<PAGE>
 
================================================================================

                                 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, 1998

                                      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                           (Zip Code)
offices)

      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 ___ No ___ Not Applicable  X 
                                                                 ---

The number of shares outstanding of the Registrant's Common Stock, par value 
$0.01 per share, as of July 14, 1998 was 1,000.

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

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MAY 31, 1998
--------------------------------------------------------------------------------

                                                                  Page
                                                                 ------
                                                                  
PART I - FINANCIAL INFORMATION:                                   
                                                                  
Item 1 - Financial Statements:                                    
                                                                  
Consolidated Balance Sheets                                       
 February 28, 1998 and May 31, 1998 (Unaudited)................   F-3
                                                             
Consolidated Statements of Operations                        
 Three months ended May 31, 1997 and 1998 (Unaudited)..........   F-4
                                                             
Consolidated Statements of Stockholders' Equity              
 Three months ended May 31, 1997 and 1998 (Unaudited)..........   F-5
                                                             
Consolidated Statements of Cash Flows                        
 Three months ended May 31, 1997 and 1998 (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-19
                                                             
PART II - OTHER INFORMATION:                                 
                                                             
Items 1-6......................................................   F-23
                                                         
                                                             
Signatures.....................................................   F-25
                                                             

                                      F-2
<PAGE>
 
ATC GROUP SERVICES INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
FEBRUARY 28, 1998 AND MAY 31, 1998 (Unaudited)
--------------------------------------------------------------------------------
<TABLE> 
<CAPTION> 
                                                                                   FEBRUARY 28,        MAY 31,
                                                                                      1998              1998
                                                                                   ------------      -----------
                                                                                                     (Unaudited)
<S>                                                                                <C>               <C>
ASSETS
------
CURRENT ASSETS:                                                                   
 Cash and cash equivalents....................................................... $  5,268,708       $  1,539,496
 Trade accounts receivable, less allowance for doubtful accounts
  ($3,077,829 at February 28, 1998 and $3,350,882 at May 31, 1998)...............   39,934,302         43,005,533
 Unbilled receivables............................................................   10,196,397          9,441,224
 Prepaid expenses and other current assets.......................................    2,422,523          1,467,305
 Deferred income taxes...........................................................    2,041,200          2,041,200
 Refundable income taxes.........................................................    4,232,505          4,321,489
                                                                                  ------------       ------------
  Total current assets...........................................................   64,095,635         61,816,247

PROPERTY AND EQUIPMENT, Net (Note C).............................................    5,793,928          5,917,736

GOODWILL, net of accumulated amortization
 ($3,261,108 at February 28, 1998 and $3,907,824 at May 31, 1998)(Note B).......   106,829,231        105,932,515
COVENANTS NOT TO COMPETE, net of accumulated amortization
 ($774,589 at February 28, 1998 and $1,197,979 at May 31, 1998)(Note B).........     5,162,911          4,739,521
DEBT ISSUANCE COSTS, net of accumulated amortization
 ($107,570 at February 28, 1998 and $352,847 at May 31, 1998)(Note B)...........     5,808,246          6,799,648
OTHER ASSETS....................................................................     1,365,056          1,650,066
                                                                                  ------------       ------------
                                                                                  $189,055,007       $186,855,733
                                                                                  ============       ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
 Short-term debt................................................................. $    300,000       $    300,000
 Current maturities of long-term debt............................................    1,420,816          1,559,413
 Accounts payable................................................................    7,738,433          9,872,313
 Accrued compensation............................................................    5,096,880          6,148,563
 Accrued payment obligations - ATEC acquisition (Note B).........................      589,026            215,500
 Tender Offer liability (Note B).................................................   14,278,838          3,681,818
 Other accrued expenses..........................................................    5,231,164          7,640,028
                                                                                  ------------       ------------
  Total current liabilities......................................................   34,655,157         29,417,635
                                                 

LONG-TERM DEBT, less current maturities (Note D).................................  120,419,684        124,669,685
OTHER LIABILITIES, including non-current payment obligations (Note B)............    2,737,185          2,177,100
DEFERRED INCOME TAXES............................................................    4,606,800          4,606,800
                                                                                  ------------       ------------
  Total liabilities..............................................................  162,418,826        160,871,220
                                                                                  ------------       ------------

COMMITMENTS AND CONTINGENCIES (Notes B and E)

STOCKHOLDERS' EQUITY:
 Common stock, par value $.01 per share; authorized 10,000 shares;
  issued and outstanding 1,000 shares at February 28, 1998 and May 31, 1998......           10                 10
 Additional paid-in capital......................................................   28,425,589         28,425,589
 Additional paid-in capital - restricted Holdings
  Stock, net of deferred executive compensation..................................           --             50,844
 Retained (Deficit)..............................................................   <1,789,418>        (2,491,930)
                                                                                  ------------       ------------
   Total stockholders' equity....................................................   26,636,181         25,984,513
                                                                                  ------------       ------------
                                                                                  $189,055,007       $186,855,733         
                                                                                  ============       ============
</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, 1997 AND 1998 (Unaudited)
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION>  
                                              Three Months Ended May 31,
                                         ------------------------------------
                                          Predecessor            Successor
                                              1997                  1998
                                         --------------        --------------
<S>                                      <C>                   <C> 
REVENUES...............................   $31,374,666           $40,282,914
 Reimbursable Costs....................     4,455,833             5,769,682
                                          -----------           -----------
 
NET REVENUES...........................    26,918,833            34,513,232
 
COST OF NET REVENUES...................    14,661,621            18,818,906
                                          -----------           -----------
 
  Gross profit.........................    12,257,212            15,694,326
                                          -----------           -----------
 
OPERATING EXPENSES:
 Selling...............................       999,995             1,408,273
 General and administrative............     8,477,336            10,915,077
 Provision for bad debts...............       377,439               370,992
                                          -----------           -----------
                                            9,854,770            12,694,342
                                          -----------           -----------
 
  Operating income.....................     2,402,442             2,999,984
 
NON-OPERATING EXPENSE (INCOME):
 Interest expense......................       498,408             3,795,934
 Interest income.......................       (51,783)               (5,792)
 Other.................................         9,501                (1,646)
                                          -----------           -----------
                                              456,126             3,788,496
                                          -----------           -----------
 
  Income (loss) before income taxes....     1,946,316              (788,512)
                                                                    
INCOME TAX EXPENSE (BENEFIT)...........       770,000               (86,000)
                                          -----------           -----------
 
NET INCOME (LOSS)......................   $ 1,176,316           $  (702,512)
                                          ===========           ===========
</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, 1997 AND 1998 (UNAUDITED)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
 
                                           
                                                                               
                                                  COMMON STOCK             ADDITIONAL      HOLDINGS              
                                                  ------------              PAID-IN       RESTRICTED     RETAINED               
                                             SHARES         AMOUNT          CAPITAL       STOCK-NET      EARNINGS         TOTAL
                                         -------------   ------------   ---------------   ----------   --------------- ------------ 
<S>                                      <C>             <C>            <C>               <C>          <C>             <C>
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 of predecessor..............           -               -                  -            -         1,176,316     1,176,316
                                         -------------   ------------   ---------------   ----------   --------------  ------------ 
BALANCE, May 31, 1997..................   7,802,987         $78,030        $28,994,053       $    -       $17,540,990   $46,613,073
                                         =============   ============   ===============   ==========   ==============  ============ 
<CAPTION> 

                                                  COMMON STOCK             ADDITIONAL      HOLDINGS
                                                  ------------              PAID-IN       RESTRICTED     RETAINED              
                                             SHARES         AMOUNT          CAPITAL       STOCK-NET      (DEFECIT)        TOTAL
                                         -------------   ------------   ---------------   ----------   -------------   ------------ 

BALANCE, February 28, 1998.............       1,000         $    10        $28,425,589            -    $  (1,789,418)   $26,636,181

Amortization of deferred 
 compensation costs....................           -               -                  -       50,844         
Net (loss) of successor................           -               -                  -            -         (702,512)      (702,512)
                                         -------------   ------------   ---------------   ----------   --------------  ------------ 
BALANCE, May 31, 1998..................       1,000         $    10        $28,425,589      $50,844    $  (2,491,930)   $25,984,513
                                         =============   ============   ===============   ==========   ==============  ============ 
</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, 1997 AND 1998 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                                          Three Months Ended
                                                                                                                May 31,
                                                                                                  ----------------------------------
                                                                                                   Predecessor           Successor
                                                                                                      1997                  1998
                                                                                                  --------------      --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                                               <C>
  Net income (loss).............................................................................  $  1,176,316        $  (702,512)
  Adjustments to reconcile net income (loss) to net cash from operating activities:
   Depreciation and leasehold amortization......................................................       239,580            428,964
   Amortization of goodwill and covenants.......................................................       425,599          1,320,106
   Provision for bad debts......................................................................       377,439            370,992
   Other........................................................................................       (16,338)           299,286
   Changes in operating assets and liabilities,  net of amounts acquired in
     acquisitions:
      Receivables...............................................................................    (2,062,365)        (2,966,550)
      Prepaid expenses and other assets.........................................................      (115,701)           670,208
      Accounts payable and other liabilities....................................................    (2,678,862)         5,220,901
      Income taxes payable......................................................................       458,132            (88,984)
                                                                                                  ------------       ------------
   Net cash flows from operating activities.....................................................    (2,196,200)         4,552,411
                                                                                                  ------------       ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of American Testing and Engineering Corp, net of cash acquired.......................    (2,420,766)                -
  Purchase of property and equipment............................................................      (256,753)          (673,272)
  Other.........................................................................................        19,510            401,646
                                                                                                  ------------       ------------
   Net cash flows from investing activities.....................................................    (2,658,009)          (271,626)
                                                                                                  ------------       ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from issuance of long-term debt and notes payable, net of issuance costs.............    33,000,000          3,319,417
  Proceeds from issuance of common stock, net of expenses.......................................        23,938                 -
  Payment of Tender Offer obligations...........................................................            -         (11,150,448)
  Principal payments on long-term debt..........................................................   (21,939,978)          (178,966)
  Other capital transactions....................................................................       (26,484)                -
                                                                                                  ------------       ------------
   Net cash flows from financing activities.....................................................    11,057,476         (8,009,997)
                                                                                                  ------------       ------------
 
   Net change in cash and cash equivalents......................................................     6,203,267         (3,729,212)
                                                                                                                     
CASH AND CASH EQUIVALENTS, Beginning of period..................................................     2,003,890          5,268,708
                                                                                                  ------------       ------------
 
CASH AND CASH EQUIVALENTS, End of period........................................................  $  8,207,157       $  1,539,496
                                                                                                  ============       ============
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash payments for:
  Interest......................................................................................  $    559,751       $    562,519
                                                                                                  ============       ============
  Income taxes..................................................................................  $    193,529       $      2,984
                                                                                                  ============       ============
</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, 1998 (UNAUDITED)
--------------------------------------------------------------------------------

A.  GENERAL
 
  ACQUISITION OF THE COMPANY BY ACQUISITION HOLDINGS, INC.--ATC Group Services
Inc. and subsidiaries ("ATC" or the "Company") became a wholly owned
subsidiary of Acquisition Holdings, Inc. ("Holdings") effective February 5,
1998 (the "Merger Date") upon the merger of the Company with Acquisition
Corp., a wholly owned subsidiary of Holdings, with ATC being the surviving
corporation (the "Merger"). Holdings, through Acquisition Corp., completed an
offer to purchase the outstanding common stock of ATC at $12.00 per share using
the proceeds from the issuance of 12% senior subordinated notes (the "Notes"),
bank borrowings (the "Bank Credit Facilities") and new equity investments. The
accompanying financial statements for the Company from February 5, 1998 and
subsequent thereto (the "Successor Period"), are attributable to operations of
the Company under the successor ownership of Holdings. The predecessor financial
statements, representing the period prior to February 5, 1998 (the "Predecessor
Period"), relate to the previous ownership of the Company.
 
  PRINCIPALS OF CONSOLIDATION--The consolidated financial statements include
the accounts of ATC Group Services Inc. and its wholly owned subsidiaries. All
significant inter-company accounts and transactions have been eliminated.
 
  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, 1998,
which are included in the Company's Annual Report on Form 10-K.

  NATURE OF BUSINESS--The Company is a national business services firm
providing technical and project management services relating to environmental
consulting (the "environmental consulting and engineering" segment) and
information technology consulting services (the "information technology
consulting" segment). The Company's environmental consulting and engineering
segment provides environmental and geotechnical engineering services,
architectural engineering services, construction materials testing and
analytical testing. The Company's information technology consulting segment
provides analysis and design services and system programming services to
assist clients in building new or modifying existing computer systems. This
business unit also provides support to clients in maintaining computer
systems.
 
     RECLASSIFICATIONS -- Certain reclassifications have been made to the prior
period's financial statements to conform to the current year's presentation.

B.   MERGER AND BUSINESS ACQUISITIONS 
 
     MERGER, NOTE OFFERING, AND TENDER OFFER TRANSACTIONS--Acquisition Holdings,
Inc. ("Holdings" or "Parent") and its wholly owned subsidiary, Acquisition Corp.
("Issuer"), were organized to effect the acquisition of the Company under the
terms and conditions of a Merger Agreement dated November 26, 1997 (the "Merger
Agreement").

     Pursuant to the Merger Agreement, the Issuer offered (the "Tender Offer")
to purchase all the issued and outstanding shares of the Company's Common Stock
at a price of $12.00 per share. The Tender Offer was conditioned upon Issuer
issuing $100,000,000 of Senior Subordinated Notes (the "Notes"; see Note D) and
obtaining sufficient bank financing necessary to consummate the Tender Offer.
Effective February 5, 1998, (the "Merger Date") upon satisfaction of the
necessary conditions, the Issuer was merged into ATC, with ATC being the
surviving corporation (the "Merger").
 
                                      F-7
<PAGE>
 
     The Merger Agreement followed the execution of a stockholders agreement
(the "Stockholders Agreement") with George Rubin and Morry F. Rubin
(collectively the "Stockholders") requiring the Stockholders to vote 14.8% of
their interest in the Company in favor of the Merger. In connection with the
Stockholders Agreement, the Stockholders each agreed to and entered into
Severance Consulting and Non-Competition Agreements (the "Severance
Agreements"). Under these agreements, the Stockholders resigned from their
officer positions, agreed to provide certain consulting services as requested by
the Company for a period of three years following the consummation of the
transactions, and agreed to restrict the Stockholders from competing with the
Company's business and restricting certain other activities for a period ranging
from three to four years from the effective date of the Merger. In consideration
of the Severance Agreements, the Company paid the Stockholders $3.1 million on
the Merger Date and will pay $553,430 on each of the next six succeeding
quarters commencing April 1, 1998.
 
  In connection with the Merger and Tender Offer, the Company, through the
Issuer, entered into a new bank credit agreement which provided for a
$20,000,000 Term Loan and $30,000,000 Revolving Credit Facility (collectively
the "Bank Credit Facilities"). The proceeds of the Term Loan along with the
proceeds of the Notes and equity investments in Holdings were used to finance
the Tender Offer, repay certain indebtedness including related accrued
interest and prepayment penalties, pay a portion of the Severance Agreement
consideration, and to pay financing costs and expenses.
 
  The acquisition of the Company by Holdings has been accounted for as a
purchase. The excess of the purchase cost over the historical book value of
the net assets acquired was allocated to the Severance Agreements and the
remainder, to goodwill, is being amortized over 30 years.
 
  The accompanying consolidated balance sheet reflects the following sources
and uses of funds related to the Tender Offer, Merger, Stockholders Agreement
and the Bank Credit Facilities (collectively the "Transactions").
 
   Sources of Funds:
     Notes........................................................ $100,000,000
     Bank Term Loan...............................................   20,000,000
     Equity investment from Holdings..............................   30,714,639
     Tender Offer obligations to be funded from cash on hand and
      revolving credit borrowings. (The outstanding balance at
      May 31, 1998 was $3,681,818)................................   16,082,850
                                                                   ------------
                                                                   $166,797,489
                                                                   ============
   Uses of Funds:
     Purchase of common stock, warrants and stock options......... $105,473,603
     Repay existing debt:
       Principal..................................................   42,076,461
       Accrued interest...........................................      577,345
       Accrued ATEC obligations...................................      754,250
     Shareholder Agreement Consideration:                         
       Amount paid at Merger Date.................................    3,100,002
       Amounts payable in quarterly installments..................    3,320,578
       Financing costs and expenses, including debt prepayment    
         penalty..................................................   11,495,250
                                                                   ------------
                                                                   $166,797,489
                                                                   ============
 
                                      F-8
<PAGE>
 
  The total consideration paid in connection with the Transactions and
allocation of the consideration to the historical book value of assets,
covenant not to compete and goodwill is as follows:
 
   Consideration:
     Purchase price of common stock, warrants, and stock options.  $105,473,603
     Severance Agreements consideration..........................     6,420,580
     Financing costs and expenses less amount related to debt
      issuance...................................................     4,828,614
                                                                   ------------
                                                                    116,722,797
   Allocation of Consideration:
     Net assets acquired.........................................    51,214,836
   Fair value adjustments:
     Non-compete agreement.......................................     4,700,000
     Other.......................................................      (301,537)
                                                                   ------------
   Excess purchase consideration.................................    61,109,498
   Predecessor basis adjustment..................................    (2,289,050)
                                                                   ------------
     Goodwill....................................................  $ 58,820,448
                                                                   ============
 
  Holdings is not engaged in any activities other than those related to its
ownership interest in ATC. A majority interest in Holdings is owned by
affiliates of Weiss, Peck & Greer, L.L.C. ("Weiss Peck"), who was also a party
to the Merger Agreement. Other actual and beneficial owners of Holdings
include ATC management and employees who made equity contributions or elected
to receive options to purchase common stock of Holdings in replacement of
their "in-the-money" ATC stock options.
 
  Weiss Peck is a private investment firm, founded in 1970, which manages in
excess of $14 billion in public equities and fixed-income securities for
institutional and individual clients worldwide. In addition to its money
management activities, the firm has a twenty-seven year history as an investor
of equity capital in over 200 venture capital and private equity transactions.
Investments of its Private Equity Group are made through affiliated funds with
$230 million of committed capital.
 
  BUSINESS ACQUISITIONS--The following acquisitions have been accounted for as
purchases. The acquired company's assets and liabilities are included in the
accompanying consolidated balance sheets at fair value at the date of purchase.
The acquired company's operations subsequent to the acquisition are included in
the accompanying consolidated statements of operations. The preliminary purchase
price allocation for the fiscal 1998 acquisitions are subject to change when
additional information concerning asset and liability valuations is obtained.
Therefore, the final allocation may differ from the preliminary allocation.

Fiscal 1998
 
  BING YEN & ASSOCIATES, INC.--On November 26, 1997 ATC purchased all of the
outstanding stock of Bing Yen & Associates, Inc. ("Bing Yen"). Bing Yen
provides geotechnical and structural forensic services to a wide variety of
clients in the western United States and is located in Tustin, California.
 
  The purchase price was comprised of the following consideration:
 
     Amounts paid to seller:
       Cash......................................................... $2,200,000
       Note payable at 8% due January 2, 1998.......................    550,000
       Notes payable at 8% due in three annual installments
        commencing January 1999.....................................  1,150,000
                                                                     ----------
                                                                      3,900,000
     Liabilities assumed:
       Current liabilities..........................................    313,254
       Direct expenses of transaction...............................     50,000
                                                                     ----------
                                                                     $4,263,254
                                                                     ==========


                                      F-9
<PAGE>
 
  In addition, a maximum aggregate principal amount of $1,500,000 in unsecured
contingent achievement promissory notes will be issued if certain minimum net
revenue levels are achieved, resulting in a maximum total consideration to
seller of $5,400,000.
 
  The notes payable of $1,150,000 are subject to setoffs if actual net assets
as of the closing date are below warranted amounts, for trade receivables not
collected within one year of the closing date and under certain other
specified conditions.
 
  The preliminary purchase price allocation is as follows:
 
     Cash........................................................... $  163,680
     Accounts receivable, net.......................................  2,292,191
     Work in process................................................      5,122
     Prepaid expense................................................     10,746
     Property and equipment.........................................    142,241
     Covenant not to compete........................................     50,000
     Goodwill.......................................................  1,595,324
     Other assets...................................................      3,950
                                                                     ----------
                                                                     $4,263,254
                                                                     ==========
 
  ENVIRONMENTAL WARRANTY, INC.--On November 4, 1997, ATC purchased 90.9% of
the outstanding stock of Environmental Warranty, Inc. ("E.W.I."), a property
and casualty insurance brokerage firm specializing in environmental insurance
products.
 
  The purchase price was comprised of the following consideration:
 
     Amounts paid to sellers:
       Cash......................................................... $  150,000
       Notes payable, net of imputed interest at 8.0%...............    582,424
       Payment commitments..........................................    275,000
       ATC Common Stock (33,000 shares).............................    365,062
                                                                     ----------
                                                                      1,372,486
     Liabilities assumed:
       Current liabilities..........................................    314,811
       Direct expenses of transaction...............................     25,000
                                                                     ----------
                                                                     $1,712,297
                                                                     ==========

  The notes payable are due in three annual installments commencing November
1998 and are subject to certain setoffs. The payment commitments are also due
in three installments commencing November 1999. ATC issued 33,000 shares of
restricted common stock valued at 11 1/16 per share.
 
  The preliminary purchase price allocation is as follows:
 
     Cash and equivalents........................................... $  169,350
     Receivables....................................................    158,391
     Prepaid and other current assets...............................      2,875
     Property and other.............................................     15,384
     Goodwill.......................................................  1,366,297
                                                                     ----------
                                                                     $1,712,297
                                                                     ==========

  BCM ENGINEERS, INC.--On August 20, 1997 ATC purchased certain assets and
assumed certain liabilities of the environmental consulting and engineering
services division of the Smith Technology Corporation, which operated
primarily as BCM Engineers, Inc. ("BCM"). BCM is a leading municipal water and
wastewater environmental engineering firm and provides services in water,
environmental compliance and site investigations, remedial design and
engineering, asbestos, and air quality management. BCM serves major industrial
clients in the chemical, petrochemical, oil and gas manufacturing, water
supply, commercial development and utilities industries from multiple
locations in the east and Gulf Coast.



                                      F-10
<PAGE>
 
 
  The purchase price was comprised of the following consideration:
 
     Amounts paid to seller or to others on behalf of seller:
       Cash........................................................ $ 5,425,539
       Notes payable...............................................   2,950,000
       Less note payable offset....................................    (200,000)
                                                                    -----------
                                                                      8,175,539
     Liabilities assumed:
       Current liabilities.........................................   2,833,665
       Non current liabilities.....................................   1,356,151
       Direct expenses related to acquisition......................     112,133
                                                                    -----------
                                                                    $12,477,488
                                                                    ===========
 
  Notes payable includes a $200,000 note which became due September 20, 1997
and was subject to offset for reductions in net assets and for unrecorded
liabilities arising through the closing date of the transaction. Based on the
closing balance sheet provided by the Seller, the Company will offset the
$200,000 in full. In addition, based on unrealized work in process warranted
by the seller and other claims, an additional $2,750,000 has been reflected as
an offset of short-term debt in the accompanying consolidated balance sheet.

  The preliminary purchase price allocation is summarized as follows:
 
     Accounts receivable, net of allowance.......................... $ 4,710,960
     Work in process................................................   3,684,939
     Other current assets...........................................       7,357
     Other assets...................................................   1,327,270
     Covenants not to compete.......................................     100,000
     Goodwill.......................................................   2,646,962
                                                                     -----------
                                                                     $12,477,488
                                                                     ===========

 Prior Acquisitions
 
  AMERICAN TESTING AND ENGINEERING CORPORATION--On May 24, 1996 ATC purchased
certain assets and assumed certain liabilities of American Testing and
Engineering Corporation ("ATEC"), a national environmental consulting firm.
ATEC provides environmental engineering and consulting services through a
large network of branch and regional offices.
 
  Under the original purchase agreement, the Company was contingently liable
to ATEC for additional purchase consideration up to $10,750,000 if certain
conditions were met. The seller since met certain of these contingent
consideration requirements in the quarter ended May 31, 1997 and the Company
began to amortize the associated goodwill in this period. In addition, in
connection with the issuance of the Senior Secured Notes on May 29, 1997, the
Company and the seller executed an amendment to the original purchase
agreement and agreed to remove or modify the remaining contingent
consideration requirements. As a result of the foregoing, the Company paid
$2,420,766 on May 30, 1997 and is obligated to make monthly payments through
February 1999. Additionally, the Company has the option to purchase certain
properties from the seller for $1,700,000 in fiscal 2002.

  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 assets in the accompanying
consolidated balance sheets.
 
  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-11
<PAGE>
 
     PRO FORMA FINANCIAL INFORMATION (UNAUDITED) -  The following unaudited pro
forma information sets forth the results of operations of ATC as if the Merger
and Tender Offer and ATC's purchases of BCM, EWI and Bing Yen had occurred on
March 1, 1997:
<TABLE> 
<CAPTION> 
                                                                         PRO FORMA
                                                                 THREE MONTHS ENDED MAY 31,
                                                                 ----------------------------
                                                                    1997            1998   
                                                                 ------------    ------------
     <S>                                                         <C>             <C> 
     Revenues..................................................  $ 41,549,577    $ 40,282,914
     Operating Income..........................................     1,676,483       2,999,984
     Net income (loss).........................................  $ <1,102,069>   $   (702,512)
</TABLE>

C.   PROPERTY AND EQUIPMENT

     Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
                                                                 FEBRUARY 28,         MAY 31,
                                                                     1998              1998   
                                                                 ------------      ------------
      <S>                                                        <C>               <C> 
      Office equipment.........................................  $ 5,345,109       $ 5,913,192
      Laboratory and field equipment...........................    3,967,605         3,628,304
      Transportation equipment.................................      582,524           585,064
      Leasehold improvements...................................    1,111,823         1,123,173
                                                                 ------------      ------------
                                                                  11,007,061        11,249,733
      Less accumulated depreciation............................   <5,213,133>       (5,331,997)
                                                                 ------------      ------------
      Property and Equipment, net..............................  $ 5,793,928       $ 5,917,736
                                                                 ============      ============
</TABLE> 

D. DEBT AND CREDIT AGREEMENTS
    
   BANK CREDIT FACILITIES--On January 29, 1998, a credit facility with various
lending institutions was established providing the Company senior secured
credit facilities consisting of a $20 million Term Loan and a $30 million
Revolving Credit Facility (the "Bank Credit Facilities").
 
   The Revolving Credit Facility is available to the Company for working
capital and general corporate purposes, including certain permitted
acquisitions. Revolving loans mature on January 29, 2003. At the Company's
option, revolving loans will accrue interest at either (a) an adjusted rate
based on the Eurodollar rate plus a margin of 2.25% or (b) the base rate
(effectively the prime rate) plus a margin of 1.25%. The loan margins are
subject to quarterly decreases based upon improvements in the Company's leverage
ratio. Interest is payable monthly and the Company pays a revolving loan
commitment fee of 1/2 of 1% on a quarterly basis. 
 
   The Term Loan amortizes quarterly commencing in February 1999 initially at
$750,000 per quarter, increasing to $1,000,000 per quarter in February 2000,
$1,500,000 per quarter in February 2001 and $1,750,000 per quarter in February
2002 with the final loan maturity on January 29, 2003.

                                      F-12
<PAGE>
 
   The Bank Credit Facilities require the Company to meet certain financial
tests, including minimum interest coverage and maximum leverage ratios beginning
as of and for the quarter ended May 31, 1998. The Bank Credit Facilities also
contain covenants which, among other things, limit the ability of the Company to
incur additional indebtedness, pay dividends, enter into transactions with
affiliates, form subsidiaries, enter into sale-leaseback transactions, make
capital expenditures, loans, investments or lease payments, merge, consolidate
or acquire or dispose of assets, voluntary prepay or amend other indebtedness,
incur liens and encumbrances and other matters customarily restricted in loan
agreements of this type.

   For the quarter ended May 31, 1998, the Company was in default of certain 
financial covenants.  The Company's lenders have provided an interim waiver with
respect to the defaults.  Under the waiver, the Company has approximately $3.4 
million of availability under its revolving line of credit as of July 15, 1998.

   The Company is in discussion with its lenders and believes the covenant 
provisions of the credit agreement will be amended.  Accordingly, the Company 
continues to classify its outstanding debt as long term in accordance with the 
existing loan maturity dates.  The final classification of the Company's 
outstanding bank debt and 12% Senior Secured Notes, will be in accordance with 
the terms of any final credit agreement.

   The Bank Credit Facilities contain customary events of default, including
payment defaults, breach of representations and warranties, covenant defaults,
cross defaults, certain events of bankruptcy and insolvency, ERISA, judgement
defaults, failure of any guarantee or security agreement supporting the
Company's obligations under the Bank Credit Facilities to be in full force and
effect, and a change of control of the Company's Parent or the Company.
 
   The obligations of the Company under the Bank Credit Facilities are
unconditionally guaranteed by the Company's Parent and any direct or indirect
subsidiaries of the Company. In addition, the obligations of the Company under
the Bank Credit Facilities are secured by substantially all of the assets of
the Company.
 
   12% SENIOR SUBORDINATED NOTES DUE 2008--The 12% Senior Subordinated Notes
due 2008 were issued January 29, 1998 pursuant to an indenture agreement and
became obligations of the Company as of the Merger Date. Interest accrues at
12% per annum and is payable semiannually in arrears on each January 15 and
July 15, commencing July 15, 1998. The Notes are unsecured obligations of the
Company, ranking subordinate in right of payment to all senior indebtedness
(as defined) as of the Merger Date, and ranking pari passu in right of payment
with any future senior subordinated indebtedness and senior in right of
payment to all other subordinated obligations of the Company. The Notes will
be redeemable, in whole of in part, at the Company's option on or after
January 15, 2003 at redemption prices set forth in the Note indenture
agreement. Up to 35% of the aggregate principal amount of the Notes may be
redeemed on or prior to January 15, 2001 with the net cash proceeds of a
public offering at redemption prices and terms in accordance with the Note
indenture agreement. The Note indenture agreement provides noteholders the
option to have their notes purchased in the event of a change in control. In
addition, the Note indenture contains covenants restricting the incurrence of
additional indebtedness, payment of dividends, sales of assets, incurrence of
liens, mergers and acquisitions and conduct of the business to existing
businesses.
 
   8.18% SENIOR SECURED NOTES--On May 29, 1997, the Company issued $32,500,000
of 8.18% Senior Secured Notes to a group of financial institutions. The proceeds
were used in part to repay the Company's bridge credit facility outstanding as
of February 28, 1997. In connection with the issuance of the 8.18% Senior
Secured Notes, the Company had entered into a bank credit agreement providing a
$15,000,000 revolving line of credit. Amounts outstanding under the bank
revolver and the 8.18% Senior Secured Notes were repaid in full using proceeds
of the 12% Senior Subordinated Notes due 2008 and the Bank Credit Facilities.

                                      F-13
<PAGE>

E. COMMITMENTS AND CONTINGENCIES
 
   LITIGATION--GENERAL LITIGATION--Joseph I. Peters v. George Rubin, et al, Civ.
Action No. 16026-NC, Court of Chancery, New Castle County, Delaware. On or about
November 12, 1997, a summons and complaint were filed in the Delaware Court on
behalf of Joseph I. Peters, as plaintiff. On or about December 18, 1997, an
amended complaint was filed (the "Amended Complaint"). The Amended Complaint
names the Company, the members of the Company's board of directors, Weiss Peck
and the WPG Corporate Development Associates V, L.P., a Weiss Peck affiliate, as
defendants. The Amended Complaint challenges the Tender Offer and Merger. The
Amended Complaint seeks class action status on behalf of the stockholders of the
Company. The plaintiff in the action claims that the offer price for the
Company's Common Stock is inadequate and that the defendants have breached their
fiduciary duties to the plaintiff and other stockholders of the Company. The
plaintiff seeks, among other things, to enjoin the Transactions or compensatory
damages. On January 7, 1998, a motion to dismiss was filed by Weiss Peck and WPG
Corporate Development Associates V, L.P, a Weiss Peck affiliate. On January 13,
1998, answers to the complaint were filed by the Company and the remaining
defendants. The parties to the action are currently conducting discovery. The
Company believes the allegations contained in the Amended Complaint are without
merit and intends to defend the action vigorously; however, there can be no
assurance of the outcome.
 
   First Fidelity Bank, N.A., et al v. Hill International, Inc. et al.,
Superior Court of New Jersey, Law Division, Burlington County, Docket No. Bur-
L-03400-95, filed December 19, 1995. Irvin E. Richter, et al v. ATC Group
Services Inc., et al. United States District Court, District of New Jersey,
Civ. No. 96 CV 5818 (JBS) filed December 6, 1996. On December 19, 1995, a
second amended complaint was filed in the above-entitled action which joined
the Company as a defendant and included a count against the Company seeking
recovery of certain assets purchased from Hill on the grounds that plaintiff
banks held security interests in the assets and that Hill was in default under
the security agreement creating such alleged security interests. The original
plaintiffs in this action were First Fidelity Bank, N.A. and United Jersey
Bank, N.A. The primary defendants were Hill and certain of its subsidiaries,
and Irvin Richter, David Richter, Janice Richter and William Doyle. Irvin
Richter and David Richter are officers and stockholders of Hill. In April
1996, the Company filed a cross-claim against Hill, Irvin Richter and David
Richter alleging breach of contract and fraud, among other allegations, and
seeking unspecified damages, including punitive damages, and equitable relief.
In August, 1996, Hill and the Richters filed an answer denying ATC's cross-
claims, a cross-claim against ATC and a third party claim against certain
members of ATC's management and an employee. The cross-claim and third party
claim seek unspecified damages, including punitive damages, for defamation,
breach of the Richters' non-competition agreements and securities fraud. The
defamation claims are based (i) on plaintiff banks' allegation of fraud
against Hill and the Richters in their amended complaint, which Hill and the
Richters allege was based on defamatory statements made by ATC in settlement
discussions with the plaintiff banks and (ii) on a letter alleged to contain
defamatory statements which was sent to an account debtor of the Company by an
employee. In its answer, the Company both denies that it made defamatory
statements and asserts that the defamation allegations fail to state legally
valid claims. The breach of contract and securities claims are based on
allegations that ATC made representations concerning a registration rights
agreement to be provided in connection with options issued to the Richters as
consideration for their non-competition agreements. In its answer, the Company
denies that an agreement concerning registration rights was ever reached and
asserts that any such rights were forfeited or suspended by the Richters in
any case as a result of their conduct in connection with the asset purchase.

ATC also disputes that the Richters sustained damages on the grounds, among
others, that the options were non-transferable and because ATC's stock price
never exceeded the exercise price at any point where the options would have
been exercisable. These related cases are in the discovery phase. In January,
1997, the plaintiff banks dismissed their claim against ATC. On December 6,
1996, Hill and the Richters commenced an action against ATC and the same
officers and employees of ATC alleging essentially the same claims in federal
court as in the state action. This action is entitled Irwin E. Richter et al.
v. ATC Group Services, et al., Civ. No. 96-5818 (JBS), U.S. District Court for
the District of New Jersey, December 6, 1996. ATC has answered, raising the
same defenses and additional defenses related to the timeliness of the federal
securities claims. The case is currently in the discovery phase. It does not
create a risk of double recovery. In the Company's opinion, the outcome of
this matter will not have a significant effect on the Company's financial
position or future results of operations and cash flows, although no
assurances can be given in this regard.

                                      F-14
<PAGE>
 
   Commonwealth of Massachusetts v. TLT Construction Corp. et al., Civ. Action
No. 96-02281 F, Superior Court of Middlesex County, Massachusetts. This is an
action brought by the Commonwealth of Massachusetts in April 1996, against the
architects and general contractor on a renovation and construction project on
the Suffolk County Courthouse in Massachusetts. The basis of the lawsuit is
that one or more damp-proofing products specified by the architect defendants
and installed by the contractor defendant made employees in the courthouse ill
because of the off-gassing of harmful vapors. Dennison Environmental Services
Inc., ("Dennison") an ATC subsidiary, was joined on August 13, 1996, as a
third party defendant by TLT Construction Corporation, the general contractor,
because Dennison performed some air quality testing of the air in the courthouse
for the Commonwealth of Massachusetts during the construction process. The
contractor alleges that it acted in reliance on these tests in continuing to
install the material after the test report was given to it by the state. ATC's
position is that it did not commit any error or omission in this case, that ATC
made no representation to the contractors or material supplier and had no
privity with them and that Dennison's opinion concerning short term, during-
construction health effects of the off-gassing could not be justifiably relied
upon with respect to the long-term performance and health effects of the product
or its installation. This case is in the discovery phase. At this point, ATC
considers the case to be without merit, and ATC intends to vigorously defend the
action. Notice of this claim has been made to ATC's professional liability
insurer. At the time that notice of this claim was filed, the Company had in
effect a professional liability insurance policy in the amount of $10.0 million
with a deductible of $250,000.
 
   Barrett-Moeller et al. v. ATC Associates Inc., Civ. Action No. 97-01037D,
Superior Court of Middlesex County, Massachusetts. This is an action arising
out of the same set of occurrences as gave rise to Commonwealth of
Massachusetts v. TLT Construction, Corp. described above. The action was
brought by a group of employees who worked in the Suffolk County Courthouse
during the period in which the off-gassing of harmful vapors was alleged to
have occurred. The suit seeks damages for personal injury in an unspecified
amount. Notice of this claim has been made to ATC's professional liability
insurer. At the time that notice of this claim was filed, the Company had in
effect a professional liability insurance policy in the amount of
$10.0 million with a deductible of $250,000.

   Joan Spencer v. TLT Construction et al., Civ. Action No. 97-4161C, Superior
Court of Middlesex County, Massachusetts. This is an action arising out of the
same set of occurrences as gave rise to Commonwealth of Massachusetts v. TLT
Construction, Corp. described above. The action was brought by an employee who
worked in the Suffolk County Courthouse during the period in which the off-
gassing of harmful vapors was alleged to have occurred. The suit seeks damages
for personal injury in an unspecified amount. Notice of this claim has been
made to ATC's professional liability insurer. At the time that notice of this
claim was filed, the Company had in effect a professional liability insurance
policy in the amount of $10.0 million with a deductible of $250,000.

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

                                     F-15
<PAGE>
 
   State of New York Department of Taxation and Finance. The Company has
received a notice of audit from the New York State Department of Taxation and
Finance ("NYDTF") for the three fiscal years 1993, 1994 and 1995. The agent
has issued an audit report, which is expected to be the basis of a
formal assessment estimated to be approximately $200,000. ATC's most recent
communications with the NYDTF indicate that it is probable that ATC will incur
a liability for back taxes in an approximate amount of $200,000 which the
Company has recorded as a liability as of February 28, 1998.
 
   Professional Service Industries, Inc. v. ATC Group Services Inc. and Thomas
Bowker, Superior Court, Norfolk County, Massachusetts, June 19, 1997, Civ. No.
97-01146. The complaint alleges that ATC interfered with a non-competition
agreement between Mr. Bowker, currently an ATC employee, and PSI. An injunction
has been issued by the court against ATC and Mr. Bowker prohibiting them from
competitive acts within certain geographic areas. The case is currently on hold
pending mediation between the parties in an attempt to settle the case. If
settlement is not achieved through the mediation process, ATC intends to
continue to vigorously defend the claim.

   Etzel v. ATC Etzel Place II, L.P. V. ATC Environmental Inc., Missouri Etzel
Place II, L.P. v. ATC Environmental Inc. Action No. 982-01473, Missouri Circuit
Court, Twenty-Second Judicial Circuit (St. Louis City). This action was brought
on June 2, 1998 and alleges that ATC breached its contract with the plaintiff
and was negligent in performing asbestos survey services in connection with an
asbestos removal project. Plaintiff requests damages in the amount of
$241,062.40. ATC believes it performed all services properly and intends to
vigorously defend this action. Notice of this claim has been made under ATC's
professional liability and pollution liability insurance policy. The insurance
policy is subject to a $150,000 self-insured retention amount. Although the
Company believes this claim will not result in a material loss, no assurance in
this regard can be given.

 
   1100 Airport North Partnership V. Atc Group Services Inc., Superior Court of,
1100 Airport North Partnership v. ATC Group Services Inc., Cause No. 02D01-9804-
CP-813, Superior Court of Allen County Indiana. This action was filed on May 1,
1998 and arises out of ATC's lease of office space in Fort Wayne, Indiana. The
Plaintiff seeks damages and attorneys fees for ATC's alleged breach of the
lease. On July 1, 1998, a default judgment was entered against ATC in the
amounts of $302,116.13 and $1,443.00 for damages and attorneys fees,
respectively. ATC believes it has sufficient grounds to vacate the default
judgement and has meritorious defenses in this action. Although the Company
believes this claim will not result in a material loss, no assurance in this
regard can be give.

   
ADMINISTRATIVE VIOLATIONS
 
   Indiana Department of Environmental Management v. ATC Associates Inc. ATC
received a Notice of Violation ("NOV") and Proposed Agreed Order, EPA I.D. No.
IND 004939765, dated June 9, 1997, on June 12, 1997 and a revised NOV and
Proposed Agreed Order on April 22, 1998. The revised Proposed Agreed Order
sought a penalty in the amount of $78,400 for alleged violations of the federal
hazardous waste regulations and Indiana hazardous waste regulations arising
out of the handling of hazardous wastes at ATC's Indianapolis laboratory. A
final settlement was agreed to among the parties resulting in a net liability
of $27,225 to the Company.
 
PROBABLE CLAIMS
 
   One Parkway Project. ATC has received notice of related potential claims by
R.M. Shoemaker Co., a Pennsylvania construction firm, and four of its workers
arising out of ATC's performance of asbestos abatement survey, design and
project monitoring services. The services were performed by ATC's Burlington,
New Jersey office on a project known as the One Parkway Project. The claims
allege that ATC: (i) failed to locate certain asbestos-containing materials in
a high rise building during its inspection of the facility; (ii) failed to
include these undiscovered materials in the design specifications for an
asbestos abatement project in connection with a renovation project on the
building; and (iii) failed to properly clearance inspect and test the areas on
which abatement had been performed prior to demobilization of the asbestos
abatement project. The claimants allege that ATC's acts or omissions resulted
in additional corrective actions including remobilization of certain areas,
delays of the renovation project and exposure of construction workers to
asbestos contamination. R.M. Shoemaker has alleged that it sustained damages
in the amount of $1,500,000 for additional abatement costs plus additional
damages for delay. The workers' exposure claims have not been quantified. No
suit has been filed.

                                      F-16
<PAGE>
 
   At this point, the Company believes that it was not responsible for the
alleged problems on this project. ATC's responsibilities on the project were
limited, and ATC believes that the alleged omissions which allegedly resulted
in the alleged losses were outside the scope of the Company's contractual
responsibilities. The Company has served notice of these claims upon its
professional liability insurer. This coverage is subject to a $250,000
deductible.
 
   Bob Moore Construction/Garden Ridge, Inc. ATC has received notice of a
potential claim arising out of ATC's performance of soil compaction testing
for Bob Moore Construction, Inc., the general contractor on a retaining wall
construction project for Garden Ridge, Inc., a garden supply chain, in
Norcross, Georgia. The retaining wall eventually failed. Independent
consultants performed investigations and prepared reports to determine the
cause of failure. Reports initially concluded that the failure was due to a
flaw in the design prepared by the wall manufacture and installation firm.
Both consultants concluded that the soil work was properly performed. Since
then, consultants have prepared follow-up reports, and the contractor has
requested ATC's involvement in mediation discussions regarding the
responsibility for repairs with respect to the various parties involved in the
project. Total costs to repair the project currently total $960,000. ATC is
evaluating the follow-up reports to determine ATC's potential liability or
responsibility, if any. ATC currently believes that it performed all services
properly and that it should have no liability. In any case, ATC believes its
share of liability should amount to only a small portion of the total costs.
Notice of this claim has been made under ATC's professional liability insurance
policy. The professional liability insurance is subject to a $250,000
deductible. Although the Company believes this claim will not result in a
material loss, no assurance in this regard can be given.
 
   Argosy Casino, Lawrenceburg, Indiana. ATC has received notice of potential
claims arising out of geotechnical analyses for which American Testing and
Engineering Corporation originally provided the geotechnical analyses and on
which ATC subsequently performed the design of a Tensar/soil stabilized earth
slope. The stabilized earth/geogrid engineered slope failed at the interface
between the compacted subgrade and the first geogrid layer. A tentative
settlement reached among the parties to this claim would result in ATC's
payment of $266,000 in corrective costs, of which ATC expects contribution
from other parties in an amount of $40,000 to $80,000. The Company has
recorded a reserve of the minimum expected loss in the accompanying
consolidated balance sheet. Notice of this claim has been made under ATC's
professional liability insurance policy. The professional liability insurance
is subject to a $250,000 deductible.
 
   Smith Technology Acquisition Claims. ATC has filed two claims for recoupment
against Smith Technology Corporation ("Smith") arising out of the Agreement
for Sale and Purchase of Business Assets of August 19, 1998, between ATC and
Smith ("the Agreement"). The first claim asserted a recoupment against the
full amount of the $200,000 30-day note and a return of conditionally assumed
liabilities in the total amount of $135,000. These remedies were asserted to
partially recoup a deficiency in the Adjusted Equity Value as stated on
Smith's closing Engineering Division Balance Sheet from that warranted in the
purchase agreement.
 
   On March 27, 1998, ATC asserted a second set of recoupment claims arising
under the Agreement for various value, liability, and loss issues in the
amount of $5,127,859 against the $2,750,000 note payable to Smith which had
been assigned to Chase Manhattan Bank. On April 13, 1998, ATC served a
corrective amendment to this claim asserting an additional claim amount of
$21,475. This resulted in a total claim amount of $5,149,334. The amount of
claim outstanding after set-off of the full amount of the note is $2,499,334.
Of this amount, ATC believes that $850,000 of the amount claimed for third
party liability claims should be covered by insurance, resulting in non-
recoverable claim in the amount of $1,649,334 net of a $100,000 non-refundable
payment. A portion of this unrecoverable claim has been expensed in the
accompanying consolidated statement of operations, and the balance is expected
to be recorded as an additional cost associated with the acquisition as
amounts are incurred.

   On May 22, 1998, ATC filed notice to Smith and Chase Bank of Smith's breach
of the convenants of the Agreement in failing to turn over $606,604.39 of ATC's
cash receipts. Smith and Chase have thus far refused to turn over these funds on
the basis of their allegation that a dispute between Smith and ATC exists
concerning certain payments and recoupment claims under the Agreement as
described above. Although ATC believes it is entitled to these funds under the
Agreement, no assurance can be given that the release of such funds can be
obtained without legal action.
 

                                      F-17
<PAGE>
 
   TG Kentucky, Lebanon, Kentucky. The potential claim arises out of a contract
to perform preliminary geotechnical investigations at the TG Kentucky Facility,
Lebanon, Kentucky, for James M. Gray Construction Company ("Gray"). ATC issued
geotechnical engineering reports bases on its investigations. Gray alleges that
it encountered differing site conditions from those identified in ATC's
geotechnical reports. Gray asserts it could incur over $500,000 in additional
costs to finish the project considering these alleged unexpected conditions.
Allegations have been made against ATC for costs over budget. ATC believes it
performed all services properly and that it should incur no liability. Notice
has been given to ATC's professional liability insurer. The policy is subject to
the $150,000 self-insured retention amount. Although the Company believes this
claim will not result in a material loss, no assurance in this regard can be
given.

F. 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 1999 are as follows:

 
<TABLE>
<CAPTION>
                                           Environmental     Information     Adjustments &
                                           & Engineering     Technology      Elimination's        Total
                                          ---------------  ---------------  ---------------  ---------------
<S>                                       <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 1999
-----------

     Quarter Ended May 31, 1998
     --------------------------

     Revenues.............................. $ 37,749,386    $2,724,736       <191,208>          $ 40,282,914
     Operating income......................    2,658,958       341,026              -              2,999,984
     Depreciation and amortization.........      412,449        16,515              -                428,964
     Capital expenditures..................      672,165         1,107              -                673,272
 
     Identifiable Assets as of May 31, 1998  184,981,259     6,199,893     <4,325,409>          $186,855,733
     --------------------------------------
 
</TABLE> 

                                     F-18
 
<PAGE>

ATC GROUP SERVICES INC. AND SUBSIDIARIES

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

RECENT DEVELOPMENTS

  Tender Offer and Merger. The Company became a wholly owned subsidiary of
Acquisition Holdings, Inc. ("Holdings") upon the merger of ATC with Acquisition
Corp., a wholly owned subsidiary of Holdings, with ATC being the surviving
corporation (the "Merger"). Acquisition Corp. offered (the "Tender Offer") and
completed the purchase of the issued and outstanding shares of the Company's
Common Stock at a price of $12.00 per share. The Tender Offer was consummated
using the proceeds from the issuance of $100,000,000 of 12% Senior Subordinated
Notes (the "Notes"), borrowings under a new bank credit facility (the "Bank
Credit Facilities") and equity investments in Holdings. The accompanying
financial statements for the Company from February 5, 1998 (the "Successor
Period") are attributable to operations of the Company under the successor
ownership of Holdings. The predecessor financial statements, representing the
period prior to February 5, 1998 (the "Predecessor Period"), relates to the
previous ownership of the Company. Prior to the Tender Offer and Merger, the
Company had entered into two separate Severance, Consulting and Noncompetition
Agreements (the "Severance Agreements") with two officers of the Company. The
Severance Agreements provided for the resignation of the officers upon
completion of the Merger and the terms of a non-compete agreement. The Tender
Offer and Merger, issuance of the Notes, execution of the Bank Credit Facilities
and Severence Agreements, are collectively referred to as the "Transactions".
 
  The Company has acquired twelve businesses since 1993. The three most recent
acquisitions which have been consummated include: (i) the purchase by the
Company of all of the stock of Bing Yen & Associates, Inc. ("Bing Yen") on
November 26, 1997; (ii) the purchase by the Company of substantially all of the
stock of Environmental Warranty, Inc. ("EWI") on November 4, 1997; and (iii) the
purchase by the Company of certain assets and the assumption by the Company of
certain liabilities on August 20, 1997 of the Engineering Division of Smith
Technology Corporation which operated primarily as BCM Engineers Inc. ("BCM").
 
  As a result of the Merger, the consolidated financial statements for the
Successor Period are presented on a different basis of accounting than that of
the Predecessor Period and are therefore not directly comparable.
 
OVERVIEW
 
  General. ATC is a leading national provider of professional consulting,
engineering and testing services within the environmental and construction
materials industries. Management believes the Company is also a leading
provider of integrated environmental information management technology
services. The Company provides a broad range of services to a diverse client
base of over 8,000 customers. The Company provides its services through a
network of 74 branch offices located in 35 states covering every major market of
the United States.
 
  In 1993, the Company initiated a strategy of controlled growth through
acquisitions to build a national infrastructure and to broaden its range of
technical services. The Company has created a national infrastructure through
the completion of 12 acquisitions since May 1993. ATC has thereby also
expanded its service mix by adding construction materials testing and
engineering, lead risk management, indoor air quality management, water and
wastewater management and information management technology services. 

  The Company's rapid growth is primarily attributable to the acquisition of
assets of American Testing and Engineering Corporation ("ATEC") in May 1996 and
the acquisition of assets of BCM in August 1997. ATEC, with its large network of
regional and branch offices, positioned the Company as a national provider of
professional environmental consulting, testing and engineering services. As a
result of the BCM acquisition, ATC has become a high-quality provider of
consulting, engineering and design services in water supply and treatment,
wastewater systems, air quality management, traditional environmental site
investigations, site assessments and storage tank management services.
Subsequent to each acquisition that it has made, the Company has implemented
cost reduction measures, including integration of offices, introduction of
flexible staffing programs and reduction of duplicative corporate overhead
costs.

                                     F-19
<PAGE>
 
RESULTS OF OPERATIONS

Three Months Ended May 31, 1998 Compared with Three Months Ended May 31, 1997
-----------------------------------------------------------------------------

     Revenues in the three months ended May 31, 1998 increased 28.4% to
$40,282,914, compared with $31,374,666 in the three months ended May 31, 1997.
This increase was primarily attributable to revenues associated with the BCM
acquisition which was consummated on August 20, 1997 and the acquisitions of EWI
and Bing Yen which were completed in November 1997. Revenues in the three months
ended May 31, 1998 from ATC's branch offices having comparable operations in the
three months ended May 31, 1997 increased 3.0% to $32,303,847, compared with
$31,374,666 in the three months ended May 31, 1997. Revenues in the three months
ended May 31, 1998 attributable to the acquisition of BCM totaled $6,333,194.
Revenues attributable to the acquisition of EWI and Bing Yen totaled $1,645,873
million or 4.1% of revenues in the three months ended May 31, 1998. Revenues 
were not affected by the Transactions.

     Reimbursable costs represent direct project expenses billed to
environmental and engineering segment clients.  For the three months ended May
31, 1998, reimbursable costs increased 29.5% to $5,769,682, compared with
$4,455,833 in the three months ended May 31, 1997. Reimbursable costs as a
percentage of revenues remained approximately the same, 14.3% for the three
months ended May 31, 1998 compared with 14.2% in the three months ended May 31,
1997. Reimbursable costs were not affected by the Transactions. 

     Gross profit in the three months ended May 31, 1998 increased 28.0% to
$15,694,326, compared with $12,257,212 in the three months ended May 31, 1997.
Gross margin remained the same, 45.5% in the three months ended May 31, 1998,
and 1997.

     Operating expenses in the three months ended May 31, 1998 increased 28.8%
to $12,694,342, compared with $9,854,770 in the three months ended May 31, 1997.
Operating expenses increased as a percentage of net revenues to 36.8% in the
three months ended May 31, 1998, compared with 36.6% in the three months ended
May 31, 1997. Employee costs increased 41.5% to $5,927,641, or 17.2% of net
revenues, in the three months ended May 31, 1998 compared with $4,187,830, or
15.6% of net revenues, in the three months ended May 31, 1997. These increases
in total cost were due to employees hired in connection with the expansion of
ATC's operations. Other increases in operating expenses resulted from higher
facility costs and administrative expenses resulting from the growth in
operations and increased employee levels. Additionally, in the three months
ended May 31, 1998, amortization of goodwill and intangibles increased to
$1,320,106, compared with $425,599 in the three months ended May 31, 1997
reflecting the additional goodwill amortization resulting from acquisitions and
the Transactions.

     Operating income in the three months ended May 31, 1998 increased 24.9% to
$2,999,984 compared with $2,402,442 in the three months ended May 31, 1997.
Operating income decreased as a percentage of net revenues to 8.7% in the three
months ended May 31, 1998, compared with 8.9% in the three months ended May 31,
1997.

     Non-operating expense in the three months ended May 31, 1998 increased to
$3,788,496 compared with of $456,126 in the three months ended May 31, 1997. The
increase in non-operating expense is attributable to increased interest expense
due to the 12% Senior Subordinated Notes and bank debt outstanding during the
quarter.

     Income tax (benefit) expense in the three months ended May 31, 1998 was
$<86,000>, compared with $770,000 in the three months ended May 31, 1997. During
the three months ended May 31, 1998 and 1997, the Company's effective tax rates
were 10.9% and 39.6%, respectively. The effective tax rate for the three months 
ended May 31, 1998 results from non deductible goodwill amortization related to
the Transactions.

     As a result of the foregoing, the Company incurred a net loss of $<702,512>
compared with net income of $1,176,316 in the three months ended May 31, 1997.
Net income (loss) decreased as a percentage of net revenues to <2.0>% in the
three months ended May 31, 1998 compared with 4.4% in the three months ended May
31, 1997.

                                     F-20
<PAGE>
 
INFORMATION SYSTEMS AND THE YEAR 2000
 
  The Company is in the process of addressing Year 2000 issues. The Company is
currently engaged in a comprehensive project to convert its accounting and
management information system to a system consisting of new hardware and
packaged software recently purchased from a large vendor who has represented
that these systems are Year 2000 compliant. The Company's information
technology segment, which provides information system support services to both
the Company and the Company's clients, is currently operating on systems that
are Year 2000 compliant. ATC's remaining operations are generally dependent
only on personal computers and off-the-shelf commercial word processing,
drafting, spreadsheet and engineering software. Year 2000 compliant versions
of these systems are currently available, and the Company will convert to
these compliant systems over the next year and a half as the Company upgrades
its operational personal computer systems in the ordinary course to the most
recently issued software releases.

LIQUIDITY AND CAPITAL RESOURCES
 
  The Company's principal sources of liquidity are cash flow from operations and
available borrowings under a Revolving Credit Facility established under the
Bank Credit Facilities. The Revolving Credit Facility provides the Company with
an aggregate of up to $30.0 million of senior secured financing to be used for
working capital and general corporate purposes (including permitted
acquisitions). It is expected that the Company's principal uses of liquidity
will be to provide working capital, finance capital expenditures, fund costs
associated with acquisitions and meet debt service requirements. As a result of
the consummation of the Transactions, the Company is highly leveraged. Except to
the extent set forth below, there will be no mandatory payments of principal on
the Notes scheduled prior to their maturity. Based upon current operations,
anticipated cost savings and future growth, the Company believes that its cash
flow from operations, together with available borrowings under the Revolving
Credit Facility will be adequate to meet its anticipated requirements for
working capital, capital expenditures and scheduled principal and interest
payments, although the Company believes that its ability to repay the Notes and
amounts outstanding under its Bank Credit Facilities at maturity will require
additional financing. There can be no assurance, however, that any such
additional financing will be available at such time to the Company, or that any
such available financing will be on terms favorable to the Company. Furthermore,
there can be no assurance that the Company's business will continue to generate
cash flow at or above current levels or that estimated cost savings or growth
can be achieved.
 
  The Notes impose certain limitations on the ability of the Company and its
subsidiaries to, among other things, incur additional indebtedness, incur
liens, pay dividends or make certain other restricted payments, consummate
certain asset sales, enter into certain transactions with affiliates, issue
preferred stock, merge or consolidate with any other person or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of
the assets of the Company and its subsidiaries. In addition, the New Credit
Facility contains other and more restrictive covenants effectively prohibiting
the Company from prepaying the Notes. The Bank Credit Facility also requires
the Company to maintain specified financial ratios and satisfy certain
financial tests. The Company's ability to meet such financial ratios and tests
may be affected by events beyond its control; there can be no assurance that
the Company will be able to meet such tests. 
 
   For the quarter ended May 31, 1998, the Company was in default of certain 
financial covenants.  The Company's lenders have provided an interim waiver with
respect to the defaults.  Under the waiver, the Company has approximately $3.4 
million of availability under its revolving line of credit as of July 15, 1998.

   The Company is in discussion with its lenders and believes the covenant 
provisions of the credit agreement will be amended.  Accordingly, the Company 
continues to classify its outstanding debt as long term in accordance with the 
existing loan maturity dates.  The final classification of the Company's 
outstanding bank debt and 12% Senior Secured Notes, will be in accordance with 
the terms of any final credit agreement.

  The Company conducts part of its operations through its subsidiaries. As a
result, the Company relies, in part, upon payment from its subsidiaries for the
funds necessary to meet its obligations, including the payment of interest on
and principal of the Notes. The ability of the subsidiaries to make such
payments will be subject to, among other things, applicable state laws. Claims
of creditors of the Company's subsidiaries will generally have priority as to
the assets of such subsidiaries over the claims of the Company.
 

                                     F-21
<PAGE>
 
  The Company has historically financed its operations through internally
generated funds, public and private equity and debt financings and borrowings
under its credit facilities. As of May 31, 1998, working capital was $32.4
million, compared with working capital of $29.4 million at February 28, 1998, an
increase of $3.0 million. The increase in working capital was primarily due to
the net borrowings of bank debt under the Company's Revolving Credit Facility.
As a result of the Tender Offer and Merger and the Company's prior acquisitions,
the Company has a negative tangible net worth, primarily as a result of goodwill
amounts recognized in connection with these transactions.

  During the three months ended May 31, 1998, net cash flows used in operating
activities were $4,552,411 primarily due to operating income before interest as
interest on the 12% Notes is paid semiannually commencing in July 1998, offset
in part by increases in accounts receivable and unbilled receivables. Net
cash flows used in investing activities were $271,626, resulting from purchases
of property and equipment less the proceeds from the sale of certain assets
relating to a laboratory operation. Net cash flows used by financing activities
were $8,009,997, primarily representing payments of Tender Offer obligations and
net bank borrowings under the Company's Revolving Credit Facility.

  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 8.18% Senior Secured Notes, less
repayment of the previously outstanding bridge credit facility.

SEASONALITY
 
  ATC typically experiences a slow down in business activities during the
winter months and an increase in business activities during the summer months.
This is due to seasonal fluctuations in construction and remediation
activities. As a result, operating results may vary from period to period. For
fiscal 1998, comparable quarterly revenues as a percentage of relevant annual
revenues were 24.6%, 26.6%, 25.0% and 23.8%.


                                     F-22
<PAGE>
 
                          PART II - OTHER INFORMATION
                                        
Item 1.  LEGAL PROCEEDINGS:

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

     First Fidelity Bank, N.A., et al v. Hill International, Inc. et al.,
     Superior Court of New Jersey, Law Division, Burlington County, Docket No.
     Bur-L-03400-95, filed December 19, 1995. Irvin E. Richter, et al v. ATC
     Group Services Inc., et al. United States District Court, District of New
     Jersey, Civ. No. 96 CV 5818 (JBS) filed December 6, 1996. On December 19,
     1995, a second amended complaint was filed in the above-entitled action
     which joined the Company as a defendant and included a count against the
     Company seeking recovery of certain assets purchased from Hill on the
     grounds that plaintiff banks held security interests in the assets and that
     Hill was in default under the security agreement creating such alleged
     security interests. The original plaintiffs in this action were First
     Fidelity Bank, N.A. and United Jersey Bank, N.A. The primary defendants
     were Hill and certain of its subsidiaries, and Irvin Richter, David
     Richter, Janice Richter and William Doyle. Irvin Richter and David Richter
     are officers and stockholders of Hill. In April 1996, the Company filed a
     cross-claim against Hill, Irvin Richter and David Richter alleging breach
     of contract and fraud, among other allegations, and seeking unspecified
     damages, including punitive damages, and equitable relief. In August, 1996,
     Hill and the Richters filed an answer denying ATC's cross-claims, a cross-
     claim against ATC and a third party claim against certain members of ATC's
     management and an employee. The cross-claim and third party claim seek
     unspecified damages, including punitive damages, for defamation, breach of
     the Richters' non-competition agreements and securities fraud. The
     defamation claims are based (i) on plaintiff banks' allegation of fraud
     against Hill and the Richters in their amended complaint, which Hill and
     the Richters allege was based on defamatory statements made by ATC in
     settlement discussions with the plaintiff banks and (ii) on a letter
     alleged to contain defamatory statements which was sent to an account
     debtor of the Company by an employee. In its answer, the Company both
     denies that it made defamatory statements and asserts that the defamation
     allegations fail to state legally valid claims. The breach of contract and
     securities claims are based on allegations that ATC made representations
     concerning a registration rights agreement to be provided in connection
     with options issued to the Richters as consideration for their non-
     competition agreements. In its answer, the Company denies that an agreement
     concerning registration rights was ever reached and asserts that any such
     rights were forfeited or suspended by the Richters in any case as a result
     of their conduct in connection with the asset purchase.
 
                                     F-23
<PAGE>
 
     Commonwealth of Massachusetts v. TLT Construction Corp. et al., Civ. Action
     No. 96-02281 F, Superior Court of Middlesex County, Massachusetts. This is
     an action brought by the Commonwealth of Massachusetts in April 1996,
     against the architects and general contractor on a renovation and
     construction project on the Suffolk County Courthouse in Massachusetts. The
     basis of the lawsuit is that one or more damp-proofing products specified
     by the architect defendants and installed by the contractor defendant made
     employees in the courthouse ill because of the off-gassing of harmful
     vapors. Dennison Environmental Services Inc., ("Dennison") an ATC
     subsidiary, was joined on August 13, 1996, as a third party defendant by
     TLT Construction Corporation, the general contractor, because Dennison
     performed some air quality testing of the air in the courthouse for the
     Commonwealth of Massachusetts during the construction process. The
     contractor alleges that it acted in reliance on these tests in continuing
     to install the material after the test report was given to it by the state.
     ATC's position is that it did not commit any error or omission in this
     case, that ATC made no representation to the contractors or material
     supplier and had no privity with them and that Dennison's opinion
     concerning short term, during-construction health effects of the off-
     gassing could not be justifiably relied upon with respect to the long-term
     performance and health effects of the product or its installation. This
     case is in the discovery phase. At this point, ATC considers the case to be
     without merit, and ATC intends to vigorously defend the action. Notice of
     this claim has been made to ATC's professional liability insurer. At the
     time that notice of this claim was filed, the Company had in effect a
     professional liability insurance policy in the amount of $10.0 million with
     a deductible of $250,000.


ITEM 2.  CHANGES IN SECURITIES:
         Not Applicable

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES:
         

   For the quarter ended May 31, 1998, the Company was in default of certain 
financial covenants.  The Company's lenders have provided an interim waiver with
respect to the defaults.  Under the waiver, the Company has approximately $3.4 
million of availability under its revolving line of credit as of July 15, 1998.

   The Company is in discussion with its lenders and believes the covenant 
provisions of the credit agreement will be amended.  Accordingly, the Company 
continues to classify its outstanding debt as long term in accordance with the 
existing loan maturity dates.  The final classification of the Company's 
outstanding bank debt and 12% Senior Secured Notes, will be in accordance with 
the terms of any final credit agreement.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
         Not Applicable

ITEM 5.  OTHER INFORMATION:
         Not Applicable


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K:
     (a)  Exhibits:

             Not applicable

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

                                     F-24
<PAGE>
                                   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 1998                     /s/ Nicholas J. Malino 
--------------------                    -----------------------------------  
                                            Nicholas J. Malino 
                                            President (Principal 
                                             Executive Officer)
 

Dated: July 15, 1998                    /s/ Paul Grillo 
--------------------                    ----------------------------------- 
                                            Paul Grillo 
                                            Executive Vice President and
                                            Chief Financial Officer
                                            (Principal Financial Officer)


Dated: July 15, 1998                    /s/ Wayne A. Crosby               
--------------------                    ----------------------------------- 
                                            Wayne A. Crosby               
                                            Controller (Principal Accounting 
                                             Officer) 


 


                                     F-25