the entire nine-month period while the financial
results for the twelve-month period ended March 27, 1998 include only one month
of OHM financial results because we acquired 54% of OHM on February 25, 1998.
In addition, our operating results will be discussed based on the business
platforms we established when we adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" for the nine months ended December 25, 1998. These platforms
include Engineering & Construction, Consulting & Ventures, Outsourced Services
and International.
 
Nine Months Ended December 25, 1998 Compared to Twelve Months Ended March 27,
1998
 
 Revenues and Gross Margin
 
 
   Company. Revenues for the nine months ended December 25, 1998 were $757.4
million, an increase of approximately 71%, when compared to the $442.2 million
in revenues reported in the twelve months ended March 27, 1998. This increase
is primarily attributable to higher revenues in the Engineering & Construction
platform resulting from the OHM acquisition.
 
   Our gross margin for the nine months ended December 25, 1998 was 12.0%,
slightly higher than the 11.6% gross margin reported in the twelve months ended
March 27, 1998. In the 1999 fiscal year, management expects to maintain these
gross margin levels. However, our ability to maintain or improve our gross
margin levels is heavily dependent on various factors including utilization of
professional staff, proper execution of projects, successful bidding of new
contracts at adequate margin levels and continued realization of overhead
savings achieved upon the completed integration of recent acquisitions.
 
   Engineering & Construction. Revenues from the Engineering & Construction
platform were $597.9 million for the nine months ended December 25, 1998
compared to $346.1 million for the twelve months ended March 27, 1998, an
increase of approximately 73%. Our Engineering & Construction platform includes
revenues from the Department of Defense (DOD), Department of Energy (DOE) and
commercial clients. Revenues from the DOD and a small number of other
government agencies were $363.0 million in the nine months ended December 25,
1998 or $163.6 million greater than the $199.4 million of DOD revenues in the
twelve months ended March 27, 1998. DOE revenues of $79.8 million in the nine
months ended December 25, 1998 were $39.3 million higher than the $40.5 million
of DOE revenues reported in the twelve months ended March 27, 1998. Commercial
revenues were $155.1 million in the nine months ended December 25, 1998 or
$48.9 million higher than the $106.2 million of commercial revenues reported in
the twelve months ended March 27, 1998.
 
   A substantial percentage of our revenues continue to be earned from federal
governmental contracts with various federal agencies. Revenues from federal
governmental contracts accounted for 69% of our revenues in the nine months
ended December 25, 1998 compared to 58% in the twelve months ended March 27,
1998. The increase in government revenues for the nine months ended December
25, 1998 both in absolute dollars and as
 
                                       29
<PAGE>
 
a percentage of revenue is primarily attributable to the OHM acquisition.
Federal governmental revenues are derived principally from work performed for
the DOD and, to a lesser extent, the DOE and are thus included in our
Engineering & Construction platform. We expect to continue to earn a
substantial portion of our Engineering & Construction revenues from the DOD
indefinite delivery order contracts which are primarily related to remedial
action work. In addition, management expects to increase our revenues from the
DOE in the future due to an expected transition by the DOE over the next
several years to emphasize remediation, as opposed to studies, combined with
our favorable experience in winning and executing similar work for the DOD and
our past performance of DOE studies. We believe that we have begun to benefit
from this transition by the DOE with the commencement in 1998 of a $122.0
million project to perform the excavation, pretreatment and drying of an
estimated one million tons of materials for the DOE's Fernald Environmental
Management Project.
 
   The increase in commercial revenues for the nine months ended December 25,
1998 is primarily attributable to the OHM acquisition. However, revenue growth
from the commercial sector, excluding recent acquisitions, could be restricted
in the near term partly due to increased emphasis on competitive bids and
commercial clients delaying certain work until final Congressional action is
taken on the reauthorization of CERCLA. As for CERCLA, it is uncertain when
reauthorization will occur or what the details of the legislation, including
retroactive liability, cleanup standards, and remedy selection, may include.
Uncertainty regarding possible rollbacks of environmental regulation and/or
reduced enforcement could further decrease the demand for our services, as
clients anticipate and adjust to the new regulations. These factors have been
partially offset by an increased desire on the part of commercial clients for
strategic environmental services that provide an integrated, proactive approach
to environmental issues and that are driven by economic, as opposed to legal or
regulatory, concerns. Further, legislative or regulatory changes could also
result in increased demand for our services if such changes decrease the cost
of remediation projects or result in more funds being spent for actual
remediation. The ultimate impact of any such changes will depend upon a number
of factors, including the overall strength of the U.S. economy and clients'
views on the cost effectiveness of the remedies available.
 
   Our Engineering & Construction platform segment profit was $63.8 million for
the nine months ended December 25, 1998, an increase of 72% when compared to
the $37.0 million segment profit for the twelve months ended March 27, 1998.
This increase is primarily attributable to the OHM acquisition. The Engineering
& Construction segment profit was 10.7% of Engineering & Construction revenues
for both the nine months ended December 25, 1998 and for the twelve months
ended March 27, 1998.
 
   Consulting & Ventures. Revenues from our Consulting & Ventures (C & V)
platform were $79.4 million for the nine months ended December 25, 1998
compared to $79.6 million reported during the twelve months ended March 27,
1998, a decrease of approximately 0.3%. Most of the revenues from Consulting &
Ventures are derived from commercial clients. The increase in these revenues on
an annualized basis is primarily due to four acquisitions of specialized
companies during the twelve months ended March 27, 1998 as well as the GTI
acquisition during the nine months ended December 25, 1998. For a description
of our recent acquisitions, see "Acquisitions." Excluding any future
acquisitions, revenue growth from the commercial sector could be restricted as
discussed above under Engineering & Construction.
 
   Our Consulting & Ventures platform segment profit was $10.6 million for the
nine months ended December 25, 1998, an increase of 45% when compared to the
$7.3 million segment profit reported in the twelve months ended March 27, 1998.
The Consulting & Ventures segment profit was 13.4% and 9.2% of Consulting &
Ventures revenues for the nine months ended December 25, 1998 and the twelve
months ended March 27, 1998, respectively. The increase in absolute dollars and
as a percentage of revenue is primarily attributable to the acquisitions of JSC
and GTI.
 
   Outsourced Services. Outsourced Services revenues were $70.4 million for the
nine months ended December 25, 1998 compared to $6.8 million reported in the
twelve months ended March 27, 1998. This increased revenue is almost entirely
attributable to the OHM acquisition and the inclusion of its outsourcing
 
                                       30
<PAGE>
 
operations in our results of operations for the nine months ended December 25,
1998, as opposed to the one month of results included in the twelve months
ended March 27, 1998. OHM's outsourcing operations provide a range of project,
program and construction management services to the DOD as well as state and
local government agencies.
 
   Our Outsourced Services platform segment profit improved to $7.9 million for
the nine months ended December 25, 1998, an increase of $7.0 million when
compared to the $0.9 million segment profit reported in the twelve months ended
March 27, 1998. This increase is also a result of the OHM acquisition.
 
   International. International revenues, primarily from our 50.1% investment
in Chi Mei IT, a subsidiary operating in Taiwan, were $9.8 million for the nine
months ended December 25, 1998 compared to $9.6 million for the twelve months
ended March 27, 1998. The increase, on an annualized basis, is the result of
Chi Mei increased project volume and the GTI acquisition on December 3, 1998.
See "Business--Operations--International" for a more detailed description of
the International platform.
 
   Our International platform reported a loss of $0.4 million for the nine
months ended December 25, 1998 compared to a loss of $1.4 million in the twelve
months ended March 27, 1998. This improvement is primarily due to improved
project margins on several Chi Mei projects. Through the Chi Mei board of
directors, we undertook to improve management oversight, project management
skills and change order negotiation efforts. We believe these efforts will
minimize future potential losses and provide the basis for profitable Chi Mei
operations. The GTI acquisition increased the size of the International
platform with operations primarily in Australia, the United Kingdom and Italy.
The GTI acquisition included approximately $80.0 million of contract backlog
for work to be performed for the U.S. Air Force Center for Environmental
Excellence under a worldwide five-year indefinite delivery order cost-
reimbursable contract. We expect to increase the platform further with the
acquisition of Roche in 1999 (see "Notes to Consolidated Financial Statements--
Subsequent Events").
 
   Backlog. Our total funded and unfunded backlog at both December 25, 1998 and
March 27, 1998 was approximately $3.5 billion. At December 25, 1998, the
backlog included approximately $525.0 million of funded contracted backlog
scheduled to be completed during 1999 and approximately $320.0 million of
unfunded project work expected to be defined and performed in 1999 under
existing indefinite delivery order contracts. We expect to earn revenues from
our backlog primarily over the next one to five years, with a substantial
portion of the backlog consisting of governmental contracts, many of which are
subject to annual funding and definition of project scope. The backlog at both
December 25, 1998 and March 27, 1998 includes $2.7 billion of future work we
estimate we will receive (based on historical experience) under existing
indefinite delivery order programs. In accordance with industry practices,
substantially all of our contracts are subject to cancellation, delay or
modification by the customer.
 
   Our backlog at any given time is subject to changes in scope of services
which may lead to increases or decreases in backlog amounts. These scope
changes have led to a number of contract claims requiring negotiations with
clients in the ordinary course of business. (See "Notes to Consolidated
Financial Statements--Summary of significant accounting policies--Contract
accounting and accounts receivable").
 
 Selling, General and Administrative Expenses
 
   Selling, general and administrative expenses were 5.5% of revenues for the
nine months ended December 25, 1998 compared to 7.2% of revenues in the twelve
months ended March 27, 1998. This decrease is primarily attributable to the
elimination of certain duplicative overhead functions and other cost savings
achieved as a result of the OHM acquisition. In fiscal 1999, management expects
selling, general and administrative expenses to decrease slightly as a
percentage of revenues because the full effect of the cost savings from the OHM
acquisition will be realized. In addition, we anticipate additional cost
savings to be achieved from the GTI acquisition that occurred on December 3,
1998.
 
 
                                       31
<PAGE>
 
   Selling, general and administrative expenses include goodwill amortization
expense of $7.0 million for the nine months ended December 25, 1998 and $1.4
million for the twelve months ended March 27, 1998. The significant increase to
goodwill amortization is primarily due to the OHM acquisition. Selling, general
and administrative expenses (excluding goodwill) were 4.6% of revenues for the
nine months ended December 25, 1998 and 6.9% of revenues for the twelve months
ended March 27, 1998.
 
 Special Charges
 
   We recorded special charges of $25.0 million for the nine months ended
December 25, 1998 compared to $14.2 million for the twelve months ended March
27, 1998. For the nine months ended December 25, 1998 we recorded a non-cash
charge of $25.0 million, including $10.6 million (net of cash proceeds of $5.8
million) related to the sale of our investment in Quanterra, Incorporated and
$14.4 million, related to the write-down of assets associated with the HTTS(R)
business. A summary of the special charges incurred during the nine months
ended December 25, 1998 is outlined below:
 
<TABLE>
<CAPTION>
                                      Nine Months Ended December 25, 1998
                                -----------------------------------------------
                                 Cash/     Special              Reserve balance
                                Noncash    Charges     Activity   at 12/25/98
                                ------- -------------- -------- ---------------
                                        (In thousands)
<S>                             <C>     <C>            <C>      <C>
Write-off of the Quanterra
 Investment.................... Noncash    $(10,550)   $10,550        $--
Write-down of the assets--
 Primarily the Hybrid Thermal
 Treatment System(R)........... Noncash     (14,421)    14,421         --
                                           --------    -------        ---
  Total........................            $(24,971)   $24,971        $--
                                           ========    =======        ===
</TABLE>
 
   Quanterra. On May 27, 1998, our Board of Directors considered and approved
the divestiture of certain non-core assets including our 19% common stock
ownership interest in Quanterra, Incorporated, an environmental laboratory
business. This charge of $10.6 million represented the net book value of our
investment in Quanterra less proceeds of $5.8 million from a sale completed in
June 1998. No additional cash was expended in connection with the writeoff.
 
   Hybrid Thermal Treatment System(R). On May 27, 1998, our Board of Directors
considered and approved the divestiture of the assets associated with our
Hybrid Thermal Treatment System(R) (HTTS(R)) business. This resulted in a
charge of $14.4 million representing the net book value of these assets less
estimated salvage value.
 
                                       32
<PAGE>
 
   The special charges of $14.2 million recorded in the twelve months ended
March 27, 1998 included $5.7 million for integration costs associated with the
acquisition of OHM, a $3.9 million non-cash charge related to a project claim
settlement, a $2.8 million charge associated with the relocation of our
corporate headquarters, and a $1.8 million loss from the sale of a small
remediation services business. A summary of the special charges incurred during
the twelve months ended March 27, 1998 is outlined below:
 
<TABLE>
<CAPTION>
                                      Twelve Months Ended March 27, 1998
                                -----------------------------------------------
                                 Cash/     Special              Reserve balance
                                Noncash    Charges     Activity   at 12/25/98
                                ------- -------------- -------- ---------------
                                        (In thousands)
<S>                             <C>     <C>            <C>      <C>
Integration costs--OHM
 acquisition
  Severance...................     Cash    $ (2,197)   $ 2,197           --
  Duplicative offices/assets..     Cash      (2,478)     1,226      $(1,252)
  Other.......................     Cash      (1,019)     1,019           --
 
Claim Settlement
  Helen Kramer................  Noncash      (3,943)     3,943           --
 
Relocation of Corporate
 Headquarters
  Severance and relocation....     Cash      (1,743)     1,743           --
  Duplicative offices/assets..     Cash        (710)       710           --
  Other.......................     Cash        (358)       358           --
 
Sale of remediation business..  Noncash      (1,800)     1,800           --
                                           --------    -------      -------
  Total.......................             $(14,248)   $12,996      $(1,252)
                                           ========    =======      =======
</TABLE>
 
   OHM Acquisition. The $5.7 million special charge for integration costs
associated with the acquisition of OHM included $2.2 million of costs for
severance and $3.5 million of costs and other related items for closing and
eliminating duplicative offices. As part of the plan of integration, we laid-
off more than 100 employees, primarily in the operating group and
administrative support functions. In addition, as part of the plan we closed
three leased facilities, reduced the size of three more facilities and
subleased a portion of eight additional facilities. As of December 25, 1998,
$1.3 million of the integration charge remained to be paid. The remaining costs
relate to the facility closures and office consolidations and will be paid over
the remaining terms of the leases. Most of these lease commitments will be paid
within the next three years. One lease requires payments over the next seven
years.
 
   Helen Kramer. In December 1997, we settled a contract claim which has been
outstanding in excess of five years with the US Army Corps of Engineers, the
Environmental Protection Agency and the Department of Justice (jointly
Government) arising out of work performed by our joint venture with Davy
International at the Helen Kramer Superfund project. On December 26, 1997, the
joint venture received a $14.5 million payment from the Government to resolve
all outstanding project claims related to additional work resulting from
differing site conditions. In early January 1998, the joint venture paid $4.3
million to the Government to resolve related civil claims by the Government.
Our share of the joint venture results is 60%, accordingly, we received net
cash of $6.0 million, our proportionate share of the settlement. In December
1997, we recorded a non-cash pre-tax charge of $3.9 million because the cash
received was less than the receivables related to this project which totaled
approximately $9.9 million.
 
   Relocation of Corporate Headquarters and Sale of Remediation Business. The
special charges that occurred in the first quarter of the twelve months ended
March 27, 1998 resulted from the relocation of our corporate headquarters from
Torrance, California to Monroeville (Pittsburgh), Pennsylvania and the sale of
our California based small project remediation services business. The
headquarters relocation consolidated the corporate overhead functions with our
largest operations office and moved us closer to our lenders and largest
shareholders, which are located in the Eastern United States. As a result of
this relocation, we incurred a pre-tax charge of $2.8 million. The relocation
charge included $0.8 million of costs for severance, $0.9 million of
 
                                       33
<PAGE>
 
costs for the relocation of some employees, $0.7 million of costs related to
the closure of the offices in Torrance, California and $0.4 million of other
related costs. As part of this relocation, 32 employees were laid off,
primarily corporate management and administrative support personnel. As of
December 25, 1998, these amounts have been paid. In May 1997, we incurred a
non-cash pre-tax charge of $1.8 million to sell our California based small
projects remediation services business.
 
 Interest, Net
 
   Net interest expense was 3.3% of revenues for the nine months ended December
25, 1998 and 1.8% for the twelve months ended March 27, 1998. The following
table shows net interest expense for these comparative periods:
 
<TABLE>
<CAPTION>
                                                      Nine Months  Twelve Months
                                                         Ended         Ended
                                                      December 25,   March 27,
                                                          1998         1998
                                                      ------------ -------------
                                                            (In thousands)
<S>                                                   <C>          <C>
Interest incurred....................................   $25,876       $10,730
Capitalized interest.................................        --           (10)
Interest income......................................      (981)       (2,751)
                                                        -------       -------
  Interest, net......................................   $24,895       $ 7,969
                                                        =======       =======
</TABLE>
 
   The increase in interest expense is primarily attributable to the credit
facilities used in the OHM acquisition (see "Notes to Consolidated Financial
Statements--Long-term debt").
 
 Income Taxes
 
   For the nine months ended December 25, 1998, we reported a loss from
continuing operations of $0.7 million and recorded an income tax charge of $9.7
million before adjusting for the special charge. We also provided a deferred
tax asset valuation adjustment for a portion of the special charges and
recognized a tax benefit of $3.0 million on the divestiture of the HTTS(R)
business (see "Special Charges"). The total net tax charge is $6.7 million. Our
effective income tax rate from continuing operations is more than the federal
statutory rate primarily due to the valuation adjustment for the above charge
and amortization of cost in excess of net assets of acquired businesses (see
"Notes to Consolidated Financial Statements--Income taxes").
 
   For the twelve months ended March 27, 1998, we reported a loss from
continuing operations before income taxes and an extraordinary item of $2.2
million and recorded an income tax charge of $4.2 million after adjusting for
the special charge and a $2.3 million deferred tax asset valuation adjustment
prior to the acquisition of OHM. We also recognized a tax benefit of $3.5
million on an extraordinary charge for the early extinguishment of debt and a
$3.0 million benefit for a loss from disposition of a discontinued operation.
The total net tax benefit is $2.4 million. Our effective income tax rate from
continuing operations is more than the federal statutory rate primarily due to
the above charge, state income taxes and nondeductible expenses (see "Notes to
Consolidated Financial Statements--Income taxes").
 
   We will need to have approximately $288.0 million of future earnings to
fully realize our deferred tax asset of $109.6 million (net of a valuation
allowance of $50.3 million) at December 25, 1998, assuming a net 38% federal
and state tax rate. We evaluate the adequacy of the valuation allowance and the
realizability of the deferred tax asset on an ongoing basis. Because of our
position in the industry, recent acquisitions and restructuring, and existing
backlog, management expects that our future taxable income will more likely
than not allow us to fully realize our recorded deferred tax asset of $109.6
million. The increase in gross deferred tax asset is primarily due to the
acquisitions of OHM and GTI.
 
                                       34
<PAGE>
 
 Extraordinary Item
 
   For the twelve months ended March 27, 1998, we recorded a $5.7 million
charge, net of income tax benefit of $3.5 million, for the early extinguishment
of $65.0 million of senior debt which was refinanced in connection with the
acquisition of OHM. We incurred a $5.6 million payment for the make whole
interest provision as a result of retiring our $65.0 million senior debt, in
accordance with the loan agreement. In addition, we also expensed approximately
$3.6 million related to the unamortized loan origination expenses associated
with issuing the $65.0 million senior debt.
 
 Dividends
 
   Our reported dividends for the nine months ended December 25, 1998 were $4.7
million and $6.2 million for the twelve months ended March 27, 1998. Our
reported dividends include imputed dividends on our Convertible Preferred Stock
of $0.9 million for the nine months ended December 25, 1998 and $2.1 million
for the twelve months ended March 27, 1998, which are not payable in cash or
stock. Commencing with November 21, 1997, our Convertible Preferred Stock
outstanding accrued a 3% in-kind stock dividend for one year during which the
statement of operations also included an imputed dividend at a rate of
approximately 3% per annum. This additional imputed dividend of $0.9 million
for the nine months ended December 25, 1998 and $0.5 million for the twelve
months ended March 27, 1998, will never be paid in cash, except for fractional
shares, and represents the amortization of the fair market value adjustment
recorded since the date of issuance. Commencing with November 21, 1998, our
outstanding Convertible Preferred Stock is entitled to a 6% cumulative cash
dividend payable quarterly. We reported cash dividends on our outstanding
depositary shares each representing 1/100 of a share of our 7% cumulative
convertible exchangeable preferred stock (the 7% Preferred Stock) of $2.7
million in the nine months ended December 25, 1998 and $3.6 million for the
twelve months ended March 27, 1998. The decrease in cash dividends between the
March 27, 1998 and December 25, 1998 fiscal periods of $0.9 million is due to
the shortened fiscal period.
 
   Our dividends are summarized below:
 
<TABLE>
<CAPTION>
                                                    Nine Months  Twelve Months
                                                       Ended         Ended
                                                    December 25,   March 27,
                                                        1998         1998
                                                    ------------ -------------
                                                          (In thousands)
<S>                                                 <C>          <C>
7% Cumulative convertible exchangeable cash
 dividend..........................................    $2,697       $3,595
6% Cumulative convertible participating
  --Imputed non-cash dividend......................       860        2,105
  --In kind 3% stock dividend......................       894          467
  --Cash dividend..................................       213           --
                                                       ------       ------
    Total..........................................    $4,664       $6,167
                                                       ======       ======
</TABLE>
 
Twelve Months Ended March 27, 1998 Compared to Twelve Months Ended March 28,
1997
 
 Revenues and Gross Margin
 
   Company. Revenues for the twelve months ended March 27, 1998 were $442.2
million or 22% higher than the $362.1 million in revenues reported in the
twelve months ended March 28, 1997. The twelve months ended March 27, 1998
include the results of OHM Corporation since February 25, 1998, the date on
which we acquired a 54% controlling interest. Revenues related to OHM in the
twelve months ended March 27, 1998 were $42.1 million.
 
   Gross margins were 11.6% of revenues in the twelve months ended March 27,
1998 and 10.5% in the twelve months ended March 28, 1997. The improved gross
margin was due to spreading fixed overhead costs over higher revenue levels.
 
                                       35
<PAGE>
 
   Engineering & Construction. Engineering & Construction revenues were $346.1
million in the twelve months ended March 27, 1998 compared to $308.6 million in
the twelve months ended March 28, 1997, an increase of approximately 12%. DOD
revenues were $199.4 million in the twelve months ended March 27, 1998 or $45.9
million greater than the $153.5 million of DOD revenues in the twelve months
ended March 28, 1997. The strong improvement in DOD activity was due to
increased funding of the DOD indefinite delivery order programs and an increase
in the number of DOD contracts being executed. In addition, OHM contributed
about $20.0 million to the increase in DOD revenues in the twelve months ended
March 27, 1998. DOE revenues of $40.5 million in the twelve months ended March
27, 1998 were $9.1 million lower than the $49.6 million of DOE revenues
reported in the twelve months ended March 28, 1997. Commercial revenues were
$106.2 million in the twelve months ended March 27, 1998 or $0.7 million higher
than the $105.5 million in commercial revenue reported in the twelve months
ended March 28, 1997.
 
   Our Engineering & Construction platform segment profit of $37.0 million in
the twelve months ended March 27, 1998 increased 43% over the $25.9 million
segment profit reported in the twelve months ended March 28, 1997. This
increase is primarily a result of the increase in higher margin, DOD revenues.
The Engineering & Construction segment profit was 10.7% and 8.4% of Engineering
& Construction revenues for the twelve months ended March 27, 1998 and the
twelve months ended March 28, 1997, respectively.
 
   Consulting & Ventures. Consulting & Ventures revenues of $79.6 million in
the twelve months ended March 27, 1998 exceeded the twelve months ended March
28, 1997 revenues of $48.8 million by $30.8 million, an increase of
approximately 63%. This increase is primarily attributable to the acquisitions
of specialized companies primarily serving targeted commercial markets.
 
   Our Consulting & Ventures platform segment profit was $7.3 million in the
twelve months ended March 27, 1998 compared to $0.7 million in the twelve
months ended March 28, 1997. The increase in segment profit is also due to the
acquisitions that occurred in the twelve months ended March 27, 1998. The
Consulting & Ventures segment profit was 9.1% and 1.4% of Consulting & Ventures
revenues for the twelve months ended March 27, 1998 and the twelve months ended
March 28, 1997, respectively.
 
   Outsourced Services. Outsourced Services revenues in the twelve months ended
March 27, 1998 were $6.8 million, from the OHM acquisition, compared to none in
the twelve months ended March 28, 1997. As discussed previously, the OHM
acquisition occurred on February 25, 1998 and consequently no revenue from OHM
was included in the twelve months ended March 28, 1997 results.
 
   Outsourced Services reported $0.9 million in segment profit in the twelve
months ended March 27, 1998 compared to none in the twelve months ended March
28, 1997.
 
   International. International revenues were $9.6 million in the twelve months
ended March 27, 1998 compared to $4.7 million in the twelve months ended March
28, 1997. This increase is the result of the Chi Mei acquisition in October
1996.
 
   The International platform segment loss of $1.4 million in the twelve months
ended March 27, 1998 compares to segment profit of $0.2 million in the twelve
months ended March 28, 1997. The higher loss is the result of losses on
selected international projects.
 
 Selling, General and Administrative Expenses
 
   Selling, general and administrative expenses were 7.2% of revenues in the
twelve months ended March 27, 1998 and 9.2% in the twelve months ended March
28, 1997. Selling, general and administrative expenses of $31.8 million in the
twelve months ended March 27, 1998 were $1.7 million or 5.0% lower than the
twelve months ended March 28, 1997 level primarily due to the full year impact
of the corporate restructuring initiated at the end of the second fiscal
quarter of 1997 and the relocation of our corporate headquarters in the first
quarter of the twelve months ended March 27, 1998 which resulted in reduced
lease expense and labor cost as
 
                                       36
<PAGE>
 
we integrated and consolidated management and corporate functions into our
largest facility (see "Special Charges").
 
   Selling, general and administrative expenses include goodwill amortization
of $1.4 million for the twelve months ended March 27, 1998 and $0.8 million for
the twelve months ended March 28, 1997. Selling, general and administrative
expenses, excluding goodwill, were 6.9% of revenues for the twelve months ended
March 27, 1998 and 9.0% of revenues for the twelve months ended March 28, 1997.
 
 Special Charges
 
   Special charges of $14.2 million were recorded in the twelve months ended
March 27, 1998. These special items include $5.7 million for integration costs
associated with the acquisition of OHM, $3.9 million non-cash charge related to
the Helen Kramer project claim settlement, $2.8 million charge associated with
the relocation of our corporate headquarters, and $1.8 million loss from the
sale of a small remediation services business. See previous table on Special
Charges incurred in the twelve months ended March 27, 1998.
 
   Corporate Restructuring. Special charges of $8.4 million were recorded in
the twelve months ended March 28, 1997. The special charge relating to a
corporate restructuring included $3.4 million for severance, $4.1 million for
closing and reducing the size of selected offices and $0.9 million for other
related items. As part of the restructuring plan, we laid-off 133 employees and
paid over $2.5 million in termination benefits. In addition, we approved a plan
to close five leased facilities and reduce the size of eleven other leased
facilities by either sublease or abandonment. The remaining costs to be paid
relate to the facility closures and office space reductions which will be paid
out over the terms of the leases. One of these facility closures has a
remaining lease obligation of approximately six years. A summary of the special
charges incurred during the twelve months ended March 28, 1997 is outlined
below:
 
<TABLE>
<CAPTION>
                                       Twelve Months Ended March 28, 1997
                                 -----------------------------------------------
                                  Cash/     Special              Reserve balance
                                 Noncash    Charges     Activity   at 12/25/98
                                 ------- -------------- -------- ---------------
                                         (In thousands)
<S>                              <C>     <C>            <C>      <C>
Corporate Restructuring:
  Severance and relocation......  Cash      $(3,400)     $3,400       $  --
  Duplicative offices/assets....  Cash       (4,100)      3,227        (873)
  Other.........................  Cash         (903)        903          --
                                            -------      ------       -----
    Total.......................            $(8,403)     $7,530       $(873)
                                            =======      ======       =====
</TABLE>
 
 Interest, Net
 
   Net interest expense was 1.8% of revenues in the twelve months ended March
27, 1998 and 1.5% of revenues in the twelve months ended March 28, 1997. The
following table shows net interest expense for these comparative periods:
 
<TABLE>
<CAPTION>
                                                             Twelve Months Ended
                                                             -------------------
                                                             March 27, March 28,
                                                               1998      1997
                                                             --------- ---------
                                                               (In thousands)
<S>                                                          <C>       <C>
Interest incurred...........................................  $10,730   $ 7,168
Capitalized interest........................................      (10)       --
Interest income.............................................   (2,751)   (1,908)
                                                              -------   -------
  Interest, net.............................................  $ 7,969   $ 5,260
                                                              =======   =======
</TABLE>
 
   The increase in the twelve months ended March 27, 1998 net interest expense
compared to the twelve months ended March 28, 1997 of $2.7 million is
attributable to the credit facilities used in the OHM acquisition
 
                                       37
<PAGE>
 
(see "Notes to Consolidated Financial Statements--Long-term debt"). Loan
origination costs, fees and interest expense incurred for the period February
25, 1998 to March 27, 1998 related to the acquisition of OHM stock were
approximately $3.4 million.
 
 Income Taxes
 
   For the twelve months ended March 27, 1998, we reported a loss from
continuing operations before income taxes and an extraordinary item of $2.2
million and recorded an income tax charge of $4.2 million after adjusting for
the special charge and a $2.3 million deferred tax asset valuation adjustment
prior to the acquisition of OHM. We also recognized a tax benefit of $3.5
million on an extraordinary charge for the early extinguishment of debt and a
$3.0 million benefit for a loss from disposition of a discontinued operation.
The total net tax benefit is $2.4 million. Our effective income tax rate from
continuing operations is more than the federal statutory rate primarily due to
the above charge, state income taxes and nondeductible expenses (see "Notes to
Consolidated Financial Statements--Income taxes").
 
   For the twelve months ended March 28, 1997, in which we reported a loss from
continuing operations before income taxes of $9.0 million, we recorded an
income tax benefit of $0.2 million which included a $4.6 million tax charge
resulting from the adjustment of our deferred tax asset valuation allowance
based on our assessment of the uncertainty as to when we will generate a
sufficient level of future earnings to realize the deferred tax asset created
by the special charges (see "Special Charges").
 
 Dividends
 
   Our dividends are summarized below:
 
<TABLE>
<CAPTION>
                                                            Dividend Summary on
                                                              Preferred Stock
                                                            -------------------
                                                            March 27, March 28,
                                                              1998      1997
                                                            --------- ---------
                                                              (In thousands)
<S>                                                         <C>       <C>
7% Cumulative convertible exchangeable cash dividend.......  $3,595    $4,050
6% Cumulative convertible participating
  --Imputed non-cash dividend..............................   2,105       866
  --In kind 3% stock dividend (including cash paid of
   $12,000 for fractional shares)..........................     467        --
                                                             ------    ------
    Total..................................................  $6,167    $4,916
                                                             ======    ======
</TABLE>
 
   Commencing with November 21, 1997, our Convertible Preferred Stock
outstanding accrued a 3% in-kind stock dividend for one year during which the
statement of operations also included an imputed dividend at a rate of
approximately 3% per annum.
 
Discontinued Operations
 
   At December 25, 1998, our consolidated balance sheet included accrued
liabilities of $7.9 million to complete the closure and post-closure of our
disposal facilities and the PRP matters net of trust fund and annuity
investments, restricted to closure and post-closure use and anticipated
insurance settlement proceeds. In the twelve months ended March 27, 1998, we
increased our provision for loss on disposition of our discontinued
transportation, treatment and disposal business by $5.0 million net of income
tax benefit of $3.0 million. This increased provision primarily related to an
additional accrual for closure costs related to the former Panoche disposal
site. In March 1998, we announced approval by the California Department of
Toxic Substances Control of the final closure and post closure plan for the
last of our four inactive treatment, storage and disposal facilities. The
approved plans allow us to proceed with the completion of final closure
 
                                       38
<PAGE>
 
construction and provides for future submittal of technical studies that will
be utilized to determine final aspects and costs of closure construction and
monitoring programs for the former Panoche disposal site.
 
   For further information regarding our discontinued operations, see "Notes to
Consolidated Financial Statements--Discontinued operations."
 
                                       39
<PAGE>
 
                               THE IT GROUP, INC.
 
LIQUIDITY AND CAPITAL RESOURCES
 
   Working capital increased by $45.4 million or 60.6% to $120.3 million at
December 25, 1998 from $74.9 million at March 27, 1998 as a result of the
acquisitions of OHM and GTI. The current ratio at December 25, 1998 was 1.44:1
which compares to 1.38:1 at March 27, 1998.
 
   Cash used by operating activities for the nine months ended December 25,
1998 totaled $34.5 million compared to $19.5 million of cash used for operating
activities in the twelve months ended March 27, 1998. This $15.0 million
increase is principally due to an increase in working capital requirements as a
result of the OHM acquisition. The $34.5 million of cash used for operating
activities during the nine months ended December 25, 1998 also includes $11.1
million of costs associated with our discontinued operations (see "Notes to
Consolidated Financial Statements--Discontinued operations"). We expect our
discontinued operations cash usage for the twelve months ended December 31,
1999 to be less than $8.0 million.
 
   Capital expenditures were $6.9 million, $4.8 million and $3.4 million for
the nine months ended December 25, 1998, the twelve months ended March 27, 1998
and the twelve months ended March 28, 1997, respectively. Capital expenditures
for the nine months ended December 25, 1998 were $2.1 million higher than the
twelve months ended March 27, 1998 due primarily to computer related
expenditures required to integrate our recent acquisitions. We expect capital
expenditures to increase to approximately $14.0 million in fiscal year 1999 due
to information technology upgrades required to integrate recent acquisitions.
 
   Cash used for the acquisition of businesses, net of cash acquired was $81.3
million and $163.2 million for the nine months ended December 25, 1998 and the
twelve months ended March 27, 1998, respectively. On February 25, 1998, we
purchased 54% of OHM for $160.2 million which is included in the Consolidated
Statements of Cash Flows net of $12.0 million of cash acquired. On June 11,
1998, we paid $34.8 million as part of the consideration to acquire the balance
of OHM. On December 3, 1998, we acquired GTI for $69.4 million (or $40.1
million net of $29.3 million in cash acquired). We also acquired speciality
consulting firms PHR, PEG, JSC and LandBank for cash during the twelve months
ended March 27, 1998. These acquisition agreements, along with the acquisition
of Beneco by OHM, include potential future contingent payments. The total
potential future contingent payments range from a low of $1.9 million to a
maximum of approximately $19.1 million.
 
   We do not expect to pay significant cash income taxes over the next several
years due to our net operating loss carryforwards. (See "Notes to Consolidated
Financial Statements--Income taxes" and "Management's Discussion and Analysis
of Results of Operations and Financial Condition--Income Taxes".)
 
   In connection with the OHM acquisition, we entered into a $240.0 million
credit facility which was used to complete the cash tender offer to acquire 54%
of OHM, to refinance our $65.0 million principal amount of senior notes and for
working capital purposes until we acquired the balance of OHM on June 11, 1998.
On June 11, 1998, the credit facilities were amended and restated to effect a
$378.0 million refinancing. Under this refinancing, we initially borrowed
$228.0 million under term loan provisions and approximately $85.0 million
through a revolving credit facility. On September 14, 1998, the lenders under
the credit facilities approved the first amendment, increasing the revolving
credit facility from $150.0 million to $185.0 million.
 
   Long-term debt, including OHM's 8% convertible subordinated debentures, of
$405.1 million at December 25, 1998 increased from $284.7 million at March 27,
1998 primarily due to the acquisitions of OHM and GTI. (See "Notes to
Consolidated Financial Statements--Long-term debt".) Our ratio of total debt,
including current portion, to equity was 1.77:1 at December 25, 1998, 2.03:1 at
March 27, 1998 and 0.42:1 at March 28, 1997. See "Notes to Consolidated
Financial Statements--Long-term debt".
 
   Due to conditions existent in the long-term credit markets during the third
and fourth quarter of 1998, we utilized our revolving credit facility and
current cash flow as described above to finance the acquisition of GTI.
 
                                       40
<PAGE>
 
As a result of the utilization of funds for acquisition purposes and a $28.8
million increase in unbilled receivables related to certain government projects
which, according to the contract terms can not be billed until certain
milestones are achieved, we have utilized a larger portion of our existing
revolving credit capacity than would normally be expected. Between the date of
the GTI acquisition and mid March 1999, we have had average daily availability
under our revolving credit facilities and cash of $25.0 million. We continue to
have significant cash requirements including interest, operating lease
payments, preferred dividend obligations, required term loan and subordinated
debenture principal payments, the potential acquisition contingent payments
discussed above, expenditures for the closure of our inactive disposal sites
and PRP matters (see "Transportation, Treatment and Disposal Discontinued
Operations") and contingent liabilities.
 
   The EFM and Roche acquisitions require an aggregate cost which (excluding
potential earnout payments) we estimate to be approximately $85.4 million. To
finance the acquisitions and to pay down borrowings under our revolving credit
facilities, and with improving conditions in the capital markets, we have begun
a private placement of $200 million of senior subordinated notes (Notes). If
the offering is completed, the Notes will have a fixed rate of interest payable
every six months in cash commencing in 1999 and will be redeemable on or after
2004. The Notes will be general unsecured obligations, subordinated to
borrowings under our credit facilities and other senior indebtedness and pari
passu with other existing future indebtedness unless the terms of that
indebtedness expressly provide otherwise.
 
   As of December 25, 1998, on an as adjusted basis after giving effect to the
Note offering and the EFM and Roche acquisitions, the aggregate amount of debt
including the current portion would have been approximately $518.2 million, and
approximately $127.7 million would have been available for additional working
and acquisition capital under the revolving credit facilities.
 
   Our obligation to close the EFM acquisition is subject to the successful
completion of the Note offering and if the acquisition does not close on or
before May 27, 1999, either party can terminate the agreement and we will
forfeit $5.5 million in payments we will have made under the agreement by that
time. Our obligations to close the Roche acquisition are not subject to any
financing contingencies, however, we have agreed with Roche's shareholders to
purchase certain shareholders' interests for approximately $3.5 million by
March 31, 1999 and to postpone the purchase of the remaining interests until
completion of the Note offering.
 
Quantitative and Qualitative Disclosures About Market Risk
 
   The following discussion of our exposure to various market risks contains
"forward looking statements" that involve risks and uncertainties. These
projected results have been prepared utilizing certain assumptions considered
reasonable in the circumstances and in light of information currently available
to us. Nevertheless, because of the inherent unpredictability of interest
rates, actual results could differ materially from those projected in such
forward-looking information.
 
   At December 25, 1998, we had fixed-rate debt totaling $44.5 million in
principal amount and having a fair value of $40.7 million. These instruments
are fixed rate and, therefore, do not expose us to the risk of earnings loss
due to changes in market interest rates. However, the fair value of these
instruments would decrease to approximately $40.0 million if interest rates
were to increase by 10% from their levels at December 25, 1998.
 
   At December 25, 1998, we had floating-rate long-term debt totaling $368.8
million in principal amount and having a fair value of $368.8 million. These
borrowings are under our Bank Credit Facilities (see "Notes to Consolidated
Financial Statements--Long-term debt"). We have entered into a swap agreement
with a notional amount of $126.0 million as required by our credit facilities
and to reduce our exposure to adverse fluctuations in interest rates relating
to this debt. We have not entered into any other derivative financial
instruments for trading purposes. If floating rates were to increase by 10%
from December 25, 1998 levels, we would incur additional interest expense of
approximately $1.8 million.
 
 
                                       41
<PAGE>
 
   As discussed in our Notes to Consolidated Financial Statements--Discontinued
Operations, our consolidated balance sheet includes $7.9 million of accrued
liabilities to complete the closure and post-closure of our disposal facilities
and other matters, net of certain trust fund and annuity investments which are
restricted to closure and post-closure use and insurance recovery. These trust
fund assets total $20.1 million at December 25, 1998 and consist predominately
of high quality common stocks, fixed rate AAA rated corporate and government
bonds, and annuity investments which provide for periodic payments into the
trust fund. If interest rates were to increase by 10% from their levels at
December 25, 1998, the decrease in fair value of the fixed-rate debt securities
would not be material to us. If the market prices of the individual equity
securities were to decrease by 10% from their levels at December 25, 1998, the
resulting loss in fair value of these securities would not be material to us.
 
Year 2000 Compliance
 
   The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of our computer
programs or hardware that have date-sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
 
 State of Readiness
 
   Our core financial and administrative software systems are certified as Year
2000 compliant by the vendor. During the twelve months ended March 27, 1998, we
established an integration test plan to test this software and verify Year 2000
compliance. In February 1998, we completed the integration tests which verified
that the Company's core financial and administrative software systems were Year
2000 compliant. Our core hardware was also tested and was found to be fully
compliant with the Year 2000 requirements. We recently hired a Year 2000
Program Director and have begun communicating with clients, suppliers,
financial institutions and others with which we do business to coordinate Year
2000 conversion. A significant portion of our business (69%) is attributable to
the U.S. federal government (see "Business--Operations--Clients"). If the U.S.
federal government is not Year 2000 compliant, there could be a delay in the
collection of accounts receivable from the U.S. federal government in January
2000. At this time, we cannot predict the impact on our consolidated financial
condition, liquidity and results of operations of the U.S. federal government's
Year 2000 readiness. However, we do not believe there will be any significant
delays in the collection of our accounts receivable.
 
 Costs
 
   We have prepared a detailed conversion plan and have estimated the total
cost of Year 2000 compliance to be approximately $3.1 million. As of December
25, 1998, we have incurred costs of approximately $0.5 million to address year
2000 issues. All of the costs have been or will be charged to operating expense
and funded through operating cash flows.
 
 Risks and Contingencies
 
   We are currently developing a contingency plan to address how we will handle
the most reasonably likely worst case scenarios including situations where our
clients, suppliers, financial institutions and others are not Year 2000
compliant on January 1, 2000. We do not have control over these third parties
and, as a result, cannot currently estimate to what extent future operating
results may be adversely affected by the failure of these third parties to
successfully address their Year 2000 issues. However, our contingency plan will
include actions designed to identify and minimize any third party exposures and
management believes that, based on third party exposures identified to date,
these issues should be resolved by the year 2000.
 
 
                                       42
<PAGE>
 
FORWARD LOOKING STATEMENTS
 
   Statements of our intentions, beliefs, expectations or predictions for the
future, denoted by the words "anticipate," "believe," "estimate," "expect,"
"project," "imply," "intend," "foresee," and similar expressions are forward-
looking statements that reflect our current views about future events and are
subject to risks, uncertainties and assumptions. Such risks, uncertainties and
assumptions include those identified in the "Business" section of this report
and the following:
 
  .  changes in laws or regulations affecting our operations, as well as
     competitive factors and pricing pressures,
 
  .  bidding opportunities and success,
 
  .  project results, including success in pursuing claims and change orders,
 
  .  management of our cash resources, particularly in light of our
     substantial leverage,
 
  .  funding of backlog,
 
  .  matters affecting contracting and engineering businesses generally, such
     as the seasonality of work and the impact of weather and clients' timing
     of projects,
 
  .  our ability to generate a sufficient level of future earnings to utilize
     our deferred tax assets,
 
  .  the ultimate closure costs of our discontinued operations,
 
  .  the success of our acquisition strategy, including the effects of the
     integration of recent acquisitions and any future acquisitions,
     including the proposed acquisitions of EFM and Roche described in this
     report, and achievement of expected cost savings and other synergies
     therefrom, and
 
  .  industry-wide market factors and other general economic and business
     conditions.
 
   Our actual results could differ materially from those projected in these
forward-looking statements as a result of these factors, many of which are
beyond our control.
 
                                       43
<PAGE>
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
       INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
              SCHEDULE FOR THE NINE MONTHS ENDED DECEMBER 25, 1998
                       AND TWO YEARS ENDED MARCH 27, 1998
 
Consolidated Financial Statements.
 
<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
   <S>                                                                     <C>
   Report of Ernst & Young LLP, Independent Auditors......................  45
   Consolidated Balance Sheets--December 25, 1998 and March 27, 1998......  46
   Consolidated Statements of Operations--Nine Months Ended December 25,
    1998
    and Years Ended March 27, 1998 and March 28, 1997.....................  47
   Consolidated Statements of Stockholders' Equity--Nine Months Ended
    December 25, 1998 and Years Ended March 27, 1998 and March 28, 1997...  48
   Consolidated Statements of Cash Flows--Nine Months Ended December 25,
    1998
    and Years Ended March 27, 1998 and March 28, 1997.....................  49
   Notes to Consolidated Financial Statements.............................  50
 
Financial Statement Schedule.
 
   II. Valuation and qualifying accounts..................................  95
</TABLE>
 
   Schedules not filed herewith are omitted because of the absence in all
material respects of conditions under which they are required or because the
information called for is shown in the consolidated financial statements or
notes thereto.
 
                                       44
<PAGE>
 
                REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
 
The Board of Directors
The IT Group, Inc.
 
   We have audited the accompanying consolidated balance sheets of The IT
Group, Inc. as of December 25, 1998 and March 27, 1998 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the nine months ended December 25, 1998 and for each of the two years in the
period ended March 27, 1998. Our audits also included the financial statement
schedule listed in the index at Item 8. These consolidated financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule 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, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of The IT Group, Inc. at December 25, 1998 and March 27, 1998 and the
consolidated results of its operations and its cash flows for the nine months
ended December 25, 1998 and each of the two years in the period ended March 27,
1998 in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
 
                                             ERNST & YOUNG LLP
 
Pittsburgh, Pennsylvania
February 15, 1999, except for the
subsequent event footnote as to
which the date is March 8, 1999
 
                                       45
<PAGE>
 
                               THE IT GROUP, INC.
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                        December 25, March 27,
                                                            1998       1998
                                                        ------------ ---------
                                                            (In thousands)
                         ASSETS
<S>                                                     <C>          <C>
Current assets:
 Cash and cash equivalents.............................  $  21,265   $  24,765
 Accounts receivable, less allowance for doubtful
  accounts of $18,958,000 and $19,026,000,
  respectively.........................................    338,589     210,630
 Prepaid expenses and other current assets.............     17,308      25,523
 Deferred income taxes.................................     15,919      12,750
                                                         ---------   ---------
   Total current assets................................    393,081     273,668
Property, plant and equipment, at cost:
 Land and land improvements............................      2,166         846
 Buildings and leasehold improvements..................     15,072      18,222
 Machinery and equipment...............................     81,763     159,433
                                                         ---------   ---------
                                                            99,001     178,501
   Less accumulated depreciation and amortization......     51,331     102,480
                                                         ---------   ---------
     Net property, plant and equipment.................     47,670      76,021
Cost in excess of net assets of acquired businesses....    356,619     211,878
Investment in Quanterra................................         --      16,300
Other assets...........................................     17,469      17,557
Deferred income taxes..................................     93,719      73,745
Long-term assets of discontinued operations............     40,048      40,048
                                                         ---------   ---------
   Total assets........................................  $ 948,606   $ 709,217
                                                         =========   =========
         LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 Accounts payable......................................  $ 150,912   $  82,597
 Accrued wages and related liabilities.................     44,929      38,395
 Billings in excess of revenues........................      8,219       3,723
 Other accrued liabilities.............................     43,254      42,091
 Short-term debt, including current portion of long-
  term debt............................................     17,603      16,738
 Net current liabilities of discontinued operations....      7,904      15,200
                                                         ---------   ---------
   Total current liabilities...........................    272,821     198,744
Long-term debt.........................................    364,824     240,147
8% convertible subordinated debentures.................     40,235      44,550
Long-term accrued liabilities of discontinued
 operations, net.......................................         --       3,773
Other long-term accrued liabilities....................     31,979      23,755
Minority interest......................................        579      50,098
Commitments and contingencies
Stockholders' equity:
 Preferred stock, $100 par value; 180,000 shares
  authorized
   7% cumulative convertible exchangeable, 20,556
    issued and outstanding, 24,000 shares authorized...      2,056       2,056
   6% cumulative convertible participating, 46,095 and
    45,271 shares issued and outstanding...............      4,609       4,451
 Common stock, $.01 par value; 50,000,000 shares
  authorized; 22,675,917 and 9,737,589 shares issued,
  respectively.........................................        227          97
 Treasury stock at cost, 47,484 and 8,078 shares,
  respectively.........................................        (74)        (74)
 Additional paid-in capital............................    348,794     246,681
 Deficit...............................................   (116,984)   (104,893)
 Accumulated other comprehensive income (deficit)......       (460)       (168)
                                                         ---------   ---------
   Total stockholders' equity..........................    238,168     148,150
                                                         ---------   ---------
   Total liabilities and stockholders' equity..........  $ 948,606   $ 709,217
                                                         =========   =========
</TABLE>
 
    The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       46
<PAGE>
 
                               THE IT GROUP, INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (In thousands, except per share data)
 
<TABLE>
<CAPTION>
                                                          Twelve Months Ended
                                        Nine Months Ended --------------------
                                          December 25,    March 27,  March 28,
                                              1998          1998       1997
                                        ----------------- ---------  ---------
<S>                                     <C>               <C>        <C>
Revenues...............................     $757,435      $442,216   $362,131
Cost and expenses:
  Cost of revenues.....................      666,474       391,126    323,993
  Selling, general and administrative
   expenses............................       41,828        31,774     33,431
  Special charges......................       24,971        14,248      8,403
                                            --------      --------   --------
Operating income (loss)................       24,162         5,068     (3,696)
Other income, net......................           --           716         --
Interest, net..........................      (24,895)       (7,969)    (5,260)
                                            --------      --------   --------
Loss from continuing operations before
 income taxes..........................         (733)       (2,185)    (8,956)
(Provision) benefit for income taxes...       (6,694)       (4,175)       179
                                            --------      --------   --------
Loss from continuing operations........       (7,427)       (6,360)    (8,777)
Discontinued operations--closure costs
 (net of $3,040 income tax benefit)....           --        (4,960)        --
                                            --------      --------   --------
Loss before extraordinary item.........       (7,427)      (11,320)    (8,777)
Extraordinary item--early
 extinguishment of debt (net of $3,497
 income tax benefit)...................           --        (5,706)        --
Net loss...............................       (7,427)      (17,026)    (8,777)
Less preferred stock dividends.........       (4,664)       (6,167)    (4,916)
                                            --------      --------   --------
Net loss applicable to common stock....     $(12,091)     $(23,193)  $(13,693)
                                            ========      ========   ========
Net loss per share basic and diluted:
  Continuing operations (net of
   preferred stock dividends)..........     $  (0.63)     $  (1.28)  $  (1.48)
  Discontinued operations--loss from
   remediation.........................           --         (0.51)        --
  Extraordinary item--early
   extinguishment of debt..............           --         (0.59)        --
                                            --------      --------   --------
                                            $  (0.63)     $  (2.38)  $  (1.48)
                                            ========      ========   ========
</TABLE>
 
 
 
    The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       47
<PAGE>
 
                               THE IT GROUP, INC.
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                  For nine months ended December 25, 1998 and
                         two years ended March 27, 1998
                                 (In thousands)
 
<TABLE>
<CAPTION>
                               7%           6%
                           cumulative   cumulative                                          Accumulated
                          convertible   convertible                                            Other
                          exchangeable participating                 Additional            Comprehensive
                           preferred     preferred   Common Treasury  paid-in                 Income
                             stock         stock     stock   stock    capital    Deficit     (Deficit)    Totals
                          ------------ ------------- ------ -------- ---------- ---------  ------------- --------
<S>                       <C>          <C>           <C>    <C>      <C>        <C>        <C>           <C>
Balance at March 29,
 1996...................     $2,400       $   --      $ 91    $(84)   $206,465  $ (68,007)     $  --     $140,865
 Comprehensive income:
  Net loss..............         --           --        --      --          --     (8,777)        --       (8,777)
  Foreign currency
   translation
   adjustments net of
   tax..................         --           --        --      --          --         --        (17)         (17)
                                                                                                         --------
 Comprehensive loss.....                                                                                   (8,794)
                                                                                                         --------
 Net proceeds from
  preferred stock and
  warrants issued to
  Carlyle...............         --        4,117        --      --      36,492         --         --       40,609
 Conversion of preferred
  stock.................       (344)          --         7      --         337         --         --           --
 Restricted stock
  awards, net...........         --           --        (1)     10         214         --         --          223
 Dividends on preferred
  stock.................         --           87        --      --         779     (4,916)        --       (4,050)
                             ------       ------      ----    ----    --------  ---------      -----     --------
Balance at March 28,
 1997...................      2,056        4,204        97     (74)    244,287    (81,700)       (17)     168,853
 Comprehensive income:
  Net loss..............         --           --        --      --          --    (17,026)        --      (17,026)
  Foreign currency
   translation
   adjustments net of
   tax..................         --           --        --      --          --         --       (151)        (151)
                                                                                                         --------
 Comprehensive loss.....                                                                                  (17,177)
                                                                                                         --------
 Restricted stock.......         --           --        --      --         223         --         --          223
 Dividends on preferred
  stock.................         --          247        --      --       2,232     (6,167)        --       (3,688)
 Stock options
  exercised.............         --           --        --      --         (61)        --         --          (61)
                             ------       ------      ----    ----    --------  ---------      -----     --------
Balance at March 27,
 1998...................      2,056        4,451        97     (74)    246,681   (104,893)      (168)     148,150
 Comprehensive income:
  Net loss..............         --           --        --      --          --     (7,427)        --       (7,427)
  Foreign currency
   translation
   adjustments net of
   tax..................         --           --        --      --          --         --       (292)        (292)
                                                                                                         --------
 Comprehensive loss.....                                                                                   (7,719)
                                                                                                         --------
 Restricted stock.......         --           --        --      --          38         --         --           38
 Dividends on preferred
  stock.................         --          158        --      --       1,421     (4,664)        --       (3,085)
 IT shares issued in
  exchange for OHM
  stock, net of stock
  issue costs...........         --           --       130      --     100,654         --         --      100,784
                             ------       ------      ----    ----    --------  ---------      -----     --------
Balance at December 25,
 1998...................     $2,056       $4,609      $227    $(74)   $348,794  $(116,984)     $(460)    $238,168
                             ======       ======      ====    ====    ========  =========      =====     ========
</TABLE>
 
    The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       48
<PAGE>
 
                               THE IT GROUP, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
<TABLE>
<CAPTION>
                                                            Twelve Months Ended
                                          Nine Months Ended --------------------
                                            December 25,    March 27,  March 28,
                                                1998          1998       1997
                                          ----------------- ---------  ---------
<S>                                       <C>               <C>        <C>
Cash flows from operating activities:
  Net loss..............................      $  (7,427)    $ (17,026) $ (8,777)
    Adjustments to reconcile net loss to
     net cash provided by (used for)
     operating activities:
      Net loss from discontinued
       operations.......................             --         4,960        --
      Extraordinary charge for early
       retirement of debt...............             --         3,640        --
      Depreciation and amortization.....         20,094        13,158    14,363
      Non-recurring special charges.....         24,971         5,743        --
      Deferred income taxes.............          6,187           678       370
      Other.............................             13          (980)      (45)
  Changes in assets and liabilities, net
   of effects from acquisitions and
   dispositions of businesses:
    (Increase) decrease in receivables..        (88,612)          386    25,422
    (Increase) decrease in prepaid
     expenses and other current assets..           (364)         (717)      601
    Increase (decrease) in accounts
     payable............................         65,359        (7,687)      905
    (Decrease) increase in accrued wages
     and related liabilities............        (14,825)       (4,471)    2,473
    Increase (decrease) in billings in
     excess of revenues.................          4,496        (4,634)    5,183
    (Decrease) increase in other accrued
     liabilities........................        (30,190)        1,591    (2,111)
    (Decrease) increase in other long-
     term accrued liabilities...........         (3,126)          733       452
    Decrease in liabilities of
     discontinued operations............        (11,069)      (14,914)  (14,041)
                                              ---------     ---------  --------
    Net cash (used for) provided by
     operating activities...............        (34,493)      (19,540)   24,795
Cash flows from investing activities:
  Capital expenditures..................         (6,860)       (4,766)   (3,361)
  Investment in Quanterra...............             --            --    (3,325)
  Proceeds from sale of equity interest
   in Quanterra.........................          5,750            --        --
  Proceeds from disposition of business              --         2,800        --
  Acquisition of businesses, net of cash
   acquired.............................        (81,332)     (163,189)   (1,455)
  Other, net............................          1,003        (4,896)      700
                                              ---------     ---------  --------
  Net cash used by investing
   activities...........................        (81,439)     (170,051)   (7,441)
Cash flows from financing activities:
  Financing costs.......................         (6,179)       (4,113)       --
  Repayments of long-term borrowings....       (409,690)      (68,666)     (438)
  Long-term borrowings..................        531,015       210,940       962
  Net proceeds from issuance of
   preferred stock......................             --            --    40,609
  Dividends paid on preferred stock.....         (2,714)       (2,702)   (4,050)
  Issuances of common stock, net........             --            --       (33)
                                              ---------     ---------  --------
  Net cash provided by financing
   activities...........................        112,432       135,459    37,050
                                              ---------     ---------  --------
Net (decrease) increase in cash and cash
 equivalents............................         (3,500)      (54,132)   54,404
Cash and cash equivalents at beginning
 of period..............................         24,765        78,897    24,493
                                              ---------     ---------  --------
Cash and cash equivalents at end of
 period.................................      $  21,265     $  24,765  $ 78,897
                                              =========     =========  ========
</TABLE>
 
    The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       49
<PAGE>
 
                               THE IT GROUP, INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
Summary of significant accounting policies:
 
 Basis of presentation and principles of consolidation
 
   The consolidated financial statements include The IT Group, Inc. (formerly
International Technology Corporation) (IT or the Company) and its wholly-owned
and majority-owned subsidiaries. The Company uses the equity method to account
for certain joint ventures in which the Company does not have in excess of 50%
of voting control. Intercompany transactions are eliminated.
 
   On June 9, 1998, the Board of Directors of IT approved a change in IT's
fiscal year end from the last Friday in March of each year to the last Friday
of December of each year. The report covering the transition period is IT's
Annual Report on Form 10-K for the nine months ended December 25, 1998.
 
 Estimates used in the preparation of the consolidated financial statements
 
   The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and the accompanying notes. Actual results inevitably will differ from those
estimates and such differences may be material to the consolidated financial
statements.
 
 Recent Accounting Pronouncements
 
   In June of 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities". This statement will be required to be adopted as of the first
fiscal quarter of the year 2000. The Company intends to adopt FASB No. 133 by
the effective date although earlier adoption is permitted. The statement
requires the swap agreements, used by the Company to manage the interest rate
risks associated with the variable nature of the Company's Credit Facilities,
to be recorded at fair market value and reflected in earnings. The Company has
evaluated its existing interest rate contracts and management does not believe
that the effect of market volatility on interest rates will have a material
effect on earnings for the existing contracts including anticipated
modifications.
 
                                       50
<PAGE>
 
                               THE IT GROUP, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
 Transition Period
 
   The Company elected to change its fiscal year-end from the last Friday in
March to the last Friday in December effective for the nine months ended
December 25, 1998. Comparative information for the nine months ended December
25, 1998, December 26, 1997 and December 27, 1996 is as follows:
 
<TABLE>
<CAPTION>
                                                  Nine Months Ended
                                        --------------------------------------
                                        December 25, December 26, December 27,
                                            1998         1997         1996
                                        ------------ ------------ ------------
                                                     (unaudited)  (unaudited)
                                        (In thousands, except per share data)
<S>                                     <C>          <C>          <C>
Revenues...............................   $757,435     $306,178     $266,419
Cost of revenues.......................    666,474      271,572      239,778
                                          --------     --------     --------
Gross profit...........................     90,961       34,606       26,641
Selling, general and administrative
 expense...............................     41,828       21,182       25,339
Special charges........................     24,971        8,554        8,403
                                          --------     --------     --------
Operating income (loss)................     24,162        4,870       (7,101)
Interest, net..........................    (24,895)      (3,386)      (4,105)
                                          --------     --------     --------
Income (loss) from continuing
 operations............................       (733)       1,484      (11,206)
(Provision) benefit for income taxes...     (6,694)      (4,316)       1,146
                                          --------     --------     --------
Net loss...............................     (7,427)      (2,832)     (10,060)
                                          --------     --------     --------
Less preferred stock dividends.........     (4,664)      (4,609)      (3,395)
                                          --------     --------     --------
Net loss applicable to common stock....   $(12,091)    $ (7,441)    $(13,455)
                                          ========     ========     ========
Basic and diluted loss per common
 share.................................   $  (0.63)    $  (0.76)    $  (1.48)
                                          ========     ========     ========
</TABLE>
 
 Cash equivalents
 
   Cash equivalents include highly liquid investments with an original maturity
of three months or less.
 
 Contract accounting and accounts receivable
 
   The Company primarily derives its revenues from providing environmental
management services in the United States, principally to federal, state and
local governmental entities, large industrial companies, utilities and waste
generators. Services are performed under time-and-material, cost-reimbursement,
fixed-price and unit-bid contracts. The Company's contracts are generally
completed within 2 years.
 
   Revenues from time-and-material and cost-reimbursement contracts are
recognized as costs are incurred. Estimated fees on such contracts and revenues
on fixed-price and certain unit-bid contracts are recognized under the
percentage-of-completion method determined based on the ratio of costs incurred
to estimated total costs. Anticipated losses on contracts are recorded as
identified. Certain contracts include provisions for revenue adjustments to
reflect scope changes and other matters, including claims, which require
negotiations with clients to settle the amounts in the ordinary course of
business, leading to some estimates of claim or scope change amounts being
included in revenues. When such amounts are finalized, any changes from the
estimates are reflected in earnings.
 
   Included in accounts receivable, net at December 25, 1998 are billed
receivables, unbilled receivables and retention in the amounts of $269.0
million, $60.6 million and $9.0 million, respectively. Billed receivables,
unbilled receivables and retention from the U.S. Government as of December 25,
1998 were $145.6 million,
 
                                       51
<PAGE>
 
                               THE IT GROUP, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
$37.5 million and $2.2 million, respectively. At March 27, 1998, billed
receivables, unbilled receivables and retention were $172.7 million, $27.0
million and $10.9 million, respectively. Billed receivables, unbilled
receivables and retention from the U.S. Government as of March 27, 1998 were
$93.1 million, $9.9 million and $2.2 million, respectively.
 
   Unbilled receivables typically represent amounts earned under the Company's
contracts but not yet billable according to the contract terms, which usually
consider the passage of time, achievement of certain milestones, negotiation of
change orders or completion of the project. Generally, unbilled receivables are
expected to be billed and collected in the subsequent year. Billings in excess
of revenues represent amounts billed in accordance with contract terms, which
are in excess of the amounts includable in revenue.
 
   Included in accounts receivable at December 25, 1998 is approximately $31.6
million associated with claims and unapproved change orders, which are believed
by management to be probable of realization. Most of these claims and change
orders are being negotiated or are in arbitration and should be settled within
one year. This amount includes contract claims in litigation (see "Notes to
Consolidated Financial Statements--Contingencies"). While management believes
no material loss will be incurred related to these claims and change orders,
the actual amounts realized could be materially different than the amount
recorded.
 
   The Company performs periodic evaluations of its clients' financial
condition and generally does not require collateral. At December 25, 1998,
accounts receivable are primarily concentrated in federal, state and local
governmental entities and in commercial clients in which the Company does not
believe there is any undue credit risk.
 
 Property, plant and equipment
 
   The cost of property, plant and equipment is depreciated using primarily the
straight-line method over the following useful lives of the individual assets:
buildings--20 to 30 years, land improvements--3 to 20 years, and machinery and
equipment--3 to 10 years including salvage value. Amortization of leasehold
improvements is provided using the straight-line method over the term of the
respective lease.
 
 Interest
 
   Interest incurred was $25.9 million, $10.7 million and $7.2 million for the
nine months ended December 25, 1998, the twelve months ended March 27, 1998 and
the twelve months ended March 28, 1997, respectively.
 
   Interest income is principally earned on the Company's investments in cash
equivalents and was $1.0 million, $2.8 million and $1.9 million for the nine
months ended December 25, 1998, the twelve months ended March 27, 1998 and the
twelve months ended March 28, 1997, respectively.
 
 Intangible assets
 
   Cost in excess of net assets of acquired businesses is amortized over 20 to
40 years on a straight-line basis. At December 25, 1998 and March 27, 1998,
accumulated amortization is $16.6 million and $9.6 million, respectively. The
Company periodically evaluates the recoverability of intangibles resulting from
business acquisitions and measures the amount of impairment, if any, by
assessing current and future levels of income and cash flows as well as other
factors, such as business trends and prospects and market and economic
conditions. Other intangibles arising principally from acquisitions, are
amortized on a straight-line basis over periods not exceeding 20 years.
 
                                       52
<PAGE>
 
                               THE IT GROUP, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
 Stock-based compensation
 
   The Company grants stock options for a fixed number of shares to employees
and members of the Board of Directors with an exercise price equal to the fair
value of the shares at the date of grant. The Company accounts for its stock
grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees," (APB No. 25) and the related interpretations. The pro forma
information regarding net income and earnings per share as required by
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (SFAS No. 123) is disclosed in the note Stock incentive
plans: Compensation cost.
 
 Changes in Presentation of Comparative Financial Statements
 
   Certain amounts in the March 27, 1998 financial statements were reclassified
to conform with the presentation in the current period.
 
 Risks and uncertainties
 
   The Company provides a broad range of environmental and hazardous waste
remediation services to its clients located primarily in the United States. The
assessment, remediation, analysis, handling and management of hazardous
substances necessarily involve significant risks, including the possibility of
damages or injuries caused by the escape of hazardous materials into the
environment, and the possibility of fines, penalties or other regulatory
action. These risks include potentially large civil and criminal liabilities
for violations of environmental laws and regulations, and liability to clients
and to third parties for damages arising from performing services for clients,
which could have a material adverse effect on the consolidated financial
condition, liquidity and results of operations of the Company. Although the
Company believes that it generally benefits from increased environmental
regulations and from enforcement of those regulations, increased regulation and
enforcement also create significant risks for the Company.
 
   The Company does not believe there are currently any material environmental
liabilities related to continuing operations not already recorded or disclosed
in its financial statements. The Company anticipates that its compliance with
various laws and regulations relating to the protection of the environment will
not have a material effect on its capital expenditures, future earnings or
competitive position.
 
   The Company's revenue from governmental agencies accounted for 74%, 63% and
67% of revenue for the nine months ended December 25, 1998, the twelve months
ended March 27, 1998 and the twelve months ended March 28, 1997, respectively.
Because of its dependence on government contracts, the Company also faces the
risks associated with such contracting, which could include civil and criminal
fines and penalties. As a result of its government contracting business, the
Company has been, is and may in the future be subject to audits and
investigations by government agencies. The fines and penalties which could
result from noncompliance with the Company's government contracts or
appropriate standards and regulations, or the Company's suspension or debarment
from future government contracting, could have a material adverse effect on the
consolidated financial condition, liquidity and results of operations of the
Company. The dependence on government contracts will also continue to subject
the Company to significant financial risk and an uncertain business environment
caused by any federal budget reductions.
 
   In addition to the above, there are other risks and uncertainties that
involve the use of estimates in the preparation of the Company's consolidated
financial statements. (See "Business Acquisitions and Commitments and
contingencies").
 
                                       53
<PAGE>
 
                               THE IT GROUP, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
 Fair value of financial instruments (continuing operations)
 
   The following methods and assumptions were used by the Company in estimating
the fair value of its financial instruments:
 
   Cash and cash equivalents: The carrying amount reported in the balance sheet
approximates its fair value.
 
   Long and short-term debt: The fair value of the 8% convertible subordinated
debentures was based on a quoted market price at December 25, 1998. The
carrying amount of the credit agreement and other debt approximates its fair
value.
 
   The carrying amounts and estimated fair values of the Company's financial
instruments are:
 
<TABLE>
<CAPTION>
                                         December 25, 1998    March 27, 1998
                                        ------------------- -------------------
                                        Carrying Estimated  Carrying Estimated
                                         amount  fair value  amount  fair value
                                        -------- ---------- -------- ----------
                                                    (In thousands)
<S>                                     <C>      <C>        <C>      <C>
Cash and cash equivalents.............. $ 21,265  $ 21,265  $ 24,765  $ 24,765
Long and short-term debt:
  Credit agreement debt:
    Revolver borrowings outstanding--
     pre-OHM Merger....................       --        --    33,200    33,200
    Revolver borrowings outstanding....  143,000   143,000   126,293   126,293
    Term Loan..........................  225,750   225,750    80,000    80,000
  8% Convertible Subordinated
   Debentures--Due October 1, 2006.....   44,548    40,650    46,753    45,643
  Other................................    9,364     9,364    15,189    15,189
</TABLE>
 
Business Acquisitions:
 
 Fluor Daniel GTI, Inc.
 
   On December 3, 1998, the Company acquired the outstanding common stock of
Fluor Daniel GTI, Inc. (GTI), an environmental consulting, engineering and
construction management services company. GTI operates mainly throughout the
United States with minor foreign operations. Total consideration amounted to
$69.4 million plus approximately $2.0 million in transaction costs. This
transaction was accounted for as a purchase in accordance with Accounting
Principles Board (APB) No. 16. The excess of the purchase price over the fair
value of assets acquired and liabilities assumed in the merger of $16.3 million
is primarily classified as cost in excess of net assets of acquired businesses
and is being amortized over forty years.
 
   The estimated fair value of the assets acquired and liabilities assumed of
GTI are as follows:
 
<TABLE>
<CAPTION>
Description                                                          Amount
-----------                                                      --------------
                                                                 (In thousands)
<S>                                                              <C>
Current assets.................................................     $91,644
Property and equipment.........................................       3,587
Intangibles, primarily cost in excess of net assets of acquired
 businesses....................................................      16,324
Other long term assets.........................................       5,972
Current liabilities............................................      46,130
</TABLE>
 
                                       54
<PAGE>
 
                              THE IT GROUP, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   As a result of the merger with GTI, the Company has adopted a plan and
commenced the process of closing specific overlapping facilities and reducing
consolidated employment. The acquired balance sheet includes an accrual of
$7.9 million for the estimated GTI severance, office closure costs and lease
termination costs of which $0.9 million has been paid through December 25,
1998. The balance will be paid primarily over the next twelve months.
 
   The purchase price allocation is preliminary and based upon information
currently available. Management is continuing to gather and evaluate
information regarding the valuation of assets and liabilities at the date of
the acquisition. Management does not anticipate material changes to the
preliminary allocation.
 
 OHM Acquisition
 
   In January 1998, the Company entered into a merger agreement to acquire OHM
Corporation (OHM), an environmental and hazardous waste remediation company
servicing primarily industrial, federal government and local government
agencies located primarily in the United States. The transaction was effected
through a two-step process for a total purchase price of $303.4 million
consisting of (a) the acquisition of 54% of the total outstanding shares
through a cash tender offer, which was consummated on February 25, 1998, at
$11.50 per share for 13.9 million shares of OHM common stock, for a total
consideration of $160.2 million plus $4.6 million in acquisition costs and (b)
the acquisition on June 11, 1998 of the remaining 46% of the total outstanding
shares through the exchange of 12.9 million shares of Company common stock
valued at $8.04 per share, or $103.8 million and payment of $30.8 million plus
$4.0 million in acquisition costs.
 
   This transaction was accounted for as a step acquisition and therefore the
effects of the first phase of the merger were included in the March 27, 1998
financial statements and the effects of both phases were included in the June
26, 1998 financial statements. The excess of the purchase price over the fair
value of assets acquired and liabilities assumed in the merger of $328.5
million has been finalized during the nine months ended December 25, 1998 and
is classified as cost in excess of net assets of acquired businesses with
amortization over forty years.
 
   The estimated fair value of the assets acquired and liabilities assumed of
OHM as adjusted are as follows:
 
<TABLE>
<CAPTION>
Description                                                           Amount
-----------                                                       --------------
                                                                  (In thousands)
<S>                                                               <C>
Current assets...................................................    $117,309
Property and equipment...........................................      19,324
Cost in excess of net assets of acquired businesses..............     328,495
Other long term assets...........................................      72,666
Current liabilities..............................................     126,385
Long term liabilities, primarily debt............................     107,924
</TABLE>
 
   As a result of the merger with OHM (the OHM Merger), the Company adopted a
plan and has commenced the process of closing specific overlapping facilities
and reducing consolidated employment. The acquired balance sheet includes an
accrual of $16.2 million for the estimated OHM severance, office closure costs
and lease termination costs of which $7.3 million has been paid through
December 25, 1998. The balance relating primarily to office lease costs is
anticipated to be paid over the next seven years.
 
 Pro Forma Effects of Acquisitions
 
   The following unaudited pro forma condensed statements of operations gives
effect to the GTI acquisition as if the acquisition occurred on March 28, 1997
and the effect of the OHM merger as if this merger occurred
 
                                      55
<PAGE>
 
                               THE IT GROUP, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
on March 29, 1996. Basic and diluted loss per share has been calculated
utilizing the basic and diluted weighted average of IT shares outstanding
during the periods adjusted for approximately 12.9 million shares of common
stock issued June 11, 1998 for the OHM acquisition assuming the 12.9 million
shares were outstanding as of the beginning of the periods presented.
 
<TABLE>
<CAPTION>
                                                      Twelve Months Ended
                               Nine months ended -----------------------------
                               December 25, 1998 March 27, 1998 March 28, 1997
                                   Pro Forma       Pro Forma      Pro Forma
                               ----------------- -------------- --------------
                                    (In thousands, except per share data)
<S>                            <C>               <C>            <C>
Revenues......................     $897,284        $1,119,115      $984,945
Loss from continuing
 operations before
 extraordinary item...........       (3,680)          (53,074)      (12,280)
Net loss......................       (9,771)          (48,602)      (12,280)
Net loss applicable to common
 stock........................      (14,435)          (54,769)      (17,196)
Loss per share:
  Basic and diluted...........        (0.64)            (2.42)        (0.78)
</TABLE>
 
   The above amounts are based upon certain assumptions and estimates which the
Company believes are reasonable. The pro forma results do not reflect
anticipated cost savings and do not necessarily represent results which would
have occurred if the GTI and OHM mergers had taken place at the date and on the
basis assumed above.
 
 Other Acquisitions
 
   The Company acquired certain other businesses during the twelve months ended
March 27, 1998 and the twelve months ended March 28, 1997 for aggregate
consideration of $12.3 million and $1.5 million, respectively. These
acquisition agreements include potential contingent payments. The Company paid
$1.3 million in cash under two of these agreements through December 25, 1998.
Potential future contingent payments relating to these acquisitions as of
December 25, 1998 range from a low of $1.9 million to a maximum of
approximately $9.1 million. The Company paid $1.9 million in January 1999. In
accordance with Accounting Principles Board Opinion No. 16--Business
Combinations, these acquisitions were accounted for using the purchase method
and in the aggregate were not material to require disclosure of pro forma
financial information. In addition, in connection with the acquisition of OHM,
the Company assumed the potential future earnout payments relating to Beneco, a
company acquired by OHM in June 1997, which range from a low of zero to a
maximum of $10.0 million. See "Subsequent Events" also for acquisitions after
December 25, 1998.
 
Consolidated statements of cash flows supplemental disclosures:
 
   Supplemental cash flow information is:
 
<TABLE>
<CAPTION>
                                                           Twelve Months Ended
                                         Nine Months Ended -------------------
                                           December 25,    March 27, March 28,
                                               1998          1998      1997
                                         ----------------- --------- ---------
                                                    (In thousands)
<S>                                      <C>               <C>       <C>
Interest paid, net of amounts
 capitalized............................     $ 24,634      $ 11,060   $6,713
Interest received.......................        1,008         2,652    1,730
Income taxes paid.......................          335           770      287
Income tax refunds received.............           --             3    1,178
Acquisition liabilities assumed.........       66,050       218,440    6,346
Stock issued in connection with
 acquisitions...........................      103,810            --       --
</TABLE>
 
                                       56
<PAGE>
 
                               THE IT GROUP, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
Special Charges:
 
   Asset Sales. On May 27, 1998, the Company's Board of Directors considered
and approved the divestiture of certain non-core assets. The non-core assets
primarily include the Company's 19% common stock ownership interest in
Quanterra, Inc., (an environmental laboratory business) and the assets
associated with the Company's Hybrid Thermal Treatment System (HTTS(R))
business (thermal transportable incineration equipment). As a result of these
actions, the Company recorded a non-cash charge of $25.0 million in the three
months ending June 26, 1998 including $10.6 million (net of cash proceeds of
$5.8 million) related to the sale of the Quanterra investment and $14.4
million, primarily related to assets associated with the HTTS(R) business.
 
   Special charges of $14.2 million were recorded in the twelve months ended
March 27, 1998. The charges include $5.7 million for integration costs
associated with the acquisition of OHM, a $3.9 million non-cash charge related
to a project claim settlement, a $2.8 million charge associated with the
relocation of the Company's corporate headquarters, and a $1.8 million loss
from the sale of a small remediation services business.
 
   OHM. The $5.7 million special charge for integration costs associated with
the acquisition of OHM included $2.2 million of costs for severance and $3.5
million of costs and other related items for closing and consolidating the
Company's offices with OHM offices. As part of the plan of integration, the
Company identified slightly more than 100 IT employees, primarily in the
operating group and administrative support functions, to be laid-off. In
addition, the Company approved a plan for restructuring IT offices in which it
would close three leased facilities, reduce the size of three more facilities
and sublease a portion of eight additional facilities. As of December 25, 1998,
$1.3 million of the integration charge remained to be paid. The remaining costs
relate to the facility closures and office consolidations and will be paid over
the remaining terms of the leases. Most of these lease commitments will be paid
within the next three years. One lease requires payments over the next seven
years.
 
   Helen Kramer. In December 1997, the Company settled a contract claim which
has been outstanding in excess of five years with the US Army Corps of
Engineers, the U.S. Environmental Protection Agency (USEPA) and the Department
of Justice (jointly Government) arising out of work performed by the joint
venture of IT and Davy International at the Helen Kramer Superfund project. On
December 26, 1997, the joint venture received a $14.5 million payment from the
Government to resolve all outstanding project claims related to additional work
resulting from differing site conditions. In early January 1998, the joint
venture paid $4.3 million to the Government to resolve related civil claims by
the Government. IT's share of the joint venture results is 60%, accordingly, IT
received net cash of $6.0 million, its proportionate share of the settlement.
In December 1997, the Company recorded a non-cash pre-tax charge of $3.9
million as the cash received was less than the unbilled and billed receivables
related to this project which totaled approximately $9.2 million and $0.7
million, respectively.
 
   Relocation. The special charges that occurred in the first quarter of the
twelve months ended March 27, 1998 resulted from the relocation of the
Company's corporate headquarters from Torrance, California to Monroeville
(Pittsburgh), Pennsylvania and the sale of its California based small project
remediation services business. The headquarters relocation consolidated the
corporate overhead functions with the Company's largest operations office and
moved it closer to its lenders and largest shareholders which are located in
the Eastern United States. As a result of this relocation, the Company incurred
a pre-tax charge of $2.8 million. The relocation charge included $0.8 million
of costs for severance, $0.9 million of costs for the relocation of IT
employees, $0.7 million of costs related to the closure of the offices in
Torrance, California and $0.4 million of other related costs. As part of this
relocation, 32 employees were laid off, primarily corporate management and
administrative support personnel. As of December 25, 1998, these amounts have
been paid. In May 1997, the
 
                                       57
<PAGE>
 
                               THE IT GROUP, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
Company incurred a non-cash pre-tax charge of $1.8 million to sell its
California based small projects remediation services business.
 
   Restructuring. In conjunction with the corporate restructuring which was
initiated in the second quarter of the twelve months ended March 28, 1997, the
Company incurred a pre-tax restructuring charge of $8.4 million. The
restructuring charge included $3.4 million of costs for severance, $4.1 million
of costs for closing and reducing the size of a number of the Company's
offices, and $0.9 million of costs for other related items. As part of the plan
of termination, the Company laid-off 133 employees and paid over $2.5 million
in termination benefits. In addition, the Company approved a plan to close five
leased facilities and reduce the size of eleven other leased facilities by
either sublease or abandonment. Most of the remaining costs to be paid relate
to the facility closures and office space reductions which will be paid out
over the terms of the lease. One of these facility closures has a remaining
lease obligation of approximately six years. At December 25, 1998, $0.9 million
of the charge remained to be paid.
 
Long-term debt:
 
   Long-term debt consists of the following:
 
<TABLE>
<CAPTION>
                                                        December 25, March 27,
                                                            1998       1998
                                                        ------------ ---------
                                                            (In thousands)
<S>                                                     <C>          <C>
8% Convertible Subordinated Debentures--Due October 1,
   2006................................................   $ 44,548   $ 46,753
Credit Agreement Debt:
  Revolver borrowings outstanding......................         --     33,200
  Revolver borrowings outstanding......................    143,000    126,293
  Term Loan............................................    225,750     80,000
Other..................................................      9,364     15,189
                                                          --------   --------
                                                           422,662    301,435
Less current portion...................................     17,603     16,738
                                                          --------   --------
                                                          $405,059   $284,697
                                                          ========   ========
</TABLE>
 
   Aggregate maturity of long-term debt, including annual mandatory sinking
fund payments for the convertible subordinated debentures, for the five fiscal
years following December 25, 1998 is: 1999, $17.6 million; 2000, $9.4 million;
2001, $8.8 million; 2002, $8.8 million; 2003 and thereafter $378.0 million.
 
   The convertible subordinated debentures are convertible into 45.04 shares of
common stock and $107.50 cash per $1,000 unit with interest payable
semiannually on April 1 and October 1, and are redeemable at the option of the
Company. The convertible subordinated debentures require annual mandatory
sinking fund payments of 7.5% of the principal amount which commenced in 1996,
and continue through October 1, 2005.
 
   IT executed the OHM Tender Offer with a $240.0 million credit facility (the
credit facilities). The credit facilities were used to complete the Tender
Offer, to refinance IT's $65.0 million principal amount of senior notes and for
working capital purposes during the period from the Tender Offer closing date
of February 25, 1998 until the merger closing date of June 11, 1998. Loans made
under the credit facilities bore interest at a rate equal to LIBOR plus 2.50%
per annum (or the Bank's base rate plus 1.50% per annum) through June 10, 1998,
at the Company's option and required no amortization. The Company recorded an
extraordinary charge of $9.2 million, reduced by $3.5 million of deferred tax
benefit, as the result of the early extinguishment of existing debt necessary
to obtaining the credit facilities. On June 11, 1998, upon consummation of the
second step of the OHM acquisition (see "Business Acquisitions"), the Company's
credit facilities were refinanced. As such, the
 
                                       58
<PAGE>
 
                               THE IT GROUP, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
Company classified applicable portions of the credit facilities outstanding as
of March 27, 1998 as long-term debt in accordance with the provisions of the
credit facilities.
 
   After the refinancing in conjunction with the OHM Merger, the credit
facilities consist of an eight-year amortizing term loan (term loans) of $228.0
million and a six-year revolving credit facility (revolving loans) of $185.0
million that contains a sublimit of $50.0 million for letter of credit
issuance. The term loans made under the credit facilities bear interest at a
rate equal to LIBOR plus 2.50% per annum (or the lender's base rate plus 1.50%
per annum) and amortize on a semi-annual basis in aggregate annual installments
of $4.5 million for the first six years after the OHM Merger, with the
remainder payable in eight equal quarterly installments in the seventh and
eighth years after the OHM Merger. The revolving loans made under the credit
facilities bear interest at a rate equal to LIBOR plus 2.00% per annum (or the
lender's base rate plus 1.00% per annum). Six months after completion of the
merger, adjustments to the interest rates were made based on the ratio of IT's
consolidated total debt to consolidated earnings before interest, taxes,
depreciation and amortization. The credit facilities are secured by a security
interest in substantially all of the assets of the Company and its
subsidiaries. In addition, the facilities include representations, warranties
and covenants customary for facilities of this type that include various
financial covenants and limitations (subject to certain exceptions) on
indebtedness, lease obligations, mergers and acquisitions and other fundamental
changes prohibit the payment of cash dividends on common stock and limit
capital expenditures. The credit facilities also include customary events of
default. Events constituting default include a change of control of IT
including among other things, the disposition under certain circumstances of
the Company's 6% Cumulative Convertible Participating Preferred Stock and
warrants on or after the funding of the credit facilities on June 11, 1998 to a
person other than the Preferred Stock Group (see "Notes to Consolidated
Financial Statements--Preferred stock").
 
   On September 14, 1998, the lenders under the credit facilities approved the
first amendment to the loan agreement covering the credit facilities to
increase the revolving credit facility from $150.0 million to $185.0 million.
This increase in revolver funding availability was based upon growth
projections of the Company's business, the increase in seasonality of revenue
streams related to OHM contracts and to create additional flexibility to
finance further strategic and diversifying acquisitions, particularly due to
turmoil in the long-term credit markets during the second half of 1998.
 
   At October 26, 1998, the lenders under the credit facilities approved the
second amendment to the agreement. This second amendment provided for the
acquisition of GTI as a permitted acquisition under the credit facilities,
provided for the borrowing of up to $35.0 million under the revolving credit
facility to make the GTI acquisition and amended the financial covenants to
provide for the effects of the GTI acquisition. IT closed the acquisition of
GTI on December 3, 1998. The GTI acquisition was funded through the use of the
Company's cash on hand, borrowing of $35.0 million under the revolving facility
and use of $20.0 million of GTI's cash on hand, which was loaned to the Company
and is evidenced by an interest bearing promissory note payable on demand.
Letters of credit outstanding at December 25, 1998 were $20.4 million.
 
   As required by the credit facilities, on August 11, 1998, the Company
executed a six year swap agreement with a large multi national banking
organization. The swap agreement is based upon a notional amount of $126.0
million wherein the Company, the fixed-rate payer, pays (receives) the
difference between 3-month LIBOR and a fixed rate of 5.58% with its swap
counter-party, the floating-rate payer. The LIBOR rate is adjusted quarterly
and amounts owing or due are settled at each quarterly reset date. The Company
charges (credits) amounts exchanged under the swap to interest expense. Net
credits to the Company in the nine months ended December 25, 1998 were not
material. The swap agreement contains a one time cancellation option for the
counter-party and an imbedded interest rate cap for the Company. At any
quarterly reset date beginning with February 11, 2000, the counter-party, at
its option, may cancel the swap agreement for the remaining term. If the
counter-party elects to exercise its cancellation option, the Company receives
the benefit of a 7% interest
 
                                       59
<PAGE>
 
                               THE IT GROUP, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
rate cap on the notional amount of $126.0 million. The terms of the interest
rate cap allow the Company to utilize the interest rate cap for any six
quarterly periods during the term of the swap agreement remaining after
exercise of the cancellation option by the counter-party. The election of the
six quarterly cap periods by the Company need not be consecutive quarters. The
mark to market value of the swap at December 24, 1998 represents a cost to the
Company of $3.3 million. This value is based on 1) the shape of the yield curve
at the valuation date, 2) the assumption that future rate changes are parallel
shifts along the yield curve at all points, 3) LIBOR futures prices at the
measurement date and 4) that option volatility remains unchanged from current
levels. The market value of the swap, assuming only a 50 basis point increase
in LIBOR rates, is a positive $1.2 million, reflecting the significant change
in market values associated with small interest rate changes.
 
   The Company also has various miscellaneous outstanding notes payable and
capital lease obligations totaling $9.4 million. These notes payable mature at
various dates between January 1999 and November 2000, at interest rates ranging
from to 7.5% to 8.6%.
 
Income taxes:
 
   Income tax provision (benefit), net of changes in the deferred tax valuation
allowance, consists of the following:
 
<TABLE>
<CAPTION>
                                                             Twelve Months Ended
                                           Nine Months Ended -------------------
                                             December 25,    March 27, March 28,
                                                 1998          1998      1997
                                           ----------------- --------- ---------
                                                      (In thousands)
<S>                                        <C>               <C>       <C>
Current:
  Federal.................................      $   57        $    54    $(764)
  State...................................         450            559      215
                                                ------        -------    -----
                                                   507            613     (549)
                                                ------        -------    -----
Deferred:
  Federal.................................       5,696         (2,801)     336
  State...................................         491           (174)      57
  Foreign.................................          --             --      (23)
                                                ------        -------    -----
                                                 6,187         (2,975)     370
                                                ------        -------    -----
  Total provision (benefit)...............      $6,694        $(2,362)   $(179)
                                                ======        =======    =====
</TABLE>
 
   Income tax provision (benefit) is included in the statements of operations
as follows:
 
<TABLE>
<CAPTION>
                                                            Twelve Months Ended
                                          Nine Months Ended -------------------
                                            December 25,    March 27, March 28,
                                                1998          1998      1997
                                          ----------------- --------- ---------
                                                     (In thousands)
<S>                                       <C>               <C>       <C>
Continuing operations before
 extraordinary items....................       $6,694        $ 4,175    $(179)
Extraordinary item: early extinguishment
 of debt................................           --         (3,497)      --
                                               ------        -------    -----
                                                6,694            678     (179)
Discontinued operations.................           --         (3,040)      --
                                               ------        -------    -----
  Total provision (benefit).............       $6,694        $(2,362)   $(179)
                                               ======        =======    =====
</TABLE>
 
 
                                       60
<PAGE>
 
                               THE IT GROUP, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
   A reconciliation of the provision (benefit) for income taxes on the total
provision (benefit) computed by applying the federal statutory rate of 34% to
the loss from continuing operations before income taxes and the reported
provision (benefit) for income taxes of the total provision (benefit) is as
follows:
 
<TABLE>
<CAPTION>
                                                            Twelve Months Ended
                                          Nine Months Ended -------------------
                                            December 25,    March 27, March 28,
                                                1998          1998      1997
                                          ----------------- --------- ---------
                                                     (In thousands)
<S>                                       <C>               <C>       <C>
Income tax benefit computed at statutory
 federal income tax rate................       $  (249)      $  (743)  $(3,045)
State income taxes, net of federal tax
 benefit, if any........................           335           504       179
Equity in income (loss) of foreign
 subsidiaries...........................            --           121        --
Amortization of cost in excess of net
 assets of acquired businesses..........         2,557           287       100
Extraordinary item: early extinguishment
 of debt................................            --        (3,129)       --
Discontinued operations.................            --        (2,720)       --
Federal deferred tax asset valuation
 allowance adjustment...................         6,059         1,906     2,597
Research and development tax credits....        (2,540)           --        --
Other...................................           532         1,412       (10)
                                               -------       -------   -------
  Total provision (benefit).............       $ 6,694       $(2,362)  $  (179)
                                               =======       =======   =======
</TABLE>
 
   At December 25, 1998 and March 27, 1998, the Company had deferred tax assets
and liabilities as follows:
 
<TABLE>
<CAPTION>
                                                         December 25, March 27,
                                                             1998        1998
                                                         ------------ ---------
                                                             (In thousands)
<S>                                                      <C>          <C>
Deferred tax assets:
  Closure accruals--discontinued operations.............   $ 11,229   $ 15,771
  NOL carryforwards.....................................     64,490     72,319
  Tax basis in excess of book basis in Quanterra........         --     11,145
  Capital loss carryover................................     17,446         --
  Alternative minimum tax credit carryforwards..........      3,458      3,458
  Investment and other tax credit carryforwards.........     12,750     10,474
  Other accrued liabilities.............................      5,458     17,050
  Asset basis difference--OHM and GTI...................     62,292     25,987
  Other, net............................................     23,253      7,933
                                                           --------   --------
    Gross deferred tax asset............................    200,376    164,137
  Valuation allowance for deferred tax asset............    (50,267)   (31,865)
                                                           --------   --------
    Total deferred tax asset............................    150,109    132,272
Deferred tax liabilities:
  Tax depreciation in excess of book depreciation.......    (17,120)   (19,465)
  Asset basis difference--discontinued operations.......    (11,576)   (13,012)
  Other, net............................................    (11,775)   (13,300)
                                                           --------   --------
    Total deferred tax liabilities......................    (40,471)   (45,777)
                                                           --------   --------
    Net deferred tax asset..............................   $109,638   $ 86,495
                                                           ========   ========
Net current asset.......................................   $ 15,919   $ 12,750
  Net noncurrent asset..................................     93,719     73,745
                                                           --------   --------
    Net deferred tax asset..............................   $109,638   $ 86,495
                                                           ========   ========
</TABLE>
 
                                       61
<PAGE>
 
                               THE IT GROUP, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   Approximately $15.2 million and $3.9 million of the valuation allowance
relates to the OHM and GTI acquisitions, respectively. Tax benefits
subsequently recognized that are related to these amounts will reduce cost in
excess of net assets of acquired businesses.
 
   At December 25, 1998, the Company had net operating losses (NOL's), tax
credit carryforwards and capital losses with expiration dates as follows:
 
<TABLE>
<CAPTION>
                                                   Research
                                           Net        and              Capital
                                        Operating Development  Other     Loss
Expiration Dates                         Losses   Tax Credits Credits Carry Over
----------------                        --------- ----------- ------- ----------
                                                     (In thousands)
<S>                                     <C>       <C>         <C>     <C>
1998--2003............................. $     72    $ 1,140   $2,225   $45,910
2004--2008.............................   18,700      3,393       --        --
2009--2013.............................  156,386      5,992       --        --
Indefinite.............................       --         --    3,458        --
                                        --------    -------   ------   -------
  Total................................ $175,158    $10,525   $5,683   $45,910
                                        ========    =======   ======   =======
</TABLE>
 
   During the nine months ended December 25, 1998, the Company increased its
deferred tax asset valuation allowance from $31.9 million to $50.2 million. The
increase was principally related to the acquisition of OHM and GTI
corporations, respectively, and based on the Company's assessment of the
uncertainty as to when it will generate a sufficient level of future earnings
of applicable character to realize a portion of the deferred tax asset created
by the special charges. Because of the Company's position in the industry,
recent restructuring and acquisitions, and existing backlog, management expects
that its future taxable income will more likely than not allow the Company to
fully realize its deferred tax asset. The Company evaluates the adequacy of the
valuation allowance and the realizability of the deferred tax asset on an
ongoing basis.
 
   During the twelve months ended March 27, 1998, the Company increased its
deferred tax asset valuation allowance from $9.5 million to $31.9 million. The
increase was principally related to the acquisition of OHM corporation and the
Company's assessment of its ability to fully utilize the deferred tax asset.
During 1998, prior to the acquisition of OHM, the Company increased its
valuation allowance to offset increases in the deferred tax asset balance.
During the fourth quarter, the Company acquired OHM (see "Business
Acquisitions--OHM Acquisition") which substantially increased projected taxable
income.
 
   During the twelve months ended March 28, 1997, the Company increased its
deferred tax asset valuation allowance from $4.9 million to $9.5 million. This
change was principally due to the Company's assessment of the uncertainty as to
when it will generate a sufficient level of future earnings to realize the
deferred tax asset created by the special charges (see "Special Charges").
 
                                       62
<PAGE>
 
                               THE IT GROUP, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
Earnings per share
 
   The following table sets forth the computation of basic and diluted earnings
per share:
 
<TABLE>
<CAPTION>
                                                            Twelve Months Ended
                                          Nine Months Ended --------------------
                                            December 25,    March 27,  March 28,
                                                1998          1998       1997
                                          ----------------- ---------  ---------
                                          (In thousands, except per share data)
<S>                                       <C>               <C>        <C>
Numerator:
  Loss from continuing operations and
   before extraordinary items............     $ (7,427)     $ (6,360)  $ (8,777)
  Preferred stock dividends..............       (4,664)       (6,167)    (4,916)
                                              --------      --------   --------
  Numerator for basic and dilutive
   earnings per share--income available
   to common stockholders................      (12,091)      (12,527)   (13,693)
  Discontinued operations--closure costs
   (net of income tax benefit)...........           --        (4,960)        --
                                              --------      --------   --------
                                               (12,091)      (17,487)   (13,693)
  Extraordinary charge for early
   retirement of debt (net of income tax
   benefit)..............................           --        (5,706)        --
                                              --------      --------   --------
Net income (loss) applicable to common
 stock...................................     $(12,091)     $(23,193)  $(13,693)
                                              ========      ========   ========
Denominator:
  Weighted-average number of common
   shares outstanding for basic and
   dilutive earnings per share...........       19,149         9,737      9,227
                                              ========      ========   ========
Net loss per share:
  Earnings from continuing operations
   (net of preferred stock dividends)....     $  (0.63)     $  (1.28)  $  (1.48)
  Earnings from discontinued operations..           --         (0.51)        --
  Extraordinary item--early
   extinguishment of debt................           --         (0.59)        --
                                              --------      --------   --------
Net loss per share.......................     $  (0.63)     $  (2.38)  $  (1.48)
                                              ========      ========   ========
</TABLE>
 
   In June 1998, approximately 12.9 million shares were issued in connection
with the second step of the OHM Merger. (See Business Acquisitions.)
 
Commitments and contingencies:
 
 Lease commitments
 
   The Company's operating lease obligations are principally for buildings and
equipment. Most leases contain renewal options at varying terms. Generally, the
Company is responsible for property taxes and insurance on its leased property.
At December 25, 1998, future minimum rental commitments under noncancelable
leases with terms longer than one year aggregate $125.1 million and require
payments in the five succeeding years and thereafter of $36.8 million, $31.1
million, $22.5 million, $14.6 million, $8.6 million, and $11.5 million,
respectively. A portion of these leased assets represent duplicative facilities
and equipment resulting from the OHM and GTI acquisitions. The Company is
currently and actively involved in attempting to sublease these assets.
 
   Rental expense related to continuing operations was $29.4 million for the
nine months ended December 25, 1998, $12.9 million (including $1.2 million of
the special charges) for the twelve months ended
 
                                       63
<PAGE>
 
                               THE IT GROUP, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
March 27, 1998, and $12.6 million (including $2.2 million of the special
charges) for the twelve months ended March 28, 1997.
 
 Contingencies
 
 Coakley Landfill Action
 
   On March 9, 1998, the Coakley Landfill PRP Steering Committee terminated,
allegedly for cause, IT Corporation's contract to perform design and
remediation services at the Coakley Landfill and sued IT for damages for delay,
redesign, regrading, repair costs, as well as for possible exposure to
penalties by the USEPA. (The Coakley Landfill Group v. IT Corporation v. Gary
W. Blake, Inc., et al., U.S.D.C., D.N.H., Case No. 98-167-JD) IT disputes that
the Steering Committee is entitled to terminate the agreement for cause and
believes the termination action arose from IT's pending change order request of
approximately $6.3 million (which has now grown to $7.2 million). IT has
answered and counterclaimed for damages for wrongful termination, issuing
defective plans and specifications, breach of contract and unfair trade
practices. Discovery of the case is ongoing, and no trial date has been set and
the ultimate outcome of this matter cannot yet be predicted.
 
 Occidental Chemical Litigation
 
   OHM is in litigation in the U.S. District Court for the Western District of
New York with Occidental Chemical Corporation (Occidental) relating to the
Durez Inlet Project performed in 1993 and 1994 for Occidental in North
Tonawanda, New York. (Occidental Chemical Corporation v. OHM Remediation
Services Corporation, U.S.D.C., W.D.N.Y, Case No 94-0955(H)) OHM's account
receivables at December 25, 1998 include a claim receivable of $8.7 million
related to this matter. OHM's work was substantially delayed and its costs of
performance were substantially increased as a result of conditions at the site
that OHM believes were materially different than as represented by Occidental.
Occidental's amended complaint seeks $8.8 million in damages primarily for
alleged costs incurred as a result of project delays and added volumes of
incinerated waste. OHM's counterclaim seeks an amount in excess of $9.2 million
(inclusive of $8.7 million of claim receivable) for damages arising from
Occidental's breach of contract, misrepresentation and failure to pay
outstanding contract amounts. The Company has established additional reserves
for a portion of the receivables related to this matter. Management believes
that it has established adequate reserves should the resolution of the above
matter be lower than the amounts recorded. The parties have completed discovery
in the case and filed motions for summary judgement against each other.
Although the court may rule on the matter at any time, its ultimate outcome
cannot be predicted.
 
 GM--Hughes Massena Litigation
 
   These two matters (General Motors Corporation v. OHM Remediation Services
Corporation, U.S.D.C., N.D.N.Y., Case No. 7:96-CV-1214TJMDS) and (OHM
Remediation Services Corporation v. Hughes Environmental Systems, Inc. And ERM
Northeast, Inc., U.S.D.C., N.D.N.Y., Case No. 7:96-CV-0110TJMDS) have now been
fully settled.
 
 Other
 
   The Company is subject to other claims and lawsuits in the ordinary course
of its business. In the opinion of management, all such other pending claims
are either adequately covered by insurance or, if not insured, will not
individually or in the aggregate result in a material adverse effect on the
consolidated financial condition, liquidity and results of operations of the
Company. In the course of the Company's business, there is always
 
                                       64
<PAGE>
 
                               THE IT GROUP, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
risk and uncertainty in pursuing and defending claims and litigation and, not
withstanding the reserves currently established, adverse future results in
litigation or other proceedings could have a material adverse effect upon the
Company's consolidated financial condition, liquidity and results of
operations.
 
Governmental regulation:
 
   The Company is subject to extensive regulation by applicable federal, state
and local agencies. All facets of the Company's business are conducted in the
context of a complex statutory, regulatory and governmental enforcement
framework and a highly visible political environment. The Company's operations
must satisfy stringent laws and regulations applicable to performance. Future
changes in regulations may have a material adverse effect on the consolidated
financial conditional, liquidity and results of operations of the Company.
 
Preferred stock:
 
 Carlyle Investment
 
   At the November 20, 1996 Annual Meeting of Stockholders, IT's shareholders
voted to approve a $45.0 million investment (the Carlyle Investment) by The
Carlyle Group (Carlyle), a Washington, D.C. based merchant banking firm. The
Carlyle Investment consists of 45,000 shares of 6% Cumulative Convertible
Participating Preferred Stock, par value $100 per share (Convertible Preferred
Stock) and detachable warrants to purchase 1,250,000 shares of IT common stock,
par value $.01 per share (Carlyle Warrants). The net proceeds to IT (after
related offering costs of $4.4 million) from the Carlyle Investment were $40.6
million.
 
   Carlyle holds approximately 21% (approximately 24% assuming exercise of the
Carlyle Warrants) of the voting power of IT. Until November 20, 2001, the
holders of the Convertible Preferred Stock have the right to elect a majority
of the IT Board of Directors, provided that such holders continue to hold at
least 20% of the voting power of IT. The terms of the Convertible Preferred
Stock provide that, until November 20, 2001, the holders of the Convertible
Preferred Stock have the right to elect a majority of the Board of Directors of
the Company, provided that Carlyle continues to own at least 20% of the voting
power of the Company.
 
   The Convertible Preferred Stock ranks, as to dividends and liquidation, pari
passu to the Company's 7% Preferred Stock (see "7% Preferred Stock") and prior
to the Company's common stock. The Convertible Preferred Stock is entitled to
cumulative annual dividends. No dividends were payable in the first year;
dividends were payable quarterly in kind for the second year at the rate of 3%
per annum and, through November 1998, Carlyle was paid dividends of an
additional 1,095 shares of Convertible Preferred Stock. Commencing November 21,
1998, dividends are payable quarterly in cash at the rate of 6% per annum. The
Convertible Preferred Stock is entitled to a liquidation preference of $1,000
per share.
 
   The Convertible Preferred Stock and detachable warrants may at any time, at
the option of Carlyle, be converted into IT common shares. At December 25,
1998, 7,323,015 and 1,250,000 common shares are issuable upon conversion of the
Convertible Preferred stock and Carlyle Warrants, respectively. The conversion
price of the Convertible Preferred Stock is $7.59 per share and the exercise
price of the warrants is $11.39 per share. The Company will be entitled at its
option to redeem all of the Convertible Preferred Stock at its liquidation
preference plus accumulated and unpaid dividends on or after November 21, 2003.
 
   Although the first two years' dividends are paid at a rate of 0% and 3%,
respectively, dividends were imputed during this period at a rate of
approximately 6% per annum. Imputed dividends were $0.9 million, $2.1 million
and $0.9 million in the nine months ended December 25, 1998, the twelve months
ended
 
                                       65
<PAGE>
 
                               THE IT GROUP, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
March 27, 1998 and the twelve months ended March 28, 1997, respectively. Any
imputed dividends will never be paid in cash or stock.
 
 7% Preferred stock
 
   In a September 1993 public offering, the Company issued 2,400,000 depositary
shares, each representing a 1/100th interest in a share of the Company's 7%
Cumulative Convertible Exchangeable Preferred Stock (7% Preferred Stock). The
depositary shares entitle the holder to all proportional rights and preferences
of the 7% Preferred Stock, including dividend, liquidation, conversion,
redemption and voting rights and preferences.
 
   The 7% Preferred Stock ranks, as to dividends and liquidation, pari passu to
the Convertible Preferred Stock (see "Carlyle Investment") and prior to the
Company's common stock. The dividend per annum and liquidation preference for
each share of 7% Preferred Stock are $175 and $2,500, respectively, and for
each depositary share are $1.75 and $25, respectively. Dividends on the 7%
Preferred Stock and depositary shares are cumulative and payable quarterly.
 
   The 7% Preferred Stock is convertible at the option of the holder into
shares of the Company's common stock at a conversion price of $23.36 per share,
subject to adjustment under certain circumstances. At December 25, 1998,
2,199,903 shares of common stock are issuable upon conversion of the 7%
Preferred stock. On any dividend payment date, the 7% Preferred Stock is
exchangeable at the option of the Company, in whole but not in part, for 7%
Convertible Subordinated Debentures Due 2008 in a principal amount equal to
$2,500 per share of Preferred Stock (equivalent to $25 per depositary share).
The 7% Preferred Stock may be redeemed at any time, at the option of the
Company, in whole or in part, initially at a price of $2,622.50 per share of
Preferred Stock (equivalent to $26.225 per depositary share) and thereafter at
prices declining to $2,500 per share of Preferred Stock (equivalent to $25 per
depositary share) on or after September 30, 2003.
 
   Additionally, the 7% Preferred Stock has a special conversion right that
becomes effective in the event of certain significant transactions affecting
ownership or control of the Company. In such situations, the special conversion
right would, for a limited period, reduce the then prevailing conversion price
to the greater of the market value of the common stock or $12.68 per share. The
Carlyle Investment (see "Carlyle Investment") triggered this special conversion
right. On January 9, 1997, holders of 344,308 depositary shares elected to
convert such shares to 678,816 shares of IT common stock.
 
   The 7% Preferred Stock is non-voting, except that holders are entitled to
vote as a separate class to elect two directors if the equivalent of six or
more quarterly dividends (whether consecutive or not) on the 7% Preferred Stock
are in arrears. Such voting rights will continue until such time as the
dividend arrearage on the 7% Preferred Stock has been paid in full.
 
Stock incentive plans:
 
 Summary
 
   At the November 20, 1996 Annual Meeting of Stockholders, IT's shareholders
voted to approve the Company's 1996 Stock Incentive Plan (1996 Plan) which
provides for the issuance of the Company's common stock or any other security
or benefit with a value derived from the value of its common stock. Options are
granted at exercise prices equal to or greater than the quoted market price at
the date of grant. At December 25, 1998, the maximum number of shares of the
Company's common stock that may be issued pursuant to awards granted under the
1996 Plan is 242,819. At January 1 of each year, the maximum number of shares
available for award under the 1996 Plan may be increased by Board approval by
an amount which represents up to 2% of the number of the Company's common stock
which are issued and outstanding at that
 
                                       66
<PAGE>
 
                               THE IT GROUP, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
date. During the nine months ended December 25, 1998, 331,500 stock options
were granted under the 1996 Plan, which expire in fiscal year 2008.
 
   The Company's 1991 Stock Incentive Plan (1991 Plan) and 1983 Stock Incentive
Plan (1983 Plan) provided for the granting of incentive and non-qualified stock
options and the issuance of the Company's common stock or any other security or
benefit with a value derived from the value of its common stock. No shares are
available for grant under these plans as such authority to grant as to the 1991
Plan expired in March 1996 and as to the 1983 Plan expired in September 1993.
Options granted under the plans and outstanding at December 25, 1998 will
expire at various dates through January 20, 2008.
 
   Changes in the number of shares represented by outstanding options under the
1996 Plan, the 1991 Plan and the 1983 Plan during the nine months ended
December 25, 1998, the twelve months ended March 27, 1998 and the twelve months
ended March 28, 1997 are summarized as follows:
 
<TABLE>
<CAPTION>
                                                             Twelve Months Ended
                                           Nine Months Ended --------------------
                                             December 25,    March 27,  March 28,
                                                 1998          1998       1997
                                           ----------------- ---------  ---------
<S>                                        <C>               <C>        <C>
Outstanding at beginning of year.........        770,457      747,679    744,847
Options converted........................        262,125           --         --
Options granted
  (Nine months ended December 25, 1998,
   $6.44--$10.13 per share; 1998, $7.00--
   $8.50 per share; 1997, $8.63 per
   share)................................        331,000      132,921    171,000
Options exercised
  (Nine months ended December 25, 1998,
   $10.24 per share 1997, $11.50 per
   share)................................           (750)          --     (3,629)
Options expired and forfeited............        (51,156)    (110,143)  (164,539)
                                               ---------     --------   --------
Outstanding at end of year ($7.00--$32.50
 per share)..............................      1,311,676      770,457    747,679
                                               =========     ========   ========
Vested options...........................        776,500      486,520    473,257
                                               =========     ========   ========
Common stock reserved for future
 issuance................................      1,554,495
</TABLE>
 
   Additional information regarding stock options granted to employees is
outline below:
 
<TABLE>
<CAPTION>
                                                           Twelve Months Ended
                                         Nine Months Ended -------------------
                                           December 25,    March 27, March 28,
                                               1998          1998      1997
                                         ----------------- --------- ---------
<S>                                      <C>               <C>       <C>
Weighted average fair value of options
 at grant date..........................      $ 6.19        $ 4.79    $ 5.34
Weighted average exercise price of all
 outstanding options....................      $11.11        $13.99    $15.96
Weighted average exercise price of
 vested options.........................      $12.39        $16.95    $19.04
Weighted average exercise price of
 options exercised......................      $10.24        $11.50    $   --
Weighted average exercise price for
 expired and forfeited options..........      $22.73        $19.69    $18.53
Weighted average remaining contractual
 life of options outstanding............         7.4           6.7       6.8
</TABLE>
 
   Approximately 188,000 OHM stock options converted into approximately 262,000
IT stock options on June 11, 1998. As of December 25, 1998, these options
remain outstanding.
 
 Compensation cost
 
   The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options
 
                                       67
<PAGE>
 
                               THE IT GROUP, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
because, as discussed below, the alternative fair value accounting provided for
under Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation," (SFAS No. 123) requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
 
   SFAS No. 123 provides that, if its optional method of accounting for stock
options is not adopted (and which the Company has not adopted), disclosure is
required of pro forma net income and net income per share. In determining the
pro forma information for stock options granted, the fair value for these
options were estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted average assumptions:
 
<TABLE>
<CAPTION>
                                                            Twelve Months Ended
                                          Nine Months Ended -------------------
                                            December 25,    March 27, March 28,
                                                1998          1998      1997
                                          ----------------- --------- ---------
<S>                                       <C>               <C>       <C>
Risk free interest rate based upon zero-
 coupon U.S. Treasury Notes.............          6.0%          6.0%     6.38%
Dividend yield..........................         None          None      None
Volatility factor of expected market
 price of the Company's common stock....        0.443         0.395     0.395
Weighted average expected life of each
 option.................................          7.4           6.7       6.8
</TABLE>
 
   The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferrable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
 
   If compensation cost for the Company's stock options had been determined
based on the fair value at the grant dates as defined by SFAS No. 123, the
Company's net loss applicable to common stock and net loss per common share
would have increased to the following pro forma amounts:
 
<TABLE>
<CAPTION>
                                                          Twelve Months Ended
                                        Nine Months Ended --------------------
                                          December 25,    March 27,  March 28,
                                              1998          1998       1997
                                        ----------------- ---------  ---------
                                        (In thousands, except per share data)
<S>                                     <C>               <C>        <C>
Net loss applicable to common stock
  As reported..........................     $(12,091)     $(23,193)  $(13,693)
                                            ========      ========   ========
  Pro forma............................     $(12,367)     $(23,386)  $(13,735)
                                            ========      ========   ========
Net loss per common share
  As reported..........................     $  (0.63)     $  (2.38)  $  (1.48)
                                            ========      ========   ========
  Pro forma............................     $  (0.65)     $  (2.40)  $  (1.49)
                                            ========      ========   ========
</TABLE>
 
   Additionally, under the 1991 Plan, the Company awarded shares of nonvested
restricted stock to officers and key employees which amounted to 266,019 in the
twelve months ended March 29, 1996. Vesting of awards is dependent upon
continued employment and, in the case of certain performance-related awards,
the sustained level of a target market price for the Company's common stock
that exceeds the related market price on the date of grant. On December 25,
1998, the total number of shares of restricted stock outstanding was 105,900.
 
                                       68
<PAGE>
 
                               THE IT GROUP, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
The cost of restricted stock awards is generally expensed over the vesting
period, which ranges from two to five years, and amounted to $0.2 million, $0.5
million and $0.6 million for the nine months ended December 25, 1998, the
twelve months ended March 27, 1998 and the twelve months ended March 28, 1997,
respectively.
 
 Employee benefit plans:
 
   The Company has a defined contribution, contributory pension and profit
sharing plan (the Plan), covering all employees with one year of continuous
service. The Company amended the Plan, effective December 25, 1998, to
discontinue the minimum annual contribution of 3% of participants' eligible
compensation. Additionally, beginning January 1, 1999, the Company amended its
voluntary 401(k) savings plan. The Company now contributes up to 4% of
participants' eligible compensation by matching 100% of each participants'
contribution (up to 4% of eligible compensation). Prior to January 1, 1999, the
Company contributed up to 2% of participants' eligible compensation by matching
50% of each participant's contribution (up to 4% of eligible compensation) to
the Company's voluntary 401(k) savings plan. The Plan currently allows a
maximum contribution of up to 15% of participants' eligible compensation up to
$10,000 annually. The Company funds current costs as accrued, and there are no
unfunded vested benefits.
 
   Pension and profit sharing expense was $3.5 million, $3.6 million and $3.6
million for the nine months ended December 25, 1998, the twelve months ended
March 27, 1998 and the twelve months ended March 28, 1997, respectively.
 
Operating segments:
 
 Organization
 
   The IT Group, Inc. has four reportable segments: Engineering & Construction
(E & C), Consulting & Ventures (C & V), Outsourced Services and International.
The Company's E & C Platform manages complex hazardous waste remediation
projects of all sizes involving the assessment, planning and execution of the
decontamination and restoration of property, plant and equipment that have been
contaminated by hazardous substances. The Outsourced Services Platform provides
full service capabilities for operations, maintenance, management and
construction at federal, state and local government facilities and in the
private sector. The C & V Platform provides a wide range of consulting services
including environmental permitting, facility siting and design, strategic
environmental management, environmental compliance/auditing, risk
assessment/management, pollution prevention, waste minimization, environmental
information systems, and data management. The Company's International Platform
is designed to meet the global needs of the Company's U.S. based clients and to
invest in businesses or enter into joint ventures to pursue and perform
international projects. Current International operations consist of a 50.1%
investment in a Taiwan-based wastewater treatment design/build firm and with
the acquisition of GTI in December 1998, the Company expanded its international
presence and provides environmental services through offices located in Europe
and Australia.
 
                                       69
<PAGE>
 
                               THE IT GROUP, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
 Segment Information
 
<TABLE>
<CAPTION>
                                     Outsourced
                             E & C    Services   C & V  International  Total
                            -------- ---------- ------- ------------- --------
                                              (In thousands)
<S>                         <C>      <C>        <C>     <C>           <C>
Nine months ended December
 25, 1998
  Revenues................. $597,897  $70,400   $79,353    $ 9,785    $757,435
  Segment profit (loss)....   63,817    7,896    10,617       (418)     81,912
  Depreciation expense.....    6,044      162     1,607         69       7,882
  Segment assets...........  218,940   11,697    56,896      8,539     296,072
Twelve Months Ended March
 27, 1998
  Revenues................. $346,143  $ 6,819   $79,643    $ 9,611    $442,216
  Segment profit (loss)....   37,045      948     7,272     (1,419)     43,846
  Depreciation expense.....    4,387       22     1,605        113       6,127
  Segment assets...........  188,342    6,226    22,395      4,118     221,081
Twelve Months Ended March
 28, 1997
  Revenues................. $308,635  $    --   $48,832    $ 4,664    $362,131
  Segment profit...........   25,909       --       694        177      26,780
  Depreciation expense.....    8,704       --       758         56       9,518
  Segment assets...........   73,650       --    19,828      7,087     100,565
</TABLE>
 
<TABLE>
<CAPTION>
                                                          Twelve Months Ended
                                        Nine months ended --------------------
                                          December 25,    March 27,  March 28,
                                              1998          1998       1997
                                        ----------------- ---------  ---------
<S>                                     <C>               <C>        <C>
Profit or Loss
  Total profit for reportable
   segments............................     $ 81,912      $ 43,846   $ 26,780
  Unallocated amounts:
    Corporate selling, general and
     administrative expense............      (32,779)      (23,814)   (22,073)
    Special charges (a)................      (24,971)      (14,248)    (8,403)
    Interest expense, net..............      (24,895)       (7,969)    (5,260)
                                            --------      --------   --------
    Loss before income taxes,
     extraordinary
     item and discontinued operations..     $   (733)     $ (2,185)  $ (8,956)
                                            ========      ========   ========
Assets (b)
  Assets for reportable segments.......     $296,072      $221,081   $100,565
  Other assets.........................      652,534       488,136    241,966
                                            --------      --------   --------
    Total consolidated assets..........     $948,606      $709,217   $342,531
                                            ========      ========   ========
Depreciation Expense
  Depreciation for reportable
   segments............................     $  7,882      $  6,127   $  9,518
  Depreciation on corporate assets
   (c).................................        2,059         2,606      2,842
                                            --------      --------   --------
    Total depreciation expense.........     $  9,941      $  8,733   $ 12,360
                                            ========      ========   ========
</TABLE>
--------
(a) See "Notes to Consolidated Financial Statements--Special Charges". These
    special charges are excluded from segment profit (loss) because most of
    these items can not be identified with a particular segment and because
    management does not include special charges when analyzing the Company's
    business segments.
 
(b) Segment assets include primarily accounts receivable of each business
    segment. Other assets are principally long-term assets including property
    and equipment, cost in excess of net assets of acquired businesses, income
    tax assets and assets of discontinued operations.
 
(c) Depreciation on corporate assets includes corporate facilities, furniture
    and equipment and the Company's mainframe computer hardware and software
    which have not been allocated to the operating segments.
 
                                       70
<PAGE>
 
                               THE IT GROUP, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
 Geographic Information
 
<TABLE>
<CAPTION>
                                                               Twelve Months Ended
                            Nine months ended    -----------------------------------------------
                            December 25, 1998        March 27, 1998          March 28, 1997
                         ----------------------- ----------------------- -----------------------
                                      Long-Lived              Long-Lived              Long-Lived
                         Revenues (a) Assets (b) Revenues (a) Assets (b) Revenues (a) Assets (b)
                         ------------ ---------- ------------ ---------- ------------ ----------
                                                     (In thousands)
<S>                      <C>          <C>        <C>          <C>        <C>          <C>
United States...........   $746,992    $458,233    $431,599    $358,973    $351,152    $117,386
Other foreign
 countries..............     10,443       3,573      10,617       2,831      10,979       1,848
                           --------    --------    --------    --------    --------    --------
                           $757,435    $461,806    $442,216    $361,804    $362,131    $119,234
                           ========    ========    ========    ========    ========    ========
</TABLE>
--------
(a) Revenues are attributed to countries based on the location of clients.
 
(b) Long-lived assets include non-current assets of the Company, excluding
    deferred income taxes.
 
 Major Clients
 
   The Company's revenues attributable to the U.S. federal government were
$525.0 million, $255.9 million and $215.1 million for the nine months ended
December 25, 1998, the twelve months ended March 27, 1998 and the twelve months
ended March 28, 1997, respectively. All four of the Company's operating
segments report revenues from the U.S. government. No other customer accounted
for 10% or more of the Company's consolidated revenues in any fiscal period.
 
 Revenues by Products and Services
 
<TABLE>
<CAPTION>
                                                           Twelve Months Ended
                                         Nine months ended -------------------
                                           December 25,    March 27, March 28,
                                               1998          1998      1997
                                         ----------------- --------- ---------
                                                    (In thousands)
<S>                                      <C>               <C>       <C>
Site remedial action projects...........     $607,682      $355,754  $313,299
Project, program and construction
 management.............................       70,400         6,819        --
Consulting and engineering services.....       79,353        79,643    48,832
                                             --------      --------  --------
                                             $757,435      $442,216  $362,131
                                             ========      ========  ========
</TABLE>
 
Quarterly results of operations (unaudited):
 
<TABLE>
<CAPTION>
                                           First         Second       Third
                                          quarter       quarter      quarter
                                        ------------  ------------ ------------
                                        (In thousands, except per share data)
<S>                                     <C>           <C>          <C>
Nine months ended December 25, 1998:
  Revenues............................. $    225,188  $    260,187 $    272,060
  Gross margin.........................       27,058        30,553       33,350
  Income (loss) from continuing
   operations..........................      (19,291)        5,468        6,396
  Net income (loss) applicable to
   common stock........................      (20,860)        3,899        4,870
  Net income (loss) per share:
    Basic.............................. $      (1.76) $       0.17 $       0.22
                                        ============  ============ ============
    Diluted............................ $      (1.76) $       0.16 $       0.19
                                        ============  ============ ============
</TABLE>
 
                                       71
<PAGE>
 
                               THE IT GROUP, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
<TABLE>
<CAPTION>
                                       First     Second     Third     Fourth
                                      quarter    quarter   quarter    quarter
                                      --------- --------- ---------  ---------
                                      (In thousands, except per share data)
<S>                                   <C>       <C>       <C>        <C>
Twelve Months Ended March 27, 1998:
  Revenues........................... $ 98,181  $ 102,840 $ 105,157  $ 136,038
  Gross margin.......................   11,424     11,412    11,770     17,200
  Income (loss) from continuing
   operations before extraordinary
   item..............................   (2,914)     1,922    (1,840)    (3,528)
  Discontinued operations--closure
   costs.............................       --         --        --     (4,960)
  Extraordinary item--early
   extinguishment of debt............       --         --        --     (5,706)
  Net income (loss) applicable to
   common stock......................   (4,447)       385    (3,379)   (15,752)
  Net income (loss) per share:
  Basic and diluted:
    Earnings from continuing
     operations
     (net of preferred stock
     dividends)......................    (0.46)      0.04     (0.35)     (0.52)
    Discontinued operations..........       --         --        --      (0.51)
    Extraordinary item--early
     extinguishment of debt..........       --         --        --      (0.59)
                                      --------  --------- ---------  ---------
  Net income (loss) per share........ $  (0.46) $    0.04 $   (0.35) $   (1.62)
                                      ========  ========= =========  =========
</TABLE>
 
   See "Notes to Consolidated Financial Statements--Special Charges".
 
Discontinued operations:
 
 Overview
 
   Prior to December 1987 the Company was a major provider of hazardous waste
transportation, treatment, and disposal operations in California. In December
1987, the Company's Board of Directors adopted a strategic restructuring
program which included a formal plan to divest the transportation, treatment
and disposal operations through sale of some facilities and closure of certain
other facilities. Subsequent to this date, the Company ceased obtaining new
business for these operations. During the quarter ended March 27, 1998, the
Company recorded an increase in the provision for loss on disposition of $8.0
million or $5.0 million, net of income tax benefit of $3.0 million, primarily
for additional closure costs related to the approval of the closure plan by the
DTSC for the Panoche disposal site. Prior to the twelve months ended March 27,
1998, the Company cumulatively recorded a provision for loss on disposition
(including the initial provision and three subsequent adjustments) in the
amount of $168.2 million, net of income tax benefit of $32.9 million. During
each of the three fiscal years ended December 25, 1998, the Company funded
previously accrued costs of $11.1 million, $14.9 million and $15.7 million
relating to the closure plans and construction and PRP matters. The Company
expects to incur costs over the next several years; however, the nature of the
costs will change from closure design and construction to post-closure
monitoring. At December 25, 1998, the Company's consolidated balance sheet
included accrued liabilities of approximately $7.9 million to complete the
closure and post-closure of its disposal facilities and the PRP matters, net of
certain trust fund and annuity investments, restricted to closure and post-
closure use. The trust funds are invested in high quality common stock and AAA
rated corporate and government bonds which are recognized at fair market value
and annuity investments which pay periodic payments into the trust fund.
 
   The annuities and trust fund assets are held in a legally binding trust
agreement by a third party trustee naming the California EPA, Department of
Toxic Substances control (DTSC) as the beneficiary of the trust. As closure and
post closure obligations are met by the Company, DTSC is obligated to release
funds from the trusts to reflect reduced estimates of remaining costs.
 
                                       72
<PAGE>
 
                               THE IT GROUP, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   The provision for loss on disposition of transportation, treatment and
disposal discontinued operations is based on various assumptions and estimates,
including those discussed below. The adequacy of the provision for loss is
periodically reevaluated in light of the developments since the adoption of the
divestiture plan, and management believes that the provision as adjusted is
reasonable; however, the ultimate effect of the divestiture on the consolidated
financial condition, liquidity and results of operations of the Company is
dependent upon future events, the outcome of which cannot be determined at this
time. Closure and post-closure costs could be higher than estimated if
regulatory agencies were to require closure and/or post-closure procedures
significantly different than those in the approved plans, or if the Company is
required to perform unexpected remediation work at the facilities in the future
or to pay penalties for alleged noncompliance with regulations or permit
conditions. Outcomes significantly different from those used to estimate the
provision for loss could result in a material adverse effect on the
consolidated financial condition, liquidity and results of operations of the
Company.
 
 Northern California Facilities
 
   As a part of the Company's discontinued operations, the Company operated a
series of treatment, storage and disposal facilities in California, including
four major disposal facilities. Closure plans for all four of these facilities
have now been approved by all applicable regulatory agencies. Closure
construction has been completed at three of these facilities (Montezuma Hills,
Benson Ridge, and Vine Hill).
 
   On March 18, 1998, the DTSC certified the Environmental Impact Report and
approved the Closure Plan for the Panoche facility. The approved plans provide
for submittal of technical studies that will be utilized to determine final
aspects, details and costs of closure construction and monitoring programs.
While IT believes that the approved closure plans substantially reduce future
cost uncertainties to complete the closure of the Panoche facility, the
ultimate costs will depend upon the results of the technical studies called for
in the approved plans. Closure construction for the plan is scheduled to be
completed in the fall of 2000.
 
   The carrying value of the long-term assets of discontinued operations of
$40.0 million at December 25, 1998 is principally comprised of unused residual
land at the inactive disposal facilities and assumes that land sales will occur
at market prices estimated by the Company based on certain assumptions
(entitlements, development agreements, etc.). A portion of the residual land is
the subject of a local community review of its strategy which will be the
subject of public hearings and city council deliberation through the second
quarter of 1999. There is no assurance as to the timing of development or sales
of any of the Company's residual land, or the Company's ability to ultimately
liquidate the land for the estimated sale prices. If the assumptions used to
determine such prices are not realized, the value of the land could be
materially different from the current carrying value.
 
   The Company maintains Environmental Impairment Liability coverage for the
Northern California facilities through the Company's captive insurance company.
The limits of the policy are $32.0 million which meet the current requirements
of both federal and state law.
 
 Operating Industries, Inc. Superfund Site
 
   In June 1986, USEPA notified a number of entities, including the Company,
that they were PRPs with respect to the Operating Industries, Inc. (OII)
Superfund site in Monterey Park, California. Between October 1995 and April
1996, the Company, the USEPA and the Steering Committee agreed to settlements
of the Company's alleged liability for certain prior response costs incurred by
the USEPA. While resolving the Company's alleged liability for these response
costs, the settlement did not include a release of liability for
 
                                       73
<PAGE>
 
                               THE IT GROUP, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
future or final OII remedies. The USEPA has requested, and the Steering
Committee and the Company have submitted, proposals to work cooperatively with
interested parties on the final remedy. While the USEPA has estimated response
costs for the final remedy to approximate $161.8 million, and the USEPA has
alleged the Company generated 2% by volume of the manifested hazardous wastes
disposed of at the site, the Company believes that USEPA's final remedy cost
estimates are substantially overstated. Should the costs of the final remedy be
greater than the amounts recognized or should the Company be forced to assume a
disproportionate share of the costs of the final remedy, the cost to the
Company of concluding this matter could materially increase.
 
 GBF Pittsburg Site
 
   In September 1987, the Company and 17 others were served with a Remedial
Action Order (RAO) issued by the DTSC, concerning the GBF Pittsburg landfill
site near Antioch, California. From the 1960's through 1974, a predecessor to
IT Corporation operated a portion of one of the two parcels as a liquid
hazardous waste site.
 
   In June 1997, the DTSC completed and released a final Remedial Action Plan
(RAP) selecting DTSC's preferred pump-and-treat remedial alternative, which the
Company now estimates to cost up to $18.0 million based on DTSC's prior
estimates. As part of the RAP, the DTSC also advised the PRP group of its
position that all PRPs, including the Company, are responsible for paying the
future closure and postclosure costs of the overlying municipal landfill, which
have been estimated at approximately $4.0 million. (The DTSC also seeks
approximately $1.0 million in oversight costs from all PRPs.) The PRP group
continues to believe that its preferred alternative of continued limited site
monitoring, which was estimated to cost approximately $4.0 million, is
appropriate and has filed an application with the appropriate Regional Water
Quality Control Board (RWQCB) for designation of the site as a containment zone
which, if approved, would facilitate the PRP group's preferred remedial
alternative.
 
   The Company and the PRP group initiated litigation (Members of the
GBF/Pittsburg Landfill(s) Respondents Group, etc., et al, v. State of
California Environmental Protection Agency Contra Costa County, California
Superior Court Case No. C97-02936) challenging the final RAP, and the PRP group
and the DTSC have agreed to stay this litigation and implementation of major
RAP elements pending the RWQCB's review of the containment zone application.
The PRP group continues to work with the RWQCB and the DTSC to determine the
scope of the studies necessary for consideration of the application.
 
   In the final RAP the DTSC assigned the Company and the other members of the
PRP group collective responsibility (on a non-binding basis) for 50% of the
site's response costs. The PRP group continues to believe that the DTSC
allocation is inappropriate and current owner/operators should pay a larger
portion of the site's response costs and the PRP group has initiated litigation
(Members of the GBF/Pittsburg Landfill(s) Respondents Group, etc., et al, v.
Contra Costa Waste Service, etc., et al. U.S.D.C., N.D. CA, Case No. C96-
03147SI) against the owner/operators of the site and other non-cooperating PRPs
to cause them to bear their proportionate share of site remedial costs. The
owner/operators are vigorously defending the PRP group's litigation, and the
outcome of the litigation cannot be determined at this time. Mediation of this
litigation has been postponed until late September 1999. IT Corporation has
paid approximately 50% of the PRP group's costs to-date on an interim basis.
 
   Failure of the PRP group to effect a satisfactory resolution with respect to
the choice of appropriate remedial alternatives or to obtain an appropriate
contribution towards site remedial costs from the current owner/operators of
the site and other non-cooperating PRPs, could substantially increase the cost
to the Company of remediating the site.
 
 
                                       74
<PAGE>
 
                               THE IT GROUP, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 Other Site Cleanup Actions
 
   The Company, as a major provider of hazardous waste transportation,
treatment and disposal operations in California prior to the December 1987
adoption of its strategic restructuring program, has been named a PRP at a
number of other sites and may from time to time be so named at additional sites
and may also face damage claims by third parties for alleged releases or
discharges of contaminants or pollutants arising out of its transportation,
treatment and disposal discontinued operations. The Company has either denied
responsibility and/or is participating with others named by the USEPA and/or
the DTSC in conducting investigations as to the nature and extent of
contamination at the sites. Based on the Company's experience in resolving
claims against it at a number of sites and upon current information, in the
opinion of management, with advice of counsel, claims with respect to sites not
described above at which the Company has been notified of its alleged status as
a PRP will not individually or in the aggregate result in a material adverse
effect on the consolidated financial condition, liquidity and results of
operations of the Company.
 
   The Company has initiated against a number of its past insurers claims for
recovery of certain damages and costs with respect to both its Northern
California sites and certain PRP matters. The carriers dispute their
allegations to the Company and the Company expects them to continue to contest
the claims. The Company has included in its provision for loss on disposition
of discontinued operations (as adjusted) an amount that, in the opinion of
management, with advice of counsel, represents a probable recovery with respect
to those claims.
 
Subsequent events:
 
   On February 5, 1999, the Company signed an agreement to acquire all of the
stock of Roche Limited Consulting Group (Roche) for $10.0 million plus two
potential earnout payments. Roche is based in Quebec City, Canada and provides
engineering and construction services to wastewater, paper, mining and
transportation industries worldwide. Roche has approximately 700 employees and
had revenue of $28.0 million in its most recent year ended December 31, 1998.
The acquisition is expected to close in April 1999.
 
   On March 8, 1999, the Company signed an agreement to acquire specified
assets of the Environment and Facilities Management Group (EFM Group) of ICF
Kaiser International, Inc. for $82.0 million in cash reduced by $8.0 million
representing working capital retained by Kaiser. The EFM Group provides
environmental remediation, program management and technical support for United
States Government agencies including the DOD, National Aeronautics and Space
Administration (NASA) and the DOE as well as private sector environmental
clients. The EFM Group has approximately 500 employees and had revenue of
approximately $106.0 million for the calendar year ended December 31, 1998. The
acquisition is expected to close in April 1999.
 
   The Company has begun a private placement of $200 million of subordinated
notes (Notes). If the offering of the Notes is completed, the Notes will have a
fixed rate of interest payable every six months in cash commencing in 1999 and
will be redeemable in or after 2004 at a premium. The Notes will be general
unsecured obligations of the Company, subordinated to the Company's credit
facilities (see Notes to Consolidated Financial Statements--Long-term debt) and
other senior indebtedness and pari passu with other existing future
indebtedness unless the terms of that indebtedness expressly provide otherwise.
The proceeds of the Notes, assuming the offering is completed, will be used to
fund the Roche and EFM acquisitions and to refinance existing indebtedness.
 
   On March 5, 1999, the lenders under the Company's credit facilities approved
the third amendment to the loan agreement. The third amendment provides for the
Company to issue up to $250 million in subordinated notes for the acquisitions
(discussed above) and to pay down outstanding borrowings under the revolving
credit facility portion of the credit facilities.
 
                                       75
<PAGE>
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.
 
   There were none.
 
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
 
   At the 1996 Annual Meeting of Stockholders, stockholders approved a cash
investment (the Investment) of $45,000,000 in the Company by certain investors
affiliated with The Carlyle Group (collectively, Carlyle), a private merchant
bank headquartered in Washington, D.C. In consideration of its investment,
Carlyle received 45,000 shares of newly issued Cumulative Convertible
Participating Preferred Stock, par value $100 per share (the Convertible
Preferred Stock), and warrants (the Warrants) to purchase up to 1,250,000
shares of our Common Stock (at the current exercise price of $11.39 per share).
Carlyle's purchase of the Convertible Preferred Stock and Warrants was financed
through the private sale of interests in limited partnerships affiliated with
Carlyle or through other entities. These partnerships and other entities then
purchased the Convertible Preferred Stock and Warrants.
 
   Pursuant to the terms of the Investment, Carlyle is entitled to elect a
majority of our Board of Directors, until November 20, 2001, which date is five
years from the consummation of the Investment (the Five-Year Period), provided
that Carlyle continues to own at least 20% of the voting power of the Company.
Also pursuant to the terms of the Investment, the number of directors
comprising our Board will be an odd number. A majority of the directors (the
Preferred Stock Directors) will be elected by the holders of the Convertible
Preferred Stock acting by written consent and without a meeting of the Common
Stock holders, and the remaining directors (the Common Stock Directors) will be
elected by the Common Stock holders. The Preferred Stock Directors serve for
annual terms. The Investment agreements also provide that at least two of the
directors elected by the holders of the Common Stock will have no employment or
other relationship with us or Carlyle, other than their positions as directors
of the Company. During the Five-Year Period, holders of the Convertible
Preferred Stock will not participate in elections of the Common Stock Directors
and the Preferred Stock Directors will not have the right to vote on the
election of any director to fill a vacancy among the Common Stock Directors. At
the end of the Five-Year Period, provided that Carlyle continues to own at
least 20% of the voting power of the Company, holders of the Convertible
Preferred Stock will be entitled to elect the largest number of directors which
is a minority of the directors and to vote with the Common Stock holders (as a
single class) on the election of the remaining directors. Additionally, the
holders of the Convertible Preferred Stock, in the event they no longer have
the right to elect at least a minority of the directors, will have the right
(voting as a class with holders of our 7% Cumulative Convertible Exchangeable
Preferred Stock, par value $100 per share, and any other parity stock) to elect
two directors to the Board in the event we fail to make payment of dividends on
the Convertible Preferred Stock for six dividend periods.
 
   Pursuant to an agreement of merger dated January 15, 1998 (the OHM Merger
Agreement), the Company acquired OHM Corporation (OHM) in a two-step
transaction, comprised of a tender offer for 13,933,000 shares of OHM common
stock, or 54% of the outstanding OHM stock, for $160,300,000 in cash, which was
consummated on February 25, 1998, and a merger (the OHM Merger) of an IT
subsidiary into OHM on June 11, 1998. In the OHM Merger, the former OHM
shareholders received IT common stock representing approximately 57% of the
outstanding IT common stock and 45% of the voting power of IT, as well as cash
in the aggregate amount of $30,800,000. Subsequent to the OHM Merger, holders
of the Convertible Preferred Stock own approximately 21% (approximately 24%
assuming exercise of the Carlyle Warrants) of the Company's voting power.
 
   At the Special Meeting of Shareholders held on June 11, 1998 (the Special
Meeting), at which the OHM Merger was approved, the shareholders also voted to
eliminate our classified Board of Directors system.
 
                                       76
<PAGE>
 
Under that system, the Common Stock Directors served for three year terms which
were staggered to provide for the election of approximately one-third of the
Board members each year. As a result of the shareholders' vote to eliminate our
classified Board of Directors system, the holders of the Common Stock are
entitled to vote each year on the election of all Common Stock Directors.
 
   After the OHM Merger, pursuant to the OHM Merger Agreement, Richard W. Pogue
and Charles W. Schmidt were appointed to the Board of Directors as Common Stock
Directors. In connection with their appointment, the authorized number of
directors (both Common and Preferred Stock Directors) was increased to nine
(9), with the Board consisting of five Preferred Stock Directors and four
Common Stock Directors so that the Preferred Stock Directors continue to
represent a majority of the Board of Directors. To allow for this change, one
of the Common Stock Directors, E. Martin Gibson, resigned as such and was
reappointed as a Preferred Stock Director.
 
   After giving effect to the changes approved in connection with the OHM
Merger, our Board of Directors is constituted as follows:
 
<TABLE>
<CAPTION>
                                                                Term to Director of the
Name                      Age         Current Position          Expire  IT Group Since
----                      ---         ----------------          ------- ---------------
<S>                       <C> <C>                               <C>     <C>
Common Stock Directors:
Anthony J. DeLuca (1)...   51 Director, Chief Executive Officer  1999        1996
                              and President
 
James C. McGill (3).....   55 Director                           1999        1990
 
Richard W. Pogue (3)....   70 Director                           1999        1998
 
Charles W. Schmidt (2)..   71 Director                           1999        1998
 
Preferred Stock
 Directors:
Daniel A. D'Aniello (1)
 (2)....................   52 Director and Chairman of the       1999        1996
                              Board (non-officer position)
 
Philip B. Dolan (1)
 (2)....................   40 Director                           1999        1996
 
E. Martin Gibson (3)....   60 Director                           1999        1994
 
Robert F. Pugliese (3)..   66 Director                           1999        1996
 
James David Watkins
 (2)....................   72 Director                           1999        1996
</TABLE>
--------
(1) Member of Executive Committee
 
(2) Member of Compensation Committee.
 
(3) Member of Audit Committee.
 
Background of the Directors:
 
   Mr. D'Aniello has been a Managing Director for Carlyle since 1987. Mr.
D'Aniello was Vice President, Finance and Development for Marriott Corporation,
a hospitality company, from 1981 to 1987. He currently serves on the Board of
Directors for GTS Duratek, Inc., an environmental services company, Baker &
Taylor, Inc., a wholesale distributor of books, and PRA International, Inc. Mr.
D'Aniello is Chairman of GTS Duratek, Inc. and Vice Chairman of Baker & Taylor,
Inc.
 
   Mr. DeLuca was named Chief Executive Officer and President on July 22, 1997
and President and Acting Chief Executive Officer and a Director as of July 1,
1996. Prior thereto, Mr. DeLuca had been Senior Vice President and Chief
Financial Officer of the IT Group since March 1990. Before joining us Mr.
DeLuca had been a senior partner at the public accounting firm Ernst & Young
LLP.
 
 
                                       77
<PAGE>
 
   Mr. Dolan has been a Principal for Carlyle since 1998. Prior thereto, he was
a Vice President for Carlyle from 1989. He also serves on the Board of
Directors of Baker & Taylor, Inc. Prior to joining Carlyle, Mr. Dolan was an
investment analyst and fund manager with the Trust Division of the Mercantile-
Safe Deposit and Trust Company and was engaged in management consulting and
practiced public accounting with Seidman & Seidman. Mr. Dolan is a Certified
Public Accountant.
 
   Mr. Gibson served as Chairman of the Board of Directors, a non-officer, non-
employee position, from April 6, 1995 until his resignation as Chairman upon
completion of the Investment. From 1990 until December 1994, Mr. Gibson served
as Chairman of Corning Life Sciences, Inc., a subsidiary of Corning
Incorporated. Mr. Gibson served in various other senior management capacities
with Corning Incorporated during his 32 year career there, including as a
Senior Vice President and General Manager of Corning Medical and Scientific
Division from 1980 until 1983, and as Group President of Corning Consumer
Products and Laboratory Sciences from 1983 until 1990. From 1983 to 1994, Mr.
Gibson served on the Board of Directors of Corning Incorporated. Mr. Gibson
also serves on the Boards of Directors of Hardinge, Inc., NovaCare, Inc. and
Primerica, Inc.
 
   Mr. McGill is currently, and has been for at least five years, a private
investor. He served as Chairman of McGill Environmental Systems, Inc. from 1970
to 1987. Mr. McGill serves on the Board of Trustees of the University of Tulsa
and on the Boards of Directors of two private corporations that are engaged in
venture capital and health exercise equipment businesses.
 
   Mr. Pogue is a consultant with Dix & Eaton, a public relations firm.
Effective June 30, 1994, Mr. Pogue retired as Senior Partner of the law firm of
Jones, Day, Reavis & Pogue, Cleveland, Ohio, of which he had been a partner
since 1961. Mr. Pogue is also a Director of Continental Airlines, Inc., Derlan
Industries Limited, M.A. Hanna Company, KeyCorp, LAI Worldwide, Inc., Rotek
Incorporated and TRW Inc. Mr. Pogue was a Director of OHM for 12 years prior to
the OHM Merger.
 
   Mr. Pugliese has been Special Counsel to Eckert Seamans Cherin & Mellott
since 1993. Mr. Pugliese was Executive Vice President, Legal and Corporate
Affairs for Westinghouse Electric Corporation and served as General Counsel
from 1976 to 1992. Mr. Pugliese is a member of the Association of General
Counsel. Mr. Pugliese has served as Secretary to the Board of Directors of
Westinghouse Electric Corporation and Chairman of the Board of Trustees at the
University of Scranton, and served as a Director of OCWEN Asset Investment
Corporation and St. Clair Memorial Hospital.
 
   Mr. Schmidt retired in January 1991 as Senior Vice President, External
Affairs of Raytheon Company, a broadly diversified manufacturer of industrial
and consumer products, and was formerly President and Chief Executive Officer
of SCA Services, Inc., a company that provided waste management-related
services and previously was President and Chief Executive Officer of S.D.
Warren Company, a division of Scott Paper Company. Mr. Schmidt also serves as a
trustee of the Massachusetts Financial Services Family of Mutual Funds and is a
Director of Mohawk Paper Company. Mr. Schmidt was a Director of OHM for 12
years prior to the OHM Merger.
 
   Admiral Watkins has been the President of the Joint Oceanographic
Institutions, Inc. since 1993 and President of Consortium Oceanographic
Research and Education since 1994. Admiral Watkins was Secretary of Energy of
the United States from 1989 to 1993. Prior to his appointment as Secretary of
Energy, the Admiral served as Director of Philadelphia Electric Company and
VESTAR, Inc. (a pharmaceutical company), and was a consultant to the Carnegie
Corporation of New York. From 1982 to 1986, he served as the Chief of Naval
Operations, capping a career spanning nearly four decades. Admiral Watkins was
also appointed to chair the Presidential Commission on AIDS from 1987 to 1988.
He was a Trustee of the Carnegie Corporation of New York from 1993 to 1998.
Admiral Watkins currently serves as a Director of Edison International and
GTS-Duratek and as Chairman of Eurotech, Ltd.
 
                                       78
<PAGE>
 
Section 16(a) Beneficial Ownership Reporting Compliance
 
   Section 16(a) of the Securities Exchange Act of 1934 (the Exchange Act)
requires directors, certain officers of the Company and persons holding more
than 10% of the Company's Common Stock to file reports concerning their
ownership of Common Stock by dates established under the Exchange Act and also
requires that the Company disclose any noncompliance with those requirements
during fiscal year 1998. Based solely upon a review of reports delivered to the
Company, the Company believes all Section 16(a) filing requirements were
satisfied.
 
ITEM 11. EXECUTIVE COMPENSATION.
 
   The "Executive Compensation" section of Registrant's definitive proxy
statement to be filed with the Securities and Exchange Commission for the nine
months ended December 25, 1998 is incorporated herein by reference.
 
                                       79
<PAGE>
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
 
Principal Stockholders
 
   The following table sets forth information as of March 5, 1999 with respect
to beneficial ownership of (a) Common Stock, (b) Depositary Shares, each
representing 1/100 of a share of 7% Preferred Stock (the Depositary Shares),
(c) Convertible Preferred Stock and (d) the Warrants, by (w) each person known
by the Company to be the beneficial owner of 5% or more of the outstanding
Common Stock (based solely on information contained in Schedules 13D, -G, or -F
filed by such persons and delivered to the Company), Depositary Shares,
Convertible Preferred Stock or Warrants, (x) each director of the Company, (y)
the executive officers of the Company and (z) all directors and persons serving
as executive officers of the Company as a group.
 
<TABLE>
<CAPTION>
                           Amount and                   Amount and                 Amount and     Percent of
                           Nature of       Percent of   Nature of    Percent of     Nature of    Convertible
                           Beneficial        Common     Beneficial   Depositary    Beneficial     Preferred
                          Ownership of       Stock     Ownership of    Shares     Ownership of      Stock
                             Common       Beneficially  Depositary  Beneficially   Convertible   Beneficially
          Name            Stock (1)(2)     Owned (2)      Shares       Owned     Preferred Stock    Owned
          ----            ------------    ------------ ------------ ------------ --------------- ------------
<S>                       <C>             <C>          <C>          <C>          <C>             <C>
TCG Holdings, L.L.C.....   6,556,061(3)      22.49%                                  41,263         89.52%
Carlyle Investment
 Management, L.L.C......     766,954(4)       3.28%                                   4,832         10.48%
Brahman Capital Corp. et
 al.....................   2,939,492(5)      13.01%
T. Rowe Price
 Associates, Inc.(6)....   1,493,311          6.60%
Dimension Fund Advisors
 (7)....................   1,239,915          5.49%
Baron Capital Group,
 Inc. (8)...............   1,200,000          5.31%
Daniel A. D'Aniello
 (9)....................           0            --
Philip B. Dolan (11)....           0            --
E. Martin Gibson........      12,226             *        5,000           *
James C. McGill (10)....      20,713             *        1,000           *
Robert F. Pugliese......       2,966             *
James D. Watkins........       2,966             *
Anthony J. DeLuca.......     188,485             *
David L. Backus.........           0             *
James G. Kirk...........       2,624             *
James R. Mahoney........      85,730             *
Richard W. Pogue........      69,841(11)         *
Raymond J. Pompe........      74,725             *
Charles W. Schmidt......      15,940             *
Philip O. Strawbridge...     173,195             *
All directors and
 executive officers as a
 group (14 persons)
 (12)...................     649,411          2.83%
</TABLE>
--------
*Less than 1%
 
(1)  The number of shares of Common Stock beneficially owned includes shares of
     Common Stock in which the persons set forth in the table have either
     investment or voting power. Unless otherwise indicated, all of such
     interests are owned directly, and the indicated person or entity has sole
     voting and investment power, subject to community property laws where
     applicable. The number of shares beneficially owned also includes shares
     that the following individuals have the right to acquire within 60 days of
     March 5, 1999 upon exercise of stock options (and conversion of Depositary
     Shares in the case of Messrs. Gibson and
   McGill) in the following amounts: (i) 6,875 shares upon exercise of options
   and 5,351 shares upon conversion of the Depositary Shares as to Mr. Gibson,
   (ii) 1,875 shares upon exercise of options and 1,070 shares upon conversion
   of the Depositary Shares as to Mr. McGill, (iii) 55,760 shares as to Mr.
   Pogue, (iv) 13,940 shares as to Mr. Schmidt, (v) 38,834 shares as to Mr.
   DeLuca, (vi) 31,834 shares as to Mr. Mahoney, (vii) 20,355 shares as to Mr.
   Pompe, (viii) 2,624 shares as to Mr. Kirk, and (ix) 136,565 shares as to Mr.
   Strawbridge.
 
 
                                       80
<PAGE>
 
(2)  For the purposes of determining the number of shares of Common Stock
     beneficially owned, as well as the percentage of outstanding Common Stock
     held, by each person or group set forth in the table, the number of such
     shares is divided by the sum of the number of outstanding shares of Common
     Stock on March 5, 1999 plus (i) the number of shares of Common Stock
     subject to options exercisable currently or within 60 days of March 5,
     1999 by such person or group, (ii) shares of Common Stock into which
     persons who hold Depositary Shares or Convertible Preferred Stock may
     convert such security (or otherwise obtain Common Stock), and/or receive
     Common Stock upon exercise of Warrants, in accordance with Rule
     13d-3(d)(1) under the Securities Exchange Act of 1934, as amended (Rule
     13d-3(d)(1)). Depositary Shares may be converted at any time into Common
     Stock at the ratio of 1.0702 shares of Common Stock for each Depositary
     Share. The Convertible Preferred Stock may be converted at any time into
     Common Stock at the ratio of 131.75 shares of Common Stock for each share
     of Convertible Preferred Stock (reflecting a conversion price of $7.59 per
     share of Convertible Preferred Stock).
 
(3)  Represents shares of Common Stock issuable upon conversion of all shares
     of Convertible Preferred Stock and exercise of all Carlyle Warrants held
     by certain limited partnerships controlled by TCG Holdings, L.L.C., a
     Delaware limited liability company (TCG Holdings), as set forth in more
     detail in the following sentence. The cumulative TCG Holdings ownership
     figure represents (i) 1,826,339 shares beneficially owned by Carlyle
     Partners II, L.P., a Delaware limited partnership (CPII), (ii) 82,936
     shares beneficially owned by Carlyle Partners III, L.P., a Delaware
     limited partnership (CPIII), (iii) 1,530,275 shares beneficially owned by
     Carlyle International Partners II, L.P., a Cayman Islands limited
     partnership (CIPII), (iv) 82,095 shares beneficially owned by Carlyle
     International Partners III, L.P., a Cayman Islands limited partnership
     (CIPIII), (v) 344,474 shares beneficially owned by C/S International
     Partners, a Cayman Islands partnership (C/SIP), (vi) 1,907 shares
     beneficially owned by Carlyle Investment Group, L.P., a Delaware limited
     partnership (CIG), (vii) 2,407,370 shares beneficially owned by Carlyle-IT
     International Partners, L.P., a Cayman Islands limited partnership
     (CITIP), (viii) 80,818 shares beneficially owned by Carlyle-IT
     International Partners II, L.P., a Cayman Islands limited partnership
     (CITIPII), and (ix) 199,847 shares beneficially owned by Carlyle-IT
     Partners, L.P., a Delaware limited partnership (CITP). TC Group, L.L.C., a
     Delaware limited liability company (TC Group), may be deemed to be the
     beneficial owner of 6,556,061 shares of ITC Common Stock as the general
     partner of CPII, CPIII, CIG, and CITP, and as the managing general partner
     of CIPII, CIPIII, C/SIP, CITIP and CITIPII. TCG Holdings, as a member
     holding a controlling interest in TC Group, may be deemed to share all
     rights herein described belonging to TC Group. Furthermore, because
     certain managing members of TCG Holdings are also managing members of
     Carlyle Investment Management, L.L.C., a Delaware limited liability
     company (CIM), TCG Holdings may be deemed the beneficial owner of the
     shares of Common Stock controlled by CIM (see footnote 4 below). The
     principal business address of TC Group and TCG Holdings is c/o The Carlyle
     Group, 1001 Pennsylvania Avenue, N.W., Suite 220 South, Washington DC
     20004. The principal business address of CPII, CPIII, CIG, CITP and CIM is
     Delaware Trust Building, 900 Market Street, Suite 200, Wilmington,
     Delaware 19801. The principal business address of CIPII, CIPIII, C/SIP,
     CITIP and CITIPII is Coutts & Co., P.O. Box 707, Cayman Islands, British
     West Indies.
 
(4)  Represents shares of Common Stock issuable upon conversion of all shares
     of Convertible Preferred Stock and exercise of all Carlyle Warrants held
     by the State Board of Administration of the State of Florida over which
     CIM holds sole voting and disposition power. Because certain managing
     members of TCG Holdings are also managing members of CIM, CIM may be
     deemed to be the beneficial owner of the shares of Common Stock controlled
     by TCG Holdings (see footnote 3 above).
 
(5)  Such information is derived solely from a Schedule 13G filed by the
     Brahman Stockholders, which is comprised of the entities listed in the
     following sentence (filing as joint filers), with the SEC dated February
     12, 1999. The Brahman Stockholders' cumulative ownership represents (i)
     469,042 shares with respect to which Brahman Partners II, L.P. has shared
     power to vote or direct the vote and shared power to dispose or direct the
     disposition, (ii) 1,052,641 shares with respect to which Brahman
     Institutional Partners, L.P. has shared power to vote or direct the vote
     and shared power to dispose or direct the
 
                                       81
<PAGE>
 
   disposition, (iii) 1,214,219 shares with respect to which BY Partners, L.P.
   has shared power to vote or direct the vote and shared power to dispose or
   direct the disposition, (iv) 2,735,902 shares with respect to which Brahman
   Management, L.L.C. has shared power to vote or direct the vote and shared
   power to dispose or direct the disposition, (v) 1,273,509 shares with
   respect to which Brahman Capital Corp. has shared power to vote or direct
   the vote and shared power to dispose or direct the disposition (which
   position includes shares owned by Brahman Partners II Offshore, Ltd), and
   (vi) 2,795,192 shares with respect to which each of Peter A. Hochfelder,
   Robert J. Sobel, and Mitchell A. Kuflik have shared power to vote or direct
   the vote and shared power to dispose or direct the disposition. The Brahman
   Stockholders further report in such Schedule 13G that (i) none of the above
   named entities individually has the sole power to vote or direct the vote
   or to dispose or direct the disposition of the shares it beneficially owns,
   (ii) but that Brahman Management, as the sole general partner of Brahman
   Partners II, L.P., BY Partners, L.P. and Brahman Institutional Partners,
   L.P., has the power to vote and dispose of the shares owned by each of
   Brahman Partners II, L.P., BY Partners, L.P. and Brahman Institutional
   Partners, L.P., and (iii) further that Brahman Capital Corp., pursuant to
   investment advisory contracts and arrangements, has the power to vote and
   dispose of the shares owned by BY Partners, L.P. and Brahman Partners II
   Offshore, Ltd., a Cayman Islands exempted company. The address of Brahman
   Capital Corp and the affiliated reporting persons is 277 Park Avenue, 26th
   Floor, New York, New York 10172 except in the case of Brahman Partners II
   Offshore, Ltd., the address of which is c/o Citco, N.V. Kaya Flamboyan 9,
   Willemstad, Curacao, Netherlands Antilles.
 
(6)  Such information is based solely from a Schedule 13G filed by T. Rowe
     Price Associates (Price) with the SEC dated February 12, 1999. Price's
     ownership represents (i) 1,328,000 shares which Price owns directly and
     (ii) 165,911 shares deemed outstanding and owned directly subject to
     warrants and conversion privileges. Further, of the 1,493,911 share Price
     holds, it has sole power to vote or direct the vote of 271,300 shares.
     These securities are owned by various individual and institutional
     investors which Price serves as investment adviser with power to direct
     investments and/or sole power to vote the securities. For purposes of the
     reporting requirements of the Securities Exchange Act of 1934, Price is
     deemed to be a beneficial owner of such securities; however, Price
     expressly disclaims that it is, in fact, the beneficial owner of such
     securities. Price's address is 100 E. Pratt Street, Baltimore, Maryland
     21202.
 
(7)  Such information is derived solely from a Schedule 13G filed by Dimension
     Fund Advisors, Inc. (Dimension) with the SEC dated February 11, 1999.
     Dimension reports that it is an investment advisor registered under
     Section 203 of the Investment Advisors Act of 1940, and furnishes
     investment advice to four investment companies registered under the
     Investment Company Act of 1940, and serves as investment manager to
     certain other investment vehicles, including commingled group trusts.
     (These investment companies and investment vehicles are the Portfolios.)
     In its role as investment advisor and investment manager, Dimension
     possesses both voting and investment power over the securities of the
     Company described that are owned by the Portfolios. All securities
     reported in this schedule are owned by the portfolios, and Dimension
     disclaims beneficial ownership of such securities. Dimension further
     reports that none of its advisory clients, to its knowledge, owns more
     than 5% of the class. Dimension disclaims beneficial ownership of all
     such securities. Dimension's address is 1299 Ocean Avenue, 11th Floor,
     Santa Monica, CA 90401.
 
(8)  Such information is derived solely from a Schedule 13G filed by the Baron
     Shareholders, which is composed of the entities listed in the following
     sentence (filing as joint filers), with the SEC dated June 4, 1998. The
     Baron Stockholders is comprised of Baron Capital Group, Inc. (BCG),
     Bamco, Inc. (BAMCO), Baron Small Cap Fund (BSC), Baron Asset Fund (BAF),
     and Ronald Baron. The Baron Stockholders report in such Schedule 13G that
     (i) BCG, BAMCO, BSC and Ronald Baron have the shared power to vote or
     direct the vote of 1,200,000 shares of Common Stock; (ii) BCG, BAMCO, BAF
     and Ronald Baron have shared power to dispose of or direct the
     disposition of 1,200,000 shares of Common Stock, but that none of BCG,
     BAMCO, BSC, or Ronald Baron have the sole power to vote or direct the
     vote of or the sole power to dispose or to direct the disposition of, any
     Common Stock. BAMCO is a subsidiary of BCG.
 
                                      82
<PAGE>
 
   BSC is an investment advisory client of BAMCO. Ronald Baron owns a
   controlling interest in BCG. BCG and Ronald Baron disclaim beneficial
   ownership of shares held by their controlled entities (or the investment
   advisory client thereof) to the extent such shares are held by persons other
   than BCG and Ronald Baron. BAMCO disclaims beneficial ownership of shares
   held by its investment advisory clients to the extent such shares are held
   by persons other than BAMCO and its affiliates. The address of Baron Capital
   Group, Inc. and the affiliated reporting persons is 767 Fifth Avenue, 24th
   Floor, New York, New York 10153.
 
(9)  Mr. D'Aniello is a Managing Member of TCG Holdings. Mr. D'Aniello's
     interest in TCG Holdings is not controlling and thus Mr. D'Aniello
     expressly disclaims any beneficial ownership in the shares of Company
     Common Stock beneficially owned by TCG Holdings. Mr. Dolan is an employee
     of The Carlyle Group and holds no economic interest in either TC Group or
     TCG Holdings, and as such expressly disclaims any beneficial ownership in
     the shares of Company Common Stock beneficially owned by any of such
     entities.
 
(10)  Includes 1,000 shares of Common Stock and 1,000 Depositary Shares
      (convertible into 1,070 shares of Common Stock) owned by Mr. McGill's
      wife, as to which Mr. McGill has no voting or dispositive power, and
      1,250 shares owned by a revocable living trust maintained by Mr. McGill.
      Mr. McGill disclaims beneficial ownership of all such shares. Also
      includes 1,875 shares that may be purchased upon the exercise of options
      that are currently exercisable or that will become exercisable within 60
      days of March 5, 1999.
 
(11)  Includes 1,081 shares of Common Stock owned by a revocable trust for Mr.
      Pogue's wife with respect to which Mr. Pogue is a trustee. Mr. Pogue
      disclaims beneficial ownership of all such shares.
 
(12)  Includes 308,662 shares of Common Stock that may be purchased upon the
      exercise of options that are currently exercisable or that will become
      exercisable within 60 days of March 5, 1999 and 6,000 Depositary Shares
      (convertible into 6,421 shares of Common Stock).
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 
   Employment Agreements. The Company and each of Anthony J. DeLuca, James R.
Mahoney and Raymond J. Pompe have entered into employment agreements with terms
through November 1999. The employment agreements provide for initial base
salaries at the rates in effect at the time of the closing of the Investment,
subject to annual upward adjustment at the discretion of the Compensation
Committee of the Board of Directors (the "Compensation Committee"). Salaries
are subject to reduction only in connection with action taken by the Board of
Directors for all management employees. Each of the employment agreements
provides for a short-term incentive compensation plan to be administered by the
Compensation Committee. The target short-term incentive compensation level is
40%, and the maximum level is 60%, of base salary, except in the case of Mr.
DeLuca, for whom the target level is 50%, and the maximum level is 75%, of base
salary. The Company also is required to maintain long-term incentive plans to
be administered by the Compensation Committee, which will make awards,
primarily of stock options, based on appropriate performance criteria. The
annual awards are at the discretion of the Compensation Committee and will
generally target long-term incentive opportunities.
 
   The agreements provide for severance payments under certain circumstances.
Under the agreements, the Company will have "good reason" to terminate Messrs.
DeLuca, Mahoney or Pompe because of the Company's performance if such persons
fail to meet certain management forecasts for two consecutive fiscal years. If
the executive is terminated because of the Company's performance (under the
circumstances permitted in the agreements) within 24 months after a change in
control, is terminated without reason, or resigns for cause, he is entitled to
receive his base salary as adjusted from time to time (presently $400,000 in
the case of Mr. DeLuca, $260,000 in the case of Mr. Mahoney and $280,000 in the
case of Mr. Pompe) for 12 months following the termination (24 months in the
case of Mr. DeLuca), or, if he is terminated because of the Company's
performance (under the circumstances permitted in the agreements) but not
within 24 months after a change in control, he is entitled to receive his base
salary for six months following the termination (12 months in the case of Mr.
DeLuca). In addition, under certain circumstances, the executive's short-term
 
                                       83
<PAGE>
 
incentive compensation will be paid on a pro-rated basis, and he will be
entitled to Company employee benefits for a specified period.
 
   The Company has provided loans to Messrs. DeLuca, Mahoney and Pompe to allow
them to make substantial purchases of the Company's Common Stock in the open
market. The agreements each required that within three months of the closing of
the Investment, Mr. DeLuca purchase between $100,000 and $125,000 worth of
Common Stock and Messrs. Mahoney and Pompe each purchase between $75,000 and
$100,000 worth of Common Stock. All of the executives have purchased the
required amounts of Common Stock, and Messrs. DeLuca, Mahoney, and Pompe have
received loans in the principal amounts of $125,000, $100,000, and $100,000,
respectively, to purchase the stock. In connection with the short-term
compensation plan described above, the Company may provide for forgiveness of a
certain portion of the loan principal and interest if previously agreed to
targets are met or exceeded. The loans bear interest at the rate of 8.25% per
year and are repayable at upon the earlier of the executive's termination of
employment or November 19, 1999. The employment agreements also provide for
reimbursement for business expenses and vacation and other benefits consistent
with existing Company policies and practices.
 
   Additionally, as part of their employment agreements, each of Messrs.
DeLuca, Mahoney and Pompe are bound by non-compete provisions with the Company
if they terminate their employment by resignation.
 
   The Company has also agreed to enter into employment agreements with David
L. Backus and Philip O. Strawbridge with terms similar to those of the
employment agreements for Messrs. Mahoney and Pompe. The Company has also
agreed to enter into severance agreements with certain other key executives of
the Company. Such agreements generally will provide for the payment of 12
months of base salary in the event the executive is involuntarily terminated
for other than cause.
 
   Mr. Strawbridge, as well as other senior executives at OHM, entered into
employment agreements with OHM prior to the execution of the Merger Agreement,
and the tender offer for OHM resulted in a change in control of OHM for
purposes of those employment agreements. As a result of the change in control,
under his employment agreement, Mr. Strawbridge was entitled to continue his
employment with OHM in his position at the time of the tender offer for a
period of approximately three years following the date of the change in
control. During his term of employment, Mr. Strawbridge would have been
entitled to receive a base salary and to continue to participate in incentive
and employee benefit plans at levels no less favorable to him than existed
prior to the change in control. In the event of a termination by OHM or by Mr.
Strawbridge of his employment during the employment term under circumstances
amounting to good reason under his employment agreement, Mr. Strawbridge would
have been entitled to receive a lump sum payment, subject to an overall
limitation to assure that payments will not constitute "excess parachute
payments" under federal income tax law. Mr. Strawbridge has agreed to remain
employed but the Company has agreed to pay to Mr. Strawbridge the amount he
would have received under his employment agreement if his employment had been
terminated, and pursuant to that agreement Mr. Strawbridge has received
$1,400,000.
 
   Backus Arrangements. David L. Backus, a Senior Vice President has agreed to
be employed by the Company following the acquisition of GTI. While employed at
GTI, Mr. Backus was on loan from his previous employer. The Company paid Mr.
Backus $200,000 as full consideration for the value of foregone benefits and
compensation that he would have been entitled to if he had returned to his
previous employer.
 
   Coffman Agreement. In connection with his resignation from the Company,
Franklin E. Coffman, a Senior Vice President, entered into an agreement dated
as of April 17, 1998 superceding his employment agreement. See "Certain
Transactions--Employment Agreements." Pursuant to that agreement Mr. Coffman
resigned as an officer of the Company and received a one-time payment of
$275,000, less payroll deductibles representing one year's salary and the cash
value of certain benefits. Mr. Coffman's eligibility to participate in Company
benefits ceased as of the date of the agreement. The Company and Mr. Coffman
also agreed that he would have the right to exercise vested options during a
two year period after the agreement and that all unvested options will expire
on the earlier of their scheduled expiration or April 7, 2000. The Company also
 
                                       84
<PAGE>
 
agreed to lift vesting restrictions on 8,971 shares of previously awarded
restricted stock. The terms of the agreement were consistent with terms that he
would have received if he had retired from the Company.
 
   Retention of Eckert Seamans Cherin & Mellott. The Company has retained the
law firm of Eckert Seamans Cherin & Mellott, to which Robert F. Pugliese, a
director of the Company, is Special Counsel, to perform certain limited
services in connection with the Company's credit agreement and the merger of
OHM Corporation.
 
   Relocation Loans. In certain circumstances, the Company has granted and may
in the future grant interest-free loans to executive officers, officers and
certain other employees principally for real estate purchases in connection
with company-initiated transfers to a new location. All loans are approved by
the Compensation Committee and are to be secured by the principal residence of
the individual. Mr. James R. Mahoney, Senior Vice President, entered into a
relocation loan arrangement with the Company with an original principal amount
of $200,000 and secured by a deed of trust on his personal residence in
California. The loan was interest free so long as Mr. Mahoney remained an
employee. Beginning December 31, 1991 and on each December 31st thereafter
until the due date of the loan, 5% of the original principal amount (to a
maximum of 50% of the original principal amount) was forgiven by the Company.
Additionally, Mr. Mahoney agreed to repay the remaining 50% of the original
principal amount in installments related to the issuance of awards under the
Company's incentive compensation plan. In April 1997, $122,451 remained
outstanding on this loan. In May 1998, Mr. Mahoney repaid in full the $102,451
then remaining outstanding on his loan in connection with the sale of his
California residence.
 
   In connection with the relocation and consolidation of the Company's
corporate headquarters from Torrance, California to Pittsburgh, Pennsylvania in
June 1997, and other relocations occurring at approximately the same time, the
Company offered relocation assistance to a limited number of officers and key
employees. Relocation assistance packages offered to these individuals involve
three elements: 1) reimbursement of out-of-pocket relocation expenses,
including travel, real estate brokerage commissions (up to a 6% maximum), and
loan origination fees (up to a maximum of two points), 2) a loan to be used for
the purchase of a new residence, and 3) a mobility allowance of between 15% and
30% of salary (Mr. Mahoney received an allowance of 30% of salary in connection
with his relocation and Mr. DeLuca received a 30% allowance in connection with
his relocation). Amounts paid to reimburse out-of-pocket expenses were
"grossed-up" for tax purposes. The loans to relocating associates have ten year
terms, are to be secured by the residence purchased, and do not bear interest
as long as the associate stays with the Company. Five percent of the loan
principal is required to be repaid annually by the associate and 5% will be
forgiven annually by the Company for each year the associate remains with the
Company. The loans are also due upon the sale of the residence purchased.
Mr. DeLuca and Mr. Mahoney each were offered and accepted relocation loans on
such terms in the original principal amounts of up to $100,000. Mr. DeLuca
accepted a loan of $70,000 in May 1997 and the balance of $30,000 in August
1998. During the fiscal year ended December 25, 1998, (i) Mr. DeLuca repaid
$3,500 of the loan, and (ii) the maximum amount owed by Mr. DeLuca to the
Company under the loan was $91,500. As of March 5, 1999, the principal amount
outstanding for Mr. DeLuca's loan was $86,500. Mr. Mahoney accepted a loan of
$100,000 in April 1998. During the fiscal year ended December 25, 1998, the
maximum amount owed by Mr. Mahoney to the Company under the loan was $100,000.
As of March 5, 1999, the principal amount outstanding for Mr. Mahoney's loan
was $90,000. Total relocation costs for all relocating employees was
approximately $953,000.
 
   Executive Stock Ownership. The Company has adopted an Executive Stock
Ownership Program which requires that within three years certain key executives
own an amount of the Company's Common Stock equal to a multiple of their salary
ranging from one times salary for vice presidents to three times salary for
Mr. DeLuca. To assist these executives in meeting the ownership guidelines, the
Company has provided loans to Messrs. DeLuca, Mahoney, Pompe, and Strawbridge
in the amounts of $939,100, $152,600, $164,300 and $233,300 respectively, to
purchase the Company's Common Stock. The Company also provided similar loans
totaling $510,700 to four other key executives. All of the executives used the
loans solely to purchase the Company's Common Stock at current market prices.
The loans bear interest at the rate of 4.46% per year and
 
                                       85
<PAGE>
 
are repayable upon the earlier of the executives' termination of employment or
November 23, 2001. It is expected that the executives will be able to repay the
loans from incentive compensation payments earned throughout the three-year
loan period.
 
   Carlyle Financial Advisory Fees. In connection with the Investment, the
Company agreed to pay Carlyle (i) an annual financial advisory fee of $100,000,
payable quarterly; and (ii) investment banking fees (equal to 1% of transaction
value) and reimbursement of reasonable out-of-pocket expenses for investment
banking services rendered to the Company. The Company has paid $2,500,000 in
investment banking fees to Carlyle (and reimburse reasonable out-of-pocket
expenses) for services rendered in connection with the Merger transactions,
which is less than the 1% fee to which Carlyle would otherwise have been
entitled pursuant to the terms of its existing agreement with the Company.
 
   Indemnification. The General Corporation Law of the State of Delaware, the
state of incorporation of the Company, and the Bylaws of the Company provide
for indemnification of directors and officers. Section 145 of the Delaware
General Corporation Law provides generally that a person sued as a director,
officer, employee or agent of a corporation may be indemnified by the
corporation for reasonable expenses, including attorneys' fees, if, in cases
other than actions brought by or in the right of the corporation, he or she has
acted in good faith and in a manner he or she reasonably believed to be in, or
not opposed to, the best interests of the corporation (and in the case of a
criminal proceeding, had no reasonable cause to believe that his or her conduct
was unlawful). Section 145 provides that no indemnification for any claim or
matter may be made, in the case of an action brought by or in the right of the
corporation, if the person has been adjudged to be liable, unless the Court of
Chancery or other court determines that indemnity is fair and reasonable
despite the adjudication of liability. Indemnification is mandatory in the case
of a director, officer, employee or agent who has been successful on the
merits, or otherwise, in defense of a suit against him or her. The
determination of whether a director, officer, employee or agent should be
indemnified must be made by a majority of disinterested directors, independent
legal counsel or the stockholders.
 
   Directors and officers of the Company are covered under policies of
directors' and officers' liability insurance. The directors and all officers
serving the Company as Senior Vice President or in a higher position and
certain other officers are parties to Indemnity Agreements (the Indemnity
Agreements). The Indemnity Agreements provide indemnification for the directors
and covered officers in the event the directors' and officers' liability
insurance does not cover a particular claim for indemnification or if such a
claim or claims exceed the limits of such coverage. The Indemnity Agreements
are generally intended to provide indemnification for any amounts a director or
covered officer is legally obligated to pay because of claims arising out of
the director's or officer's service to the Company.
 
   Additionally, the Company's Certificate of Incorporation provides that its
directors are not to be liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty to the fullest extent permitted by law.
This provision is intended to allow the Company's directors the benefit of the
Delaware General Corporation Law which provides that directors of Delaware
corporations may be relieved of monetary liabilities for breach of their
fiduciary duty of care, except under certain circumstances, including breach of
the director's duty of loyalty, acts or omissions not in good faith or
involving intentional misconduct or a knowing violation of law or any
transaction from which the director derived an improper personal benefit.
 
   The Investment agreements also contain additional provisions for the
indemnification of Company directors and officers in certain circumstances. The
Investment Agreement provides that the Company will indemnify, defend and hold
harmless Carlyle, and its affiliates, directors, officers, advisors, employees
and agents to the fullest extent lawful from and against all demands, losses,
damages, penalties, claims, liabilities, obligations, actions, causes of action
and reasonable expenses (Losses) arising out of the Investment Agreement or the
related transactions or arising by reason of or resulting from the breach of
any representation, warranty, covenant or agreement of the Company contained in
the Investment Agreement for the period for which such representation or
warranty survives; provided, however, that the Company shall not have any
liability to indemnify Carlyle with respect to Losses arising from the bad
faith or gross negligence of the Carlyle indemnified party.
 
                                       86
<PAGE>
 
   The Investment agreements also provide that Carlyle will indemnify, defend
and hold harmless the Company, its affiliates, directors, officers, advisors,
employees and agents from and against all Losses arising out of the breach of
any representation, warranty, covenant or agreement of Carlyle contained in the
Investment Agreement for the period for which such representation or warranty
survives; provided, however, that Carlyle shall not have any liability to
indemnify the Company with respect to Losses arising from the bad faith or
gross negligence of the Company indemnified party.
 
   The Investment agreements provide that no claim may be made against an
indemnifying party for indemnification until the aggregate dollar amount of all
Losses exceeds $1,500,000 and the indemnification obligations of the respective
parties shall be effective only until the dollar amount paid in respect of the
Losses indemnified against aggregates to an amount equal to $45,000,000.
 
   Further, pursuant to the Merger Agreement with OHM, the Company will, from
and after the effective time of the OHM Merger, indemnify and hold harmless, to
the fullest extent permitted under applicable law (and the Company will also
advance expenses as incurred to the fullest extent permitted under applicable
law, provided the person to whom expenses are advanced provides an undertaking
to repay such advances if it is ultimately determined that such person is not
entitled to indemnification), each present and former director and officer of
OHM and its subsidiaries against any costs or expenses (including reasonable
attorneys' fees), judgments, fines, losses, claims, damages or liabilities
incurred in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative,
arising out of or pertaining to matters existing or occurring at or prior to
the effective time of the OHM Merger, including the transactions contemplated
by the OHM Merger Agreement, which is based or arises out of the fact that such
person is or was a director or officer of OHM or any of its subsidiaries. In
addition, for not less than six years after the effective time, the Company and
OHM will maintain OHM's and its subsidiaries' existing directors' and officers'
liability insurance ("D&O Insurance"), subject to certain maximum premium
payments, provided that the Company may substitute therefor policies having at
least the same coverage and containing terms which are no less advantageous to
the intended beneficiaries thereof than the existing D&O Insurance with respect
to matters existing or occurring at or prior to the effective time or may
purchase a six-year extended reporting endorsement under OHM's existing D&O
Insurance.
 
   The Company has substantially similar indemnification obligations with
respect to persons who are or were directors, officers, employees or agents of
GTI before or after the effective time of the merger with GTI, pursuant to the
agreement for the acquisition of GTI.
 
                                       87
<PAGE>
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.
 
Exhibits
 
   These Exhibits are numbered in accordance with the Exhibit Table of Item 601
of Regulation S-K.
 
<TABLE>
<CAPTION>
 Exhibit
   No.                                 Description
 -------                               -----------
 <C>     <C> <S>
  2      Omitted--Inapplicable.
  3(i)   Certificate of Incorporation of the Registrant as amended by the
         Amendment to Certificate of Incorporation filed September 17, 1987,
         with the Delaware Secretary of State(1), and by the Certificate of
         Amendment to Certificate of Incorporation filed June 19, 1998(2), with
         the Delaware Secretary of State(2) and by the Certificate of Amendment
         of Certification of Incorporation of International Technology
         Corporation, dated as of December 21, 1998, as filed with the Delaware
         Secretary of State on December 23, 1998.(3)
  3(ii)  Amended and Restated Bylaws of the Registrant as amended through June
         12, 1998.(2)
  4(i)   1.  Certificate of Designations with respect to the Registrant's 7%
             Cumulative Convertible Exchangeable Preferred Stock, $100 par
             value.(4)
         2.  Certificate of Designations, Preferences and Relative,
             Participating, Optional and Other Special Rights and
             Qualifications, Limitations and Restrictions Thereof of
             Cumulative, Convertible Participating Preferred Stock of The IT
             Group, Inc., issued November 20, 1996.(5)
  4(ii)  1.  Indenture for the Registrant's 7% Convertible Subordinated
             Debentures Due 2008.(4)
         2.  Indenture dated as of October 1, 1986 between OHM Corporation and
             United States Trust Company of New York, Trustee, relating to OHM
             Corporation's 8% Convertible Subordinated Debentures due October
             1, 2006.(6)
         3.  Specimen Debenture Certificate.(7)
         4.  First Supplemental Indenture dated as of May 20, 1994 by and among
             OHM Corporation and United States Trust Company of New York.(8)
         5.  Second Supplemental Indenture dated as of June 11, 1998 among OHM
             Corporation, The IT Group, Inc., a guarantor, and United States
             Trust Company of New York.(2)
  9      Omitted--Inapplicable.
 10(ii)  1.  Amended and Restated Credit Agreement, dated as of June 11, 1998,
             among the Registrant, IT Corporation, OHM Corporation, the
             institutions from time to time party thereto as lenders, the
             institutions from time to time party thereto as issuing banks,
             Citicorp USA Inc., in its capacity as administrative agent, and
             BankBoston, M.A., in its capacity as documentation agent.(9)
         2.  First Amendment dated September 16, 1998 to the Amended and
             Restated Credit Agreement, dated as of June 11, 1998, among the
             Registrant, IT Corporation, OHM Corporation, the institutions from
             time to time party thereto as lenders, the institutions from time
             to time party thereto as issuing banks, Citicorp USA Inc., in its
             capacity as administrative agent, and BankBoston, N.A., in its
             capacity as documentation agent.(10)
</TABLE>
 
 
                                       88
<PAGE>
 
<TABLE>
<CAPTION>
 Exhibit
   No.                                 Description
 -------                               -----------
 <C>     <C> <S>
          3. Second Amendment dated October 26, 1998 to the Amended and
             Restated Credit Agreement, dated as of June 11, 1998, among the
             Registrant, IT Corporation, OHM Corporation, the institutions from
             time to time party thereto as lenders, the institutions from time
             to time party thereto as issuing banks, Citicorp USA Inc., in its
             capacity as administrative agent, and BankBoston, N.A., in its
             capacity as documentation agent.(10)
          4. Third Amendment dated March 5, 1999 to the Amended and Restated
             Credit Agreement, dated as of June 11, 1998, among the Registrant,
             IT Corporation, OHM Corporation, the institutions from time to
             time party thereto as lenders, the institutions from time to time
             party thereto as issuing banks, Citicorp USA Inc., in its capacity
             as administrative agent, and BankBoston, N.A., in its capacity as
             documentation agent.
          5. Agreement and Plan of Merger, dated as of January 15, 1998, among
             OHM Corporation, Registrant and IT-Ohio, Inc.(11)
          6. Parent Voting Agreement dated January 15, 1998 among OHM
             Corporation, Registrant and the stockholders of Registrant named
             therein.(11)
          7. Company Voting Agreement dated January 15, 1998 among OHM
             Corporation, Registrant and the shareholders of OHM Corporation
             named therein.(11)
          8. Option Termination Agreement dated January 15, 1998 between James
             L. Kirk and OHM Corporation.(11)
          9. Share Repurchase Agreement dated January 15, 1998 among OHM
             Corporation, Registrant, Rust International, Inc. and Waste
             Management, Inc.(11)
         10. Second Amended and Restated Share Repurchase Agreement, dated as
             of February 17, 1998, among OHM Corporation, WMX, Rust, Rust
             Remedial Services Holding Company Inc. and Registrant.(12)
         11. Stock Purchase Agreement dated as of June 17, 1997 by and among
             OHM Corporation, Beneco Enterprises, Inc., Bennie Smith, Jr.,
             Robert Newberry and Scott Doxey.(13)
         12. Agreement and Plan of Merger, dated as of October 27, 1998, among
             Fluor Daniel GTI, Inc., Tiger Acquisition Corporation and the
             Registrant.(10)
         13. Amended and Restated Marketing Agreement dated as of October 27,
             1998 between Fluor Daniel GTI, Inc. and Fluor Daniel, Inc.(10)
         14. Intercompany Services Agreement dated October 27, 1998 between the
             Registrant, Fluor Daniel, Inc. and Fluor Daniel GTI, Inc.(10)
         15. Share Purchase Agreement dated February 5, 1999 by and between the
             shareholders of Roche Limited, Consulting Group and IT Holdings
             Canada, Inc. and The IT Group, Inc.
         16. Asset Purchase Agreement, dated as of March 8, 1999, between IT
             and ICF Kaiser International, Inc.(14)
         17. Stock Redemption Agreement dated as of June 26, 1998, between
             Quanterra Incorporated, the registrant and IT Corporation.(15)
         18. Securities Purchase Agreement dated as of August 28, 1996 between
             the Registrant and certain Purchasers identified therein
             affiliated with The Carlyle Group(5), including agreement by and
             between The Carlyle Group and the Registrant re financial advisory
             and investment banking fees.(16)
</TABLE>
 
 
                                       89
<PAGE>
 
<TABLE>
<CAPTION>
 Exhibit
   No.                                 Description
 -------                               -----------
 <C>     <C> <S>
         19. Amendment No. 1, dated November 20, 1996, to Securities Purchase
             Agreement dated August 28, 1996, by and among the Registrant and
             certain Purchasers identified therein affiliated with The Carlyle
             Group.(17)
         20. Form of Warrant Agreement by and among the Registrant and certain
             Warrant Holders defined herein affiliated with The Carlyle Group,
             dated as of November 20, 1996.(5)
         21. Form of Registration Rights Agreement by and among the Registrant
             and certain Investors affiliated with The Carlyle Group, dated
             November 20, 1996.(5)
         22. Master Loan and Security Agreement dated May 11, 1993, between OHM
             Remediation Services Corp. and BOT Financial Corporation.(18)
         23. Amendment No. 1 to Master Loan and Security Agreement dated as of
             January 19, 1995 between BOT Financial Corporation and OHM
             Remediation Services Corp.(19)
         24. Promissory Note dated December 23, 1993 executed by OHM
             Remediation Services Corp. in favor of BOT Financial
             Corporation.(20)
         25. Promissory Note dated December 28, 1994 executed by OHM
             Remediation Services Corp. in favor of BOT Financial
             Corporation.(8)
         26. Loan and Security Agreement dated as of August 1, 1994 by and
             between OHM Remediation Services Corp. and Internationale
             Nederlanden Lease Structured Finance B.V.(21)
         27. Promissory Note dated August 31, 1994 executed by OHM Remediation
             Services Corp. in favor of Internationale Nederlanden Lease
             Structured Finance B.V.(21)
         28. Continuing Corporate Guaranty dated as of August 1, 1994 executed
             by OHM Corporation in favor of Internationale Nederlanden Lease
             Structured Finance B.V.(21)
 10(iii)  1. Non-Employee Directors' Retirement Plan, as amended and restated
             June 2, 1994(22)(23), as amended by the Amended and Restated Non-
             Employee Directors Retirement Plan, Amendment No. 5, dated
             November 20, 1996.(22)(16)
          2. Description of the Special Turn-a-Round Plan (Fiscal Year 1995
             Management Incentive Plan) of the Registrant.(22)(24)
          3. 1983 Stock Incentive Plan, as amended.(22)(25)
          4. 1991 Stock Incentive Plan(22)(26) as modified by waiver dated
             November 20, 1996, by certain former Non-Employee Directors, in
             favor of the Registrant.(16)(22)
          5. Form of Amendment dated October 23, 1998, to the Restricted Stock
             and Escrow Agreement under the Registrant's 1991 Stock Incentive
             Plan.(22)(27)
          6. 1996 Stock Incentive Plan, as amended and restated effective June
             11, 1998.(22)(28)
          7. OHM Corporation 1986 Stock Option Plan, as amended and restated as
             of May 10, 1994.(22)(29)
          8. OHM Corporation Nonqualified Stock Option Plan for
             Directors.(22)(30)
          9. OHM Corporation Directors' Deferred Fee Plan.(8)(22)
         10. Amendment No. 1 to OHM Corporation Directors' Deferred Fee
             Plan.(19)(22)
         11. OHM Corporation Retirement Savings Plan, as amended and restated
             as of January 1, 1994.(8)(22)
</TABLE>
 
                                       90
<PAGE>
 
<TABLE>
<CAPTION>
 Exhibit
   No.                                 Description
 -------                               -----------
 <C>     <C> <S>
         12. Amendment No. 1 to OHM Corporation Retirement Savings Plan, as
             amended and restated as of January 1, 1994.(19)(22)
         13. Amendment No. 2 to OHM Corporation Retirement Savings Plan, as
             amended and restated as of January 1, 1994.(22)(31)
         14. OHM Corporation Retirement Savings Plan Trust Agreement between
             OHM Corporation and National City Bank, as Trustee, as amended and
             restated effective July 1, 1994.(8)(22).
         15. Fiscal Year 1997 Management Incentive Plan.(16)(22)
         16. Fiscal Year 1998 Management Incentive Plan.(16)(22)
         17. Retirement Agreement dated March 3, 1994 between Murray H.
             Hutchison and the Registrant.(24)(22) as amended by First
             Amendment dated January 6, 1995 to the Retirement Agreement dated
             March 3, 1994 between Murray H. Hutchison and the
             Registrant.(22)(32)
         18. Retirement Plan of IT, 1993 Restatement.(22)(24)
         19. Amendment Number One to IT Corporation Retirement Plan, dated as
             of July 1, 1995.(22)(33)
         20. Amendment Number Two to IT Corporation Retirement Plan, dated as
             of October 1, 1995.(22)(33)
         21. Amendment Number Three to IT Corporation Retirement Plan, dated as
             of July 15, 1996.(22)(34)
         22. Amendment Number Four to IT Corporation Retirement Plan, dated as
             of February 1, 1997.(16)(22)
         23. Amendment Number Five to IT Corporation Retirement Plan, dated as
             of May 13, 1997.(16)(22)
         24. Amendment Number Six to IT Corporation Retirement Plan dated as of
             May 27, 1998.(2)(22)
         25. Amendment Number Seven to IT Corporation Retirement plan dated as
             of December 31, 1998.(22)
         26. Executive Stock Purchase Interest Reimbursement Plan, approved
             September 6, 1995.(22)(26)
         27. Executive/Directors Deferred Compensation Plan, effective January
             1, 1996.(22)(26)
         28. Executive Restoration Plan, effective July 1, 1995 as amended
             through May 13, 1997.(22)(26)
         29. IT Corporation Deferred Compensation Plan (amended and restated
             effective January 1, 1998).(2)(22)
         30. IT Corporation Restoration Plan amended and restated effective
             January 1, 1998.(2)(22)
         31. 1997 The IT Group, Inc. Non-Employee Directors Stock Plan--
             Director Fees, dated as of February 26, 1997.(22)(34)
         32. Employment Agreement, dated as of November 20, 1996, by and
             between the Registrant, IT Corporation, and Anthony J.
             DeLuca.(16)(22)
         33. Separation Agreement, dated as of April 10, 1998, by and between
             the Registrant, its subsidiaries and affiliates, and Franklin E.
             Coffman.(2)(22)
         34. Employment Agreement, dated as of November 20, 1996, by and
             between the Registrant, IT Corporation, and James R.
             Mahoney.(16)(22)
         35. Employment Agreement, dated as of November 20, 1996, by and
             between the Registrant, IT Corporation, and Raymond J.
             Pompe.(16)(22)
</TABLE>
 
                                       91
<PAGE>
 
<TABLE>
<CAPTION>
 Exhibit
   No.                                 Description
 -------                               -----------
 <C>     <C> <S>
         36. Employment Continuation, Non-competition and Confidentiality
             Agreement dated the 17th day of June, 1997, by and between Beneco
             Enterprises, Inc., a Utah corporation, OHM Corporation, an Ohio
             corporation, and Scott Doxey.(2)(22)
         37. Employment Continuation, Non-competition and Confidentiality
             Agreement dated the 17th day of June, 1997, by and between Beneco
             Enterprises, Inc., a Utah corporation, OHM Corporation, an Ohio
             corporation, and Robert Newberry.(2)(22)
         38. Employment Continuation, Non-competition and Confidentiality
             Agreement dated the 17th day of June, 1997, by and between Beneco
             Enterprises, Inc., a Utah corporation, OHM Corporation, an Ohio
             corporation, and Bennie Smith, Jr.(2)(22)
         39. Form of Employment Agreement by and between OHM Corporation, and
             each of Pamela K.M. Beall, Robert J. Blackwell, Kris E. Hansel,
             Steven E. Harbour, James L. Kirk, Philip V. Petrocelli, Philip O.
             Strawbridge, and Michael A. Szomjassy, as amended by Amendment No.
             1 in the case of each of Ms. Beall and Messrs. Blackwell, Hansel,
             Harbour, Strawbridge and Szomjassy, and as amended by Amendment
             No. 2 in the case of each of Ms. Beall and Messrs. Blackwell,
             Hansel, and Harbour.(2)(22)
         40. The IT Group, Inc. Severance and Retention Bonus Plan dated March
             5, 1998.(2)(22)
         41. Executive Stock Ownership Program by and between the Registrant
             and certain executive officers of the Registrant.(22)
         42. The IT Group, Inc. Executive Bonus Plan effective November 17,
             1998 (22)
 11      Omitted--Inapplicable.
 12      Omitted--Inapplicable.
 13      Omitted--Inapplicable.
 16      Omitted--Inapplicable.
 18      Omitted--Inapplicable.
 20      Omitted--Inapplicable.
 21      List of the Registrant's subsidiaries.
 22      Omitted--Inapplicable.
 23      1.  Consent of Ernst & Young LLP, Independent Auditors.
 24      Omitted--Inapplicable.
 27      Financial Data Schedule for the year ended December 25, 1998.
 28      Omitted--Inapplicable.
 99      Omitted--Inapplicable.
</TABLE>
--------
Footnotes
 
 (1) Previously filed with the Securities and Exchange Commission as an Exhibit
     to the Registrant's Annual Report on Form 10-K for the year ended March
     31, 1988 (No. 1-9037) and incorporated herein by reference.
 
 (2) Previously filed with the Securities and Exchange Commission as an Exhibit
     to Registrant's Report on Form 10-K for the year ended March 27, 1998 and
     incorporated herein by reference.
 
 
                                       92
<PAGE>
 
 (3) Previously filed with the Securities and Exchange Commission as an Exhibit
     to the Registrant's Report on Form 8-K dated December 23, 1998 and
     incorporated herein by reference.
 
 (4) Previously filed with the Securities and Exchange Commission as an Exhibit
     to the Registrant's Registration Statement on Form S-3 (No. 33-65988) and
     incorporated herein by reference.
 
 (5) Previously filed with the Securities and Exchange Commission as an Exhibit
     to the Registrant's Form 8-K dated September 20, 1996 and incorporated
     herein by reference.
 
 (6) Previously filed with the Securities and Exchange Commission as an Exhibit
     to OHM Corporation's Annual Report on Form 10-K for the year ended
     December 31, 1986 and incorporated herein by reference.
 
 (7) Previously filed with the Securities and Exchange Commission as an Exhibit
     to OHM Corporation's Amendment No. 1 to Registration Statement of Form S-
     1, No. 33-8296 and incorporated by reference.
 
 (8) Previously filed with the Securities and Exchange Commission as an Exhibit
     to OHM Corporation's Annual Report on Form 10-K for the year ended
     December 31, 1994 and incorporated herein by reference.
 
 (9) Previously filed with the Securities and Exchange Commission as an Exhibit
     to Registrant's Report on Form 8-K dated June 11, 1998 and incorporated
     herein by reference.
 
(10) Previously filed with the Securities and Exchange Commission as an Exhibit
     to the Registrant's Schedule 14D-1 dated November 3, 1998 and incorporated
     herein by reference.
 
(11) Previously filed with the Securities and Exchange Commission as an Exhibit
     to the Registrant's Report on Form 8-K dated January 15, 1998.
 
(12) Previously filed with the Securities and Exchange Commission as an Exhibit
     to the Registrant's Schedule 14D-1 (Amendment No. 5) dated February 18,
     1998 and incorporated herein by reference.
 
(13) Previously filed with the Securities and Exchange Commission as an Exhibit
     to OHM Corporation's Report on Form 8-K filed on July 2, 1997 and
     incorporated herein by reference.
 
(14) Previously filed with the Securities and Exchange Commission as an Exhibit
     to the Registrant's Annual Report on Form 8-K dated March 12, 1999 and
     incorporated herein by reference.
 
(15) Previously filed with the Securities and Exchange Commission as an Exhibit
     to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
     June 26, 1998 and incorporated herein by reference.
 
(16) Previously filed with the Securities and Exchange Commission as an Exhibit
     to Registrant's Report on Form 10-K for the year ended March 28, 1997.
 
(17) Previously filed with the Securities and Exchange Commission as an Exhibit
     to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
     December 27, 1996 and incorporated herein by reference.
 
(18) Previously filed with the Securities and Exchange Commission as an Exhibit
     to OHM Corporation's Quarterly Report on Form 10-Q for the quarter ended
     June 30, 1993 and incorporated herein by reference.
 
(19) Previously filed with the Securities and Exchange Commission as an Exhibit
     to OHM Corporation's Quarterly Report on Form 10-Q for the quarter ended
     June 30, 1995 and incorporated herein by reference.
 
(20) Previously filed with the Securities and Exchange Commission as an Exhibit
     to OHM Corporation's Annual Report on Form 10-K for the year ended
     December 31, 1993 and incorporated herein by reference.
 
(21) Previously filed with the Securities and Exchange Commission as an Exhibit
     to OHM Corporation's Quarterly Report on Form 10-Q for the quarter ended
     September 30, 1994 and incorporated herein by reference.
 
(22) Filed as a management compensation plan or arrangement per Item 14(a)(3)
     of the Securities Exchange Act.
 
                                       93
<PAGE>
 
(23) Previously filed with the Securities and Exchange Commission as an Exhibit
     to the Registrant's Annual Report on Form 10-K for the year ended March
     31, 1995 and incorporated herein by reference.
 
(24) Previously filed with the Securities and Exchange Commission as an Exhibit
     to the Registrant's Annual Report on Form 10-K for the year ended March
     31, 1994 and incorporated herein by reference.
 
(25) Previously filed with the Securities and Exchange Commission as an Exhibit
     to the Registrant's Annual Report on Form 10-K for the year ended March
     31, 1993 and incorporated herein by reference.
 
(26) Previously filed with the Securities and Exchange Commission as an Exhibit
     to the Registrant's Annual Report on Form 10-K for the year ended March
     29, 1996 and incorporated herein by reference.
 
(27) Previously filed with the Securities and Exchange Commission as an Exhibit
     to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
     September 25, 1998 and incorporated herein by reference.
 
(28) Previously filed with the Securities and Exchange Commission as an Exhibit
     to the Registrant's Proxy Statement dated May 11, 1998 and incorporated
     herein by reference.
 
(29) Previously filed with the Securities and Exchange Commission as an
     Appendix to OHM Corporation's Proxy Statement for its Annual Meeting held
     May 10, 1994 and incorporated herein by reference.
 
(30) Previously filed with the Securities and Exchange Commission as an Exhibit
     to OHM Corporation's Quarterly Report on Form 10-Q for the quarter ended
     September 30, 1992 and incorporated herein by reference.
 
(31) Previously filed with the Securities and Exchange Commission as an Exhibit
     to the OHM Corporation's Annual Report on Form 10-K for the year ended
     December 31, 1995 and incorporated herein by reference.
 
(32) Previously filed with the Securities and Exchange Commission as an Exhibit
     to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
     December 31, 1994 and incorporated herein by reference.
 
(33) Previously filed with the Securities and Exchange Commission as an Exhibit
     to the Registrant's Form S-8 (No. 333-00651) and incorporated herein by
     reference.
 
(34) Previously filed with the Securities and Exchange Commission as an Exhibit
     to the Registrant's Registration Statement on Form S-8 (No. 333-26143) and
     incorporated herein by reference.
 
(35) Previously filed with the Securities and Exchange Commission as an Exhibit
     to the Registrant's Form 8-K, dated January 17, 1997 and incorporated
     herein by reference.
 
Reports on Form 8-K
 
1. Current report on Form 8-K, dated November 3, 1998, reporting under Item 5
   relating to the announcement of the Agreement and Plan of Merger entered
   into among the registrant, Tiger Acquisition Corporation (a newly formed
   wholly owned subsidiary of the registrant), Flour Daniel GTI, Inc. and Fluor
   Daniel, Inc.
 
2. Current report on Form 8-K, dated November 19, 1998, reporting under Item 5
   relating to the announcement of the early termination of the 15-day waiting
   period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976 in
   connection with the registrant's previously announced acquisition of Fluor
   Daniel GTI, Inc.
 
3. Current report on Form 8-K, dated December 3, 1998, reporting under Item 2
   relating to the merger of Tiger Acquisition Corporation, a wholly owned
   subsidiary of the registrant, with and into Fluor Daniel GTI, Inc., pursuant
   to the previously announced Agreement and Plan of Merger, dated as of
   October 27, 1998 and Item 7 the Financial Statements of Businesses acquired
   and Pro Forma Financial Information.
 
4. Current report on Form 8-K, dated December 23, 1998, reporting under Item 5
   the completion of all steps necessary to change its name from International
   Technology Corporation to The IT Group, Inc. and Item 7 Financial Statements
   of Businesses Acquired in connection with the previously announced
   acquisition of Fluor Daniel GTI, Inc.
 
5. Current report on Form 8-K, dated March 8, 1999, reporting under Item 5 the
   announcement of the Asset Purchase Agreement entered into by the registrant
   and ICF Kaiser International, Inc.
 
                                       94
<PAGE>
 
                               THE IT GROUP, INC.
 
                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
 
                                 (In thousands)
 
<TABLE>
<CAPTION>
                            Balance at Provision  Accounts              Balance
                            beginning   charged   written               at end
                            of period  to income    off     Other      of period
                            ---------- ---------- --------  -------    ---------
<S>                         <C>        <C>        <C>       <C>        <C>
Nine months ended December
 25, 1998:
  Allowance for doubtful
   accounts................  $19,026     $1,203   $(3,101)  $ 1,830(1)  $18,958
  Valuation allowance for
   deferred tax asset......  $31,865     $6,059   $   --    $12,343(5)  $50,267
Year ended March 27, 1998:
  Allowance for doubtful
   accounts................  $ 2,055     $  206   $(1,147)  $17,912(2)  $19,026
  Valuation allowance for
   deferred tax asset......  $ 9,471     $2,252   $   --    $20,142(4)  $31,865
Year ended March 28, 1997:
  Allowance for doubtful
   accounts................  $ 2,943     $  304   $(1,208)  $    16(3)  $ 2,055
  Valuation allowance for
   deferred tax asset......  $ 4,869     $4,602   $   --    $   --      $ 9,471
</TABLE>
--------
(1) Represents allowance for doubtful accounts recorded on the books of GTI at
    acquisition.
 
(2) Represents allowance for doubtful accounts at the date of acquisition for
    business acquired during the twelve months ended March 27, 1998 totaling
    $18,020 less the allowance for doubtful accounts of $108 relating to the
    sale of IT's remediation services business.
 
(3) Represents allowance for doubtful accounts at November 1996 for receivables
    acquired in the purchase of Chi Mei.
 
(4) Represents valuation allowance adjustment relating to the acquisition of
    OHM Corporation.
 
(5) Represents valuation allowance adjustment relating to the acquisitions of
    OHM and GTI corporations.
 
                                       95
<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, in Monroeville,
Pennsylvania on the 22nd day of March, 1999.
 
                                          THE IT GROUP, INC.
 
                                                  /s/ Anthony J. Deluca
                                          By: _________________________________
                                                    Anthony J. DeLuca
                                              President and Chief Executive
                                                         Officer
 
   Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
 
<TABLE>
<S>                                    <C>                        <C>
       /s/ Daniel A. D'Aniello         Chairman of the Board of   March 22, 1999
______________________________________  Directors
         Daniel A. D'Aniello
 
        /s/ Anthony J. Deluca          Director, President and    March 22, 1999
______________________________________  Chief Executive Officer
          Anthony J. DeLuca             and Duly Authorized
                                        Officer
 
         /s/ Philip B. Dolan           Director                   March 22, 1999
______________________________________
           Philip B. Dolan
 
         /s/ E. Martin Gibson          Director                   March 22, 1999
______________________________________
           E. Martin Gibson
 
         /s/ James C. McGill           Director                   March 22, 1999
______________________________________
           James C. McGill
 
         /s/ Richard W. Pogue          Director                   March 22, 1999
______________________________________
           Richard W. Pogue
 
        /s/ Robert F. Pugliese         Director                   March 22, 1999
______________________________________
          Robert F. Pugliese
 
        /s/ Charles W. Schmidt         Director                   March 22, 1999
______________________________________
          Charles W. Schmidt
 
       /s/ James David Watkins         Director                   March 22, 1999
______________________________________
         James David Watkins
 
      /s/ Philip O. Strawbridge        Senior Vice President,     March 22, 1999
______________________________________  Chief Administrative
        Philip O. Strawbridge           Officer and Principal
                                        Financial Officer
 
          /s/ Harry J. Soose           Vice President, Finance    March 22, 1999
______________________________________  and Principal Accounting
            Harry J. Soose              Officer
</TABLE>
 
                                       96