ACMAT CORP - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

OR

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-6234

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

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

233 MAIN STREET 06050-2350
NEW BRITAIN, CONNECTICUT (Zip Code)
(Address of principal executive offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
(860) 229-9000

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, WITHOUT PAR VALUE
CLASS A STOCK, WITHOUT PAR VALUE

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]

The aggregate market value of the Common Stock and Class A Stock held by
non-affiliates of the registrant was $17,309,214 as of the Registrant's most
recently completed second fiscal quarter.

As of March 1, 2003 there were 552,855 shares of the registrant's Common
Stock and 1,755,104 shares of registrant's Class A Stock, each without par
value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

None

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PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 15
Item 3. Legal Proceedings........................................... 15
Item 4. Submission of Matters to a Vote of Security Holders......... 16

PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder matters......................................... 16
Item 6. Selected Financial Data..................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 17
Item 7a. Quantitative and Qualitative Discussions about Market
Risk........................................................ 23
Item 8. Financial Statements and Supplementary Data................. 25
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 58

PART III
Item 10. Directors and Executive Officers of the Registrant.......... 58
Item 11. Executive Compensation...................................... 59
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 60
Item 13. Certain Relationships and Related Transactions.............. 61

PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 61

1

PART I

ITEM 1. BUSINESS

GENERAL

ACMAT Corporation ("ACMAT" or the "Company") provides specialized
commercial insurance and bonding coverage for contractors, architects, engineers
and other professionals in the construction and environmental fields and other
specialty insurance such as products liability. The Company derives its
underwriting expertise from its construction operations. Through United Coastal
Insurance Company ("United Coastal"), the Company provides a broad line of
specialty general liability and products liability insurance, professional
liability insurance to architects, engineers and other professions and
environmental liability insurance to specialty trade and environmental
contractors, property owners, storage and treatment facilities and allied
professionals. Through ACSTAR Insurance Company ("ACSTAR Insurance"), the
Company provides surety bonds for general building, specialty trade and
environmental contractors and all forms of commercial surety. Both United
Coastal Insurance and ACSTAR Insurance are rated A- (excellent) by A.M. Best
Co., Inc. ("A.M. Best").

The Company is also engaged in construction contracting which consists of
general building construction for new buildings and interior contracting
services of building interiors for commercial, industrial and institutional
buildings.

FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS

Financial information relating to the three business segments is set forth
in Note 17 to the consolidated financial statements included in of this
document.

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

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

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

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

2

UNITED COASTAL LIABILITY INSURANCE

The liability insurance lines of the Company are discussed more fully
below:

CONTRACTORS

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

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

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

PROFESSIONALS

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

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

OWNERS AND LENDERS

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

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

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

3

PRODUCTS LIABILITY

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

The Company customizes many of its insurance policies to suit the
individual needs of its insureds. One limit insuring multiple exposures under
one policy form and limit are offered.

ACSTAR BONDING

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

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

The Company provides the following types of bonds:

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

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

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

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

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

4

INSURANCE AND BONDING PERFORMANCE RATIOS

The following table sets forth the combined ratios of the Company, prepared
in accordance with accounting principles generally accepted in the United States
of America ("GAAP") and statutory accounting principles prescribed or permitted
by state insurance authorities.

The combined ratio is a traditional measure of underwriting profitability.
When the combined ratio is under 100%, underwriting results are generally
considered profitable. Conversely, when the combined ratio is over 100%,
underwriting results are considered unprofitable. The combined ratio does not
reflect investment income, federal income taxes or other non-operating income or
expense.

The increase in the combined ratios over the past year results primarily
from two large losses reported in current year of $2.2 million. In addition,
prior year favorable reserve development is significantly lower due to actual
loss experience being closer to estimates. See Item 7 "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

UNDERWRITING

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

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

The Company's underwriting and pricing strategy is designed to produce an
underwriting profit resulting in a Company-wide combined ratio below 100%. This
has been achieved in two of the past three years.

The Company continually monitors financial stability of contractors with
surety bonds outstanding. Work in progress reports and updated financial
information are reviewed periodically by the Company to ensure that the
contractor continues to meet the underwriting guidelines. The Company also sends
out status reports to the Obligees to ensure that the projects are progressing
favorably.

5

REINSURANCE

In the normal course of business, the Company assumes and cedes reinsurance
with other companies. Reinsurance ceded primarily represents excess of loss
reinsurance with companies with "A" ratings from the insurance rating
organization, A.M. Best. Reinsurance ceded also includes facultative reinsurance
which is applicable to excess policies written over a primary policy issued by
the Company for specific projects. Reinsurance is ceded to limit losses from
large exposures and to permit recovery of a portion of direct losses; however,
such a transfer does not relieve the originating insurer of its liability.

Effective November 1, 2002, the Company cedes 80% of its exposure in excess
of $1,000,000 up to $5,000,000 on a per principal/insured basis. Prior to
October 31, 2002, reinsurance was applicable on a per principal/insured basis
for 100% of the losses in excess of $1,000,000 up to $8,000,000. From May 1,
2000 to April 30, 2002, the Company also reinsured surety losses on a per
principal basis for losses in excess of $8,000,000 up to $13,000,000.

The availability and price of reinsurance fluctuates according to market
conditions. The renewal of the reinsurance treaty in 2002 was arranged at a
moderate price increase and involved the Company's participation. Depending on
the availability and cost of reinsurance, the Company may, from time to time,
elect to cede greater or lesser portions of its underwriting risk.

CLAIMS

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

RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES

Reserves for losses and loss adjustment expenses are estimates at any given
point in time of what the Company may have to ultimately pay on incurred losses,
including related settlement costs, based on facts and circumstances then known.
The Company also reviews its claims reporting patterns, past loss experience,
risk factors and current trends and considers their effect in the determination
of estimates of incurred but not reported losses. Ultimate losses and loss
adjustment expenses are affected by many factors which are difficult to predict,
such as claim severity and frequency, inflation levels and unexpected and
unfavorable judicial rulings. Reserves for surety claims also consider the
amount of collateral held as well as the financial strength of the contractor
and its indemnitors. Management believes that the reserves for losses and loss
adjustment expenses at December 31, 2002 are adequate to cover the unpaid
portion of the ultimate net cost of losses incurred through that date and
related adjustment expenses incurred, including losses incurred but not
reported. The Company also has the reserves evaluated independently by a
qualified actuary.

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

6

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

The decrease in net loss and loss adjustment expense reserves in 2002 from
2001 was primarily due to payments on surety and general liability policies for
prior years net of subrogation and ceded recoveries. The reduction was partially
offset by loss and loss adjustment expenses incurred primarily in the current
year which reflects two large losses of approximately $2.2 million. Also, the
favorable development observed previously in prior years reduced significantly
as the actual loss experience came in closer to the estimates. The increase in
reinsurance recoverable in 2002 from 2001 is primarily due to one liability
claim, which exceeded the limits retained by the Company.

The decrease in net loss and loss adjustment expense reserves in 2001 from
2000 is due to significant loss payments for surety and general liability
claims, the release of net favorable development in surety loss reserves
relating to older years that are no longer required partially offset by an
increase in current year incurred loss and loss adjustment expenses. This
increase reflects largely surety losses, which occurred during the year.

While management continually evaluates the potential for changes in loss
estimates, due to the uncertainty inherent in the surety business, the emergence
of net favorable development may or may not continue to occur. Management
believes that the reserves for losses and loss adjustment expense are adequate
to cover the unpaid portion of the ultimate net cost of losses and loss
adjustment expenses, including losses incurred but not reported.

The Company has no exposure to any asbestos or environmental claims
associated with general liability policies issued with the pre-1986 pollution
exclusion. Policies written without the exclusion are typically associated with
mass tort environmental and asbestos claims. The Company has never issued a
policy with the pre-1986 pollution exclusion. The Company's exposure to asbestos
and environmental liability claims is primarily limited to asbestos and
environmental liability insurance for contractors and consultants involved in
the remediation, removal, storage, treatment and/or disposal of environmental
and asbestos hazards.

As of December 31, 2002, 2001 and 2000 reserves for the combined losses and
loss adjustment expenses of the Company's insurance operations as determined in
accordance with accounting principles and practices prescribed or permitted by
insurance regulatory authorities ("Statutory basis reserves") were $17,258,971,
$19,812,958 and $29,375,218, respectively. As of December 31, 2002, 2001 and
2000 reserves determined in accordance with GAAP were $25,642,865, $22,585,626
and $29,310,606, respectively. The primary difference between the Statutory
basis reserves and the GAAP basis reserves is the netting of reinsurance
recoverable against losses and loss adjustment expense reserves for statutory
purposes.

7

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

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

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

8

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

IRIS RATIOS

The National Association of Insurance Commissioners ("NAIC") has developed
the Insurance Regulatory Information System ("IRIS"), intended to assist state
insurance departments in executing their statutory mandates to oversee the
financial condition of insurance companies operating in their respective states.
IRIS identifies twelve industry ratios and specifies "usual values" for each
ratio. When an insurance company's ratio falls outside the "usual value," it is
designated an "unusual value," which event alerts state insurance departments to
potential problems. For the year ended December 31, 2002, United Coastal and
ACSTAR, each had one IRIS ratio designated as an "unusual value". United
Coastal's two-year overall operating ratio of 111% exceeded the usual ratio of
100% due to United Coastal's increase in losses and loss adjustment expenses
attributable to a large loss of approximately $1,700,000 reported in the current
year. ACSTAR's investment yield ratio of 3.8% was below the minimum yield ratio
of 4.5% primarily because of ACSTAR's 34% ownership of United Coastal which was
not a significant income producer in 2002.

A.M. BEST RATINGS

A.M. Best ratings are indications of the solvency of an insurer based on an
analysis of the financial condition and operations of a company relative to the
industry in general. Occasionally, the requirement for an A.M. Best's-rated
insurer is a condition imposed upon the contractor by the party engaging the
contractor. Certain insurance brokers also restrict the business they will place
with insurers which are not A.M. Best's-rated. The 2002 Best letter ratings
range from A++ (superior) to F (in liquidation). United Coastal Insurance and
ACSTAR Insurance each have an A.M. Best's rating of A- (excellent).

RISK-BASED CAPITAL

Risk-based capital requirements are used as early warning tools by the
National Association of Insurance Commissioners and the states to identify
companies that require further regulatory action. The ratio for each of the
Company's insurance subsidiaries as of December 31, 2002 was above the level
which might require regulatory action.

TERRORISM RISK INSURANCE ACT OF 2002

On November 26, 2002, the Terrorism Risk Insurance ACT of 2002 (the
Terrorism Act) was enacted into Federal law and established a temporary Federal
program in the Department of the Treasury that provides for a system of shared
public and private compensation for insured losses resulting from acts of
terrorism committed by or on behalf of a foreign interest. In order for a loss
to be covered under the Terrorism ACT (i.e., subject losses), the loss must be
the result of an event that is certified as an act of terrorism by the U.S.
Secretary of Treasury; with the exception of workers' compensation claim
payments, losses arising as a result of a war declared by Congress are not
covered by the Terrorism Act. The Terrorism Insurance Program (the Program)
generally requires that all commercial property casualty insurers licensed in
the U.S. participate in the Program. The Program became effective upon enactment
and terminates on December 31, 2005. The amount of compensation paid to
participating insurers under the Program is 90% of subject losses, after an
insurer deductible, subject to an annual cap. The deductible under the Program
is 7% for 2003, 10% for 2004 and 15% for 2005. In each case, the deductible
percentage is applied to the insurer's direct earned premiums from the calendar
year immediately preceding the applicable year. The Program also contains an
annual cap that limits the amount of subject losses to $100 billion aggregate
per program year. Once subject losses have reached the $100 billion aggregate
during a program year, there is no additional reimbursement from the U.S.
Treasury and an insurer that has met its deductible for the program year is not
liable for any losses (or portion thereof) that exceed the $100 billion cap. The
Company's 2003 deductible

9

under this federal program is $214,000 for United Coastal and $386,000 for
ACSTAR, subject to final rules to be established by the U.S. Treasury.

ACMAT CONTRACTING

GENERAL

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

BACKLOG

The following table sets forth the Company's backlog of unbilled contract
amounts, the total number of contracts and the number of contracts with unbilled
amounts in excess of $400,000 as of December 31, 2002 and 2001:

The Company estimates that all of the December 31, 2002 backlog will be
completed prior to December 31, 2003.

MATERIALS

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

CONTRACT ACQUISITION

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

WARRANTY

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

10

ASBESTOS ABATEMENT OPERATIONS

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

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

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

MARKETING

INSURANCE AND BONDING

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

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

The Company's insurance and bonding products are marketed in all 50 states,
the District of Columbia, Puerto Rico and the Virgin Islands.

ACMAT CONTRACTING

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

11

COMPETITION

INSURANCE AND BONDING

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

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

ACMAT CONTRACTING

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

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

REGULATION

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

12

As an approved non-admitted excess and surplus lines insurer, United
Coastal Insurance is not subject to the comparatively more extensive state
regulations to which ACSTAR Insurance is subject. The regulations and
restrictions to which ACSTAR Insurance and United Coastal Insurance are subject
include provisions intended to assure the solvency of ACSTAR Insurance and
United Coastal Insurance and are primarily for the protection of policyholders
and loss claimants rather than for the benefit of investors.

State insurance regulations impose certain restrictions upon the types of
investments that the Company's insurance subsidiaries can acquire and the
percentage of their capital or assets that may be placed in any particular
investment or type of investment. Certain states also require insurance
companies to furnish evidence of financial security by means of a deposit of
marketable securities with the state insurance regulatory authority. On December
31, 2002, the Company's insurance subsidiaries had securities with an aggregate
fair value of approximately $10.5 million on deposit with various state
regulatory authorities.

The insurance subsidiaries of ACMAT are restricted as to the amount of cash
dividends they may pay. During 2002, United Coastal Insurance paid $1,500,000 in
dividends which was below the level that requires prior approval by the Arizona
Insurance Department. At January 1, 2003, approximately $1,845,000 is available
for the payment of dividends by United Coastal Insurance in 2003 without the
prior approval of the Arizona Insurance Department.

Under applicable insurance regulations in its domicile state of Illinois,
ACSTAR Insurance is also restricted as to the amount of dividends it may pay.
ACSTAR may pay or declare a dividend only up to the amount of any available
surplus funds derived from realized net profits on its business, as determined
in accordance with statutory accounting principles. During 2002, ACSTAR paid
$3,000,000 in dividends to ACSTAR Holdings which is below the level that
requires prior approval by the Illinois Insurance Department. At January 1,
2003, approximately $2,646,000 is available for the payment of dividends by
ACSTAR Insurance in 2003 without the prior approval of the Illinois Insurance
Department.

INVESTMENTS

The Company's investment strategy is to maintain a conservative investment
policy by acquiring high quality securities, primarily bonds, with fixed
effective maturities of less than ten years. The investment portfolio is well
diversified and is in compliance with regulatory requirements. The Company's
bond portfolio is composed primarily of investments rated AA or better by
Standard and Poor's.

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

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

The Company historically invested in tax-exempt securities as part of its
strategy to maximize after-tax income. As a result of the alternative minimum
tax carryforward of approximately $2.4 million at December 31, 2002, the Company
has minimized its investment in tax-exempt securities for the foreseeable

13

future. The following table summarizes the fair value investments portfolio at
December 31, 2002 and 2001 (dollars in thousands):

- ---------------

(1) Fixed maturities available for sale are carried at fair value. Total cost of
fixed maturities was approximately $59,872,707 at December 31, 2002 and
$61,841,000 at December 31, 2001.

(2) Equity securities are carried at fair value. Total cost of equity securities
was approximately $6,700,559 at December 31, 2002 and $5,065,000 at December
31, 2001.

(3) Short-term investments, consisting primarily of money market instruments
maturing within one year are carried at cost which, along with accrued
interest, approximates fair value.

The following table sets forth our combined fair value of fixed maturity
investment portfolio classified by maturity distribution at December 31, 2002
and 2001 (dollars in thousands):

- ---------------

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

The Company's insurance subsidiaries are subject to state laws and
regulations that require diversification of its investment portfolio and limit
the amount of investments in certain investment categories. Failure to comply
with these laws and regulations would cause non-conforming investments to be
treated as non-admitted assets for purposes of measuring statutory surplus and,
in some instances, would require divestiture. As of December 31, 2002, the
Company's investments complied with such laws and regulations.

14

Investment results for the years ended December 31, 2002, 2001 and 2000 are
shown in the following table (dollars in thousands):

- ---------------

(1) Average of the aggregate invested amounts at the beginning of the period and
at end of each quarter including cash and cash equivalents.

(2) Investment income is net of investment expenses and does not include
realized investment gains or losses or provision for income taxes.

In 2002, the interest rate environment decreased led by reduction in U.S.
Treasury rates, reflected in the marginal drop in yield. Invested assets are
attributable to the net cash flow generated by written premiums, cash collateral
and the reinvestment of investment income offset in part by cash used to repay
debt, repurchase stock and pay claims.

DERIVATIVES

See Note 12 of the Company's consolidated financial statements for a
discussion of the policies and transactions related to the Company's derivative
financial instruments.

GENERAL BUSINESS FACTORS

During 2002, 2001 and 2000, customers who individually accounted for more
than 10% of consolidated construction contracting revenue are as follows; in
2002 -- four customers provided 31%, 26%, 19% and 18%, in 2001 -- three
customers provided 33%, 27%, and 20%, respectively. In 2000 -- three customers
provided 33%, 22% and 19%, respectively. One customer accounted for more than
10% of the United Coastal insurance revenues in 2001. However, in the opinion of
the Company's management, no material part of the business of the Company and
its subsidiaries is dependent upon a single customer or group of customers, the
loss of any one of which would have a materially adverse effect on the Company.

ENVIRONMENTAL COMPLIANCE

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

EMPLOYEES

As of December 31, 2002, the Company employed approximately 25 persons, all
in the United States. None of its current employees are employed subject to
collective bargaining agreements. The Company believes that its relations with
all of its employees are excellent.

ITEM 2. PROPERTIES

The Company and its subsidiaries occupy a 7 story office building located
at 233 Main Street, in New Britain, Connecticut. ACMAT leases approximately 67%
of the building to unaffiliated tenants. The office building is suitable and
adequate for ACMAT's current and future requirements.

ITEM 3. LEGAL PROCEEDINGS

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

15

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

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

No matters were submitted to a vote of security holders during the fourth
quarter of 2002.

PART II

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

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

No dividends have been paid in the past five years and there is no
intention of paying dividends in the near future. As of March 1, 2003, there
were 280 Common Stock shareholders of record and 600 Class A Stock shareholders
of record.

ITEM 6. SELECTED FINANCIAL DATA

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

16

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

CONSOLIDATED RESULTS OF OPERATIONS:

Net earnings were $3,156,893 in 2002, $1,706,588 in 2001 and $2,224,317 in
2000. The increase in 2002 net earnings reflects the net effect of life
insurance proceeds net of related obligations, due to the death of the Chairman
and President of the Company and the related tax benefits offset by an increase
to loss reserves due to two large losses reported in current year, additional
remediation expenses incurred on a construction project that significantly
exceeded the original estimate and lower capital gains. The decrease in 2001 net
earnings compared to the 2000 net earnings was due primarily to a decrease in
earned premiums and an increase in the loss ratio partially offset by an
increase in realized capital gains.

Revenues were $31,574,097 in 2002, $26,962,807 in 2001 and $26,341,755 in
2000. The increase in 2002 revenues compared to 2001 revenues reflects the net
effect of life insurance proceeds, increased contract revenues offset in part by
a decrease in investment income and realized capital gains. The increase in 2001
revenues compared to the 2000 revenues is due primarily to an increase in
contract revenues and realized gains offset in part by a decrease in earned
premiums and net investment income. Earned premiums were $7,571,725 in 2002,
$7,581,276 in 2001 and $9,215,904 in 2000. Contract revenues were $16,289,326 in
2002, $14,074,878 in 2001 and $11,790,207 in 2000. The increase in contract
revenue reflects the timing of three large projects.

Investment income was $3,553,565 in 2002, $4,031,793 in 2001 and $4,570,927
in 2000. The decrease in 2002 investment income was primarily related to a
decrease in yield on invested assets offset in part by an increase in net
invested assets. The decrease in 2001 investment income compared to 2000
investment income was primarily related to a decrease in yield on invested
assets and a continued decrease in invested assets as the Company continued to
reduce long-term debt. Net realized capital gains (losses) were $25,971 in 2002,
$374,301 in 2001 and ($123,125) in 2000.

Life insurance proceeds reflect the net proceeds of several key-man life
insurance policies totaling approximately $8,800,000. In addition, the Company
incurred certain obligations, previously approved by the Board of Directors,
totaling approximately $5,500,000. These obligations for consulting fees,
widow's compensation and unused vacation pay were due only to the extent that
sufficient proceeds existed from the life insurance policies at the time of Mr.
Nozko's death.

Other income was $784,607 in 2002, $900,559 in 2001 and $887,842 in 2000.
Other income consists primarily of rental income. The decrease in 2002 other
income compared to 2001 reflects a reduction in fees related to funds
administration. The increase in 2001 other income compared to 2000 reflects an
increase in construction administration fees in 2001 offset by a lease
termination fee received from a tenant in 2000.

Losses and loss adjustment expenses were $4,071,399 in 2002, $1,536,022 in
2001 and $1,506,908 in 2000. The increase in losses and loss adjustment expenses
in 2002 is attributable to two large losses reported in current year of $2.2
million and prior year favorable reserve development was significantly lower due
to actual loss experience being closer to estimates. The increase in losses and
loss adjustment expenses for 2001 are attributable to an increase in surety loss
ratio offset in part by a decrease in current year earned premiums.

Amortization of policy acquisition costs were $1,753,553 in 2002,
$2,049,946 in 2001 and $2,375,038 in 2000. The decrease in amortization of
policy acquisition costs is primarily attributable to the decrease in commission
rates for agents and decrease in earned premium.

Costs of contract revenues were $18,339,534 in 2002, $13,183,057 in 2001
and $11,006,382 in 2000. The gross profit (loss) margins on construction
projects were (12.6)% in 2002, 6.3% in 2001 and 6.6% in 2000. The Company
incurred additional remediation expenses on a construction project that
significantly exceeded the original estimate and cost overruns on several other
projects that are now substantially complete. Gross margins fluctuate each year
based upon the profitability of specific projects.

General and administrative expenses were $4,856,068 in 2002, $4,856,785 in
2001 and $4,997,849 in 2000. The change in general and administrative expenses
in 2002 compared to 2001 is due primarily to the decrease in intangible
amortization expense offset by an increase in bad debt expense. The decrease in
general
17

and administrative expenses in 2001 compared to 2000 is due primarily to a
decrease in salary expense offset in part by an increase in depreciation
expense.

Interest expense was $1,928,084 in 2002, $2,723,052 in 2001 and $2,982,824
in 2000. The decrease in interest expense is due to the decrease in long-term
debt and the replacement of high interest bearing debt with lower interest
bearing debt during 2002.

Income tax benefit was $2,531,434 in 2002 compared to income tax expense of
$907,357 in 2001 and $1,248,437 in 2000, representing effective tax rates of
(404.7%), 34.7% and 35.9%, respectively. The fluctuation in the effective tax
rate reflects the recognition of net life insurance proceeds during 2002 which
are exempt for income tax purposes.

RESULTS OF OPERATIONS BY SEGMENT

The company has three reportable operating segments: ACSTAR Bonding, United
Coastal Liability Insurance and ACMAT Contracting. The Company's reportable
segments are primarily the three main legal entities of the Company which offer
different products and services. The accounting policies of the segments are the
same as those described in the summary of significant accounting policies. The
adjustments and eliminations required to arrive at consolidated amounts shown
above consist principally of the elimination of the intersegment revenues
related to the performance of certain services and rental charges.

Operating earnings for ACMAT contracting are operating revenues less cost
of contract revenues and identifiable selling, general and administrative
expenses. Operating earnings for the bonding and liability insurance segments
are revenues less losses and loss adjustment expenses, amortization of policy
acquisition costs and identifiable selling, general and administrative expenses.

Revenues for the ACSTAR Bonding segment were $5,360,871 in 2002, $5,487,683
in 2001 and $6,284,212 in 2000. The 2002 decrease in revenue is primarily due to
a decrease in investment income and capital gains offset in part by a 5%
increase in earned premium. The 2001 decrease in revenue is primarily due to a
24% decrease in earned premiums and partly offset by an increase in investment
income and realized gains.

Net written premiums were $4,326,190 in 2002, $3,498,860 in 2001 and
$5,024,005 in 2000. The increase in 2002 net written premiums compared to 2001
reflects the impact of the favorable insurance rate market. ACSTAR has
experienced a significant increase in business opportunities over the past
twelve months that meet ACSTAR's underwriting standards. The decrease in 2001
net written premiums compared to 2000 reflects the impact of ACSTAR's increased
reinsurance on a per principal basis which began on May 1, 2000.

Earned premiums were $4,001,183 in 2002, $3,808,737 in 2001 and $5,032,465
in 2000. The increase in 2002 earned premiums compared to 2001 reflects the 24%
increase in 2002 net written premiums compared to 2001. The decrease in 2001
earned premiums compared to 2000 reflects the 30% decrease in 2001 net written
premiums compared to 2000 and the impact of the reinsurance treaty on May 1,
2000.

Investment income was $1,451,169 in 2002, $1,560,080 in 2001 and $1,253,329
in 2001. The 2002 investment income reflects an increase in invested assets
offset by a decrease in the effective yield on those invested assets. The
increase in 2001 investment income was primarily related to a decrease in
investment expenses. Net realized capital gains (losses) were $5,737 in 2002,
$191,670 in 2001 and ($5,622) in 2000.

Operating earnings for the ACSTAR Bonding segment were $1,217,718 in 2002,
$2,098,548 in 2001 and $2,436,708 in 2000. The decrease in 2002 operating
earnings reflect the addition of $500,000, net of recoveries, to loss reserves
for a large loss reported in current year and a decrease in investment income
and realized

18

capital gains in 2002. The decrease in operating earnings in 2001 is primarily
related to lower earned premium and higher loss ratios partially offset by
higher net investment income and capital gains.

Losses and loss adjustment expenses were $1,300,237 in 2002, $404,260 in
2001 and $251,876 in 2000. The increase in losses and loss adjustment expenses
for 2002 reflects a large loss of approximately $500,000 reported in current
year and significantly lower net favorable development in prior year. Prior year
development benefited primarily from a salvage recovery of $1,677,851 which was
partially offset by adverse development. The increase in 2001 losses and loss
adjustment expenses compared to 2000 reflects an increase in the loss and loss
adjustment expense ratio, offset in part by a decrease in 2001 earned premiums
and the release of net favorable development in surety loss reserves relating to
older years. Amortization of policy acquisition costs were $1,564,398 in 2002,
$1,601,377 in 2001 and $2,001,561 in 2000. The decrease in amortization of
policy acquisition costs in 2002 is primarily attributable to a decrease in the
average commissions paid to agents offset in part by the increase in 2002 earned
premiums. The decrease in amortization of policy acquisition costs in 2001 is
primarily attributable to the decrease in 2001 earned premiums.

General and administrative expenses were $1,278,518 in 2002, $1,383,498 in
2001 and $1,594,067 in 2000. The decrease in general and administrative expenses
is due primarily to no further amortization expense related to intangibles and a
one-time rent recovery from an affiliate. The decrease in general and
administrative expenses in 2001 is primarily due to reduced funds control
expenses in 2001 compared to 2000.

Revenues for the United Coastal Liability Insurance segment were $5,458,373
in 2002, $6,363,392 in 2001 and $7,080,714 in 2000. The 2002 decrease in revenue
reflects a 5% decrease in earned premiums and a 23% decrease in investment
income compared to 2001. The 2001 decrease in revenue reflects a 10% decrease in
earned premiums and a 21% decrease in investment income compared to 2000. The
decrease in revenues over the past two years reflects the Company's strategy to
selectively underwrite during uncertain economic times and a reduction in
invested assets to pay dividends to the parent to reduce corporate debt.

Net written premiums were $3,659,805 in 2002, $3,133,460 in 2001 and
$3,887,000 in 2000. The increase in 2002 net written premiums compared to 2001
reflects the impact of the favorable insurance rate market. United Coastal has
experienced a significant increase in business opportunities over the past
twelve months that meet United Coastal's underwriting standards. The decrease in
2001 net written premiums compared to 2000 reflects the Company's strategy
toward the unfavorable pricing in the casualty insurance market.

Earned premiums were $3,570,542 in 2002, $3,772,539 in 2001 and $4,183,439
in 2000. The decrease in 2002 earned premiums compared to 2001 reflects the
change and timing of premiums written in 2002. The decrease in 2001 earned
premiums compared to 2000 reflects the 19% decrease in 2001 net written premiums
compared to 2000.

Investment income was $1,845,179 in 2002, $2,385,377 in 2001 and $3,001,161
in 2000. The decrease in investment income was primarily related to a decrease
in the effective yield on invested assets and a decrease in invested assets as a
result of dividends distributed to the parent company to reduce corporate debt.
Net realized capital gains (losses) were $20,234 in 2002, $182,631 in 2001 and
($117,503) in 2000.

Operating earnings for the United Coastal Liability Insurance segment were
$677,349 in 2002, $2,810,000 in 2001 and $3,549,472 in 2000. The decrease in
2002 operating earnings compared to 2001 is due primarily to a decrease in
earned premiums and investment income, as well as the addition of $1,700,000 to
loss reserves for a large loss reported in the current year. The decrease in
2001 operating earnings compared to 2000 is due primarily to a decrease in
earned premiums and investment income.

19

Losses and loss adjustment expenses were $2,771,162 in 2002, $1,131,762 in
2001 and $1,255,032 in 2000. The increase in losses and loss adjustment expenses
for 2002 compared to 2001 is attributable to a large loss of approximately
$1,700,000 reported in current year. The decrease in losses and loss adjustment
expenses for 2001 compared to 2000 is attributable to the decrease in earned
premiums.

Amortization of policy acquisition costs were $951,023 in 2002, $1,286,409
in 2001 and $1,303,916 in 2000. The decrease in amortization of policy
acquisition costs for 2002 compared to 2001 is primarily attributable to the
decrease in earned premiums and the significant reduction in ceded premiums. The
decrease in amortization of policy acquisition costs for 2001 compared to 2000
is primarily attributable to the decrease in earned premiums.

General and administrative expenses were $1,058,839 in 2002, $1,135,221 in
2001 and $972,294 in 2000. The decrease in 2002 general and administrative
expenses compared to 2001 is due primarily to a reduction in rent expense from a
one-time rent recovery from an affiliate. The increase in 2001 general and
administrative expenses compared to 2000 is due primarily to an increase in
expenses related to the Company's tri-annual statutory audit in 2001.

Revenues for the ACMAT Contracting segment were $19,658,401 in 2002,
$17,540,369 in 2001 and $15,898,910 in 2000. The 2002 increase in revenue
reflects a 16% increase in contract revenues compared to 2001 due to the timing
of three large projects in 2002. The 2001 increase in revenue reflects a 19%
increase in contract revenues compared to 2000. Contract revenue depends greatly
on the successful securement of contracts bid and execution. The Company is
substantially complete with its current projects and its current backlog relates
to primarily one profitable project. The backlog at December 31, 2002 was
$430,000 compared to $13,946,000 at December 31, 2001. The significant decrease
in backlog reflects the significant number of contractors competing for a
limited number of projects available in our market place.

Operating losses for the ACMAT Contracting segment were $2,690,427 in 2002
compared to operating earnings of $912,376 in 2001 and $1,111,731 in 2000. The
2002 operating loss is due primarily to additional remediation expenses incurred
on a construction project that significantly exceeded the original estimate and
cost overruns on several other projects. The decrease in 2001 operating earnings
compared to 2000 operating earnings is due primarily to a decrease in funds
control income and lower gross profit on contracts in 2001

Cost of contract revenues were $18,339,534 in 2002, $13,183,057 in 2001 and
$11,006,382 in 2000. The gross profit (loss) margin on construction projects was
(12.6%) in 2002, 6.3% in 2001 and 6.6% in 2000. Gross margin fluctuations each
year based upon the profitability of specific projects. The gross loss in 2002
reflects significant cost overruns on several projects that are now
substantially complete.

General and administrative expenses were $4,008,294 in 2002, $3,444,936 in
2001 and $3,780,797 in 2000. The increase in general and administrative expenses
in 2002 compared to 2001 is due primarily to an increase in bad debt expense and
a one-time return of rental income to affiliates collected on their behalf
offset in part by a decrease in salary expense in 2002. The decrease in general
and administrative expenses in 2001 compared to 2000 is due primarily to the
decrease in amortization of intangibles.

CRITICAL ACCOUNTING POLICIES:

RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES

Reserves for losses and loss adjustment expenses are established with
respect to both reported and incurred but not reported claims for insured risks.
The amount of loss reserves for reported claims is primarily based upon a
case-by-case evaluation of the type of risk involved, knowledge of the
circumstances surrounding

20

each claim and the policy provisions relating to the type of claim. As part of
the reserving process, historical data is reviewed and consideration is given to
the anticipated impact of various factors such as legal developments and
economic conditions, including the effects of inflation. Reserves are monitored
and evaluated periodically using current information on reported claims. This is
a critical accounting policy for the insurance operations.

Management believes that the reserves for losses and loss adjustment
expenses at December 31, 2002 are adequate to cover the unpaid portion of the
ultimate net cost of losses and loss adjustment expenses, including losses
incurred but not reported. Reserves for losses and loss adjustment expenses are
estimates at any given point in time of what the Company may have to pay
ultimately on incurred losses, including related settlement costs based on facts
and circumstances then known. The Company also reviews its claims reporting
patterns, past loss experience, risk factors and current trends and considers
their effect in the determination of estimates of incurred but not reported
reserves. Ultimate losses and loss adjustment expenses are affected by many
factors which are difficult to predict, such as claim severity and frequency,
inflation levels and unexpected and unfavorable judicial rulings. Reserves for
surety claims also consider the amount of collateral held as well as the
financial strength of the principal and its indemnitors.

The combined ratio is one means of measuring the underwriting experience of
a property and casualty insurer. The combined ratio, consisting of the ratio of
losses and loss adjustment expenses to premiums earned (the "loss ratio") plus
the ratio of underwriting expenses to premiums written (the "expense ratio")
reflects relative underwriting profit or loss. The Company's insurance
subsidiaries' loss ratios under generally accepted accounting principles
("GAAP") were 53.8%, 20.3% and 16.4% for the years ended December 31, 2002, 2001
and 2000, respectively. The increase in losses and loss adjustment expenses is
attributable to two large losses reported in current year of $2.2 million. In
addition, prior year favorable development is significantly lower due to actual
loss experience being closer to estimates. The Company's insurance subsidiaries'
expense ratios under GAAP were 64.1%, 69.3% and 58.9% for the years ended
December 31, 2002, 2001 and 2000, respectively. The decrease in the 2002 expense
ratio results primarily from the decrease in commissions paid and one-time
rental income recovered from an affiliate. The increase in the 2001 expense
ratios compared to 2000 is due to the decline in premiums. The Company's
insurance subsidiaries' combined ratios under GAAP were 117.9%, 89.6% and 75.3%
for the years ended December 31, 2002, 2001 and 2000, respectively.

REVENUE RECOGNITION

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

LIQUIDITY AND CAPITAL RESOURCES

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

ACMAT, exclusive of its subsidiaries, has incurred negative cash flows from
operating activities primarily because of interest expense related to notes
payable and long-term debt incurred by ACMAT to acquire and capitalize its
insurance subsidiaries and to repurchase Company stock.

21

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

The Company realized cash flow from operations in the amount of $11,615,814
in 2002 and $1,465,272 in 2001, compared to cash flow used from other sources to
support operations of $8,190,436 in 2000. The cash flow from operations is due
primarily to the increase of cash collateral. Substantially all of the Company's
cash flow is used to repay long-term debt, repurchase stock and purchase
investments. Purchases of investments are made based upon excess cash available
after the payment of losses and loss adjustment expenses and other operating and
non-operating expenses. The Company's short term investment strategy coincides
with the relatively short maturity of its liabilities which are comprised
primarily of reserves for losses covered by claims-made insurance policies,
reserves related to surety bonds and collateral held for surety obligations.

Net cash used for investing activities was $1,918,242 in 2002 compared to
net cash provided by investing activities was of $8,821,721 in 2001 and
$14,008,674 in 2000.

The terms of the Company's note agreements contain limitations on payment
of cash dividends, re-acquisition of shares, borrowings and investments and
require maintenance of specified ratios and minimum net worth levels, including
cross default provisions. The Company is in compliance with all of these
covenants at December 31, 2002.

The Company maintains a short-term unsecured bank credit line of $10
million to fund interim cash requirements. There were no borrowings outstanding
under this line of credit as of December 31, 2002.

During 2002, the Company purchased, in the open market and privately
negotiated transactions, 78,114 shares of its Class A Stock at an average price
of $8.88. During 2002, the Company also purchased 4,234 shares of its Common
Stock at an average price of $19.01.

The Company's principal source of cash for repayment of long-term debt is
dividends from its two insurance companies. During 2002 ACMAT received
$3,990,000 as dividends from its subsidiaries. Under applicable insurance
regulations, ACMAT's insurance subsidiaries are restricted as to the amount of
dividends they may pay to their respective holding companies, without the prior
approval of their domestic state insurance department.

For 2003, the amount of dividends ACMAT's insurance subsidiaries may pay,
without prior approval of their domestic state insurance departments, is limited
to approximately $4,491,000.

In 2003, the Company anticipates that internally generated funds will be
utilized for repayment of long-term debt. Principal repayments on long-term debt
is scheduled to be $2,405,388 in 2003.

REGULATORY ENVIRONMENT

Risk-based capital requirements are used as early warning tools by the
National Association of Insurance Commissioners and the states to identify
companies that require further regulatory action. The ratio for each of the
Company's insurance subsidiaries as of December 31, 2002 was above the level
which might require regulatory action.

CONTRACTUAL CASH OBLIGATIONS AND COMMITMENTS

Contractual obligations at December 31, 2002 include the following:

The Company also has cash collateral of $25,991,045 at December 31, 2002
which it would be required to return at the end of expiration of applicable bond
period subject to any claims.

22

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCUSSIONS ABOUT MARKET RISK:

MARKET RISK

Market risk is the risk of loss arising from adverse changes in market
rates and prices, such as interest rates, foreign currency exchange rates, and
other relevant market rate or price changes. Market risk is directly influenced
by the volatility and liquidity in the markets in which the related underlying
assets are traded. The following is a discussion of the Company's primary market
risk exposures and how those exposures are currently managed as of December 31,
2002. The Company's market risk sensitive instruments are entered into for
purposes other than trading.

The carrying value of the Company's investment portfolio as of December 31,
2002 was $69,749,407, 87% of which is invested in fixed maturity securities. The
primary market risk to the investment portfolio is interest rate risk associated
with investments in fixed maturity securities. The Company's exposure to equity
price risk and foreign exchange risk is not significant. The Company has no
direct commodity risk.

For the Company's investment portfolio, there were no significant changes
in the Company's primary market risk exposures or in how those exposures are
managed compared to the year December 31, 2002. The Company does not anticipate
significant changes in the Company's primary market risk exposures or in how
those exposures are managed in future reporting periods based upon what is known
or expected to be in effect in future reporting periods.

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

SENSITIVITY ANALYSIS

Sensitivity analysis is defined as the measurement of potential loss in
future earnings, fair values or cash flows of market sensitive instruments
resulting from one or more selected hypothetical changes in interest rates and
other market rates or prices over a selected time. In the Company's sensitivity
analysis model, a hypothetical change in market rates is selected that is
expected to reflect reasonably possible near-term changes in those rates. The
term "near term" means a period of time going forward up to one year from the
date of the consolidated financial statements. Actual results may differ from
the hypothetical change in market rates assumed in this disclosure, especially
since this sensitivity analysis does not reflect the results of any action that
would be taken by us to mitigate such hypothetical losses in fair value.

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

For invested assets, duration modeling is used to calculate changes in fair
values. Durations on invested assets are adjusted for call, put and interest
rate reset features. Duration on tax exempt securities is adjusted for the fact
that the yield on such securities is less sensitive to changes in interest rates
compared to Treasury securities. Invested asset portfolio durations are
calculated on a market value weighted basis, including accrued investment
income, using holdings as of December 31, 2002.

The sensitivity analysis model used by the Company produces a loss in fair
value of market sensitive instruments of $1.4 million based on a 100 basis point
increase in interest rates as of December 31, 2002, which is not considered
material. This loss value only reflects the impact of an interest rate increase
on the fair value of the Company's financial instruments, which constitute
approximately 57% of total assets. As a result, the loss value excludes a
significant portion of the Company's consolidated balance sheet which would
partially mitigate the impact of the loss in fair value associated with a 100
basis point increase in interest rates.

23

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

24

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

ACMAT CORPORATION AND SUBSIDIARIES

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

Independent Auditors' Report

Consolidated Statements of Earnings for the years ended December 31,
2002, 2001 and 2000

Consolidated Balance Sheets as of December 31, 2002 and 2001

Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2002, 2001 and 2000

Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001 and 2000

Notes to Consolidated Financial Statements -- December 31, 2002, 2001
and 2000

Consolidated Schedules included in Part II of this Report -- Years ended
December 31, 2002, 2001 and 2000

I -- Condensed Financial Information of Registrant (Parent Company
Only)

II -- Valuation and Qualifying Accounts and Reserves

V -- Supplemental Information Concerning Property-Casualty Insurance
Operations

25

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
ACMAT Corporation:

We have audited the consolidated financial statements of ACMAT Corporation
and subsidiaries as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedules as listed in the accompanying index. These
consolidated financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedules based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ACMAT
Corporation and subsidiaries as of December 31, 2002 and 2001, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the
related financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for goodwill and other intangible
assets in 2002.

/s/ KPMG LLP

Hartford, Connecticut
March 14, 2003

26

ACMAT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

See Notes to Consolidated Financial Statements.
27

ACMAT CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001

See Notes to Consolidated Financial Statements.
28

ACMAT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
DECEMBER 31, 2002, 2001 AND 2000

See Notes to Consolidated Financial Statements.

29

ACMAT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

See Notes to Consolidated Financial Statements.
30

ACMAT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(A) PRINCIPLES OF CONSOLIDATION

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

These consolidated financial statements have been prepared in conformity
with accounting principles generally accepted ("GAAP") in the United States of
America. All significant intercompany accounts and transactions have been
eliminated in consolidation.

(B) BUSINESS

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

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

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

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

During 2002, 2001 and 2000, customers who individually accounted for more
than 10% of consolidated construction contracting revenue are as follows; in
2002 -- four customers provided 31%, 26%, 19% and 18%, in 2001 -- three
customers provided 33%, 27%, and 20%, respectively. In 2000 -- three customers
provided 33%, 22% and 19%, respectively. One customer accounted for more than
10% of the United Coastal insurance revenues in 2001.

(C) INVESTMENTS

Fixed maturities include bonds, notes and redeemable preferred stocks.
Equity securities reflect investment in common stock, non-redeemable preferred
stock and mutual funds.

Investments are classified as "available for sale" and are reported at fair
value, with unrealized gains or losses charged or credited directly to
stockholders' equity.

31

ACMAT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

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

(D) DEFERRED POLICY ACQUISITION COSTS

Deferred policy acquisition costs, representing commissions and certain
underwriting costs, are deferred and amortized on a straight-line basis over the
policy term.

(E) PROPERTY AND EQUIPMENT

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

(F) INTANGIBLES

Intangible assets relate to insurance operating licenses and are deemed to
have an indefinite useful life. The Company has performed the transitional
impairment tests using the fair value approach. Based on these tests, the
Company did not impair any intangible assets.

Prior to adoption of Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" (FAS 142) on January 1, 2002, intangibles
were stated at amortized cost and amortized using the straight-line method.
Intangibles include insurance operating licenses and goodwill, which represents
the excess of cost over the fair market value of net assets acquired. These
intangible assets were amortized over periods ranging from 15 to 25 years.

(G) INSURANCE RESERVE LIABILITIES

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

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

32

ACMAT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

expenses are adequate to cover the unpaid portion of the ultimate net cost of
losses and loss adjustment expenses incurred, including losses incurred but not
reported.

(H) COLLATERAL HELD

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

(I) REINSURANCE

In the normal course of business, the Company assumes and cedes reinsurance
with other companies. Reinsurance ceded primarily represents excess of loss
reinsurance with companies with "A" ratings from the insurance rating
organization, A.M. Best Company, Inc. Reinsurance ceded also includes a
facultative reinsurance treaty which is applicable to excess policies written
over a primary policy issued by the Company for specific projects. Reinsurance
is ceded to limit losses from large exposures and to permit recovery of a
portion of direct losses; however, such a transfer does not relieve the
originating insurer of its liability. The Company participates in assumed quota
share reinsurance arrangements covering marine and property catastrophe risks
with one of its excess of loss reinsurers.

Amounts recoverable from reinsurers are estimated in a manner consistent
with the claim liability associated with the reinsured business. The Company
evaluates and monitors the financial condition of reinsurers under voluntary
reinsurance arrangements to minimize its exposure to significant losses from
reinsurer insolvencies.

Effective November 1, 2002, the Company cedes 80% of its exposure in excess
of $1,000,000 up to $5,000,000 on a per principal/insured basis. Prior to
October 31, 2002, reinsurance was applicable on a per principal/insured basis
for 100% of the losses in excess of $1,000,000 up to $8,000,000. From May 1,
2000 to April 30, 2002, the Company also reinsured surety losses on a per
principal basis for losses in excess of $8,000,000 up to $13,000,000.

Reinsurance recoverables include ceded reserves for losses and loss
adjustment expenses. Ceded unearned premiums of $690,902 and $600,174 at
December 31, 2002 and 2001, respectively, are included in other assets. All
reinsurance contracts maintained by the Company qualify as short-duration
prospective contracts. A summary of reinsurance premiums written and earned is
provided below:

Ceded incurred losses and loss adjustment expenses totaled $6,549,843,
$148,557 and $4,301,295 for the years ended December 31, 2002, 2001 and 2000,
respectively.

(J) DERIVATIVE FINANCIAL INSTRUMENTS

The Company uses interest rate swaps as a means of hedging exposure to
interest rate on its long-term debt. The Company does not hold or issue
derivative instruments for trading purposes. The Company follows FAS 133, which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. FAS 133 requires that an entity

33

ACMAT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

recognize all derivatives as either assets or liabilities in the consolidated
balance sheet and measure those instruments at fair value. Where applicable,
hedge accounting is used to account for derivatives. To qualify for hedge
accounting, the changes in value of the derivative must be expected to
substantially offset the changes in value of the hedged item. Hedges are
monitored to ensure that there is a high correlation between the derivative
instruments and the hedged investment. Derivatives that do not qualify for hedge
accounting, if any, would be marked to market with the changes in fair value
reflected in the consolidated statement of earnings.

(K) REVENUE RECOGNITION

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

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

(L) INCOME TAXES

The provision for taxes comprises two components, current income taxes and
deferred income-taxes. Deferred income taxes arise from changes during the year
in cumulative temporary differences between the tax basis and book basis of
assets and liabilities.

Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.

(M) USE OF ESTIMATES

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

(N) COMPREHENSIVE INCOME

The following table summarizes reclassification adjustments for other
comprehensive income and the related tax effects for the years ended December
31, 2002, 2001 and 2000:

34

ACMAT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(O) ACCOUNTING CHANGES

Goodwill and Other Intangible Assets

In July 2001, the Financial Accounting Standards Board (FASB) issued FAS
142, "Goodwill and Other Intangible Assets". FAS 142 addresses the initial
recognition and measurement of intangible assets acquired either singly or with
a group of other assets, as well as the measurement of goodwill and other
intangible assets subsequent to their initial acquisition. FAS 142 changes the
accounting for goodwill and intangible assets that have indefinite useful lives
from an amortization approach to an impairment-only approach that requires that
those assets be tested at least annually for impairment. Intangible assets that
have finite useful lives will continue to be amortized over their useful lives,
but without an arbitrary ceiling on their useful lives.

Upon adoption of FAS No. 142, on January 1, 2002 the Company evaluated its
existing intangible asset that was acquired in a purchase business combination
to make any necessary reclassifications in order to conform with the new
classification criteria in FAS No. 141 for recognition separate from goodwill.
The Company reassessed the useful lives and residual values of all intangible
assets acquired. If an intangible asset is identified as having an indefinite
useful life, the Company will be required to test the intangible asset for
impairment in accordance with the provisions of FAS No. 142. Impairment is
measured as the excess of carrying value over the fair value of an intangible
asset with an indefinite life. Any impairment loss will be measured as of the
date of adoption and recognized as the cumulative effect of a change in
accounting principle.

As of January 1, 2002, the Company had an unamortized asset in the amount
of $1,920,360 which was subject to the transition provisions of FAS No. 142. The
Company stopped amortizing intangibles on January 1, 2002. Net earnings and
earnings per share adjusted to exclude intangible amortization for the year
ended December 31, 2001 and 2000 are as follows:

In addition, the Company has performed the transitional impairment tests
using the fair value approach required by the new standard. Based on these
tests, the Company did not impair any intangible asset.

Accounting for Stock-Based Compensation-Disclosure

In December, 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 "Accounting for Stock-Based Compensation-Transition and
Disclosure" (FAS 148), an amendment to FASB Statement No. 123 "Accounting for
Stock-Based Compensation" (FAS 123). It amends the disclosure provisions of FAS
123 to require prominent annual disclosure about the effects on reported net
earnings in the

35

ACMAT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Summary of Significant Accounting Policies and also requires disclosure about
these effects in interim financial statements. These provisions are effective
for financial statements for fiscal years ending after December 15, 2002.
Accordingly, the Company has adopted the applicable disclosure requirements of
this statement for year-end reporting.

(P) STOCK-BASED COMPENSATION

The Company accounts for stock options under the recognition and
measurement principles of Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees", and related interpretations.

The stock options were awarded at an exercise price equal to the market
value of the underlying common stock on the date of the grant. Accordingly,
there has been no employee compensation cost recognized in earnings for the
stock options.

FAS 123 provides an alternative to APB 25 whereby fair values may be
ascribed to options using a valuation model and amortized to compensation cost
over the vesting period of the options. The following tables illustrate the pro
forma effect on net income (loss) and earnings per share for each period
indicated as if the Company applied the fair value recognition provisions of FAS
123 to its stock option program. See Note 15 for a description of the method and
fair value assumptions used in estimating the fair value of options.

The pro forma fair value of stock-based compensation in the Company's Class
A Shares for the year ended December 31, 2002, 2001 and 2000 is as follows:

(Q) ACCOUNTING STANDARDS NOT YET ADOPTED

In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, "Accounting for Asset Retirement Obligations" (FAS 143). FAS 143
changes the measurement of an asset retirement obligation from a
cost-accumulation approach to a fair value approach, where the fair value
(discounted value) of an asset retirement obligation is recognized as a
liability in the period in which it is incurred and accretion expense is
recognized using the credit-adjusted risk-free interest rate in effect when the
liability was initially recognized. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset and
subsequently amortized into expense. The pre-FAS 143 prescribed practice of
reporting a retirement obligation as a contra-asset will no longer be allowed.
The Company does not expect any impact of this new standard which will take
effect on January 1, 2003.

In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (FAS
146). FAS 146 requires that a liability for costs associated with exit or
disposal activities be recognized when the liability is incurred. Existing
generally accepted accounting principles provide for the recognition of such
costs at the date of management's commitment to an exit plan. In addition, FAS
146 requires that the liability be measured at fair value and be

36

ACMAT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

adjusted for changes in estimated cash flows. The provisions of the new standard
are effective for exit or disposal activities initiated after December 31, 2002.
The Company does not expect the impact of this new standard to be significant.

(R) LIFE INSURANCE PROCEEDS, NET

On January 13, 2002, the Founder, Chairman, President and Chief Executive
Officer of the Corporation died at the age of 82. At the time of his death, Mr.
Nozko, Sr. owned of record or beneficially shares of the Corporation's Common
Stock and Class A Stock having approximately 53% of the total voting power of
the Corporation's voting capital stock. During the pendency of Mr. Nozko's
estate, such voting power has been vested in the executors of the estate who are
his son, Henry W. Nozko, Jr., the current Chairman, President and Chief
Executive Officer of the Corporation, and his daughter Pamela N. Cosmas.

The Company was the owner and beneficiary of several key-man life insurance
policies totaling approximately $11.9 million. After consideration of the
cash-surrender value of the policies, the Company reported a gross gain of
approximately $8.8 million in 2002. In connection with the passing of Henry W.
Nozko, Sr., the Company incurred certain obligations, previously approved by the
Board of Directors, totaling approximately $5.5 million. These obligations for
consulting fees, widow's compensation and unused vacation pay were due only to
the extent that sufficient proceeds existed from the life insurance policies at
the time of Mr. Nozko's death.

(2) INVESTMENTS

INVESTMENTS AT DECEMBER 31, 2002 AND 2001 FOLLOWS:

37

ACMAT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

On December 31, 2002, the Company's insurance subsidiaries had securities
with an aggregate book value of approximately $10.5 million on deposit with
various state regulatory authorities.

The amortized cost and fair value of fixed maturities at December 31, 2002
and 2001, by effective maturity, follows:

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

The Company makes investments in collateralized mortgage obligations
(CMOs). CMOs typically have high credit quality, offer good liquidity, and
provide a significant advantage in yield and total return compared to U.S.
Treasury securities. The Company's investment strategy is to purchase CMO
tranches which offer the

38

ACMAT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

most favorable return given the risks involved. One significant risk evaluated
is prepayment sensitivity. This drives the investment process to generally favor
prepayment protected CMO tranches including planned amortization classes and
last cash flow tranches. The Company does invest in other types of CMO tranches
if a careful assessment indicates a favorable risk/return tradeoff. The Company
does not purchase residual interests in CMOs.

At December 31, 2002 and 2001, the Company held CMOs classified as
available for sale with a fair value of $33,057,515 and $17,012,201,
respectively. Approximately 47% and 86% of the Company's CMO holdings are fully
collateralized by GNMA, FNMA or FHLMC securities at December 31, 2002 and 2001,
respectively. In addition, the Company held $3,091,914 and $4,175,164 of GNMA,
FNMA, FHLMC or FHA mortgage-backed pass-through securities classified as
available for sale at December 31, 2002 and 2001, respectively. Virtually all of
these securities are rated AAA or implied AAA.

A summary of gross unrealized gains and losses at December 31, 2002 and
2001 follows:

(3) INVESTMENT INCOME AND REALIZED CAPITAL GAINS AND LOSSES

A summary of net investment income for the years ended December 31, 2002,
2001 and 2000 follows:

Realized capital gains (losses) for the years ended December 31, 2002, 2001
and 2000 follows:

Gross gains of $36,482, $314,351 and $14,162 and gross losses of $15,971,
$11,973 and $137,287 were realized on fixed maturity sales for the years ended
December 31, 2002, 2001 and 2000, respectively. Gross gains of $11,490 and
$71,923 were realized on the sale of equity securities for the years ended
December 31, 2002 and 2001, respectively, and gross losses of $6,030 were
realized on equity security sales for the year ended

39

ACMAT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

December 31, 2002. There were no gross gains or losses realized on equity
security sales for the year ended December 31, 2000.

(4) RECEIVABLES

A summary of receivables at December 31, 2002 and 2001 follows:

The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the owner. In management's opinion, the majority of
contract retainage is expected to be collected in 2003.

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

(5) PROPERTY AND EQUIPMENT

A summary of property and equipment at December 31, 2002 and 2001 follows:

Useful lives for depreciation purposes are five years for equipment and
vehicles, fifteen years for furniture and fixtures and forty years for the
building.

Future minimum rental income to be generated by leasing a portion of the
building under non-cancelable operating leases as of December 31, 2002 are
estimated to be $512,690 for 2003, $179,200 for 2004 and $126,000 for 2005
through 2007. Rental income earned in 2002, 2001 and 2000 was $607,097, $593,573
and $768,496, respectively.

40

ACMAT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(6) INTANGIBLES

Intangibles of $1,920,360, consists primarily of the Company's insurance
licenses, have a indefinite useful life and are not amortized. At December 31,
2002 and 2001, the insurance licenses of $4,188,926 had accumulated amortization
of $2,268,566.

(7) RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES

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

The decrease in net loss and loss adjustment expense reserves in 2002 from
2001 was primarily due to payments on surety and general liability policies for
prior years net of subrogation and ceded recoveries. The reduction was partially
offset by loss and loss adjustment expenses incurred primarily in the current
year which reflects two large losses of approximately $2.2 million. Also, the
favorable development observed previously in prior years reduced significantly
as the actual loss experience came in closer to the estimates. The increase in
reinsurance recoverable in 2002 from 2001 is primarily due to one liability
claim, which exceeded the limits retained by the Company.

The decrease in net loss and loss adjustment expense reserves in 2001 from
2000 is due to significant loss payments for surety and general liability
claims, the release of net favorable development in surety loss reserves
relating to older years that are no longer required partially offset by an
increase in current year incurred loss and loss adjustment expenses. This
increase reflects largely surety losses, which occurred during the year.

While management continually evaluates the potential for changes in loss
estimates, due to the uncertainty inherent in the surety business, the emergence
of net favorable development may or may not continue to occur. Management
believes that the reserves for losses and loss adjustment expense are adequate
to cover the unpaid portion of the ultimate net cost of losses and loss
adjustment expenses, including losses incurred but not reported.

The Company has no exposure to any asbestos or environmental claims
associated with general liability policies issued with the pre-1986 pollution
exclusion. Policies written with the exclusion are typically associated with
mass tort environmental and asbestos claims. The Company has never issued a
policy with the pre-1986 pollution exclusion. The Company's exposure to asbestos
and environmental liability claims is

41

ACMAT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

primarily limited to asbestos and environmental liability insurance for
contractors and consultants involved in the remediation, removal, storage,
treatment and/or disposal of environmental and asbestos hazards.

(8) NOTES PAYABLE TO BANKS

At December 31, 2002, the Company has a $10,000,000 bank line of credit
with two financial institutions. The line of credit does not require the Company
to maintain a compensating balance. There were no outstanding borrowings under
this line of credit at December 31, 2002 and 2001. Under the terms of the line
of credit, interest on the outstanding balance is calculated based upon the
London Inter-Bank Offering Rate (LIBOR) plus 160 basis points in effect during
the borrowing period.

(9) LONG-TERM DEBT

A summary of long-term debt at December 31, 2002 and 2001 follows:

On November 22, 2002, the company obtained a $10,000,000 term loan from two
financial institutions, which is payable in monthly installments of $55,556 with
a balloon payment of $5,388,888 due on November 22, 2009. The term loan has a
balance of $9,944,444 at December 31, 2002. The interest rate for this term loan
varies based on LIBOR plus 200 basis points in effect during the borrowing
period. In connection with this term loan, the Company also entered into an
interest rate swap that establishes a fixed interest rate for half of the loaned
amount at 6.08%. The loan agreement contains certain limitations on borrowing,
minimum statutory capital levels and requires maintenance of certain ratios. The
proceeds were used to prepay the balance of the Convertible Notes due 2022.

On December 17, 2001, the Company obtained a $5,000,000 term loan from a
financial institution, which is payable in quarterly installments of $250,000
which is to commence March 1, 2004. The term loan, due 2009 has a balance of
$5,000,000 at December 31, 2002. The interest rate varies based on LIBOR plus
190 basis points in effect during the borrowing period. The interest rate cannot
exceed 5.5%. The loan agreement contains certain limitations on borrowings,
minimum statutory capital levels and requires maintenance of certain ratios. The
proceeds were used to prepay $5,005,000 of the Convertible Notes due 2022.

On September 1, 1999, the Company obtained a $4,500,000 term loan from a
financial institution, which is payable in quarterly installments of $250,000
which commenced December 1, 1999. The term loan, due 2004 has a balance of
$1,250,000 at December 31, 2002. The interest rate is fixed at 7.25%. The loan
agreement contains certain limitations on borrowings, minimum statutory capital
levels and requires maintenance of certain ratios. The proceeds were used to
replace a $5,000,000, five year term loan obtained on December 9, 1998.

On December 23, 1998, the Company obtained a permanent mortgage loan from a
financial institution. The $7,800,000 mortgage note, with interest fixed at
6.95% is payable in monthly installments of principal and interest over 10
years. The mortgage note, due 2009, has a balance of $5,317,477 at December 31,
2002. The

42

ACMAT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

loan agreements contain certain limitations on borrowings, minimum statutory
capital levels and require maintenance of certain ratios.

On July 1, 1992, the Company issued a 30-year unsecured $16,500,000, 11.5%
subordinated Convertible Note to the Sheet Metal Workers' National Pension Fund
("Fund") to purchase 3,000,000 shares of United Coasts Corporation's outstanding
common stock held by the Fund. The note was convertible into ACMAT Class A stock
at $11 per share. The Company prepaid the note by making voluntary principal
payments of $1,100,000 in 1998, $5,005,000 in 2001 and the balance of $10,395,00
in 2002.

Principal payments on long-term debt are $2,405,388, $2,708,396,
$2,515,208, $2,576,097 and $2,641,354 for the years 2003 through 2007,
respectively. Interest expense paid in 2002, 2001 and 2000 amounted to
$1,977,661, $2,804,927 and $2,815,876, respectively.

The fair value at December 31, 2002 of the mortgage and the term loans
approximate carrying value.

(10) INCOME TAXES

The components of income tax expense (benefit) for the years ended December
31, 2002, 2001 and 2000 follows:

The effective income tax rate, as a percentage of earnings before income
taxes for the years ended December 31, 2002, 2001 and 2000 follows:

43

ACMAT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2002 and 2001 are presented below:

The federal net operating loss carryforward as of December 31, 2002 is
$525,578 and expires in 2021. The alternative minimum tax credit carryforward as
of December 31, 2002 is $2,416,391 and has an indefinite life. In assessing the
realization of deferred tax assets, management considers whether it is more
likely than not that the deferred tax assets will be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, tax planning strategies and anticipated future taxable income in
making this assessment and believes it is more likely than not the Company will
realize the benefits of its deductible temporary differences, net of the
valuation allowance, at December 31, 2002 and 2001.

The most significant component of the state gross deferred asset is the net
operating loss carryforward for the State of Connecticut which amounted to
$27,219,742 as of December 31, 2002. Of this amount, $15,634,692 expires through
2003 while $11,585,050 expires in 2020 and 2021. In 2002 and 2001, a valuation
allowance is provided to offset the deferred tax asset related to the state
deferred tax assets as management believes it is more likely than not that these
deferred tax assets are unrealizable.

Federal net operating loss carryforward as of December 31, 2002 is $525,578
and expires in 2021.

Taxes paid in 2002, 2001 and 2000 were $180,392, $626,625 and $320,405,
respectively.

44

ACMAT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(11) PENSION AND PROFIT SHARING PLANS

Effective January 1, 2000, the Company adopted the ACMAT 401(k) plan for
the benefit of non-union employees. The Company contributed $75,000 to the ACMAT
401(k) Plan in 2002, 2001 and 2000.

The Company participated in various multi-employer defined contribution
plans for its union employees. Upon withdrawal from these plans, the Company may
be liable for its share of the unfunded vested liabilities of the plans. Such
obligations, if any, of the Company are not determinable at December 31, 2002.

(12) DERIVATIVE FINANCIAL INSTRUMENTS

The Company uses interest rate swaps as a means of hedging exposure to
interest rate risk on its long-term debt. To qualify as a hedge, the hedge
relationship must be designated and documented at inception and be highly
effective in accomplishing the objective of offsetting the changes in cash flows
for the risk being hedged. To the extent these derivatives are effective in
offsetting the variability of the hedged cash flows, changes in the derivatives'
fair value are not be included in current earnings but are reported in
accumulated other comprehensive income ("AOCI"). For the years ended December
31, 2002 and 2001, the amounts included in AOCI for these changes were losses of
$117,142 and 0, respectively, and would be included in the earnings of future
periods when those earnings are also affected by the variability of the hedged
cash flows.

During the year ended December 31, 2003, the amount of losses the Company
expects to reclassify from AOCI into interest expense for its cash flow hedges
is not significant. To the extent these hedges are not effective, changes in
their fair value would be immediately included in earnings.

(13) STOCKHOLDERS' EQUITY

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

During 2002 and 2000, ACMAT repurchased, in open market and privately
negotiated transactions, 4,234 and 27,239, respectively, shares of its Common
Stock at an average price of $19.01 and $19.08 per share, respectively. The
Company also repurchased during 2002, 2001 and 2000, in open market and
privately negotiated transactions, 78,114, 234,235 and 253,833, respectively,
shares of its Class A Stock at an average price of $8.88, $7.80 and $7.29 per
share, respectively.

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

The exercise price of each option equals the market price of the Company's
stock on the date of grant and the option's term is ten years. On June 20, 2002
the Board of Directors granted 174,500 options to certain
45

ACMAT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

directors and officers which generally vest over a ten-year period for
employees. The Board of Directors granted 70,000 options to certain directors
and officers on December 16, 2000 which vested on June 14, 2001.

Under applicable insurance regulations, ACMAT's insurance subsidiaries are
restricted as to the amount of dividends they may pay, without the prior
approval of any insurance department and are limited to approximately $4,491,000
in 2003.

The Company's insurance subsidiaries, United Coastal Insurance and ACSTAR,
are domiciled in Arizona and Illinois, respectively. The statutory financial
statements of United Coastal Insurance and ACSTAR are prepared in accordance
with accounting practices prescribed by the Arizona Department of Insurance and
the Illinois Department of Insurance, respectively. Prescribed statutory
accounting practices include a variety of publications of the National
Association of Insurance Commissioners (NAIC), as well as the state laws,
regulations, and general administrative rules. Permitted statutory accounting
practices encompass all accounting practices not so prescribed.

In accordance with statutory accounting principles, ACMAT's insurance
subsidiaries' statutory capital and surplus was $48,423,319 and $50,735,332 at
December 31, 2002 and 2001, respectively, and their statutory net income for the
years ended December 31, 2002, 2001 and 2000 was $1,988,493, $6,048,222 and
$7,641,075, respectively. Effective January 1, 2001, the insurance subsidiaries
began preparing its statutory basis financial statements in accordance with the
revised manual subject to any deviation prescribed or permitted by its
domicilary insurance commissioner. The impact of this change was an increase to
the statutory capital and surplus of approximately $3.9 million. The primary
differences between amounts reported in accordance with GAAP and amounts
reported in accordance with statutory accounting principles are carrying value
of fixed maturity investments; assets not admitted for statutory purposes such
as agents balances over 90 days, furniture and fixtures and certain notes
receivable; and deferred acquisition costs recognized for GAAP only.

(14) EARNINGS PER SHARE

The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share ("EPS") computations for the years ended
December 31, 2002, 2001 and 2000:

46

ACMAT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(15) STOCK OPTION FAIR VALUE INFORMATION

The fair value effect of stock options reported in Note 1, Stock-Based
Compensation, is derived by application of a variation of the Black-Scholes
option pricing model. No options were granted in 2001.

The significant assumptions used during the year in estimating the fair
value on the date of the grant for original options and reload options granted
in 2002 and 2000 were as follows:

(16) COMMITMENTS AND CONTINGENCIES

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

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

47

ACMAT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

(17) SEGMENT REPORTING

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

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

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

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

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

48

ACMAT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The components of revenue for each segment are as follows:

49

ACMAT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

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

(18) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

A summary of the unaudited quarterly results of operations for 2002 and
2001 follows:

50

ACMAT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Operating earnings represent operating revenues less the cost of contract
revenues, losses and loss adjustment expenses and amortization of policy
acquisition costs and selling, general and administrative expenses. Annual
earnings per share for 2002 does not equate to the sum of the quarters due to
the timing of stock purchases.

51

SCHEDULE I

ACMAT CORPORATION AND SUBSIDIARIES

CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY)
AS OF DECEMBER 31, 2002 AND 2001 AND FOR THE
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

The following presents the condensed financial position of ACMAT
Corporation (parent company only) as of December 31, 2002 and 2001 and its
condensed statements of earnings and cash flows for the years ended December 31,
2002, 2001 and 2000.

BALANCE SHEETS

See Notes to Condensed Financial Statements.
52

STATEMENT OF EARNINGS

See Notes to Condensed Financial Statements.
53

STATEMENTS OF CASH FLOWS

See Notes to Condensed Financial Statements.
54

ACMAT CORPORATION AND SUBSIDIARIES

CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)

NOTES TO CONDENSED FINANCIAL STATEMENTS

The accompanying condensed financial statements should be read in
conjunction with the Consolidated Financial Statements and Notes thereto in the
Company's 2002 Annual Report.

(1) SUPPLEMENTAL CASH FLOW INFORMATION

Income taxes received from subsidiaries during the years ended December 31,
2002, 2001 and 2000 were $694,197, $516,173, and $118,150, respectively.
Interest paid during the years ended December 31, 2002, 2001 and 2000 was
$1,977,661, $2,933,115 and $3,023,070, respectively. Interest paid in 2001 and
2000 included $128,188 and $207,194, respectively, paid to subsidiaries for
intercompany loans.

(2) LONG-TERM DEBT

A summary of long-term debt at December 31, 2002 and 2001 follows:

See Note 9 to the Consolidated Financial Statements in the Annual Report
for a description of the long-term debt and aggregate maturities for 2003 to
2007 and thereafter.

(3) INCOME TAXES

See Note 10 to the Consolidated Financial Statements in the Annual Report
for a description of income taxes.

(4) DERIVATIVE FINANCIAL INSTRUMENTS

See Note 12 to the Consolidated Financial Statements in the Annual Report
for a description of the derivative financial instruments.

(5) COMMITMENTS AND CONTINGENCIES

See Note 16 to the Consolidated Financial Statements in the Annual Report
for a description of the commitments and contingencies.

55

SCHEDULE II

ACMAT CORPORATION AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

- ---------------

(a) Deductions represent accounts written off.

56

SCHEDULE V

ACMAT CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

57

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

- ---------------

(1) Mrs. Victoria C. Nozko is the mother of Mr. Henry W. Nozko, Jr. Mr. Henry W.
Nozko III is the son of Mr. Henry W. Nozko, Jr. and the grandson of Mrs.
Victoria C. Nozko.

EXECUTIVE OFFICERS OF THE REGISTRANT

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

58

ITEM 11. EXECUTIVE COMPENSATION

Directors who are not employees of the Company are paid an annual fee of
$4,000. The Company does not have any employment agreements with any employee.

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

- ---------------

(A) Represents a bonus earned in a reporting year and paid in the subsequent
year. Individual discretionary bonuses are paid to various officers and
employees.

(B) Does not include the aggregate amount of perquisites and other personal
benefits, which was less than the lesser of $50,000 or 10% of the total
salary and bonus reported. Henry W. Nozko, Jr. was paid $365,233 for unused
vacation time which was payable only from the proceeds of the life insurance
policies owned by the Company on Henry W. Nozko, Sr.

(C) The amounts shown in this column represent contributions made by the Company
to the Company's 401(K) Plan. All nonunion employees employed on a full time
or part time salaried basis are eligible to participate on the first day of
January or July after twelve consecutive months of employment. The Company
contributes amounts, as determined by the Board of Directors, to be
allocated among the participants according to a formula based upon the
employee's years of service and compensation. A participant becomes vested
at the rate of 20% per year commencing after two years of service.

The following table provides information on options during 2002 by the
named Executive Officers and the value of their unexercised options at December
31, 2002.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END 2002 OPTION VALUES

59

- ---------------

(1) Represents the number of options held at year end.

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

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

As of March 1, 2003, no person was known to the Company to be the
beneficial owner of more than five percent of its outstanding shares of Common
Stock or Class A Stock except as set forth in the following table which also
shows, as of that date, the total number of shares of each class of stock of the
Company beneficially owned, and the percent of the outstanding class of stock so
owned, by each director, and by all directors and officers of the Company, as a
group:

- ---------------

(1) The person listed has the sole power to vote the shares of Common Stock and
Class A Stock listed above as beneficially owned by such person and has
sole investment power with respect to such shares.

(2) Does not include 400 shares of Class A Stock and 8,100 shares of Common
Stock held by his wife, Gloria C. Nozko.

(3) Includes options to purchase 35,000 shares of Class A Stock.

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

(5) Includes options to purchase 116,500 shares of Class A Stock.

(6) Includes options to purchase 26,500 shares of Class A Stock.

(7) Includes option to purchase 11,500 shares of Class A Stock.

(8) Includes options to purchase 20,000 shares of Class A Stock.

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

(10) Address of Third Avenue Management LLC is 767 Third Avenue, New York, NY
10017-2023.

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

(12) Address of Robotti & Company, Inc. is 52 Vanderbilt Avenue, Suite 503, New
York, NY 10017.

(13) Address of Vanguard Group, Inc. is 100 Vanguard Blvd. Malvern, PA 19355.

(14) Excludes options to purchase shares of Common and Class A Stock.

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

60

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

OTHER RELATIONSHIPS

During the year ended December 31, 2002, the Company paid to Dr. Arthur
Cosmas $154,575 in fees in connection with consulting services rendered by Dr.
Cosmas with respect to inspection and engineering services relating to ACMAT's
environmental activities. Dr. Cosmas is the son-in-law of Victoria C. Nozko, the
brother-in-law of Henry W. Nozko, Jr. and uncle of Henry W. Nozko III.

PART IV

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

(a) 1. Consolidated Financial Statements

Included in Part II of this Report:

Independent Auditors' Report
Consolidated Statements of Earnings for the years ended December 31,
2002, 2001 and 2000
Consolidated Balance Sheets as of December 31, 2002 and 2001
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001 and 2000
Notes to Consolidated Financial Statements -- December 31, 2002, 2001 and
2000

2. Financial Statement Schedules

Consolidated Schedules included in Part II of this Report-Years ended
December 31, 2002, 2001 and 2000:

I -- Condensed Financial Information of Registrant

II -- Valuation and Qualifying Accounts and Reserves

V -- Supplemental Information Concerning Property-Casualty Insurance
Operations

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

(b) Reports on Form 8-K

The Company did not file a report on Form 8-K during the fourth quarter of
2002.

(c) Exhibits

(3) Certificate Amending and Restating the Company's Bylaws as
filed as an Exhibit to the Company's Form 10-Q for the
Quarter ended March 31, 1989 is incorporated herein by
reference.
(3a) Certificate Amending and Restating the Company's Certificate
of Incorporation as amended May 1, 1991 as filed as an
Exhibit to the Company's Form 10-Q for the Quarter ended
March 31, 1991 is incorporated by reference.
(3b) Promissory Note between ACMAT Corporation and Webster Bank
as filed as an Exhibit to the Company's Form 10-K for the
year ended December 31, 1998 is incorporated by reference.
(3c) Open-end Mortgage Deed and Security Agreement between ACMAT
Corporation and Webster Bank as filed as an Exhibit to the
Company's Form 10-K for the year ended December 31, 1999 is
incorporated by reference.
(3d) Amended and Restated Commercial Credit Agreement between
ACMAT Corporation, Webster Bank and Fleet National Bank is
attached hereto as Exhibit 4(d).
(3e) Revolving Credit Note between ACMAT Corporation and Webster
Bank is attached hereto in Exhibit 4(e).

61

(3f) Term Note dated September 1, 1999 between ACMAT Corporation
and Webster Bank as filed as an Exhibit to the Company's
Form 10-K for the year ended December 31, 1999 is
incorporated by reference.
(3g) Term Note II dated December 17, 2001, between ACMAT
Corporation and Webster Bank as filed as an Exhibit to the
Company's Form 10-K for the year ended December 31, 2001 is
incorporated by reference.
(3h) Revolving Credit Note between ACMAT Corporation and Fleet
National Bank is attached hereto as Exhibit 4(h).
4(i) Term Note III dated November 22, 2002 between ACMAT
Corporation and Webster Bank is attached hereto as Exhibit
4(i).
4(j) Term Note III dated November 22, 2002 between ACMAT
Corporation and Fleet National Bank is attached hereto as
Exhibit 4(j).
(21) Subsidiaries of ACMAT.

62

SIGNATURES

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

ACMAT CORPORATION

By: /s/ HENRY W. NOZKO, JR.
------------------------------------
Henry W. Nozko, Jr.
President and Chief Executive
Officer

Dated: March 27, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

/s/ HENRY W. NOZKO, JR. Chairman of the Board, President, March 27, 2003
----------------------------------------- Chief Executive Officer and
Henry W. Nozko, Jr. Director

/s/ MICHAEL P. CIFONE Senior Vice President and Chief March 27, 2003
----------------------------------------- Financial Officer (Principal
Michael P. Cifone Financial and Accounting Officer)

/s/ VICTORIA C. NOZKO Director March 27, 2003
-----------------------------------------
Victoria C. Nozko

/s/ JOHN C. CREASY Director March 27, 2003
-----------------------------------------
John C. Creasy

/s/ HENRY W. NOZKO III Director March 27, 2003
-----------------------------------------
Henry W. Nozko III

63

INDEX TO EXHIBITS

64

PART II -- OTHER INFORMATION

ITEM 4. CONTROLS AND PROCEDURES

The Company maintains a system of internal controls and procedures designed
to provide reasonable assurance as to the reliability of our published financial
statements and other disclosures included in this report. Within the 90-day
period prior to the date of this report, we evaluated the effectiveness of the
design and operation of our disclosure controls and procedures pursuant to Rule
13a-14 of the Securities Exchange Act of 1934. Based upon that evaluation, our
Chief Executive Officer and our Principal Financial Officer concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information relating to ACMAT Corporation (including its consolidated
subsidiaries) required to be included in this annual report on Form 10-K.

There have been no significant changes in our internal controls or in other
factors which could significantly affect internal controls subsequent to the
date that we carried out our evaluation.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a. Exhibits:

99.1 Certification of Chief Executive Officer

99.2 Certification of Chief Financial Officer

b. Report on Form 8-K -- None

65

EXHIBIT 21

SUBSIDIARIES OF ACMAT CORPORATION

Listed are the subsidiaries of ACMAT Corporation:

- ---------------

(1) Owned 100% by ACSTAR Holdings, Inc.

(2) Owned 66% by ACMAT Corporation and 34% by ACSTAR Insurance Company

66

SIGNATURES

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

ACMAT CORPORATION

By:
------------------------------------
Henry W. Nozko, Jr.
President and Chief Executive
Officer

Dated: March 27, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

Chairman of the Board, President, March 27, 2003
----------------------------------------- Chief Executive Officer and
Henry W. Nozko, Jr. Director

Senior Vice President and Chief March 27, 2003
----------------------------------------- Financial Officer (Principal
Michael P. Cifone Financial and Accounting Officer)

Director March 27, 2003
-----------------------------------------
Victoria C. Nozko

Director March 27, 2003
-----------------------------------------
John C. Creasy

Director March 27, 2003
-----------------------------------------
Henry W. Nozko III

67

CERTIFICATION

I, Henry W. Nozko, Jr., certify that:

1. I have reviewed this annual report on Form 10-K of ACMAT Corporation;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this report;

4. ACMAT's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures as
defined in Exchange Act Rules 13a-14 and 15d-14) for ACMAT and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to ACMAT, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;

b) evaluated the effectiveness of ACMAT's disclosure controls and
procedures as of a date within 90 days prior to filing date of this
annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. ACMAT's other certifying officers and I have disclosed, based on our
most recent evaluation, to ACMAT's auditors and the audit committee of
the board of directors;

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect ACMAT's ability to record,
process, summarize and report financial data and have identified for
ACMAT's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. ACMAT's other certifying officers and I have indicated in this annual
report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

/s/ HENRY W. NOZKO, JR.
--------------------------------------
Henry W. Nozko, Jr.
Chief Executive Officer

Date: March 27, 2003

68

CERTIFICATION

I, Michael P. Cifone., certify that:

1. I have reviewed this annual report on Form 10-K of ACMAT Corporation;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this report;

4. ACMAT's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures as
defined in Exchange Act Rules 13a-14 and 15d-14) for ACMAT and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to ACMAT, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;

b) evaluated the effectiveness of ACMAT's disclosure controls and
procedures as of a date within 90 days prior to filing date of this
annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. ACMAT's other certifying officers and I have disclosed, based on our
most recent evaluation, to ACMAT's auditors and the audit committee of
the board of directors;

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect ACMAT's ability to record,
process, summarize and report financial data and have identified for
ACMAT's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. ACMAT's other certifying officers and I have indicated in this annual
report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

/s/ MICHAEL P. CIFONE
--------------------------------------
Michael P. Cifone
Chief Financial Officer

Date: March 27, 2003

69