UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark one)

For the quarterly period ended July 31, 2004

OR

For the Transition Period from                     to                    

Commission file number 1-7567

URS CORPORATION

(Exact name of registrant as specified in its charter)

(415) 774-2700
(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act).Yes x No o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

URS CORPORATION AND SUBSIDIARIES

     This quarterly report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “will,” and similar terms used in reference to our future revenue and earnings projections, our future cash contributions to our retirement plans, the future maintenance of our insurance coverage, future outcomes of our legal proceedings, our guarantees and debt service obligations, our future debt redemptions, our future capital resources, our future ability to collect cash from our clients, our future accounting and project management conversion and future economic and industry conditions. We believe that our expectations are reasonable and are based on reasonable assumptions. However, such forward-looking statements by their nature involve risks and uncertainties. We caution that a variety of factors, including but not limited to the following, could cause our business and financial results to differ materially from those expressed or implied in our forward-looking statements: the recent economic downturn; our inability to comply with government regulations; changes in our book of business; our dependence on government appropriations and procurements; our ability to profitably execute our contracts; our leveraged position; our ability to service our debt; liability for pending and future litigation; changes in the law; our ability to maintain adequate insurance coverage; a decline in defense spending; industry competition; our ability to attract and retain key individuals; risks associated with international operations; our ability to successfully integrate our accounting and project management software; and other factors discussed more fully in Management’s Discussion and Analysis of Financial Condition and Results of Operations beginning on page 29, Risk Factors That Could Affect Our Financial Conditions and Results of Operations beginning on page 42, as well as in other reports subsequently filed from time to time with the United States Securities and Exchange Commission. We assume no obligation to revise or update any forward-looking statements.

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PART I
FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

URS CORPORATION AND SUBSIDIARIES

See Notes to Consolidated Financial Statements

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URS CORPORATION AND SUBSIDIARIES

See Notes to Consolidated Financial Statements

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URS CORPORATION AND SUBSIDIARIES

See Notes to Consolidated Financial Statements

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URS CORPORATION AND SUBSIDIARIES

NOTE 1. ACCOUNTING POLICIES

Overview

     The terms “we,” “us,” and “our” used in this quarterly report refer to URS Corporation and its consolidated subsidiaries unless otherwise indicated. We offer a comprehensive range of professional planning and design, systems engineering and technical assistance, program and construction management, and operations and maintenance services for surface transportation, air transportation, rail transportation, industrial process, facilities and logistics support, water/wastewater treatment, hazardous waste management, and military platforms support. Headquartered in San Francisco, we operate in over 20 countries with approximately 27,000 employees providing engineering and technical services to federal, state and local governmental agencies as well as private industry clients in the chemical, manufacturing, pharmaceutical, forest product, mining, oil, gas, and utility industries.

     The accompanying unaudited interim consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These financial statements include the accounts of our wholly-owned subsidiaries. In order to bid, negotiate and execute projects, we may form joint ventures with third parties. Unconsolidated joint ventures are accounted for using the equity method. We consolidate our proportionate share of revenues, direct operating expenses and gross profits generated by joint ventures related to construction activities. Total joint venture revenues, direct operating expenses and gross profit are included in the Consolidated Statements of Operations and Comprehensive Income for all other consolidated joint ventures. All significant intercompany transactions and accounts have been eliminated in consolidation.

     You should read our unaudited interim consolidated financial statements in conjunction with the audited consolidated financial statements and related notes contained in our Annual Report on Form 10-K for the fiscal year ended October 31, 2003. The results of operations for the nine months ended July 31, 2004 are not necessarily indicative of the operating results for the full year or for future years.

     In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all normal recurring adjustments that are necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods presented.

     The preparation of our unaudited interim consolidated financial statements in conformity with GAAP necessarily requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and costs during the reporting periods. Actual results could differ from those estimates. On an ongoing basis, we review our estimates based on information that is currently available. Changes in facts and circumstances may cause us to revise our estimates.

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URS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (Continued)

Income Per Common Share

     Basic income per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted income per common share is computed giving effect to all potentially dilutive shares of common stock that were outstanding during the period. Potentially dilutive shares of common stock consist of the incremental shares of common stock issuable upon the exercise of stock options. Diluted income per share is computed by dividing net income by the sum of the weighted-average common shares and potentially dilutive common shares that were outstanding during the period.

     In accordance with the disclosure requirements of Statement of Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS 128”), a reconciliation of the numerator and denominator of basic and diluted income per common share is provided as follows:

     Our 6½% Convertible Subordinated Debentures (“6½% debentures”) are due in 2012 and are convertible into shares of our common stock at the rate of $206.30 per share. However, the effect of the assumed conversion of the 6½% debentures was not included in our computation of diluted income per share because it would be anti-dilutive.

     The following outstanding stock options were not included in our computation of diluted income per share because the exercise price of those options was greater than the average market value of the shares of our common stock in the periods presented.

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URS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (Continued)

Stock-Based Compensation

     We account for stock issued to employees and outside directors in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). Accordingly, compensation cost is measured based on the excess, if any, of the market price of our common stock over the exercise price of a stock option, determined on the date the option is granted.

     Statement of Financial Accounting Standard No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (“SFAS 148”), requires prominent disclosure in both annual and interim financial statements of the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS 148 also requires disclosure of pro forma results on an interim basis as if we had applied the fair value recognition provisions of Statement of Financial Accounting Standard No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”).

     We continue to apply APB 25 and related accounting interpretations for our 1991 Stock Incentive Plan and 1999 Equity Incentive Plan (collectively, the “Plans”). All of our options are awarded with an exercise price that is equal to the market price of our common stock on the date of the grant and accordingly, no compensation cost has been recognized in connection with options granted under the Plans. For disclosures required by SFAS 123, we use the Black-Scholes option pricing model to calculate the estimated stock option compensation expense based on the fair value of stock options granted and the following assumptions.

     If the compensation cost for awards under the Plans had been determined in accordance with SFAS 123, as amended, our net income and earnings per share would have been reduced to the pro forma amounts indicated below:

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URS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (Continued)

Adopted and Recently Issued Statements of Financial Accounting Standards

     In January 2003, the Financial Accounting Standards Board (“FASB”) issued Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), which is an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements.” FIN 46 requires a variable interest entity (“VIE”) to be consolidated by a company that is considered to be the primary beneficiary of that VIE. In December 2003, the FASB issued FIN 46 (revised December 2003), “Consolidation of Variable Interest Entities” (“FIN 46-R”), to address certain FIN 46 implementation issues. Although we have no special purpose entities (“SPEs”) as defined in FIN 46, we evaluated the impact of FIN 46 related to our joint ventures with third parties. We adopted FIN 46-R as of April 30, 2004.

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URS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (Continued)

     In general, we account for non-special purpose entities (“non-SPEs”) in accordance with Emerging Issues Task Force Issue 00-01, “Investor Balance Sheet and Income Statement Display under the Equity Method for Investments in Certain Partnerships and Other Ventures” (“EITF 00-01”), or in accordance with the equity method of accounting. Our adoption of FIN 46-R did not have a material impact on our accounting for these non-SPEs created prior to February 1, 2003 and we continue to account for these non-SPEs under the equity method or under EITF 00-01, as appropriate.

     FIN 46-R requires that all entities, regardless of whether or not a special purpose entity, created subsequent to January 31, 2003, be evaluated for consolidation purposes. We have not entered into any joint venture or partnership agreements subsequent to January 31, 2003 that would have a material impact on our consolidated financial statements. Future joint venture or partnership agreements requiring consolidation under FIN 46-R could have a material impact on our consolidated financial statements.

     In December 2003, the FASB issued Statement of Financial Accounting Standards No. 132 (Revised), “Employer’s Disclosure about Pensions and Other Postretirement Benefits” (“Revised SFAS 132”). Revised SFAS 132 retains disclosure requirements from the original SFAS 132 and requires additional disclosures relating to assets, obligations, cash flows and net periodic benefit cost. Revised SFAS 132 is effective for fiscal years ending after December 15, 2003, except that certain disclosures are effective for fiscal years ending after June 15, 2004. Interim period disclosures are effective for interim periods beginning after December 15, 2003. Our required Revised SFAS 132 interim disclosures are included in Note 3, “Employee Retirement Plans.”

     On December 17, 2003, the Staff of the Securities and Exchange Commission (“SEC” or the “Staff”) issued Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB 104”), which supersedes SAB 101, “Revenue Recognition in Financial Statements.” SAB 104’s primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, which was superseded as a result of the issuance of Emerging Issues Task Force Consensus No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). Additionally, SAB 104 rescinds the SEC’s Revenue Recognition in Financial Statements Frequently Asked Questions and Answers (the “FAQ”) issued with SAB 101 that had been codified in SEC Topic 13, Revenue Recognition. Selected portions of the FAQ have been incorporated into SAB 104. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. SAB 104 applies to our service related contracts. We do not have any material multiple element arrangements and thus SAB 104 does not impact our financial statements nor is adoption of SAB 104 considered a change in accounting principle.

     On January 12, 2004 and May 19, 2004, the FASB issued FASB Staff Position (“FSP”) No. 106-1 and 106-2, respectively, both entitled “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“FSP 106-1” and “FSP 106-2”). The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Medicare Act”) was signed into law in December 2003 and establishes a prescription drug benefit, as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a prescription drug benefit that is at least actuarially equivalent to Medicare’s prescription drug coverage. FSP 106-1 permits employers that sponsor postretirement benefit plans to make a one-time election to defer accounting for any effects of the Medicare Act until the earlier of (a) the issuance of guidance by the FASB on how to account for the federal subsidy to be provided to plan sponsors under the Medicare Act or (b) the remeasurement of plan assets and obligations subsequent to January 31, 2004. Under FSP 106-1, we elected to defer accounting for the effects of the Medicare Act. Our deferral remains in effect until the effective date of FSP 106-2, which provides guidance on the accounting for the effects of the Medicare Act by employers whose prescription drug benefits are

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URS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (Continued)

actuarially equivalent to the drug benefit under Medicare Part D. FSP 106-2 requires those employers to provide disclosures regarding the effects of the federal subsidy provided by the Medicare Act. For entities that elected deferral and for which the impact is significant, FSP 106-2 is effective for the first interim or annual period beginning after June 15, 2004. Entities for which FSP 106-2 does not have a significant impact are permitted to delay recognition of the effects of the Medicare Act until the next regularly scheduled measurement date following the issuance of FSP 106-2. We are currently evaluating the impact of the Medicare Act on our postretirement plans. Should adoption of FSP 106-2 have a significant impact on our financial statements, we may be required to recognize the effects of the Medicare Act during the fourth quarter of fiscal year 2004.

     On April 9, 2004, FASB issued FASB Staff Position No. 129-1, “Disclosure of Information about Capital Structure, Relating to Contingently Convertible Securities” (“FSP 129-1”). FSP 129-1 clarifies that the disclosure requirements of Statement of Financial Accounting Standards No. 129, “Disclosure of Information about Capital Structure” apply to all contingently convertible securities and to their potentially dilutive effects on earnings per share (“EPS”), including those for which the criteria for conversion have not been satisfied, and thus are not included in the computation of diluted EPS. The guidance in FSP 129-1 is effective immediately and applies to all existing and newly created securities. Our required FSP 129-1 disclosures are included above under “Income Per Common Share.” Our 61/2% debentures are convertible into shares of our common stock; however, the number of shares which they could be converted into is not material to our income per share computation.

Reclassifications

     We have made reclassifications to our 2003 financial statements to conform them to the 2004 presentation. These reclassifications have no effect on the consolidated net income, net cash flows and equity as they were previously reported.

NOTE 2. PROPERTY AND EQUIPMENT

     Property and equipment consists of the following:

     As of July 31, 2004 and October 31, 2003, we capitalized development costs of internal-use software of $58.7 million and $58.3 million, respectively. We amortized the capitalized software costs using the straight-line method over an estimated useful life of ten years.

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URS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (Continued)

     Property and equipment is depreciated by using the following estimated useful lives.

     Depreciation expense of property and equipment for the three months ended July 31, 2004 and 2003 was $8.2 million and $9.7 million, respectively. Depreciation expense for the nine months ended July 31, 2004 and 2003 was $29.1 million and $29.8 million, respectively.

     Amortization expense of our purchased intangible assets for the three months ended July 31, 2004 and 2003 was $0.8 million and $0.9 million, respectively. Amortization expense of our purchased intangible assets for the nine months ended July 31, 2004 and 2003 was $2.4 million and $3.2 million, respectively.

NOTE 3. EMPLOYEE RETIREMENT PLANS

     In fiscal year 1999, we acquired and assumed obligations of Radian International, L.L.C.’s (“Radian”) defined benefit pension plans and several post-retirement benefit plans. These retirement plans cover a selected group of Radian employees and former employees who will continue to be eligible to participate in the retirement plans.

     The Radian defined benefit plans include a Supplemental Executive Retirement Plan (“SERP”) and Salary Continuation Agreement (“SCA”) which are intended to supplement the retirement benefits provided by the participants’ other benefit plans upon attaining minimum age and years of service requirements.

     In fiscal year 2002, we acquired and assumed the obligations of EG&G Technical Services, Inc.’s defined benefit pension plan (“EG&G pension plan”) and post-retirement medical plan (“EG&G post-retirement medical plan”). These plans cover some of our EG&G Division’s hourly and salaried employees.

     In July 1999, we entered into a Supplemental Executive Retirement Agreement (the “Executive Plan”) with Martin M. Koffel, our Chief Executive Officer.

     The components of net periodic benefit costs relating to the Radian SERP and SCA, the EG&G pension plan, the EG&G post-retirement medical plan and the Executive Plan are as follows:

   Executive Plan

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URS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (Continued)

   Radian SERP and SCA

   EG&G pension plan

   EG&G post-retirement medical plan

     For measurement purposes, we used the same assumptions for the interim disclosure of net periodic benefit cost as for the prior year-end disclosure at October 31, 2003. For a description of each plan, see Note 12 “Employee Retirement Plans” to our Consolidated Financial Statements included in the Annual Report on Form 10-K for the fiscal year ended October 31, 2003.

Funding Requirements and Contributions

     The Executive Plan and Radian SERP and SCA do not have funding requirements. For fiscal year 2004, we expect to make cash contributions of approximately $5.8 million and $0.2 million to the EG&G pension plan and the EG&G post-retirement medical plan, respectively.

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URS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (Continued)

NOTE 4. CURRENT AND LONG-TERM DEBT

Senior Secured Credit Facility

     Our Senior Secured Credit Facility (“Credit Facility”) consists of two term loans, Term Loan A and Term Loan B, and a revolving line of credit. Borrowings under the Credit Facility bear interest at either a base rate or a Eurodollar rate plus, in each case, an interest rate margin that varies with our financial performance. As of July 31, 2004 and October 31, 2003, we had $353.8 million and $357.8 million in principal amounts outstanding, respectively, under the term loan facilities. As of July 31, 2004, we had drawn $16.7 million on our revolving line of credit and had outstanding standby letters of credit aggregating to $55.9 million, reducing the amount available to us under our revolving credit facility to $152.4 million.

     We have amended our Credit Facility on five separate occasions. The first amendment, dated January 30, 2003, increased our maximum leverage ratios through January 31, 2004, and increased the interest rate margins by 0.25% on our Credit Facility, but also provided that if we achieved the original leverage ratio of 3.90:1 or less at October 31, 2003, the original interest rate margins would be restored. Because we achieved this ratio, the original interest rate margins were restored in January 2004. The second amendment, dated November 6, 2003, enabled us to repurchase and redeem our 11½% Senior Notes (“11½% notes”), 12¼% Senior Subordinated Notes (“12¼% notes”) and/or our 6½% debentures with the entire proceeds of an equity issuance up to $220.0 million. The third amendment, dated December 16, 2003, reduced the interest rate margins on Term Loan B. The fourth amendment, dated March 29, 2004, increased the equity offering proceeds that could be used to repurchase or redeem our outstanding notes and debentures to $300.0 million and permitted us to borrow unsecured debt and/or use our revolving line of credit for this purpose if our leverage ratio was less than 2.50 after giving effect to the transaction.

     The fifth amendment, dated June 4, 2004, reduced the interest rate margins on our Credit Facility to 1.25% for base rate borrowings and to 2.25% for Eurodollar borrowings, increased the credit limit on our revolving line of credit to $225.0 million and increased the outstanding amount of our Term Loan B by $25.0 million. This amendment has also enabled us to achieve an additional 0.25% reduction in interest rate margins, to 1.00% for base rate borrowings and to 2.00% for Eurodollar borrowings, since Moody’s increased our credit rating from Ba3 to Ba2 on August 18, 2004.

     As of July 31, 2004, we were in compliance with all of our Credit Facility covenants.

     As a part of our Credit Facility, we maintain a revolving line of credit to fund daily operating cash needs and to support standby letters of credit. During the ordinary course of business, the use of the revolving line of credit is driven by collection and disbursement activities. Our daily cash needs follow a predictable pattern that typically parallels our payroll cycles, which drive, if necessary, our short-term borrowing requirements.

     Our average daily revolving line of credit balances for the three-month periods ended July 31, 2004 and 2003 were $28.2 million and $3.1 million, respectively. The maximum amounts outstanding at any one point in time during the three-month periods ended July 31, 2004 and 2003 were $74.6 million and $20.0 million, respectively. Our average daily revolving line of credit balances for the nine-month periods ended July 31, 2004 and 2003 were $21.1 million and $25.2 million, respectively. The maximum amounts outstanding at any one point in time during the nine-month periods ended July 31, 2004 and 2003 were $74.6 million and $70.0 million, respectively.

     As of July 31, 2004, we had an outstanding balance of $16.7 million under our revolving line of credit. On October 31, 2003, we had no outstanding balance. The effective average interest rates paid on the

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URS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (Continued)

revolving line of credit during the three months ended July 31, 2004 and 2003 were approximately 4.8% and 5.8%, respectively. The effective average interest rates paid on the revolving line of credit during the nine months ended July 31, 2004 and 2003 were approximately 5.5% and 6.0%, respectively.

Other Indebtedness

     11½% Senior Notes. As of July 31, 2004 and October 31, 2003, we had outstanding amounts of $130 million and $200 million in 11½% notes due 2009, respectively. Interest is payable semi-annually in arrears on March 15 and September 15 of each year. These notes are subordinate to our Credit Facility and senior to our 12¼% notes and our 6½% debentures described below. During the third quarter of fiscal year 2004, we redeemed $70 million of the principal amount, at 111.5% of face value, using proceeds from our public common stock offering described in Note 8, “Common Stock.”

     12¼% Senior Subordinated Notes. As of July 31, 2004 and October 31, 2003, we had outstanding amounts of $20 million and $200 million in 12¼% notes due 2009, respectively. Interest is payable semi-annually in arrears on May 1 and November 1 of each year. These notes are subordinate to our Credit Facility and our 11½% notes. During the third quarter of fiscal year 2004, we redeemed $180 million of the principal amount, at 106.125% of face value, using proceeds from our public common stock offering described in Note 8, “Common Stock,” borrowings from our Credit Facility and cash on hand.

     8 5/8% Senior Subordinated Debentures (the “8 5/8% debentures”). On January 15, 2004, we retired the entire outstanding balance at October 31, 2003 of $6.5 million.

     6½% Convertible Subordinated Debentures. As of July 31, 2004 and October 31, 2003, we owed $1.8 million due 2012.

     Notes payable, foreign credit lines and other indebtedness. As of July 31, 2004 and October 31, 2003, we had outstanding amounts of $9.8 million and $10.9 million in notes payable and foreign lines of credit, respectively. Notes payable primarily include notes used as our financing vehicle to purchase office equipment, computer equipment and furniture. These notes have three-year to five-year terms with interest rates ranging from approximately 4% to 7%.

     We maintain foreign lines of credit, which are collateralized by the assets of our foreign subsidiaries. As of July 31, 2004 and October 31, 2003, we had $2.7 million and $2.8 million available under these foreign lines of credit, respectively.

Fair Value of Financial Instruments

     The fair values of the 11½% notes and the 12¼% notes will fluctuate depending on market conditions and our performance. The carrying values of the 11½% notes and the 12¼% notes may at times differ from fair values. As of July 31, 2004 and October 31, 2003, the total fair values of the 11½% notes and the 12¼% notes were approximately $167.5 million and $450.8 million, respectively.

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URS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (Continued)

Costs incurred for extinguishment of debt

     As a result of the aforementioned redemptions of our 11½% notes and our 12¼% notes, we incurred $27.4 million in costs to extinguish this debt during the three and nine months ended July 31, 2004, as detailed below:

     The write-off of the pre-paid financing fees, debt issuance costs and discounts and the amounts paid for call premiums are included in the indirect, general and administrative expenses of our Consolidated Statements of Operations and Comprehensive Income.

NOTE 5. COMMITMENTS AND CONTINGENCIES

     We are involved in various legal proceedings that are pending against us and our subsidiaries alleging, among other things, breach of contract or tort in connection with the performance of professional services, the outcome of which cannot be predicted with certainty. Because of developments occurring during the quarter ended July 31, 2004, we are including information regarding the following proceedings in particular:

•

Saudi Arabia: Prior to our acquisition of Lear Seigler Services, Inc. (“LSI”) in August 2002, LSI provided aircraft maintenance support services on F-5 aircraft under a contract with a Saudi Arabian government ministry (the “Ministry”). LSI’s performance under the contract was completed in November 2000, but since that time various claims have been made against LSI, including breach of a joint venture and other agreements, and the failure to pay rent and taxes. During the quarter ended July 31, 2004, an arbitration ruling by the International Chamber of Commerce (“ICC”) was issued against LSI that included a monetary award of $4.9 million to a joint venture partner (the “claimant”). During August 2004, the claimant filed an action in the United States District Court in Maryland to confirm and enforce the ICC award. We are contesting the confirmation and enforceability of portions of the award. In addition, during the quarter ended July 31, 2004, the Ministry directed payment of a performance bond issued in its favor under this contract in the amount of approximately $5.6 million. One of the conditions for closing out the contract and LSI’s obligations under the bond is the successful resolution of a pending tax assessment issued by the Saudi Arabian taxing authority assessing LSI approximately $5.1 million in taxes for the years 1999 through 2002. We disagree with the Saudi Arabian taxing authority’s assessment and are providing responses, additional information and documentation. The bank that received the demand for release of the bond has notified LSI that it expects to be repaid for the cost of the bond under a guarantee issued by LSI related to the bond. However, we have informed the bank that we believe the Ministry had no basis for seeking payment on the bond, and we believe we have no obligation to reimburse the bank if the bank should choose to voluntarily pay the Ministry.

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URS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (Continued)

•		Lebanon: Prior to our acquisition of Dames and Moore Group, Inc., in 1999, which included Radian International, LLC, a wholly-owned subsidiary (“Radian”), Radian entered into a contract to provide environmental remediation to a Lebanese company involved in the development and reconstruction of the central district of Beirut. Various disputes have arisen under this contract, including an allegation by the customer that Radian breached the contract by, among other things, failing to reduce the level of chemical and biological constituents, including methane gas, at the project site to the contract level. The parties sought to resolve their disputes in an arbitration proceeding filed with the ICC. The customer is also seeking damages for delays of up to $8.5 million.
		During July 2004, an ICC arbitration panel ruled against Radian and ordered Radian to prepare a plan to reduce the level of methane gas at the project site to the contract level, to pay approximately $2.4 million in attorney fees and other expenses to the customer, and authorized the customer to withhold program payments. The customer also drew on an $8.5 million bank guarantee and the bank has filed suit in Lebanon to recover this amount from Radian. We believe that Radian is not obligated under the bank guarantee and will vigorously defend this matter. Prior to entering into this contract, Radian obtained a project-specific, $50 million insurance policy with a $1 million deductible. We believe that this insurance policy will respond on our behalf to many of the claims described above. Additionally, the contract contains a $20 million limitation on damages.

     Currently, we have limits of $125 million per loss and $125 million in the aggregate annually for general liability, professional errors and omissions liability and contractor’s pollution liability insurance (in addition to the project-specific policy noted above and policies for other specific projects). These policies include self-insured claim retention amounts of $4 million, $5 million and $5 million, respectively. In some actions, parties are seeking damages, including punitive or treble damages that substantially exceed our insurance coverage or are not insured.

     Excess limits provided for these coverages are on a “claims made” basis, covering only claims actually made during the policy period currently in effect. Thus, if we do not continue to maintain these policies, we will have no coverage for claims made after the termination date – even for claims based on events that occurred during the term of coverage. We intend to maintain these policies; however, we may be unable to maintain existing coverage levels. We have maintained insurance without lapse for many years with limits in excess of losses sustained.

     Although the outcome of our legal proceedings cannot be predicted with certainty and no assurances can be provided, based on our previous experience in such matters, we do not believe that any of the legal proceedings described above, including those against LSI and Radian, individually or collectively, are likely to exceed established loss accruals or our insurance coverage and, therefore, we do not believe that they are likely to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

     As of July 31, 2004, we had the following guarantee obligations and commitments:

     We have guaranteed the credit facility of EC III, LLC, a 50%-owned, unconsolidated joint venture, in the event of a default by the joint venture. This joint venture was formed in the ordinary course of business to perform a contract for the federal government. The term of the guarantee is equal to the remaining term of the underlying debt, which is nineteen months. The maximum potential amount of future payments that we could be required to make under this guarantee at July 31, 2004, was $6.5 million.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (Continued)

     We also maintain a variety of commercial commitments that are generally made to support provisions of our contracts. In addition, in the ordinary course of business we provide letters of credit to clients and others against advance payments and to support other business arrangements. We are required to reimburse the issuers of letters of credit for any payments they make under the letters of credit.

     From time to time, we may provide guarantees related to our services or work. If our services under a guaranteed project are later determined to have resulted in a material defect or other material deficiency, then we may be responsible for monetary damages or other legal remedies. When sufficient information about claims on guaranteed projects is available and monetary damages or other costs or losses are determined to be probable, we recognize such guarantee losses. Currently, we have no guarantee claims for which losses have been recognized.

NOTE 6. SEGMENT AND RELATED INFORMATION

     We operate our business through two segments: the URS Division and the EG&G Division. These two segments operate under separate management groups and produce discrete financial information. Their operating results also are reviewed separately by management. The information disclosed in our consolidated financial statements is based on the two segments that comprise our current organizational structure.

     The following table presents summarized financial information of our reportable segments. Included in the “Eliminations” column are elimination of inter-segment sales and elimination of investment in subsidiaries. We have reclassified our reporting segment information for the three-month and nine-month periods ended July 31, 2003 to conform to our presentation for fiscal year 2004.

17

URS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (Continued)

18

URS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (Continued)

     We define our segment operating income (loss) as total segment net income, before income tax and net interest expense. Our long-lived assets primarily consist of our property and equipment.

Geographic areas

     Our revenues by geographic areas are shown below:

Major Customers

     For the three months and nine months ended July 31, 2004, we had multiple contracts with two major customers, who contributed more than ten percent of our total consolidated revenues, as listed below:

NOTE 7. RELATED PARTY TRANSACTIONS

     Some of our officers, directors and employees may have disposed of shares of our common stock, both in cashless transactions with us and in market transactions. These disposals occurred in connection with exercises of stock options, the vesting of restricted and deferred stock and the payment of withholding taxes due with respect to such exercises and vesting. These officers, directors and employees may continue to dispose of shares of our common stock in this manner and for similar purposes.

NOTE 8. COMMON STOCK

     During April 2004, we sold an aggregate of 8.1 million shares of our common stock through an underwritten public offering. The offering price of our common stock was $26.50 per share and the total offering proceeds to us were $204.3 million, net of underwriting discounts and commissions and other offering-related expenses of $10.5 million.

19

URS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (Continued)

NOTE 9. GUARANTOR INFORMATION

     Substantially all of our domestic operating subsidiaries have guaranteed our obligations under our Credit Facility, our 12¼% notes and our 11½% notes (collectively, the “Notes”). Each of the subsidiary guarantors has fully and unconditionally guaranteed our obligations on a joint and several basis.

     Substantially all of our income and cash flows are generated by our subsidiaries. We have no operating assets or operations other than our investments in our subsidiaries. As a result, funds necessary to meet our debt service obligations are provided in large part by distributions or advances from our subsidiaries. Financial conditions and operating requirements of the subsidiary guarantors may limit our ability to obtain cash from our subsidiaries for the purposes of meeting our debt service obligations, including the payment of principal and interest on our Notes and our Credit Facility. In addition, although the terms of our Notes and our Credit Facility limit us and our subsidiary guarantors’ ability to place contractual restrictions on the flow of funds to us, legal restrictions, including local regulations, and contractual obligations associated with secured loans, such as equipment financings at the subsidiary level may restrict the subsidiary guarantors’ ability to pay dividends, or make loans or other distributions to us.

     The following pages contain: our condensed consolidating balance sheets as of July 31, 2004 and October 31, 2003; our condensed consolidating statements of operations and comprehensive income for the three and nine months ended July 31, 2004 and 2003; and our condensed consolidating statements of cash flows for the nine months ended July 31, 2004 and 2003. Elimination entries necessary to consolidate our subsidiaries are reflected in the eliminations column. Complete financial statements of our subsidiaries that guarantee our Credit Facility and our Notes would not provide additional material information that would be useful in assessing the financial condition of such subsidiaries.

20

URS CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
(In thousands)
(unaudited)

21

URS CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
(In thousands)