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 Quarterly Period Ended August 31, 1997

                                       OR

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

                         Commission File Number: 1-10583

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


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

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

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

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

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




The number of shares outstanding of the Registrant's  Common Stock as of October
14, 1997 was 7,807,107.







<PAGE>
ATC GROUP SERVICES INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1997
PART I - FINANCIAL INFORMATION:
<TABLE>

     Item 1 - Financial Statements:
<S>                                                                                                                     <C>   
     Consolidated Balance Sheets
              February 28, 1997 and August 31, 1997 (Unaudited).......................................................    F-3

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

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

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

     Notes to Consolidated Financial Statements
              Three months and six months ended August 31, 1997 (Unaudited)...........................................    F-7

     Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations...................    F-14

PART II - OTHER INFORMATION:

     Items 1-6........................................................................................................    F-18

     Signatures.......................................................................................................    F-20

 Exhibit 11 - Computation of Earnings Per Share
                    Three months and six months ended August 31, 1996 and 1997 (Unaudited)............................    F-21

 Exhibit 27 - Financial Data Schedule
                   August 31, 1997 (Unaudited)........................................................................    F-22

</TABLE>


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

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


                                                                                                February 28,         August 31,
                                                                                                   1997                 1997
                                                                                             ---------------       --------------
<S>                                                                                          <C>                   <C>
ASSETS                                                                                                            (Unaudited)
CURRENT ASSETS:
     Cash and cash equivalents........................................................      $      2,003,890      $    7,893,465
     Trade accounts receivable, less allowance for doubtful accounts
       ($1,455,716 at February 28, 1997 and $2,106,863 at August 31, 1997)............            34,406,026          41,600,223
     Costs in excess of billings on uncompleted contracts.............................             5,191,569          10,535,085
     Prepaid expenses and other current assets........................................             2,934,193           3,413,025
     Deferred income taxes ...........................................................               790,400             790,400
     Refundable income taxes..........................................................               118,340                   -
                                                                                            ----------------      --------------
         Total current assets.........................................................            45,444,418          64,232,198

PROPERTY AND EQUIPMENT, Net (Note C)..................................................             3,784,633           5,025,542

GOODWILL, net of accumulated amortization (Note B)
   ($1,478,876 at February 28, 1997 and $2,297,353  at August 31, 1997)...............            35,587,076          45,713,191
COVENANTS NOT TO COMPETE, net of accumulated amortization (Note B)
     ($455,316 at February 28, 1997 and $557,207 at August 31, 1997)..................               632,184             630,293
OTHER ASSETS..........................................................................               845,346           4,228,040
                                                                                             ---------------      --------------
                                                                                             $    86,293,657      $  119,829,264
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
     Short-term debt..................................................................       $       300,000      $    3,072,219
     Current maturities of long-term debt.............................................             1,986,730           1,601,692
     Accounts payable.................................................................             7,440,024          11,750,239
     Income taxes payable.............................................................                     -             554,241
     Accrued compensation.............................................................             3,789,233           4,877,043
     Accrued payment obligations - ATEC acquisition (Note B)..........................             1,721,594           3,880,285
     Other accrued expenses (Note B)..................................................             2,505,143           3,507,311
                                                                                             ---------------      --------------
         Total current liabilities....................................................            17,742,724          29,243,030

LONG-TERM DEBT, less current maturities...............................................            22,123,344          38,697,491
OTHER LIABILITIES.....................................................................               270,386           3,305,019
DEFERRED INCOME TAXES.................................................................               717,900             717,900
                                                                                            ----------------     ---------------
         Total liabilities............................................................            40,854,354          71,963,440
                                                                                            ----------------     ---------------

COMMITMENTS AND CONTINGENCIES (Notes B and D)

STOCKHOLDERS' EQUITY:
     Common stock, par value $.01 per share; authorized 20,000,000 shares;
       issued and outstanding: 7,800,187 shares at February 28, 1997 and 7,805,407
       shares at August 31, 1997......................................................                78,002              78,054
     Additional paid-in capital.......................................................            28,996,627          28,998,741
     Retained earnings................................................................            16,364,674          18,789,029
                                                                                            ----------------      --------------
         Total stockholders' equity...................................................            45,439,303          47,865,824
                                                                                            ----------------      --------------
                                                                                             $    86,293,657      $  119,829,264
                                                                                             ===============      ==============
</TABLE>
See notes to consolidated financial statements.

                                      F-3
<PAGE>
ATC GROUP SERVICES INC. AND SUBSIDIARIES

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

<CAPTION>


                                                            Three Months Ended                     Six Months Ended
                                                              August 31,                              August 31,
                                                        1996               1997               1996                  1997
                                                ----------------- ------------------    ----------------   ----------------
<S>                                               <C>               <C>                  <C>                 <C> 
REVENUES ...................................      $    33,922,028    $    34,722,201     $    50,568,011     $   66,096,867
     Reimbursable Costs.....................            5,077,483          5,905,664           7,699,061         10,361,497
                                                ----------------- ------------------    ----------------   ----------------

NET REVENUES   .............................           28,844,545         28,816,537          42,868,950         55,735,370

COST OF NET REVENUES........................           16,314,731         15,751,062          23,057,124         30,412,683
                                                ----------------- ------------------    ----------------   ----------------

         Gross Profit.......................           12,529,814         13,065,475          19,811,826         25,322,687

OPERATING EXPENSE:
     Selling................................              750,818          1,039,462           1,293,400          2,039,457
     General and administration.............            7,660,199          8,951,861          11,578,214         17,429,197
     Provision for bad debts................              208,666            366,945             341,301            744,384
                                                ----------------- ------------------    ----------------   ----------------
                                                        8,619,683         10,358,268          13,212,915         20,213,038
                                                -----------------   ----------------     ---------------    ---------------

         Operating income...................            3,910,131          2,707,207           6,598,911          5,109,649

NONOPERATING EXPENSE (INCOME):
     Interest expense.......................              512,773            763,501             570,099          1,261,909
     Interest income........................              (65,412)           (97,121)           (195,447)          (148,904)
     Other..................................              (22,723)           (22,212)            (33,537)           (12,711)
                                                ----------------- ------------------    ----------------   ----------------
                                                          424,638            644,168             341,115          1,100,294
                                                ----------------- ------------------    ----------------   ----------------

         Income before income taxes.........            3,485,493          2,063,039           6,257,796          4,009,355

INCOME TAX EXPENSE (Note B).................            1,384,000            815,000           2,438,000          1,585,000
                                                ----------------- ------------------    ----------------   ----------------

NET INCOME..................................     $      2,101,493   $      1,248,039     $     3,819,796    $     2,424,355
                                                 ================   ================     ===============    ===============

EARNINGS PER COMMON SHARE
     AND DILUTIVE COMMON
     EQUIVALENT SHARE:
         Primary............................     $           .25    $           .15      $           .45    $           .29
                                                 ===============    ===============     ================    ===============
         Fully diluted......................     $           .25    $           .15      $           .44    $           .28
                                                 ===============    ===============     ================    ===============

WEIGHTED AVERAGE NUMBER OF
     SHARES OUTSTANDING:
         Primary............................            8,576,018          8,533,775           8,578,831          8,467,249
                                                 ================   ================    ================    ===============
         Fully diluted......................            8,576,018          8,533,775           8,628,179          8,525,884
                                                 ================   ================    ================    ===============
</TABLE>
See notes to consolidated financial statements.
                                      F-4
<PAGE>
ATC GROUP SERVICES INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED AUGUST 31, 1996 AND 1997 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                         1996
                                           --------------------------------------------------------------------------------------
                                                                                           Notes
                                                                        Additional      Receivable-
                                                  Common Stock           Paid-in          Common        Retained
                                              Shares         Amount      Capital          Stock         Earnings         Total
                                           ------------  ------------  -------------   ------------   ------------   ------------
<S>                                        <C>           <C>           <C>             <C>            <C>            <C>
BALANCE, February 29, 1996............      7,796,577    $     77,966  $  29,030,189   $    (45,000)  $  10,129,259  $ 39,192,414

Sale of common stock at $2.50 to
  $10.00 per  share, upon exercise of
  stock options and warrants..........          2,980              29         24,376              -               -        24,405
Stock received as consideration for
  sale of  assets.....................        (12,320)           (123)       (51,990)             -         (72,319)     (124,432)
Continuing registration costs applied
  against additional paid-in capital..              -               -        (28,570)             -               -       (28,570)
Other capital transactions............              -               -              -         45,000               -        45,000
Net income............................              -               -              -              -       3,819,796     3,819,796
                                           ------------  ------------  -------------   ------------    ------------   -----------

BALANCE, August 31, 1996..............      7,787,237    $     77,872  $  28,974,005   $          -    $ 13,876,736   $42,928,613
                                           ============  ============  =============   ============    ============   ===========

</TABLE>
<TABLE>
<CAPTION>
                                                                                         1997  
                                           --------------------------------------------------------------------------------------
                                                                                           Notes
                                                                        Additional      Receivable-
                                                  Common Stock           Paid-in          Common        Retained
                                              Shares         Amount      Capital          Stock         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.........            5,220            52        36,098               -              -         36,150
Continuing registration costs applied
   against additional paid-in capital.                -             -       (33,984)              -              -        (33,984)
Net income............................                -             -             -               -      2,424,355      2,424,355
                                           ------------  ------------  ------------    ------------   ------------   ------------
BALANCE, August 31, 1997..............        7,805,407  $     78,054    $28,998,741   $          -   $ 18,789,029   $ 47,865,824
                                           ============  ============  =============   ============   ============   ============
</TABLE>
See notes to consolidated financial statements.

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

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


                                                                                                         Six Months Ended
                                                                                                            August 31,
                                                                                                ---------------------------------
                                                                                                     1996               1997    
                                                                                                ----------------  ---------------
<S>                                                                                             <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..........................................................................       $      3,819,796     $      2,424,355
Adjustments to reconcile net income to net cash from operating activities:..........
   Depreciation and leasehold amortization..........................................                405,074              503,855
   Amortization of goodwill and covenants...........................................                524,795              920,368
   Provision for bad debts..........................................................                341,301              744,384
   Other liabilities................................................................                (85,292)          (1,077,567)
   Changes in operating assets and liabilities, net of amounts acquired in acquisitions:
       Accounts receivable and cost in excess of billings on uncompleted contracts..             (4,042,124)          (5,100,710)
       Prepaid expenses and other assets............................................               (847,080)          (1,149,515)
   Accounts payable and other liabilities...........................................             (6,808,932)             332,285 
       Income taxes payable.........................................................                634,069              554,241
                                                                                           ----------------        -------------
         Net cash flows from operating activities...................................             (6,058,393)          (1,848,304)
                                                                                           ----------------        -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of BCM Engineers, Inc...................................................                      -           (5,425,539)
   Purchase of American Testing and Engineering Corp., net of cash acquired.........             (8,965,952)          (2,420,766)
   Purchase of 3D Information Services, Inc., net of cash acquired..................             (2,926,681)                   -
   Purchase of property and equipment...............................................               (783,686)            (667,393)
   Other............................................................................                 16,477               60,302
                                                                                            ---------------         ------------
         Net cash flows from investing activities...................................            (12,659,842)          (8,453,396)
                                                                                            ---------------         ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuance of long-term debt and notes payable.......................             20,923,572           38,500,000
   Proceeds from issuance of common stock, net of expenses..........................                 24,405               36,150
   Principal payments on long-term debt and notes payable,
     including capital lease obligations............................................            (12,233,289)         (22,310,891)
   Payments for continuing registration costs.......................................                (28,570)             (33,984)
                                                                                         ------------------      ---------------
         Net cash flows from financing activities...................................              8,686,118           16,191,275
                                                                                           ----------------      ---------------

         Net change in cash and cash equivalents....................................            (10,032,117)           5,889,575

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

CASH AND CASH EQUIVALENTS, End of period............................................       $      3,437,326       $    7,893,465
                                                                                           ================       ==============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
   Cash payments for:...............................................................
       Interest.....................................................................       $        527,314       $      577,486
                                                                                           ================       ==============
       Income taxes.................................................................       $      1,803,931       $      489,187
                                                                                           ================       ==============

</TABLE>
See notes to consolidated financial statements.

                                      F-6
<PAGE>
ATC GROUP SERVICES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS AND SIX MONTHS ENDED AUGUST 31, 1997 (Unaudited)
-------------------------------------------------------------------------------

A.  GENERAL

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

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

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

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

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

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

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

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

     In February 1997, the Financial  Accounting Standards Board issued SFAS No.
128,  Earnings Per Share.  SFAS No. 128,  which becomes  effective for financial
statements  of the Company  issued for fiscal years  ending  after  December 15,
1997,  replaces primary and fully diluted earnings per share, as disclosed under
certain  pronouncements,  with basic and diluted  earnings per share.  Pro forma
basic earnings per share for the three months ended August 31, 1996 and 1997 are
$.27 and $.16, respectively.  Pro forma diluted earnings per share for the three
months ended August 31, 1996 and 1997 are $.25 and $.15, respectively. Pro forma

                                      F-7
<PAGE>
basic  earnings  per share for the six months ended August 31, 1996 and 1997 are
$.49 and $.31,  respectively.  Pro forma diluted  earnings per share for the six
months ended August 31, 1996 and 1997 are $.45 and $.29, respectively.

         Reclassifications  -  Certain  reclassifications  have been made to the
prior   period's   financial   statements   to  conform  to  the  current  years
presentation.

B.  BUSINESS ACQUISITIONS AND MERGER

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

Fiscal 1998
         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  ("Smith") which operated
primarily as BCM Engineers,  Inc. ("BCM").  BCM is a leading municipal water and
wastewater  environmental  engineering  firm and  provides  services  in  water,
resource management, 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.
<TABLE>
<CAPTION>


         The purchase price was comprised of the following consideration:
<S>                                                                                                      <C>  
         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)
         Liabilities assumed:
               Current liabilities...................................................................         2,833,665
               Non current liabilities...............................................................         1,356,151
         Direct expenses related to acquisition......................................................           112,133

                                                                                                           ------------
                                                                                                           $ 12,477,488
                                                                                                           ============
</TABLE>

         Notes  payable  includes a $200,000 note which became due September 20,
1997 and is subject to offset for  reductions  in net assets and for  unrecorded
liabilities arising through the closing date of the transaction.  The seller has
not delivered a final  closing  balance  sheet,  however,  based on  preliminary
information  available and unrecorded  liabilities  incurred by the Company, the
note is expected to be offset in full.  Current  liabilities  includes an amount
equal to the offset.

         An additional  note payable in the amount of $2,750,000 is due February
27, 1998 and is subject to offset for uncollected  accounts  receivable and work
in  process in excess of  recorded  reserves  and for  certain  other  specified
matters.
<TABLE>
<CAPTION>

         The preliminary purchase price allocation is summarized as follows:
<S>                                                                                                      <C>  
         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
                                                                                                           ============
</TABLE>
    The  preliminary  purchase  price  allocation  is  subject  to change  when
additional  information  concerning asset and liability  valuations is obtained.
Therefore, the final allocation may differ froom the preliminary allocation.
                                      F-8
<PAGE>
Fiscal 1997
         American  Testing  and  Engineering  Corporation  - On May 24, 1996 ATC
purchased certain assets and assumed certain liabilities of American Testing and
Engineering Corporation ("ATEC"), a national environmental consulting firm. ATEC
provides  environmental  engineering  and  consulting  services  through a large
network of branch and regional offices.

         Under the original  purchase  agreement,  the Company was  contingently
liable  to ATEC for  additional  purchase  consideration  up to  $10,750,000  if
certain  conditions  were met. The seller since met certain of these  contingent
consideration  requirements  in the  quarter  ended May 31, 1997 and the Company
began to amortize  the  associated  goodwill in this  period.  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. The
monthly   payments  due  during  the  next  year  are  included  in   short-term
liabilities.  The  non-current  portion  at August  31,  1997 of  $1,721,500  is
included in Other  Liabilities in the accompanying  consolidated  balance sheet.
Additionally, the Company has the option to purchase certain properties from the
seller for $1,700,000 in fiscal 2002.

<TABLE>
<CAPTION>

         The  purchase   price  as  amended  was   comprised  of  the  following
consideration:
<S>                                                                                                      <C>  
         Amounts paid to seller and a majority owner:
               Cash..................................................................................    $    9,000,000
               Payment obligations, for property and facility
                  rentals and non-compete consideration..............................................         6,001,000
               Contingent/additional consideration under amended purchase agreement..................         9,049,000
         Liabilities assumed:
               Current liabilities...................................................................        15,731,076
               Bank debt.............................................................................        10,750,000
         Direct expenses related to acquisition......................................................           139,438
                                                                                                          -------------
                                                                                                          $  50,670,514
                                                                                                          =============

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

         Accounts receivable and work in process, net of allowances..................................     $  18,957,768
         Other current assets........................................................................         2,023,996
         Other assets................................................................................         1,428,617
         Covenants not to compete....................................................................           430,000
         Goodwill ...................................................................................        27,830,133
                                                                                                          -------------
                                                                                                          $  50,670,514
                                                                                                          =============
</TABLE>

         As a result of sellers  warranties of purchased  trade  receivables and
work in process that were not  realized,  the Company is entitled to set-offs of
$618,835 against the option price to acquire certain  properties in fiscal 2002.
If the Company does not exercise  its option,  the set-offs  will be refunded by
the seller. Amounts are included in other non-current assets in the accompanying
consolidated balance sheet.

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

                                      F-9
<PAGE>
         3D Information Services,  Inc. - On May 28, 1996, ATC purchased certain
assets and assumed certain liabilities of 3D Information Services,  Inc. ("3D"),
a New Jersey based information services company providing technical  information
consulting  services in all phases of information  system  design,  development,
maintenance  and management in client server and mainframe  based  environments.
The purchase price was comprised of the following consideration:
<TABLE>
<CAPTION>
<S>                                                                                                         <C> 
         Amounts paid to seller:
               Cash..................................................................................       $  3,000,000
               Note payable..........................................................................          2,500,000
         Assumed liabilities.........................................................................            247,905
         Direct expenses related to acquisition......................................................             23,149
                                                                                                            ------------
                                                                                                            $  5,771,054
                                                                                                            ============
         The initial purchase price allocation is summarized as follows:

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

         The Hill Businesses  provide  environmental  consulting and engineering
services,  including  asbestos  management,  industrial  hygiene  and indoor air
quality  consulting,   environmental  auditing  and  permitting,   environmental
regulatory compliance,  water and wastewater  engineering,  solid waste landfill
management and analytical laboratory services.  The purchase price was comprised
of the following consideration.
<TABLE>
<CAPTION>
<S>                                                                                                        <C>
         Amounts paid to seller:
                Cash.................................................................................      $  2,517,949
                Letter of credit, net of imputed interest (Note E)...................................           700,000
                Note payable at 8.75% interest (Note E)..............................................           300,000
         Liabilities assumed.........................................................................           907,884
         Direct expenses related to acquisition......................................................           885,538
                                                                                                           ------------
                                                                                                           $  5,311,371
                                                                                                           ============ 
</TABLE>
         Direct expenses related to acquisition includes costs incurred in order
to obtain  proper title to the assets from Sellers bank as described  further in
Note D. In addition, the Company issued to certain selling shareholders,  50,000
stock  options to  purchase  restricted  common  stock at  $13.875  per share as
consideration for non compete agreements.
<TABLE>
<CAPTION>
         The purchase price allocation is summarized as follows:
<S>                                                                                                      <C>  
         Costs in excess of billings on uncompleted contracts, net of unrealizable amounts...........     $     620,000
         Property and equipment......................................................................           175,000
         Other assets................................................................................            30,572
         Covenants not to compete....................................................................            37,500
         Goodwill....................................................................................         4,448,299
                                                                                                           ------------
                                                                                                           $  5,311,371
                                                                                                           ============
</TABLE>
         The  Company is  contingently  liable to  reimburse  up to  $150,000 of
certain facility lease costs if incurred by Hill International, Inc. The payment
of the contingent  liability,  which the Seller claims is now due, certain other
liabilities  and the $300,000 note is being withheld  pending the outcome of the
litigation (Note D).
                                      F-10
<PAGE>
         Applied Geosciences,  Inc. - Effective February 29, 1996, ATC purchased
certain  assets and assumed  certain  liabilities of Applied  Geosciences,  Inc.
("AGI"), a California based  environmental  consulting company having offices in
San Diego, Tustin and San Jose, California.  The purchase price was comprised of
the  following   consideration.   In  addition,   AGI  will  receive  contingent
consideration of up to $190,000  subject to actual  collections of the purchased
trade  receivables  in  excess  of  a  minimum  amount   established  under  the
agreements. As of February 28, 1997 $22,324 of contingent consideration had been
earned and paid.
<TABLE>
<CAPTION>
<S>                                                                                                      <C>
         Cash to seller..............................................................................    $      147,546
         Contingent consideration earned to date.....................................................            22,324
         Cash to secured creditors of seller.........................................................           441,514
         Liabilities assumed.........................................................................           225,538
         Direct expenses related to acquisition......................................................            31,246
                                                                                                         --------------
                                                                                                         $      868,168
                                                                                                         ==============
         The purchase price allocation is summarized as follows:

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

         Pro Forma Financial  Information  (Unaudited) - The following unaudited
pro forma  information  sets forth the results of  operations of ATC as if ATC's
purchase of significant subsidiaries including ATEC and 3D had occurred on March
1, 1996:
<TABLE>
<CAPTION>
                                                                                        PRO FORMA
                                                             ----------------------------------------------------------------
                                                                  Three Months Ended                 Six Months Ended
                                                                      August 31,                        August 31,
                                                             ------------------------------   -------------------------------
                                                                  1996            1997             1996              1997
                                                             --------------  --------------   --------------    -------------
<S>                                                          <C>             <C>              <C>               <C>
         Revenues.........................................   $   33,922,028  $   34,722,201   $   72,043,995    $  66,096,867
         Net income.......................................   $    2,101,493  $    1,248,039   $    4,944,968    $   2,424,355
         Earnings per share (fully diluted)...............   $          .25  $          .15   $          .57    $         .28
         Weighted average shares (fully diluted)..........        8,576,018       8,533,775        8,628,179        8,525,884
</TABLE>

C.  PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
         Property and equipment is comprised of the following:
                                                                                            February 28  ,          August 31,
                                                                                                1997                  1997
                                                                                            ---------------      ---------------
<S>                                                                                         <C>                  <C>    
         Office equipment.................................................................  $    3,339,049       $    4,035,139
         Laboratory and field equipment...................................................       3,335,721            3,939,400
         Transportation equipment.........................................................         207,857              450,665
         Leasehold improvements...........................................................         849,700            1,041,035
                                                                                            --------------       --------------
                                                                                                 7,732,327            9,466,239
         Less accumulated depreciation....................................................       3,947,694            4,440,697
                                                                                            --------------       --------------
         Property and equipment, net......................................................  $    3,784,633       $    5,025,542
                                                                                            ==============       ==============
</TABLE>
                                      F-11
<PAGE>
D.  CONTINGENCIES

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

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

         State of New York  Department  of Taxation and Finance- The Company has
received a notice of audit from the New York State  Department  of Taxation  and
Finance for the three fiscal years 1993,  1994, and 1995. The agent has issued a
preliminary  audit  report,  which  is  expected  to be the  basis  of a  formal
assessment estimated to be approximately  $200,000. The Company is disputing the
agents positions and intends to appeal any assessment if rendered. No assurances
can be given regarding the ultimate liability, if any, which may result.
                                      F-12
 <PAGE>
         Cambridge  Housing  Authority v. Con-Test,  Inc. and ATC Group Services
Inc., Superior Court of Middlesex County,  Massachusetts;  October 1, 1997. This
is a claim 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 is  joined as a party on a  successor  liability
theory,  even though the  services  giving rise to the claim  occurred  over two
years prior to ATC's purchase of business assets from Con-Test. Although ATC has
not yet answered the  complaint,  ATC intends to vigorously  defend the claim on
the  grounds  that  it  is  not  a  successor   under  any  known  precedent  of
Massachusetts  law.  It is  therefore  the  opinion  of  the  Company  that  the
probability of material loss from this claim is low.

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

E.  INDUSTRY SEGMENT DATA

         The Company provides services through its environmental  consulting and
engineering segment and its information technology consulting segment.  Industry
segment data is as follows:
<TABLE>
<CAPTION>


                                                   Environmental       Information          Adjustments &
                                                   & Engineering       Technology           Elimination's        Total
                                                   --------------     --------------      ---------------    --------------
<S>                                                <C>                <C>                 <C>                <C>
Fiscal 1998
         Quarter Ended August 31, 1997

         Revenues...........................       $   32,852,171     $    1,945,894      $      (75,864)    $   34,722,201
         Operating income...................            2,653,929             53,279                   -          2,707,208
         Depreciation and amortization......              253,450             10,825                   -            264,275
         Capital expenditures...............              390,515             20,125                   -            410,640

         Six Months-Ended August 31, 1997

         Revenues...........................       $   62,214,082     $    4,186,193       $    (303,408)    $   66,096,867
         Operating income...................            4,885,372            224,277                   -          5,109,649
         Depreciation and amortization......              484,185             19,670                   -            503,855
         Capital expenditures...............              626,781             40,612                   -            667,393

         Identifiable Assets as of August 31, 1997 $  117,701,868     $    5,363,196       $  (3,235,800)    $  119,829,264
         -----------------------------------------


Fiscal 1997
         Quarter Ended August 31, 1996

         Revenues...........................       $   31,401,790     $    2,520,238       $           -     $   33,922,028
         Operating income...................            3,752,618            157,513                   -          3,910,131
         Depreciation and amortization......              206,175                171                   -            206,346
         Capital expenditures...............              354,251                  -                   -            354,251

         Six Months Ended August 31, 1996

         Revenues...........................       $   47,899,812     $    2,668,199 $                 -     $   50,568,011
         Operating income...................            6,422,882            176,029                   -          6,598,911
         Depreciation and amortization......              400,941              4,133                   -            405,074
         Capital expenditures...............              737,367             46,319                   -            783,686

         Identifiable Assets as of August 31, 1996 $   84,596,463     $    5,903,957        $ (2,000,000)    $   88,500,420
         -----------------------------------------
</TABLE>


                                      F-13

<PAGE>
ATC GROUP SERVICES INC. AND SUBSIDIARIES

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

FY 1998
         Acquisition of 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 ("Smith")
which  operated  primarily as BCM  Engineers,  Inc.  ("BCM" or the  "Engineering
Division").  BCM is a  leading  municipal  water  and  wastewater  environmental
engineering firm with current  operations at multiple  locations in the east and
Gulf Coast. BCM's other primary service  specializations  include water resource
management, environmental compliance and site investigation, 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  among  others.  For its most
recent  twelve month period ended July 31, 1997,  the  Engineering  Division had
unaudited revenues of $40,531,000 and division operating income before corporate
allocations of $3,673,000.

         The  acquisition  has been  accounted  for as a  purchase.  The  assets
acquired  consist of  intangible  assets  including  customer  contract  rights,
customer lists, order backlog, patents and the right to the "BCM Engineers Inc."
name and tangible assets including trade accounts  receivable,  work in process,
property and equipment,  supplies and general records.  ATC additionally entered
into non-competition  agreements with Smith and a major  shareholder/officer  of
Smith. Total consideration paid to the seller for the assets and non-competition
agreements totaled $8,375,539 including a $5,425,539 cash payment at closing and
short-term notes payable totaling  $2,950,000.  The notes payable are subject to
setoffs for uncollected  accounts receivable and work in process, and changes in
the net tangible  assets  through the date of closing.  Offsets of $200,000 have
been reflected in the accompanying  financial  statements (Note B). In addition,
ATC assumed certain liabilities of Smith of approximately $4,189,816, including,
a portion of the trade payables of BCM/Smith,  employee  obligations and certain
other specified liabilities.

Senior Debt Offering and Bank Credit Agreement

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

Prior Year Acquisitions

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

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

         Acquisition of 3D Information Services,  Inc. - Effective May 28, 1996,
ATC purchased  certain assets and assumed  certain  specified  liabilities of 3D
Information  Services,  Inc.  ("3D"),  a New Jersey based  information  services
company providing technical information system consulting services in all phases
of information system design, development,  maintenance and management in client
server and mainframe based environments.  Its clients include major companies in
the  telecommunications,  financial services and pharmaceutical  industries.
                                      F-14
<PAGE>
FY 1996
         Acquisition of Hill International Inc. Environmental  Subsidiaries - On
November 10, 1995, ATC purchased certain assets and assumed certain  liabilities
of  the  subsidiary   companies  at  Hill  International,   Inc.  that  provided
environmental  consulting  and  engineering  services  (collectively  the  "Hill
Businesses"). These services include asbestos management, industrial hygiene and
indoor  air  quality   consulting,   environmental   auditing  and   permitting,
environmental  regulatory compliance,  water and wastewater  engineering,  solid
waste  and  landfill  management,  hazardous  waste  management  and  analytical
laboratory services.

         Acquisition of Applied Geosciences, Inc. - Effective February 29, 1996,
ATC  purchased  certain  assets  and  assumed  certain  liabilities  of  Applied
Geosciences,  Inc. ("AGI").  AGI's services include  environmental and hazardous
waste site assessments,  remediation  design, air quality  management,  asbestos
services, litigation support and engineering geology through its offices located
in Southern California.

Results of Operations

Three Months Ended August  31, 1997 Compared with
Three Months Ended August 31, 1996
--------------------------------------------------------------------------------
         Revenues in the three months ended  August 31, 1997  increased  2.4% to
$34,722,201,  compared  with  $33,922,028  in the three  months ended August 31,
1996.  This  increase  was  primarily  attributable  to the  acquisition  of BCM
effective August 20, 1997.

         Revenues in the three  months  ended  August 31, 1997 from ATC's branch
offices having  comparable  operations in the three months ended August 31, 1996
remained approximately the same at $33,950,934, compared with $33,922,028 in the
three months ended August 31, 1996. Revenues  attributable to the acquisition of
certain  assets of BCM  totaled  $771,267,  or 2.2% of  revenues,  for the three
months ended August 31, 1997.

         Reimbursable   costs  represent   direct  project  expenses  billed  to
environmental and engineering segment clients. For the three months ended August
31,  1997,  reimbursable  costs  increased  16.3% to  $5,905,664  compared  with
$5,077,483,  in the three months ended August 31, 1996.  Reimbursable costs as a
percentage  of revenues  increased to 17.0% in the three months ended August 31,
1997  compared  with  15.0% in the three  months  ended  August  31,  1996.  The
Company's   environmental   management  and  traditional   consulting  services,
consisting of drilling, materials testing and engineering services represented a
larger portion of total  revenues and these  services  utilize higher amounts of
outside services and direct project expenses  resulting in the higher percentage
of reimbursable costs.

         Gross profit in the three months ended August 31, 1997  increased  4.3%
to $13,065,475,  compared with  $12,529,814 in the three months ended August 31,
1996.  Gross  profit as a  percentage  of net revenue  increased to 45.3% in the
three  months ended  August 31,  1997,  compared  with 43.4% in the three months
ended August 31,  1996.  The gross  profit  percentage  increase is due to lower
margins in the prior  period  related to the final  project  costs  incurred  to
complete a large  fixed-price  contract which could not be billed to the client,
and the impact of lower net revenues in certain regions where costs could not be
reduced proportionately.

         Operating  expenses in the three months ended August 31, 1997 increased
20.2% to $10,358,268,  compared with $8,619,683 in the three months ended August
31, 1996.  Operating expenses increased as a percentage of net revenues to 35.9%
in the three  months ended  August 31,  1997,  compared  with 29.9% in the three
months ended August 31, 1996. The increase in operating expenses as a percentage
of net revenue is the result of  increases  in labor,  administrative  costs and
fixed costs while net revenue  levels  have  remained  constant.  The prior year
period  results  included the initial  staffing  levels and costs for  employees
hired from ATEC.  The Company had eliminated  approximately  13% of ATEC's total
labor  costs  by  hiring  revenue  generating  field  personnel  and  minimizing
administrative personnel and related costs. However, after the first few months,
the Company added higher level administrative  employees including corporate and
regional  financial  personnel  and  sales  personnel  for its  corporate  sales
programs.  In addition,  executive and employee  compensation  levels  increased
during the latter part of fiscal 1997 and certain  additional  bonuses to branch
personnel  were paid  during the current  quarterly  period in excess of amounts
previously accrued. As a result of the foregoing, employee costs increased 36.6%
to  $4,804,677,  or 16.7% of net revenues,  in the three months ended August 31,
1997 compared  with  $3,517,889,  or 12.2% of net revenues,  in the three months
ended August 31, 1996. Other increases in operating expenses resulted from legal
expenses and administrative expenses resulting from the growth in operations and
increased  employee levels.  Additionally,  in the three months ended August 31,
1997,  amortization of goodwill and intangibles increased to $494,769,  compared
with  $362,091  in the  three  months  ended  August  31,  1996  reflecting  the
additional goodwill amortization resulting from acquisitions.

                                      F-15
<PAGE>
         Operating  income in the three months  ended August 31, 1997  decreased
30.8% to $2,707,207  compared  with  $3,910,131 in the three months ended August
31, 1996.  Operating income decreased as a percentage of net revenues to 9.4% in
the three months ended August 31, 1997,  compared with 13.6% in the three months
ended August 31, 1996.

         Nonoperating  expense  in  the  three  months  ended  August  31,  1997
increased to $644,168  compared  with  $424,638 in the three months ended August
31, 1996. The increase is primarily  attributable to increased  interest expense
on the  Senior  Secured  Notes in excess of bank debt  outstanding  in the prior
period.  Increases in interest expense were offset in part by interest income on
the net cash proceeds received from the Senior Secured Notes.

         Income  tax  expense in the three  months  ended  August  31,  1997 was
$815,000,  compared  with  $1,384,000 in the three months ended August 31, 1996.
During the three months ended August 31, 1997 and 1996, the Company's  effective
tax rates were 39.5% and 39.7%, respectively.

         As a result of the  foregoing,  net  income in the three  months  ended
August 31,  1997  decreased  40.6% to  $1,248,039,  or $.15 per share on a fully
diluted  basis,  compared  with  $2,101,493 or $.25 per share on a fully diluted
basis,  in the three months ended August 31, 1996.  The fully  diluted  weighted
average number of shares outstanding remained approximately the same. Net income
decreased  as a  percentage  of net  revenues to 4.3% in the three  months ended
August 31, 1997, compared with 7.3% in the three months ended August 31, 1996.

Six Months Ended August  31, 1997 Compared with Six Months Ended August 31, 1996
--------------------------------------------------------------------------------
         Revenues in the six months  ended  August 31, 1997  increased  30.7% to
$66,096,867,  compared with $50,568,011 in the six months ended August 31, 1996.
This increase was primarily  attributable  to the  acquisition  of BCM effective
August 20, 1997 and revenues from the ATEC and 3D acquisitions  completed in May
1996.

         Revenues  in the six months  ended  August 31,  1997 from ATC's  branch
offices  having  comparable  operations  in the six months ended August 31, 1996
decreased 3.2% to $45,815,867, compared with $47,318,770 in the six months ended
August 31,  1996.  (Comparable  revenues  was based on total  revenues  less BCM
revenues  in August  1997,  and less  estimated  revenues of ATEC and 3D for the
three months ended May 31 of each fiscal period.)  Comparable revenues decreased
in part,  due to a large project which was completed in the first quarter of the
prior year period. Revenues attributable to the acquisition of certain assets of
BCM totaled $771,267,  or 1.2% of revenues,  for the six months ended August 31,
1997.

         Reimbursable   costs  represent   direct  project  expenses  billed  to
environmental and engineering segment clients. For the three months ended August
31, 1997,  reimbursable  costs  increased  34.6% to  $10,361,497  compared  with
$7,699,061,  in the six months ended August 31,  1996.  Reimbursable  costs as a
percentage  of revenues  increased  to 15.7% in the six months  ended August 31,
1997 compared with 15.2% in the six months ended August 31, 1996.  The Company's
environmental  management and  traditional  consulting  services,  consisting of
drilling,  materials  testing  and  engineering  services  represented  a larger
portion of total revenues and these  services  utilize higher amounts of outside
services  and direct  project  expenses  resulting in the higher  percentage  of
reimbursable costs.

         Gross profit in the six months ended August 31, 1997 increased 27.8% to
$25,322,687  compared with  $19,811,626 in the six months ended August 31, 1996.
Gross profit as a percentage of net revenue decreased to 45.4% in the six months
ended  August 31, 1997,  compared  with 46.2% in the six months ended August 31,
1996. The gross profit  percentage for the prior year period was up slightly due
to a highly  profitable  first  quarter  which  benefited  from work  previously
delayed from adverse winter weather conditions.

         Operating  expenses in the six months ended  August 31, 1997  increased
53.0% to $20,213,038,  compared with  $13,212,915 in the six months ended August
31, 1996.  Operating expenses increased as a percentage of net revenues to 36.3%
in the six months ended August 31, 1997,  compared  with 30.8% in the six months
ended August 31, 1996. The increase in operating expenses as a percentage of net
revenue for the current six month period fully reflects the ATEC service mix and
integration  of its operations  including  additional  labor and  administrative
costs.  The prior year period results  included the initial  staffing levels and
costs for employees  hired from ATEC. The Company had  eliminated  approximately
13% of ATEC's total labor costs by hiring revenue generating field personnel and
minimizing  administrative personnel and related costs. However, after the first
few months, the Company added higher level  administrative  employees  including
corporate and regional financial personnel and sales personnel for its corporate
sales  programs.  In  addition,   executive  and  employee  compensation  levels
increased during the latter part of fiscal 1997 and certain  additional  bonuses
to branch  personnel were paid during the quarterly period ended August 31, 1997
in excess of amounts  previously  accrued.  Employee  costs  increased  56.8% to
$8,992,507,  or 16.1% of net  revenues,  in the six months ended August 31, 1997
compared  with  $5,736,092,  or 13.4% of net  revenues,  in the six months ended
August 31, 1996.  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 legal expenses and administrative expenses resulting from

                                      F-16
<PAGE>
the growth in operations and increased employee levels. Additionally, in the six
months ended August 31, 1997, amortization of goodwill and intangibles increased
to  $920,368,  compared  with  $524,795 in the six months  ended August 31, 1996
reflecting the additional goodwill amortization resulting from acquisitions.

         Operating  income in the six months  ended  August 31,  1997  decreased
22.6% to $5,109,649, compared with $6,598,911 in the six months ended August 31,
1996.  Operating income decreased as a percentage of net revenues to 9.2% in the
six months ended August 31,  1997,  compared  with 15.4% in the six months ended
August 31, 1996.

         Nonoperating  expense in the six months ended August 31, 1997 increased
to  $1,100,294  compared  with $341,115 in the six months ended August 31, 1996.
The  increase in  nonoperating  expense is primarily  attributable  to increased
interest expense due to increased bank debt outstanding  since May 1996 when the
ATEC and 3D acquisitions were completed,  and the issuance of the Senior Secured
Notes in May 1997 in excess of previously outstanding bank debt.

         Income  tax  expense  in the six  months  ended  August  31,  1997  was
$1,585,000,  compared  with  $2,438,000 in the six months ended August 31, 1996.
During the six months ended August 31, 1996 and 1995,  the  Company's  effective
tax rates were 39.5% and 39.0%, respectively.

         As a result of the foregoing, net income in the six months ended August
31, 1997  decreased  36.5% to  $2,424,355,  or $.28 per share on a fully diluted
basis,  compared with  $3,819,796 or $.44 per share on a fully diluted basis, in
the six months ended August 31, 1996. The fully diluted  weighted average number
of shares  outstanding  decreased  to  8,525,884  shares from  8,628,179  shares
primarily due to lower average  common stock prices and the impact on the number
of common  stock  equivalents.  Net  income  decreased  as a  percentage  of net
revenues to 4.3% in the six months ended August 31, 1997,  compared with 8.9% in
the six months ended August 31, 1996.

Liquidity and Capital Resources

     At August 31, 1997,  working capital was $34,989,168  compared with working
capital of  $27,701,694  at February 28, 1997, an increase of  $7,287,474.  This
increase in working  capital is  primarily  a result of the net  proceeds of the
Senior Secured Notes after  repayment of bank debt and fees, and the purchase of
certain assets of BCM including accounts receivable and unbilled receivables. As
a  result  of the  Company's  acquisition  of BCM and  additional  consideration
incurred in connection  with the ATEC  acquisition,  the Company's  tangible net
worth decreased to $1,522,340 at August 31, 1997 from $9,220,043 at February 29,
1997,  primarily as a result of goodwill  amounts  recognized in connection with
these transactions.

     During  the six  months  ended  August  31,  1997,  net cash  flows used in
operating  activities were  $1,848,304,  primarily due to the increase in billed
and  unbilled   receivables,   and  decreases in  accounts   payable  and  other
liabilities,  representing  payments of property facility  rentals,  non-compete
consideration  and assumed  liabilities of ATEC and other  acquisitions,  and an
increase in billed and  unbilled  receivables.  Net cash flows used in investing
activities were $8,453,396,  resulting from the acquisitions of BCM and ATEC and
purchases  of property  and  equipment.  Net cash flows  provided  by  financing
activities  were  $16,191,275,  primarily  representing  the  proceeds of Senior
Secured Notes less  repayment of  outstanding  bank debt and a bank borrowing of
$5,500,000 made in the connection with the BCM  acquisition.

         During the six months  ended  August 31,  1996,  net cash flows used in
operating activities were $6,058,393,  primarily due to the decrease in accounts
payable  and other  liabilities,  representing  payments  of  property  facility
rentals,  non-compete  consideration  and assumed  liabilities of ATEC and other
acquisitions, and an increase in billed and unbilled receivables. Net cash flows
used in investing  activities were $12,659,842,  resulting from the acquisitions
of ATEC and 3D and purchases of property and equipment.  Net cash flows provided
by financing activities were $8,686,118,  primarily representing the proceeds of
the bridge  credit  facility,  less  payments  made on long-term  debt and notes
payable assumed from ATEC.

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

         The  Company  may seek to obtain  additional  public or private  equity
financing in the future in order to expand operations,  provide funds for future
acquisitions  or  reduce  debt,  however  no  assurance  can be  given as to the
Company's ability to obtain funds on acceptable terms and conditions.
                                      F-17
<PAGE>
                           PART II - OTHER INFORMATION

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

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

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

                                      F-18
<PAGE>
         Cambridge  Housing  Authority v. Con-Test,  Inc. and ATC Group Services
Inc., Superior Court of Middlesex County,  Massachusetts;  October 1, 1997. This
is a claim 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 is  joined as a party on a  successor  liability
theory,  even though the  services  giving rise to the claim  occurred  over two
years prior to ATC's purchase of business assets from Con-Test. Although ATC has
not yet answered the  complaint,  ATC intends to vigorously  defend the claim on
the  grounds  that  it  is  not  a  successor   under  any  known  precedent  of
Massachusetts  law.  It is  therefore  the  opinion  of  the  Company  that  the
probability of material loss from this claim is low.

Item 2.  Changes in Securities:
         Not Applicable

Item 3.  Defaults Upon Senior Securities:
         Not Applicable

Item 4.  Submission of Matters to a Vote of Security Holders:
                  On October 10, 1997,  the Company held its annual meeting of
                  shareholders  at which time the  following  matters were voted
                  upon by security holders:

         (1) The following individuals were re-elected as directors by the votes
indicated.

              Name                         Votes For           Votes Against
              -------------------------    ---------           -------------
              George Rubin                 5,179,723                18,685
              Morry F. Rubin               5,182,063                16,345
              Richard L. Pruitt            5,182,063                16,345
              Richard S. Greenberg, Esq.   5,182,063                16,345
              Julia S. Heckman             5,182,063                16,345

Item 5.  Other Information:
         Not Applicable

Item 6.  Exhibits and Reports on Form 8-K:
         (a)      Exhibits:
                  11 - Computation of Earnings Per Share -
                         Three months and six months ended August 31,1996 and 
                         1997 (Unaudited)

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

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


                                      F-19
<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:  October 15, 1997                 /s/ MORRY F.RUBIN
  --------------------------               -------------------------------------
                                      
                                           MORRY F. RUBIN,
                                           President and Chief Executive Officer

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


                                      F-20
<PAGE>
ATC GROUP SERVICES INC. AND SUBSIDIARIES                              EXHIBIT 11

COMPUTATION OF EARNINGS PER SHARE
THREE MONTHS AND SIX MONTHS ENDED AUGUST 31, 1996 and 1997 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>


                                                                                        PRO FORMA
                                                             ----------------------------------------------------------------
                                                                  Three Months Ended                 Six Months Ended
                                                                      August 31,                        August 31,
                                                             ------------------------------   -------------------------------
                                                                  1996            1997             1996              1997
                                                             --------------  --------------   --------------    -------------
<S>                                                          <C>             <C>              <C>               <C>
Primary Earnings Per Share:
   Weighted average number of shares of
     common stock outstanding..................                   7,785,761      7,804,618         7,787,174        7,802,900

   Additional shares assuming exercise of
     dilutive stock options and stock warrants.                     790,257         729,157          791,657          664,349
                                                             --------------  --------------   --------------    -------------

       Total average common and common
         equivalent shares outstanding.........                   8,576,018       8,533,775        8,578,831        8,467,249
                                                             ==============  ==============   ==============    =============

   Net income..................................              $    2,101,493  $    1,248,039   $    3,819,796    $   2,424,355
                                                             ==============  ==============   ==============    =============

   Earnings per common and dilutive
     common equivalent share...................              $          .25  $          .15   $          .45    $         .29
                                                             ==============  ==============   ==============    =============


Fully Diluted Earnings Per Share:
   Weighted average number of shares of
     common stock outstanding..................                   7,785,761       7,804,618        7,787,174        7,802,900

   Additional shares assuming exercise of
     dilutive stock options and stock warrants.                     790,257         729,157          841,005          722,984
                                                             --------------  --------------   --------------    -------------

       Total average common and common
         equivalent shares outstanding.........                   8,576,018       8,533,775        8,628,179        8,525,884
                                                             ==============  ==============   ==============    =============

   Net income..................................              $    2,101,493  $    1,248,039   $    3,819,796    $   2,424,355
                                                             ==============  ==============   ==============    =============

   Earnings per common and dilutive
     common equivalent share...................              $          .25  $          .15   $          .44    $         .28
                                                             ==============  ==============   ==============    =============
</TABLE>

                                      F-21

<PAGE>


ATC GROUP SERVICES INC. AND SUBSIDIARIES                              EXHIBIT 27

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

                                                                                                                     As of
Item Number                                           Item Description                                          August 31, 1997
                                                                                                                ---------------
<S>                 <C>                                                                                         <C>    
5-02(1)             Cash and cash items..................................................................       $    7,893,465
5-02(2)             Marketable securities ...............................................................                    -
5-02(3)(a)(1)       Notes and accounts receivable - trade................................................           43,707,086
5-02(4)             Allowances for doubtful accounts.....................................................            2,106,863
5-02(6)             Inventory............................................................................                    -
5-02(9)             Total current assets.................................................................           61,388,084
5-02(13)            Property, plant and equipment........................................................            9,466,239
5-02(14)            Accumulated depreciation.............................................................            4,440,697
5-02(18)            Total assets.........................................................................          119,829,264
5-02(21)            Total current liabilities............................................................           29,243,030
5-02(22)            Bonds, mortgages and similar debt....................................................           43,371,402
5-02(28)            Preferred stock - mandatory redemption...............................................                    -
5-02(29)            Preferred stock - no mandatory redemption............................................                    -
5-02(30)            Common stock.........................................................................               78,054
5-02(31)            Other stockholders' equity...........................................................           47,787,770
5-02(32)            Total liabilities and stockholders' equity...........................................          119,829,264


                                                                                                                     Six Months
                                                                                                                       Ended
                                                                                                                  August 31, 1997
                                                                                                                 ----------------

5-03(b)1(a)         Net sales of tangible products.......................................................                    -
5-03(b)1            Total revenues.......................................................................           66,096,867
5-03(b)2(a)         Cost of tangible goods sold..........................................................                    -
5-03(b)2            Total costs and expenses applicable to sales and revenues............................           40,774,180
5-03(b)3            Other costs and expenses.............................................................           19,307,039
5-03(b)5            Provision for doubtful accounts and notes............................................              744,384
5-03(b)(8)          Interest and amortization of debt discount...........................................            1,261,909
5-03(b)(10)         Income before taxes and other items..................................................            4,009,355
5-03(b)(11)         Income tax expense...................................................................            1,585,000
5-03(b)(14)         Income/(loss) continuing operations..................................................            2,424,355
5-03(b)(15)         Discontinued operations..............................................................                    -
5-03(b)(17)         Extraordinary items..................................................................                    -
5-03(b)(18)         Cumulative effect - changes in accounting principles.................................                    -
5-03(b)(19)         Net Income...........................................................................            2,424,355
5-03(b)(20)         Earnings per share - primary.........................................................                  .29
5-03(b)(20)         Earnings per share - fully diluted...................................................                  .28
</TABLE>


                                      F-22