<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, 1997
                                       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, 1998 of the Common Stock and Class A
Stock held by non-affiliates of the registrant was $44,778,726.

As of March 1, 1998 there were 596,857 shares of the registrant's Common Stock
and 2,697,273 shares of registrant's Class A Stock, each without par value,
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE: None
<PAGE>   2
                                     PART I

Item 1.  Business                                                              3
       General                                                                 3
       Financial Information about Industry Segments                           3
       Description of Business Segments                                        3
         Insurance and Surety Bonding                                          3
                General                                                        3
                Liability Insurance                                            4
                Surety Bonding                                                 5
                Insurance 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
         Construction Contracting                                              9
                General                                                        9
                Backlog                                                        9
                Materials                                                     10
                Contract Acquisition                                          10
                Warranty                                                      10
                Asbestos Abatement Operations                                 10
         Marketing                                                            10
         Competition                                                          11
         Regulation                                                           11
         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
         Regulatory Environment                                               20

Item 8. Financial Statements and Supplementary Data                           21

Item 9. Changes in and Disagreements with Accountants on
           Accounting and Financial Disclosure                                46

                                    PART III

Item 10. Directors and Executive Officers of the Registrant                   46

Item 11. Executive Compensation                                               48

Item 12. Security Ownership of Certain Beneficial Owners and Management       50

Item 13. Certain Relationships and Related Transactions                       51

                                     PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K      51
<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. 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 others. Both United Coastal Insurance and ACSTAR
Insurance are rated A (excellent) by The A.M. Best Co., Inc. ("A.M. Best"). In
1997, insurance operations accounted for over 67% 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.

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 Company, formerly a
subsidiary of United Coasts, became a wholly-owned subsidiary of ACMAT and its
affiliates.

Financial Information about Industry Segments

Financial information relating to the two segments is set forth in Note 16 to
the consolidated financial statements on page 38 of this document.

In June 1997, Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 131, "Financial Reporting for
Segments of a Business Enterprise". SFAS No. 131 was developed jointly by the
FASB and the Accounting Standards Board of the Canadian Institute of Charted
Accountants in response to request from financial statement users for additional
and better segment information. This statement is effective for periods
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated, unless it is
impracticable to do so. The Company does not anticipate that SFAS No. 131 will
significantly impact the composition of its current operating segments which are
consistent with the management approach. The Company anticipates that the
current insurance segment will be further disclosed as two segments as a result
of SFAS No. 131.

                          INSURANCE AND SURETY BONDING

General

The Company's insurance subsidiaries primarily provide liability insurance and
surety bonding for general, specialty trade, environmental remediation, asbestos
and lead abatement contractors and professional liability for architects,
engineers, environmental consultants and others. The Company also provides
products liability insurance for manufacturers and distributors. This highly
specialized insurance market includes general liability, pollution liability,
environmental consulting liability, hazardous waste storage and treatment
pollution liability and other related liabilities. Fewer property and casualty
insurers serve these markets due to the technical skills required in the
underwriting process and the high degree and intensive amount of service
required to tailor coverages to the special needs of policyholders and to
provide timely responses to individual contract requirements.


                                       3
<PAGE>   4
Liability Insurance

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.

Surety 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. Most bonds are supported by various levels of collateral
based upon the financial condition of the customer.

The Company generally requires cash or irrevocable letters of credit to
collateralize a portion or all 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 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,
                                                 1997         1996         1995
                                                 ----         ----         ----
<S>                                              <C>          <C>          <C>
GAAP Ratios:
    Loss ratio                                   28.8%        30.0%        30.0%
    Expense ratio                                48.0         43.5         41.4
                                                 ----         ----         ----
    GAAP combined ratio                          76.8         73.5         71.4
                                                 ====         ====         ====
Statutory Ratios:
   Loss ratio                                    29.5         30.5         30.5
   Expense ratio                                 45.0         42.7         41.9
                                                 ----         ----         ----
   Statutory combined ratio                      74.5         73.2         72.4
                                                 ====         ====         ====
</TABLE>

The increase in the combined ratio over the past three years results primarily
from the decline in premiums. See Item 7 "Management's Discussion and Analysis
of Financial Condition and Results of Operations."


                                       5
<PAGE>   6
Underwriting

The Company's underwriting practices rely heavily upon the knowledge base which
it has developed in over forty-eight 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

The Company reinsures the excess limit on each insurance policy above $2 million
up to $5 million for liability and reinsures $10 million of $15.5 million of
individual bond limits offered by the Company through a treaty with two
companies, Transatlantic Reinsurance Company, an affiliate of American
International Group, Inc. and United States Fidelity & Guaranty Company, each
rated "A+" and "A", respectively, by A. M. Best. The Company has additional
liability treaty excess of loss reinsurance which provides limits on a per
policy basis of $5,000,000 per occurrence or claim made and in the aggregate
excess of $5,000,000 per occurrence or claim made and in the aggregate. To date,
the Company's reinsurers have fulfilled their obligations under their
reinsurance contracts with the Company. Facultative reinsurance is also used for
current insureds seeking project specific excess insurance. In general, a
reinsurance transaction takes place when an insurance company cedes all or a
portion of its exposure to liability on insurance written or surety bonds issued
to another insurer which assumes such exposure, as if the ceding insurer were
itself purchasing insurance from the assuming insurer. Reinsurance does not
legally discharge an insurance carrier from its primary liability to a
policyholder for the face amount of coverage and, accordingly, the financial
stability of the Company's reinsurers is an important factor in determining the
Company's ultimate exposure to claims.

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,
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


                                       6
<PAGE>   7
its indemnitors. Management believes that the reserves for losses and loss
adjustment expenses at December 31, 1997 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>
                                        1997                1996                1995
                                    ------------        ------------        ------------
<S>                                 <C>                 <C>                 <C>
Balance at January 1                $ 47,960,084        $ 45,235,311        $ 40,954,783
 Less reinsurance recoverable          3,841,001           3,872,099           4,228,879
                                    ------------        ------------        ------------
 Net balance at January 1             44,119,083          41,363,212          36,725,904

Incurred related to:

          Current year                 5,176,030           7,137,183           8,015,877
          Prior years                   (838,778)         (1,167,203)           (900,506)
                                    ------------        ------------        ------------
Total incurred                         4,337,252           5,969,980           7,115,371
Payments related to:

          Current year                    94,398             153,514             111,989
          Prior years                  2,939,345           3,060,595           2,366,074
                                    ------------        ------------        ------------
Total Payments                         3,033,743           3,214,109           2,478,063

Net balance at December 31            45,422,592          44,119,083          41,363,212
 Plus reinsurance recoverable          3,478,121           3,841,001           3,872,099
                                    ------------        ------------        ------------
 Balance at December 31             $ 48,900,713        $ 47,960,084        $ 45,235,311
                                    ============        ============        ============
</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, 1997, 1996 and 1995 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 $57,723,399,
$59,968,945 and $58,835,913, respectively. As of December 31, 1997, 1996 and
1995 reserves determined in accordance with generally accepted accounting
principles ("GAAP basis reserves") were $48,900,713, $47,960,084 and
$45,235,311, respectively. The difference between the Statutory basis reserves
and the GAAP basis reserves 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.


                                       7
<PAGE>   8
The following losses and loss adjustment expense reserve runoff table is for the
combined insurance operations of the Company's insurance subsidiaries. ACSTAR
Insurance operations began in 1988. The run-off table presents the reserve
activity since the inception of United Coastal Insurance in 1985. 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>
                                       1988     1989     1990     1991     1992     1993     1994     1995     1996     1997
                                      ------   ------   ------   ------   ------   ------   ------   ------   ------   ------
<S>                                   <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>
                                                                             (thousands)

Liability for unpaid losses
 and loss adjustment expenses         11,528   15,626   21,378   26,234   29,240   30,437   36,726   41,363   44,119   45,423

Liability reestimated as of:

 One year later                       11,528   15,476   21,378   26,234   29,240   30,437   35,825   40,193   43,282
 Two years later                      11,378   15,476   21,378   26,234   29,240   28,337   34,659   37,872
 Three years later                    11,378   15,476   21,378   26,234   26,000   27,170   29,913
 Four years later                     11,378   14,876   21,378   22,094   24,833   23,550
 Five years later                     10,778   14,876   16,642   20,927   22,284
 Six years later                      10,778    6,622   15,475   18,841
 Seven years later                     2,924    5,455   13,394
 Eight years later                     2,382    4,411
 Nine years later                      2,354

Cumulative Redundancy (deficiency):    9,174   11,215    7,984    7,393    6,956    6,887    6,813    3,491      839

Paid (cumulative) as of:

 One year later                          759      565    1,357    3,216    6,142    1,560    2,361    3,067    2,942
 Two years later                       1,026      743    4,067    8,699    7,574    3,655    4,582    5,256
 Three years later                     1,070    2,140    8,954    9,576    8,603    5,022    6,412
 Four years later                      1,178    3,460   10,233   10,488    9,554    6,189
 Five years later                      2,349    3,924   10,554   10,816    9,818
 Six years later                       2,355    4,010   10,858   10,856
 Seven years later                     2,238    4,012   10,874
 Eight years later                     2,354    4,011
 Nine years later                      2,354

Gross liability - end of year                                                      34,730   40,955   45,235   47,960   48,901
 Reinsurance recoverable                                                            4,293    4,229    3,872    3,841    3,478
                                                                                   ------   ------   ------   ------   ------
Net liability - end of year                                                        30,437   36,726   41,363   44,119   45,423
</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, 1997, none of the Company's
insurance subsidiaries' IRIS ratios were designated an "unusual value", except
for the change in net writings for United Coastal. The change in net writings
was below the NAIC standard of 33% primarily due to a continuing soft insurance
market place and the Company's strategy to avoid current unfavorable pricing.

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 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 1997 Best letter ratings range
from A++ (superior) to F (in liquidation).

Since 1994, 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, 1997 was significantly above the level which
might require regulatory action.

                            CONSTRUCTION CONTRACTING

General

The Company provides a broad range of 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
installs interiors in office buildings, retail establishments, schools,
colleges, churches, hospitals and other buildings. The Company's 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 interior design, construction and asbestos abatement industries are highly
fragmented. Many interior contractors, in contrast to the Company, specialize in
a particular interior component such as ceilings or partitions. 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, 1997 and 1996:

<TABLE>
<CAPTION>
                                                 December 31, 1997  December 31, 1996
                                                 -----------------  -----------------
<S>                                              <C>                <C>
Total Number of Contracts.                                     12             14
Total unbilled contract amounts.                       $4,800,000     $8,700,000
Number of contracts with unbilled amounts in
excess of $400,000.                                             2              3
Aggregate unbilled amount of contracts in
excess of $400,000.                                    $4,000,000     $8,200,000
</TABLE>

The Company estimates that all of the December 31, 1997 backlog will be
completed prior to December 31, 1998.


                                       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 Surety 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.

The Company's insurance products are marketed in all 50 states primarily through
several of the largest insurance brokers, including Johnson & Higgins, Marsh &
McLennan, Willis Corroon, AON, Inc. and Sedgwick.


                                       10
<PAGE>   11
Construction 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 Surety 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 and CNA. 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.

Construction 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.

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


                                       11
<PAGE>   12
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, 1997, the Company's insurance subsidiaries had securities with an aggregate
book value of approximately $9.9 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 1997, United
Coastal Insurance paid $10,001,200 in dividends. At January 1, 1998,
approximately $5,300,000 is available for the payment of dividends by United
Coastal Insurance in 1998 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 1997, ACSTAR paid
$5,600,000 in dividends to ACSTAR Holdings. At January 1, 1998, approximately
$4,732,000 is available for the payment of dividends by ACSTAR Insurance in 1998
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 excluded from earnings and recorded as a
separate component of stockholders' equity, 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, 1997 and 1996
(dollars in thousands):

<TABLE>
<CAPTION>
                                                              December 31,
                                                       1997                   1996
                                                           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                 $ 34,320      25.4%       38,322      27.3
  State and political subdivisions              43,976      32.5        55,135      39.2
Industrial and Miscellaneous                    15,137      11.2            --        --
Mortgage-backed securities                       8,420       6.2            54        --
                                              --------     -----      --------     -----
Total fixed maturities available for sale      101,853      75.3        93,511      66.5
Equity securities (2)                            1,011        .7            11        --
Short-term investments (3)                      32,422      24.0        46,969      33.5
                                              --------     -----      --------     -----
Total investments                             $135,286     100.0%     $140,491     100.0%
                                              ========     =====      ========     =====
</TABLE>

(1)      Fixed maturities available for sale are carried at fair value. Total
         cost of fixed maturities was approximately $101,524,000 at December 31,
         1997 and $93,398,000 at December 31, 1996.

(2)      Equity securities are carried at fair value. Total cost of equity
         securities was approximately $983,000 at December 31,1997 and $5,000 at
         December 31, 1996.

(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, 1997 and 1996 (dollars in
thousands):

<TABLE>
<CAPTION>
                                                      December 31,
                                                1997                    1996
                                                     Percent                  Percent
                                                       of                       of
                                        Amount       Total       Amount       Total
                                       --------      -----      --------      -----
<S>                                    <C>           <C>        <C>           <C>
Due in (1):
One year or less                       $ 46,296       45.5%     $ 41,559       44.4%
After one year through five years        55,149       54.1        51,231       54.8
After five years through ten years          408         .4           372         .4
After ten years                              --         --           349         .4
                                       --------      -----      --------      -----
                                       $101,853      100.0%     $ 93,511      100.0%
                                       ========      =====      ========      =====
</TABLE>

         (1) Based on stated maturity dates with no prepayment assumptions.
         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, 1997, the Company's
investments complied with such laws and regulations.


                                       13
<PAGE>   14
Investment results for the years ended December 31, 1997, 1996 and 1995 are
shown in the following table (dollars in thousands):

<TABLE>
<CAPTION>
                                       1997             1996             1995
                                     --------         --------         --------
<S>                                  <C>              <C>              <C>
Invested assets (1)                  $140,029         $139,282         $129,719
Investment income (2)                $  6,505         $  6,536         $  6,036
Average yield                            4.65%            4.69%            4.65%
</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, 1997, the Company employed approximately 30 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 that
respecting those actions where the Company is a defendant, has appropriate
insurance reserves recorded, and does not believe 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 183 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 1997.


                                       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>
                                                1997                  1996
                                          HIGH       LOW        HIGH       LOW
<S>                                      <C>        <C>        <C>        <C>
COMMON STOCK
  1st Quarter                                20         20         16         15
  2nd Quarter                                20         20         20         15
  3rd Quarter                            21-1/2     20-1/2     18-7/8         17
  4th Quarter                                21         21     20-1/2         18

CLASS A STOCK
  1st Quarter                            16-1/4     14-1/4     13-3/4     12-1/2
  2nd Quarter                            16-1/2         15         13     11-5/8
  3rd Quarter                            19-3/4     15-1/2         13     11-1/2
  4th Quarter                            19-1/2         17     14-3/4     12-1/2
</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, 1998, there were 360 Common
Stock shareholders of record and 980 Class A Stock shareholders of record.

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                   1997             1996             1995             1994             1993
                               ------------     ------------     ------------     ------------     ------------
<S>                            <C>              <C>              <C>              <C>              <C>
Revenues                       $ 33,552,135     $ 37,035,305     $ 41,857,398     $ 40,755,676     $ 40,193,622
Total Assets                    176,208,762      184,359,566      180,402,238      168,494,814      174,609,667
Long-Term Debt                   48,212,727       35,807,419       40,127,590       43,405,266       49,832,463
Stockholders'  Equity            39,577,739       49,702,404       37,587,259       38,004,935       36,686,002

Net Earnings                      4,456,949        5,293,111        5,350,280        4,839,861        3,909,117
Basic Earnings Per Share               1.29             1.56             1.49             1.20              .93
Diluted Earnings Per Share             1.12             1.22             1.17             1.18              .91
</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, 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 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 will
maintain its existing pricing strategy and high level of service.

Contract Revenues

Contract revenues were $10,056,322 in 1997 compared to $9,415,734 in 1996.
Construction revenue is difficult to predict in 1998 and depends greatly on the
successful securement of contracts bid. 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 is
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.

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
investments 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.


                                       16
<PAGE>   17
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 is 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.

RESULTS OF OPERATIONS:

YEARS ENDED DECEMBER 31, 1996 AND 1995:

Earned Premiums

Earned premiums in 1996 were $19,899,936 compared to $23,492,905 in 1995. Net
written premiums were $18,041,488 in 1996 compared to $22,856,791 in 1995. The
decrease in earned premiums in 1996 reflects the 21% decrease in 1996 net
written premiums over 1995 net written premiums. The Company has written fewer
new accounts as a result of what is believed to be an inadequate pricing
environment in the market. 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 $9,415,734 in 1996 compared to $11,614,632 in 1995.
In 1996, the Company has focused on fewer, more profitable projects.

Investment Income, Net

Net investment income was $6,535,572 in 1996 compared to $6,062,883 in 1995,
representing effective yields of 4.64% and 4.58%, respectively. The increase in
investment income in 1996 over 1995 was due substantially to an increase in
total invested assets. Invested assets, including cash and cash equivalents,
were $142,677,985 and $135,886,913 at December 31, 1996 and 1995, respectively.
The increase in invested assets is attributable to the net cash flow generated
by written premiums, cash collateral and the reinvestment of investment income
offset by the purchase of stock and the repayment of debt.

Net Realized Capital Gains

Realized capital gains from the sale of investments during 1996 were $257,774
compared to realized capital gains of $7,897 in 1995. In December, 1996, the
Company sold fixed maturity securities with a book value of approximately
$34,000,000 resulting in a realized gain of approximately $204,000.

Cost of Contract Revenues

Cost of contract revenues were $8,396,344 in 1996 compared to $10,774,758 in
1995. The decrease in cost of contract revenues during 1996 compared to 1995
reflects the decrease in contract revenues. Cost of contract revenues vary from
period to period as a function of contract revenues (See Contract Revenues). The
Company's construction backlog at December 31, 1996 was approximately $8,700,000
compared to $3,600,000 at December 31, 1995.


                                       17
<PAGE>   18
Losses and Loss Adjustment Expenses

Losses and loss adjustment expenses were $5,969,980 in 1996 compared to
$7,115,371 in 1995. The decreases in the losses and loss adjustment expenses are
attributable to the decline in earned premiums from 1995 to 1996 without any
fluctuations in the loss ratios. 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 $3,617,308 in 1996 as compared to
$3,939,008 in 1995. 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 $5,610,176 in 1996 compared to
$6,097,322 in 1995. The decrease in selling, general and administrative expenses
from 1996 to 1995 reflects a decrease in salary expense.

Interest Expense

Interest expense has increased to $4,946,418 in 1996 from $4,810,578 in 1995.
The increase in interest expense in 1996 is due primarily to the increase in
short term borrowings offset, in part, by a decrease in long-term debt.

Income Taxes

Income tax expense was $2,313,828 in 1996 compared to $2,414,400 in 1995,
representing effective Federal tax rates of 26.5% and 25.1%, 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.

Management believes that the reserves for losses and loss adjustment expenses at
December 31, 1997 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 28.8%,30.0% and 30.0% for the years ended December 31, 1997, 1996
and 1995, respectively. These loss ratios are below industry averages and are
believed to be the result of conservative underwriting. There can be no
assurance that such loss ratios can continue. The Company's insurance
subsidiaries' expense ratios under GAAP were 48.0%, 43.5% and 41.4% for the
years ended


                                       18
<PAGE>   19
December 31, 1997, 1996 and 1995, respectively. The Company's insurance
subsidiaries' combined ratios under GAAP were 76.8%, 73.5% and 71.4% for the
years ended December 31, 1997, 1996 and 1995, respectively. The increase in the
1997 combined ratio results primarily from 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 realized cash flow from operations of $5,585,329 in 1997 compared to
$14,260,264 in 1996 and $19,289,320 in 1995. Net cash flows provided by
operations in 1997 were derived principally from premium collections and
collateral held. Substantially all of the Company's cash flow was 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 $4,993,298 in 1997. Net cash used
for investing activities amounted to $11,392,397 in 1996 and $11,431,882 in
1995.

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, 1997.

The Company maintains a short-term unsecured bank credit line of $10 million to
fund interim cash requirements. There was $5,000,000 outstanding under this line
of credit as of December 31, 1997. Effective June 30, 1994, this credit line was
renewed and modified to include an additional $8,000,000, six-year, term loan
which is repayable in quarterly installments commencing September 30, 1994.
Portions of the proceeds of such term loan were applied to the repayment of
intercompany debt and to the reduction of the Company's short-term credit line.

On November 7, 1995, the Company obtained a $7,500,000 Demand Discretionary Line
of Credit with The Bank of Boston Connecticut which expired on November 6, 1997.
Under the terms of the line of credit, interest on the outstanding balance is
calculated based upon the LIBOR plus 160 basis points in effect during the
borrowing period. There was $5,200,000 outstanding under this line of credit at
December 31, 1996.

During 1997, the Company purchased, in the open market and privately negotiated
transactions, 3,400 shares of its Common Stock at an average price of $20.44.
The Company also purchased, in open market and privately negotiated
transactions, 1,347,686 shares of its Class A Stock at an average price of
$14.98 per share.


                                       19
<PAGE>   20
The Company's principal source of cash for repayment of long-term debt is
dividends from its two insurance companies. 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 1998, the amount of
dividends ACMAT's insurance subsidiaries may pay, without prior approval of
their domestic state insurance departments, is limited to approximately
$10,032,000.

In 1998, 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 $4,365,000 in
1998.

YEAR 2000 ISSUE

In 1997, the Company began converting its computer systems to be Year 2000
compliant (e.g. to recognize the difference between '99 and '00 as one year
instead of negative 99 years). The total cost of the project is estimated to be
less than $100,000 and is being funded through operating cash flows. The Company
is expensing all costs associated with these system changes. At December 31,
1997, approximately 35% of the Company's systems were compliant, with all
systems expected to be compliant by the end of 1998. However, there can be no
assurance that the systems of other companies on which the Company's systems
rely also will be timely converted or that any such failure to convert by
another company would not have an adverse effect on the Company's systems.

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, 1997 was significantly above the level which
might require regulatory action.


                                       20
<PAGE>   21
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,
         1997, 1996 and 1995

         Consolidated Balance Sheets as of December 31, 1997 and 1996

         Consolidated Statements of Stockholders' Equity for the years ended
         December 31, 1997, 1996 and 1995

         Consolidated Statements of Cash Flows for the years ended December 31,
         1997, 1996 and 1995

         Notes to Consolidated Financial Statements - December 31, 1997, 1996
         and 1995

         Consolidated Schedules included in Part II of this Report - Years ended
         December 31, 1997, 1996 and 1995:

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


                                       21
<PAGE>   22
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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997 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.

Hartford, Connecticut                                      KPMG Peat Marwick LLP
February 23, 1998


                                       22
<PAGE>   23
                       ACMAT CORPORATION AND SUBSIDIARIES

Consolidated Statements of Earnings
Years Ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                                          1997            1996             1995
                                                       -----------     -----------      -----------
<S>                                                    <C>              <C>              <C>
Earned Premiums                                        $15,045,844      19,899,936       23,492,905
Contract Revenues                                       10,056,322       9,415,734       11,614,632
Investment Income, Net                                   6,504,716       6,535,572        6,062,883
Net Realized Capital Gains                                 282,667         257,774            7,897
Other Income                                             1,662,586         926,289          679,081
                                                       -----------     -----------      -----------
                                                        33,552,135      37,035,305       41,857,398

Losses and Loss Adjustment Expenses                      4,337,252       5,969,980        7,115,371
Cost of Contract Revenues                                9,331,103       8,396,344       10,774,758
Amortization of Policy Acquisition Costs                 2,802,993       3,617,308        3,939,008
Selling, General and Administrative Expenses             5,767,808       5,610,176        6,097,322
Interest Expense                                         5,116,414       4,946,418        4,810,578
                                                       -----------     -----------      -----------
                                                        27,355,570      28,540,226       32,737,037
                                                       -----------     -----------      -----------
Earnings Before Income Taxes and Minority Interest       6,196,565       8,495,079        9,120,361

Income Taxes                                             1,739,616       2,313,828        2,414,400
                                                       -----------     -----------      -----------
Earnings Before Minority Interest                        4,456,949       6,181,251        6,705,961

Minority Interest                                               --        (888,140)      (1,355,681)
                                                       -----------     -----------      -----------
Net Earnings                                           $ 4,456,949       5,293,111        5,350,280
                                                       ===========     ===========      ===========
Basic Earnings Per Share                               $      1.29            1.56             1.49
                                                       -----------     -----------      -----------
Diluted Earnings Per Share                             $      1.12            1.22             1.17
                                                       -----------     -----------      -----------
</TABLE>

See Notes to Consolidated Financial Statements.


                                       23
<PAGE>   24
                       ACMAT CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets
December 31, 1997 and 1996

<TABLE>
<CAPTION>
Assets                                                                 1997             1996
                                                                   ------------     ------------
<S>                                                                <C>              <C>
Investments:
 Fixed Maturities - Available for Sale at Fair Value
  (Cost of $101,523,931 in 1997 and $93,397,819 in 1996)           $101,852,980       93,511,048
 Equity Securities - Available for Sale at Fair Value
  (Cost of $983,074 in 1997 and $5,262 in 1996)                       1,010,927           10,573
 Short-term Investments, at Cost which Approximates Fair Value       32,422,313       46,969,137
                                                                   ------------     ------------
  Total Investments                                                 135,286,220      140,490,758

Cash and Cash Equivalents                                             2,095,449        2,187,227
Accrued Interest Receivable                                           1,458,164        1,567,761
Receivables, Net of Allowance for Doubtful Accounts of
 $309,746 in 1997 and $322,406 in 1996                                7,118,527        8,381,590
Reinsurance Recoverable                                               3,478,121        3,841,001
Income Tax Refund Receivable                                            564,829               --
Prepaid Expenses                                                        204,642          206,562
Deferred Income Taxes                                                 1,940,936        2,285,883
Limited Partnership Investment                                        2,052,475        1,439,174
Property and Equipment, Net                                          13,179,337       13,553,114
Deferred Policy Acquisition Costs                                     2,078,405        2,905,875
Other Assets                                                          3,529,634        3,951,946
Intangibles, Net                                                      3,222,023        3,548,675
                                                                   ------------     ------------
                                                                   $176,208,762      184,359,566
                                                                   ============     ============
Liabilities & Stockholders' Equity
Notes Payable to Banks                                             $  5,000,000       13,200,000
Accounts Payable                                                      3,188,554        1,873,611
Reserves for Losses and Loss Adjustment Expenses                     48,900,713       47,960,084
Unearned Premiums                                                     9,804,159       12,341,642
Collateral Held                                                      20,275,702       21,830,566
Other Accrued Liabilities                                             1,249,168        1,404,821
Income Taxes                                                                 --          239,019
Long-term Debt                                                       48,212,727       35,807,419
                                                                   ------------     ------------
 Total Liabilities                                                  136,631,023      134,657,162

Stockholders' Equity:
  Common Stock (No Par Value; 3,500,000 Shares Authorized;
  596,857 and 600,257 Shares Issued and Outstanding)                    596,857          600,257
  Class A Stock (No Par Value; 10,000,000 Shares Authorized;
   2,712,174 and 3,488,860 Shares Issued and Outstanding)             2,712,174        3,488,860
  Additional Paid-in Capital                                                 --        8,407,877
  Retained Earnings                                                  36,033,153       36,894,494
  Unrealized Gain on Securities, Net of Deferred Taxes
        of $121,346 in 1997 and $160,169 in 1996                        235,555          310,916
                                                                   ------------     ------------
    Total Stockholders' Equity                                       39,577,739       49,702,404
                                                                   ------------     ------------
Commitments and Contingencies
                                                                   $176,208,762      184,359,566
                                                                   ============     ============
</TABLE>

See Notes to Consolidated Financial Statements.


                                       24
<PAGE>   25
                       ACMAT CORPORATION AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity
December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                                                                                            Net
                                                                                                         unrealized
                                               Common        Class A                                       gains
                                                stock         stock        Additional                     (losses)        Total
                                                 par           par           paid-in        Retained         on        stockholders'
                                                value         value          capital        earnings      securities      equity
                                             -----------    -----------    -----------    -----------    -----------    -----------
<S>                                          <C>              <C>            <C>           <C>            <C>            <C>
Balance as of December 31, 1994              $   652,920      3,313,067      9,358,948     26,251,103     (1,571,103)    38,004,935

  Acquisition and retirement of
    10,456 shares of Common Stock            $   (10,456)            --       (151,829)            --             --       (162,285)
  Acquisition and retirement of
    797,228 shares of Class A Stock                   --       (797,228)    (8,635,992)            --             --     (9,433,220)
  Issuance of 149,997 shares
    of Class A Stock                                  --        149,997      1,349,973             --             --      1,499,970
  Net unrealized appreciation of
    debt and equity securities                        --             --             --             --      2,717,264      2,717,264
  Deferred taxes on net unrealized gains
    on debt and equity securities                     --             --             --             --       (389,685)      (389,685)
  Net earnings                                        --             --             --      5,350,280             --      5,350,280
                                             -----------    -----------    -----------    -----------    -----------    -----------
Balance as of December 31, 1995              $   642,464      2,665,836      1,921,100     31,601,383        756,476     37,587,259

  Acquisition and retirement of
    42,207 shares of Common Stock            $   (42,207)            --       (751,865)            --             --       (794,072)
  Acquisition and retirement of
    872,975 shares of Class A Stock                   --       (872,975)   (10,633,162)            --             --    (11,506,137)
  Issuance of 499,999 Shares of
    Class A Stock                                     --        499,999      4,499,991             --             --      4,999,990
  Issuance of 85,000 Shares of Class A
    Stock pursuant to stock options                   --         85,000        644,150             --             --        729,150
  Issuance of 1,111,000 Shares of
    Class A Stock                                     --      1,111,000     12,727,663             --             --     13,838,663
Net unrealized losses on debt and
    equity securities                                 --             --             --             --       (675,077)      (675,077)
Deferred taxes on net unrealized gains
    on debt and equity securities                     --             --             --             --        229,517        229,517
  Net earnings                                        --             --             --      5,293,111             --      5,293,111
                                             -----------    -----------    -----------    -----------    -----------    -----------
Balance as of December 31, 1996              $   600,257      3,488,860      8,407,877     36,894,494        310,916     49,702,404

  Acquisition and retirement of
     3,400 shares of Common Stock            $    (3,400)            --        (66,096)            --             --        (69,496)
  Acquisition and retirement of
      1,347,686 shares of Class A Stock               --     (1,347,686)   (13,522,491)    (5,318,290)            --    (20,188,467)
  Issuance of 450,000 shares
    of Class A Stock                                  --        450,000      4,050,000             --             --      4,500,000
  Issuance of 121,000 shares of
    Class A Stock pursuant to stock options           --        121,000      1,130,710             --             --      1,251,710
  Net unrealized losses on debt and
    equity securities                                 --             --             --             --       (114,183)      (114,183)
  Deferred tax benefit on net unrealized
    losses on debt and equity securities              --             --             --             --         38,822         38,822
  Net earnings                                        --             --             --      4,456,949             --      4,456,949
                                             -----------    -----------    -----------    -----------    -----------    -----------
Balance as of December 31, 1997              $   596,857      2,712,174             --     36,033,153        235,555     39,577,739
                                             ===========    ===========    ===========    ===========    ===========    ===========
</TABLE>

See Notes to Consolidated Financial Statements.


                                       25
<PAGE>   26
                       ACMAT CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996, 1995

<TABLE>
<CAPTION>
                                                                1997               1996                1995
                                                            -------------      -------------      -------------
<S>                                                         <C>                <C>                <C>
Cash Flows From Operating Activities:
 Net Earnings                                               $   4,456,949          5,293,111          5,350,280
 Adjustments to Reconcile Net Earnings to Net
 Cash Provided by Operating Activities:
  Depreciation and Amortization                                 1,506,013          1,787,061          2,224,897
  Minority Interests                                                   --            888,140          1,355,681
  Net Realized Capital Gains                                     (282,667)          (257,774)            (7,897)
  Limited Partnership Investment                                 (966,315)            33,725            (23,092)
  Changes In:
   Accrued Interest Receivable                                    109,597            663,227           (340,162)
   Receivables, Net                                             1,263,063            640,844            458,133
   Reinsurance Recoverable                                        362,880             31,098            356,780
   Deferred Policy Acquisition Costs                              827,470            553,433            202,113
   Prepaid Expenses and Other Assets                              351,384           (183,343)          (693,741)
   Accounts Payable and Other Liabilities                       1,159,290           (773,028)            67,992
   Collateral Held                                             (1,554,864)         4,062,611          7,364,249
   Reserves for Losses and Loss Adjustment Expenses               940,629          2,724,773          4,280,528
   Income Taxes                                                   (50,617)           757,357           (631,229)
   Unearned Premiums                                           (2,537,483)        (1,960,971)          (675,212)
                                                            -------------      -------------      -------------
    Net Cash Provided by Operating Activities                   5,585,329         14,260,264         19,289,320
                                                            -------------      -------------      -------------
Cash Flows From Investing Activities:
 Proceeds From Investments Sold or Matured:
  Fixed Maturities - Sold                                      41,501,401         39,094,153         12,902,187
  Fixed Maturities - Matured                                   35,221,999         61,896,825         42,485,000
  Equity Securities                                               774,349            298,568            614,340
  Short-Term Investments                                      155,255,106         95,826,099         80,444,029
 Purchases Of:
  Fixed Maturities                                            (85,168,980)       (73,340,147)       (67,587,026)
  Equity Securities                                            (1,727,812)          (255,262)                --
  Short-term Investments                                     (140,708,282)      (134,436,189)       (80,077,020)
 Capital Expenditures                                            (154,483)          (140,838)          (213,392)
 Other                                                                 --           (335,606)                --
                                                            -------------      -------------      -------------
   Net Cash Provided by (Used for) Investing Activities         4,993,298        (11,392,397)       (11,431,882)
                                                            -------------      -------------      -------------
Cash Flows From Financing Activities:
 Borrowings Under Line of Credit                                5,000,000          9,200,000          4,200,000
 Repayments Under Line of Credit                              (13,200,000)        (3,500,000)        (1,000,000)
 Repayments on Long-term Debt                                  (3,594,692)        (1,820,181)        (1,777,706)
 Issuance of Long-term Debt                                     8,500,000          2,500,000                 --
 Issuance of Class A Stock                                        882,250            560,000                 --
 Payments for Subsidiaries' Stock                                      --           (440,625)           (35,000)
 Payments for Acquisition and Retirement of Stock              (8,257,963)       (12,300,209)        (9,595,505)
                                                            -------------      -------------      -------------
   Net Cash Used For Financing Activities                     (10,670,405)        (5,801,015)        (8,208,211)
                                                            -------------      -------------      -------------
Net Decrease in Cash and Cash Equivalents                         (91,778)        (2,933,148)          (350,773)

Cash and Cash Equivalents, Beginning of Year                    2,187,227          5,120,375          5,471,148
                                                            -------------      -------------      -------------
Cash and Cash Equivalents, End of Year                      $   2,095,449          2,187,227          5,120,375
                                                            =============      =============      =============
</TABLE>

See Notes to Consolidated Financial Statements.


                                       26
<PAGE>   27
                       ACMAT CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995

(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 1996 and 1995
                  financial statements to conform with the classifications in
                  1997.

         (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 1997, 1996 and 1995, customers who individually
                  accounted for more than 10% of consolidated construction
                  contracting revenue for the respective years are as follows:
                  1997 - four customers provided 28%, 21%, 19% and 11%,
                  respectively; in 1996 - four customers provided 18%, 15%, 14%
                  and 10%, respectively; in 1995 - three customers provided 28%,
                  24% and 18%, 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 reported as a separate component of stockholders'
                  equity, 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 represents participation in
                  a joint venture, Grandview Partners, L.P., which invests
                  primarily in small capitalization stocks traded on national
                  market exchanges. The Company owns 11.2% of the Limited
                  Partnership. The limited partnership investment is carried on
                  the equity method of accounting in which the Company's share
                  of the net income of the limited partnership is 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.


                                       27
<PAGE>   28
                       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, 1997, 1996 and 1995, deferrable costs
                  capitalized were $1,975,523, $3,063,875 and $3,736,895,
                  respectively. The amortization of deferred policy acquisition
                  costs charged to operations for the years ended December 31,
                  1997, 1996 and 1995 was $2,802,993, $3,617,308 and $3,939,008,
                  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 $5 million for liability
                  and $10 million of $15.5 million of individual surety bond
                  limit. Effective April 1, 1995, the Company secured additional
                  liability treaty excess of loss reinsurance which provides
                  limits on a per policy basis of $5,000,000 per occurrence or
                  claim made and in the aggregate excess of $5,000,000 per
                  occurrence or claim made and in the aggregate. 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.


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

                  Reinsurance recoverables include ceded reserves for losses and
                  loss adjustment expenses. Ceded unearned premiums of $912,039
                  and $1,083,877 at December 31, 1997 and 1996, 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
                1997             1996             1995              1997             1996              1995
            ------------      -----------      -----------      ------------      -----------      -----------
<S>         <C>               <C>              <C>              <C>               <C>              <C>
Direct      $ 12,851,647       17,954,271       22,810,600      $ 15,164,588       19,834,586       23,171,614
Assumed          686,935        1,516,988        1,427,542         1,144,017        1,470,043        1,582,138
Ceded           (858,385)      (1,429,771)      (1,381,351)       (1,262,761)      (1,404,693)      (1,260,847)
            ------------      -----------      -----------      ------------      -----------      -----------
Totals      $ 12,680,197       18,041,488       22,856,791      $ 15,045,844       19,899,936       23,492,905
            ============      ===========      ===========      ============      ===========      ===========
</TABLE>

                  There were no reinsurance recoveries on ceded paid losses and
                  loss adjustment expenses for the year ended December 31, 1997.
                  Reinsurance recoveries on ceded paid losses and loss
                  adjustment expenses totaled approximately $98,000 and $30,000
                  for the years ended December 31, 1996 and 1995, respectively.
                  Ceded incurred losses and loss adjustment expenses totaled
                  $364,015 and $421,408 for the years ended December 31, 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 terms of the
                  respective policy contracts. 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)      Future Accounting Standards

                  In June 1997, the Financial Accounting Standards Board
                  ("FASB") issued SFAS No. 130, "Reporting Comprehensive
                  Income". The objective of Statement of Financial Accounting
                  Standards ("SFAS") No. 130 is to report comprehensive income
                  which is defined as all changes in equity of an enterprise
                  that result from transactions and other economic events of the
                  period other than transactions with owners. SFAS No. 130
                  establishes standards for reporting and display of
                  comprehensive income and its components in a full set of
                  general-purpose financial statements. This Statement is
                  effective for fiscal years beginning after December 15, 1997.
                  Reclassification of financial statements for earlier periods
                  provided for comparative purposes is required. The Company is
                  currently evaluating the presentation alternatives provided by
                  the Statement.


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

         In June 1997, FASB issued SFAS No. 131, "Financial Reporting for
         Segments of a Business Enterprise". SFAS No. 131 was developed jointly
         by the FASB and the Accounting Standards Board of the Canadian
         Institute of Charted Accountants in response to request from financial
         statement users for additional and better segment information. This
         statement is effective for periods beginning after December 15, 1997.
         In the initial year of application, comparative information for earlier
         years is to be restated, unless it is impracticable to do so. The
         Company does not anticipate that SFAS No. 131 will significantly impact
         the composition of its current operating segments which are consistent
         with the management approach. The Company anticipates that the current
         insurance segment will be further disclosed as two segments as a result
         of SFAS No. 131.

(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, has become a wholly-owned
         subsidiary of ACMAT and its affiliates. The merger was a non-cash
         transaction that is not reflected in the Statements of Cash Flow.

(3)      INVESTMENTS

<TABLE>
<CAPTION>
INVESTMENTS AT DECEMBER 31, 1997 AND 1996 FOLLOWS:       AMORTIZED       ESTIMATED         CARRYING
                                                           COST          FAIR VALUE          VALUE
                                                       ------------     ------------     ------------
<S>                                                    <C>              <C>              <C>
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        34,183,314       34,319,976       34,319,976
 Industrial and Miscellaneous                            15,057,614       15,136,895       15,136,895
 Mortgage-Backed Securities                               8,354,186        8,420,489        8,420,489
                                                       ------------     ------------     ------------
   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
                                                       ============     ============     ============

1996
Fixed Maturities Available for Sale:
Bonds:
 States, Municipalities and Political Subdivisions     $ 54,988,633       55,135,319       55,135,319
 United States Government and Government Agencies        38,409,186       38,375,729       38,375,729
                                                       ------------     ------------     ------------
  Total Fixed Maturities                                 93,397,819       93,511,048       93,511,048
Equity Securities - Common Stocks:
 Banks, Trusts and Insurance                                  5,262           10,573           10,573
                                                       ------------     ------------     ------------
  Total Equity Securities                                     5,262           10,573           10,573
                                                       ------------     ------------     ------------
Short-Term Investments                                   46,969,137       46,969,137       46,969,137
                                                       ------------     ------------     ------------
  Total Investments                                    $140,372,218      140,490,758      140,490,758
                                                       ============     ============     ============
</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. In addition, the tax
         ramifications related to the realization of the unrealized gains and
         losses have not been considered in any of the estimates. 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, 1997, the Company's insurance subsidiaries had
         securities with an aggregate book value of approximately $9.9 million
         on deposit with various state regulatory authorities.


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

         The amortized cost and fair value of fixed maturities at December 31,
         1997 and 1996, by effective maturity, follows:

<TABLE>
<CAPTION>
                                                        1997                          1996
                                            Amortized          Fair          Amortized       Fair
                                              Cost            Value            Cost          Value
                                           ------------     -----------     ----------     ----------
<S>                                        <C>              <C>             <C>            <C>
Due In One Year or Less                    $ 46,284,844      46,296,200     41,537,975     41,558,524
Due After One Year Through Five Years        54,904,724      55,148,780     51,207,347     51,231,119
Due After Five Years Through Ten Years          334,363         408,000        306,286        372,000
Due After Ten Years                                  --              --        346,211        349,405
                                           ------------     -----------     ----------     ----------
    Total                                  $101,523,931     101,852,980     93,397,819     93,511,048
                                           ============     ===========     ==========     ==========
</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,
                  1997 and 1996 follows:

<TABLE>
<CAPTION>
                                         1997                     1996
                                  Gains       Losses        Gains       Losses
                                 --------     -------      -------     --------
<S>                              <C>          <C>          <C>          <C>
States, Municipalities and
 Political Subdivisions          $ 71,667     (24,864)     191,053      (44,367)
United States Government and
  Government Agencies             221,346     (18,381)      83,642     (117,099)
Industrial and Miscellaneous       79,280          --      352,544           --
                                 --------     -------      -------     --------
  Total                           372,293     (43,245)     627,239     (161,466)
Equity Securities                  27,853          --        5,311           --
                                 --------     -------      -------     --------
  Total                          $400,146     (43,245)     632,550     (161,466)
                                 ========     =======      =======     ========
</TABLE>

(4)      INVESTMENT INCOME AND REALIZED CAPITAL GAINS AND LOSSES

         A summary of net investment income for the years ended December 31,
         1997, 1996 and 1995 follows:

<TABLE>
<CAPTION>
                                        1997            1996            1995
                                    -----------      ----------      ----------
<S>                                 <C>              <C>             <C>
Tax-Exempt Interest                 $ 1,996,969       2,912,844       3,317,887
Taxable Interest                      4,639,758       3,768,102       2,769,577
Dividends on Equity Securities           10,283             750           7,617
Other                                        --         (33,725)         23,094
Investment Expenses                    (142,294)       (112,399)        (55,292)
                                    -----------      ----------      ----------
  Net Investment Income             $ 6,504,716       6,535,572       6,062,883
                                    ===========      ==========      ==========
</TABLE>

         Realized capital gains (losses) for the years ended December 31, 1997,
         1996 and 1995 follows:

<TABLE>
<CAPTION>
                                               1997         1996          1995
                                             --------     --------      --------
<S>                                          <C>          <C>           <C>
Fixed Maturities                             $258,318      209,918           810
Equity Securities                              24,349       48,568         7,087
Sales of Property and Equipment                    --         (712)           --
                                             --------     --------      --------
  Net Realized Capital Gains                 $282,667      257,774         7,897
                                             ========     ========      ========
</TABLE>


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

         Gross gains of $261,005, $237,726 and $25,235 and gross losses of
         $2,687, $27,808 and $24,425 were realized on fixed maturity sales for
         the years ended December 31, 1997, 1996, and 1995, respectively. Gross
         gains of $24,349, $48,568 and $56,926 and gross losses of $0, $0 and
         $49,839 were realized on sale of equity securities for the years ended
         December 31, 1997, 1996 and 1995, respectively.

(5)      RECEIVABLES

         A summary of receivables at December 31, 1997 and 1996 follows:

<TABLE>
<CAPTION>
                                                                           1997            1996
                                                                       -----------      ----------
<S>                                                                    <C>              <C>
Insurance Premiums Due From Agents                                     $ 4,469,243       6,299,560
Receivables Under Long-term Contracts:
  Amounts Billed                                                         1,834,994       1,139,034
  Recoverable Costs in Excess of Billings on Uncompleted Contracts         588,009         594,062
  Billings in Excess of Costs on Uncompleted Contracts                      (5,400)       (203,200)
  Retainage, Due on Completion of Contracts                                264,067         235,382
                                                                       -----------      ----------
     Total Receivables Under Long-term Contracts                         2,681,670       1,765,278
Other                                                                      277,360         639,158
                                                                       -----------      ----------
     Total Receivables                                                   7,428,273       8,703,996
Less Allowances for Doubtful Accounts                                     (309,746)       (322,406)
                                                                       -----------      ----------
     Total Receivables, Net                                            $ 7,118,527       8,381,590
                                                                       ===========      ==========
</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 1998.

         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, 1997 and 1996
         follows:

<TABLE>
<CAPTION>
                                                      1997               1996
                                                  -----------         ----------
<S>                                               <C>                 <C>
Building                                          $14,657,155         14,617,842
Land                                                  800,000            800,000
Equipment and Vehicles                              1,073,059          1,250,233
Furniture and Fixtures                                914,187            892,858
                                                  -----------         ----------
                                                   17,444,401         17,560,933
Less Accumulated Depreciation                       4,265,064          4,007,819
                                                  -----------         ----------
                                                  $13,179,337         13,553,114
                                                  ===========         ==========
</TABLE>

         Future minimum rental income to be generated by leasing a portion of
         the building under noncancelable operating leases as of December 31,
         1997 are estimated to be $612,548 for 1998, $654,548 for 1999, $591,845
         for 2000, $570,944 for 2001, and $570,944 for 2002. Rental income
         earned in 1997, 1996 and 1995 was $561,852, $504,063 and $543,507,
         respectively.

(7)      INTANGIBLES

         A summary of intangibles, acquired primarily in connection with
         purchases of the Company's insurance subsidiaries, at December 31, 1997
         and 1996 follows:

<TABLE>
<CAPTION>
                                                       1997               1996
                                                    ----------         ---------
<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                        3,491,775         3,165,123
                                                    ----------         ---------
                                                    $3,222,023         3,548,675
                                                    ==========         =========
</TABLE>

         Intangible assets are written off when they become fully amortized.


                                       32
<PAGE>   33
                       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>
                                      1997             1996             1995
                                  ------------      -----------      -----------
<S>                               <C>                <C>              <C>
Balance at January 1              $ 47,960,084       45,235,311       40,954,783
 Less reinsurance recoverable        3,841,001        3,872,099        4,228,879
                                  ------------      -----------      -----------
Net balance at January 1            44,119,083       41,363,212       36,725,904

Incurred related to:
 Current year                        5,176,030        7,137,183        8,015,877
 Prior years                          (838,778)      (1,167,203)        (900,506)
                                  ------------      -----------      -----------
Total incurred                       4,337,252        5,969,980        7,115,371

Payments related to:
 Current year                           94,398          153,514          111,989
 Prior years                         2,939,345        3,060,595        2,366,074
                                  ------------      -----------      -----------
Total payments                       3,033,743        3,214,109        2,478,063

Net balance at December 31          45,422,592       44,119,083       41,363,212
 Plus reinsurance recoverable        3,478,121        3,841,001        3,872,099
                                  ------------      -----------      -----------
Balance at December 31            $ 48,900,713       47,960,084       45,235,311
                                  ============      ===========      ===========
</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

         The Company has available a $10,000,000 bank line of credit with Fleet
         Bank, N.A. which expires in June 1999. The line of credit requires the
         Company to maintain, on deposit with the bank, a compensating balance
         equal to 5% of the line of credit. Borrowings outstanding under this
         line were $5,000,000 at December 31, 1997 and $8,000,000 at December
         31, 1996.

         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
         (7.2% and 7.4% at December 31, 1997 and 1996, respectively).

         The Company had available a $7,500,000 Demand Discretionary Line of
         Credit with The Bank of Boston Connecticut which expired on November 6,
         1997. Under the terms of the line of credit, interest on the
         outstanding balance is calculated based upon the LIBOR plus 160 basis
         points in effect during the borrowing period (7.4% at December 31,
         1996). Borrowings outstanding under this line was $5,200,000 at
         December 31, 1996.

         The fair value of notes payable to banks approximates cost.

(10)     LONG-TERM DEBT

         A summary of long-term debt at December 31, 1997 and 1996 follows:

<TABLE>
<CAPTION>
                                                      1997               1996
                                                   -----------        ----------
<S>                                                <C>                <C>
Term Loan Due 2004                                 $ 6,690,000                --
Senior Notes Due 2005                               12,000,000                --
Term Loan Due 2003                                   1,874,998         2,232,142
Term Loan Due 2000                                   3,333,333         4,666,667
Mortgage Note Due 2000                               7,814,396         7,908,610
Convertible Note Due 2022                           16,500,000        16,500,000
Convertible Senior Notes Due 1999                           --         4,500,000
                                                   -----------        ----------
                                                   $48,212,727        35,807,419
                                                   ===========        ==========
</TABLE>


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

On February 3, 1997, the Company obtained a $7,500,000, seven-year term loan
from a financial institution, which is payable in quarterly installments of
$270,000 commencing March 31, 1997 with a final payment of $210,000 on March 31,
2004. The interest rate is equal to the LIBOR plus 160 basis points for each
90-day interest period. The proceeds were used to purchase shares of Class A
Stock.

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
commencing January 31, 1998, with interest at prime rate (8-1/2%). 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 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 and American International Life
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 therefor,
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, 1997.

On April 1, 1996, the Company obtained a $2,500,000, seven-year term loan from a
financial institution, which is repayable in quarterly installments of $89,286
commencing June 30, 1996. The Term Loan shall bear interest as follows: (a)
sixty percent (60%) of the outstanding principal balance of the Term Loan shall
bear interest at a fixed rate of 8.22% and (b) forty percent (40%) of the
outstanding principal balance of the Term Loan shall bear interest at LIBOR plus
180 basis points for each 90-day interest period (7.34%). The proceeds were used
to repay the line of credit.

On June 30, 1994, the Company obtained an $8,000,000, six-year term loan from a
financial institution, which is repayable in quarterly installments of $333,333
commencing September 30, 1994. The Term Loan shall bear interest as follows: (a)
sixty percent (60%) of the outstanding principal balance of the Term Loan shall
bear interest at a fixed rate of 8.51% and (b) forty percent (40%) of the
outstanding principal balance of the Term Loan shall bear interest at LIBOR plus
180 basis points for each 90-day interest period (7.32%). Portions of the
proceeds of this term loan were applied to the repayment of intercompany debt
and to the reduction of the Company's line of credit.

On April 18, 1990, the Company obtained a permanent mortgage loan from The
Manufacturer's Life Insurance Company. The $8,350,000 mortgage note, with
interest at 9.69%, is payable in monthly installments over 10 years based on a
thirty year amortization schedule. The outstanding principal balance is payable
on April 1, 2000. The proceeds were used to repay an existing construction loan
and to fund completion of the Company's headquarters.

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's. At December 31, 1995, the
Company had reserved 1,500,000 shares of Class A Stock for issuance pursuant to
such conversion option.

Principal payments on long-term debt are $4,365,381, $4,375,894, $11,191,393,
$2,928,287 and $2,660,421 the years 1998 through 2002, respectively. Interest
expense paid in 1997, 1996 and 1995 amounted to $4,630,502, $4,980,833 and
$4,791,005, respectively.

It is not practicable to estimate the fair value of long-term debt at December
31, 1997 because of the complex and unique terms associated with these debt
instruments.

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

(11)     INCOME TAXES

         The components of income tax expense for each year follows:

<TABLE>
<CAPTION>
                                       1997             1996            1995
                                    -----------      ----------      ----------
<S>                                 <C>              <C>             <C>
Current Taxes:
  Federal                           $ 1,310,845       2,288,025       2,415,594
  State                                  45,000          60,000         125,000
                                    -----------      ----------      ----------
                                      1,355,845       2,348,025       2,540,594
                                    -----------      ----------      ----------
Deferred Taxes (Credits):
  Federal                               383,771         (34,197)       (126,194)
  State                                      --              --              --
                                    -----------      ----------      ----------
                                        383,771         (34,197)       (126,194)
                                    -----------      ----------      ----------
Total                               $ 1,739,616       2,313,828       2,414,400
                                    ===========      ==========      ==========
</TABLE>

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

<TABLE>
<CAPTION>
                                                    1997       1996       1995
                                                    ----       ----       ----
<S>                                                 <C>        <C>        <C>
Federal Statutory Tax Rate                          34.0%      34.0%      34.0%
State Income Tax Benefit                             (.3)       (.2)       (.5)
Effect of Tax-Exempt Interest                       (9.4)      (9.9)      (10.5)
Amortization of Goodwill                             1.8        1.3        1.2
Officers Life Insurance Premiums                     1.2         .8         .7
Other, Net                                            --         .5         .2
                                                    ----       ----       ----
  Effective Federal Income Tax Rate                 27.3%      26.5%      25.1%
                                                    ====       ====       ====
</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, 1997 and 1996 are presented below:

<TABLE>
<CAPTION>
                                                                                1997          1996
                                                                             ----------     ---------
<S>                                                                          <C>            <C>
Deferred Tax Assets:
  Reserves for Losses and Loss Adjustment Expenses,
   Principally Due to Reserve Discounting                                    $2,848,237     2,984,252
 Unearned Premiums                                                              604,664       765,529
 Accounts Receivable, Principally Due to Allowance for Doubtful Accounts        105,314       109,619
 Other                                                                           26,505        22,073
                                                                             ----------     ---------
  Total Gross Deferred Tax Assets                                             3,584,720     3,881,473
  Less Valuation Allowance                                                           --            --
                                                                             ----------     ---------
  Net Deferred Tax Assets                                                    $3,584,720     3,881,473
Deferred Tax Liabilities:
  Plant and Equipment                                                           461,118       441,031
  Deferred Policy Acquisition Costs                                             706,658       987,998
  Unrealized Gains on Investments                                               121,346       160,169
  Limited Partnership Investment                                                352,659            --
  Other                                                                           2,003         6,392
                                                                             ----------     ---------
   Total Gross Deferred Tax Liabilities                                       1,643,784     1,595,590
                                                                             ----------     ---------
   Net Deferred Tax Assets                                                   $1,940,936     2,285,883
                                                                             ==========     =========
</TABLE>

         There was no valuation allowance for deferred income tax assets as of
         December 31, 1997 and 1996. 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
         differences at December 31, 1997.

         Taxes paid in 1997, 1996 and 1995 were $1,790,253, $1,556,471 and
         $3,045,627, respectively.


                                       35
<PAGE>   36
                       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, $100,000 and
         $100,000, for 1997, 1996 and 1995, respectively.

         The Company participated in various multi-employer defined contribution
         plans for its union employees. Charges to expense with respect to the
         Company's contributions to the various plans were approximately $13,593
         in 1996 and $42,000 in 1995. No payments were made in 1997. 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, 1997.

(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 1997, 1996 and 1995, ACMAT repurchased, in open market and
         privately negotiated transactions 3,400, 42,207 and 10,456,
         respectively, shares of its Common Stock at an average price of $20.44,
         $18.81 and $15.52 per share, respectively. The Company also repurchased
         during 1997, 1996 and 1995, in open market and privately negotiated
         transactions 1,347,686, 872,975 and 797,228, respectively, of its Class
         A Stock at an average price of $14.98, $13.18 and $11.83 per share,
         respectively.

         During 1997, 1996 and 1995, the Company issued 450,000, 499,999 and
         149,997, 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
         nonstatutory 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>
                                                               1997             1996            1995
                                                          -------------    -------------    -------------
<S>                                                       <C>              <C>              <C>
Options outstanding at December 31                              383,000          504,000          490,000
Weighted average price per share of
   options outstanding                                    $        9.59    $        9.04    $        8.12
Expiration dates                                          1/2001-7/2006    1/2001-7/2006    1/2001-9/2004
Options exercisable at December 31                              383,000          405,000          490,000
Options granted                                                      --           99,000               --
Options exercised or surrendered                                121,000           85,000           15,000
Price ranges of options exercised or surrendered          $  6.00-$8.50    $  6.00-$8.50    $        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, which requires compensation
         expense to be 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 1997 or 1995.

<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>


                                       36
<PAGE>   37
                       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 $10,032,000 in 1998.

         The Company's insurance subsidiaries, United Coastal Insurance and
         ACSTAR, are domiciled in the States of 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,
         1997, 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 $70,989,140 and
         $70,109,199 at December 31, 1997 and 1996, respectively, and their
         statutory net income for the years ended December 31, 1997, 1996 and
         1995 was $12,383,045, $8,778,843 and $9,072,104, 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, 1997, 1996 and 1995:

<TABLE>
<CAPTION>
                                                              Average
                                                               Shares       Per-Share
1997:                                          Earnings      Outstanding      Amount
                                              ----------     -----------    ----------
<S>                                           <C>            <C>            <C>
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
                                              ==========     ==========     ==========
1996:
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>


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

<TABLE>
<CAPTION>
                                                               Average
                                                                Shares       Per-Share
1995:                                          Earnings      Outstanding      Amount
                                              ----------     -----------    ----------
<S>                                           <C>            <C>            <C>
Basic EPS:
    Earnings available to stockholders        $5,350,280      3,581,660     $     1.49

Effect of Dilutive Securities:
    Stock options                                     --        110,592
    Convertible Senior Notes                  $  744,974      1,075,000
    Convertible Note                          $1,252,350      1,500,000
                                              ----------     ----------
Diluted EPS:
    Earnings available to stockholders        $7,347,604      6,267,252     $     1.17
                                              ==========     ==========     ==========
</TABLE>

(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 subsidiary. Since 1989, the Company has obtained its surety
         bonds from its insurance subsidiary.

(16)     SEGMENT REPORTING

         The Company operates in two industry segments: Construction contracting
         and insurance. Information relating to the two segments is summarized
         as follows:

<TABLE>
<CAPTION>
                                                  1997                1996              1995
                                              -------------      -------------      ------------
<S>                                           <C>                <C>                <C>
Operating Revenues:
  Insurance                                   $  22,842,746         27,099,143        30,715,995
  Construction Contracting                       13,629,600         13,629,218        15,787,715
  Eliminations and Adjustments                   (2,920,211)        (3,693,056)       (4,646,312)
                                              -------------      -------------      ------------
                                              $  33,552,135         37,035,305        41,857,398
                                              =============      =============      ============
Operating Earnings:
  Insurance                                   $  10,997,398         12,104,805        13,398,956
  Construction Contracting                          315,581          1,336,692           531,983
                                              -------------      -------------      ------------
                                                 11,312,979         13,441,497        13,930,939
Interest Expense                                 (5,116,414)        (4,946,418)       (4,810,578)
                                              -------------      -------------      ------------
Earnings Before Income Taxes and Minority
  Interest
                                              $   6,196,565          8,495,079         9,120,361
                                              =============      =============      ============
Depreciation and Amortization:
  Insurance                                   $     821,482          1,104,895         1,547,490
  Construction Contracting                          684,531            682,166           677,407
                                              -------------      -------------      ------------
                                              $   1,506,013          1,787,061         2,224,897
                                              =============      =============      ============
Identifiable Assets:
  Insurance                                   $ 155,844,674        164,764,249
  Construction Contracting                       20,364,088         19,595,317
                                              -------------      ------------
                                              $ 176,208,762       184,359,566
                                              =============      ============
Capital Expenditures:
  Insurance                                   $      94,361             55,732
  Construction Contracting                           60,122             85,106
                                              -------------      ------------
                                              $     154,483           140,838
                                              =============      ============
</TABLE>


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

         Operating earnings for construction contracting is operating revenues
         less cost of contract revenues and identifiable selling, general and
         administrative expenses. Operating earnings for the insurance segment
         is operating revenues less losses and loss adjustment expenses,
         amortization of policy acquisition costs and identifiable selling,
         general and administrative expenses. Interest expense has not been
         included in the computation of operating earnings. 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.

(17)     QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

         A summary of the unaudited quarterly results of operations for 1997 and
         1996 follows:

<TABLE>
<CAPTION>
                                MARCH 31        JUNE 30     SEPTEMBER 30  DECEMBER 31
                               ----------     ----------     ---------     ---------
<S>                            <C>             <C>          <C>           <C>
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
                               ----------     ----------     ---------     ---------
Diluted Earnings Per Share     $      .27            .34           .27           .24
                               ----------     ----------     ---------     ---------
                                                                                1996
Operating Revenues             $8,458,973     10,083,327     9,658,242     8,834,763
                               ----------     ----------     ---------     ---------
Operating Earnings             $3,164,711      3,520,217     3,419,530     3,337,039
                               ----------     ----------     ---------     ---------
Net Earnings                   $1,140,114      1,330,331     1,402,372     1,420,294
                               ----------     ----------     ---------     ---------
Basic Earnings Per Share       $      .36            .46           .41           .34
                               ----------     ----------     ---------     ---------
Diluted Earnings Per Share     $      .28            .33           .33           .29
                               ----------     ----------     ---------     ---------
</TABLE>

Note:    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. Annual
         earnings per share for 1996 does not equate to the sum of the quarters
         due to the timing of stock purchases during the year.

         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.


                                       39
<PAGE>   40
                                                                      Schedule I

                       ACMAT CORPORATION AND SUBSIDIARIES

                  Condensed Financial Information of Registrant

                  As of December 31, 1997 and 1996 and for the

                  years ended December 31, 1997, 1996 and 1995

The following presents the condensed financial position of ACMAT Corporation
(parent company only) as of December 31, 1997 and 1996 and its condensed
statements of earnings and cash flows for the years ended December 31, 1997,
1996 and 1995.

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                       Assets                            1997             1996
                                                     ------------     -----------
<S>                                                  <C>              <C>
Current assets:
        Cash                                         $    822,100       1,021,946
        Receivables                                     2,953,635       2,114,041
        Other current assets                              192,842         194,762
                                                     ------------     -----------
                       Total current assets             3,968,577       3,330,749

Property and equipment, net                            12,927,465      13,304,686
Investments in and advance from subsidiaries           76,576,942      82,608,954
Intangibles                                               692,495         866,855
Other assets                                            2,549,472       2,400,640
                                                     ------------     -----------
                                                     $ 96,714,951     102,511,884
                                                     ============     ===========

        Liabilities and Stockholders' Equity

Current liabilities:
        Notes payable to banks                       $  5,000,000      13,200,000
        Current portion of long-term debt               4,365,381       6,284,692
        Other current liabilities                       3,924,485       3,802,061
                                                     ------------     -----------
                       Total current liabilities       13,289,866      23,286,753
Long-term debt                                         43,847,346      29,522,727
                                                     ------------     -----------
Total liabilities                                      57,137,212      52,809,480
Stockholders' equity                                   39,577,739      49,702,404
                                                     ------------     -----------
                                                     $ 96,714,951     102,511,884
                                                     ============     ===========
</TABLE>

See Notes to Condensed Financial Statements.


                                       40
<PAGE>   41
                                                           Schedule I, continued

                       ACMAT CORPORATION AND SUBSIDIARIES

            Condensed Financial Information of Registrant, Continued

                              STATEMENT OF EARNINGS

<TABLE>
<CAPTION>
                                                                     1997             1996            1995
                                                                 ------------      ----------      -----------
<S>                                                              <C>               <C>             <C>
Contract revenues                                                $ 10,056,322       9,415,734       11,614,632
Cost of contract revenues                                           9,331,103       8,396,344       10,999,758
                                                                 ------------      ----------      -----------
          Gross profit                                                725,219       1,019,390          614,874

Selling, general and administrative expenses                        3,982,916       3,896,182        4,255,974
                                                                 ------------      ----------      -----------
          Operating loss                                           (3,257,697)     (2,876,792)      (3,641,100)

Interest expense                                                   (5,116,414)     (6,064,964)      (6,087,231)
Interest income                                                        43,101          52,999           27,576
Underwriting fees                                                   1,718,281       2,132,685        2,433,587
Other income                                                        1,811,896       2,027,800        1,711,920
                                                                 ------------      ----------      -----------
          Loss before income taxes and equity in net
                earnings of subsidiaries                           (4,800,833)     (4,728,272)      (5,555,248)

Income tax benefit                                                 (1,500,000)     (1,473,000)      (1,750,000)
                                                                 ------------      ----------      -----------
          Loss before equity in net earnings of subsidiaries       (3,300,833)     (3,255,272)      (3,805,248)

Equity in net earnings of subsidiaries                              7,757,782       8,548,383        9,155,528
                                                                 ------------      ----------      -----------
          Net earnings                                           $  4,456,949       5,293,111        5,350,280
                                                                 ============      ==========      ===========
</TABLE>

                                                                     (Continued)

See Notes to Condensed Financial Statements.


                                       41
<PAGE>   42
                                                           Schedule I, Continued

                       ACMAT CORPORATION AND SUBSIDIARIES

            Condensed Financial Information of Registrant, Continued

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Cash flows from operating activities:                                 1997              1996             1995
                                                                  ------------      ------------      -----------
<S>                                                               <C>               <C>               <C>
             Net earnings                                         $  4,456,949         5,293,111        5,350,280
             Depreciation and amortization                             684,521           682,166          677,407
             Equity in undistributed earnings of subsidiaries       (7,757,782)       (8,548,383)      (9,155,528)
             (Increase) decrease in accounts receivable               (839,594)         (174,311)          42,888
             (Increase) decrease in other assets                       149,711          (182,424)        (139,069)
             Increase (decrease) in other liabilities                  122,424          (587,169)         643,844
                                                                  ------------      ------------      -----------
                    Net cash used for operating activities          (3,183,771)       (3,517,010)      (2,580,178)
                                                                  ------------      ------------      -----------
Cash flows from investing activities:
             Capital expenditures                                      (60,122)          (85,108)        (155,700)
             Decrease in investment in subsidiaries                 13,714,452         9,834,721       10,768,258
             Other                                                          --          (335,606)              --
                                                                  ------------      ------------      -----------
                    Net cash provided by investing activities       13,654,330         9,414,007       10,612,558
                                                                  ------------      ------------      -----------
Cash flows from financing activities:
             Borrowings under lines of credit                        5,000,000         9,200,000        4,200,000
             Repayments of lines of credit                         (13,200,000)       (3,500,000)      (1,000,000)
             Repayment of long-term debt                            (3,594,692)       (1,820,181)      (1,777,706)
             Issuance of long-term debt                              8,500,000         2,500,000               --
             Issuance of Class A stock, net of taxes                   882,250           560,000               --
             Payments for acquisition and retirement of stock       (8,257,963)      (12,300,209)      (9,595,505)
                                                                  ------------      ------------      -----------
                    Net cash used for financing activities         (10,670,405)       (5,360,390)      (8,173,211)
                                                                  ------------      ------------      -----------
Net increase (decrease) in cash                                       (199,846)          536,607         (140,831)

Cash, beginning of year                                              1,021,946           485,339          626,170
                                                                  ------------      ------------      -----------
Cash, end of year                                                 $    822,100      $  1,021,946          485,339
                                                                  ============      ============      ===========
</TABLE>

See Notes to Condensed Financial Statements.


                                       42
<PAGE>   43
                                                           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
1997 Annual Report.

(1)      SUPPLEMENTAL CASH FLOW INFORMATION

         Income taxes received from subsidiaries during the years ended December
         31, 1997, 1996 and 1995 were $112,995, $1,990,201 and $2,214,656,
         respectively. Interest paid during the years ended December 31, 1997,
         1996 and 1995 was $4,630,502, 6,099,379 and $5,769,404, respectively.
         Interest paid in 1996 and 1995 included $1,118,546 and $978,399,
         respectively, paid to subsidiaries for intercompany loans.

         During 1997, 1996 and 1995, the Company issued 450,000, 499,999 and
         149,997 shares of Class A Stock respectively 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. 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.

         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, 1997 and 1996 follows:

<TABLE>
<CAPTION>
                                                       1997              1996
                                                   -----------        ----------
<S>                                                <C>                <C>
Term Loan Due 2004                                 $ 6,690,000                --
Senior Notes Due 2005                               12,000,000                --
Term Loan Due 2003                                   1,874,998         2,232,142
Term Loan Due 2000                                   3,333,333         4,666,667
Mortgage Note Due 2000                               7,814,396         7,908,610
Convertible Note Due 2022                           16,500,000        16,500,000
Convertible Senior Notes Due 1999                           --         4,500,000
                                                   -----------        ----------
                                                   $48,212,727        35,807,419
                                                   ===========        ==========
</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 1998 to 2002 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.


                                       43
<PAGE>   44
                                                                     SCHEDULE II

                       ACMAT CORPORATION AND SUBSIDIARIES

                 Valuation and Qualifying Accounts and Reserves

                  Years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                         Balance         Additions
                           at             charged                        Balance
                        beginning         to costs                         at
                           of               and                          end of
    Description          period           expenses     Deductions (a)    period

  Allowance for
doubtful accounts:
<S>                     <C>              <C>           <C>               <C>
1997                    $322,406         620,000         632,660         309,746
                        ========         =======         =======         =======
1996                    $340,844         400,904         419,342         322,406
                        ========         =======         =======         =======
1995                    $271,519         340,000         270,675         340,844
                        ========         =======         =======         =======
</TABLE>

(a) Deductions represent accounts written off.


                                       44
<PAGE>   45
ACMAT CORPORATION AND SUBSIDIARIES                                    Schedule V

   Supplemental Information concerning property-casualty insurance operations

         As of and for the years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                                  Discount Ded.
                                  Reserves for     from Unpaid
                  Deferred        Unpaid Losses      Losses                                                           Losses & Loss
Affiliation        Policy          and Loss         and Loss                                              Net              Expenses
   with          Acquisition      Adjustment       Adjustment        Unearned          Earned         Investment            Related
Registrant         Costs           Expenses         Expenses         Premiums         Premiums          Income         Current Year
----------       ----------       ----------       ----------       ----------       ----------       ----------       ----------
Insurance
 Segment
<S>              <C>              <C>             <C>               <C>              <C>               <C>            <C>
1997             $2,078,405       48,900,713               --        9,804,159       15,045,844        6,461,615        5,176,030
                 ==========       ==========       ==========       ==========       ==========       ==========       ==========
1996             $2,905,875       47,960,084               --       12,341,642       19,899,936        6,482,573        7,137,183
                 ==========       ==========       ==========       ==========       ==========       ==========       ==========
1995             $3,459,308       45,253,311               --       14,302,613       23,492,905        6,035,307        8,015,877
                 ==========       ==========       ==========       ==========       ==========       ==========       ==========
</TABLE>

<TABLE>
<CAPTION>

                                   Amortization       Paid
                 Adjustment        of Deferred       Losses
Affiliation      Incurred            Policy          and Loss
   with          to                Acquisition      Adjustment        Premiums
Registrant       Prior Years         Costs           Expenses         Written
----------       ----------        ----------       ----------       ----------
Insurance
 Segment
<S>              <C>              <C>              <C>             <C>
1997               (838,778)        2,802,993        3,033,743       12,680,197
                 ==========        ==========       ==========       ==========
1996             (1,167,203)        3,617,308        3,214,109       18,041,488
                 ==========        ==========       ==========       ==========
1995               (900,506)        3,939,008        2,478,063       22,856,791
                 ==========        ==========       ==========       ==========
</TABLE>


                                       45
<PAGE>   46
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)             78                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)             51                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 and Three D
                                                                        Departments, Inc.

VICTORIA C. NOZKO (1)               79                1982              Housewife during past five years.  Member of the
                                                                        Audit Committee.

JOHN C. CREASY                      78                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                 53                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.


                                       46
<PAGE>   47
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.

NAME                       AGE      OFFICES HELD

Henry W. Nozko, Sr.        78       President, Chief Executive Officer, Director
                                    and Chairman of the Board since 1951.

Henry W. Nozko, Jr.        51       Executive Vice President since 1982.
                                    Treasurer since 1973. Director since 1971,
                                    and Chief Operating Officer since 1985.

Robert H. Frazer           51       Vice President since 1982. Secretary since
                                    1992. General Counsel since 1977.

Michael P. Cifone          39       Vice President-Finance since 1990. Corporate
                                    Controller since 1989.


                                       47
<PAGE>   48
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              LONG-TERM          ALL OTHER
POSITION                                                    COMPENSATION (A)       COMPENSATION (B)  COMPENSATION (C)

                                             YEAR        SALARY         BONUS      CLASS A OPTIONS
<S>                                          <C>        <C>            <C>         <C>               <C>
Henry W. Nozko, Sr                           1997       $430,000       $ 86,000             --       $ 10,591
Chairman, President                          1996       $428,292       $172,000         46,000       $ 10,345
and Chief Executive Officer                  1995       $407,875       $184,275             --       $  9,876

Henry W. Nozko, Jr                           1997       $310,000       $ 62,000             --       $ 10,488
Executive Vice President and Chief           1996       $334,500       $124,000         26,000       $ 10,238
Operating Officer                            1995       $292,833       $132,300             --       $  9,774

Robert H. Frazer, Esq                        1997       $165,000       $ 33,000             --       $ 10,450
Vice President, Secretary and                1996       $164,375       $ 49,500             --       $ 10,198
General Counsel                              1995       $156,875       $ 70,875             --       $  9,736

Michael P. Cifone                            1997       $110,000       $ 22,000             --       $  9,253
Vice President-Finance                       1996       $109,583       $ 33,000             --       $ 10,090
                                             1995       $104,583       $ 47,250             --       $  9,608
</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.


                                       48
<PAGE>   49
         The following table provides information on options exercised during
         1997 by the named Executive Officers and the value of their unexercised
         options at December 31, 1997. No options were granted in 1997.

         AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR
                             END 1997 OPTION VALUES

<TABLE>
<CAPTION>
                                                                       Number of
                                           Shares                      Unexercised   Value of Unexercised
                                          Acquired        Value         Options at   In-the-Money Options
Name                                     on Exercise     Realized      12/31/97 (1)     at 12/31/97 (2)
                                         -----------     --------      ------------  --------------------
<S>                                      <C>             <C>           <C>           <C>
Henry W. Nozko, Sr
      - ACMAT Class A Stock Options             --             --         61,000       $380,500
      - ACMAT Common Stock Options              --             --         50,000       $512,500

Henry W. Nozko, Jr
      - ACMAT Class A Stock Options         20,000       $195,000         61,000       $490,500
      - ACMAT Common Stock Options              --             --         50,000       $512,500

Robert H. Frazer
      - ACMAT Class A Stock Options         30,000       $293,438         50,000       $462,500

Michael P. Cifone
      - ACMAT Class A Stock Options         35,000       $277,500         10,000       $ 85,000
</TABLE>

         (1)      Represents the number of options held at year end. All options
                  were exercisable at December 31, 1997.

         (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.


                                       49
<PAGE>   50
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:

As of March 1, 1998, 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 (16)
         ----------------               --------          ----------------------             ------------          -----------------
<S>                                     <C>               <C>                                <C>                   <C>
Henry W. Nozko, Sr                        Common                 444,000(2)(5)                      68.64%                   43.41%
                                         Class A                  76,200(2)(4)                       2.76
Henry W. Nozko, Jr                        Common                 189,274(2)(3)(5)                   29.26                    20.00
                                         Class A                 187,574(2)(3)(4)                    6.80
Victoria C. Nozko                        Class A                  42,000(6)                          1.55                      .43
John C. Creasy                            Common                   3,300                              .55                      .52
                                         Class A                  18,453(7)                           .68
Michael J. Sullivan                      Class A                  18,390(8)                           .68                      .19
Sheet Metal Workers'
National Pension Fund                    Class A               1,500,000(9)                         35.74                    13.23
Franklin Resources, Inc.                 Class A                 495,000(10)                        16.50                     4.52
First Manhattan Co.                      Class A                 348,550(11)                        12.92                     3.54
Queensway Financial
   Holdings Limited                      Class A                 311,000(12)                        11.53                     3.16
Investment Counselor of
Maryland, Inc.                           Class A                 190,000(13)                         7.04                     1.93
EQSF Advisors, Inc.                      Class A                 189,978(14)                         7.04                     1.93
U.S. Bancorp                             Class A                 179,800(15)                         6.67                     1.83
All Directors and
Officers (7 persons)
as a Group                                Common                 636,574                            91.35                    61.14
                                         Class A                 404,232                            13.80
</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 5,500 shares of
         Common Stock held by Mr. Nozko, Jr. as custodian for his minor children
         nor 1,900 shares of Class A Stock and 2,750 shares of Common Stock held
         by his wife, Gloria C. Nozko.

(4)      Includes options to purchase 61,000 shares of Class A Stock.

(5)      Includes options to purchase 50,000 shares of Common Stock.

(6)      Includes options to purchase 15,000 shares of Class A Stock.

(7)      Includes options to purchase 16,500 shares of Class A Stock.

(8)      Includes options to purchase 18,000 shares of Class A Stock.

(9)      Assumes the full conversion of $16,500,000 principal amount of 11.5%
         Convertible Note into 1,500,000 shares of Class A Stock. The Address of
         the Fund is Suite 500, 601 North Fairfax Street, Alexandria, VA 22314.

(10)     Address of Franklin Resources, Inc. is 777 Mariners Island Blvd. San
         Mateo, CA 94404

(11)     Address of First Manhattan Co. is 437 Madison Avenue, New York, NY
         10022.

(12)     Address of Queensway Financial Holdings Limited is 90 Adelaide Street
         West, Toronto, Ontario M5H3V9.

(13)     Address of Investment Counselor's of Maryland, Inc. is 803 Cathedral
         Street, Baltimore, MD 21201.

(14)     Address of EQSF Advisors, Inc. is 767 Third Avenue, New York, NY
         10017-2023.

(15)     Address of U.S. Bancorp is 601 2nd Avenue South, Minneapolis, MN
         55402-4302.

(16)     Based upon one vote for each share of Common Stock and one-tenth vote
         for each share of Class A Stock.


                                       50
<PAGE>   51
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 $16,500,000 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, $16,500,000 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, a director of ACMAT,
currently serves as the Business Manager and Financial Secretary/Treasurer of
the Sheet Metal Workers' Local Union No. 20 and as First General Vice President
of the Sheetmetal Workers' International Association.

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 (8-1/2%). 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 $199,266 in
reinsurance premiums in the year ended December 31, 1997.

Other Relationships

During the year ended December 31, 1997, the Company paid to Dr. Arthur Cosmas
$114,690 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, 1997, 1996 and 1995
                  Consolidated Balance Sheets as of December 31, 1997 and 1996
                  Consolidated Statements of Stockholders' Equity for the years
                  ended December 31, 1997, 1996 and 1995
                  Consolidated Statements of Cash Flows for the years ended
                  December 31, 1997, 1996 and 1995
                  Notes to Consolidated Financial Statements - December 31,
                  1997, 1996 and 1995


                                       51
<PAGE>   52
         2. Financial Statement Schedules

         Consolidated Schedules included in Part II of this Report-Years ended
         December 31, 1996, 1995 and 1994:

         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 1997.

(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 The Manufacturers
              Life Insurance Company filed as an Exhibit to the Company's Form
              10-Q for the Quarter ended March 31, 1990 are incorporated by
              reference.

(4c)          Open-end Mortgage Deed and Security Agreement between ACMAT
              Corporation and The Manufacturers Life Insurance Company filed as
              an Exhibit to the Company's Form 10-Q for the Quarter ended March
              31, 1990 are incorporated by reference.

(4d)          Loan Agreement dated as of June 30, 1994 between ACMAT Corporation
              and Shawmut Bank Connecticut, N.A. filed as an Exhibit to the
              Company's Amendment No. 1 to Form S-1 dated July 13, 1994 is
              incorporated by reference.

(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: $16,500,000 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.

(28)          Information from Reports Furnished to State Insurance Regulatory
              Authorities. Schedule P of the Annual Statements of ACSTAR
              Insurance Company and United Coastal Insurance Company for 1997.

(99)          Agreement to furnish copies of long-term debt instruments.


                                       52
<PAGE>   53
                                   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 25, 1998                By:________________________
                                            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.

                                    Chairman of the Board,
                                    President, Chief Executive
      ____________________          Officer and Director          March 25, 1998
      Henry W. Nozko, Sr.

                                    Chief Operating Officer,
                                    Executive Vice President
      ____________________          Treasurer and Director        March 25, 1998
      Henry W. Nozko, Jr.

                                    Vice President - Finance
                                    (Principal Financial and
      ____________________          Accounting Officer)           March 25, 1998
      Michael P. Cifone

      ____________________          Director                      March 25, 1998
      Victoria C. Nozko

      ____________________          Director                      March 25, 1998
      John C. Creasy


                                       53
<PAGE>   54
                                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 4                       - Note Purchase Agreements                                   Incorporated by Reference

    Exhibit 4b                      - Promissory Note between ACMAT                              Incorporated by Reference
                                       and The Manufacturers Life
                                       Insurance Company

    Exhibit 4c                      - Open-end Mortgage Deed/Security                            Incorporated by Reference
                                       Agreement between ACMAT and The
                                       Manufacturers Life Insurance Co.

    Exhibit 4d                      - Loan Agreement between ACMAT and                           Incorporated by Reference
                                       Shawmut Bank

    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                                      Page 55

    Exhibit 27                       - Financial Data Schedule                                   Page 56

    Exhibit 28                      - Information from Reports                                   Page 57
                                       Furnished to State Insurance
                                       Regulatory Authorities

    Exhibit 99                       - Agreement to furnish copies of long-term                  Page 62
                                       debt instruments
</TABLE>


                                       54