<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                                    FORM 10-K

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

                   For the fiscal year ended December 31, 1998
                                       OR
             TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
              EXCHANGE ACT OF 1934

              For the transition period from              to             

                         Commission file number 0 - 6234

                                ACMAT CORPORATION
             (Exact name of registrant as specified in its charter)

      Connecticut                                      06-0682460
(State of incorporation)                    (I.R.S. Employer Identification No.)

233 Main Street
New Britain, Connecticut                               06050-2350 
(Address of principal executive offices)               (Zip Code)

               Registrant's telephone number, including area code
                                 (860) 229-9000

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

Securities registered pursuant to Section 12 (g) of the Act:
                                     Common Stock, without par value
                                     Class A Stock, without par value

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) or 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   XX     No       

The aggregate market value as of March 1, 1999 of the Common Stock and Class A
Stock held by non-affiliates of the registrant was $35,709,538.

As of March 1, 1999 there were 592,088 shares of the registrant's Common Stock
and 2,389,808 shares of registrant's Class A Stock, each without par value,
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:  None
<PAGE>   2
<TABLE>
<CAPTION>
                                     PART I
<S>                                                                            <C>
Item 1.  Business                                                                3
       General                                                                   3
       Financial Information about Operating Segments                            3
                United Control Liability Insurance                               3
                ACSTAR Bonding                                                   5
                Insurance and Bonding Performance Ratios                         5
                Underwriting                                                     6
                Reinsurance                                                      6
                Claims                                                           6
                Reserves for Losses and Loss Adjustment Expenses                 6
                IRIS Ratios                                                      9
                A.M. Best Ratings                                                9
                Risk-Based Capital                                               9
          ACMAT Contracting                                                      9
                General                                                          9
                Backlog                                                          9
                Materials                                                       10
                Contract Acquisition                                            10
                Warranty                                                        10
                Asbestos Abatement Operations                                   10
         Marketing                                                              10
         Competition                                                            11
         Year 2000 Issue                                                        20
         Investments                                                            12
         Environmental Compliance                                               14
         Employees                                                              14

Item 2. Properties                                                              14

Item 3. Legal Proceedings                                                       14

Item 4. Submission of Matters to a Vote of Security Holders                     14

                                     PART II

Item 5. Market for the Registrant's Common Stock and Related
          Stockholder matters                                                   15

Item 6. Selected Financial Data                                                 15

Item 7. Management's Discussion and Analysis of Financial Condition and
          Results of Operations                                                 16
         Reserves for Losses and Loss Adjustment Expenses                       18
         Liquidity and Capital Resources                                        19
         Year 2000 Issue                                                        20
         Regulatory Environment                                                 21

Item 8. Financial Statements and Supplementary Data                             23

Item 9. Changes in and Disagreements with Accountants on Accounting and
          Financial Disclosure                                                  50

                                    PART III

Item 10. Directors and Executive Officers of the Registrant                     50

Item 11. Executive Compensation                                                 52

Item 12. Security Ownership of Certain Beneficial Owners and Management         54

Item 13. Certain Relationships and Related Transactions                         55

                                     PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K        55
</TABLE>
<PAGE>   3
                                     PART I
                                ITEM 1. BUSINESS

General

ACMAT Corporation ("ACMAT" or the "Company") provides specialized commercial
insurance and bonding coverages for contractors, architects, engineers and other
professionals in the construction and environmental fields and other specialty
insurance such as products liability. The Company derives its underwriting
expertise from its construction and remediation operations. Through United
Coastal Insurance Company ("United Coastal Insurance"), the Company provides a
broad line of general, professional, environmental and other liability insurance
primarily to environmental contractors and specialty trade contractors and
architects, engineers and other professionals. Through ACSTAR Insurance Company
("ACSTAR Insurance"), the Company provides surety bonds for general building,
specialty trade and environmental contractors and all forms of commercial
surety. Both United Coastal Insurance and ACSTAR Insurance are rated A-
(excellent) by The A.M. Best Co., Inc. ("A.M. Best"). In 1998, insurance
operations accounted for over 64% of the Company's consolidated revenues.

The Company is also engaged in construction contracting which consists of
interior contracting services involving the design and furnishing of building
interiors and asbestos abatement services for commercial, industrial and
institutional buildings.

Financial Information about Operating Segments

Financial information relating to the three business segments is set forth in
Note 16 to the consolidated financial statements on page 41 of this document.

The Company has three reportable operating segments: United Coastal Liability
Insurance, ACSTAR Bonding and ACMAT Contracting. The Company's reportable
segments are primarily the three main legal entities of the Company which offer
different products and services. The accounting policies of the segments are the
same as those described in the summary of significant accounting policies.

The United Coastal Liability Insurance operating segment offers specific lines
of liability insurance as an approved non-admitted excess and surplus lines
insurer in forty-six states, Puerto Rico, the Virgin Islands and the District of
Columbia. United Coastal offers claims made and occurrence policies for specific
specialty lines of liability insurance through certain excess and surplus lines
brokers who are licensed and regulated by the state insurance department(s) in
the state(s) in which they operate. United Coastal offers general, asbestos,
lead, pollution and professional liability insurance nationwide to specialty
trade contractors, environmental contractors, property owners, storage and
treatment facilities and professionals. United Coastal also offers products
liability insurance to manufacturers and distributors.

The Bonding operating segment provides, primarily through ACSTAR, surety bonds
written for prime, specialty trade, environmental, asbestos and lead abatement
contractors and miscellaneous obligations. ACSTAR also offers other
miscellaneous surety such as workers' compensation bonds, supply bonds,
subdivision bonds and license and permit bonds.

ACMAT Contracting provides construction contracting services to commercial and
governmental customers. ACMAT Contracting also provides underwriting services to
its insurance subsidiaries. In addition, ACMAT Contracting owns a commercial
office building in New Britain, Connecticut and leases office space to its
insurance subsidiaries as well as third parties.

                       UNITED COASTAL LIABILITY INSURANCE


                                       3
<PAGE>   4

The liability insurance lines of the Company, which consist primarily of
contractor policies and professional liability policies, are discussed more
fully below:

Contractors

  -      General Liability - Policies are offered to general contractors and
         specialty trade contractors involved in plumbing, heating, electrical,
         framing, roofing, drilling, excavation, demolition, road work, and
         other contracting activities. Coverage is also offered for other
         specialized non-contractor general liability risks. Coverage is limited
         to third-party bodily injury and property damage arising out of covered
         operations. General liability insurance is offered on either a
         claims-made or occurrence basis.

  -      Contractor Pollution Liability - Policies are offered to contractors
         involved in hazardous waste remediation or cleanup, installation or
         removal of storage tanks, or the transportation of hazardous waste.
         Coverage is provided for third party-bodily injury or property damage
         liability caused by release of, or exposure to, pollutants as a result
         of contractors' operations. Contractor pollution liability insurance is
         offered on a claims-made basis.

  -      Asbestos and Lead Abatement Liability - Policies are offered to
         contractors involved in the removal or encapsulation of asbestos and/or
         lead containing materials from structures or their containment through
         appropriate encapsulation or repair. Coverage is provided for
         third-party bodily injury and property damage liability as a result of
         a release of asbestos or lead which arises out of the contractors'
         operations. Asbestos and lead abatement liability insurance is provided
         on either a claims-made or occurrence basis.

Professionals

  -      Architects and Engineers Professional Liability - Policies are offered
         to architects and engineers and consultants in the fields of
         architecture; civil, electrical, mechanical, structural and process
         engineering; construction/property management; design/build services;
         laboratory testing and surveying. Project professional liability
         policies are also offered for architect and engineer design teams and
         owner controlled wrap-ups. All policies are written on a claims-made
         basis.

  -      Environmental Asbestos and/or Lead Consultants Professional Liability -
         Policies are offered to consultants involved in providing services such
         as environmental assessments, design/build services, asbestos or lead
         consulting, remedial investigations and feasibility studies, and
         storage tank consulting. Coverage is provided for liability arising out
         of the acts, errors or omissions of a consultant in the performance of
         professional services. All professional liability coverages are written
         on a claims-made basis.

Owners and Lenders

  -      Hazardous Waste Storage and Treatment Pollution Liability - Policies
         are offered on a claims-made basis in response to the insurance
         requirements of the Environmental Protection Agency in connection with
         facilities subject to the Resource Conservation and Recovery Act of
         1976 ("RCRA").

  -      Site Specific Pollution Liability - These policies cover pollution
         claims arising or emanating from a specific site and are provided on a
         claims-made basis. Comprehensive site evaluations are required prior to
         providing coverage for any site.

  -      Lenders Pollution Liability - Policies are offered to financial
         institutions for pollution occurring at property owned or controlled by
         the institution as a result of foreclosure or otherwise. Lender
         pollution liability coverage is offered on a claims-made basis.

Products Liability

  -      Products Liability - Policies are offered on a claims-made or
         occurrence basis to manufacturers for a variety of products including
         chemicals, fertilizers, pesticides, pollution control devices, storage
         tanks and other.

                                       4
<PAGE>   5
The Company customizes many of its insurance policies to suit the individual
needs of its insureds. Combined policies insuring multiple exposures under one
policy form and one combined policy limit are available.

                                 ACSTAR Bonding

Surety bonds are written for general, specialty trade, environmental, asbestos
and lead abatement contractors. The Company also offers a wide variety of
miscellaneous bonds. Many bonds are supported by various levels of collateral
based upon the financial condition of the customer.

The Company often requires cash or irrevocable letters of credit to
collateralize a portion of most bonds issued. In addition, the Company will only
accept irrevocable letters of credit from financial institutions which have a
rating of C "sound credit risk" or higher as determined by Thomson BankWatch,
Inc. However, no assurance can be made that such financial institutions will
maintain their financial strength and, thus, that funds guaranteed under letters
of credit will be available, if needed, to offset any potential future claims.

The Company provides the following types of bonds:

  -      Payment and performance bonds - Bonds are provided for general building
         and specialty trade contractors, environmental remediation and asbestos
         abatement contractors and consultants, lead abatement contractors and
         solid waste disposal contractors. A payment and performance bond
         guarantees satisfactory performance and completion of the contractor's
         work and payment of the contractor's debts and obligations relating to
         the performance of the contract covered by the bond.

  -      Closure and post-closure bonds - Bonds are provided for owners of solid
         and hazardous waste landfills as required to meet certain requirements
         under RCRA and remediation bonds in connection with the Comprehensive
         Environmental Response, Compensation and Liability Act of 1980
         ("CERCLA"). Closure bonds usually guarantee that a property owner will
         restore property to a specified level or condition. Post-closure bonds
         guarantee cultivation and maintenance of a closed site.

  -      Supply and other specialty bonds - Bonds are provided for contractors,
         manufacturers and other owners in their normal course of operations,
         usually to guaranty the supply of equipment and material.

  -      Miscellaneous surety, license, permit, self insurer, supersedeas and
         other bonds - Miscellaneous bonds are provided for applicants based on
         those requirements specified in the bond form and the applicant's
         financial strength.

The underwriting department and management are responsible for the development
of new insurance products and enhancements. Underwriting profitability is
enhanced by the creation of niche products focused on classes of business which
traditionally have provided underwriting profits.

Insurance and Bonding Performance Ratios

The following table sets forth the combined ratios of the Company, prepared in
accordance with generally accepted accounting principles and statutory
accounting principles prescribed or permitted by state insurance authorities.
The combined ratio is a traditional measure of underwriting profitability. When
the combined ratio is under 100%, underwriting results are generally considered
profitable. Conversely, when the combined ratio is over 100%, underwriting
results are considered unprofitable. The combined ratio does not reflect
investment income, federal income taxes or other non-operating income or
expense.

<TABLE>
<CAPTION>
                                                                  Year
                                                            Ended December 31,     
                                                      -------------------------------
                                                      1998         1997          1996
                                                      ----         ----          ----
<S>                                                   <C>          <C>           <C>
GAAP Ratios:
    Loss ratio                                        19.6%        28.8%         30.0%
    Expense ratio                                     51.8         48.0          43.5
                                                      ----         ----          ----
    GAAP combined ratio                               71.4         76.8          73.5
                                                      ====         ====          ====
Statutory Ratios:
   Loss ratio                                         19.9         29.5          30.5
   Expense ratio                                      59.2         45.0          42.7
                                                      ----         ----          ----
   Statutory combined ratio                           79.1%        74.5%         73.2%
                                                      ====         ====          ====
</TABLE>

                                       5
<PAGE>   6
The increase in the combined statutory ratio over the past three years results
primarily from the decline in premiums offset by the release of reserves on
older underwriting years. See Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

Underwriting

The Company's underwriting practices rely heavily upon the knowledge base which
it has developed in over forty-nine years of construction contracting.
Accordingly, ACMAT, in addition to its construction contracting operations,
provides risk evaluation, loss adjustment, underwriting, claims handling and
monitoring services for its insurance subsidiaries, United Coastal Insurance and
ACSTAR Insurance. Contractors seeking liability insurance and bonding through
the Company are carefully reviewed with respect to their past practices, claims
history and records. Other factors considered are the contractors' and
professionals' financial conditions, training techniques, safety procedures,
histories of violations, record keeping, supervisory qualifications and
experience. Historically, the Company has issued policies and bonds to fewer
than twenty-five percent of its applicants.

Underwriting procedures for products liability insurance involve conducting an
in-depth review of the product that is being manufactured or distributed. Such
review involves examining an applicant's past record of recalls, claims history
and litigation.

The Company's underwriting and pricing strategy is designed to produce an
underwriting profit resulting in a Company-wide combined ratio well below 100%.
The Company has a conservative underwriting philosophy which, in the opinion of
management, is one of the primary reasons for the favorable loss ratios relative
to the property and casualty insurance industry over the last three years.

The Company continually monitors financial stability of contractors with surety
bonds outstanding. Work in progress reports and updated financial information
are reviewed by the Company to ensure that the contractor continues to meet the
underwriting guidelines.

Reinsurance

In the normal course of business, the Company assumes and cedes reinsurance with
other companies. Reinsurance ceded primarily represents excess of loss
reinsurance with companies with "A" ratings from the insurance rating
organization, A.M. Best Company, Inc. Such reinsurance is applicable on a per
policy basis generally to those policies with per occurrence limits in excess of
$2 million up to $10 million for liability and for individual surety bonds, the
Company reinsures through various layered excess of loss agreements up to $10
million on a $15.6 million bond. Reinsurance ceded also includes a facultative
reinsurance treaty which is applicable to excess policies written over a primary
policy issued by the Company for specific projects. Reinsurance is ceded to
limit losses from large exposures and to permit recovery of a portion of direct
losses; however, such a transfer does not relieve the originating insurer of its
liability. The Company participates in assumed quota share reinsurance
arrangements covering marine and property catastrophe risks with one of its
excess of loss reinsurers.

The availability and price of reinsurance fluctuates according to market
conditions. Depending on the availability and cost of reinsurance, the Company
may, from time to time, elect to cede greater or lesser portions of its
underwriting risk.

Claims

The Company directly handles substantially all claims of its insureds, except
that independent claims adjusters and/or counsel selected for their experience
and reputation in the locality of the claim are retained to conduct initial
fact-finding investigations. All decisions respecting payment of claims are made
by experienced employees of the Company.

Reserves for Losses and Loss Adjustment Expenses

Reserves for losses and loss adjustment expenses are estimates at any given
point in time of what the Company may have to ultimately pay on incurred losses,
including related settlement costs, based on facts and circumstances then known.
The Company also reviews its claims reporting patterns, past loss experience,
risk factors and current trends and considers their effect in the determination
of estimates of incurred but not reported losses. Ultimate losses and loss
adjustment expenses are affected by many factors which are difficult to predict,

                                       6
<PAGE>   7
such as claim severity and frequency, inflation levels and unexpected and
unfavorable judicial rulings. Reserves for surety claims also consider the
amount of collateral held as well as the financial strength of the contractor
and its indemnitors. Management believes that the reserves for losses and loss
adjustment expenses at December 31, 1998 are adequate to cover the unpaid
portion of the ultimate net cost of losses incurred through that date and
related adjustment expenses incurred, including losses incurred but not
reported.

Reserves for losses and loss adjustment expenses are established with respect to
both reported and incurred but not reported claims for insured risks. The amount
of loss reserves for reported claims is primarily based upon a case-by-case
evaluation of the type of risk involved, knowledge of the circumstances
surrounding each claim and the policy provisions relating to the type of claim.
In determining appropriate adjustments to reserves historical data is reviewed
and consideration is given to the anticipated impact of various factors such as
legal developments and economic conditions, including the effects of inflation.
Reserves are monitored and recomputed periodically using new information on
reported claims.

The following table sets forth a reconciliation of beginning and ending reserves
for losses and loss adjustment expenses for the periods indicated on a GAAP
basis for the business of the Company.

<TABLE>
<CAPTION>
                                           1998                   1997                   1996
                                           ----                   ----                   ----
<S>                                    <C>                    <C>                    <C>
Balance at January 1                   $ 48,900,713           $ 47,960,084           $ 45,235,311
 Less reinsurance recoverable             3,478,121              3,841,001              3,872,099
                                       ------------           ------------           ------------
 Net balance at January 1                45,422,592             44,119,083             41,363,212

Incurred related to:

          Current year                    4,508,667              5,176,030              7,137,183
          Prior years                    (2,321,939)              (838,778)            (1,167,203)
                                       ------------           ------------           ------------
Total incurred                            2,186,728              4,337,252              5,969,980

Payments related to:

          Current year                       18,260                 94,398                153,514
          Prior years                     6,700,114              2,939,345              3,060,595
                                       ------------           ------------           ------------
Total Payments                            6,718,374              3,033,743              3,214,109

Net balance at December 31               40,890,946             45,422,592             44,119,083
 Plus reinsurance recoverable             2,224,116              3,478,121              3,841,001
                                       ------------           ------------           ------------
 Balance at December 31                $ 43,115,062           $ 48,900,713           $ 47,960,084
                                       ============           ============           ============

</TABLE>


The decrease of incurred losses and loss adjustment expenses of prior years
represents a reallocation of reserves among accident years. There can be no
assurance, however, that the Company's reserves will be sufficient to cover
ultimate losses and loss adjustment expenses or that future adjustments to
losses and loss adjustment expense reserves will not be required.

The Company has no exposure to any asbestos or environmental claims associated
with general liability policies issued with the pre-1986 pollution exclusion.
Policies written with the exclusion are typically associated with mass tort
environmental and asbestos claims. The Company has never issued a policy with
the pre-1986 pollution exclusion. The Company's exposure to asbestos and
environmental liability claims is primarily limited to asbestos and
environmental liability insurance for contractors and consultants involved in
the remediation, removal, storage, treatment and/or disposal of environmental
and asbestos hazards.

As of December 31, 1998, 1997 and 1996 reserves for the combined losses and loss
adjustment expenses of the Company's insurance operations as determined in
accordance with accounting principles and practices prescribed or permitted by
insurance regulatory authorities ("Statutory basis reserves") were $49,758,263,
$57,723,399 and $59,968,945, respectively. As of December 31, 1998, 1997 and
1996 reserves determined in accordance with generally accepted accounting
principles ("GAAP basis reserves") were $43,115,062, $48,900,713 and
$47,960,084, respectively. The difference between the Statutory basis reserves
and the GAAP basis reserves 

                                       7
<PAGE>   8
result from the minimum statutory, or "Schedule P", loss reserves required to be
maintained by the Company's insurance subsidiaries, partially offset by the
netting of reinsurance recoverable against losses and loss adjustment expense
reserves for statutory purposes.

The following losses and loss adjustment expense reserve runoff table is for the
combined insurance operations of the Company's insurance subsidiaries. The data
for 1992 and prior periods are presented on a net basis in the reserve run-off
table. Restatement of prior periods is not practicable.

Each column shows the reserve held at the indicated calendar year-end and
cumulative data on payments and reestimated liabilities for that accident year
and all prior accident years making up that calendar year-end reserve.
Therefore, the redundancy (deficiency) is also a cumulative number for that year
and all prior years. It would not be appropriate to use this cumulative history
to project future performance.


<TABLE>
<CAPTION>
                                    1989      1990      1991      1992     1993      1994      1995      1996     1997      1998
                                    ----      ----      ----      ----     ----      ----      ----      ----     ----      ----
                                                                        (thousands)
<S>                               <C>       <C>       <C>       <C>      <C>       <C>       <C>       <C>      <C>       <C>
Liability for unpaid losses
 and loss adjustment expenses     15,626    21,378    26,234    29,240   30,437    36,726    41,363    44,119   45,423    40,891

Liability reestimated as of:

 One year later                   15,476    21,378    26,234    29,240   30,437    35,825    40,193    43,282   43,106  
 Two years later                  15,476    21,378    26,234    29,240   28,337    34,659    37,872    40,865           
 Three years later                15,476    21,378    26,234    26,000   27,170    29,913    35,354                     
 Four years later                 14,876    21,378    22,094    24,833   23,550    27,193                               
 Five years later                 14,876    16,642    20,927    22,284   20,880                                         
 Six years later                   6,622    15,475    18,841    19,914                                                  
 Seven years later                 5,455    13,394    16,932                                                            
 Eight years later                 4,411    12,845                                                                      
 Nine years later                  4,261                                                                                
                                                                                                                        
Cumulative Redundancy                                                                                                   
 (deficiency):                    11,365     8,533     9,302     9,326    9,557     9,533     6,009     3,256    2,317  
                                                                                                                        
Paid (cumulative) as of:                                                                                                
                                                                                                                        
 One year later                      565     1,357     3,216     6,142    1,560     2,361     3,067     2,942    6,703  
 Two years later                     743     4,067     8,699     7,574    3,655     4,582     5,256     8,951           
 Three years later                 2,140     8,954     9,576     8,603    5,022     6,412     8,922                     
 Four years later                  3,460    10,233    10,488     9,554    6,189     7,969                               
 Five years later                  3,924    10,554    10,816     9,818    6,869                                         
 Six years later                   4,010    10,858    10,856    10,034                                                  
 Seven years later                 4,012    10,874    10,949                                                            
 Eight years later                 4,011    10,874                                                                      
 Nine years later                  4,011                                                                                
                                                                                                                        
Gross liability - end of year                                            34,730    40,955    45,235    47,960   48,901    43,115
 Reinsurance recoverable                                                  4,293     4,229     3,872     3,841    3,478     2,224
                                                                         ------    ------    ------    ------   ------    ------
Net liability - end of year                                              30,437    36,726    41,363    44,119   45,423    40,891
</TABLE>

In 1995, the Company changed its method of reporting estimated liabilities for
claims-made policies which is reflected in the reserve run-off table. For
calendar years 1994 and prior, reserves associated with claims-made policies
were reported based on accident year basis consistent with the Company's
treatment in Schedule P to the Company's Statutory Annual Statement. At the
request of the Arizona Insurance Department, ("Department") the Company was
required to change its method of reporting in Schedule P to the Annual
Statement, reserve and payment data associated with claims-made policies to a
report year basis versus an accident year basis in order to comply with the
National Association of Insurance Commissioners ("NAIC") guidelines. The
Company's prior treatment of claims-made loss data on an accident basis was
approved by the Department during years prior to 1995. For its 1995 statutory
filing, the Company restated loss data reported in Schedule P to comply with the
Department's request. As a result of the change to Schedule P for claims-made
policies, the Company has also changed the method for reporting claims-made loss
payment data in the reserve run-off table to conform to a report year basis for
claims-made policies. Occurrence policies were and continue to be reported on an
accident year basis. The 1995 reestimated liabilities for each calendar year
have been restated to reflect the new method of reporting.

Because of the change in reporting loss data for claims-made policies from an
accident year basis to a report year basis, prior accident year reserves have
been moved forward to fall within the report year resulting in no change to
total reserve amounts or estimates. Management believes that the aggregate
reserves for losses and loss adjustment expenses for all accident years are
adequate.

                                       8
<PAGE>   9
IRIS Ratios

The National Association of Insurance Commissioners ("NAIC") has developed the
Insurance Regulatory Information System ("IRIS"), intended to assist state
insurance departments in executing their statutory mandates to oversee the
financial condition of insurance companies operating in their respective states.
IRIS identifies eleven industry ratios and specifies "usual values" for each
ratio. When an insurance company's ratio falls outside the "usual value," it is
designated an "unusual value," which event alerts state insurance departments to
potential problems. For the year ended December 31, 1998, none of the Company's
insurance subsidiaries' IRIS ratios were designated an "unusual value", except
for the change in net writings for United Coastal and the change in surplus and
the investment yield for both insurance companies. The change in net writings
for United Coastal was below the NAIC standard of 33% primarily due to a
continuing soft insurance marketplace and the Company's strategy to avoid
current unfavorable pricing. The investment yield for United Coastal is below
the NAIC standard of 4.5% primarily due to loss related to United Coastal's
share of losses from a limited partnership investment. The investment yield for
ACSTAR is above the NAIC standard of 10% primarily due to dividends received
from ACSTAR's investment in United Coastal. The decrease in surplus is greater
than 10% primarily due to dividends of $18,500,000 paid by United Coastal and
dividends of $6,390,000 paid by ACSTAR during 1998.

A.M. Best Ratings

A.M. Best ratings are indications of the solvency of an insurer based on an
analysis of the financial condition and operations of a company relative to the
industry in general. Occasionally, the requirement for an A.M. Best's-rated
insurer is a condition imposed upon the contractor by the party engaging the
contractor. Certain insurance brokers also restrict the business they will place
with insurers which are not A.M. Best's-rated. The 1998 Best letter ratings
range from A++ (superior) to F (in liquidation). United Coastal Insurance and
ACSTAR Insurance each have an A.M. Best's rating of A- (excellent).

Risk-Based Capital

Risk-based capital requirements are used as early warning tools by the National
Association of Insurance Commissioners and the states to identify companies that
require further regulatory action. The ratio for each of the Company's insurance
subsidiaries as of December 31, 1998 was significantly above the level which
might require regulatory action.

                               ACMAT CONTRACTING

General

The Company provides a broad range of general building construction and
coordinated interior contracting services. The Company began to offer asbestos
abatement services in the 1970's and the Company continues to be active in the
asbestos abatement field. The Company provides new and renovation general
construction and installs interiors for office buildings, retail establishments,
schools, colleges, churches, hospitals and other buildings. The Company's
general building construction and interior contracting is provided both in
connection with new buildings and in connection with the remodeling and
renovation of interiors of existing buildings usually under contracts with
building owners and building occupants. The Company provides a broad range of
coordinated interior contracting services, many of which are performed by
subcontractors.

Backlog

The following table sets forth the Company's backlog of unbilled contract
amounts, the total number of contracts and the number of contracts with unbilled
amounts in excess of $400,000 as of December 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                          December 31, 1998              December 31, 1997
                                                          -----------------              -----------------
<S>                                                       <C>                            <C>
Total Number of Contracts.                                       4                                 12
Total unbilled contract amounts.                              $6,000,000                       $4,800,000
Number of contracts with unbilled amounts in
excess of $400,000.                                              2                                 2
Aggregate unbilled amount of contracts in
excess of $400,000.                                           $5,900,000                       $4,000,000
</TABLE>


The Company estimates that all of the December 31, 1998 backlog will be
completed prior to December 31, 1999.

                                       9
<PAGE>   10
Materials

The Company purchases the materials it installs in the course of its
construction contracting operations from a number of suppliers. Most of the
Company's materials are standard building components which historically have
been readily available from several suppliers. Some components are manufactured
to the Company's specifications. Most of the materials used by the Company are
shipped directly to the job site by the manufacturer.

Contract Acquisition

The Company's work projects are obtained by lump sum fixed price bids, unit
prices or are negotiated. Contract prices are usually determined by competition
with other contractors.

Warranty

Each project usually contains a one-year warranty or guaranty period, wherein
the Company and its subcontractors warrant that the work is free from defects
and was performed in accordance with the plans and specifications. Occasionally,
the Company is required to make minor corrections or adjustments, but has never
incurred any significant costs in connection with any such work.

Asbestos Abatement Operations

Both the Company's insurance and construction contracting operations have
involved risks associated with asbestos. The Company has in the past insured and
continues to insure risks associated with asbestos abatement or containment
operations on both a claims-made and occurrence basis. Since harm from exposure
to asbestos fibers may not be detectable in humans for as much as thirty years,
losses under insurance contracts written on an occurrence basis may not be known
for some time.

The Company's construction contracting operations involve the removal of
asbestos. As asbestos containing materials deteriorate or become disturbed by
incidental or intentional contact, asbestos fibers may enter the air and can
circulate into the breathing zone of building occupants. Exposure to asbestos is
thought by some to be a cause of cancer. In the mid 1970's, the Company became
engaged in the removal of asbestos in addition to its other contracting
operations. Since that time, it has been engaged in hundreds of contracts
involving the removal of asbestos. Claims by non-employees related to asbestos
have been made against the Company from time to time and are pending and there
can be no assurance that claims will not be made in the future.

While the Company currently has claims pending against it by employees, the
Company believes that it is fully covered by workers' compensation insurance
with respect to any claims by current and former employees relating to asbestos
operations. The Company currently obtains its workers' compensation insurance in
those states in which it performs work either from state insurance funds or one
of several insurance companies designated in accordance with the Assigned Risk
Pool. The amount of workers' compensation insurance maintained varies from state
to state but is generally greater than the maximum recovery limits established
by law and is not subject to any aggregate policy limits. In the past, the
Company has received a number of asbestos-related claims from employees, all of
which have been fully covered by its workers' compensation insurance. The
Company believes, although no assurances can be given, that workers'
compensation insurance sufficient to cover all future claims will remain
available in accordance with applicable state laws.

                                    MARKETING

Insurance and Bonding

As an excess and surplus lines carrier, United Coastal Insurance markets its
policies through excess and surplus lines brokers only in those states in which
it is permitted to write coverage. Currently, United Coastal Insurance is
permitted to write excess and surplus lines insurance as a nonadmitted insurer
in forty-six states, the District of Columbia, Puerto Rico and the Virgin
Islands.

ACSTAR Insurance offers payment and performance bonds through carefully selected
insurance agents which specialize in the needs of contractors. All underwriting
approvals and issuance of policies and bonds are performed directly by the
Company's insurance subsidiaries.

                                       10
<PAGE>   11
The Company's insurance products are marketed in all 50 states primarily through
several of the largest insurance brokers, including J&H Marsh & McLennan, Willis
Corroon, AON, Inc. and Sedgwick.

ACMAT Contracting

The Company markets its construction contracting services directly to building
owners and building occupants. Project opportunities are brought to the
attention of the Company through various sources such as F. W. Dodge Company,
which publishes lists of projects available for bid, architects, owners, general
contractors, or engineers who are familiar with the Company. The Company also
depends upon repeat business and responses to the Company's advertising program
which is intended to emphasize ACMAT's packaged interior renovation capability.
ACMAT's sales force consists of its senior management and project managers, all
of whom function as construction consultants and work closely with owners,
tenants and architects.

                                   COMPETITION

Insurance and Bonding

The property and casualty insurance industry is highly competitive. The Company
competes with large national and smaller regional insurers in each state in
which it operates, as well as monoline specialty insurers. The Company's
principal competitors include certain insurance subsidiaries of American
International Group, Inc. ("AIG"), Reliance Insurance Group, Zurich Insurance
Group, Design Professionals Insurance Company, CNA Insurance Companies and
Lloyd's of London. Many of its competitors are larger and have greater financial
resources than the Company. Among other things, competition may take the form of
lower prices, broader coverage, greater product flexibility, higher quality
services or the insurer's rating by independent rating agencies. The Company
competes with admitted insurers, surplus line insurers, new forms of insurance
organizations such as risk retention groups, and alternative self-insurance
mechanisms.

Competition in the field of surety bonding is intense and many of the Company's
competitors are larger and have greater surplus than the Company, thereby
allowing them to provide bonds with higher limits than those which the Company
is able to provide. The Company's principal competitors include the St. Paul
Companies, Inc., Reliance Insurance Group, AIG, CNA and Frontier Insurance
Company. The Company's insurance subsidiaries hold primary and reinsurance
certificates of authority as acceptable sureties on Federal bonds as do
approximately 250 to 300 other surety companies. The certificates give the
Company an advantage over companies which are not certified by the United States
Treasury Department with respect to surety bonding on Federal projects in that
such certification has become a standard with respect to both Federal and other
bonds. Approximately one-half of the surety bonds written by the Company's
subsidiaries are required to be provided by a Treasury listed company. With
respect to other bonds, the Company faces competition from as many as 1,000
additional non-certified surety companies.

ACMAT Contracting

Competition in the interior construction business serviced by ACMAT generally is
intense. Historically, a majority of the Company's construction business was
performed on projects on which the Company had been in competition with other
contractors. The Company focuses its efforts on privately negotiated contracts
obtained through advertising and its reputation. Quality of service and pricing
are the Company's principal methods of competition.

The economic climate of the Northeast has increased the competitive pressure on
all aspects of the Company's contracting operations. The Company has responded
with marketing efforts seeking to obtain business when the Company's reputation
and experience allow it to privately negotiate contracts at prices which are
sufficiently profitable.

                                   REGULATION

The business of ACMAT's insurance subsidiaries is subject to comprehensive and
detailed regulation and supervision throughout the United States. The laws of
the various jurisdictions establish supervisory agencies with broad
administrative authority which includes, but is not limited to, the power to
regulate licenses, to transact business, trade practices, agent licensing,
policy forms, claim practices, underwriting practices, reserve requirements, the
form and content of required financial statements and the type and amounts of
investments permitted. The insurance companies are required to file detailed
annual reports with supervisory agencies in each of the jurisdictions in which
they do business, and their operations and accounts are subject to examination
by such agencies at regular intervals.

                                       11
<PAGE>   12
As a nonadmitted excess and surplus lines insurer, United Coastal Insurance is
not subject to the comparatively more extensive state regulations to which
ACSTAR Insurance is subject. The regulations and restrictions to which ACSTAR
Insurance and United Coastal Insurance are subject include provisions intended
to assure the solvency of ACSTAR Insurance and United Coastal Insurance and are
primarily for the protection of policyholders and loss claimants rather than for
the benefit of investors.

State insurance regulations impose certain restrictions upon the types of
investments that the Company's insurance subsidiaries can acquire and the
percentage of their capital or assets that may be placed in any particular
investment or type of investment. Certain states also require insurance
companies to furnish evidence of financial security by means of a deposit of
marketable securities with the state insurance regulatory authority. On December
31, 1998, the Company's insurance subsidiaries had securities with an aggregate
book value of approximately $10 million on deposit with various state regulatory
authorities.

The insurance subsidiaries of ACMAT are restricted as to the amount of cash
dividends they may pay. United Coastal Insurance is restricted by the Arizona
Insurance Holding Company Systems Act as to the amount of dividends it may pay
without the prior approval of the Arizona Department. During 1998, United
Coastal Insurance paid $18,500,000 in dividends. At January 1, 1999,
approximately $3,030,000 is available for the payment of dividends by United
Coastal Insurance in 1999 without the prior approval of the Arizona Insurance
Department.

Under applicable insurance regulations in its domicile state of Illinois, ACSTAR
Insurance is also restricted as to the amount of dividends it may pay. ACSTAR
may pay or declare a dividend only up to the amount of any available surplus
funds derived from realized net profits on its business, as determined in
accordance with statutory accounting principles. During 1998, ACSTAR paid
$6,980,000 in dividends to ACSTAR Holdings. At January 1, 1999, approximately
$7,700,000 is available for the payment of dividends by ACSTAR Insurance in 1999
without the prior approval of the Illinois Insurance Department.

New regulations and legislation are being proposed to limit damage awards, to
control plaintiffs' counsel fees, to bring the industry under regulation by the
federal government and to control premiums, policy terminations and other policy
terms. It is not possible to predict whether these proposals will be adopted or
their likely effect, if any, on the Company.

                                   INVESTMENTS

The Company's investment strategy is to maintain a conservative investment
policy by generally acquiring high quality securities, primarily bonds, with
fixed effective maturities of approximately three years or less. The investment
portfolio is well diversified and is in compliance with regulatory requirements.
The Company's bond portfolio is composed primarily of investments rated AA or
better by Standard and Poor's. Management has also decided to avoid long-term
investing at what management believes to be low long-term interest rates.

The Company's investment portfolio is subject to several risks including
interest rate and reinvestment risk. Fixed maturity security values generally
fluctuate inversely with movements in interest rates. The Company's corporate
and municipal bond investments may contain call and sinking fund features which
may result in early redemptions and the Company's mortgage-backed securities
investments held by the Company are subject to prepayment risk. Declines in
interest rates could cause early redemptions or prepayments which would require
the Company to reinvest at lower rates.

Investment securities are classified as held to maturity, available for sale or
trading. The Company currently classifies all investment securities as available
for sale. Investment securities available for sale are carried at fair value
and unrealized gains and losses are included in other comprehensive income, net
of estimated income taxes.

                                       12
<PAGE>   13
The Company invests primarily in tax-exempt securities as part of its strategy
to maximize after-tax income. Such strategy considers, among other factors, the
impact of the alternative minimum tax. The following table summaries the fair
value fixed maturity investments portfolio at December 31, 1998 and 1997
(dollars in thousands):

<TABLE>
<CAPTION>
                                                                             December 31,  
                                                    ----------------------------------------------------------        
                                                            1998                                1997     
                                                    -------------------------         ------------------------
                                                                       Percent                          Percent
                                                                        of                                of
                                                    Amount             Total          Amount             Total
                                                    ------             -----          ------             -----
<S>                                                <C>               <C>             <C>               <C>
Fixed maturities available for sale (1):
  U.S. government and government
     agencies and authorities                      $ 19,006             16.7%        $ 28,866             21.3%
   State and political subdivisions                  55,082             48.3           43,976             32.5
   Industrial and Miscellaneous                          --             --             15,137             11.2
   Mortgage-backed securities                        24,795             21.8           13,874             10.3
                                                   --------          -------         --------          -------
Total fixed maturities available for sale            98,883             86.8          101,853             75.3
Equity securities(2)                                  2,061              1.8            1,011               .7
Short-term investments (3)                           12,948             11.4           32,422             24.0
                                                   --------          -------         --------          -------
Total investments                                  $113,892            100.0%        $135,286            100.0%
                                                   ========          =======         ========          =======
</TABLE>


(1)      Fixed maturities available for sale are carried at fair value. Total
         cost of fixed maturities was approximately $98,128,000 at December 31,
         1998 and $101,524,000 at December 31, 1997.
(2)      Equity securities are carried at fair value. Total cost of equity
         securities was approximately $2,065,000 at December 31,1998 and
         $983,000 at December 31, 1997.
(3)      Short-term investments, consisting primarily of money market
         instruments maturing within one year are carried at cost which, along
         with accrued interest, approximates fair value.

The following table sets forth the fair value of fixed maturities in the fixed
maturity investment portfolio at December 31, 1998 and 1997 (dollars in
thousands):

<TABLE>
<CAPTION>
                                                                         December 31,
                                             -------------------------------------------------------------        
                                                        1998                                1997
                                             ----------------------------         ------------------------

                                                                 Percent                            Percent
                                                                   of                                  Of
                                             Amount               Total         Amount               Total
                                             ------               -----         ------               -----
<S>                                         <C>               <C>              <C>               <C>
Due in (1):
One year or less                            $ 19,805              20.0%        $ 46,296              45.5%
After one year through five years             72,805              73.6%          55,149              54.1
After five years through ten years             5,225               5.3%             408                .4
After ten years                                1,048               1.1%              --              --
                                            --------           --------        --------           -------
                                            $ 98,883             100.0%        $101,853             100.0%
                                            ========           ========        ========           =======
</TABLE>

         (1) Based on effective maturity dates. Actual maturities may differ
         because borrowers may have the right to call or prepay obligations with
         or without call or prepayment penalties.

The Company's insurance subsidiaries are subject to state laws and regulations
that require diversification of its investment portfolio and limit the amount of
investments in certain investment categories. Failure to comply with these laws
and regulations would cause non-conforming investments to be treated as
non-admitted assets for purposes of measuring statutory surplus and, in some
instances, would require divestiture. As of December 31, 1998, the Company's
investments complied with such laws and regulations.

                                       13
<PAGE>   14
Investment results for the years ended December 31, 1998, 1997 and 1996 are
shown in the following table (dollars in thousands):

<TABLE>
<CAPTION>
                                                         1998             1997              1996
                                                         ----             ----              ----
<S>                                                    <C>              <C>               <C>
                      Invested assets (1)              $126,371         $140,029          $139,282
                      Investment income (2)            $  6,138         $  6,505          $  6,536

                      Average yield                        4.86%            4.65%             4.69%
</TABLE>

(1)      Average of the aggregate invested amounts at the beginning and end of
         the period including cash and cash equivalents.
(2)      Investment income is net of investment expenses and does not include
         realized investment gains or losses or provision for income taxes.

The yields reflect the Company's investment strategy of acquiring high quality
tax-exempt securities with fixed effective maturities of approximately three
years or less. Invested assets are attributable to the net cash flow generated
by written premiums, cash collateral and the reinvestment of investment income
offset in part by cash used to repay debt and repurchase stock.

                            ENVIRONMENTAL COMPLIANCE

The Company does not expect that its compliance with federal, state or local
environmental laws or regulations will have any material effect upon its capital
expenditures, earnings or competitive position.

                                    EMPLOYEES

As of December 31, 1998, the Company employed approximately 40 persons, all in
the United States. None of its current employees are employed subject to
collective bargaining agreements. The Company believes that its relations with
all of its employees are excellent.

ITEM 2. PROPERTIES

The Company and its subsidiaries occupy a 7 story office building located at 233
Main Street, in New Britain, Connecticut. ACMAT leases approximately 40% of the
building to unaffiliated tenants. The office building is suitable and adequate
for ACMAT's current and future requirements.

ITEM 3. LEGAL PROCEEDINGS

The Company is a party to legal actions arising in the ordinary course of its
business. In management's opinion, the Company has adequate legal defenses
respecting those actions where the Company is a defendant, has appropriate
insurance reserves recorded, and does not believe that their settlement will
materially affect the Company's operations or financial position.

The Company has, together with many other defendants, been named as a defendant
in approximately 190 actions brought in Connecticut state courts by injured or
deceased individuals or their representatives based on product liability claims
relating to materials containing asbestos. No specific claims for monetary
damages are asserted in these actions. Although it is early in the litigation
process, the Company does not believe that its exposure in connection with these
cases is significant.

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

No matters were submitted to a vote of security holders during the fourth
quarter of 1998.

                                       14
<PAGE>   15
                                     PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

ACMAT's Class A Stock trades on the Nasdaq Stock Market under the symbol ACMTA.
The Common Stock trades on the over-the-counter market. The following table sets
forth the quarterly high and low closing prices of the Company's Common Stock
and Class A Stock as reported by Nasdaq.

<TABLE>
<CAPTION>
                                         1998                                   1997
                                 HIGH               LOW               HIGH              LOW
<S>                              <C>               <C>               <C>              <C>
COMMON STOCK
  1st Quarter                    21-1/4            21-1/4            20               20
  2nd Quarter                    21                21                20               20
  3rd Quarter                    21                21                21-1/2           20-1/2
  4th Quarter                    23                20-1/2            21               21

CLASS A STOCK
  1st Quarter                    17-7/8            15-3/8            16-1/4           14-1/4
  2nd Quarter                    15-3/4            15-1/8            16-1/2           15
  3rd Quarter                    16-1/2            14-9/16           19-3/4           15-1/2
  4th Quarter                    15-3/4            14-1/4            19-1/2           17
</TABLE>

No dividends have been paid in the past five years and there is no intention of
paying dividends in the near future. As of March 18, 1999, there were     Common
Stock shareholders of record and      Class A Stock shareholders of record.

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                               1998             1997            1996             1995              1994
                                               ----             ----            ----             ----              ----
<S>                                        <C>                 <C>           <C>               <C>              <C>
Revenues                                   $ 28,752,273        $33,552,135   $37,035,305       $41,857,398      $40,755,676
Total Assets                                146,126,465        176,208,762   184,359,566       180,402,238      168,494,814
Long-Term Debt                               37,200,000         48,212,727    35,807,419        40,127,590       43,405,266
Stockholders'  Equity                        37,622,926         39,577,739    49,702,404        37,587,259       38,004,935

Net Earnings                                  2,120,529          4,456,949     5,293,111         5,350,280        4,839,861
Basic Earnings Per Share                            .66               1.29          1.56              1.49             1.20
Diluted Earnings Per Share                          .65               1.12          1.22              1.17             1.18
</TABLE>

Note:  No cash dividends were paid during any of the periods above.

                                       15
<PAGE>   16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS

RESULTS OF OPERATIONS:
YEARS ENDED DECEMBER 31, 1998 AND 1997:

Earned Premiums

Earned premiums in 1998 were $10,962,663 compared to $15,045,844 in 1997. Net
written premiums were $8,203,617 in 1998 compared to $12,680,197 in 1997. The
decrease in earned premiums in 1998 reflects the 35% decrease in 1998 net
written premiums over 1997 net written premiums primarily due to a continuing
soft insurance market place and the Company's strategy to avoid current
unfavorable pricing in the Company's casualty operations. Variances in net
written premiums have historically occurred due to the fluctuations in size,
number and timing of bonds and policies bound by the Company. The Company plans
to maintain its existing pricing strategy and high level of service.

Contract Revenues

Contract revenues were $12,139,924 in 1998 compared to $10,056,322 in 1997. The
increase in contract revenues reflects the Company's securement of an $11
million project in July 1998 which will be completed in August of 1999.
Construction revenue is difficult to predict in 1999 and depends greatly on the
successful securement of contracts bid. The Company's construction backlog at
December 31, 1998 was approximately $6,000,000 compared to $4,800,000 at
December 31, 1997.

Investment Income, Net

Net investment income was $6,138,105 in 1998 compared to $6,504,716 in 1997,
representing effective yields of 4.86% and 4.65%, respectively. The decrease in
investment income in 1998 over 1997 was due primarily to a decrease in total
invested assets. Invested assets, including cash and cash equivalents, were
$116,198,344 and $137,381,669 at December 31, 1998 and 1997, respectively. The
decrease in invested assets is attributable to the net cash flow used to
purchase stock, repay debt, return cash collateral and pay claims offset by net
cash flow generated from written premiums and the reinvestment of investment
income.

Net Realized Capital Gains

Realized capital gains from the sale of investments during 1998 were $266,169
compared to realized capital gains of $282,667 in 1997.

Other Income

Other income (expense) was ($754,588) in 1998 compared to $1,662,586 in 1997.
The fluctuation in other income (expense) is due to a loss of approximately
$1,400,000 for the Company's share of losses from a limited partnership in 1998
which compares to a gain of approximately $965,000 in 1997. The limited
partnership invests in small cap equities and incurred losses in 1998 due to
volatility in the small cap market. The Company sold its investment in the
limited partnership on December 31, 1998.

Cost of Contract Revenues

Cost of contract revenues were $11,635,879 in 1998 compared to $9,331,103 in
1997. The increase in cost of contract revenues during 1998 compared to 1997 is
consistent with the increase in contract revenues. The gross profit margin on
construction contracts was 4.2% and 7.2% in 1998 and 1997, respectively. Gross
margins fluctuate each year based upon the profitability of specific projects.
The decrease in the 1998 profit margin was due primarily to losses on two
projects which were completed in 1998. Cost of contract revenues vary from
period to period as a function of contract revenues (See Contract Revenues).

                                       16
<PAGE>   17
Losses and Loss Adjustment Expenses

Losses and loss adjustment expenses were $2,186,728 in 1998 compared to
$4,337,252 in 1997. The decreases in the losses and loss adjustment expenses are
attributable to the decline in earned premiums from 1997 to 1998 and the release
of approximately 1,150,000 of surety loss reserves which compares to a release
of approximately $176,500 in 1997. The reserves released represent the release
of reserves on older underwriting years which are no longer needed. Losses and
loss adjustment expense reserves represent management's estimate of the ultimate
cost of unpaid losses incurred for these periods relative to premiums earned.

Amortization of Policy Acquisition Costs

Amortization of policy acquisition costs was $2,112,857 in 1998 as compared to
$2,802,993 in 1997. The decrease in amortization of policy acquisition costs is
primarily attributable to the decrease in premiums earned. Policy acquisition
costs, primarily commissions, are deferred and amortized over the policy or bond
term.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $5,355,183 in 1998 compared to
$5,767,808 in 1997. The decrease in selling, general and administrative expenses
from 1998 to 1997 is due primarily to a decrease in bad debt expense.

Interest Expense

Interest expense decreased to $4,621,401 in 1998 from $5,116,414 in 1997. The
decrease in interest expense in 1998 is due to a decrease in long-term and
short-term debt.

Income Taxes

Income tax expense was $719,696 in 1998 compared to $1,739,616 in 1997,
representing effective Federal tax rates of 23.2% and 27.3%, respectively. The
decrease in the Federal effective tax rate is due to tax exempt interest income
and dividends subject to the dividend received deduction making up a larger
portion of taxable income.

RESULTS OF OPERATIONS:
YEARS ENDED DECEMBER 31, 1997 AND 1996:

Earned Premiums

Earned premiums in 1997 were $15,045,844 compared to $19,899,936 in 1996. Net
written premiums were $12,680,197 in 1997 compared to $18,041,488 in 1996. The
decrease in earned premiums in 1997 reflects the 30% decrease in 1997 net
written premiums over 1996 net written premiums primarily due to a continuing
soft insurance market place and the Company's strategy to avoid unfavorable
pricing in the Company's casualty operations. Variances in net written premiums
have historically occurred due to the fluctuations in size, number and timing of
bonds and policies bound by the Company.

Contract Revenues

Contract revenues were $10,056,322 in 1997 compared to $9,415,734 in 1996. The
Company's construction backlog at December 31, 1997 was approximately $4,800,000
compared to $8,700,000 at December 31, 1996.

Investment Income, Net

Net investment income was $6,504,716 in 1997 compared to $6,535,572 in 1996,
representing effective yields of 4.65% and 4.69%, respectively. Invested assets,
including cash and cash equivalents, were $137,381,669 and $142,677,985 at
December 31, 1997 and 1996, respectively. The decrease in invested assets was
attributable to the net cash flow used to purchase stock and repay debt offset
in part by written premiums, cash collateral and the reinvestment of investment
income offset by the purchase of stock and the repayment of debt.

                                       17
<PAGE>   18
Net Realized Capital Gains

Realized capital gains from the sale of investments during 1997 were $282,667
compared to realized capital gains of $257,774 in 1996.

Other Income

Other income was $1,662,586 in 1997 compared to $926,289 in 1996. The increase
in other income reflects earnings of $965,845 from the limited partnership
investment in 1997.

Cost of Contract Revenues

Cost of contract revenues were $9,331,103 in 1997 compared to $8,396,344 in
1996. The increase in cost of contract revenues during 1997 compared to 1996
reflects the increase in contract revenues. Costs of contract revenues vary from
period to period as a function of contract revenues (See Contract Revenues).

Losses and Loss Adjustment Expenses

Losses and loss adjustment expenses were $4,337,252 in 1997 compared to
$5,969,980 in 1996. The decreases in the losses and loss adjustment expenses are
attributable to the decline in earned premiums from 1996 to 1997. Losses and
loss adjustment expense reserves represent management's estimate of the ultimate
cost of unpaid losses incurred for these periods relative to premiums earned.

Amortization of Policy Acquisition Costs

Amortization of policy acquisition costs was $2,802,993 in 1997 as compared to
$3,617,308 in 1996. Policy acquisition costs, primarily commissions, are
deferred and amortized over the policy or bond term.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $5,767,808 in 1997 compared to
$5,610,176 in 1996. The increase in selling, general and administrative expenses
from 1997 to 1996 reflects an increase in the bad debts expense.

Interest Expense

Interest expense has increased to $5,116,414 in 1997 from $4,946,418 in 1996.
The increase in interest expense in 1997 was due primarily to an increase in
long-term debt issued to purchase stock offset in part by a decrease in
short-term debt.

Income Taxes

Income tax expense was $1,739,616 in 1997 compared to $2,313,828 in 1996,
representing effective Federal tax rates of 27.3% and 26.5%, respectively. The
Federal effective tax rate fluctuates according to the mix of tax exempt and
taxable securities held by the Company.

RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES:

Reserves for losses and loss adjustment expenses are established with respect to
both reported and incurred but not reported claims for insured risks. The amount
of loss reserves for reported claims is primarily based upon a case-by-case
evaluation of the type of risk involved, knowledge of the circumstances
surrounding each claim and the policy provisions relating to the type of claim.
As part of the reserving process, historical data is reviewed and consideration
is given to the anticipated impact of various factors such as legal developments
and economic conditions, including the effects of inflation. Reserves are
monitored and evaluated periodically using current information on reported
claims.

                                       18
<PAGE>   19

Management believes that the reserves for losses and loss adjustment expenses at
December 31, 1998 are adequate to cover the unpaid portion of the ultimate net
cost of losses and loss adjustment expenses, including losses incurred but not
reported. Reserves for losses and loss adjustment expenses are estimates at any
given point in time of what the Company may have to pay ultimately on incurred
losses, including related settlement costs based on facts and circumstances then
known. The Company also reviews its claims reporting patterns, past loss
experience, risk factors and current trends and considers their effect in the
determination of estimates of incurred but not reported reserves. Ultimate
losses and loss adjustment expenses are affected by many factors which are
difficult to predict, such as claim severity and frequency, inflation levels and
unexpected and unfavorable judicial rulings. Reserves for surety claims also
consider the amount of collateral held as well as the financial strength of the
principal and its indemnitors.

The combined ratio is one means of measuring the underwriting experience of a
property and casualty insurer. The combined ratio, consisting of the ratio of
losses and loss adjustment expenses to premiums earned (the "loss ratio") plus
the ratio of underwriting expenses to premiums written (the "expense ratio")
reflects relative underwriting profit or loss. The Company's insurance
subsidiaries' loss ratios under generally accepted accounting principles
("GAAP") were 19.6%, 28.8% and 30.0% for the years ended December 31, 1998, 1997
and 1996, respectively. These loss ratios are below industry averages and are
believed to be the result of conservative underwriting. The decrease in the loss
ratios is due to the release of Surety reserves in 1998 and 1997. There can be
no assurance that such loss ratios can continue. The Company's insurance
subsidiaries' expense ratios under GAAP were 51.8%, 48.0% and 43.5% for the
years ended December 31, 1998, 1997 and 1996, respectively. The increase in the
expense ratios is due to the decline in premiums. The Company's insurance
subsidiaries' combined ratios under GAAP were 71.4%, 76.8% and 73.5% for the
years ended December 31, 1998, 1997 and 1996, respectively. The decrease in the
1998 combined ratio results primarily from the reduction in loss reserves offset
in part by the decline in premiums.

LIQUIDITY AND CAPITAL RESOURCES:

The Company internally generates sufficient funds for its current operations and
maintains a relatively high degree of liquidity in its investment portfolio. The
primary sources of funds to meet the demands of claim settlements and operating
expenses are premium collections, investment earnings and maturing investments.
The Company has no material commitments for capital expenditures and, in the
opinion of management, has adequate sources of liquidity to fund its operations
over the next 12 months.

ACMAT, exclusive of its subsidiaries, has incurred negative cash flows from
operating activities primarily because of interest expense related to notes
payable and long-term debt incurred by ACMAT to acquire and capitalize its
insurance subsidiaries and to repurchase Company stock. ACMAT has also incurred
negative working capital as a result of holding short-term debt related to its
operations.

ACMAT's principal sources of funds are dividends from its wholly owned
subsidiaries, intercompany and short-term borrowings, insurance underwriting
fees from its subsidiaries, construction contracting operations and rental
income. Management believes that these sources of funds are adequate to serve
its indebtedness. ACMAT has recently utilized short-term borrowings to
repurchase its stock. ACMAT has also relied on dividends from its insurance
subsidiaries to repay debt.

The Company used cash flow from other sources to support operations in the
amount of $530,977 in 1998, compared to cash flow realized from operations of
$5,585,329 in 1997 and $14,260,264 in 1996. The reduction in cash flows from
operations is due primarily to the return of cash collateral and the payment of
claims. Substantially all of the Company's cash flow is used to repay short-term
and long-term debt, repurchase stock and purchase investments. Purchases of
investments are made based upon excess cash available after the payment of
losses and loss adjustment expenses and other operating and non-operating
expenses. The Company's short term investment strategy coincides with the
relatively short maturity of its liabilities which are comprised primarily of
reserves for losses covered by claims-made insurance policies, reserves related
to surety bonds and collateral held for surety obligations.

Net cash provided by investing activities was $21,326,746 in 1998, and
$4,993,298 in 1997. Net cash used for investing activities amounted to
$11,392,397 in 1996.

                                       19
<PAGE>   20
The terms of the Company's note agreements contain limitations on payment of
cash dividends, re-acquisition of shares, borrowings and investments and require
maintenance of specified ratios and minimum net worth levels, including cross
default provisions. The payment of future cash dividends and the re-acquisition
of shares are restricted each to amounts of an available fund ("Available
Fund"). The Available Fund is a cumulative fund which is increased each year by
20% of the Consolidated Net Earnings (as defined). The Company is in compliance
with all covenants at December 31, 1998, except for the ratio of Earnings Before
Income Taxes, Depreciation and Amortization to Fixed Charges. The Company has
received a waiver for this covenant.

The Company maintains a short-term unsecured bank credit line of $10 million to
fund interim cash requirements. There were no borrowings outstanding under this
line of credit as of December 31, 1998. Effective December 23, 1998, the Company
obtained a $5,000,000, five-year, term loan which is repayable in quarterly
installments commencing March 1, 1999. Portions of the proceeds of such term
loan were applied to the repayment of term debt and to the reduction of the
Company's short-term credit line.

During 1998, the Company purchased, in the open market and privately negotiated
transactions, 4,769 shares of its Common Stock at an average price of $20.65.
The Company also purchased, in open market and privately negotiated
transactions, 342,366 shares of its Class A Stock at an average price of $15.10
per share.

The Company's principal source of cash for repayment of long-term debt is
dividends from its two insurance companies. During 1998, ACMAT received
$18,850,000 as dividends from its subsidiaries. Under applicable insurance
regulations, ACMAT's insurance subsidiaries are restricted as to the amount of
dividends they may pay to their respective holding companies, without the prior
approval of their domestic state insurance department. For 1999, the amount of
dividends ACMAT's insurance subsidiaries may pay, without prior approval of
their domestic state insurance departments, is limited to approximately
$10,730,000.

In 1999, the Company anticipates that internally generated funds and short-term
borrowings will be utilized for repayment of long-term debt. Principal
repayments on long-term debt is scheduled to be approximately $1,560,000 in
1999.

YEAR 2000 ISSUE

There has been significant public discussion in recent years of the "Year 2000"
issue, which relates to the potential inability of computer programs and systems
to adequately store and process data after December 31, 1999, due to the
inability of such programs and systems to identify correct dates subsequent to
December 31, 1999.

In 1997, the Company began to address the Year 2000 issue. The Company's
financial and operational computer and software systems are approximately 60%
compliant, with all systems expected to be compliant and tested by June 30,
1999. The total cost of the project is estimated to be less than $100,000 and is
being funded through operating cash flows. Management believes that these
systems will be suitable for continued use into and beyond the year 2000. If for
any reason these systems are not suitable for such use, the Year 2000 issue
could have a material adverse impact on the Company's ability to meet financial
and reporting requirements and to support its insurance operations.

The Company's Year 2000 review includes an assessment of "embedded chip" systems
associated with its end-user computing hardware and software (including personal
computers, spreadsheets, word processing and other personal and work group
applications), its corporate facilities (such as security systems, elevators and
climate control systems) and its office equipment (including telephones, fax
machines and similar equipment). The Company is continuing to identify potential
problems associated with its embedded chip systems and to develop corrective
plans to avoid or mitigate such potential problems. Where appropriate, the
Company intends to upgrade or replace non-compliant embedded chip systems to
avoid potential Year 2000 problems. The Company anticipates that the deployment
of corrected systems for its "embedded chip" technology will be completed during
the second quarter of 1999.

The Company is reviewing certain suppliers, business partners, customers and
other parties to determine the extent to which the Company may be vulnerable to
the failure of these parties to address and correct their own Year 2000
problems. However, there can be no guarantee that the systems of other companies
that support the Company's operations will be timely converted or that a failure
by these companies to correct their Year 2000 problems will not have a material
adverse effect on the Company.


                                       20
<PAGE>   21

The Company's Year 2000 Review is intended to reduce the level of uncertainty
associated with the Year 2000 issue. As part of this review, the Company plans
to develop contingency plans to address and mitigate the potential impact of
problems that might surface with the approach of the millennium. In light of the
current stage of the Company's review of its core financial and operational
systems and its "embedded chip" technology, the Company is developing
contingency plans that focus on the potential interruption of support services
provided to the Company by business affiliates or public authorities due to
problems these parties may experience in connection with the Year 2000 issue.
The Company intends to explore these and other "worst case" scenarios in the
coming months to anticipate and limit, wherever possible, the potential impact
of any such scenario on the Company's insurance operations or financial
condition. These plans will include identifying alternate suppliers and vendors,
conducting staff training and developing alternative communication plans.

The Company has made changes in insurance coverage it currently markets in light
of the Year 2000 issue. In the past, judicial interpretations have expanded the
coverage of insurance policies, including those regarding pollution and other
environmental exposures, beyond the scope anticipated by insurers. The Company
will continue to review its reserves in light of evolving developments relating
to the Year 2000 issue.

The dates on which the Company believes that the various components of its Year
2000 review will be completed are based on management's best estimates, which,
in turn, are based upon numerous assumptions regarding future events, including
the continued availability of certain resources, third-party compliance plans
and other factors. As a result, there can be no guarantee that the Company's
schedule of completion dates will be realized or that there will not be
increased costs associated with the implementation of the Year 2000 review. Due
to the general uncertainty inherent in the Year 2000 issue, resulting in part
from the uncertainty of the Year 2000 readiness of third-parties, the Company
cannot assure its ability to timely and cost-effectively resolve problems
associated with the Year 2000 issue that may effect its operations and business
or expose it to third-party liability.

REGULATORY ENVIRONMENT

Risk-based capital requirements are used as early warning tools by the National
Association of Insurance Commissioners and the states to identify companies that
require further regulatory action. The ratio for each of the Company's insurance
subsidiaries as of December 31, 1998 was significantly above the level which
might require regulatory action.

ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCUSSIONS ABOUT MARKET RISK

MARKET RISK

Market risk is the risk of loss arising from adverse changes in market rates and
prices, such as interest rates, foreign currency exchange rates, and other
relevant market rate or price changes. Market risk is directly influenced by the
volatility and liquidity in the markets in which the related underlying assets
are traded. The following is a discussion of the Company's primary market risk
exposures and how those exposures are currently managed as of December 31, 1998.
The Company's market risk sensitive instruments are entered into for purposes
other than trading.

The carrying value of the Company's investment portfolio as of December 31, 1998
was $113,892,112, 87% of which is invested in fixed maturity securities. The
primary market risk to the investment portfolio is interest rate risk associated
with investments in fixed maturity securities. The Company's exposure to equity
price risk and foreign exchange risk is not significant. The Company has no
direct commodity risk.

For the Company's investment portfolio, there were no significant changes in the
Company's primary market risk exposures or in how those exposures are managed
compared to the year December 31, 1997. The Company does not anticipate
significant changes in the Company's primary market risk exposures or in how
those exposures are managed in future reporting periods based upon what is known
or expected to be in effect in future reporting periods.

The primary market risk for all of the Company's long-term debt is interest rate
risk at the time of refinancing. As the majority of the Company's debt is fixed
rate debt, the Company's exposure to interest rate risk in its long-term debt is
not significant. The Company will continue to monitor the interest rate
environment and to evaluate refinancing opportunities as the maturity dates
approach.

SENSITIVITY ANALYSIS

Sensitivity analysis is defined as the measurement of potential loss in future
earnings, fair values or cash flows of market sensitive instruments resulting
from one or more selected hypothetical changes in interest rates and other
market rates or prices over a selected time. In the Company's sensitivity
analysis model, a hypothetical change in market rates is selected that is
expected to reflect reasonably possible near-term changes in those rates. The
term "near term" means a period of time going forward up to one year from the
date of the consolidated financial statements.

In this sensitivity analysis model, the Company uses fair values to measure its
potential loss. The sensitivity analysis model includes the following financial
instruments: fixed maturities, interest-bearing non-redeemable preferred stocks,
short-term securities, cash, investment income accrued, and long-term debt. The
primary market risk to the Company's market sensitive instruments is interest
rate risk. The sensitivity analysis model uses a 100 basis point change in
interest rates to measure the hypothetical change in fair value of financial
instruments included in the model.

For invested assets, duration modeling is used to calculate changes in fair
values. Durations on invested assets are adjusted for call, put and interest
rate reset features. Duration on tax exempt securities is adjusted for the fact
that the yield on such securities is less sensitive to changes in interest rates
compared to Treasury securities. Invested asset portfolio durations are
calculated on a market value weighted basis, including accrued investment
income, using holdings as of December 31, 1998.

The sensitivity analysis model used by the Company produces a loss in fair value
of market sensitive instruments of $1.7 million based on a 100 basis point
increase in interest rates as of December 31, 1998, which is not considered
material . This loss of value only reflects the impact of an interest rate
increase on the fair value of the Company's financial instruments, which
constitute approximately 78% of total assets. As a result, the loss value
excludes a significant portion of the Company's consolidated balance sheet which
would materially mitigate the impact of the loss in fair value associated with a
100 basis point increase in interest rates.

For example, certain non-financial instruments, primarily insurance accounts for
which the fixed maturity portfolio's primary purpose is to fund future claims
payments related thereto, are not reflected in the development of the above loss
value. These non-financial instruments include premium balances receivable,
reinsurance recoverables, claims and claim adjustment expense reserves and
unearned premium reserves.





                                       21
<PAGE>   22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements and Schedules

ACMAT Corporation and Subsidiaries:

The following Consolidated Financial Statements of the Company, related notes
and Independent Auditors' Report are included herein:

    Independent Auditors' Report

    Consolidated Statements of Earnings for the years ended December 31, 1998,
    1997 and 1996

    Consolidated Balance Sheets as of December 31, 1998 and 1997

    Consolidated Statements of Stockholders' Equity for the years ended December
    31, 1998, 1997 and 1996

    Consolidated Statements of Cash Flows for the years ended December 31, 1998,
    1997 and 1996

    Notes to Consolidated Financial Statements - December 31, 1998, 1997 and
    1996

    Consolidated Schedules included in Part II of this Report - Years ended
    December 31, 1998, 1997 and 1996:

                  I  -  Condensed Financial Information of Registrant
                  II -  Valuation and Qualifying Accounts and Reserves
                  V  -  Supplemental Information Concerning Property-Casualty
                         Insurance Operations

                                       22
<PAGE>   23
INDEPENDENT AUDITORS' REPORT


The Board of Directors
ACMAT Corporation:


We have audited the consolidated financial statements of ACMAT Corporation and
subsidiaries as listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we also have audited the financial
statement schedules as listed in the accompanying index. These consolidated
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules 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 financial position of ACMAT Corporation
and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998 in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.

KPMG LLP


Hartford, Connecticut                                              
February 26, 1999




                                       23
<PAGE>   24
                       ACMAT CORPORATION AND SUBSIDIARIES

Consolidated Statements of Earnings
Years Ended December 31, 1998, 1997 and 1996



<TABLE>
<CAPTION>
                                                                1998                    1997                  1996
                                                                ----                    ----                  ----
<S>                                                         <C>                      <C>                   <C>
Earned Premiums                                             $ 10,962,663             15,045,844            19,899,936
Contract Revenues                                             12,139,924             10,056,322             9,415,734
Investment Income, Net                                         6,138,105              6,504,716             6,535,572
Net Realized Capital Gains                                       266,169                282,667               257,774
Other Income (Expense)                                          (754,588)             1,662,586               926,289
                                                            ------------           ------------          ------------
                                                              28,752,273             33,552,135            37,035,305

Losses and Loss Adjustment Expenses                            2,186,728              4,337,252             5,969,980
Cost of Contract Revenues                                     11,635,879              9,331,103             8,396,344
Amortization of Policy Acquisition Costs                       2,112,857              2,802,993             3,617,308
Selling, General and Administrative Expenses                   5,355,183              5,767,808             5,610,176
Interest Expense                                               4,621,401              5,116,414             4,946,418
                                                            ------------           ------------          ------------
                                                              25,912,048             27,355,570            28,540,226
                                                            ------------           ------------          ------------

Earnings Before Income Taxes and Minority Interest             2,840,225              6,196,565             8,495,079

Income Taxes                                                     719,696              1,739,616             2,313,828
                                                            ------------           ------------          ------------

Earnings Before Minority Interest                              2,120,529              4,456,949             6,181,251

Minority Interest                                                     --                     --              (888,140)
                                                            ------------           ------------          ------------


Net Earnings                                                $  2,120,529              4,456,949             5,293,111
                                                            ============           ============          ============



Basic Earnings Per Share                                    $        .66                   1.29                  1.56
                                                            ------------           ------------          ------------

Diluted Earnings Per Share                                  $        .65                   1.12                  1.22
                                                            ------------           ------------          ------------
</TABLE>

See Notes to Consolidated Financial Statements.

                                       24
<PAGE>   25
                       ACMAT CORPORATION AND SUBSIDIARIES


Consolidated Balance Sheets
December 31, 1998 and 1997

<TABLE>
<CAPTION>
Assets                                                                      1998                  1997
                                                                            ----                  ----
<S>                                                                     <C>                   <C>
Investments:
 Fixed Maturities - Available for Sale at Fair Value
  (Cost of $98,128,192 in 1998 and $101,523,931 in 1997)                $ 98,882,751           101,852,980
 Equity Securities - Available for Sale at Fair Value
  (Cost of $2,065,262 in 1998 and $983,074 in 1997)                        2,061,448             1,010,927
 Short-term Investments, at Cost which Approximates Fair Value            12,947,913            32,422,313
                                                                        ------------          ------------
  Total Investments                                                      113,892,112           135,286,220

Cash and Cash Equivalents                                                  2,306,232             2,095,449
Accrued Interest Receivable                                                1,352,334             1,458,164
Receivables, Net of Allowance for Doubtful Accounts of
 $257,617 in 1998 and $309,746 in 1997                                     3,737,627             7,118,527
Reinsurance Recoverable                                                    2,224,116             3,478,121
Income Tax Refund Receivable                                                 207,380               564,829
Prepaid Expenses                                                             162,784               204,642
Deferred Income Taxes                                                      1,733,987             1,940,936
Limited Partnership Investment                                                    --             2,052,475
Property and Equipment, Net                                               12,894,191            13,179,337
Deferred Policy Acquisition Costs                                          1,550,089             2,078,405
Other Assets                                                               3,170,242             3,529,634
Intangibles, Net                                                           2,895,371             3,222,023
                                                                        ------------          ------------
                                                                        $146,126,465           176,208,762
                                                                        ============          ============
Liabilities & Stockholders' Equity
Notes Payable to Banks                                                  $         --             5,000,000
Accounts Payable                                                           3,200,965             3,188,554
Reserves for Losses and Loss Adjustment Expenses                          43,115,062            48,900,713
Unearned Premiums                                                          6,795,435             9,804,159
Collateral Held                                                           17,344,376            20,275,702
Other Accrued Liabilities                                                    847,701             1,249,168
Long-term Debt                                                            37,200,000            48,212,727
                                                                        ------------          ------------
 Total Liabilities                                                       108,503,539           136,631,023

Commitments and Contingencies

Stockholders' Equity:
  Common Stock (No Par Value; 3,500,000 Shares Authorized;
  592,088 and 596,857 Shares Issued and Outstanding)                         592,088               596,857
  Class A Stock (No Par Value; 10,000,000 Shares Authorized;
  2,460,808 and 2,712,174 Shares Issued and Outstanding)                   2,460,808             2,712,174
  Retained Earnings                                                       34,074,538            36,033,153
  Accumulated Other Comprehensive Income                                     495,492               235,555
                                                                        ------------          ------------
    Total Stockholders' Equity                                            37,622,926            39,577,739
                                                                        ------------          ------------


                                                                        $146,126,465           176,208,762
                                                                        ============          ============
</TABLE>

See Notes to Consolidated Financial Statements.

                                       25
<PAGE>   26
                       ACMAT CORPORATION AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity
December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>
                                                                                                                  
                                                      Common                                                      
                                                    stock par        Class A        Additional          Retained  
                                                      value         stock par         paid-in           earnings  
                                                                      value           capital
                                                    ----------      ----------      ----------          ---------
   
<S>                                                 <C>            <C>             <C>                <C>         
Balance as of December 31, 1995                      $642,464       2,665,836         1,921,100        31,601,383 
                                                                                                                  
Comprehensive income:                                                                                             
   Net unrealized losses on debt and equity                                                                       
   securities, net of reclassification
   adjustment                                               -               -                 -                 -
   Net earnings                                             -                -                -         5,293,111 
                                                                                                                  
Total comprehensive income                                                                                        
                                                                                                                  
Acquisition and retirement of 42,207                                                                              
   shares of Common Stock                            $(42,207)              -          (751,865)                -
Acquisition and retirement of 872,975                                                                             
   shares of Class A Stock                                  -        (872,975)      (10,633,162)                -
Issuance of 499,999 Shares of Class A                                                                             
   Stock                                                    -         499,999         4,499,991                 -
Issuance of 85,000 Shares of Class A                                                                              
   Stock pursuant to stock options                          -          85,000           644,150                 - 
Issuance of 1,111,000 Shares of                                                                                   
   Class A Stock                                            -       1,111,000        12,727,663                 - 
                                                     --------       ---------       -----------        ---------- 
Balance as of December 31, 1996                      $600,257       3,488,860         8,407,877        36,894,494 
                                                                                                                  
Comprehensive income:                                                                                             
   Net unrealized losses on debt and equity                                                                       
   securities, net of reclassification
   adjustment                                               -               -                 -                 -
   Net earnings                                             -               -                 -         4,456,949 
                                                                                                                  
Total comprehensive income                                                                                        
                                                                                                                  
Acquisition and retirement of                                                                                     
   3,400 shares of Common Stock                      $ (3,400)              -           (66,096)                - 
Acquisition and retirement of                                                                                     
   1,347,686 shares of Class A Stock                        -      (1,347,686)      (13,522,491)       (5,318,290)
Issuance of 450,000 shares                                                                                        
   of Class A Stock                                         -         450,000         4,050,000                 - 
Issuance of 121,000 shares of Class A Stock                                                                       
   pursuant to stock options                                -         121,000         1,130,710                   
                                                     --------       ---------       -----------        ---------- 
Balance as of December 31, 1997                      $596,857       2,712,174                 -        36,033,153 
                                                                                                                 
                                                                                                                  
Comprehensive income:                                                                                             
   Net unrealized appreciation of debt and                                                                        
   equity securities, net of reclassification
   adjustment                                               -               -                 -
   Net earnings                                             -               -                 -         2,120,529 
                                                                                                                  
Total comprehensive income                                                                                        
                                                                                                                  
Acquisition and retirement of                                                                                     
   4,769 shares of Common Stock                      $ (4,769)              -                 -           (93,697)
Acquisition and retirement of                                                                                     
   342,366 shares of Class A Stock                          -        (342,366)         (841,980)       (3,985,447)
Issuance of 91,000 shares of Class A Stock                                                                        
   pursuant to stock options                                -          91,000           841,980                 -  
                                                     --------       ---------       -----------        ---------- 
                                                                                                                - 
Balance as of December 31, 1998                      $592,088       2,460,808                 -        34,074,538 
                                                     ========       =========       ===========        ========== 
</TABLE>



<TABLE>
<CAPTION>
                                                       Accumulated
                                                          other             Total
                                                      comprehensive     stockholders'
                                                         income             equity
                                                      -------------     -------------
<S>                                                  <C>               <C>
Balance as of December 31, 1995                           756,476          37,587,259
                                                                        
Comprehensive income:                                                   
   Net unrealized losses on debt and equity                             
   securities, net of reclassification
     adjustment                                          (445,560)           (445,560)
     Net earnings                                               -           5,293,111
                                                                          -----------
Total comprehensive income                                                  4,847,551
                                                                        
Acquisition and retirement of 42,207                                    
   shares of Common Stock                                       -            (794,072)
Acquisition and retirement of 872,975                                   
   shares of Class A Stock                                      -         (11,506,137)
Issuance of 499,999 Shares of Class A                                   
   Stock                                                   -           4,999,990
Issuance of 85,000 Shares of Class A                                    
   Stock pursuant to stock options                              -             729,150
Issuance of 1,111,000 Shares of                                         
   Class A Stock                                                -          13,838,663
                                                         --------         -----------
Balance as of December 31, 1996                           310,916          49,702,404
                                                                        
Comprehensive income:                                                   
   Net unrealized losses on debt and equity                             
   securities, net of reclassification
     adjustment                                           (75,361)            (75,361)
     Net earnings                                                           4,456,949
                                                                          -----------
Total comprehensive income                                                  4,381,588
                                                                        
Acquisition and retirement of                                           
   3,400 shares of Common Stock                                 -             (69,496)
Acquisition and retirement of                                           
   1,347,686 shares of Class A Stock                            -         (20,188,467)
Issuance of 450,000 shares                                              
   of Class A Stock                                             -           4,500,000
Issuance of 121,000 shares of Class A Stock                             
   pursuant to stock options                                    -           1,251,710
                                                         --------         -----------
Balance as of December 31, 1997                           235,555          39,577,739
                                                                        
                                                                        
Comprehensive income:                                                   
   Net unrealized appreciation of debt and                              
   equity securities, net of reclassification
     adjustment                                           259,937             259,937
     Net earnings                                               -           2,120,529
                                                                          -----------
Total comprehensive income                                                  2,380,466
                                                                        
Acquisition and retirement of                                           
   4,769 shares of Common Stock                                 -             (98,466)
Acquisition and retirement of                                           
   342,366 shares of Class A Stock                              -          (5,169,793)
Issuance of 91,000 shares of Class A Stock                              
   pursuant to stock options                                    -             932,980
                                                         --------         -----------
                                                                        
Balance as of December 31, 1998                           495,492          37,622,926
                                                         ========         ===========
</TABLE>

See Notes to Consolidated Financial Statements.

                                       26
<PAGE>   27
                       ACMAT CORPORATION AND SUBSIDIARIES


Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996


<TABLE>
<CAPTION>
                                                                            1998                    1997                    1996
                                                                            ----                    ----                    ----
<S>                                                                    <C>                   <C>                    <C>
Cash Flows From Operating Activities:
   Net Earnings                                                         $  2,120,529              4,456,949              5,293,111
   Adjustments to Reconcile Net Earnings to Net
   Cash Provided by (Used for) Operating Activities:
      Depreciation and Amortization                                        1,412,004              1,506,013              1,787,061
      Minority Interests                                                          --                     --                888,140
      Net Realized Capital Gain                                             (266,169)              (282,667)              (257,774)
      Limited Partnership Investment                                       1,429,288               (966,315)                33,725
      Deferred Income Taxes                                                   73,041                383,771                (34,197)
   Changes In:
      Accrued Interest Receivable                                            105,830                109,597                663,227
      Receivables, Net                                                     3,380,900              1,263,063                640,844
      Reinsurance Recoverable                                              1,254,005                362,880                 31,098
      Deferred Policy Acquisition Costs                                      528,316                827,470                553,433
      Prepaid Expenses and Other Assets                                      951,605                351,384               (183,343)
      Accounts Payable and Other Liabilities                                (389,056)             1,159,290               (773,028)
      Collateral Held                                                     (2,931,326)            (1,554,864)             4,062,611
      Reserves for Losses and Loss Adjustment Expenses                    (5,785,651)               940,629              2,724,773
      Income Taxes                                                           594,431               (434,388)               791,554
      Unearned Premiums                                                   (3,008,724)            (2,537,483)            (1,960,971)
                                                                        ------------           ------------           ------------
          Net Cash Provided by (Used for) Operating Activities              (530,977)             5,585,329             14,260,264
                                                                        ------------           ------------           ------------

Cash Flows From Investing Activities:
   Proceeds From Investments Sold or Matured:
      Fixed Maturities - Sold                                             40,118,160             41,501,401             39,094,153
      Fixed Maturities - Matured                                          38,383,281             35,221,999             61,896,825
      Equity Securities                                                    1,022,466                774,349                298,568
      Short-Term Investments                                              79,604,384            155,255,106             95,826,099
   Purchases Of:
      Fixed Maturities                                                   (75,373,107)           (85,168,980)           (73,340,147)
      Equity Securities                                                   (2,060,000)            (1,727,812)              (255,262)
      Short-term Investments                                             (60,129,984)          (140,708,282)          (134,436,189)
   Capital Expenditures                                                     (238,454)              (154,483)              (140,838)
   Other                                                                          --                     --               (335,606)
                                                                        ------------           ------------           ------------
                                                                                                                                  
         Net Cash Provided by (Used for) Investing Activities             21,326,746              4,993,298            (11,392,397)
                                                                        ------------           ------------           ------------

Cash Flows From Financing Activities:
 Borrowings Under Line of Credit                                           7,000,000              5,000,000              9,200,000
 Repayments Under Line of Credit                                         (12,000,000)           (13,200,000)            (3,500,000)
 Repayments on Long-term Debt                                            (23,812,727)            (3,594,692)            (1,820,181)
 Issuance of Long-term Debt                                               12,800,000              8,500,000              2,500,000
 Issuance of Class A Stock                                                   696,000                882,250                560,000
 Payments for Subsidiaries' Stock                                                 --                     --               (440,625)
 Payments for Acquisition and Retirement of Stock                         (5,268,259)            (8,257,963)           (12,300,209)
                                                                        ------------           ------------           ------------
   Net Cash Used For Financing Activities                                (20,584,986)           (10,670,405)            (5,801,015)
                                                                        ------------           ------------           ------------

Net Increase (Decrease) in Cash and Cash Equivalents                         210,783                (91,778)            (2,933,148)

Cash and Cash Equivalents, Beginning of Year                               2,095,449              2,187,227              5,120,375
                                                                        ------------           ------------           ------------

Cash and Cash Equivalents, End of Year                                  $  2,306,232              2,095,449              2,187,227
                                                                        ============           ============           ============
</TABLE>

See Notes to Consolidated Financial Statements.

                                       27
<PAGE>   28
                       ACMAT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1998, 1997 AND 1996

(1)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        (a)  Principles of Consolidation

             The consolidated financial statements include ACMAT Corporation
             ("ACMAT" or the "Company"), its subsidiaries, AMINS, Inc., Geremia
             Electric Co., ACMAT of Texas, Inc., ACSTAR Holdings, Inc. ("ACSTAR
             Holdings") and ACSTAR Holdings' wholly-owned subsidiary, ACSTAR
             Insurance Company ("ACSTAR"); and United Coastal Insurance Company
             ("United Coastal Insurance").

             These consolidated financial statements have been prepared in
             conformity with generally accepted accounting principles ("GAAP").
             All significant intercompany accounts and transactions have been
             eliminated in consolidation. Certain re- classifications have been
             made to the 1997 and 1996 financial statements to conform to the
             classifications in 1998.

        (b)  Business

             ACMAT operates as an insurance holding company and as an interior
             contractor; designing, supplying, renovating and installing
             interiors for commercial, industrial and institutional buildings,
             including asbestos abatement contracting.

             ACMAT's Insurance Group includes United Coastal Insurance, ACSTAR
             and AMINS, Inc. United Coastal Insurance is an excess and surplus
             lines property and casualty insurer providing specialty general and
             environmental liability insurance to specialty trade and
             environmental contractors, property owners, storage and treatment
             facilities and allied professionals, as well as professional
             liability insurance to architects, engineers and consultants.
             ACSTAR is licensed as an admitted insurer in 49 states and the
             District of Columbia and provides surety bonding for specialty
             trade, environmental remediation and asbestos abatement
             contractors. AMINS, Inc. is an insurance agency which acts
             primarily as a general agent for ACSTAR and United Coastal
             Insurance. United Coastal Insurance participates in a number of
             reinsurance arrangements with other companies on a quota share
             basis. These arrangements primarily cover marine and other property
             catastrophic risks.

             During 1998, 1997 and 1996, customers who individually accounted
             for more than 10% of consolidated construction contracting revenue
             are as follows; in 1998 - three customers provided 52%, 19% and
             17%, respectively. in 1997 - four customers provided 28%, 21%, 19%
             and 11%, respectively; in 1996 - four customers provided 18%, 15%,
             14% and 10%, respectively. No customers accounted for more than 10%
             of the consolidated insurance revenues in any year.

        (c)  Investments

             Securities are classified in one of three categories, held to
             maturity, trading or available for sale. Debt securities for which
             the Company has the ability and intent to hold to maturity are
             classified as held to maturity and are stated at amortized cost.
             Securities bought in anticipation of short-term market movements,
             if any, are classified as trading securities and are carried at
             market value with unrealized gains or losses reflected in the
             statement of income. Securities that are not classified as either
             held-to maturity securities or trading securities are classified as
             available for sale and are carried at market value with unrealized
             gains or losses included in other comprehensive income, net of
             income taxes.

             The fair value of investment securities are based on quoted market
             prices. Premiums and discounts on debt securities are amortized
             into interest income over the term of the securities in a manner
             that approximates the interest method. Realized gains and losses on
             sales of securities are computed using the specific identification
             method. Any security which management believes has experienced a
             decline in value which is other than temporary is written down to
             its market value through a charge to income.

             Short-term investments, consisting primarily of money market
             instruments maturing within one year are carried at cost which,
             along with accrued interest, approximates fair value. Cash and cash
             equivalents include cash on hand and short-term highly liquid
             investments of maturities of three months or less when purchased.
             These investments are carried at cost plus accrued interest which
             approximates fair value.

         (d) Limited Partnership Investment

             The limited partnership investment represented an 11.2%
             participation in a joint venture, Grandview Partners, L.P., which
             invested primarily in small capitalization stocks traded on
             national market exchanges. The Company sold the Limited Partnership
             on December 31, 1998. The limited partnership investment was
             carried on the equity method of accounting in which the Company's
             share of the net income of the limited partnership was recognized
             as income in the Company's income statement and added to the
             carrying value of the investment and distributions received from
             the limited partnership are treated as a reduction of the carrying
             value of the investment.

                                       28
<PAGE>   29
                       ACMAT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         (e) Policy Acquisition Costs

             Policy acquisition costs, representing commissions and certain
             underwriting costs, are deferred and amortized on a straight-line
             basis over the policy term. During the years ended December 31,
             1998, 1997 and 1996, deferrable costs capitalized were $1,584,541,
             $1,975,523 and $3,063,875, respectively. The amortization of
             deferred policy acquisition costs charged to operations for the
             years ended December 31, 1998, 1997 and 1996 was $2,112,857,
             $2,802,993 and $3,617,308, respectively.

         (f) Property and Equipment

             Property and equipment are reported at depreciated cost.
             Depreciation is computed using the straight-line method at rates
             based upon the respective estimated useful lives of the assets.
             Maintenance and repairs are expensed as incurred.

         (g) Intangibles

             All intangibles are stated at amortized cost and are being
             amortized using the straight-line method. Intangibles include
             insurance operating licenses and goodwill, which represents the
             excess of cost over the fair market value of net assets acquired.
             These intangible assets are amortized over periods ranging from 15
             to 25 years.

         (h) Insurance Reserve Liabilities

             Reserves for losses and loss adjustment expenses are established
             with respect to both reported and incurred but not reported claims
             for insured risks. The amount of loss reserves for reported claims
             is primarily based upon a case-by-case evaluation of the type of
             risk involved, knowledge of the circumstances surrounding the claim
             and the policy provisions relating to the type of claim. As part of
             the reserving process, historical data are reviewed and
             consideration is given to the anticipated impact of various factors
             such as legal developments and economic conditions, including the
             effects of inflation. Reserves are monitored and recomputed
             periodically using new information on reported claims.

             Reserves for losses and loss adjustment expenses are estimates at
             any given point in time of what the Company may have to pay
             ultimately on incurred losses, including related settlement costs,
             based on facts and circumstances then known. The Company also
             reviews its claims reporting patterns, past loss experience, risk
             factors and current trends and considers their effect in the
             determination of estimates of incurred but not reported losses.
             Ultimate losses and loss adjustment expenses are affected by many
             factors which are difficult to predict, such as claim severity and
             frequency, inflation levels and unexpected and unfavorable judicial
             rulings. Reserves for surety claims also consider the amount of
             collateral held as well as the financial strength of the contractor
             and its indemnitors. Management believes that the reserves for
             losses and loss adjustment expenses are adequate to cover the
             unpaid portion of the ultimate net cost of losses and loss
             adjustment expenses incurred, including losses incurred but not
             reported.

         (i) Collateral Held

             The carrying amount of collateral held approximates its fair value
             because of the short maturity of these instruments. Collateral held
             represents cash and investments retained by the Company for surety
             bonds issued by the Company.

         (j) Reinsurance

             In the normal course of business, the Company assumes and cedes
             reinsurance with other companies. Reinsurance ceded primarily
             represents excess of loss reinsurance with companies with "A"
             ratings from the insurance rating organization, A.M. Best Company,
             Inc. Such reinsurance is applicable on a per policy basis generally
             to those policies with per occurrence limits in excess of $2
             million up to $10 million for liability and for individual surety
             bonds, the Company reinsures through various layered excess of loss
             agreements up to $10 million on a $15.6 million bond. Reinsurance
             ceded also includes a facultative reinsurance treaty which is
             applicable to excess policies written over a primary policy issued
             by the Company for specific projects. Reinsurance is ceded to limit
             losses from large exposures and to permit recovery of a portion of
             direct losses; however, such a transfer does not relieve the
             originating insurer of its liability. The Company participates in
             assumed quota share reinsurance arrangements covering marine and
             property catastrophe risks with one of its excess of loss
             reinsurers.

                                       29
<PAGE>   30
                       ACMAT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         Reinsurance recoverables include ceded reserves for losses and loss
         adjustment expenses. Ceded unearned premiums of $662,363 and $912,039
         at December 31, 1998 and 1997, respectively, are included in other
         assets. All reinsurance contracts maintained by the Company qualify as
         short-duration prospective contracts. A summary of reinsurance premiums
         written and earned is provided below:

<TABLE>
<CAPTION>
                                       Premiums Written                            Premiums Earned                     
                    -------------------------------------------     -------------------------------------------
                        1998             1997           1996            1998           1997              1996
                        ----             ----           ----            ----           ----              ----
<S>                 <C>              <C>             <C>             <C>             <C>             <C>
         Direct     $ 8,324,506      12,851,647      17,954,271      11,211,803      15,164,588      19,834,586
         Assumed        528,220         686,935       1,516,988         656,023       1,144,017       1,470,043
         Ceded         (649,109)       (858,385)     (1,429,771)       (905,163)     (1,262,761)     (1,404,693)
                    -----------     -----------     -----------     -----------     -----------     -----------
         Totals     $ 8,203,617      12,680,197      18,041,488      10,962,663      15,045,844      19,899,936
                    ===========     ===========     ===========     ===========     ===========     ===========
</TABLE>

         There were no reinsurance recoveries on ceded paid losses and loss
         adjustment expenses for the years ended December 31, 1998 and 1997.
         Reinsurance recoveries on ceded paid losses and loss adjustment
         expenses totaled approximately $98,000 for the year ended December 31,
         1996. Ceded incurred losses and loss adjustment expenses totaled
         $180,553, $364,015 and $421,408 for the years ended December 31, 1998,
         1997 and 1996, respectively.

     (k) Revenue Recognition

         Revenue on construction contracts is recorded using the percentage of
         completion method. Under this method revenues with respect to
         individual contracts are recognized in the proportion that costs
         incurred to date relate to total estimated costs. Revenues and cost
         estimates are subject to revision during the terms of the contracts,
         and any required adjustments are made in the periods in which the
         revisions become known. Provisions are made, where applicable, for the
         entire amount of anticipated future losses on contracts in progress.
         Claims are recorded as revenue at the time of settlement and profit
         incentives and change orders are included in revenues when their
         realization is reasonably assured. Selling, general and administrative
         expenses are not allocated to contracts.

         Insurance premiums are recognized over the coverage period. Unearned
         premiums represent the portion of premiums written that is applicable
         to the unexpired terms of policies in force, calculated on a prorata
         basis.

     (l) Income Taxes

         Deferred tax assets and liabilities are recognized for the future tax
         consequences attributable to differences between the financial
         statement carrying amounts of existing assets and liabilities and their
         respective tax bases. Deferred tax assets and liabilities are measured
         using enacted tax rates expected to apply to taxable income in the
         years in which those temporary differences are expected to be recovered
         or settled. The effect on deferred tax assets and liabilities of a
         change in tax rates is recognized in income in the period that includes
         the enactment date.

     (m) Use of Estimates

         The preparation of financial statements in conformity with generally
         accepted accounting principles requires management to make estimates
         and assumptions that affect the amounts reported in the financial
         statements and accompanying notes. Actual results could differ from
         reported results using those estimates.

     (n) Comprehensive Income

         Effective January 1, 1998, the Company adopted Statement of Financial
         Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income.
         SFAS No. 130 establishes standards for the reporting and display of
         comprehensive income and its components in a full set of
         general-purpose financial statements. This statement stipulates that
         comprehensive income reflect the change in equity of an enterprise
         during a period from transactions and other events and circumstances
         from non-owner sources. Comprehensive income thus represents the sum of
         net income and other changes in equity from non-owner sources. The
         adoption of SFAS No. 130 resulted in the Company reporting unrealized
         gains and losses on investments as other comprehensive income.

                                       30
<PAGE>   31
                       ACMAT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         The following table summarizes reclassification adjustments for other
         comprehensive income (loss) and the related tax effects for the years
         ended December 31, 1998, 1997 and 1996:

<TABLE>
<CAPTION>
                                                                                          1998        1997         1996
                                                                                          ----        ----         ----
<S>                                                                                     <C>          <C>         <C>
         Unrealized gains (losses) on investments:
         Unrealized holding gain (loss) arising during period net of income tax
         expense of $224,405 and $57,163 for 1998 and 1997, respectively and
         income tax benefit of $141,888 in 1996                                         $435,609     111,199     (275,429)
         Less reclassification adjustment for gains included in net earnings, net of
         income tax expense of $90,497, $96,107 and $87,643 for 1998, 1997
         and 1996, respectively                                                          175,672     186,560      170,131
                                                                                        --------    --------     --------
         Other comprehensive income (loss)                                              $259,937     (75,361)    (445,560)
                                                                                        ========    ========     ========
</TABLE>

     (o) Future Accounting Standards

         SFAS No. 133, "Accounting for Derivative Instruments and Hedging
         Activities", was issued in June 1998 and establishes accounting and
         reporting standards for derivative instruments, including certain
         derivative instruments embedded in other contracts, (collectively
         referred to as derivatives) and for hedging activities. It requires
         that an entity recognize all derivatives as either assets or
         liabilities in the statement of financial position and measure those
         instruments at fair value. This statement is effective for all fiscal
         quarters of fiscal years beginning after June 15, 1999, earlier
         application is encouraged, but it is permitted only as of the beginning
         of any fiscal quarter that begins after issuance of this statement.
         This Statement should not be applied retroactively to financial
         statements of prior periods. The Company has not completed its
         evaluation of the effect SFAS No. 133 will have on the Company's
         results of operations or financial condition.

         Statement of Position ("SOP") 97-3, "Accounting by Insurance and Other
         Enterprises for Insurance-Related Assessments", was issued in December
         1997 and provides guidance for determining when an entity should
         recognize a liability for guaranty-fund and other insurance-related
         assessments, how to measure that liability, and when an asset may be
         recognized for the recovery of such assessments through premium tax
         offsets or policy surcharges. SOP 97-3 is effective for financial
         statements for fiscal years beginning after December 15, 1998, and the
         effect of initial adoption is to be reported as a cumulative catch-up
         adjustment. Restatement of previously issued financial statements is
         not allowed. The adoption of this SOP is not expected to have a
         material effect on the Company's results of operations or financial
         condition.

         Statement of Position ("SOP") 98-1, "Accounting for the Costs of
         Computer Software Developed or Obtained for Internal Use," was issued
         in March 1998 and provides guidance on accounting for the costs of
         computer software developed or obtained for internal use and for
         determining when specific costs should be capitalized and when they
         should be expensed. SOP 98-1 is effective for financial statements for
         fiscal years beginning after December 15, 1998. Costs incurred prior to
         initial application of this SOP, whether capitalized or not, should not
         be adjusted to the amounts that would have been capitalized had this
         SOP been in effect when those costs were incurred. The adoption of this
         SOP is not expected to have a material effect on the Company's result
         of operations or financial condition.

(2)      ACQUISITIONS

         Effective September 16, 1996, the Company completed the merger of
         United Coasts Corporation into ACMAT. United Coasts Corporation
         shareholders received one share of ACMAT Class A stock for each
         approximately 1.536 shares of United Coasts Corporation stock. As a
         result of the merger, ACMAT issued approximately 1,100,000 shares of
         its Class A Stock amounting to a purchase price of approximately $14
         million for the 16% minority interest in the insurance holding company
         subsidiary. As a result, United Coastal Insurance, formerly a
         subsidiary of United Coasts Corporation, became a wholly owned
         subsidiary of ACMAT and its affiliates. The merger was a non-cash
         transaction that is not reflected in the Consolidated Statements of
         Cash Flow.

                                       31
<PAGE>   32
                       ACMAT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3)      INVESTMENTS

<TABLE>
<CAPTION>
        INVESTMENTS AT DECEMBER 31, 1998 AND 1997 FOLLOWS:           AMORTIZED           ESTIMATED           CARRYING
                                                                       COST              FAIR VALUE            VALUE
                                                                       ----              ----------            -----
<S>                                                                <C>                 <C>                 <C>
         1998
         Fixed Maturities Available for Sale:
         Bonds:
          States, Municipalities and Political Subdivisions        $ 54,679,758          55,081,641          55,081,641
          United States Government and Government Agencies           18,809,228          19,005,763          19,005,763
          Mortgage-Backed Securities                                 24,639,206          24,795,347          24,795,347
                                                                   ------------        ------------        ------------
           Total Fixed Maturities                                    98,128,192          98,882,751          98,882,751

         Equity Securities - Common Stocks:
          Banks, Trusts and Insurance                                     5,262              18,948              18,948
         Equity Securities - Redeemable Preferred Stocks:
          Banks, Trusts and Insurance                                 1,060,000           1,060,000           1,060,000
          Industrial and Miscellaneous                                1,000,000             982,500             982,500
                                                                   ------------        ------------        ------------
           Total Equity Securities                                    2,065,262           2,061,448           2,061,448

         Short-Term Investments                                      12,947,913          12,947,913          12,947,913
                                                                   ------------        ------------        ------------
           Total Investments                                       $113,141,367         113,892,112         113,892,112
                                                                   ============        ============        ============

         1997
         Fixed Maturities Available for Sale:
         Bonds:
          States, Municipalities and Political Subdivision         $ 43,928,817          43,975,620          43,975,620
          United States Government and Government Agencies           28,747,121          28,866,243          28,866,243
          Industrial and Miscellaneous                               15,057,614          15,136,895          15,136,895
          Mortgage-Backed Securities                                 13,790,379          13,874,222          13,874,222
                                                                   ------------        ------------        ------------
            Total Fixed Maturities                                  101,523,931         101,852,980         101,852,980

         Equity Securities - Common Stocks:
           Banks, Trusts and Insurance                                    5,262              15,927              15,927
         Equity Securities - Redeemable Preferred Stocks:
           Industrial and Miscellaneous                                 977,812             995,000             995,000
                                                                   ------------        ------------        ------------
             Total Equity Securities                                    983,074           1,010,927           1,010,927

         Short-Term Investments                                      32,422,313          32,422,313          32,422,313
                                                                   ------------        ------------        ------------
           Total Investments                                       $134,929,318         135,286,220         135,286,220
                                                                   ============        ============        ============
</TABLE>


         Fair value estimates are made at a specific point in time, based on
         quoted market prices and information about the financial instrument.
         These estimates do not reflect any premium or discount that could
         result from offering for sale at one time the Company's entire holdings
         of a particular financial instrument. These estimates are subjective in
         nature and involve uncertainties and matters of significant judgment
         and, therefore, cannot be determined with precision. Changes in
         assumptions could significantly affect the estimates.

         On December 31, 1998, the Company's insurance subsidiaries had
         securities with an aggregate book value of approximately $10 million on
         deposit with various state regulatory authorities.

                                       32
<PAGE>   33
                       ACMAT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         The amortized cost and fair value of fixed maturities at December 31,
         1998 and 1997, by effective maturity, follows:


<TABLE>
<CAPTION>
                                                                    1998                                   1997

                                                       Amortized              Fair            Amortized             Fair
                                                          Cost                Value              Cost               Value
                                                          ----                -----              ----               -----
<S>                                                    <C>                <C>                <C>                <C>
         Due In One Year or Less                       $19,661,604         19,804,671         46,284,844         46,296,200
         Due After One Year Through Five Years          72,227,199         72,805,247         54,904,724         55,148,780
         Due After Five Years Through Ten Years          5,198,529          5,225,378            334,363            408,000
         Due After Ten Years                             1,040,860          1,047,455                 --                 -- 
                                                       -----------        -----------        -----------        -----------
             Total                                     $98,128,192         98,882,751        101,523,931        101,852,980
                                                       ===========        ===========        ===========        ===========
</TABLE>


         The Company's portfolio is comprised primarily of fixed maturity
         securities rated AA or better by Standard and Poor's and includes
         mostly U.S. Treasuries and tax-free municipal securities

         A summary of gross unrealized gains and losses at December 31, 1998 and
         1997 follows:

<TABLE>
<CAPTION>
                                                       1998                            1997                      
                                               Gains           Losses           Gains           Losses
                                               -----           ------           -----           ------
<S>                                          <C>             <C>               <C>            <C>
         States, Municipalities and
            Political Subdivisions           $413,730         (11,847)          71,667         (24,864)
         United States Government and
            Government Agencies               232,849         (36,314)         137,462         (18,340)
         Industrial and Miscellaneous              --              --           79,280              --
         Mortgage-Backed Securities           156,767            (626)          83,884             (40)
                                             --------        --------         --------        --------
           Total                              803,346         (48,787)         372,293         (43,244)

         Equity Securities                     13,686         (17,500)          27,853              --
                                             --------        --------         --------        --------

           Total                             $817,032         (66,287)         400,146         (43,244)
                                             ========        ========         ========        ========
</TABLE>

(4)      INVESTMENT INCOME AND REALIZED CAPITAL GAINS AND LOSSES

         A summary of net investment income for the years ended December 31,
         1998, 1997 and 1996 follows:

<TABLE>
<CAPTION>
                                                   1998                 1997                1996
                                                   ----                 ----                ----
<S>                                            <C>                   <C>                 <C>
         Tax-Exempt Interest                   $ 2,045,722           1,996,969           2,912,844
         Taxable Interest                        4,080,814           4,639,758           3,768,102
         Dividends on Equity Securities             56,603              10,283                 750
         Other                                          --                  --             (33,725)
         Investment Expenses                       (45,034)           (142,294)           (112,399)
                                               -----------         -----------         -----------

           Net Investment Income               $ 6,138,105           6,504,716           6,535,572
                                               ===========         ===========         ===========
</TABLE>


         Realized capital gains (losses) for the years ended December 31, 1998,
         1997 and 1996 follows:

<TABLE>
<CAPTION>
                                                1998               1997             1996
                                                ----               ----             ----
<S>                                           <C>                 <C>              <C>
         Fixed Maturities                     $ 225,701           258,318          209,918
         Equity Securities                       44,653            24,349           48,568
         Other                                   (4,185)               --             (712)
                                              ---------         ---------        ---------

            Net Realized Capital Gains        $ 266,169           282,667          257,774
                                              =========         =========        =========
</TABLE>

                                       33
<PAGE>   34
                       ACMAT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         Gross gains of $229,063, $261,005 and $237,726 and gross losses of
         $3,362, $2,687 and $27,808 were realized on fixed maturity sales for
         the years ended December 31, 1998, 1997 and 1996, respectively. Gross
         gains of $44,653, $24,349 and $48,568 were realized on sale of equity
         securities for the years ended December 31, 1998, 1997 and 1996,
         respectively. There were no losses realized on equity security sales
         for the years ended December 31, 1998, 1997 and 1996.

(5)      RECEIVABLES

         A summary of receivables at December 31, 1998 and 1997 follows:

<TABLE>
<CAPTION>
                                                                                       1998               1997
                                                                                       ----               ----
<S>                                                                                <C>                 <C>
         Insurance Premiums Due From Agents                                        $ 2,440,836           4,469,243
         Receivables Under Construction Contracts:
           Amounts Billed                                                            2,662,501           1,834,994
           Recoverable Costs in Excess of Billings on Uncompleted Contracts            173,324             588,009
           Billings in Excess of Costs on Uncompleted Contracts                     (1,957,000)             (5,400)
           Retainage, Due on Completion of Contracts                                   504,857             264,067
                                                                                   -----------         -----------
              Total Receivables Under Construction Contracts                         1,383,682           2,681,670
         Other                                                                         170,726             277,360
                                                                                   -----------         -----------
              Total Receivables                                                      3,995,244           7,428,273
         Less Allowances for Doubtful Accounts                                        (257,617)           (309,746)
                                                                                   -----------         -----------
              Total Receivables, Net                                               $ 3,737,627           7,118,527
                                                                                   ===========         ===========
</TABLE>


         The balances billed but not paid by customers pursuant to retainage
         provisions in construction contracts will be due upon completion of the
         contracts and acceptance by the owner. In management's opinion, the
         majority of contract retainage is expected to be collected in 1999.

         Recoverable costs in excess of billings on uncompleted contracts are
         comprised principally of amounts of revenue recognized on contracts for
         which billings had not been presented to the contract owners as of the
         balance sheet date. These amounts will be billed in accordance with the
         contract terms.

(6)      PROPERTY AND EQUIPMENT

         A summary of property and equipment at December 31, 1998 and 1997
         follows: 

<TABLE>
<CAPTION>
                                                  1998               1997
                                                  ----               ----
<S>                                           <C>                 <C>
         Building                             $14,843,201         14,657,155
         Land                                     800,000            800,000
         Equipment and Vehicles                 1,008,966          1,073,059
         Furniture and Fixtures                   892,663            914,187
                                              -----------        -----------
                                               17,544,830         17,444,401
         Less Accumulated Depreciation          4,650,639          4,265,064
                                              -----------        -----------
                                              $12,894,191         13,179,337
                                              ===========        ===========
</TABLE>


         Future minimum rental income to be generated by leasing a portion of
         the building under non-cancelable operating leases as of December 31,
         1998 are estimated to be $654,548 for 1999, $591,845 for 2000, $570,944
         for 2001, $570,944 for 2002 and $486,944 for 2003. Rental income earned
         in 1998, 1997 and 1996 was $626,730, $561,852 and $504,063,
         respectively.

(7)      INTANGIBLES

         A summary of intangibles, acquired primarily in connection with
         purchases of the Company's insurance subsidiaries, at December 31, 1998
         and 1997 follows:

<TABLE>
<CAPTION>
                                                 1998               1997
                                                 ----               ----
<S>                                           <C>                <C>
         Insurance Licenses                   $4,188,926         4,188,926
         Goodwill                              2,524,872         2,524,872
                                              ----------        ----------
                                               6,713,798         6,713,798
         Less Accumulated Amortization         3,818,427         3,491,775
                                              ----------        ----------
                                              $2,895,371         3,222,023
                                              ==========        ==========
</TABLE>


        Intangible assets are written off when they become fully amortized.

                                       34
<PAGE>   35
                       ACMAT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(8)      RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES

         The following table sets forth a reconciliation of beginning and ending
         reserves for unpaid losses and loss adjustment expenses for the periods
         indicated on a GAAP basis for the business of the Company.


<TABLE>
<CAPTION>
                                                   1998                  1997                 1996
                                                   ----                  ----                 ----
<S>                                           <C>                   <C>                  <C>
         Balance at January 1                  $ 48,900,713           47,960,084           45,235,311
           Less reinsurance recoverable           3,478,121            3,841,001            3,872,099
                                               ------------         ------------         ------------
         Net balance at January 1                45,422,592           44,119,083           41,363,212

         Incurred related to:
           Current year                           4,508,667            5,176,030            7,137,183
           Prior years                           (2,321,939)            (838,778)          (1,167,203)
                                               ------------         ------------         ------------
         Total incurred                           2,186,728            4,337,252            5,969,980

         Payments related to:
           Current year                              18,260               94,398              153,514
           Prior years                            6,700,114            2,939,345            3,060,595
                                               ------------         ------------         ------------
         Total payments                           6,718,374            3,033,743            3,214,109

         Net balance at December 31              40,890,946           45,422,592           44,119,083
           Plus reinsurance recoverable           2,224,116            3,478,121            3,841,001
                                               ------------         ------------         ------------
         Balance at December 31                $ 43,115,062           48,900,713           47,960,084
                                               ============         ============         ============
</TABLE>

         The decrease of incurred losses and loss adjustment expenses of prior
         years represents a reallocation of reserves among accident years.
         Management believes that the reserves for losses and loss adjustment
         expenses are adequate to cover the unpaid portion of the ultimate net
         cost of losses and loss adjustment expenses, including losses incurred
         but not reported.

         The Company has no exposure to any asbestos or environmental claims
         associated with general liability policies issued with the pre-1986
         pollution exclusion. Policies written with the exclusion are typically
         associated with mass tort environmental and asbestos claims. The
         Company has never issued a policy with the pre-1986 pollution
         exclusion. The Company's exposure to asbestos and environmental
         liability claims is primarily limited to asbestos and environmental
         liability insurance for contractors and consultants involved in the
         remediation, removal, storage, treatment and/or disposal of
         environmental and asbestos hazards.

(9)      NOTES PAYABLE TO BANKS

         At December 31, 1998, the Company has a $10,000,000 bank line of credit
         with a financial institution. The line of credit does not require the
         Company to maintain a compensating balance. There were no outstanding
         borrowings under this line of credit at December 31, 1998. Borrowings
         outstanding at December 31, 1997 under a previous line of credit were
         $5,000,000.

         Under the terms of the line of credit, interest on the outstanding
         balance is calculated based upon the London Inter-Bank Offering Rate
         (LIBOR) plus 160 basis points in effect during the borrowing period.

         The fair value of notes payable to banks approximates cost.

 (10)    LONG-TERM DEBT

         A summary of long-term debt at December 31, 1998 and 1997 follows:


<TABLE>
<CAPTION>
                                              1998               1997
                                              ----               ----
<S>                                       <C>                <C>
         Mortgage Note Due 2009           $ 7,800,000                 --
         Term Loan Due 2003                 5,000,000                 --
         Senior Notes Due 2005              9,000,000         12,000,000
         Term Loan Due 2004                        --          6,690,000
         Term Loan Due 2003                        --          1,874,998
         Term Loan Due 2000                        --          3,333,333
         Mortgage Note Due 2000                    --          7,814,396
         Convertible Note Due 2022         15,400,000         16,500,000
                                          -----------        -----------
                                          $37,200,000         48,212,727
                                          ===========        ===========
</TABLE>

                                       35
<PAGE>   36
                       ACMAT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         On December 23, 1998, the Company obtained a permanent mortgage loan
         from a financial institution. The $7,800,000 mortgage note, with
         interest fixed at 6.95% is payable in monthly installments of principal
         and interest over 10 years. The loan agreements contain certain
         limitations on borrowings, minimum statutory capital levels and require
         maintenance of specified ratios. The proceeds were used to repay the
         existing mortgage note.

         On December 9, 1998, the Company obtained a $5,000,000, five-year term
         loan from a financial institution, which is currently payable in
         quarterly installments of $250,000 commencing March 1, 1999. The
         interest rate is fixed at 7.25%. The loan agreements contain certain
         limitations on borrowings, minimum statutory capital levels and require
         maintenance of specified ratios. The proceeds, along with internal
         funds, were used to refinance existing debt which existed at December
         31, 1998.

         On February 5, 1997, ACMAT Corporation purchased 1,099,996 shares of
         Class A Stock which AIG Life Insurance Company (366,663 shares) and
         American International Life Assurance Company of New York, (733,333)
         had acquired over the last three years through conversion options (See
         Note 13). The shares were purchased at an average price of $14.70 per
         share, for a total purchase price of $16,174,942. The purchase price of
         $16,174,942 consisted of $4,174,942 in cash and promissory notes
         totaling $12,000,000. The promissory notes are with AIG Life Insurance
         Company and American International Life Assurance Company of New York
         and are payable over eight years with annual payments of $1,500,000
         which commenced on January 31, 1998, with interest at prime rate
         (7-3/4%). The Company voluntarily prepaid the principal payment of
         $1,500,000 due January 31, 1999 on December 31, 1998. The interest rate
         is equal to the prime rate, however, the interest rate shall not exceed
         9-1/4% and it shall not be less than 7-1/4%. The purchase of stock in
         1997 with the $12,000,000 promissory notes is a non-cash transaction
         that is not reflected in the Consolidated Statement of Cash Flows.

         The terms of the note agreements with AIG Life Insurance Company and
         American International Life Assurance Company of New York contain
         limitations on payment of cash dividends, re-acquisition of shares,
         borrowings and investments and require maintenance of specified ratios
         and a minimum tangible net worth of $12,000,000. ACMAT may also require
         its insurance subsidiaries to pay dividends to the extent of funds
         legally available therefore, in order to enable ACMAT to have funds to
         pay on a timely basis all amounts due with respect to the notes. The
         Company is in compliance with all of these covenants at December 31,
         1998, except for the ratio of Earnings Before Interest expense, Taxes,
         Depreciation and Amortization to Fixed Charges. The Company has
         received a waiver for this covenant

         On July 1, 1992, the Company issued a 30-year unsecured $16,500,000,
         11.5% subordinated debenture to the Sheet Metal Workers' National
         Pension Fund ("Fund") to purchase 3,000,000 shares of United Coasts
         Corporation's outstanding common stock held by the Fund. Annual
         principal payments of $1,650,000 per year for ten years are due
         beginning on July 1, 2012. The note is convertible into ACMAT Class A
         stock at $11 per share. The conversion price of $11 per share would be
         adjusted at the time of conversion to reflect any stock dividends,
         recapitalizations or additional stock issuance. The Company can prepay
         the note and the Fund has the option to accept the prepayment or
         convert the note to stock. The Company made a voluntary principal
         payment of $1,100,000 on July 31, 1998. At December 31, 1998, the
         Company had reserved 1,400,000 shares of Class A Stock for issuance
         pursuant to such conversion option.

         Principal payments on long-term debt are $1,559,871, $3,100,052,
         $3,143,108, $3,189,256 and $3,238,716 the years 1999 through 2003,
         respectively. Interest expense paid in 1998, 1997 and 1996 amounted to
         $5,121,093, $4,630,502 and $4,980,833, respectively.

         The fair value at December 31, 1998 of the mortgage, the term loan and
         the senior notes approximate carrying value. It is not practicable to
         estimate the fair value of convertible note at December 31, 1998
         because of the complex and unique terms associated with this debt
         instrument.

                                       36
<PAGE>   37
                       ACMAT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(11)     INCOME TAXES

         The components of income tax expense for each year follows:


<TABLE>
<CAPTION>
                                             1998              1997                1996
                                             ----              ----                ----
<S>                                      <C>                <C>                <C>
         Current Taxes:
           Federal                        $  584,655         1,310,845          2,288,025
           State                              62,000            45,000             60,000
                                          ----------        ----------         ----------
                                             646,655         1,355,845          2,348,025
                                          ----------        ----------         ----------
         Deferred Taxes (Credits):
           Federal                            73,041           383,771            (34,197)
           State                                  --                --                 --
                                          ----------        ----------         ----------
                                              73,041           383,771            (34,197)
                                          ----------        ----------         ----------
         Total                            $  719,696         1,739,616          2,313,828
                                          ==========        ==========         ==========
</TABLE>


       The effective Federal income tax rate, as a percentage of earnings before
       income taxes and minority interest follows:

<TABLE>
<CAPTION>
                                                      1998          1997          1996
                                                      ----          ----          ----
<S>                                                  <C>           <C>           <C>  
         Federal Statutory Tax Rate                   34.0%         34.0%         34.0%
         State Income Tax Benefit                      (.7)          (.3)          (.2)
         Effect of Tax-Exempt Interest               (20.8)         (9.4)         (9.9)
         Dividend Received Deduction                  (4.8)           --            --
         Amortization of Goodwill                      3.9           1.8           1.3
         Officers Life Insurance Premiums              2.8           1.2            .8
         Other, Net                                    8.8            .-            .5
                                                     -----          ----          ----
           Effective Federal Income Tax Rate          23.2%         27.3%         26.5%
                                                     =====          ====          ====
</TABLE>


         The tax effects of temporary differences that give rise to significant
         portions of the deferred tax assets and deferred tax liabilities at
         December 31, 1998 and 1997 are presented below:


<TABLE>
<CAPTION>
                                                                                             1998               1997
                                                                                             ----               ----
<S>                                                                                      <C>                <C>
         Deferred Tax Assets:
           Reserves for Losses and Loss Adjustment Expenses,
              Principally Due to Reserve Discounting                                      $2,455,519         2,848,237
           Unearned Premiums                                                                 417,049           604,664
           Accounts Receivable, Principally Due to Allowance for Doubtful Accounts            87,590           105,314
           State Net Operating Loss Carryforward                                           1,365,900         1,442,000
           Other                                                                              22,073            26,505
                                                                                          ----------        ----------
              Total Gross Deferred Tax Assets                                              4,348,131         5,026,720
              Less Valuation Allowance                                                     1,365,900         1,442,000
                                                                                          ----------        ----------
              Net Deferred Tax Assets                                                     $2,982,231         3,584,720
         Deferred Tax Liabilities:
           Plant and Equipment                                                               461,970           461,118
           Deferred Policy Acquisition Costs                                                 527,030           706,658
           Unrealized Gains on Investments                                                   255,254           121,346
           Limited Partnership Investment                                                         --           352,659
           Other                                                                               3,990             2,003
                                                                                          ----------        ----------
              Total Gross Deferred Tax Liabilities                                         1,248,244         1,643,784
                                                                                          ----------        ----------

              Net Deferred Tax Assets                                                     $1,733,987         1,940,936
                                                                                          ==========        ==========
</TABLE>


         A valuation allowance is provided for the state net operating loss
         carryforward which is not considered realizable. In assessing the
         realization of deferred tax assets, management considers whether it is
         more likely than not that the deferred tax assets will be realized. The
         ultimate realization of deferred tax assets is dependent upon the
         generation of future taxable income during the periods in which those
         temporary differences become deductible. Management considers the
         scheduled reversal of deferred tax liabilities, tax planning strategies
         and anticipated future taxable income in making this assessment and
         believes it is more likely than not the Company will realize the
         benefits of its deductible temporary differences, net of the valuation
         allowance, at December 31, 1998.

         Taxes paid in 1998, 1997 and 1996 were $52,227, $1,790,253 and
         $1,556,471, respectively.

                                       37
<PAGE>   38
                       ACMAT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(12)     PENSION AND PROFIT SHARING PLANS

         The Company and its subsidiaries maintain, for the benefit of non-union
         employees, a qualified thrift, profit sharing and retirement plan.
         Participants are required to contribute three percent of their
         compensation to the plan annually. The Company's contributions,
         established by the Board of Directors, were $85,000, $85,000 and
         $100,000 for 1998, 1997 and 1996, respectively.

         The Company participated in various multi-employer defined contribution
         plans for its union employees. Upon withdrawal from these plans, the
         Company may be liable for its share of the unfunded vested liabilities
         of the plans. Such obligations, if any, of the Company are not
         determinable at December 31, 1998.


(13)     STOCKHOLDERS' EQUITY

         The Company has two classes of common stock; the Common Stock and the
         Class A Stock, each without par value. The rights of the Common Stock
         and the Class A Stock are identical, except with respect to voting
         rights. Holders of the Class A Stock are entitled to one-tenth vote per
         share in relation to the Common Stock, holders of which are entitled to
         one vote per share.

         During 1998, 1997 and 1996, ACMAT repurchased, in open market and
         privately negotiated transactions 4,769, 3,400 and 42,207 respectively,
         shares of its Common Stock at an average price of $20.65, $20.44 and
         $18.81 per share, respectively. The Company also repurchased during
         1998, 1997 and 1996, in open market and privately negotiated
         transactions 342,366, 1,347,686 and 872,975, respectively, shares of
         its Class A Stock at an average price of $15.10, $14.98 and $13.18 per
         share, respectively.

         During 1997 and 1996, the Company issued 450,000 and 499,999,
         respectively, shares of Class A Stock at $10 per share pursuant to the
         conversion options of the Convertible Senior Notes to AIG Life
         Insurance Company and American International Life Assurance Company of
         New York, all of which was repurchased by the Company in 1997 (see Note
         10). The issuance of stock pursuant to the conversion option of the
         Convertible Senior Notes is a non-cash transaction that is not
         reflected in the Consolidated Statement of Cash Flows.

         The stockholders have periodically approved the distribution of
         non-qualified stock options to certain officers and directors giving
         such individuals the right to purchase restricted shares of the
         Company's Common and Class A Stock. Transactions regarding these stock
         options are summarized below:

<TABLE>
<CAPTION>
                                                                         1998                 1997                1996
                                                                         ----                 ----                ----
<S>                                                                  <C>                 <C>                 <C>
        Options outstanding at December 31                               292,000             383,000             504,000
        Weighted average price per share of
           options outstanding                                          $10.20               $9.59                $9.04
        Expiration dates                                             1/2001-7/2006       1/2001-7/2006        1/2001-7/2006
        Options exercisable at December 31                               292,000             383,000             405,000
        Options granted                                                        -                   -              99,000
        Options exercised or surrendered                                  91,000             121,000              85,000
        Price ranges of options exercised or surrendered              $6.00-$8.50         $6.00-$8.50          $6.00-$8.50
</TABLE>

         The exercise price of each option equals the market price of the
         Company's stock on the date of grant and the option's term is ten
         years. The options vest six months after the date of grant.

         The Company accounts for stock options in accordance with the
         provisions of Accounting Principles Board (APB) Opinion No. 25,
         Accounting for Stock Issued to Employees. Accordingly, compensation
         expense is recognized only if the fair value of the underlying stock at
         the grant date exceeds the exercise price of the option. Accordingly,
         no compensation cost has been recognized for stock options. Had
         compensation cost for the Company's stock options issued in 1996 been
         determined consistent with SFAS No. 123, "Accounting for Stock Based
         Compensation" the Company's net earnings and earnings per share would
         have been reduced to the pro forma amounts indicated below: There were
         no stock options granted in 1998 or 1997.


<TABLE>
<CAPTION>
                                                                        1996
                                                                        ----
<S>                                              <C>                  <C>
        Net Earnings                             As Reported          $5,293,111
                                                 Pro Forma            $4,946,617

        Basic Earnings per share                 As Reported          $     1.56
                                                 Pro Forma            $     1.46

        Diluted Earnings per share               As Reported          $     1.22
                                                 Pro Forma            $     1.16
</TABLE>

                                       38
<PAGE>   39
                       ACMAT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         The fair value of each option grant is estimated on the date of grant
         using the Black-Scholes option-pricing model with the following
         assumptions used for the options granted in 1996: no dividend yield;
         expected volatility of 20%; risk free interest rate of 6.7%; and
         expected life of ten years for the options. The weighted average fair
         value of options granted in 1996 was $5.99 per share.

         Under applicable insurance regulations, ACMAT's insurance subsidiaries
         are restricted as to the amount of dividends they may pay, without the
         prior approval of any insurance department and are limited to
         approximately $10,730,000 in 1999.

         The Company's insurance subsidiaries, United Coastal Insurance and
         ACSTAR, are domiciled in Arizona and Illinois, respectively. The
         statutory financial statements of United Coastal Insurance and ACSTAR
         are prepared in accordance with accounting practices prescribed by the
         Arizona Department of Insurance and the Illinois Department of
         Insurance, respectively. Prescribed statutory accounting practices
         include a variety of publications of the National Association of
         Insurance Commissioners (NAIC), as well as the state laws, regulations,
         and general administrative rules. As of December 31, 1998, the Company
         does not utilize any statutory accounting practices which are not
         prescribed by insurance regulators that individually or in the
         aggregate materially affect statutory shareholders' equity.

         In accordance with statutory accounting principles, ACMAT's insurance
         subsidiaries' statutory capital and surplus was $55,124,801, and
         $70,989,140 at December 31, 1998 and 1997, respectively, and their
         statutory net income for the years ended December 31, 1998, 1997 and
         1996 was $12,078,378, $12,383,045 and $8,778,843, respectively. The
         primary differences between amounts reported in accordance with GAAP
         and amounts reported in accordance with statutory accounting principles
         are excess statutory reserves over statement reserves (Schedule P
         Liability), carrying value of fixed maturity investments; assets not
         admitted for statutory purposes such as agents balances over 90 days,
         furniture and fixtures and certain notes receivable; and deferred
         acquisition costs and deferred taxes which are recognized for GAAP
         only.

         Pursuant to various debt covenants, previously described, ACMAT is
         restricted from purchasing treasury stock and paying dividends greater
         than 20% of consolidated net earnings.

(14)     EARNINGS PER SHARE

         The Company adopted SFAS No. 128, Earnings per Share, on December 31,
         1997. SFAS No. 128 supersedes APB Opinion No. 15, Earnings per Share,
         and replaces primary earnings per share and fully diluted earnings per
         share with basic earnings per share and diluted earnings per share,
         respectively. The Company has restated earnings per share for all prior
         periods presented to comply with the provisions of SFAS No. 128.

         The following is a reconciliation of the numerators and denominators of
         the basic and diluted earnings per share ("EPS") computations for the
         years ended December 31, 1998, 1997 and 1996:


<TABLE>
<CAPTION>
                                                                          Average
                                                                           Shares         Per-Share
         1998:                                          Earnings         Outstanding        Amount
                                                        --------         -----------        ------
<S>                                                    <C>               <C>              <C>
         Basic EPS:
             Earnings available to stockholders        $2,120,529         3,199,906        $    .66

         Effect of Dilutive Securities:
             Stock options                                     --            79,029
                                                       ----------        ----------

         Diluted EPS:
             Earnings available to stockholders        $2,120,529         3,278,935        $    .65
                                                       ==========        ==========        ========

         1997:
         Basic EPS:
             Earnings available to stockholders        $4,456,949         3,443,976        $   1.29

         Effect of Dilutive Securities:
             Stock options                                     --           128,917
             Convertible Senior Notes                  $   29,903            43,150
             Convertible Note                          $1,252,350         1,500,000
                                                       ----------         ---------

         Diluted EPS:
             Earnings available to stockholders        $5,739,202         5,116,043        $   1.12
                                                       ==========        ==========        ========
</TABLE>

                                       39
<PAGE>   40
                       ACMAT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                          Average
                                                                           Shares         Per-Share
         1996:                                          Earnings         Outstanding        Amount
                                                        --------         -----------        ------
<S>                                                    <C>               <C>              <C>
         Basic EPS:
             Earnings available to stockholders        $5,293,111         3,397,197        $   1.56

         Effect of Dilutive Securities:
             Stock options                                     --           132,333
             Convertible Senior Notes                  $  502,425           725,000
             Convertible Note                          $1,252,350         1,500,000
                                                       ----------        ----------

         Diluted EPS:
             Earnings available to stockholders        $7,047,886         5,754,530        $   1.22
                                                       ==========        ==========        ========
</TABLE>


         The Convertible notes were anti-dilutive in 1998.

(15)     COMMITMENTS AND CONTINGENCIES

         The Company is a party to legal actions arising in the ordinary course
         of its business. In management's opinion, the Company has adequate
         legal defenses respecting those actions where the Company is a
         defendant, has appropriate insurance reserves recorded, and does not
         believe that their settlement will materially affect the Company's
         operations or financial position.

         Many construction projects in which the Company has been engaged have
         included asbestos exposures which the Company believes to involve a
         particularly high degree of risk because of the hazardous nature of
         asbestos. The Company believes it has reduced the risks associated with
         asbestos through proper training of its employees and by maintaining
         general liability and workers' compensation insurance. From 1986 to
         1996, the Company obtained its general liability insurance from its
         insurance subsidiaries. Since 1989, the Company has obtained its surety
         bonds from its insurance subsidiary.

         The Company has, together with many other defendants, been named as a
         defendant in approximately 190 actions brought in Connecticut state
         courts by injured or deceased individuals or their representatives
         based on product liability claims relating to materials containing
         asbestos. No specific claims for monetary damages are asserted in these
         actions. Although it is early in the litigation process, the Company
         does not believe that its exposure in connection with these cases is
         significant.

 (16)    SEGMENT REPORTING

         Effective January 1, 1998, the Company adopted SFAS No. 131,
         "Disclosures about Segments of an Enterprise and Related Information".
         SFAS No. 131 establishes standards for the way that public enterprises
         report information about operating segments in annual financial
         statements and requires that selected information about those operating
         segments be reported in interim financial statements. Operating
         segments are defined as components of an enterprise about which
         separate financial information is available that is evaluated regularly
         by the chief operating decision maker in deciding how to allocate
         resources and assessing performance. The Company redefined its
         reportable operating segments as a result of the adoption of SFAS No.
         131 and segment information for 1997 and 1996 has been restated.

         The Company has three reportable operating segments: ACMAT Contracting,
         ACSTAR Bonding and United Coastal Liability Insurance. The Company's
         reportable segments are primarily the three main legal entities of the
         Company which offer different products and services. The accounting
         policies of the segments are the same as those described in the summary
         of significant accounting policies.

         ACMAT Contracting provides construction contracting services to
         commercial and governmental customers. ACMAT Contracting also provides
         underwriting services to its insurance subsidiaries. In addition, ACMAT
         Contracting owns a commercial office building in New Britain
         Connecticut and leases office space to its insurance subsidiaries as
         well as third parties.

         The United Coastal Liability Insurance operating segment offers
         specific lines of liability insurance as an approved non-admitted
         excess and surplus lines insurer in forty-six states, Puerto Rico, the
         Virgin Islands and the District of Columbia. United Coastal offers
         claims made and occurrence policies for specific specialty lines of
         liability insurance through certain excess and surplus lines brokers
         who are licensed and regulated by the state insurance department(s) in
         the state(s) in which they operate. United Coastal offers general,
         asbestos, lead, pollution and professional liability insurance
         nationwide to specialty trade contractors, environmental contractors,
         property owner, storage and treatment facilities and professionals.
         United Coastal also offers products liability insurance to
         manufacturers and distributors.

         The Bonding operating segment provides, primarily through ACSTAR,
         surety bonds written for prime, specialty trade, environmental,
         asbestos and lead abatement contractors and miscellaneous obligations.
         ACSTAR also offers other miscellaneous surety such as workers'
         compensation bonds, supply bonds, subdivision bonds and license and
         permit bonds.

                                       40
<PAGE>   41
                       ACMAT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         The Company evaluates performance based on earnings before income taxes
         and excluding interest expense. The Company accounts for intersegment
         revenue and expenses as if the products/services were to third parties.
         Information relating to the three segments is summarized as follows:


<TABLE>
<CAPTION>
                                                                               1998                1997                1996
                                                                               ----                ----                ----
<S>                                                                        <C>                  <C>                  <C>
        Revenues:
          ACSTAR Bonding                                                   $  5,286,955          7,209,863            6,948,365
          United Coastal Liability Insurance                                 10,315,294         15,043,823           20,288,641
          ACMAT Contracting                                                  15,801,541         14,218,660           14,609,901
                                                                            -----------         ----------           ----------
                                                                           $ 31,403,790         36,472,346           41,846,907
                                                                            ===========         ==========           ==========
                                                                            
        Operating Earnings:
          ACSTAR Bonding                                                   $  2,314,485          2,305,342            2,282,168
          United Coastal Liability Insurance                                  5,176,870          8,239,017           10,105,725
          ACMAT Contracting                                                     501,712          1,224,579            2,631,958
                                                                            -----------         ----------           ----------
                                                                           $  7,993,067         11,768,938           15,019,851
                                                                            ===========         ==========           ==========
                                                                            
        Depreciation and Amortization:                                      
          ACSTAR Bonding                                                   $    442,457            307,453              511,585
          United Coastal Liability Insurance                                    279,422            512,769              573,444
          ACMAT Contracting                                                     690,125            685,791              702,032
                                                                            -----------         ----------           ----------
                                                                           $  1,412,004          1,506,013            1,787,061
                                                                            ===========         ==========           ==========

        Identifiable Assets:
          ACSTAR Bonding                                                   $ 50,312,769         53,220,508
          United Coastal Liability Insurance                                 78,888,156        100,524,851
          ACMAT Contracting                                                  16,925,540         20,463,403
                                                                           ------------        -----------
                                                                           $146,126,465        176,208,762
                                                                           ============        ===========

        Capital Expenditures:
          ACSTAR Bonding                                                   $      3,364                652
          United Coastal Liability Insurance                                     49,044             93,709
          ACMAT Contracting                                                     186,046             60,122
                                                                           ------------        -----------
                                                                           $    238,454            154,483
                                                                           ============        ===========

        The components of revenue for each segment are as follows:
<CAPTION>
                                                                               1998                 1997                 1996
                                                                               ----                 ----                 ----
<S>                                                                        <C>                  <C>                  <C>
           ACMAT Contracting:
             Contract revenues                                             $ 12,139,924         10,056,322            9,415,734
             Investment income, net                                              65,342             55,071               76,800
             Intersegment revenue:
               Rental income                                                  1,251,299          1,251,955            1,201,725
               Underwriting services and agency commissions                   1,697,978          2,295,371            3,089,567
             Capital losses                                                           -                  -                 (712)
             Other                                                              646,998            559,941              826,787
                                                                           ------------         ----------           ----------
                                                                            $15,801,541         14,218,660           14,609,901
                                                                           ------------         ----------           ----------
           ACSTAR Bonding:
             Premiums                                                      $  4,618,281          5,847,558            5,837,254
             Investment income, net                                           1,169,977            962,815            1,128,896
             Equity income (loss) from limited partnership investment          (569,343)           244,302              (22,365)
             Capital gains/(losses)                                              68,040             25,380               (6,788)
             Other                                                                    -            129,808               11,368
                                                                           ------------         ----------           ----------
                                                                           $  5,286,955          7,209,863            6,948,365
                                                                           ------------         ----------           ----------
           United Coastal Liability Insurance:
             Premiums                                                      $  6,519,382          9,198,286           14,062,682
             Investment income, net                                           4,430,026          4,859,805            5,885,793
             Equity income (loss) from limited partnership investment          (832,243)           591,735              (11,360)
             Capital gains                                                      198,129            257,287              265,274
             Other                                                                    -            136,710               86,252
                                                                           ------------         ----------           ----------
                                                                           $ 10,315,294         15,043,823           20,288,641
                                                                           ------------         ----------           ----------
</TABLE>

                                       41
<PAGE>   42
                       ACMAT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         The following is a reconciliation of segment totals for revenue and
         operating income to corresponding amounts in the Company's statement of
         earnings:


<TABLE>
<CAPTION>
         Revenue:                                                         1998                 1997                 1996
                                                                          ----                 ----                 ----
<S>                                                                   <C>                  <C>                  <C>
              Total revenue for reportable segments                   $ 31,403,790           36,472,346           41,846,907
              Intersegment eliminations                                 (2,651,517)          (2,920,211)          (4,811,602)
                                                                      ------------         ------------         ------------
                                                                      $ 28,752,273           33,552,135           37,035,305
                                                                      ============         ============         ============

         Operating Earnings:
              Total operating earnings for reportable segments        $  7,993,067           11,768,938           15,019,851
              Interest expense                                          (4,621,401)          (5,116,414)          (4,946,418)
              Intersegment interest expense                                (52,774)                  --           (1,118,546)
              Other operating expenses                                    (478,667)            (455,959)            (459,808)
                                                                      ------------         ------------         ------------
                                                                      $  2,840,225            6,196,565            8,495,079
                                                                      ============         ============         ============
</TABLE>


         Operating earnings for ACMAT contracting are operating revenues less
         cost of contract revenues and identifiable selling, general and
         administrative expenses. Operating earnings for the bonding and
         liability insurance segments are revenues less losses and loss
         adjustment expenses, amortization of policy acquisition costs and
         identifiable selling, general and administrative expenses. The
         adjustments and eliminations required to arrive at consolidated amounts
         shown above consist principally of the elimination of the intersegment
         revenues related to the performance of certain services and rental
         charges. Identifiable assets are those assets that are used by each
         segment's operations. Foreign revenues are not significant

(17)     QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

         A summary of the unaudited quarterly results of operations for 1998 and
         1997 follows:


<TABLE>
<CAPTION>
                                            MARCH 31           JUNE 30        SEPTEMBER 30       DECEMBER 31
                                            --------           -------        ------------       -----------
<S>                                        <C>               <C>              <C>               <C>
         1998

         Operating Revenues                $7,402,497         6,963,358         7,504,575         6,881,843
                                           ----------        ----------        ----------        ----------

         Operating Earnings                $2,608,244         1,990,413         1,199,983         1,662,986
                                           ----------        ----------        ----------        ----------

         Net Earnings                      $1,003,526           620,254            66,538           430,211
                                           ----------        ----------        ----------        ----------

         Basic Earnings Per Share          $      .30               .19               .02               .14
                                           ----------        ----------        ----------        ----------

         Diluted Earnings Per Share        $      .27               .19               .02               .14
                                           ----------        ----------        ----------        ----------

         1997

         Operating Revenues                $8,263,809         8,642,065         8,056,863         8,589,398
                                           ----------        ----------        ----------        ----------

         Operating Earnings                $2,935,909         3,315,024         2,614,952         2,447,094
                                           ----------        ----------        ----------        ----------

         Net Earnings                      $1,149,226         1,409,415         1,013,071           885,237
                                           ----------        ----------        ----------        ----------

         Basic Earnings Per Share          $      .31               .41               .30               .27
                                           ----------        ----------        ----------        ----------
                                                                                                        .31

         Diluted Earnings Per Share        $      .27               .34               .27               .24
                                           ----------        ----------        ----------        ----------
</TABLE>


Note: Operating earnings represent operating revenues less the cost of contract
revenues, losses and loss adjustment expenses and amortization of policy
acquisition costs and selling, general and administrative expenses.

                                       42
<PAGE>   43
Schedule I

                       ACMAT CORPORATION AND SUBSIDIARIES


                  Condensed Financial Information of Registrant

                  As of December 31, 1998 and 1997 and for the

                  years ended December 31, 1998, 1997 and 1996



The following presents the condensed financial position of ACMAT Corporation
(parent company only) as of December 31, 1998 and 1997 and its condensed
statements of earnings and cash flows for the years ended December 31, 1998,
1997 and 1996.

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                    Assets                                    1998               1997
                                                                              ----               ----
<S>                                                                       <C>                <C>
         Current assets:
               Cash                                                       $   396,430            822,100
               Receivables                                                  1,549,013          2,953,635
               Other current assets                                           150,984            192,842
                                                                          -----------        -----------
                              Total current assets                          2,096,427          3,968,577

         Property and equipment, net                                       12,671,837         12,927,465
         Investments in and advance from subsidiaries                      61,652,491         76,576,942
         Intangibles                                                          518,135            692,495
         Other assets                                                       1,731,203          2,549,472
                                                                          -----------        -----------
                                                                          $78,670,093         96,714,951
                                                                          ===========        ===========



                              Liabilities and Stockholders' Equity

         Current liabilities:
               Notes payable to banks                                     $        --          5,000,000
               Current portion of long-term debt                            1,559,871          4,365,381
               Other current liabilities                                    3,847,167          3,924,485
                                                                          -----------        -----------
                              Total current liabilities                     5,407,038         13,289,866
         Long-term debt                                                    35,640,129         43,847,346
                                                                          -----------        -----------
         Total liabilities                                                 41,047,167         57,137,212

         Commitments and contingencies
         Stockholders' equity                                              37,622,926         39,577,739
                                                                          -----------        -----------



                                                                          $78,670,093         96,714,951
                                                                          ===========        ===========
</TABLE>

See Notes to Condensed Financial Statements.

                                       43
<PAGE>   44
                                                           Schedule I, continued

                       ACMAT CORPORATION AND SUBSIDIARIES

            Condensed Financial Information of Registrant, Continued

                              STATEMENT OF EARNINGS



<TABLE>
<CAPTION>
                                                                               1998                 1997                 1996
                                                                               ----                 ----                 ----
<S>                                                                        <C>                  <C>                  <C>
         Contract revenues                                                 $ 12,139,924           10,056,322            9,415,734
         Cost of contract revenues                                           11,810,879            9,331,103            8,396,344
                                                                           ------------         ------------         ------------
                 Gross profit                                                   329,045              725,219            1,019,390


         Selling, general and administrative expenses                         3,841,623            3,982,916            3,896,182
                                                                           ------------         ------------         ------------
                 Operating loss                                              (3,512,578)          (3,257,697)          (2,876,792)


         Interest expense                                                    (4,674,175)          (5,116,414)          (6,064,964)
         Interest income                                                         46,854               43,101               52,999
         Underwriting fees                                                    1,260,399            1,718,281            2,132,685
         Other income                                                         1,898,297            1,811,896            2,027,800
                                                                           ------------         ------------         ------------
                 Loss before income taxes and equity in net
                       earnings of subsidiaries                              (4,981,203)          (4,800,833)          (4,728,272)



         Income tax benefit                                                  (1,435,000)          (1,500,000)          (1,473,000)
                                                                           ------------         ------------         ------------

                 Loss before equity in net earnings of subsidiaries          (3,546,203)          (3,300,833)          (3,255,272)

         Equity in net earnings of subsidiaries                               5,666,732            7,757,782            8,548,383
                                                                           ------------         ------------         ------------

                 Net earnings                                              $  2,120,529            4,456,949            5,293,111
                                                                           ============         ============         ============

</TABLE>


See Notes to Condensed Financial Statements.

                                       44

                                                                    
<PAGE>   45
                                                           Schedule I, Continued

                       ACMAT CORPORATION AND SUBSIDIARIES

            Condensed Financial Information of Registrant, Continued

                            STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
Cash flows from operating activities:                                 1998                  1997                 1996
                                                                      ----                  ----                 ----
<S>                                                               <C>                  <C>                  <C>
          Net earnings                                            $  2,120,529            4,456,949            5,293,111
          Depreciation and amortization                                688,862              684,521              682,166
          Equity in undistributed earnings of subsidiaries          (5,666,732)          (7,757,782)          (8,548,383)
          (Increase) decrease in accounts receivable                 1,404,622             (839,594)            (174,311)
          (Increase) decrease in other assets                          787,299              149,711             (182,424)
          Increase (decrease) in other liabilities                     159,662              122,424             (587,169)
                                                                  ------------         ------------         ------------
                 Net cash used for operating activities               (505,758)          (3,183,771)          (3,517,010)
                                                                  ------------         ------------         ------------

Cash flows from investing activities:
          Capital expenditures                                        (186,046)             (60,122)             (85,108)
          Decrease in investment in subsidiaries                    20,851,120           13,714,452            9,834,721
          Other                                                             --                   --             (335,606)
                                                                  ------------         ------------         ------------
                 Net cash provided by investing activities          20,665,074           13,654,330            9,414,007
                                                                  ------------         ------------         ------------

Cash flows from financing activities:
          Borrowings under lines of credit                           7,000,000            5,000,000            9,200,000
          Repayments of lines of credit                            (12,000,000)         (13,200,000)          (3,500,000)
          Repayment of long-term debt                              (23,812,727)          (3,594,692)          (1,820,181)
          Issuance of long-term debt                                12,800,000            8,500,000            2,500,000
          Issuance of Class A stock, net of taxes                      696,000              882,250              560,000
          Payments for acquisition and retirement of stock          (5,268,259)          (8,257,963)         (12,300,209)
                                                                  ------------         ------------         ------------
                 Net cash used for financing activities            (20,584,986)         (10,670,405)          (5,360,390)
                                                                  ------------         ------------         ------------

Net increase (decrease) in cash                                       (425,670)            (199,846)             536,607

Cash, beginning of year                                                822,100            1,021,946              485,339
                                                                  ------------         ------------         ------------

Cash, end of year                                                 $    396,430              822,100            1,021,946
                                                                  ============         ============         ============
</TABLE>

See Notes to Condensed Financial Statements.

                                       45
<PAGE>   46
                                                           Schedule I, Continued

                       ACMAT CORPORATION AND SUBSIDIARIES
                         Condensed Financial Information
                     Notes to Condensed Financial Statements


The accompanying condensed financial statements should be read in conjunction
with the Consolidated Financial Statements and Notes thereto in the Company's
1998 Annual Report.

(1)      SUPPLEMENTAL CASH FLOW INFORMATION

         Income taxes received from subsidiaries during the years ended December
         31, 1998, 1997 and 1996 were $2,355,403, $112,995, and $1,990,201,
         respectively. Interest paid during the years ended December 31, 1998,
         1997 and 1996 was $5,173,867 $4,630,502, and $6,099,379, respectively.
         Interest paid in 1998 and 1996 included $52,774 and $1,118,546,
         respectively, paid to subsidiaries for intercompany loans.

         On February 5, 1997, ACMAT Corporation purchased the 1,099,996 shares
         of Class A Stock which AIG Life Insurance Company (366,663 shares) and
         American International Life Assurance Company of New York, (733,333)
         had acquired over the last three years through conversion options. The
         shares were purchased at an average price of $14.70 per share for a
         total purchase price of $16,174,942. The purchase price of $16,174,942
         consisted of $4,174,942 in cash and promissory notes totaling
         $12,000,000. The purchase of stock with the $12,000,000 promissory
         notes is a non-cash transaction that is not reflected in the
         Consolidated Statement of Cash Flows.

(2)      LONG-TERM DEBT

         A summary of long-term debt at December 31, 1998 and 1997 follows:

<TABLE>
<CAPTION>
                                             1998                 1997
                                             ----                 ----
<S>                                       <C>                <C>
         Term Loan Due 2003               $ 5,000,000                 --
         Mortgage Note Due 2008             7,800,000                 --
         Senior Notes Due 2005              9,000,000         12,000,000
         Term Loan Due 2004                        --          6,690,000
         Term Loan Due 2003                        --          1,874,998
         Term Loan Due 2000                        --          3,333,333
         Mortgage Note Due 2000                    --          7,814,396
         Convertible Note Due 2022         15,400,000         16,500,000
                                          -----------        -----------
                                          $37,200,000         48,212,727
                                          ===========        ===========
</TABLE>


         See Note 10 to the Consolidated Financial Statements in the Annual
         Report for a description of the long-term debt and aggregate maturities
         for 1999 to 2003 and thereafter.

(3)      INCOME TAXES

         See Note 11 to the Consolidated Financial Statements in the Annual
         Report for a description of income taxes.

(4)      COMMITMENTS AND CONTINGENCIES

         See Note 15 to the Consolidated Financial Statements in the Annual
         Report for a description of the commitments and contingencies.

                                       46
<PAGE>   47
                                                                     SCHEDULE II


                       ACMAT CORPORATION AND SUBSIDIARIES

                 Valuation and Qualifying Accounts and Reserves

                  Years ended December 31, 1998, 1997 and 1996


<TABLE>
<CAPTION>
                                    Balance        Additions
                                      at            charged                          Balance
                                   beginning        to costs                           at
                                      of              and                            end of
             Description            period          expenses     Deductions(a)       period
             -----------            ------          --------     -------------       ------
<S>                               <C>              <C>           <C>               <C>
           Allowance for
         doubtful accounts:

               1998                $309,746         293,149         345,278         257,617
                                   ========        ========        ========        ========
                               
                               
               1997                $322,406         620,000         632,660         309,746
                                   ========        ========        ========        ========
                               
                               
               1996                $340,844         400,904         419,342         322,406
                                   ========        ========        ========        ========
</TABLE>

(a) Deductions represent accounts written off.

                                       47
<PAGE>   48
ACMAT CORPORATION AND SUBSIDIARIES                                    Schedule V

   Supplemental Information concerning property-casualty insurance operations

         As of and for the years ended December 31, 1998, 1997 and 1996


<TABLE>
<CAPTION>
                                                    Discount Ded. 
                                  Reserves for       from Unpaid
                   Deferred       Unpaid Losses        Losses                               
  Affiliation      Policy           and Loss          and Loss                                          Net     
     with        Acquisition       Adjustment        Adjustment         Unearned         Earned      Investment  
  Registrant       Costs            Expenses          Expenses          Premiums        Premiums       Income    
  ----------       -----            --------          --------          --------        --------       ------    
<S>              <C>              <C>               <C>                <C>             <C>           <C>         
    United
   Coastal
   Liability
  Insurance:
     1998        $1,004,850        31,471,445           --              4,650,438       6,519,382     4,430,026  
                 ===========      ===========        ==========        ==========      ==========     =========  
                                                                                                                     
     1997        $1,432,358        35,994,240           --              6,846,846       9,198,286     4,859,805 
                 ==========        ==========        ==========        ==========      ==========     ========= 
                                                                                                                     
     1996        $2,056,166        36,097,543           --              9,230,566      14,062,682     4,711,440 
                 ==========        ==========        ==========        ==========      ==========     ========= 
</TABLE>


<TABLE>
<CAPTION>
                 
                 Losses & Loss    Adjustment      Amortization      Paid
                    Expenses      Incurred        of Deferred      Losses
  Affiliation       Related          to              Policy       and Loss
     with        ---------------------------      Acquisition    Adjustment      Premiums
  Registrant     Current Year    Prior Years         Costs        Expenses        Written
  ----------     ------------    -----------         -----        --------        -------
<S>              <C>             <C>             <C>             <C>            <C>
    United
   Coastal
   Liability
  Insurance:
     1998          3,123,183     (1,167,367)       1,852,218     6,572,054       4,351,983
                   =========     ===========       =========     =========      ==========

     1997          3,421,762       (662,276)       2,569,959     3,011,873       7,026,051
                  ==========      ==========       =========     =========      ==========

     1996          5,386,007     (1,167,203)       3,860,129     2,959,515      12,227,735
                   =========     ===========       =========     =========      ==========
</TABLE>


<TABLE>
<CAPTION>
                                                    Discount Ded. 
                                  Reserves for       from Unpaid               
                   Deferred       Unpaid Losses        Losses                                                  
  Affiliation      Policy           and Loss          and Loss                                          Net    
     with        Acquisition       Adjustment        Adjustment         Unearned         Earned      Investment
  Registrant       Costs            Expenses          Expenses          Premiums        Premiums       Income  
  ----------       -----            --------          --------          --------        --------       ------  
<S>              <C>              <C>               <C>                <C>             <C>           <C>       
   ACSTAR
  BONDING:
     1998        $  545,239        14,512,333           --              2,889,186       4,618,281     1,169,977
                 ===========      ===========        ==========        ==========      ==========     =========

     1997        $  646,047        16,093,222           --              3,587,126       5,847,558       962,815
                 ===========      ===========        ==========        ==========      ==========     =========

     1996        $  849,709        14,781,134           --              4,100,310       5,837,254     1,106,531
                 ===========      ===========        ==========        ==========      ==========     =========

</TABLE>


<TABLE>
<CAPTION>
                 
                   Losses & Loss     Adjustment      Amortization         Paid
                      Expenses       Incurred        of Deferred         Losses
  Affiliation         Related           to              Policy          and Loss
     with          ----------------------------      Acquisition       Adjustment        Premiums
  Registrant       Current Year     Prior Years         Costs           Expenses          Written
  ----------       ------------     -----------         -----           --------          -------
<S>                <C>              <C>             <C>                <C>              <C>
   ACSTAR
  BONDING:
                              
     1998            1,385,484      $(1,154,572)       1,225,718           146,320        4,026,634
                     =========      ===========      ===========        ==========        ==========
     1997            1,754,268      $  (176,502)       1,605,140            21,870        5,654,146
                     =========      ===========      ===========        ==========        ==========
     1996            1,751,176      $  --              1,724,096           254,594        5,813,753
                     =========      ===========      ===========        ==========        ==========
</TABLE>    

                                       48
<PAGE>   49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE: None

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table shows for each director (a) his or her age, (b) the year in
which the director first served as a director of the Company, (c) position with
the Company and business experience during the past five years, including
principal occupation, (d) his or her committee assignments, and (e) his or her
other directorships. Each director is elected for a term of one year and until
his or her successor shall be elected.

<TABLE>
<CAPTION>
             NAME                         AGE        DIRECTOR    POSITION WITH THE COMPANY AND BUSINESS EXPERIENCE
                                                      SINCE      DURING LAST FIVE YEARS, INCLUDING OCCUPATION
<S>                                       <C>        <C>         <C>
    HENRY W. NOZKO, SR. (1)                79          1951      Chairman of the Board, President and Chief Executive
                                                                 Officer of the Company.  Chairman of the Board and
                                                                 Director of United Coastal Insurance Company, ACSTAR
                                                                 Holdings, Inc. and ACSTAR Insurance Company.
                                                                 Co-Chief Executive Officer of United Coastal
                                                                 Insurance Company.
    HENRY W. NOZKO, JR. (1)                52          1971      Executive Vice President, Chief Operating Officer,
                                                                 and Treasurer of the Company.  Member of the Audit
                                                                 Committee.  President, Co-Chief Executive Officer and
                                                                 Treasurer of United Coastal Insurance Company.
                                                                 President and Treasurer of ACSTAR Holdings, Inc. and
                                                                 ACSTAR Insurance Company.  Member, Boards of
                                                                 Directors of United Coastal Insurance Company, ACSTAR
                                                                 Holdings, Inc., ACSTAR Insurance Company.

    VICTORIA C. NOZKO (1)                  80          1982      Housewife during past five years.  Member of the
                                                                 Audit Committee.

    JOHN C. CREASY                         79          1987      Retired Chief Executive Officer of Danbury Hospital,
                                                                 Member, Board of United Coastal Insurance Company.
                                                                 Member of the Compensation Committee and Audit
                                                                 Committee.

    MICHAEL J. SULLIVAN (2)                54          1993      Business Manager, Financial Secretary/Treasurer of
                                                                 Sheet Metal Workers' Local Union No. 20; General
                                                                 Secretary-Treasurer of Sheet Metal Workers'
                                                                 International Association.
</TABLE>

(1)      Mr. Henry W. Nozko, Sr. and Mrs. Victoria C. Nozko are husband and wife
         and Mr. Henry W. Nozko, Jr. is their son.

(2)      Mr. Michael J. Sullivan resigned from the Board of Directors effective
         February 28, 1999. The Pension Fund will nominate a new Director to be
         voted upon at the upcoming Annual Meeting of Shareholders.

                                       49
<PAGE>   50
     Executive Officers of the Registrant:

     The following are the Company's Executive Officers, their age, and offices
     held. Officers are appointed to serve until the meeting of the Board of
     Directors following the next Annual Meeting of Stockholders and until their
     successors have been elected.

<TABLE>
<CAPTION>
          NAME                              AGE           OFFICES HELD
          ----                              ---           ------------
<S>                                         <C>           <C>
          Henry W. Nozko, Sr.                79           President, Chief Executive
                                                          Officer, Director and
                                                          Chairman of the Board
                                                          since 1951.

          Henry W. Nozko, Jr.                52           Executive Vice President since
                                                          1982. Treasurer since 1973.
                                                          Director since 1971, and Chief
                                                          Operating Officer since 1985.

          Robert H. Frazer                   52           Vice President since 1982.
                                                          Secretary since 1992. General
                                                          Counsel since 1977.

          Michael P. Cifone                  40           Vice President-Finance since
                                                          1990. Corporate Controller
                                                          since 1989.
</TABLE>
                                                        
                                       50
<PAGE>   51
ITEM 11. EXECUTIVE COMPENSATION

Directors who are not employees of the Company are paid an annual fee of $4,000.

The following table provides certain summary information regarding compensation
of the Company's Chief Executive Officer and each of the four most highly
compensated executive officers of the Company for the periods indicated.

<TABLE>
<CAPTION>

NAME AND PRINCIPAL                                  ANNUAL COMPENSATION (A)          LONG-TERM               ALL OTHER 
POSITION                                                                          COMPENSATION (B)       COMPENSATION (C)
                                      YEAR         SALARY            BONUS        CLASS A OPTIONS
<S>                                   <C>         <C>             <C>             <C>                    <C>
Henry W. Nozko, Sr.                   1998        $447,200                -                  -                $12,238
Chairman, President                   1997        $430,000         $ 86,000                  -                $10,591
And Chief Executive Officer           1996        $428,292         $172,000            $46,000                $10,345


Henry W. Nozko, Jr.                   1998        $322,500                -                  -                $12,120
Executive Vice President and Chief    1997        $310,000         $ 62,000                  -                $10,488
Operating Officer                     1996        $334,500         $124,000            $26,000                $10,238


Robert H. Frazer, Esq.                1998        $171,600                -                 -                 $12,075
Vice President, Secretary and         1997        $165,000          $33,000                 -                 $10,450
General Counsel                       1996        $164,375          $49,500                 -                 $10,198


Michael P. Cifone                     1998        $114,400                -                 -                 $10,202
Vice President-Finance                1997        $110,000          $22,000                 -                 $ 9,253
                                      1996        $109,583          $33,000                 -                 $10,090
</TABLE>


(A) Amounts shown include cash compensation earned and received by the executive
officers. There are no other forms of non-cash compensation or other perquisites
for any executive officer.

The Company has a Management Compensation Plan based upon earnings of the
Company. As a guideline, the plan provides that participants may share in an
incentive fund equal to 12% of pretax earnings, provided such pretax earnings
amount to at least a 10% return on the Company's equity. However, both the
participants and the amount of bonus are discretionary, provided the total
amount of bonuses paid do not exceed the total incentive fund available. In
addition, the Company may offer separate incentives and commissions on an
individual basis.

(B) Options were granted for ACMAT Class A Stock.

(C) The amounts shown in this column represent contributions made by the Company
to the Company's Thrift, Profit Sharing and Retirement Plan ("Plan"). The Plan
provides that all nonunion employees employed on a full time or part time
salaried basis are eligible to participate on the first day of January or July
after twelve consecutive months of employment. The Company contributes amounts,
as determined by the Board of Directors, to be allocated among the participants
according to a formula based upon the employee's years of service and
compensation. A participant becomes vested at the rate of 20% per year
commencing after two years of service.

                                       51
<PAGE>   52
The following table provides information on options exercised during 1998 by the
named Executive Officers and the value of their unexercised options at December
31, 1998. No options were granted in 1998.


           AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
                          YEAR END 1998 OPTION VALUES

<TABLE>
<CAPTION>
                                                                                 Number of
                                                 Shares                         Unexercised        Value of Unexercised
                                                Acquired       Value            Options at         In-the-Money Options
Name                                           on Exercise    Realized          12/31/98 (1)          at 12/31/98 (2)
                                               -----------    --------          ------------          ---------------
<S>                                            <C>            <C>               <C>                <C>
Henry W. Nozko, Sr.
    - ACMAT Class A Stock Options                 15,000      $105,000              46,000                $172,500
    - ACMAT Common Stock Options                       -             -              50,000                $550,000

Henry W. Nozko, Jr.
    - ACMAT Class A Stock Options                 16,000      $152,000              45,000                $235,750
    - ACMAT Common Stock Options                       -             -              50,000                $550,000

Robert H. Frazer
    - ACMAT Class A Stock Options                 15,000      $142,500              35,000                $236,250

Michael P. Cifone
    - ACMAT Class A Stock Options                      -             -              10,000                $ 67,500
</TABLE>


         (1)      Represents the number of options held at year end. All options
                  were exercisable at December 31, 1998.

         (2)      Represents the total gain which would have been realized if
                  all options for which the year-end stock price was greater
                  than the exercise price were exercised on the last day of the
                  year.

                                       52
<PAGE>   53
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:

As of March 1, 1999, no person was known to the Company to be the beneficial
owner of more than five percent of its outstanding shares of Common Stock or
Class A Stock except as set forth in the following table which also shows, as of
that date, the total number of shares of each class of stock of the Company
beneficially owned, and the percent of the outstanding class of stock so owned,
by each director, and by all directors and officers of the Company, as a group:


<TABLE>
<CAPTION>
                                                                                   PERCENTAGE             PERCENTAGE
                                  CLASS                NUMBER OF SHARES              OF CLASS               OF TOTAL
  BENEFICIAL OWNER               OF STOCK           BENEFICIALLY OWNED (1)         OUTSTANDING          VOTING POWER (17)
  ----------------               --------           ----------------------         -----------          -----------------
<S>                              <C>                <C>                            <C>                  <C>
Henry W. Nozko, Sr.               Common                438,000 (2)(5)                68.21%                  50.13%
                                  Class A                60,000 (2)(4)                 2.46
Henry W. Nozko, Jr.               Common                190,274 (2)(3)(5)             29.63                   23.37
                                  Class A               167,574 (2)(3)(6)              6.86
Victoria C. Nozko                 Class A                42,000 (7)                    1.75                     .50
John C. Creasy                    Common                  3,300                         .56                     .62
                                  Class A                18,453 (8)                     .77
Michael J. Sullivan               Class A                18,390 (9)                     .76                     .22
Sheet Metal Workers'
   National Pension Fund          Class A             1,400,000 (10)                  36.94                   14.42
Franklin Resources, Inc.          Class A               495,000 (11)                  20.71                    5.96
First Manhattan Co.               Class A               307,816 (12)                  12.88                    3.70
Queensway Financial
   Holdings Limited               Class A               349,100 (13)                  14.61                    4.20
Investment Counselor of
Maryland, Inc.                    Class A               190,000 (14)                   7.95                    2.29
EQSF Advisors, Inc.               Class A               189,978 (15)                   7.95                    2.29
U.S. Bancorp                      Class A               179,800 (16)                   7.52                    2.16
All Directors and
   Officers (7 persons)
   as a Group                     Common                631,574                       91.26                   70.21
                                  Class A               351,632                       13.65
</TABLE>


(1)      The person listed has the sole power to vote the shares of Common Stock
         and Class A Stock listed above as beneficially owned by such person and
         has sole investment power with respect to such shares.
(2)      Does not include 14,260 shares of Common Stock nor 16,060 shares of
         Class A Stock held of record by ACMAT's qualified Thrift, Profit
         Sharing & Retirement Plan, of which Messrs. Nozko, Sr. and Nozko, Jr.
         are trustees. Address is 233 Main Street, New Britain, Connecticut
         06050-2350.
(3)      Does not include 24,250 shares of Class A Stock and 6,500 shares of
         Common Stock held by Mr. Nozko, Jr. as custodian for his minor child
         nor 900 shares of Class A Stock and 3,750 shares of Common Stock held
         by his wife, Gloria C. Nozko.
(4)      Includes options to purchase 46,000 shares of Class A Stock.
(5)      Includes options to purchase 50,000 shares of Common Stock.
(6)      Includes options to purchase 45,000 shares of Class A Stock.
(7)      Includes options to purchase 15,000 shares of Class A Stock.
(8)      Includes options to purchase 16,500 shares of Class A Stock.
(9)      Includes options to purchase 18,000 shares of Class A Stock.
(10)     Assumes the full conversion of $15,400,000 principal amount of 11.5%
         Convertible Note into 1,400,000 shares of Class A Stock. The Address of
         the Fund is Suite 500, 601 North Fairfax Street, Alexandria, VA 22314.
(11)     Address of Franklin Resources, Inc. is 777 Mariners Island Blvd. San
         Mateo, CA 94404
(12)     Address of First Manhattan Co. is 437 Madison Avenue, New York, NY
         10022.
(13)     Address of Queensway Financial Holdings Limited is 90 Adelaide Street
         West, Toronto, Ontario M5H3V9.
(14)     Address of Investment Counselor's of Maryland, Inc. is 803 Cathedral
         Street, Baltimore, MD 21201.
(15)     Address of EQSF Advisors, Inc. is 767 Third Avenue, New York, NY
         10017-2023.
(16)     Address of U.S. Bancorp is 601 2nd Avenue South, Minneapolis, MN
         55402-4302.
(17)     Based upon one vote for each share of Common Stock and one-tenth vote
         for each share of Class A Stock.

                                       53
<PAGE>   54
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:

Sheet Metal Workers' National Pension Fund

The Pension Fund has the right to convert indebtedness of ACMAT to the Pension
Fund in the principal amount of $15,400,000 into shares of Class A Stock at the
current conversion price of $11.00 per share pursuant to the terms of a 30-year
unsecured, subordinated debenture dated July 1, 1992 and bearing interest at the
annual rate of 11.5%.

Henry W. Nozko, Sr., Henry W. Nozko, Jr. and the Pension Fund are parties to a
voting agreement pursuant to which the parties have agreed to vote their
respective shares of Class A Stock in favor of the Pension Fund's nominees to
the ACMAT Board of Directors. Michael J. Sullivan has resigned from the Board of
Directors effective February 28, 1999. The Pension Fund will nominate a new
Director to be voted upon at the upcoming Annual Meeting of Shareholders.

AIG Life Insurance Company

On February 5, 1997, ACMAT Corporation purchased 1,099,996 shares of its own
Class A Stock from AIG Life Insurance Company (366,663 shares) and American
International Life Assurance Company of New York (733,333 shares). The 1,099,996
shares of Class A Stock were acquired throughout the past two years by AIG Life
Insurance Company and American International Life Assurance Company of New York
pursuant to the conversion options of the Convertible Senior Notes. The shares
were purchased by the Company at an average price of $14.70 per share for a
total purchase price of $16,174,942.

The purchase price of $16,174,942 consisted of $4,174,942 in cash and promissory
notes totaling $12,000,000. The promissory notes are with AIG Life Insurance
Company and American International Life Assurance Company of New York and are
payable over eight years with interest at prime rate (7-3/4%). The interest rate
is equal to the prime rate, however, it shall not exceed 9-1/4% and it shall not
be less than 7-1/4%.

American International Group, Inc., a holding company for AIG Life Insurance
Company and American International Life Assurance Company of New York, is a
substantial owner of Transatlantic Reinsurance Company, a reinsurer to which the
Company, through Coastal Insurance and ACSTAR Insurance, ceded approximately
$265,000 in reinsurance premiums in the year ended December 31, 1998.

Other Relationships

During the year ended December 31, 1998, the Company paid to Dr. Arthur Cosmas
$128,780 in fees in connection with consulting services rendered by Dr. Cosmas
with respect to inspection and engineering services relating to ACMAT's asbestos
abatement activities. Dr. Cosmas is the son-in-law of Henry W. Nozko, Sr. and
Victoria C. Nozko and the brother-in-law of Henry W. Nozko, Jr.

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

         (a)      1. Consolidated Financial Statements

                  Included in Part II of this Report:

                  Independent Auditors' Report
                  Consolidated Statements of Earnings for the years ended
                   December 31, 1998, 1997 and 1996 
                  Consolidated Balance Sheets as of December 31, 1998 and 1997
                  Consolidated Statements of Stockholders' Equity for the years
                   ended December 31, 1998, 1997 and 1996
                  Consolidated Statements of Cash Flows for the years ended
                   December 31, 1998, 1997 and 1996 
                  Notes to Consolidated Financial Statements - December 31,
                   1998, 1997 and 1996

                                       54
<PAGE>   55
                  2. Financial Statement Schedules

                  Consolidated Schedules included in Part II of this
                  Report-Years ended December 31, 1998, 1997 and 1996:

                     I -   Condensed Financial Information of Registrant
                    II -   Valuation and Qualifying Accounts and Reserves
                     V -   Supplemental Information Concerning Property-Casualty
                            Insurance Operations

         All other schedules are omitted as the required information is not
         applicable or the information is presented in the Consolidated
         Financial Statements or related notes.

         (b)      Reports on Form 8-K

                           The Company did not file a report on Form 8-K during
the fourth quarter of 1998.

         (c)               Exhibits

         (3)               Certificate Amending and Restating the Company's
                           Bylaws as filed as an Exhibit to the Company's Form
                           10-Q for the Quarter ended March 31, 1989 is
                           incorporated herein by reference. 

         (3a)              Certificate Amending and Restating the Company's
                           Certificate of Incorporation as amended May 1, 1991
                           as filed as an Exhibit to the Company's Form 10-Q for
                           the Quarter ended March 31, 1991 is incorporated by
                           reference. 

         (4b)              Promissory Note between ACMAT Corporation and Webster
                           Bank is attached hereto as Exhibit 4(b). 

         (4c)              Open-end Mortgage Deed and Security Agreement between
                           ACMAT Corporation and Webster Bank is attached hereto
                           as Exhibit 4(c). 

         (4d)              Commercial Credit Agreement between ACMAT Corporation
                           and BankBoston, N.A. is attached hereto as Exhibit
                           4(d). 

         (4e)              Revolving Credit Note between ACMAT Corporation and
                           BankBoston, N.A. is attached hereto as Exhibit 4(e).

         (4f)              Term Note between ACMAT Corporation and BankBoston,
                           N.A. is attached hereto as Exhibit 4(f). 

         (10a)             Annual Management Compensation Plan filed as an
                           Exhibit to the Company's 1984 Form 10-K is
                           incorporated herein by reference. 

         (10b)             Stock Purchase Agreement dated as of July 1, 1992
                           between ACMAT Corporation and the Sheet Metal
                           Workers' National Pension Fund together with Note
                           Agreement Re: 11 1/2% Convertible Subordinated Notes
                           due 2012 filed as Exhibit 10g to the Company's Form
                           10-K for the year ended December 31, 1992 is
                           incorporated herein by reference. 

         (21)              Subsidiaries of ACMAT. 

         (27)              Financial Data Schedule.

                                       55
<PAGE>   56
                                   SIGNATURES


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




                                            ACMAT CORPORATION


      Dated:  March 30, 1999                By: /s/ Henry W. Nozko, Sr.      
                                               --------------------------------
                                            Henry W. Nozko, Sr., 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>
<CAPTION>
<S>                                                  <C>                                 <C>
                                                     Chairman of the Board,
                                                     President, Chief Executive
       /s/ Henry W. Nozko, Sr                        Officer and Director                March 30, 1999
      -----------------------
      Henry W. Nozko, Sr.


                                                     Chief Operating Officer,
                                                     Executive Vice President
       /s/ Henry W. Nozko, Jr.                       Treasurer and Director              March 30, 1999
      -----------------------
      Henry W. Nozko, Jr.


                                                     Vice President - Finance
                                                     (Principal Financial and
       /s/ Michael P. Cifone                         Accounting Officer)                 March 30, 1999
      -----------------------
      Michael P. Cifone


       /s/ Victoria C. Nozko                         Director                            March 30, 1999
      -----------------------
      Victoria C. Nozko


       /s/ John C. Creasy                            Director                            March 30, 1999
      -----------------------
      John C. Creasy
</TABLE>

                                       56
<PAGE>   57
                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
    Regulation S-K Exhibit                    Page Number
    ----------------------                    -----------
<S>                                 <C>                                                          <C>
    Exhibit 3                       -  Bylaws                                                    Incorporated by Reference

    Exhibit 3a                      -  Certificate of Incorporation
                                        as amended May 1, 1991                                   Incorporated by Reference

    Exhibit 4b                      -  Promissory Note between ACMAT
                                        and Webster Bank                                         Incorporated Herein

    Exhibit 4c                      -  Open-end Mortgage Deed/Security
                                        Agreement between ACMAT and
                                        Webster Bank.                                            Incorporated Herein

    Exhibit 4d                      -  Commercial Credit Agreement between
                                        ACMAT and BankBoston, N.A.                               Incorporated Herein

    Exhibit 4e                      -  Revolving Credit Note between ACMAT
                                        and BankBoston, N.A.                                     Incorporated Herein

    Exhibit 4f                      -  Term Note between ACMAT and BankBoston, N.A.              Incorporated Herein

    Exhibit 10a                     -  Annual Management                                         Incorporated by Reference
                                        Compensation Plan

    Exhibit 10b                     -  Stock Purchase and Note Agreement                         Incorporated by Reference
                                        between ACMAT Corporation
                                        and The Sheet Metal Workers'
                                        National Pension Fund

    Exhibit 21                      -  Subsidiaries of ACMAT                                     Incorporated Herein

    Exhibit 27                      -  Financial Data Schedule                                   Incorporated Herein
</TABLE>

                                       57