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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the Quarterly Period Ended June 30, 2004

OR

For the transition period from              to             

Commission File No. 000-30911

THE PBSJ CORPORATION

(Exact name of registrant as specified in its charter)

2001 N.W. 107th AVENUE

MIAMI, FLORIDA 33172-2507

(Address of principal executive offices)

(305) 592-7275

(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  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)    YES  ¨    NO  x

As of July 31, 2004, there were 7,714,155 shares of Common Stock, $.00067 par value per share, outstanding.

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THE PBSJ CORPORATION

FORM 10-Q

JUNE 30, 2004

TABLE OF CONTENTS

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PART I

Item 1. Financial Statements

THE PBSJ CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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THE PBSJ CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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THE PBSJ CORPORATION

CONDENSED CONSOLIDATED STATEMENTS

OF CASH FLOWS

(Unaudited)

(in thousands)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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NOTES TO FINANCIAL STATEMENTS (unaudited)

1. Summary of Significant Accounting Policies:

Basis of Presentation

The accompanying financial information has been prepared in accordance with the interim reporting rules and regulations of the Securities and Exchange Commission, and therefore does not necessarily include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Estimates have been prepared on the basis of the most current and best available information and actual results could differ from those estimates.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements of the interim period contain all adjustments necessary to present fairly the financial position of The PBSJ Corporation as of June 30, 2004 and the results of their operations and their cash flows for the periods presented. All such adjustments are of a normal recurring nature. The condensed consolidated balance sheet as of September 30, 2003 was derived from the Company’s audited financial statements included in the Company’s Form 10-K for the year ended September 30, 2003. The accompanying financial statements should be read in conjunction with the Company’s Form 10-K for the year ended September 30, 2003. The results of operations for the three and nine-month periods ended June 30, 2004 are not necessarily indicative of the results to be expected for the full fiscal year.

Basic and Diluted Earnings Per Share

Basic net income attributable to common stockholders per share has been computed by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding. Diluted net income attributable to common stockholders per share reflects the potential dilution that could occur assuming the inclusion of dilutive potential common shares and has been computed by dividing net income attributable to common stockholders by the weighted average number of common shares and dilutive potential common shares outstanding. Dilutive potential common shares include all outstanding restricted stock awards after applying the treasury stock method.

A reconciliation of the number of shares used in computing basic and diluted earnings per share follows:

Revenue Recognition

In the course of providing its services, the Company routinely incurs direct expenses such as sub-contracts for services. Indirect expenses are recorded on an accrual basis and are allocated to contracts based on an overhead rate. In addition, the Company also includes pass-through costs on cost-plus contracts, which are customer-reimbursable materials, equipment and sub-contractor costs when the Company determines that it is responsible for engineering specification, procurement and management of such cost components on behalf of the customer. These direct expenses are principally passed through to the Company’s clients with minimal or no mark-up and are included in the Company’s gross revenues. The Company also reports net earned revenue, which is reflected as gross revenue less direct expenses. For cost-plus and time and material contracts, the Company reports fees earned based on actual labor multiplied by contractual rates or multipliers. For fixed price contracts, the Company reports fees earned on the percentage of completion basis, which includes revenue on the basis of costs incurred to date as a percentage of the total estimated costs. Revenues related to unapproved change orders are not recorded until collected.

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Anticipated losses are recognized in total in the period in which they became determinable. Accounts receivable and unbilled fees are presented net of an allowance for doubtful accounts of $1.1 million at June 30, 2004 and September 30, 2003.

Recent Accounting Pronouncements

In December 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” (“FIN 46R”), which replaced FIN 46. FIN 46R addresses how a business enterprise should evaluate whether it has a controlling interest in an entity through means other than voting rights. This interpretation requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. The interpretation also requires disclosures about variable interest entities that the Company is not required to consolidate but in which it has a significant variable interest. The Company is required to adopt FIN 46R by the beginning of Fiscal 2005. Although the Company has not completed its initial evaluation of FIN 46R the adoption of FIN 46R is not expected to have a material impact on the Company’s results of operations or financial condition.

In December 2003, the Securities and Exchange Commission staff (“SEC”) issued Staff Accounting Bulletin No. 104 (“SAB 104”), “Revenue Recognition,” which supercedes Staff Accounting Bulletin No. 101 (“SAB 101”), “Revenue Recognition in Financial Statements.” The primary purpose of SAB 104 is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements and to reflect the accounting guidance issued in Emerging Issues Task Force 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” Additionally, SAB 104 rescinds the SEC’s “Revenue Recognition in Financial Statements Frequently Asked Questions and Answers” (the “FAQ”) issued with SAB 101. Selected portions of the FAQ have been incorporated into SAB 104. The adoption of SAB 104 did not have an effect on our revenue recognition policy or revenues recorded.

In March 2004, the FASB approved the consensus reached on the Emerging Issues Task Force (EITF) Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The objective of this Issue is to provide guidance for identifying impaired investments. EITF 03-1 also provides new disclosure requirements for investments that are deemed to be temporarily impaired. The accounting provisions of EITF 03-1 are effective for all reporting periods beginning after June 15, 2004, while the disclosure requirements are effective only for annual periods ending after June 15, 2004. The Company has evaluated the impact of the adoption of EITF 03-1 and does not believe that impact will be significant to the Company’s overall results of operations or financial position.

Capital Structure

The Company has authorized 15,000,000 shares of common stock (par value $.00067).

The by-laws of the Company require that common stock held by shareholders who terminate employment with the Company be offered for sale at fair market value to the Company, which has right of first refusal. Should the Company decline to purchase the shares, the shares must next be offered to the Company’s profit sharing and employee stock ownership plan at fair market value, and then ultimately to full-time employees of the Company. The by-laws of the Company provide that the fair market value be determined by an independent appraisal. Other than agreements with certain retired Directors as noted in the Proxy, as of June 30, 2004 and September 30, 2003 there is no outstanding common stock relating to employees no longer employed by the Company.

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2. Contingencies:

The Company is involved in legal actions arising in the ordinary course of business. The Company maintains certain insurance coverage, covering worker’s compensation, auto liability, general and professional liability (including pollution liability) and property coverage. The Company’s insurance policies may offset the amount of loss exposure from legal actions.

As of June 30, 2004, the Company was involved in litigation where plaintiffs allege damages resulting from the Company’s engineering services. The plaintiffs’ allegations of liability in those cases seek recovery for damages caused by the Company based on various theories of negligence, contributory negligence or breach of contract.

As of June 30, 2004 and September 30, 2003, the Company had an accrual of approximately $6.8 million and $5.0 million respectively for all potential and existing claims, lawsuits and pending proceedings that, in management’s opinion, are probable and estimatable. The Company expects to pay these liabilities over the next one to three years. Management is of the opinion that the liabilities ultimately resulting from such existing and other pending proceedings, lawsuits and claims should not materially affect the Company’s financial position, results of operations or cash flows.

3. Income Taxes:

The income tax provision was $8.8 million and $6.9 million, or an effective tax rate of 41.0% and 34.0%, for the nine-month periods ended June 30, 2004 and 2003, respectively. The increase in the effective tax rate is primarily due to the increase in the valuation allowance for the deferred taxes related to research and development tax credit carry-forwards. These research and development tax credit carry-forwards, which expire beginning 2017 through 2022, were approximately $8.4 million and $10.3 million as of June 30, 2004 and September 30, 2003, respectively.

For the past several years, the Company has generated research and development tax credit related to certain qualifying costs. The qualifying costs relate primarily to the Company’s project costs which involved technical uncertainty. These research and development costs were incurred by the Company in the course of providing services under generally long-term client projects, thereby creating costs associated with recognizable revenue under the project. Because the Company has been unable to utilize the entire amount of research and development tax credits it has generated each year, the balance sheet reflects a deferred tax asset of $4.0 million and $7.1 million at June 30, 2004 and September 30, 2003, respectively, for the unused credit carryforward. In addition, because of the uncertainty associated with the ability of the Company to utilize these credits in the future, a valuation allowance of $3.3 million and $2.6 million at June 30, 2004 and September 30, 2003, respectively, has been provided for this deferred tax asset.

Our effective tax rate is based on expected income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. Significant judgment is required in determining our effective tax rate and in evaluating our tax positions. We establish reserves when, despite our belief that our tax return positions are fully supportable, we believe that certain positions are likely to be challenged. We adjust these reserves in light of changing facts and circumstances, such as the progress of a tax audit or current developments in tax law. For that matter, with respect to certain credits for increasing research activities that have been utilized to reduce our income taxes payable reported on tax returns open for examination, we have recorded a reserve of approximately $3.8 million as of June 30, 2004.

A number of years may elapse before a particular matter, for which we have established a reserve, is audited and finally resolved. The number of years with open tax audits varies depending on the tax jurisdiction. The Company is not currently under audit by the Internal Revenue Service or any other jurisdiction. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, we believe that our reserves reflect the probable outcome of known tax contingencies. Unfavorable settlement of any particular issue would require use of our cash. Favorable resolution would be recognized as a reduction to our effective tax rate in the year of resolution. Our tax reserves are presented in the balance sheet within other liabilities.

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4. Stockholders’ Equity

The significant changes in stockholders’ equity as of June 30, 2004 are as follows:

5. Segment Reporting:

The Company is organized by the services provided to its customers. Under this organizational structure, the Company has four segments: Transportation, Construction, Civil and Environmental.

Activities in the Transportation business segment generally involve planning, design, right of way acquisition, development and design of intelligent transportation services and program construction management services for multiple transportation modes, including interstate and primary highways, toll roads, arterials, bridges, transit systems, airports and port facilities. Our Program Management group provides many of our governmental clients the necessary resources to manage large infrastructure programs from concept through construction. Our services include planning, programming, and contract support.

In the area of the Construction business management, we provide a wide range of services as an agent for our clients, including contract administration, inspection, field-testing, scheduling/estimating, instituting project controls and quality assessment. Although we do not construct or build any projects, we may act as the program director of a project whereby on behalf of the owner of the project, we provide scheduling, cost estimating and construction observation services for the project, or our services may be limited to providing construction consulting.

The Civil Engineering business provides general civil engineering as well as specialized services to public and private clients. Included in these services are: site engineering and surveys, infrastructure engineering, master planning, disaster mitigation planning and response, asset assessment and management, emergency management and architectural and landscape design.

The Environmental business segment focuses on the delivery of planning, design and construction management services for private and public sector clients related to air quality management, flood insurance studies, energy planning, hazardous and solid waste management, ecological studies, wastewater treatment, water resources, environmental toxicology analysis, aquatic treatment systems and water supply and treatment.

Financial information relating to the Company’s operations by service is as follows (dollars in thousands):

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6. Long-Term Debt (dollars in thousands):

The Company has a $58 million line of credit agreement, inclusive of $3 million in letters of credit, with a bank. The expiration date on the amended line of credit is June 30, 2005. The interest rate (1.87% and 1.62% at June 30, 2004 and September 30, 2003, respectively) ranges from LIBOR plus 50 basis points to prime minus 125 basis points if the Company’s funded debt coverage ratio is less than 2.5. The range increases to LIBOR plus 75 basis points to prime minus 100 basis points if the Company’s funded debt coverage ratio is between 2.5 to 3.0. The line of credit contains clauses requiring the maintenance of various covenants and financial ratios.

On March 19, 2001, we entered into a mortgage note of $9.0 million. The mortgage agreement contains clauses requiring the maintenance of various covenants and financial ratios. On December 10, 2003, the bank approved an amendment to the mortgage agreement to reflect new conditions for the Tangible Net Worth covenant requirement under the agreement. The mortgage note is collateralized by our office building located in Maitland, Florida.

The Company was in compliance with all debt covenants at June 30, 2004.

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7. Comprehensive Income:

Other comprehensive income is comprised of unrealized gains and losses on marketable securities and changes in the value of the derivative financial instrument.

8. Goodwill:

During the first quarter of fiscal year 2003, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets. Under SFAS No. 142, purchased goodwill and intangible assets with indefinite lives are no longer amortized, but instead tested for impairment at least annually. In connection with the adoption of SFAS No. 142, the Company no longer records approximately $0.5 million annually of amortization relating to its existing goodwill. The Company performed the test for impairment at September 30, 2003 and determined that no impairment exists.

During the nine-month period ended June 30, 2004, the balance in goodwill increased by $3.8 million related to earn-out payments associated with the Welker and Associates, Inc. acquisition and the acquisition of TriLine Associate, Inc.

9. Acquisition

On June 1, 2004, the Company acquired 100% of the stock of TriLine Associates, Inc. (“TriLine”) for $3.72 million in cash. The acquisition of TriLine contributes to the Company’s goal of enhancing its presence in the greater Pittsburg area and the State of Pennsylvania. TriLine specializes in transportation, geotechnical, and environmental services. The purchase price has been preliminarily allocated to the respective assets and liabilities based upon their estimated fair values as of the acquisition date. The allocation of the purchase price resulted in assets of $4.2 million, including approximately $622,000 of intangible assets, $2.3 million of goodwill and liabilities of $520,000. The pro forma impact of the acquisition is not material to reported historical operations.

10. Subsequent Event

On July 1, 2004, the Company acquired 100% of the stock of W. Koo and Associates Structural Engineers, Inc. (“WKA”) for $2.5 million, comprised cash and the Company’s common stock. WKA specializes in infrastructure improvements for public, municipal, transit, port authorities and private sector projects with a primary focus on transportation structures in California.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is provided to increase an understanding of, and should be read in conjunction with, the condensed consolidated financial statements and accompanying notes. As you read this section, you should also refer to the Company’s Annual Report filed on Form 10-K for the fiscal year ended September 30, 2003.

Statements of our intentions, beliefs, expectations or predictions for the future, denoted by the words “anticipate”, “believe”, “estimate”, “expect”, “project”, “imply”, “intend”, “foresee”, and similar expressions, are “forward-looking statements” that reflect our current views about future events and are subject to risks, uncertainties and assumptions. Such risks, uncertainties and assumptions include our ability to attract additional business, the timing of projects and the potential for contract cancellation by our customers, our ability to attract and retain skilled employees, possible changes in collections of accounts receivable, risks of competition, changes in general economic conditions and interest rates, the risk that the Internal Revenue Service or the courts may not accept the amount or nature of one or more items of deduction, loss, income or gain as reported by the Company for tax purposes and the possible outcome of pending litigation and our actions in connection with such litigation. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Actual results could differ materially from those projected in these forward-looking statements as a result of these factors, among others, many of which are beyond our control.

Results of Operations

The following table sets forth the percentage of net earned revenue represented by the items in our condensed consolidated statements of operations:

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A summary of operating results is as follows for the three and nine months ended June 30 (dollars in thousands):

Overview

Engineering Fees for the three-month period ended June 30, 2004 increased by 8.8%, as compared to the same period in 2003. Such amounts for the nine-month periods ended June 30, 2004 increased by 13.8%, as compared to the same period in 2003. The majority of the increase was in the transportation and construction segments. The three small acquisitions described below, as well as new projects were the primary contributors to the growth in engineering fees. Additionally there was an increase in the number of employees which were primarily of technical professionals, whose billable labor gets charged to clients, thereby increasing the amount of fees earned by the Company. The acquisitions of Durham Technologies, Inc. (“DTI”) on December 1, 2002, Welker & Associates, Inc. (“Welker”) on March 19, 2003 and TriLine Associates, Inc. on June 1, 2004 also contributed to the increase in engineering fees. In addition, all four segments of the Company experienced increased volumes in backlog at June 30, 2004, as compared to June 30, 2003.

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The Company’s net income decreased 23.0% during the three-month period ended June 30, 2004 and decreased 4.5% during the nine-month period ended June 30, 2004, as compared to the same periods in 2003. The decrease in net income during the three and nine-month periods was primarily the result of a higher effective tax rate and an increase in general and administrative costs due to annual increases in pay rates, increased insurance costs and a charge of $1.8 million for an errors and omissions claim. The effective tax rate was increased to provide for an increase in the valuation allowance for the Company’s research and development tax credits.

Segment Results of Operations

Our businesses are reported as four segments, reflecting our management methodology and structure. The accounting policies of the segments are the same as those described in the footnotes to the accompanying condensed consolidated financial statements. We evaluate performance based on operating profit of the respective segments.

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Transportation

Engineering fees of $45.7 million for the three-month period ended June 30, 2004 increased 8.4% as compared to $42.2 million for the same period in 2003. For the nine-month period ended June 30, 2004, engineering fees were $130.3 million compared to $116.7 million in 2003, representing an 11.7% increase. Higher volumes from continued growth in the transportation services market and engineering fees from new projects with existing clients were the source of the increase. Some of these projects include the Texas Department of Transportation and the Federal Highway Administration and Aviation projects around the country, were the primary contributors to this increase during 2004.

Reported net earned revenue was $34.3 million during the three-month period ended June 30, 2004 as compared to $33.2 million for the same period in 2003, representing an increase of 3.6%. For the nine-month period ended June 30, 2004, net earned revenue was $99.5 million compared to $90.9 million in 2003, representing a 9.5% increase. This increase is directly related to the increase in engineering fees from internal growth, resulting from additional professionals hired. In addition, the change in net earned revenue is affected by the fluctuation in direct expenses. Direct expenses consist of out-of-pocket expenses related to the delivery of services such as blueprints, reproductions, CADD/computer charges, and travel and sub-contractor expenses. For the nine-month period ended June 30, 2004, direct expenses were $30.9 million compared to $25.8 million in 2003, representing a 19.5% increase. Direct expenses were $11.4 million during the three-month period ended June 30, 2004 as compared to $9.0 million for the same period in 2003, representing an increase of 26.2%. Direct expenses, as a percentage of net earned revenue, were 33.1% for the three-month period ended June 30, 2004 as compared to 27.2% for the same period in 2003. For the nine-month period ended June 30, 2004, direct expenses, as a percentage of net earned revenue, were 31.0% compared to 28.4% in 2003. The increase in direct expenses for the three-month and nine-month periods primarily resulted from the need to support the growth in engineering fees through the increased usage of sub-consultants in California, as well as in aviation projects around the country.

Reported operating income was $2.6 million for the three-month period ended June 30, 2004 as compared to $4.1 million for the same period in 2003, representing a decrease of 36.0%. For the nine-month period ended June 30, 2004, operating income was $8.1 million compared to $9.8 million in 2003, representing a 17.6% decrease. Operating income, as a percentage of net earned revenue, was 7.7% for the three-month period ended June 30, 2004 as compared to 12.4% for the same period in 2003. For the nine-month period ended June 30, 2004, operating income, as a percentage of net earned revenue, was 8.1% compared to 10.8% in 2003. The decrease in operating income and operating income, as a percentage of net earned revenue, is driven by an increase in costs and expenses.

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Costs and expenses consist of direct salaries that are chargeable to clients and general and administrative expenses. Direct salaries were $12.6 million for the three-month period ended June 30, 2004, as compared to $12.3 million for the same period in 2003, representing an increase of 2.3%. For the nine-month period ended June 30, 2004, direct salaries were $36.1 million compared to $33.3 million in 2003, representing an 8.2% increase. Although direct salaries increased for the two periods as compared to the prior periods, which is primarily related to the growth in engineering fees, direct salaries as a percentage of net earned revenue decreased. Direct salaries as a percentage of net earned revenue was 36.7% for the three-month period ended June 30, 2004 as compared to 37.2% for the same period in 2003. For the nine-month period ended June 30, 2004, direct salaries as a percentage of net earned revenue was 36.3% compared to 36.7% in 2003. This decrease was driven by a reduction in Transportation’s chargeability percentage due to additional professionals being hired during the period to enable further growth in the segment in the future and a slow down in the Tennessee and Alabama markets.

The other component of costs and expenses is general and administrative expenses, which consists of indirect labor and other overhead costs incurred to run the Company. Indirect labor increased 28.9%, from $3.6 million during the three-month period ended June 30, 2003 to $4.7 million for the same period in 2004. For the nine-month period ended June 30, 2004, indirect labor increased 26.0%, from $11.3 million in 2003 to $14.2 million in 2004. Indirect labor as a percentage of net earned revenue was 13.7% for the three-month period ended June 30, 2004 as compared to 11.0% for the same period in 2003. For the nine-month period, indirect labor as a percentage of net earned revenue was 14.3% in 2004 as compared to 12.4% in 2003. The increase in indirect labor is a result of the decrease in chargeability, as explained above.

Other overhead costs increased 10.2%, from $13.1 million during the three-month period ended June 30, 2003 to $14.4 million for the same period in 2004. For the nine-month period ended June 30, 2004, other overhead costs were $41.1 million, representing a 12.8% increase compared to $36.4 million for the same period in 2003. Other overhead costs, as a percentage of net earned revenue, were 41.9% for the three-month period ended June 30, 2004 as compared to 39.4% for the same period in 2003. For the nine-month period ended June 30, 2004, other overhead costs, as a percentage of net earned revenue, was 41.3% compared to 40.1% in 2003. The increase in other overhead costs was partially due to costs associated with the hiring of new technical professionals, such as health insurance and payroll taxes. In addition, this segment saw higher than normal increases in employee moving expenses and travel costs. Finally, a portion of the increase is due to annual increases in pay rates for existing personnel.

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Civil Engineering

Engineering fees of $18.8 million for the three-month period ended June 30, 2004 increased 9.3% as compared to $17.2 million for the same period in 2003. For the nine-month period ended June 30, 2004, engineering fees were $57.2 million compared to $48.0 million for the same period in 2003, representing a 19.3% increase. These increases were attributable to several factors. One of these factors was the acquisition of Durham Technologies, Inc. (“DTI”) on December 1, 2002. DTI specializes in risk and emergency management services for public sector clients, primarily federal and local government. Additional contributors to the increased engineering fees within this segment were profitable projects related to Hurricane Isabel in Virginia and the fires in Southern California. Lastly, this segment has significantly increased its chargeability and made significant steps toward improving project and contract management.

Reported net earned revenue was $16.2 million for the three-month period ended June 30, 2004 as compared to $14.9 million for the same period in 2003, representing an increase of 8.7%. For the nine-month period ended June 30, 2004, net earned revenue was $49.6 million compared to $41.4 million in 2003, representing a 19.7% increase. The increase directly related to the increase in engineering fees from new projects and from the acquisition of DTI. In addition, the change in net earned revenue is affected by the fluctuation in direct expenses. Direct expenses consist of out-of-pocket expenses related to the delivery of services such as blueprints, reproductions, CADD/computer charges, and travel and subcontractor expenses. Direct expenses were $2.6 million during the three-month period ended June 30, 2004 as compared to $2.3 million for the same period in 2003, representing an increase of 13.4%. For the nine-month period ended June 30, 2004, direct expenses were $7.7 million compared to $6.6 million in 2003, representing a 16.9% increase. For the three-month period ended June 30, 2004, direct expenses, as a percent of net earned revenue, were 16.2% compared to 15.6% in 2003. For the nine-month period ended June 30, 2004, direct expenses, as a percentage of net earned revenue, were 15.5% compared to 15.9% in 2003. For both periods, the increase in direct expenses is directly related to the increased use of sub-consultants as a result of the increase in engineering fees.

Reported operating income was $735,000 for the three-month period ended June 30, 2004 as compared to $924,000 for the same period in 2003, representing a decrease of 20.4%. For the nine-month period ended June 30, 2004, operating income was $3.1 million compared to $1.5 million in 2003, representing a 106.3% increase. Operating income, as a percentage of net earned revenue, was 4.5% for the three months ended June 30, 2004 as compared to 6.2% for the same period in 2003. For the nine-month period ended June 30, 2004, operating income, as a percentage of net earned revenue, was 6.3% compared to 3.6% in 2003. The decrease in operating income for the three-month period ending June 30, 2004 is due in part to lower chargeability when compared to the same quarter in 2003, as well as higher general and administrative costs. The increase in operating income and operating income as a percentage

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of net earned revenue for the nine-month period ending June 30, 2004 is due to increased chargeability and improved general and administrative cost control, allowing for a reduction in total costs and expenses as a percentage of net earned revenue. As chargeability increases, the Company is able to bill out more of its costs to clients, thereby improving its profit margin.

Costs and expenses consist of direct salaries that are chargeable to clients and general and administrative expenses. Direct salaries increased to $5.9 million for the three-month period ended June 30, 2004 from $5.5 million for the period ended June 30, 2003, representing a 6.3% increase. For the nine-month period ended June 30, 2004, direct salaries were $17.8 million, an increase of 18.9% as compared to $15.0 million for the same period in 2003. Direct salaries as a percentage of net earned revenue, decreased from 37.0% for the three-month period ended June 30, 2003 to 36.2% for the same period in 2004. For the nine-month periods, direct salaries as a percentage of net earned revenue decreased from 36.1% for the nine-month period ended June 30, 2003 to 35.9% for the same period in 2004. This increase in direct salaries is a result of increased direct labor charges incurred to support the growth within the segment. Specifically, the nine-month period ended June 30, 2004 saw an increase in overall chargeability.

The other component of costs and expenses is general and administrative expenses, which consists of indirect labor and other overhead costs incurred to run the Company. Indirect labor increased 15.6%, from $1.9 million for the three-month period ended June 30, 2003, to $2.2 million for the same period in 2004. For the nine-month period ended June 30, 2004, indirect labor was $6.8 million as compared to $6.0 million for the same period in 2003, representing a 13.0% increase. Indirect labor, as a percentage of net earned revenue, increased from 12.8% for the three-month period ended June 30, 2003, to 13.6% for the same period in 2004. For the nine-month period, indirect labor as a percentage of net earned revenue decreased from 14.6% in 2003 to 13.8% in 2004. The decrease in indirect labor as a percentage of net earned revenue for the nine-month period is a result of the increased chargeability within this segment. As chargeability increases, direct labor increases and indirect labor decreases, as more of the technical staff’s time worked is being charged back to clients. The increase in indirect labor as a percentage of net earned revenue for the three-month period is a result of decreased chargeability during the period as compared to the same period in 2003.

Other overhead costs increased both during the three-month and nine-month periods ended June 30, 2004. For the three-month period ended June 30, 2004, other overhead costs were $7.4 million, as compared to $6.5 million for the same period in 2003. For the nine-month period ended June 30, 2004, other overhead costs were $21.9 million, as compared to $18.9 million for the same period in 2003. The increase in other overhead costs was directly related to the growth in engineering fees, as well as to increases in medical and workers compensation insurance accruals and increases in pay rates for employees for the new calendar year.

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Environmental