UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

            [X]   QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                       For the Quarter Ended May 31, 1997

                                       OR

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

                         Commission File Number: 1-10583

                             ATC GROUP SERVICES INC.
             -----------------------------------------------------
             (Exact name of Registrant as specified in its charter)


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

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

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

                                      None
                                      ----
(Former name, former address and former fiscal year if changed since last 
report)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  Registrant  was
required  to file  such  reports)  and  (2)  has  been  subject  to such  filing
requirements for the past 90 days. Yes X No

The number of shares outstanding of the Registrant's Common Stock as of July 14,
1997 was 7,804,207.







<PAGE>


ATC GROUP SERVICES INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MAY 31, 1997
<TABLE>
<CAPTION>


PART I - FINANCIAL INFORMATION:
<S>                                                                                                                     <C>   
    Item 1 - Financial Statements:

           Consolidated Balance Sheets
             February 28, 1997 and May 31, 1997 (Unaudited)..........................................................   F-3

           Consolidated Statements of Operations
             Three months ended May 31, 1996 and 1997 (Unaudited)....................................................   F-4

           Consolidated Statements of Stockholders' Equity
             Three months ended May 31, 1996 and 1997 (Unaudited)....................................................   F-5

           Consolidated Statements of Cash Flows
             Three months ended May 31, 1996 and 1997 (Unaudited)....................................................   F-6

           Notes to Consolidated Financial Statements (Unaudited)....................................................   F-7

    Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations...................   F-13

  PART II - OTHER INFORMATION:

     Items 1-6........................................................................................................  F-16

     Signatures.......................................................................................................  F-17

     Exhibit 11 - Computation of Earnings Per Share
       Three months ended May 31, 1996 and 1997 (Unaudited)...........................................................  F-18

     Exhibit 27 - Financial Data Schedule
       May 31, 1997 (Unaudited).......................................................................................  F-19

</TABLE>

                                      F-2
<PAGE>


ATC GROUP SERVICES INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
FEBRUARY 28, 1997 AND MAY 31, 1997 (Unaudited)
<TABLE>
<CAPTION>


                                                                                                February 28,           May 31,
                                                                                                   1997                 1997
                                                                                             ---------------       --------------
                                                                                                                     (Unaudited)
<S>                                                                                          <C>                   <C>
 ASSETS
 CURRENT ASSETS:
   Cash and cash equivalents..............................................................    $    2,003,890       $   8,207,157
   Trade accounts receivable, less allowance for doubtful accounts
     ($1,455,716 at February 28, 1997 and $1,340,549 at May 31, 1997).....................        34,406,026          34,412,368
   Costs in excess of billings on uncompleted contracts...................................         5,191,569           6,538,290
   Prepaid expenses and other current assets..............................................         2,934,193           2,581,101
   Deferred income taxes..................................................................           790,400             790,400
   Refundable income taxes................................................................           118,340                  -
                                                                                               -------------        ------------
     Total current assets.................................................................        45,444,418          52,529,316

 PROPERTY AND EQUIPMENT, Net (Note C)......................................................        3,784,633           3,772,795

 GOODWILL, net of accumulated amortization
   ($1,478,876 at February 28, 1997 and $1,858,160 at May 31, 1997) (Note B)...............       35,587,076          43,376,477
 COVENANTS NOT TO COMPETE, net of accumulated amortization
   ($455,316 at February 28, 1997 and $501,631 at May 31, 1997) (Note B)...................          632,184             585,869
 OTHER ASSETS..............................................................................          845,346           3,957,547
                                                                                               -------------        ------------
                                                                                               $  86,293,657        $104,222,004
                                                                                               =============        ============

 LIABILITIES AND STOCKHOLDERS' EQUITY
 CURRENT LIABILITIES:
   Short-term debt.........................................................................    $     300,000      $      300,000
   Current maturities of long-term debt....................................................        1,986,730           1,538,642
   Accounts payable .......................................................................        7,440,024           6,728,488
   Income taxes payable....................................................................                -             458,132
   Accrued compensation....................................................................        3,789,233           4,883,954
   Accrued payment obligations - ATEC acquisition (Note B) ................................        1,721,594           3,827,301
   Other accrued expenses..................................................................        2,505,143           2,533,279
                                                                                               -------------       -------------
     Total current liabilities.............................................................       17,742,724          20,269,796

 LONG-TERM DEBT, less current maturities...................................................       22,123,344          33,631,454
 OTHER LIABILITIES, including non-current payment obligations (Note B).....................          270,386           2,989,781
 DEFERRED INCOME TAXES.....................................................................          717,900             717,900
                                                                                               -------------       -------------
     Total liabilities.....................................................................       40,854,354          57,608,931
                                                                                               -------------       -------------

 COMMITMENTS AND CONTINGENCIES (Notes B and D)

 STOCKHOLDERS' EQUITY (Note D):
   Common stock, par value $.01 per share;  authorized 20,000,000 shares; issued
     and outstanding 7,800,187 shares at February 28, 1997 and 7,802,987
     shares at May 31, 1997................................................................           78,002              78,030
   Additional paid-in capital..............................................................       28,996,627          28,994,053
   Retained earnings.......................................................................       16,364,674          17,540,990
                                                                                              --------------       -------------
       Total stockholders' equity.........................................................        45,439,303          46,613,073
                                                                                              --------------       -------------
                                                                                              $   86,293,657       $ 104,222,004
                                                                                              ==============       =============
</TABLE>

See notes to consolidated financial statements.

                                      F-3
<PAGE>

ATC GROUP SERVICES INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MAY 31, 1996 AND 1997 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>



                                                                                                      Three Months Ended
                                                                                                           May 31,
                                                                                               ---------------------------------
                                                                                                    1996              1997
                                                                                               ---------------    --------------
<S>                                                                                            <C>                <C> 

REVENUES...................................................................................    $    16,645,983    $   31,374,666
   Reimbursable Costs......................................................................          2,621,578         4,455,833
                                                                                               ---------------    --------------

NET REVENUES...............................................................................         14,024,405        26,918,833

COST OF NET REVENUES.......................................................................          6,742,393        14,661,621
                                                                                               ---------------    --------------

     Gross profit..........................................................................          7,282,012        12,257,212
                                                                                               ---------------    --------------

OPERATING EXPENSES:
   Selling.................................................................................            542,582           999,995
   General and administrative..............................................................          3,918,015         8,477,336
   Provision for bad debts.................................................................            132,635           377,439
                                                                                               ---------------    --------------
                                                                                                     4,593,232         9,854,770
                                                                                               ---------------    --------------

     Operating income......................................................................          2,688,780         2,402,442

NON-OPERATING EXPENSE (INCOME):
   Interest expense........................................................................             57,326           498,408
   Interest income.........................................................................           (130,035)          (51,783)
   Other...................................................................................            (10,814)            9,501
                                                                                               ---------------    --------------
                                                                                                       (83,523)          456,126
                                                                                               ---------------    --------------

     Income before income taxes............................................................          2,772,303         1,946,316

INCOME TAX EXPENSE.........................................................................          1,054,000           770,000
                                                                                               ---------------    --------------

NET INCOME ................................................................................    $     1,718,303    $    1,176,316
                                                                                               ===============    ==============


EARNINGS PER COMMON SHARE AND
    DILUTIVE COMMON EQUIVALENT SHARE:
     Primary...............................................................................    $           .20    $          .14
                                                                                               ===============    ==============
     Fully diluted.........................................................................    $            20    $          .14 
                                                                                               ===============    ==============

WEIGHTED AVERAGE NUMBER OF SHARES
    OUTSTANDING:
     Primary...............................................................................          8,581,643         8,400,722
                                                                                               ===============    ==============
     Fully diluted.........................................................................          8,680,339         8,517,991
                                                                                               ===============    ==============
</TABLE>
See notes to consolidated financial statements.



                                      F-4
<PAGE>


ATC GROUP SERVICES INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MAY 31, 1996 AND 1997 (Unaudited)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                                           Notes
                                                                        Additional      Receivable-
                                                  Common Stock           Paid-in          Common        Retained
                                              Shares         Amount      Capital          Stock         Earnings         Total
                                           ------------  ------------  ------------    ------------   ------------   ------------
<S>                                        <C>           <C>           <C>             <C>            <C>            <C>
BALANCE, February 29, 1996..............      7,796,577  $     77,966  $ 29,030,189    $    (45,000)  $ 10,129,259   $ 39,192,414

Sale of common stock at $4.13
   per share, upon exercise of
   stock options and warrants...........            400             4         1,646              -              -           1,650
Continuing registration costs applied
   against additional paid in capital...             -             -         (1,415)             -              -          (1,415)
Stock received as consideration for
   sale of assets.......................        (12,320)         (123)      (51,990)             -         (72,319)      (124,432)
Net income..............................             -             -             -               -       1,718,303      1,718,303
                                           ------------  ------------  ------------    ------------   ------------   ------------
BALANCE, May 31, 1996...................      7,784,657  $     77,847  $ 28,978,430    $    (45,000)  $ 11,775,243   $ 40,786,520
                                           ============  ============  ============    ============   ============   ============

                                                                                           Notes
                                                                        Additional      Receivable-
                                                  Common Stock           Paid-in          Common        Retained
                                              Shares         Amount      Capital          Stock         Earnings         Total
                                           ------------  ------------  ------------    ------------   ------------   ------------
BALANCE, February 28, 1997..............      7,800,187  $     78,002  $ 28,996,627    $         -    $ 16,364,674   $ 45,439,303

Sale of common stock at $1.88 to
   $10.00 per share, upon exercise of
   stock options and warrants...........          2,800            28        23,910              -              -          23,938
Continuing registration costs applied
   against additional paid in capital...             -             -        (26,484)             -              -         (26,484)
Net income..............................             -             -             -               -       1,176,316      1,176,316
                                           ------------  ------------  ------------    ------------   ------------   ------------
BALANCE, May 31, 1997...................      7,802,987  $     78,030  $ 28,994,053    $         -    $ 17,540,990   $ 46,613,073
                                           ============  ============  ============    ============   ============   ============

</TABLE>
See notes to consolidated financial statements.


F-5
<PAGE>
ATC GROUP SERVICES INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MAY 31, 1996 AND 1997 (Unaudited)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>


                                                                                                        Three Months Ended
                                                                                                              May 31,
                                                                                                ---------------------------------
                                                                                                     1996               1997    
                                                                                                ----------------  ---------------
<S>                                                                                             <C>               <C>

 CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income............................................................................     $    1,718,303    $     1,176,316
     Adjustments to reconcile net income to net cash from operating activities:
       Depreciation and leasehold amortization.............................................            198,728            239,580
       Amortization of goodwill and covenants..............................................            162,704            425,599
       Provision for bad debts.............................................................            132,635            377,439
       Other...............................................................................            (30,074)           (16,338)
       Changes in operating assets and  liabilities,  net of amounts acquired in
         acquisitions:
           Receivables.....................................................................         (2,849,887)        (2,062,365)
           Prepaid expenses and other assets...............................................           (453,025)          (115,701)
           Accounts payable and other liabilities..........................................         (3,149,254)        (2,678,862)
           Income taxes payable............................................................            712,252            458,132
                                                                                                --------------    ---------------
       Net cash flows from operating activities............................................         (3,557,618)        (2,196,200)
                                                                                                --------------    ---------------

 CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchase of American Testing and Engineering Corp, net of cash acquired...............         (8,965,952)        (2,420,766)
     Purchase of 3D Information Services, Inc., net of cash acquired.......................         (2,926,681)                -
     Purchase of property and equipment....................................................           (429,435)          (256,753)
     Other.................................................................................             49,910             19,510
                                                                                                --------------    ---------------
       Net cash flows from investing activities............................................        (12,272,158)        (2,658,009)
                                                                                                --------------    ---------------

 CASH FLOWS FROM FINANCING ACTIVITIES:
     Proceeds from issuance of long-term debt and notes payable............................         20,919,941         33,000,000
     Proceeds from issuance of common stock, net of expenses...............................              1,650             23,938
     Principal payments on long-term debt and notes payable, including
       capital lease obligations...........................................................        (11,814,927)       (21,939,978)
     Payments for continuing registration costs............................................             (1,415)           (26,484)
                                                                                                --------------    ---------------
       Net cash flows from financing activities............................................          9,105,249         11,057,476
                                                                                                --------------    ---------------

       Net change in cash and cash equivalents.............................................         (6,724,527)         6,203,267

CASH AND CASH EQUIVALENTS, Beginning of period.............................................         13,469,443          2,003,890
                                                                                                --------------    --------------- 

CASH AND CASH EQUIVALENTS, End of period...................................................     $    6,744,916    $     8,207,157
                                                                                                ==============    ===============

 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
     Cash payments for:
     Interest..............................................................................     $       58,190    $       559,751
                                                                                                ==============    ===============
     Income taxes..........................................................................     $      356,969    $       193,529
                                                                                                ==============    ===============
</TABLE>

See notes to consolidated financial statements.

                                      F-6
<PAGE>


ATC GROUP SERVICES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MAY 31, 1997 (Unaudited)
--------------------------------------------------------------------------------

A.  GENERAL

         Principles of  Consolidation - The  consolidated  financial  statements
include  the  accounts  of  ATC  Group   Services  Inc.  and  its   wholly-owned
subsidiaries ("ATC" or the "Company").

         In the opinion of the Company, the accompanying  unaudited consolidated
financial  statements  contain  all  adjustments   (consisting  only  of  normal
recurring accruals)  necessary to present fairly, in all material respects,  the
financial position, the results of operations and the cash flows for the periods
presented herein. These results of operations are not necessarily  indicative of
the results to be expected for the full year due to certain  seasonality factors
and the effects and timing of large service projects.

         Certain  information  and  footnote  disclosures  normally  included in
financial  statements  prepared in accordance with generally accepted accounting
principles have been omitted.  These condensed  financial  statements  should be
read in conjunction  with the  consolidated  financial  statements and the notes
included  in the  Company's  financial  statements  for the  fiscal  year  ended
February 28, 1997,  which are included in the  Company's  Annual  Report on Form
10-K.

         Nature of Business - ATC is a national business services firm providing
technical and project management  services relating to environmental  consulting
(the  "environmental   consulting  and  engineering"  segment)  and  information
technology   consulting  services  (the  "information   technology   consulting"
segment).  The  Company's  environmental   consulting  and  engineering  segment
provides  environmental  and geotechnical  engineering  services,  architectural
engineering services, construction materials testing and analytical testing. The
Company's information technology consulting segment provides analysis and design
services and system  programming  services to assist  clients in building new or
modifying existing computer systems. This business unit also provides support to
clients in maintaining computer systems.

         Senior Secured Notes - On May 29, 1997, the Company issued  $32,500,000
of 8.18% Senior  Secured Notes due in annual  installments  beginning May, 2000,
through May, 2004, to a group of financial institutions.  Interest on the Senior
Secured Notes is payable semi-annually on May 31, and November 30, commencing on
November 30,  1997.  The Senior  Secured  Notes are  collateralized  by accounts
receivable,  work-in-process,   intangible  assets  and  the  Company's  primary
depository  accounts.  The proceeds  from the Senior  Secured Notes have in part
been  utilized  to repay  the  Company's  outstanding  bridge  credit  facility.
Accordingly,  at February  28,  1997,  the Company  classified  its  $20,850,000
outstanding  bridge credit  facility as long-term  debt. The bridge facility was
entered into in May, 1996, to provide  capital in connection  with the Company's
acquisition of American  Testing and Engineering  Corporation and 3D Information
Services, Inc.

         Bank Credit  Agreement - In  connection  with the Senior  Secured  Note
offering,  the Company executed a credit agreement with the Chase Manhattan Bank
and Atlantic Bank of New York. The credit  agreement  provides for a $15,000,000
revolving line of credit maturing on November 30, 1999. The borrowings under the
line of credit are  collateralized by the Company's cash,  accounts  receivable,
work in  process,  and  intangible  assets on a pari passu basis with the Senior
Secured Note  holders.  Under the terms of the Note and Credit  Agreements,  the
Company is required to comply with  certain  financial  and  business  covenants
including  maintaining minimum working capital levels, fixed charge and interest
ratios and restrictions on dividend payments.

     Statement of Financial Accounting Standards No. 121 - On March 1, 1996, the
Company adopted Statement of Financial  Accounting  Standards  ("SFAS") No. 121,
Accounting  for the  Impairment  of  Long-Lived  Assets to be  Disposed  Of. The
adoption  of SFAS  No.  121 did not  have a  material  effect  on the  Company's
financial statements.

         Earnings Per Share Data - Earnings per common share and dilutive common
equivalent  share have been  computed by using the  weighted  average  number of
shares outstanding during each period.  Outstanding  dilutive stock warrants and
options are included in the computation of weighted average number of shares.

         In February 1997, the Financial  Accounting Standards Board issued SFAS
No. 128, Earnings Per Share. SFAS No. 128, which becomes effective for financial
statements  of the Company  issued for fiscal years  ending  after  December 15,
1997,  replaces primary and fully diluted earnings per share, as disclosed under
certain  pronouncements,  with basic and diluted  earnings per share.  Pro forma
basic  earnings  per share for the three  months ended May 31, 1996 and 1997 are
$.22 and $.15, respectively.  Pro forma diluted earnings per share for the three
months ended May 31, 1996 and 1997 are $.20 and $.14, respectively.
                                F-7
<PAGE>
         Reclassifications  -  Certain  reclassifications  have been made to the
prior   period's   financial   statements   to  conform  to  the  current  years
presentation.

B.  BUSINESS ACQUISITIONS AND MERGER

         Business Acquisitions - The following  acquisitions have been accounted
for as purchases.  The acquired company's assets and liabilities are included in
the  accompanying  consolidated  balance  sheets  at fair  value  at the date of
purchase.  The acquired company's  operations  subsequent to the acquisition are
included in the accompanying consolidated statements of operations.

Fiscal 1997
         American  Testing  and  Engineering  Corporation  - On May 24, 1996 ATC
purchased certain assets and assumed certain liabilities of American Testing and
Engineering Corporation ("ATEC"), a national environmental consulting firm. ATEC
provides  environmental  engineering  and  consulting  services  through a large
network of branch and regional offices.

         Under the original  purchase  agreement,  the Company was  contingently
liable  to ATEC for  additional  purchase  consideration  up to  $10,750,000  if
certain  conditions  were met. The seller since met certain of these  contingent
consideration  requirements  in the  quarter  ended May 31, 1997 and the Company
began  to  amortize  the  associated  goodwill  in this  period.  The  Company's
obligation   for  these   payments  of  $3,883,000  is  included  in  short-term
liabilities at May 31, 1997. In addition, in connection with the issuance of the
Senior  Secured  Notes on May 29,  1997, the Company and the seller executed  an
amendment to the original purchase  agreement and agreed to remove or modify the
remaining contingent consideration  requirements.  As a result of the foregoing,
the Company paid  $2,420,766  on May 30, 1997 and expects to be obligated to pay
$2,745,234 in fiscal 1999 and  therefore  has included this  obligation in other
long-term liabilities at May 31, 1997. Additionally,  the Company has the option
to purchase certain properties from the seller for $1,700,000 in fiscal 2002.

         The  purchase   price  as  amended  was   comprised  of  the  following
consideration:

 Amounts paid to seller and a majority owner:
    Cash.......................................................... $  9,000,000
     Payment obligations, for property and facility
        rentals and non-compete consideration.....................    6,001,000
     Contingent/additional consideration under amended purchase
        agreement.................................................    9,049,000
  Liabilities assumed:
     Current liabilities..........................................   15,731,076
     Bank debt....................................................   10,750,000
  Direct expenses related to acquisition..........................      139,438
                                                                   ------------
                                                                   $ 50,670,514
                                                                   ============
         The payment  obligations to  seller/majority  owner are payable monthly
through  February  1999 and are included in accrued  payment  obligations - ATEC
acquisition in the accompanying consolidated balance sheet.

         The purchase price allocation  reflecting the additional  consideration
is summarized as follows:

  Accounts receivable and work in process, net of allowances...... $ 18,957,768
  Other current assets............................................    2,023,996
  Other assets....................................................    1,428,617
  Covenants not to compete........................................      430,000
  Goodwill .......................................................   27,830,133
                                                                   ------------
                                                                   $ 50,670,514
                                                                   ============
         As a result of sellers  warranties of purchased  trade  receivables and
work in process that were not  realized,  the Company is entitled to set-offs of
$618,835 against the option price to acquire certain  properties in fiscal 2002.
If the Company does not exercise  its option,  the set-offs  will be refunded by
the seller. Amounts are included in other non-current assets in the accompanying
consolidated balance sheet.

         In connection  with the purchase  agreement,  the Company has issued an
irrevocable  letter of credit in the amount of $500,000 to secure the  Company's
performance of its payment obligations. The letter of credit is renewable by the
seller until such time the Company has paid the purchase obligations in full. No
amounts have been drawn against the letter of credit.

                                        F-8
<PAGE>
         3D Information Services,  Inc. - On May 28, 1996, ATC purchased certain
assets and assumed certain liabilities of 3D Information Services,  Inc. ("3D"),
a New Jersey based information services company providing technical  information
consulting  services in all phases of information  system  design,  development,
maintenance  and management in client server and mainframe  based  environments.
The purchase price was comprised of the following consideration:

  Amounts paid to seller:
     Cash......................................................... $  3,000,000
     Note payable.................................................    2,500,000
  Assumed liabilities.............................................      247,905
  Direct expenses related to acquisition..........................       23,149
                                                                   ------------
                                                                   $  5,771,054
                                                                   ============
  The initial purchase price allocation is summarized as follows:

  Accounts receivable............................................. $  1,163,981
  Work in process.................................................      279,047
  Property and equipment..........................................       77,381
  Other current assets............................................       77,560
  Covenant not to compete.........................................      100,000
  Goodwill .......................................................    4,073,085
                                                                   ------------
                                                                   $  5,771,054
Fiscal 1996                                                        ============
         Hill  Businesses - In November 1995,  ATC purchased  certain assets and
assumed  certain  liabilities  of  Kaselaan & D'Angelo  Associates,  Inc.,  Hill
Environmental,  Inc. (formerly the environmental division of Gibbs & Hill, Inc.)
and Particle Diagnostics, Inc., wholly owned subsidiaries of Hill International,
Inc. (collectively the "Hill Businesses").

         The Hill Businesses  provide  environmental  consulting and engineering
services,  including  asbestos  management,  industrial  hygiene  and indoor air
quality  consulting,   environmental  auditing  and  permitting,   environmental
regulatory compliance,  water and wastewater  engineering,  solid waste landfill
management and analytical laboratory services.  The purchase price was comprised
of the following consideration.

  Amounts paid to seller:
      Cash........................................................ $  2,517,949
           Letter of credit, net of imputed interest (Note E).....      700,000
           Note payable at 8.75% interest (Note E)................      300,000
  Liabilities assumed.............................................      907,884
  Direct expenses related to acquisition..........................      885,538
                                                                   ------------
                                                                   $  5,311,371
                                                                   ============

         Direct expenses related to acquisition includes costs incurred in order
to obtain  proper title to the assets from Sellers bank as described  further in
Note D. In addition, the Company issued to certain selling shareholders,  50,000
stock  options to  purchase  restricted  common  stock at  $13.875  per share as
consideration for non compete agreements.

  The purchase price allocation is summarized as follows:

  Costs in excess of billings on uncompleted contracts,
     net of unrealizable amounts.................................. $    620,000
  Property and equipment..........................................      175,000
  Other assets....................................................       30,572
  Covenants not to compete........................................       37,500
  Goodwill........................................................    4,448,299
                                                                   ------------
                                                                   $  5,311,371
                                                                   ============

         The  Company is  contingently  liable to  reimburse  up to  $150,000 of
certain facility lease costs if incurred by Hill International, Inc. The payment
of the contingent  liability,  which the Seller claims is now due, certain other
liabilities  and the $300,000 note is being withheld  pending the outcome of the
litigation (Note D).

                                        F-9
<PAGE>


         Applied Geosciences,  Inc. - Effective February 29, 1996, ATC purchased
certain  assets and assumed  certain  liabilities of Applied  Geosciences,  Inc.
("AGI"), a California based  environmental  consulting company having offices in
San Diego, Tustin and San Jose, California.  The purchase price was comprised of
the  following   consideration.   In  addition,   AGI  will  receive  contingent
consideration of up to $190,000  subject to actual  collections of the purchased
trade  receivables  in  excess  of  a  minimum  amount   established  under  the
agreements. As of February 28, 1997 $22,324 of contingent consideration had been
earned and paid.

  Cash to seller.................................................. $    147,546
  Contingent consideration earned to date.........................       22,324
  Cash to secured creditors of seller.............................      441,514
  Liabilities assumed.............................................      225,538
  Direct expenses related to acquisition..........................       31,246
                                                                   ------------
                                                                   $    868,168
                                                                   ============
         The purchase price allocation is summarized as follows:

  Accounts receivable, net........................................ $    474,973
  Property and equipment..........................................      115,060
  Covenants not to compete........................................       30,000
  Goodwill........................................................      248,135
                                                                   ------------
                                                                   $    868,168
                                                                   ============

         Pro Forma Financial  Information  (Unaudited) - The following unaudited
pro forma  information  sets forth the results of  operations of ATC as if ATC's
purchase of significant subsidiaries including ATEC and 3D had occurred on March
1, 1996:
<TABLE>
<CAPTION>
                                                                                                     PRO FORMA
                                                                                             Three Months Ended May 31,
                                                                                          -------------------------------
                                                                                               1996              1997
                                                                                          -------------     -------------
<S>                                                                                       <C>               <C>
  Revenues............................................................................    $  34,768,116     $  31,374,666
  Net income..........................................................................        2,615,757         1,176,316
  Earnings per share (fully diluted)..................................................    $         .30     $         .14

  Weighted average shares.............................................................        8,680,339         8,517,991
</TABLE>

C.  PROPERTY AND EQUIPMENT

 Property and equipment is comprised of the following:
<TABLE>
<CAPTION>


                                                                                           February 28,       May 31,
                                                                                               1997              1997
                                                                                          -------------     -------------
<S>                                                                                       <C>               <C>
  Office equipment....................................................................    $   3,339,049     $   3,436,139
  Laboratory and field equipment......................................................        3,335,721         3,356,402
  Transportation equipment............................................................          207,857           294,701
  Leasehold improvements..............................................................          849,700           864,138 
                                                                                          -------------     -------------
                                                                                              7,732,327         7,951,380
  Less accumulated depreciation.......................................................        3,947,694         4,178,585
                                                                                          -------------     -------------
  Property and Equipment, net.........................................................    $   3,784,633     $   3,772,795
                                                                                          =============     =============
</TABLE>

                                        F-10
<PAGE>

D.  COMMITMENTS AND CONTINGENCIES

         Litigation - First  Fidelity Bank,  N.A., et al v. Hill  International,
Inc. et al,  Superior  Court of New Jersey,  Law  Division,  Burlington  County,
Docket No.  Bur-L-03400-95,  filed December 19, 1995. Irvin E. Richter, et al v.
ATC Group Services Inc., et al, United States  District  Court,  District of New
Jersey,  Civ. No. 96 CV 5818 (JBS) filed December 6, 1996. On December 19, 1995,
a second amended complaint was filed in the  above-entitled  action which joined
the  Company as a defendant  and  included a count  against the Company  seeking
recovery of certain assets purchased from Hill  International,  Inc. ("Hill") on
the grounds that plaintiff banks hold security  interests in the assets and that
Hill is in default under the security  agreement  creating such alleged security
interests. The original plaintiffs in this action were First Fidelity Bank, N.A.
and United Jersey Bank, N.A. The primary defendants were Hill and certain of its
subsidiaries,  and Irvin  Richter,  David  Richter,  Janice  Richter and William
Doyle. Irvin Richter and David Richter are officers and stockholders of Hill. In
April 1996,  the Company  filed a cross-claim  against  Hill,  Irvin Richter and
David Richter alleging breach of contract,  fraud,  among other  allegations and
seeking unspecified damages, including punitive damages and equitable relief. In
August,  1996, Hill and the Richters filed an answer denying ATC's cross claims,
a  cross-claim  against ATC and a third party claim against  certain  members of
ATC's  management  and an  employee.  The cross claim and third party claim seek
unspecified damages,  including punitive damages, for defamation,  breach of the
Richters' non-competition  agreements and securities fraud. The defamation claim
is based on plaintiff  banks'  allegation of fraud against Hill and the Richters
in their  amended  complaint,  which Hill and the  Richters  allege was based on
defamatory  statements made by ATC in settlement  discussions with the plaintiff
banks. In its answer, the Company both denies that it made defamatory statements
and asserts that the defamation allegations fail to state a legally valid claim.
The breach of contract and securities  claims are based on allegations  that ATC
made  representations  concerning a registration rights agreement to be provided
in connection  with options  issued to the Richters as  consideration  for their
non-competition  agreements. In its answer, the Company denies that an agreement
concerning  registration  rights was ever  reached and asserts that the Richters
forfeited any such rights in any case as a result of their conduct in connection
with the asset  purchase.  These  related  cases are in their early  stages with
discovery yet to take place.  In January,  1997, the plaintiff  banks  dismissed
their claim against ATC. On December 6, 1996, Hill and the Richters commenced an
action  against  ATC  and  the  same  officers  and  employees  of ATC  alleging
essentially the same claims in federal court as in the state action. This action
is entitled  Irvin E.  Richter et al. v. ATC Group  Services,  et al.,  Civ. No.
96-5818(JBS),  U.S. District.  Court for the District of New Jersey, December 6,
1996.  ATC has  answered,  raising the same  defenses  and  additional  defenses
related to the  timeliness of the federal claim.  This is  essentially  the same
action as in federal court as the pending state action. The case is currently in
the  discovery  phase.  It does not  create a risk of  double  recovery.  In the
Company's opinion, the outcome of this matter will not have a significant effect
on the Company's financial position or future results of operations, although no
assurances can be given in this regard.

                  Commonwealth of Massachusetts v. TLT Construction Corp. et al,
Civ. Action No. 96-02281 F, Superior Court of Middlesex  County,  Massachusetts.
This is an action brought by the  Commonwealth of  Massachusetts  in April 1996,
against the architects and general  contractor on a renovation and  construction
project on the Suffolk  County  Courthouse  in  Massachusetts.  The basis of the
lawsuit is that one or more  damp-proofing  products  specified by the architect
defendants  and  installed by the  contractor  defendant  made  employees in the
courthouse  ill  because  of  the  off-gassing  of  harmful   vapors.   Dennison
Environmental  Services  Inc.,  ("Dennison")  an ATC  subsidiary,  was joined on
August 13, 1996, as a third party defendant by TLT Construction Corporation, the
general  contractor,  because Dennison performed some air quality testing of the
air  in  the  courthouse  for  the  Commonwealth  of  Massachusetts  during  the
construction  process. The contractor alleges that it acted in reliance on these
tests in continuing  to install the material  after the test report was given to
it by the  state.  This  case is in the  discovery  stage.  At this  point,  ATC
considers the case to be totally  without  merit,  and ATC intends to vigorously
defend the action.  The Company currently has in force a professional  liability
insurance  policy  covering  this  claim in the  amount  of  $10,000,000  with a
deductible of $250,000.  Notice of claim has been made regarding this action and
the insurer has agreed to assume the  defense.  In the  Company's  opinion,  the
outcome  of this  matter  will not have a  significant  effect on the  Company's
financial  position or future results of operations,  although no assurances can
be given in this regard.

         State of New York  Department  of Taxation and Finance- The Company has
received a notice of audit from the New York State  Department  of Taxation  and
Finance for the three fiscal years 1993,  1994, and 1995. The agent has issued a
preliminary  audit  report,  which  is  expected  to be the  basis  of a  formal
assessment estimated to be approximately  $200,000. The Company is disputing the
agents positions and intends to appeal any assessment if rendered. No assurances
can be given regarding the ultimate liability, if any, which may result.

         The  Company  has been named or has claims  pending  arising out of the
conduct  of its  business.  In the  opinion of  management,  these  matters  are
adequately covered by insurance, are without merit, or are not material.

                                      F-11
<PAGE>

E.  INDUSTRY SEGMENT DATA

         The Company provides services through its environmental  consulting and
engineering segment and its information technology consulting segment.  Industry
segment data for fiscal 1998 and 1997 are as follows:
<TABLE>
<CAPTION>

                                                   Environmental          Information        Adjustments &
                                                   & Engineering          Technology         Elimination's          Total
                                                ------------------     -----------------  ------------------   --------------- 
<S>      <C>                                    <C>                    <C>                <C>                  <C>
Fiscal 1998                                                                               

         Quarter Ended May 31, 1997
         --------------------------
         Revenues..............................  $      29,361,911      $    2,240,299    $      (227,544)     $    31,374,666
         Operating income......................          2,231,443             170,999                 -             2,402,442
         Depreciation and amortization.........            230,735               8,845                 -               239,580
         Capital expenditures..................            236,266              20,487                 -               256,753

         Identifiable Assets as of May 31, 1997   $    101,676,015      $    5,751,650    $    (3,205,661)     $   104,222,004
         --------------------------------------

Fiscal 1997

         Quarter Ended May 31, 1996
         --------------------------
         Revenues..............................   $     16,498,022      $      147,961    $             -      $    16,645,983
         Operating income......................          2,670,264              18,516                  -            2,688,780
         Depreciation and amortization.........            194,766               3,962                  -              198,728
         Capital expenditures..................            383,116                  -                   -              383,116

         Identifiable Assets as of May 31, 1996   $     87,209,636      $    5,845,164    $     (3,001,500)    $    90,053,300
         --------------------------------------
</TABLE>


                                        F-12
<PAGE>
ATC GROUP SERVICES INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------

Recent Developments

Senior  Debt  Offering & Bank  Credit  Agreement  - On May 29,  1997 the Company
issued  $32,500,000  of  8.18%  Senior  Secured  Notes  in a  private  placement
offering.  The notes are payable in five  installments  beginning  May 31, 2000;
interest is payable semi-annually  commencing November 30, 1997. The Company has
the right to prepay the loans at a premium over the  outstanding  principal.  In
connection with the note offering,  the Company executed a credit agreement with
the Chase  Manhattan  Bank and Atlantic Bank of New York.  The credit  agreement
provides for a  $15,000,000  revolving  line of credit  maturing on November 30,
1999. A portion of the proceeds of the Senior  Secured  Notes were used to repay
the outstanding borrowings of $21,350,000 as of May 29, 1997 under the Company's
bridge  credit  facility.  The bridge  facility was entered into in May, 1996 to
provide capital in connection with the Company's acquisition of American Testing
and Engineering Corporation and 3D Information Services, Inc.

Acquisitions

Fiscal 1997
     American  Testing  and  Engineering  Corporation  - On May  24,  1996,  ATC
purchased certain assets and assumed certain liabilities of American Testing and
Engineering Corporation ("ATEC"), a national environmental consulting firm. ATEC
provides  environmental  consulting  and  engineering  services  including  risk
assessments,    compliance   audits,   environmental   remediation   consulting,
geotechnical,  materials  testing,  industrial  hygiene and analytical  services
through a large network of branch and regional offices.

     In the three months ended May 31, 1997,  the seller met certain  contingent
consideration requirements. Additionally, in connection with the issuance of the
Senior  Secured  Notes,  the Company and seller  amended the  original  purchase
agreement.  As a result of these events,  additional  purchase  consideration of
$9,049,000 was recorded (Note B).

         3D Information  Services,  Inc. - Effective May 28, 1996, ATC purchased
certain  assets and assumed  certain  specified  liabilities  of 3D  Information
Services, Inc. ("3D"), a New Jersey based information services company providing
technical  information  system consulting  services in all phases of information
system  design,  development,  maintenance  and  management in client server and
mainframe  based  environments.  3D provides  analysis  and design  services and
system programming services to help clients in building new computer systems and
modifying  existing  computer  systems.  3D also provides  support to clients in
maintaining computer systems and in areas such as help desk management and other
system support services.  Employees of 3D typically work full-time at a client's
work site.  Its  clients  include  major  companies  in the  telecommunications,
financial services and pharmaceutical  industries.  

Fiscal 1996
         Hill  International Inc.  Environmental  Subsidiaries - On November 10,
1995,  ATC  purchased  certain  assets and assumed  certain  liabilities  of the
subsidiary  companies at Hill  International,  Inc. that provided  environmental
consulting and engineering services (collectively the "Hill Businesses").  These
services include asbestos management,  industrial hygiene and indoor air quality
consulting,  environmental  auditing and  permitting,  environmental  regulatory
compliance,   water  and  wastewater  engineering,   solid  waste  and  landfill
management,  hazardous waste management and analytical laboratory services.  The
Hill Businesses  operated from facilities  located in New York City,  Boston and
Willingboro,  New Jersey.  The Boston and New York offices have been  integrated
with ATC's existing  operations,  and ATC has benefited  from other  cost-saving
measures taken,  including the elimination of certain employees  previously with
the Hill Businesses.

         Applied Geosciences,  Inc. - Effective February 29, 1996, ATC purchased
certain  assets and assumed  certain  liabilities of Applied  Geosciences,  Inc.
("AGI").   AGI  services   included   environmental  and  hazardous  waste  site
assessments,  remediation  design,  air quality  management,  asbestos services,
litigation  support and  engineering  geology through its offices located in San
Diego, Tustin, and San Jose, California.
                                        F-13
<PAGE>
Results of Operations

Three Months Ended May 31, 1997 Compared with Three Months Ended May 31, 1996
         Revenues  in the three  months  ended May 31, 1997  increased  88.5% to
$31,374,666,  compared with  $16,645,983 in the three months ended May 31, 1996.
This  increase  was  primarily  attributable  to  the  positive  effect  of  the
acquisition of ATEC and 3D in May 1996.

     Revenues in the three months  ended May 31, 1997 from ATC's branch  offices
having  comparable  operations  in the three  months  ended May 31,  1996,  when
adjusted to eliminate the effect of a large project,  remained apporximately the
same. Actual comparable  revenues  decreased 11.3% to $11,864,392  compared with
$13,369,254  in the three months  ended May 31, 1996 as the prior year  revenues
includes  $1,430,000  from a large  government  project.  Revenues  in the three
months ended May 31, 1997  attributable to the acquisitions of certain assets of
ATEC and 3D totaled $19,509,734.

         Reimbursable   costs  represent   direct  project  expenses  billed  to
environmental  and engineering  segment clients.  For the three months ended May
31,  1997,  reimbursable  costs  increased  70%  to  $4,455,833,  compared  with
$2,621,578  in the three  months  ended May 31,  1996.  Reimbursable  costs as a
percentage  of revenues  decreased  to 14.2% for the three  months ended May 31,
1997  compared  with  15.7%  in  the  three  months  ended  May  31,  1996.  The
reimbursable  cost  percentage  for the prior year was higher than normal due to
outside  services  used to complete  the large  government  project  referred to
above.  Direct project costs were over 40% of this projects revenues.  Excluding
reimbursable  costs  of this  project,  reimbursable  costs as a  percentage  of
revenues would have been approximately 13.2%.  However,  reimbursable costs have
averaged  15.4%  following  the  acquisition  of  ATEC  as  ATEC's   traditional
consulting   services,   consisting  of  drilling  and  materials   testing  and
engineering  services,  utilize  higher  amounts of outside  services and direct
project expenses  compared to those consulting  services being provided prior to
the acquisition.

         Gross profit in the three months ended May 31, 1997 increased  68.3% to
$12,257,212,  compared  with  $7,282,012 in the three months ended May 31, 1996.
Gross margin decreased to 45.5% in the three months ended May 31, 1997, compared
with 51.9% in the three months ended May 31, 1996.  ATC's gross margin decreased
because the gross  margin for the first  quarter of fiscal 1997  benefited  from
increased  revenue levels and improved employee  utilization  resulting from the
large project  above and from work  deferred  from the fourth  quarter of fiscal
1996 which was adversely impacted from severe winter weather  conditions.  ATC's
gross profit margin for the last three quarters of fiscal 1997 averaged 42.6%.

         Operating  expenses in the three  months  ended May 31, 1997  increased
114.5% to $9,854,770, compared with $4,593,232 in the three months ended May 31,
1996. In the first quarter of fiscal 1997, operating expenses as a percentage of
net revenues was 32.8% which compares  favorably to fiscal 1996 where  operating
expenses as a percentage of net revenues  averaged 36.5%.  This  improvement was
due to the increased net revenue levels caused by the large  government  project
and weather factors referred to above without  corresponding  increases in fixed
and  administrative  costs.  In addition,  the  acquisition of ATEC completed on
March 24, 1996 changed the Company's operating cost structure,  further reducing
operating  expenses as a percentage  of net  revenues.  However,  since the ATEC
acquisition,  the Company  has  experienced  operating  cost  increases  without
corresponding net revenue increases. As a result, for the three months ended May
31, 1997 operating  expenses as a percentage of net revenues was 36.6%. Of total
operating expenses, the largest component is employee payroll and related costs.
Employee costs for the three months ended May 31, 1997 were  $4,187,830 or 15.6%
of net  revenues,  up from an  average  of 12.4%  for the first  three  quarters
following the ATEC acquisition.  Other operating costs have increased  including
travel, facility, and general administrative costs.  Additionally,  in the three
months ended May 31, 1997, amortization of goodwill and intangibles increased to
$425,599,  compared  with  $162,704  in the  three  months  ended  May 31,  1996
reflecting the additional goodwill  amortization  resulting from the ATEC and 3D
acquisitions.

         Operating income in the three months ended May 31, 1997 decreased 10.6%
to $2,402,442  compared with  $2,688,780 in the three months ended May 31, 1996.
Operating  income decreased as a percentage of net revenues to 8.9% in the three
months ended May 31, 1997, compared with 19.2% in the three months ended May 31,
1996.

         Nonoperating  expense in the three months ended May 31, 1997  increased
to $456,126  compared  with  nonoperating  income of $83,523 in the three months
ended May 31, 1996.  The change in  nonoperating  expense  (income) is primarily
attributable to increased  interest expense due to bank debt outstanding  during
the quarter.

         Income tax expense in the three months ended May 31, 1997 was $770,000,
compared  with  $1,054,000  in the three months  ended May 31, 1996.  During the
three months ended May 31, 1997 and 1996, the Company's effective tax rates were
39.6% and 38.0%, respectively.

         As a result of the foregoing,  net income in the three months ended May
31, 1997  decreased  31.5% to  $1,176,316,  or $.14 per share on a fully diluted
                                F-14
<PAGE>
basis,  compared with $1,718,303 or $0.20 per share on a fully diluted basis, in
the three months ended May 31, 1996. The fully diluted  weighted  average number
of shares outstanding decreased 162,348 shares to 8,517,991 shares primarily due
to lower  common  stock  equivalents  resulting  from lower  common stock prices
off-set by an  increase  in shares  issued  from the  exercise  of  options  and
warrants.  Net income  decreased as a percentage  of net revenues to 4.4% in the
three  months ended May 31, 1997  compared  with 12.3% in the three months ended
May 31, 1996.

Liquidity and Capital Resources

     At May 31, 1997,  working  capital was  $32,259,520  compared  with working
capital of  $27,701,694  at February 28, 1997, an increase of  $4,557,826.  This
increase in working  capital is  primarily a result of  increased  cash from the
issuance of the Senior  Secured  Notes,  increases  in accounts  receivable  and
unbilled  receivables,  offset by increases in accrued  payment  obligations  in
connection  with the ATEC  acquisition.  Primarily as a result of the additional
purchase  consideration  incurred in May 1997 in connection with the acquisition
of ATEC,  the  Company's  tangible net worth  decreased to $2,650,727 at May 31,
1997 from $9,220,043 at February 28, 1997.

         During  the three  months  ended May 31,  1997,  net cash flows used in
operating  activities were $2,196,200  primarily due to the decrease in accounts
payable  and other  liabilities,  a portion of which was  related to payments of
liabilities  from   acquisitions,   and  an  increase  in  billed  and  unbilled
receivables.  Net cash  flows  used in  investing  activities  were  $2,658,009,
resulting from the additional purchase consideration paid for ATEC and purchases
of property and equipment.  Net cash flows provided by financing activities were
$11,057,476,  primarily  representing  the proceeds of the Senior Secured Notes,
less repayment of the outstanding bridge credit facility.

         During  the three  months  ended May 31,  1996,  net cash flows used in
operating activities were $3,557,618,  primarily due to the decrease in accounts
payable  and other  liabilities,  a portion of which was  related to payments of
assumed  liabilities from  acquisitions,  and an increase in billed and unbilled
receivables.  Net cash  flows used in  investing  activities  were  $12,272,158,
resulting  from the  acquisitions  of ATEC and 3D and  purchases of property and
equipment.  Net cash flows  provided by financing  activities  were  $9,105,249,
primarily representing the proceeds of the bridge credit facility, less payments
made on long-term debt and notes payable.

         Management  of the Company  believes the proceeds  from the issuance of
the Senior Secured Notes after  repayment of the bridge credit  facility,  funds
available from its unused $15,000,000 bank line of credit and cash provided from
operations  are  adequate  to  fund  current  operations  including  liabilities
incurred in connection with the Company's acquisitions of ATEC and 3D.

         The  Company  may seek to obtain  additional  public or private  equity
financing in the future in order to expand operations,  provide funds for future
acquisitions  or  reduce  debt,  however  no  assurance  can be  given as to the
Company's ability to obtain funds on acceptable terms and conditions.


                                        F-15
<PAGE>


                           PART II - OTHER INFORMATION

Item 1.  Legal Proceedings:
         First Fidelity  Bank,  N.A., et al v. Hill  International,  Inc. et al,
         Superior Court of New Jersey, Law Division,  Burlington County,  Docket
         No. Bur-L-03400-95, filed December 19, 1995. Irvin E. Richter, et al v.
         ATC Group Services Inc., et al, United States District Court,  District
         of New Jersey,  Civ.  No. 96 CV 5818 (JBS) filed  December 6, 1996.  On
         December  19,  1995,  a  second  amended  complaint  was  filed  in the
         above-entitled  action  which  joined the  Company as a  defendant  and
         included a count against the Company seeking recovery of certain assets
         purchased from Hill  International,  Inc.  ("Hill") on the grounds that
         plaintiff banks hold security  interests in the assets and that Hill is
         in default under the security  agreement creating such alleged security
         interests.  The plaintiffs in this action are First Fidelity Bank, N.A.
         and United  Jersey  Bank,  N.A.  The primary  defendants  were Hill and
         certain of its subsidiaries,  and Irvin Richter, David Richter,  Janice
         Richter and William Doyle. Irvin Richter and David Richter are officers
         and   stockholders  of  Hill.  In  April  1996,  the  Company  filed  a
         cross-claim  against Hill,  Irvin  Richter and David  Richter  alleging
         breach  of  contract,   fraud,  among  other  allegations  and  seeking
         unspecified  damages,  including punitive damages and equitable relief.
         In August,  1996,  Hill and the Richters  filed an answer denying ATC's
         cross claims, a cross-claim against ATC and a third party claim against
         certain  members of ATC's  management.  The cross claim and third party
         claim  seek  unspecified  damages,   including  punitive  damages,  for
         defamation,  breach of the  Richters'  non-competition  agreements  and
         securities  fraud.  The defamation  claim is based on plaintiff  banks'
         allegation  of fraud  against  Hill and the  Richters in their  amended
         complaint,  which Hill and the Richters  allege was based on defamatory
         statements  made by ATC in  settlement  discussions  with the plaintiff
         banks.  In its answer,  the Company both denies that it made defamatory
         statements and asserts that the defamation  allegations fail to state a
         legally valid claim.  The breach of contract and securities  claims are
         based  on  allegations  that  ATC  made  representations  concerning  a
         registration rights agreement to be provided in connection with options
         issued to the  Richters  as  consideration  for  their  non-competition
         agreements.  In its  answer,  the  Company  denies  that  an  agreement
         concerning  registration  rights was ever  reached and asserts that the
         Richters  forfeited  any such  rights  in any case as a result of their
         conduct in connection with the asset purchase.  These related cases are
         in their early  stages with  discovery  yet to take place.  In January,
         1997, the plaintiff bank dismissed their claim against ATC. On December
         6, 1996, Hill and the Richters  commenced an action against ATC and the
         same officers and employees of ATC alleging essentially the same claims
         in federal court as in the state action. ATC has answered,  raising the
         same defenses and additional  defenses related to the timeliness of the
         federal claim.  This is essentially the same action as in federal court
         as the  pending  state  action.  It does not  create  a risk of  double
         recovery. In the Company's opinion, the outcome of this matter will not
         have a significant effect on the Company's financial position or future
         results of  operations,  although  no  assurances  can be given in this
         regard.

         Commonwealth of  Massachusetts  v. TLT  Construction  Corp. et al, Civ.
         Action  No.   96-02281  F,   Superior   Court  of   Middlesex   County,
         Massachusetts.  This  is an  action  brought  by  the  Commonwealth  of
         Massachusetts  in  April  1996,  against  the  architects  and  general
         contractor  on a  renovation  and  construction  project on the Suffolk
         County  Courthouse in  Massachusetts.  The basis of the lawsuit is that
         one  or  more   damp-proofing   products  specified  by  the  architect
         defendants and installed by the contractor  defendant made employees in
         the  courthouse  ill  because of the  off-gassing  of  harmful  vapors.
         Dennison Environmental  Services Inc.,  ("Dennison") an ATC subsidiary,
         was  joined on August  13,  1996,  as a third  party  defendant  by TLT
         Construction  Corporation,  the general  contractor,  because  Dennison
         performed some air quality testing of the air in the courthouse for the
         Commonwealth of  Massachusetts  during the  construction  process.  The
         contractor  alleges  that it  acted  in  reliance  on  these  tests  in
         continuing  to install the material  after the test report was given to
         it by the state. Dennison has just recently been served and has not yet
         answered the  complaint.  At this point,  ATC  considers the case to be
         totally without merit, and ATC intends to vigorously defend the action.
         The Company currently has in force a professional  liability  insurance
         policy  covering  this  claim  in  the  amount  of  $10,000,000  with a
         deductible of $250,000.  Notice of claim has been made  regarding  this
         action and the insurer has agreed to assume the defense.  These related
         cases are in their early stages with  discovery  yet to take place.  In
         the  Company's  opinion,  the  outcome of this  matter  will not have a
         significant  effect  on the  Company's  financial  position  or  future
         results of  operations,  although  no  assurances  can be given in this
         regard.

Item 2.  Changes in Securities:
         Not Applicable

Item 3.  Defaults Upon Senior Securities:
         Not Applicable

Item 4.  Submission of Matters to a Vote of Security Holders:
         Not Applicable

                                        F-16
<PAGE>


Item 5.  Other Information:
         Not Applicable

Item 6.  Exhibits and Reports on Form 8-K:
         (a)      Exhibits:
                  11 - Computation of Earnings Per Share
                         Three months ended May 31, 1997 (Unaudited)

                  27 - Financial Data Schedule
                         May 31, 1997 (Unaudited)

         (b)      Reports on Form 8-K:
                         Not Applicable




                                                            SIGNATURES

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
the  Registrant  has duly  caused  this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                           ATC GROUP SERVICES INC.
                                           ----------------------
                                                  (Registrant)



  Dated: July 15 1997                      /s/ MORRY F.RUBIN
  -------------------                      ----------------------
                                           MORRY F. RUBIN,
                                           President and Chief Executive Officer

  Dated: July 15, 1997                     /s/ RICHARD L. PRUITT
  --------------------                     ----------------------
                                           RICHARD L. PRUITT,
                                           Vice President and 
                                           Principal Accounting Officer


                                      F-17
<PAGE>


ATC GROUP SERVICES INC. AND SUBSIDIARIES                              EXHIBIT 11

COMPUTATION OF EARNINGS PER SHARE
THREE MONTHS ENDED MAY 31, 1997 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                             Three Months Ended May 31,
                                                                                          -------------------------------
                                                                                               1996              1997
                                                                                          -------------     -------------
<S>                                                                                       <C>               <C>
 Primary earnings per share:
     Weighted average number of shares of common stock outstanding......................      7,788,586         7,801,181

     Additional shares assuming exercise of dilutive stock options and stock warrants...        793,057           599,541
                                                                                          -------------     -------------


       Total average common and common equivalent shares outstanding....................      8,581,643         8,400,722
                                                                                          =============     =============

     Net income.........................................................................  $   1,718,303     $   1,176,316
                                                                                          =============     =============

     Earnings per common and dilutive common equivalent share...........................  $         .20     $         .14
                                                                                          =============     =============


 Fully diluted earnings per share:
     Weighted average number of shares of common stock outstanding......................      7,788,586         7,801,181

     Additional shares assuming exercise of dilutive stock options and stock warrants...        891,753           716,810
                                                                                          -------------     -------------

       Total average common and common equivalent shares outstanding....................      8,680,339         8,517,991
                                                                                          =============     =============

     Net income.........................................................................  $   1,718,303     $   1,176,316
                                                                                          =============     =============

     Earnings per common and dilutive common equivalent share...........................  $         .20     $         .14
                                                                                          =============     =============
</TABLE>

                                        F-18
<PAGE>
ATC GROUP SERVICES INC. AND SUBSIDIARIES                              EXHIBIT 27

FINANCIAL DATA SCHEDULE
MAY 31, 1997 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                                                                 As of
Item Number                                             Item Description                                     May 31, 1997
<S>                      <C>                                                                           <C>    
                                                                                                        -----------------------

5-02(1)                  Cash and cash items.......................................................... $             8,207,157
5-02(2)                  Marketable securities and short-term investments.............................                       -
5-02(3)a(1)              Notes and accounts receivable - trade........................................              35,752,917
5-02(4)                  Allowances for doubtful accounts.............................................              (1,340,549)
5-02(6)                  Inventory....................................................................                       -
5-02(9)                  Total current assets.........................................................              52,529,316
5-02(13)                 Property, plant and equipment................................................               7,951,380
5-02(14)                 Accumulated depreciation.....................................................               4,178,585
5-02(18)                 Total assets.................................................................             104,222,004
5-02(21)                 Total current liabilities....................................................              20,269,796
5-02(22)                 Bonds mortgages and similar debt.............................................              35,470,096
5-02(28)                 Preferred stock - mandatory redemption.......................................                       -
5-02(29)                 Preferred stock - no mandatory redemption....................................                       -
5-02(30)                 Common stock.................................................................                  78,030
5-02(31)                 Other stockholders' equity...................................................              46,535,043
5-02(32)                 Total liabilities and stockholders' equity...................................             104,222,004


                                                                                                          Three months ended
                                                                                                             May 31, 1997
                                                                                                        -----------------------

5-03(b)1(a)              Net sales of tangible products...............................................$                      -
5-03(b)1                 Total revenues...............................................................              31,374,666
5-03(b)2(a)              Cost of tangible goods sold..................................................                       -
5-03(b)2                 Total costs and expenses applicable to sales and revenues....................              19,117,454
5-03(b)3                 Other costs and expenses.....................................................               9,435,049
5-03(b)5                 Provision for doubtful accounts and notes....................................                 377,439
5-03(b)(8)               Interest and amortization of debt discount...................................                 498,408
5-03(b)(10)              Income before taxes and other items..........................................               1,946,316
5-03(b)(11)              Income tax expense...........................................................                 770,000
5-03(b)(14)              Income continuing operations.................................................               1,176,316
5-03(b)(15)              Discontinued operations......................................................                       -
5-03(b)(17)              Extraordinary items..........................................................                       -
5-03(b)(18)              Cumulative effect - changes in accounting principles.........................                       -
5-03(b)(19)              Net Income...................................................................               1,176,316
5-03(b)(20)              Earning per share - primary..................................................                    .14
5-03(b)(20)              Earnings per share - fully diluted...........................................                    .14

</TABLE>
                                        F-19