UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005

o		TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from                                          to                                         

URS CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		94-1381538
(State or other jurisdiction of incorporation)		(I.R.S. Employer Identification No.)
600 Montgomery Street, 26th Floor
San Francisco, California		94111-2728
(Address of principal executive offices)		(Zip Code)

(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 þ 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 þ No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

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

Class		Outstanding at October 31, 2005
Common Stock, $.01 par value		49,541,068

 

 

URS CORPORATION AND SUBSIDIARIES

     This Quarterly Report on Form 10-Q 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 business prospects, future accounting and actuarial estimates, future impact of SFAS 123(R), future outcomes of our legal proceedings, future maintenance of our insurance coverage, future guarantees and debt service obligations, future pension contributions, future capital resources, future effectiveness of our disclosure and internal controls 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: an economic downturn, changes in our book of business; our compliance with government contract procurement regulations; our dependence on government appropriations and procurements; our ability to make accurate estimates; our ability to bid on contracts and execute contracts and guarantees; our leveraged position; our ability to service our debt; liability for pending and future litigation; the impact of changes in laws and regulations; 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 SFAS 123(R); risks associated with international operations; project management and accounting software risks; terrorist and natural disaster risks; our relationships with our labor unions; 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 48, 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.

PART I. FINANCIAL INFORMATION:
Item 1.		Consolidated Financial Statements
		Consolidated Balance Sheets September 30, 2005 and December 31, 2004			2
		Consolidated Statements of Operations and Comprehensive Income Three months and nine months ended September 30, 2005 and September 30, 2004			3
		Consolidated Statements of Cash Flows Nine months ended September 30, 2005 and September 30, 2004			4
		Notes to Consolidated Financial Statements			5
Item 2.		Management's Discussion and Analysis of Financial Condition and Results of Operations			29
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			56
Item 4.		Controls and Procedures			56
PART II. OTHER INFORMATION:
Item 1.		Legal Proceedings			57
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			58
Item 3.		Defaults Upon Senior Securities			58
Item 4.		Submission of Matters to a Vote of Security Holders			58
Item 5.		Other Information			58
Item 6.		Exhibits			59
EXHIBIT 4.1
EXHIBIT 10.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

PART I
FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

URS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS — UNAUDITED
(In thousands, except per share data)

		September 30, 2005				December 31, 2004
ASSETS
Current assets:
Cash and cash equivalents, including $27,213 and $59,175 of short-term money market funds, respectively		$	86,823			$	108,007
Accounts receivable, including retainage of $41,064 and $43,844 respectively			592,666				579,953
Costs and accrued earnings in excess of billings on contracts in process			470,561				400,418
Less receivable allowances			(43,608	)			(38,719	)
Net accounts receivable			1,019,619				941,652
Deferred income taxes			21,945				20,614
Prepaid expenses and other assets			47,969				26,061
Total current assets			1,176,356				1,096,334
Property and equipment at cost, net			144,797				142,907
Goodwill			1,006,253				1,004,680
Purchased intangible assets, net			5,831				7,749
Other assets			50,547				52,010
		$	2,383,784			$	2,303,680
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Book overdraft		$	7,280			$	70,871
Notes payable and current portion of long-term debt			26,464				48,338
Accounts payable and subcontractors payable, including retainage of $13,409 and $13,302, respectively			207,945				144,435
Accrued salaries and wages			175,974				171,004
Accrued expenses and other			62,595				59,914
Billings in excess of costs and accrued earnings on contracts in process			109,470				84,393
Total current liabilities			589,728				578,955
Long-term debt			335,069				508,584
Deferred income taxes			44,852				36,305
Other long-term liabilities			105,033				97,715
Total liabilities			1,074,682				1,221,559
Commitments and contingencies (Note 5)
Stockholders’ equity:
Common shares, par value $.01; authorized 100,000 shares; 49,546 and 43,838 shares issued, respectively; and 49,494 and 43,786 shares outstanding, respectively			495				438
Treasury stock, 52 shares at cost			(287	)			(287	)
Additional paid-in capital			909,506				734,843
Accumulated other comprehensive income			2,138				6,418
Retained earnings			397,250				340,709
Total stockholders’ equity			1,309,102				1,082,121
		$	2,383,784			$	2,303,680

See Notes to Consolidated Financial Statements

URS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME —
UNAUDITED
(In thousands, except per share data)

		Three Months Ended								Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2005				2004				2005				2004
Revenues		$	962,940			$	861,681			$	2,846,556			$	2,554,307
Direct operating expenses			627,199				548,589				1,836,655				1,617,948
Gross profit			335,741				313,092				1,009,901				936,359
Indirect, general and administrative expenses			282,771				263,112				889,949				818,627
Operating income			52,970				49,980				119,952				117,732
Interest expense, net			4,513				10,326				24,771				43,597
Income before income taxes			48,457				39,654				95,181				74,135
Income tax expense			19,620				15,860				38,640				29,650
Net income			28,837				23,794				56,541				44,485
Other comprehensive income (loss):
Minimum pension liability adjustment			—				—				(270	)			—
Foreign currency translation adjustments			(229	)			600				(4,010	)			1,596
Comprehensive income		$	28,608			$	24,394			$	52,261			$	46,081
Net income per common share:
Basic		$	.59			$	.55			$	1.23			$	1.12
Diluted		$	.58			$	.55			$	1.20			$	1.11
Weighted-average shares outstanding:
Basic			48,934				43,388				45,836				39,661
Diluted			50,116				43,604				46,946				40,044

See Notes to Consolidated Financial Statements

URS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS—UNAUDITED
(In thousands)

		Nine Months Ended
		September 30,				September 30,
		2005				2004
Cash flows from operating activities:
Net income		$	56,541			$	44,485
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			29,225				31,003
Amortization of financing fees			3,315				4,943
Gain on disposal of property and equipment			(319	)			—
Costs incurred for extinguishment of debt			33,125				27,393
Provision for doubtful accounts			7,865				9,658
Deferred income taxes			7,216				(3,458	)
Stock compensation			4,508				3,020
Tax benefit of stock compensation			9,269				3,832
Changes in assets and liabilities:
Accounts receivable and costs and accrued earnings in excess of billings on contracts in process			(85,829	)			(37,137	)
Prepaid expenses and other assets			(25,532	)			(5,886	)
Accounts payable, accrued salaries and wages and accrued expenses			70,779				26,073
Billings in excess of costs and accrued earnings on contracts in process			25,077				(7,074	)
Other long-term liabilities			7,317				(80	)
Other liabilities, net			(8,603	)			591
Total adjustments and changes			77,413				52,878
Net cash from operating activities			133,954				97,363
Cash flows from investing activities:
Payment of business acquisition			(1,353	)			—
Proceeds from disposal of property and equipment			2,182				—
Capital expenditures, less equipment purchased through capital lease			(16,897	)			(14,695	)
Net cash from investing activities			(16,068	)			(14,695	)
Cash flows from financing activities:
Long-term debt principal payments			(535,919	)			(288,633	)
Long-term debt borrowings			351,376				26,496
Net borrowings (payments) under the line of credit			(16,750	)			19,961
Net change in book overdraft			(63,591	)			(13,438	)
Capital lease obligation payments			(11,184	)			(10,866	)
Short-term note borrowings			3,714				1,540
Short-term note payments			(3,610	)			(1,557	)
Proceeds from common stock offering, net of related expenses			130,257				204,287
Proceeds from sale of common stock from employee stock purchase plan and exercise of stock options			30,687				23,970
Tender and call premiums paid for debt extinguishment			(19,421	)			(19,075	)
Payments for financing fees			(4,629	)			(1,280	)
Net cash from financing activities			(139,070	)			(58,595	)
Net increase (decrease) in cash and cash equivalents			(21,184	)			24,073
Cash and cash equivalents at beginning of period			108,007				34,744
Cash and cash equivalents at end of period		$	86,823			$	58,817
Supplemental information:
Interest paid		$	25,611			$	48,336
Taxes paid		$	28,285			$	32,582
Equipment acquired through capital lease obligations		$	14,891			$	10,754

See Notes to Consolidated Financial Statements

URS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

NOTE 1. BUSINESS, BASIS OF PRESENTATION, AND 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 operate through two divisions: the URS Division and the EG&G Division. 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 transportation, facilities, environmental, homeland security, defense systems, installations and logistics, commercial/industrial, and water/wastewater treatment projects. Headquartered in San Francisco, we operate in more than 20 countries with approximately 28,000 employees providing services to federal, state and local governments, and private industry clients in the United States and abroad.

     Effective January 1, 2005, we adopted a 52/53 week fiscal year ending on the Friday closest to December 31^st, with interim quarters ending on the Fridays closest to March 31^st, June 30^th and September 30^th. We filed a transition report on Form 10-Q with the Securities and Exchange Commission (“SEC”) for the two months ended December 31, 2004. Our 2005 fiscal year began on January 1, 2005 and will end on December 30, 2005.

     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 financial position, results of operations and cash flows of our wholly-owned subsidiaries and joint ventures required to be consolidated under Financial Accounting Standards Board Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” (“FIN 46-R”). We participate in joint ventures formed for the purpose of bidding, negotiating and executing projects. Sometimes we function as the sponsor or manager of the projects performed by the joint venture. Investments in unconsolidated joint ventures are accounted for using the equity method. 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 amended Annual Report on Form 10-K/A for the fiscal year ended October 31, 2004. The results of operations for the nine months ended September 30, 2005 are not 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 statement 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.

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

Cash and Cash Equivalents/Book Overdraft

     At September 30, 2005 and December 31, 2004, we had book overdrafts for some of our disbursement accounts. These overdrafts represented transactions that had not cleared the bank accounts at the end of the reporting period. We transferred cash on an as-needed basis to fund these items as they cleared the bank in subsequent periods.

     At September 30, 2005 and December 31, 2004, cash and cash equivalents included $43.9 million and $13.5 million held by our consolidated joint ventures.

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, excluding unvested restricted stock. 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 and vesting of the restricted stock. 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.

     A reconciliation of the numerator and denominator of basic and diluted income per common share is provided as follows:

		Three Months Ended								Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2005				2004				2005				2004
						(In thousands, except per share data)
Numerator — Basic
Net income		$	28,837			$	23,794			$	56,541			$	44,485
Denominator — Basic
Weighted-average common stock shares outstanding			48,934				43,388				45,836				39,661
Basic income per share		$	.59			$	.55			$	1.23			$	1.12
Numerator — Diluted
Net income		$	28,837			$	23,794			$	56,541			$	44,485
Denominator — Diluted
Weighted-average common stock shares outstanding			48,934				43,388				45,836				39,661
Effect of dilutive securities			1,182				216				1,110				383
Stock options and restricted stock			50,116				43,604				46,946				40,044
Diluted income per share		$	.58			$	.55			$	1.20			$	1.11

     All of the potential shares associated with outstanding stock options are included in our computation of diluted income per share for the three months ended September 30, 2005. For the three months ended September 30, 2004, we did not include 1.1 million of potential shares associated with outstanding stock options in our computation of diluted income per share because the exercise prices of the options were greater than the average per share market value of our common stock. In our computation of diluted income per share for the nine months ended September 30, 2005 and September 30, 2004, we did not include five thousand and fifty-two thousand of potential shares associated with outstanding stock options, respectively.

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

Stock-Based Compensation

     In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123 (Revised), “Share-Based Payment” (“SFAS 123(R)”). SFAS 123(R) replaces SFAS 123 and supersedes APB 25. In April 2005, the SEC adopted Rule 4-01(a) of Regulation S-X, which defers the required effective date of SFAS 123(R) to the first fiscal year beginning after June 15, 2005, instead of the first interim period beginning after June 15, 2005 as originally required. Because our fiscal year will end on December 30, 2005, SFAS 123(R) will become effective for us on December 31, 2005 (the “Effective Date”), but early adoption is allowed. Upon adoption of SFAS 123(R), we will be required to record an expense for our stock-based compensation plans using a fair value method. SFAS 123(R) applies to all stock-based compensation awards granted, modified or settled in interim or fiscal periods after the required Effective Date, but does not apply to awards granted in periods before the required Effective Date, unless they are modified, repurchased or cancelled after the Effective Date. SFAS 123(R) also amends Statement of Financial Accounting Standards No. 95, “Statement of Cash Flows,” to require reporting of excess tax benefits from the exercises of stock-based compensation awards as a financing cash inflow rather than as an operating cash inflow.

     In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) to provide implementation guidance on SFAS 123(R). SAB 107 was issued to assist registrants in implementing SFAS 123(R) while enhancing the information that investors receive. The FASB has also issued interpretative guidance. We expect to use the modified prospective transition method in our adoption of SFAS 123(R), which will have a material impact on our financial statements as we have historically recorded our stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”).

     As a result of our assessment of the impacts associated with the adoption of SFAS 123(R), we have re-evaluated our 1991 Stock Incentive Plan and 1999 Equity Incentive Plan (collectively, the “Stock Incentive Plans”), and have currently decided to issue restricted stock awards rather than stock option grants to selected employees.

     We have an Employee Stock Purchase Plan (“ESPP”) under which eligible employees have authorized payroll deductions of up to ten percent of their compensation, subject to Internal Revenue Code limitations, to purchase common stock at a price of 85% of the lower of the fair market value as of the beginning or the end of the six-month offering period. Due to the effects of adopting SFAS 123(R), effective December 31, 2005, our ESPP will be modified to allow employees to purchase common stock at a price of 95% of the fair market value as of the end of the six-month offering period.

     As permitted under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), we continue to apply APB 25 and related accounting interpretations for stock-based compensation. Under APB 25, the compensation expense associated with employee stock awards is measured as the difference, if any, between the price to be paid by an employee and the fair value of the common stock on the grant date. Accordingly, we recognize no compensation expense with respect to stock-based option awards. Stock purchased through the ESPP as currently structured qualifies under a specific exception under APB 25, and as result, we do not recognize any compensation expense with respect to such purchases either. Compensation expense is recognized for modifications of stock-based option grants in accordance with APB 25. In addition, we record compensation expense related to restricted stock over the applicable vesting period and such compensation expense is measured at the fair market value of the restricted stock at the date of award.

     Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure” (“SFAS 148”), requires prominent disclosure of pro forma results in both annual and interim financial statements as if we had applied the fair value recognition provisions of SFAS 123. We use the Black-Scholes option pricing model to measure the estimated fair value of stock

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

options and the ESPP. The following assumptions were used to estimate stock option and ESPP compensation expense using the fair value method of accounting:

		Stock Incentive Plans								Employee Stock Purchase Plan
		Three Months Ended								Three Months Ended
		September 30,				September 30,				September 30,				September 30,
		2005				2004				2005				2004
Risk-free interest rate			4.3	%			4.5	%			3.5	%			1.6	%
Expected life		5.78 years				7.39 years				0.5 year				0.5 year
Volatility			44.42	%			46.27	%			27.24	%			28.84	%
Expected dividends		None				None				None				None

		Stock Incentive Plans								Employee Stock Purchase Plan
		Nine Months Ended								Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2005				2004				2005				2004
Risk-free interest rate			4.0% - 4.3	%			4.1%- 4.5	%			2.6% - 3.5	%			1.0% - 1.6	%
Expected life		5.78 years				7.39 years				0.5 year				0.5 year
Volatility (1)			44.42	%			46.27	%		23.33% and 27.24%				28.84% and 34.31%
Expected dividends		None				None				None				None

(1)

Employees can participate in our ESPP semi-annually. As a result, there are two separate computations of the fair value of stock compensation expense during the nine-month periods ended September 30, 2005 and 2004.

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

		Three Months Ended								Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2005				2004				2005				2004
						(In thousands, except per share data)
Numerator — Basic
Net income:
As reported		$	28,837			$	23,794			$	56,541			$	44,485
Add: Total stock-based compensation expense as reported, net of tax			618				1,032				2,740				1,835
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of tax			4,591				8,541				8,875				12,232
Pro forma net income		$	24,864			$	16,285			$	50,406			$	34,088
Denominator — Basic
Weighted-average common stock shares outstanding			48,934				43,388				45,836				39,661
Basic income per share:
As reported		$	.59			$	.55			$	1.23			$	1.12
Pro forma		$	.51			$	.38			$	1.10			$	.86

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

		Three Months Ended								Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2005				2004				2005				2004
						(In thousands, except per share data)
Numerator — Diluted
Net income:
As reported		$	28,837			$	23,794			$	56,541			$	44,485
Add: Total stock-based compensation expense as reported, net of tax			618				1,032				2,740				1,835
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of tax			4,591				8,541				8,875				12,232
Pro forma net income		$	24,864			$	16,285			$	50,406			$	34,088
Denominator — Diluted
Weighted-average common stock shares outstanding			50,116				43,604				46,946				40,044
Diluted income per share:
As reported		$	.58			$	.55			$	1.20			$	1.11
Pro forma		$	.50			$	.37			$	1.07			$	.85

Adopted and Recently Issued Statements of Financial Accounting Standards

     In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151, "Inventory Costs, and Amendment of Accounting Research Bulletin No. 43 (“ARB No. 43”), Chapter 4” (“SFAS 151”). SFAS 151 amends the guidance in ARB No. 43 Chapter 4, “Inventory Pricing,” by clarifying that abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage) be recognized as current period charges. The provisions of SFAS 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS 151 will not have a material effect on our consolidated financial statements.

     In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”), which replaces Accounting Principles Board Opinion No. 20, “Accounting Changes,” and Statement of Financial Accounting Standards No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS 154 requires retroactive application of a change in accounting principle to prior period financial statements unless it is impracticable or if another pronouncement mandates a different method. SFAS 154 also requires that a change in the method of depreciation, amortization or depletion for long-lived, non-financial assets be accounted for as a change in accounting estimate resulting from a change in accounting principle. It is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Depending on the type of accounting change, the adoption of SFAS 154 may have a material impact on our consolidated financial statements.

Reclassifications

     We have made reclassifications to our fiscal year 2004 financial statements to conform them to the fiscal year 2005 presentation. These reclassifications have no effect on consolidated net income, stockholders’ equity and net cash flows.

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

NOTE 2. PROPERTY AND EQUIPMENT

     Property and equipment consists of the following:

		September 30,				December 31,
		2005				2004
		(In thousands)
Equipment		$	155,654			$	153,278
Furniture and fixtures			21,244				20,855
Leasehold improvements			38,777				32,893
Construction in progress			6,202				4,328
			221,877				211,354
Accumulated depreciation and amortization			(117,821	)			(105,228	)
			104,056				106,126
Equipment, furniture and fixtures under capital leases			95,302				81,962
Accumulated amortization			(54,561	)			(45,181	)
			40,741				36,781
Property and equipment at cost, net		$	144,797			$	142,907

     As of September 30, 2005 and December 31, 2004, we capitalized internal-use software development costs of $60.1 million and $58.9 million, respectively. We amortize the capitalized software costs using the straight-line method over an estimated useful life of ten years.

     Property and equipment is depreciated using the following estimated useful lives:

		Estimated Useful Life
Equipment		4 – 10 years
Capital leases		3 – 10 years
Furniture and fixtures		5 – 10 years
Leasehold improvements		9 months – 20 years

     Depreciation expense related to property and equipment was $8.7 million and $9.3 million for the three months ended September 30, 2005 and September 30, 2004, respectively. Depreciation expense related to property and equipment for the nine months ended September 30, 2005 and September 30, 2004 was $27.1 million and $28.6 million, respectively.

     Amortization expense related to purchased intangible assets was $0.6 million and $0.8 million for the three months ended September 30, 2005 and September 30, 2004, respectively. Amortization expense related to purchased intangible assets for the nine months ended September 30, 2005 and September 30, 2004 was $2.1 million and $2.4 million, respectively.

NOTE 3. EMPLOYEE RETIREMENT PLANS

Executive Plan

     In July 1999, as amended and restated in September 2003, we entered into a Supplemental Executive Retirement Agreement (the “Executive Plan”) with Martin M. Koffel, our Chief Executive Officer, to provide an annual lifetime retirement benefit, which was fully earned as of September 30, 2005. The components of our net periodic pension costs related to the Executive Plan for the three months and nine months ended September 30, 2005 and September 30, 2004 were as follows:

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

		Three Months Ended								Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2005				2004				2005				2004
						(In thousands)
Service cost		$	—			$	228			$	—			$	684
Interest cost			131				109				393				327
Net periodic benefit cost		$	131			$	337			$	393			$	1,011

Radian SERP and SCA

     In fiscal year 1999, we acquired and assumed some of the defined benefit pension plans and post-retirement benefit plans of Radian International, L.L.C. (“Radian”), which were transferred to URS Corporation, a Nevada company. 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 a Salary Continuation Agreement (“SCA”), which are intended to supplement the retirement benefits provided by other benefit plans upon the participants attaining minimum age and years of service requirements. The components of our net periodic pension costs related to the SERP and SCA for the three months and nine months ended September 30, 2005 and September 30, 2004 were as follows:

		Three Months Ended								Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2005				2004				2005				2004
						(In thousands)
Interest cost		$	145			$	177			$	435			$	531
Amortization of net loss			18				4				54				12
Net periodic benefit cost		$	163			$	181			$	489			$	543

EG&G Pension Plan

     In fiscal year 2002, we acquired and assumed the obligations of the defined benefit pension plan (“EG&G pension plan”) and post-retirement medical plan (“EG&G post-retirement medical plan”) of EG&G Technical Services, Inc. These plans cover some of our hourly and salaried employees of the EG&G Division and a joint venture in which the EG&G Division participates. The components of our net periodic pension and post-retirement benefit costs relating to the EG&G pension plan and the EG&G post-retirement medical plan were as follows:

		Three Months Ended								Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2005				2004				2005				2004
						(In thousands)
Service cost		$	1,636			$	1,165			$	4,908			$	3,495
Interest cost			2,135				1,954				6,405				5,862
Expected return on plan assets			(2,292	)			(2,131	)			(6,876	)			(6,393	)
Amortization of:
Prior service cost			(518	)			(518	)			(1,554	)			(1,554	)
Net loss			406				30				1,218				90
Net periodic benefit cost		$	1,367			$	500			$	4,101			$	1,500

     We expect to make cash contributions during fiscal year 2005 of approximately $7.5 million to the EG&G pension plan.

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

EG&G Post-retirement Medical Plan

		Three Months Ended								Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2005				2004				2005				2004
						(In thousands)
Service cost		$	70			$	63			$	210			$	189
Interest cost			69				69				207				207
Expected return on plan assets			(64	)			(72	)			(192	)			(216	)
Amortization of:
Net loss			20				2				60				6
Net periodic benefit cost		$	95			$	62			$	285			$	186

NOTE 4. CURRENT AND LONG-TERM DEBT

Credit Facilities

New Credit Facility

     On June 28, 2005, we entered into a new senior credit facility (“New Credit Facility”) consisting of a 6-year Term Loan of $350.0 million and a 5-year Revolving Line of Credit of $300.0 million, against which up to $200.0 million can be used to issue letters of credit. As of September 30, 2005, we had $310.0 million outstanding under the Term Loan, $58.8 million in letters of credit, and no amount outstanding under the Revolving Line of Credit.

     Our Revolving Line of Credit is used to fund daily operating cash needs and to support our standby letters of credit. During the ordinary course of business, the use of our Revolving Line of Credit is a function of collection and disbursement activities. Our daily cash needs generally follow a predictable pattern that parallels our payroll cycles, which dictate, as necessary, our short term borrowing requirements.

     Principal amounts under the Term Loan will become due and payable on a quarterly basis: 15% of the principal will be payable in four equal quarterly payments beginning in the third quarter of 2008, 20% of the principal will be due during the next four quarters, and 65% will be due in the final four quarters ending on June 28, 2011. Our Revolving Line of Credit expires and is payable in full on June 28, 2010. At our option, we may repay the loans under our New Credit Facility without premium or penalty.

     All loans outstanding under our New Credit Facility bear interest at either LIBOR or the bank’s base rate plus an applicable margin, at our option. The applicable margin will change based upon our credit rating as reported by Moody’s Investor Services (“Moody’s”) and Standard & Poor’s. The LIBOR margin will range from 0.625% to 1.75% and the base rate margin will range from 0.0% to 0.75%. As of September 30, 2005, the LIBOR margin was 1.25% for both the Term Loan and Revolving Line of Credit. As of September 30, 2005, the interest rate on our Term Loan was 5.27%.

     A substantial number of our domestic subsidiaries are guarantors of the New Credit Facility on a joint and several basis. Initially, the obligations are collateralized by our guarantors’ capital stock. The collateralized obligations will be eliminated if we reach an investment grade credit rating of “Baa3” from Moody’s and “BBB-” from Standard & Poor’s. If our credit rating were to fall to or below “Ba2” from Moody’s or “BB” from Standard & Poor’s, we would be required to provide a secured interest in substantially all of our existing and subsequently acquired personal and real property, in addition to the collateralized guarantors’ capital stock. Although the capital stock of the non-guarantor subsidiaries are not required to be pledged as collateral, the terms of the New Credit Facility restrict the non-guarantors’ assets, with some exceptions, from being used as a pledge for future liens (a “negative pledge”). Moody’s upgraded

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

our credit rating from “Ba2” to “Ba1” on June 20, 2005. On July 26, 2005, Standard & Poor’s upgraded our credit rating from “BB” to “BB+.”

     Our New Credit Facility contains financial covenants. We are required to maintain: (a) a maximum ratio of total funded debt to total capital of 40% or less and (b) a minimum interest coverage ratio of not less than 3.0:1. The interest coverage ratio is calculated by dividing consolidated Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”), as defined in our New Credit Facility agreement, by consolidated cash interest expense.

     The New Credit Facility also contains customary events of default and customary affirmative and negative covenants including, but not limited to, limitations on mergers, consolidations, acquisitions, asset sales, dividend payments, stock redemptions or repurchases, transactions with stockholders and affiliates, liens, capital leases, negative pledges, sale-leaseback transactions, indebtedness, contingent obligations and investments.

     As of September 30, 2005, we were in compliance with all the covenants of the New Credit Facility.

Old Credit Facility

     Our old senior secured credit facility (“Old Credit Facility”) consisted of two term loans, Term Loan A and Term Loan B, and a revolving line of credit. Our Old Credit Facility was terminated and repaid in full on June 28, 2005. As of December 31, 2004, we had $353.8 million in principal amounts outstanding under the term loan facilities with an interest rate of 4.42%. We had also drawn $18.0 million against our revolving line of credit and had outstanding standby letters of credit aggregating to $55.3 million, reducing the amount available to us under our revolving credit facility to $151.7 million.

Revolving Line of Credit

     The effective average interest rates paid on the revolving line of credit during the three months ended September 30, 2005 and September 30, 2004 were approximately 6.43% and 4.87%, respectively. The effective average interest rates paid on the revolving line of credit from January 1 through September 30, 2005 and during the nine months ended September 30, 2004 were approximately 6.03% and 5.33%, respectively.

     Our average daily revolving line of credit balances for the three-month periods ended September 30, 2005 and September 30, 2004 were $0.1 million and $32.5 million, respectively. The maximum amounts outstanding at any one point in time during the three-month periods ended September 30, 2005 and September 30, 2004 were $3.1 million and $62.7 million, respectively. Our average daily revolving line of credit balances for the nine-month periods ended September 30, 2005 and September 30, 2004 were $2.2 million and $26.4 million, respectively. The maximum amounts outstanding at any one point in time during the nine-month periods ended September 30, 2005 and September 30, 2004 were $22.8 million and $74.6 million, respectively.

Other Indebtedness

     11¹/2% Senior Notes (“11¹/2% notes”). As of September 30, 2005 and December 31, 2004, we had outstanding amounts of $2.8 million and $130.0 million, of the original outstanding principal, due 2009. On June 15, 2005, we accepted tenders for and retired $127.2 million of the 11¹/2% notes. Interest is payable semi-annually in arrears on March 15 and September 15 of each year. These notes are effectively subordinate to our New Credit Facility, capital leases and notes payable.

     12¹/4% Senior Subordinated Notes (“12¹/4% notes”). On February 14, 2005, we retired the entire outstanding balance of $10 million of our 12¹/4% notes. As of December 31, 2004, we owed $10 million.

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

     6¹/2% Convertible Subordinated Debentures (“6¹/2% debentures”). On August 15, 2005, we retired the entire outstanding balance of $1.8 million of our 6¹/2% debentures. As of December 31, 2004, we owed $1.8 million due 2012.

     Notes payable, foreign credit lines and other indebtedness. As of September 30, 2005 and December 31, 2004, we had outstanding amounts of $13.0 million and $13.4 million, respectively, in notes payable and foreign lines of credit. The weighted average interest rates of the notes were approximately 5.7% and 5.8% as of September 30, 2005 and December 31, 2004, respectively.

     We maintain foreign lines of credit, which are collateralized by the assets of our foreign subsidiaries and letters of credit. As of September 30, 2005, we had drawn $3.1 million on our foreign lines of credit, reducing the amount available under these facilities to $12.5 million. As of December 31, 2004, we had drawn $8.5 million under our foreign lines of credit, reducing the amount available to $7.9 million. The interest rates were 5.4% and 8.6% as of September 30, 2005 and December 31, 2004, respectively.

Fair Value of Financial Instruments

     The fair values of the 11¹/2% notes and the 12¹/4% notes fluctuate depending on market conditions and our performance and at times may differ from their carrying values. On February 14, 2005, we retired the entire outstanding balance of $10.0 million on the 12¹/4% notes. On June 15, 2005, we retired 97.8% of the $130.0 million of the 11¹/2% notes with $2.8 million outstanding. We believe that the fair value of our remaining 11¹/2% notes approximate their carrying value as of September 30, 2005. As of December 31, 2004, the total fair values of the 11¹/2% notes and the 12 ¹/4% notes were approximately $161.5 million.

Maturities

     As of September 30, 2005, the amounts of our long-term debt outstanding (excluding capital leases) that mature in the next five years and thereafter are as follows:

		(In thousands)
Less than one year		$	10,890
Second year			3,601
Third year			12,120
Fourth year			50,639
Fifth year			97,156
Thereafter			151,316
		$	325,722

Costs Incurred for Extinguishment of Debt

     We incurred the following costs to extinguish our Old Credit Facility, 6¹/2% debentures, 11¹/2% notes, and 12¹/4% notes during the three months and nine months ended September 30, 2005 and September 30, 2004.

		Three Months Ended September 30, 2005
		Old Credit				6 1/2%				11 1/2%				121/4%
		Facility				Debentures				Notes				Notes				Total
		(in thousands)
Write-off of pre-paid financing fees, debt issuance costs and discounts		$	—			$	16			$	—			$	—			$	16
Tender premiums and expenses			—				—				2				—				2
Total		$	—			$	16			$	2			$	—			$	18

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

		Three Months Ended September 30, 2004
		Old Credit				6 1/2%				11 1/2%				121/4%
		Facility				Debentures				Notes				Notes				Total
		(in thousands)
Write-off of pre-paid financing fees, debt issuance costs and discounts		$	—			$	—			$	—			$	337			$	337
Call premiums			—				—				—				1,225				1,225
Total		$	—			$	—			$	—			$	1,562			$	1,562

		Nine Months Ended September 30, 2005
		Old Credit				6 1/2%				11 1/2%				121/4%
		Facility				Debentures				Notes				Notes				Total
		(in thousands)
Write-off of pre-paid financing fees, debt issuance costs and discounts		$	6,012			$	16			$	7,527			$	149			$	13,704
Tender/Call premiums and expenses			—				—				18,808				613				19,421
Total		$	6,012			$	16			$	26,335			$	762			$	33,125

		Nine Months Ended September 30, 2004
		Old Credit				6 1/2%				11 1/2%				121/4%
		Facility				Debentures				Notes				Notes				Total
		(in thousands)
Write-off of pre-paid financing fees, debt issuance costs and discounts		$	—			$	—			$	5,191			$	3,127			$	8,318
Call premiums			—				—				8,050				11,025				19,075
Total		$	—			$	—			$	13,241			$	14,152			$	27,393

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

NOTE 5. COMMITMENTS AND CONTINGENCIES

     In the ordinary course of business, we are subject to certain contractual guarantees and governmental audits or investigations and 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 various outcomes of which cannot be predicted with certainty. The following provides updated information regarding proceedings that were described in Note 9 to our consolidated financial statements, which were included in our Annual Report on Form 10-K/A for the fiscal year ended October 31, 2004:

•

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 contracts (the “F-5 Contract”) with a Saudi Arabian government ministry (the “Ministry”). LSI’s operational performance under the F-5 Contract was completed in November 2000 and the Ministry has yet to pay a $12.2 million account receivable owed to LSI. The following legal proceedings ensued:

Two Saudi Arabian landlords have pursued claims over disputed rents in Saudi Arabia. The Saudi Arabian landlord of the Al Bilad complex received a judgment in Saudi Arabia against

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

LSI for $7.9 million. The $7.9 million judgment remains unpaid and LSI is currently pursuing a countersuit in Saudi Arabia against the Al Bilad landlord. Another landlord has obtained a judgment in Saudi Arabia against LSI for $1.2 million. The $1.2 million judgment also remains unpaid and LSI successfully appealed the decision in June 2005 in Saudi Arabia, which was remanded for future proceedings. LSI intends to continue to vigorously defend these matters.

During fiscal year 2004, an arbitration ruling by the International Chamber of Commerce was issued against LSI for a breach of a contract claim, which included a monetary award of approximately $5.5 million, plus continuing interest to a joint venture partner (the “Claimant”). In September 2005, LSI paid the Claimant $4.8 million in exchange for the full release of all claims against LSI.

LSI is involved in a dispute relating to a pending tax assessment issued by the Saudi Arabian taxing authority against LSI of approximately $5.1 million in taxes for the years 1999 through 2002. LSI disagrees with the Saudi Arabian taxing authority’s assessment and is providing responses, additional information and documentation to the taxing authority. Despite LSI’s position on the taxing authority’s assessment, the Ministry inappropriately directed payment of a performance bond outstanding under the F-5 Contract in the amount of approximately $5.6 million. Banque Saudi Fransi paid the bond and thereafter filed a reimbursement claim against LSI in December 2004 in the United Kingdom’s High Court of Justice, Queen’s Bench Division, Commercial Court. LSI believes Banque Saudi Fransi’s payment of the performance bond amount was inappropriate and constituted a contractual violation of our performance bond agreement. In April 2005, LSI responded to the Banque Saudi Fransi’s claim and the Commercial Court granted Banque Saudi Fransi an application for summary judgement of approximately $5.6 million, plus attorney fees and interest. In October 2005, LSI filed a motion in Commercial Court seeking permission to file an appeal. LSI intends to continue to vigorously defend this matter.

In November 2004, LSI filed a complaint against the Ministry in the United States District Court for the Western District of Texas for intentional interference with commercial relations caused by the Ministry’s wrongful demand of the performance bond. In addition, LSI’s complaint also asserts a breach of the F-5 Contract, unjust enrichment and promissory estoppel, and seeks payment of the $12.2 million account receivable owed to LSI under the F-5 Contract, as well as other damages. In March 2005, the Ministry responded to LSI’s complaint by filing a motion to dismiss, which the District Court denied. The Ministry failed to file a timely answer to LSI’s complaint and LSI is pursuing a motion for default judgment. LSI intends to continue to vigorously pursue this matter.

•

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 (“Solidere”) involved in the development and reconstruction of the central district of Beirut. Various disputes have arisen under this contract, including an allegation by Solidere 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 International Chamber of Commerce (“ICC”). During July 2004, an ICC arbitration panel ruled against Radian and ordered Radian to prepare a plan to, among other things, 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 Solidere, and authorized Solidere to withhold project payments. As of September 30, 2005, Solidere had withheld project payments amounting to $10.3 million included in our consolidated accounts receivable. In addition, Radian has deferred other costs amounting to $5.2 million included in our consolidated costs and accrued earnings in excess of billings on contracts in process and $3.2 million included in our consolidated other assets. Radian is

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

complying with the terms of the ICC arbitration panel’s ruling and continues to be actively engaged in attempting to resolve the various disputes directly with Solidere through alternate resolution strategies that may be more advantageous to both parties. Radian intends to continue to vigorously defend this matter.

Solidere is also seeking damages for delays of up to $8.5 million and drew upon an $8.5 million bank guarantee at Saradar Bank, Sh.M.L. (“Saradar”). In July 2004, Saradar filed a reimbursement claim in the First Court in Beirut, Lebanon to recover the $8.5 million bank guarantee from Radian and co-defendant Wells Fargo Bank, N.A. In February 2005, Radian responded to Saradar’s claim by filing a Statement of Defense in the First Court of Beirut. In April 2005, Saradar also filed a reimbursement claim against Solidere in the First Court of Beirut. Radian believes that the bank guarantee has expired and as a result, it was not obligated under the guarantee. Radian intends to continue to vigorously defend this matter.

Prior to entering into the Solidere contract, Radian obtained a project-specific, $50 million insurance policy from Alpina Insurance Company (“Alpina”) with a $1 million deductible, which Radian believes is available to support its claims in excess of the deductible. The Solidere contract contains a $20 million limitation on damages. In October 2004, Alpina notified Radian of a denial of insurance coverage. Radian filed a breach of contract and bad faith claim against Alpina in the United States District Court for the Northern District of California in October 2004 seeking declaratory relief and monetary damages. In July 2005, Alpina responded to Radian’s claim by filing a motion to dismiss based on improper venue, which was granted by the District Court. The District Court’s decision, however, did not consider the underlying merits of Radian’s claim and Radian appealed the matter to the United States Court of Appeals for the Ninth Circuit in September 2005. Radian is involved in settlement discussions with Alpina and its other insurance carriers to resolve the matter and intends to continue to vigorously pursue this matter.

•

Tampa-Hillsborough County Expressway Authority: In 1999, URS Corporation Southern, a wholly-owned subsidiary, entered into an agreement (“Agreement”) with the Tampa-Hillsborough County Expressway Authority (the “Authority”) to provide foundation design, project oversight and other support services in connection with the construction of the Lee Roy Selmon Elevated Expressway structure in Tampa, Florida. In 2004, during construction of the elevated structure, one pier subsided substantially, causing significant damage to a segment of the elevated structure, though no significant injuries were reported at the time of the incident. The Authority has completed and is implementing a plan to remediate the damage to the Expressway. In October 2005, the Authority filed a lawsuit in the Thirteenth Judicial Circuit of Florida against URS Corporation Southern and an unrelated third party, alleging breach of contract and professional negligence resulting in damages to the Authority exceeding $120 million. URS Corporation Southern believes that the Authority’s filing of the lawsuit was premature since the Agreement requires completion of a pre-suit mediation before a lawsuit may be filed, which the Authority failed to complete; and therefore URS Corporation Southern believes the lawsuit will be stayed. Sufficient information is not currently available to assess liabilities associated with a remediation plan. URS Corporation Southern intends to continue to vigorously defend this matter.

     Currently, we have limits of $125.0 million per loss and $125.0 million in the aggregate annually for general liability, professional errors and omissions liability and contractor’s pollution liability insurance (in addition to other policies for some specific projects). These policies include self-insured claim retention amounts of $4.0 million, $7.5 million and $7.5 million, respectively. In some actions, parties seek 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

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

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 contingencies 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 our contingencies described above, individually or collectively, are likely to exceed established loss accruals or our various professional errors and omissions, project-specific and potentially other insurance policies. However, the resolution of outstanding contingencies is subject to inherent uncertainty and it is reasonably possible that such resolution could have an adverse effect on us.

     As of September 30, 2005, we had the following guarantee obligations and commitments:

     We have guaranteed the credit facility of one of our joint ventures, 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 five months. The maximum potential amount of future payments that we could be required to make under this guarantee at September 30, 2005, was $6.5 million.

     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 material 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. Our URS Division provides a comprehensive range of professional planning and design, program and construction management, and operations and maintenance services to the U.S. federal government, state and local government agencies, and private industry clients in the United States and internationally. Our EG&G Division provides planning, systems engineering and technical assistance, operations and maintenance, and program management services to various U.S. federal government agencies, primarily the Departments of Defense and Homeland Security.

     These two segments operate under separate management groups and produce discrete financial information. Their operating results also are reviewed separately by management. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. 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. “Eliminations” in the following tables include elimination of inter-segment sales and elimination of investments in subsidiaries.

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

		September 30, 2005
						Property
		Net				and
		Accounts				Equipment
		Receivable				at Cost, Net				Total Assets
		(In thousands)
URS Division		$	746,783			$	131,316			$	1,006,237
EG&G Division			272,836				8,322				304,236
			1,019,619				139,638				1,310,473
Corporate			—				5,159				1,732,162
Eliminations			—				—				(658,851	)
Total		$	1,019,619			$	144,797			$	2,383,784

		December 31, 2004
						Property
		Net				and
		Accounts				Equipment
		Receivable				at Cost, Net				Total Assets
		(In thousands)
URS Division		$	728,850			$	132,277			$	941,476
EG&G Division			212,802				7,254				230,573
			941,652				139,531				1,172,049
Corporate			—				3,376				1,721,031
Eliminations			—				—				(589,400	)
Total		$	941,652			$	142,907			$	2,303,680

		Three Months Ended September 30, 2005
						Operating				Depreciation
						Income				and
		Revenues				(Loss)				Amortization
		(In thousands)
URS Division		$	625,005			$	46,319			$	7,885
EG&G Division			339,796				16,740				1,239
Eliminations			(1,861	)			(110	)			—
			962,940				62,949				9,124
Corporate			—				(9,979	)			232
Total		$	962,940			$	52,970			$	9,356

		Three Months Ended September 30, 2004
						Operating				Depreciation
						Income				and
		Revenues				(Loss)				Amortization
		(In thousands)
URS Division		$	563,519			$	44,332			$	8,402
EG&G Division			298,627				15,644				1,495
Eliminations			(465	)			—				—
			861,681				59,976				9,897
Corporate			—				(9,996	)			147
Total		$	861,681			$	49,980			$	10,044

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

		Nine Months Ended September 30, 2005
						Operating				Depreciation
						Income				and
		Revenues				(Loss)				Amortization
		(In thousands)
URS Division		$	1,855,159			$	136,702			$	24,394
EG&G Division			996,179				47,433				3,879
Eliminations			(4,782	)			(288	)			—
			2,846,556				183,847				28,273
Corporate			—				(63,895	)			952
Total		$	2,846,556			$	119,952			$	29,225

		Nine Months Ended September 30, 2004
						Operating				Depreciation
						Income				and
		Revenues				(Loss)				Amortization
		(In thousands)
URS Division		$	1,708,454			$	129,282			$	26,604
EG&G Division			847,896				41,388				4,080
Eliminations			(2,043	)			—				—
			2,554,307				170,670				30,684
Corporate			—				(52,938	)			319
Total		$	2,554,307			$	117,732			$	31,003

     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:

		Three Months Ended								Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2005				2004				2005				2004
		(In thousands)
Revenues
United States		$	868,383			$	790,051			$	2,567,744			$	2,331,291
International			96,882				72,927				285,545				227,481
Eliminations			(2,325	)			(1,297	)			(6,733	)			(4,465	)
Total revenues		$	962,940			$	861,681			$	2,846,556			$	2,554,307

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

Major Customers

     For the three months and nine months ended September 30, 2005 and September 30, 2004, we had multiple contracts with the U.S. Army that contributed more than ten percent of our total consolidated revenues:

		URS Division				EG&G Division				Total
		(In millions)
Three months ended September 30, 2005
The U.S. Army (1)		$	24.6			$	169.0			$	193.6
Three months ended September 30, 2004
The U.S. Army (1)		$	28.3			$	128.7			$	157.0
Nine months ended September 30, 2005
The U.S. Army (1)		$	75.0			$	484.1			$	559.1
Nine months ended September 30, 2004
The U.S. Army (1)		$	70.8			$	362.1			$	432.9

NOTE 7. RELATED PARTY TRANSACTIONS

     On January 19, 2005, affiliates of Blum Capital Partners, L.P. (collectively, the “Blum Affiliates”) sold 2,000,000 shares of our common stock in an underwritten secondary offering. The general partner of Blum Capital Partners, L.P. was a member of our Board of Directors.

     On October 21, 2005, according to the terms of an existing registration rights agreement, the Blum Affiliates requested that we register 3,580,907 shares of URS common stock held by the Blum Affiliates. Accordingly, on October 27, 2005, we filed a Form S-3 registration statement with the SEC solely to register the Blum Affiliates’ shares of URS common stock.

NOTE 8. COMMON STOCK

     On June 8, 2005, we sold an aggregate of 3,636,721 shares of our common stock through a public offering. We granted the underwriters the right to purchase up to an additional 363,672 shares of our common stock to cover over-allotments (the “over-allotment shares”). On June 8, 2005, the underwriters exercised their option to purchase the over-allotment shares.

     The offering price of our common stock was $34.50 per share and the total offering proceeds to us were $130.3 million, net of underwriting discounts and commissions and other offering-related expenses of $7.8 million. We used the net proceeds from this common stock offering and cash available on hand to pay $127.2 million of the 11¹/2% notes and $18.8 million of tender premiums and expenses.

NOTE 9. SUPPLEMENTAL GUARANTOR INFORMATION

     Substantially all of our domestic operating subsidiaries have guaranteed our obligations under our 11¹/2% notes. Each of the subsidiary guarantors has fully and unconditionally guaranteed our obligations on a joint and several basis.

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

     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, the 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 11¹/2% notes. In addition, although the terms of our 11¹/2% notes 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 information sets forth our condensed consolidating balance sheets as of September 30, 2005 and December 31, 2004, and our condensed consolidating statements of operations and comprehensive income for the three months and nine months ended September 30, 2005 and September 30, 2004; and our condensed consolidating statements of cash flows for the nine months ended September 30, 2005 and September 30, 2004. Elimination entries necessary to consolidate our subsidiaries are reflected in the eliminations column. Separate complete financial statements for our subsidiaries, which guarantee our 11¹/2% notes, would not provide additional material information that would be useful in assessing the financial condition of such subsidiaries.

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

		As of September 30, 2005
										Subsidiary
						Subsidiary				Non-				Reclassifications/
		Corporate				Guarantors				Guarantors				Eliminations				Consolidated
ASSETS
Current assets:
Cash and cash equivalents		$	27,370			$	68,868			$	16,548			$	(25,963	)		$	86,823
Accounts receivable			—				500,615				92,051				—				592,666
Costs and accrued earnings in excess of billings on contracts in process			—				403,119				67,442				—				470,561
Less receivable allowance			—				(37,318	)			(6,290	)			—				(43,608	)
Net accounts receivable			—				866,416				153,203				—				1,019,619
Deferred income taxes			21,945				—				—				—				21,945
Prepaid expenses and other assets			17,325				25,867				4,777				—				47,969
Total current assets			66,640				961,151				174,528				(25,963	)			1,176,356
Property and equipment at cost, net			5,159				122,701				16,937				—				144,797
Goodwill			1,006,253				—				—				—				1,006,253
Purchased intangible assets, net			5,831				—				—				—				5,831
Investment in subsidiaries			658,851				—				—				(658,851	)			—
Other assets			15,391				34,006				1,150				—				50,547
		$	1,758,125			$	1,117,858			$	192,615			$	(684,814	)		$	2,383,784
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Book overdraft		$	—			$	32,913			$	330			$	(25,963	)		$	7,280
Notes payable and current portion of long-term debt			3,357				19,859				3,248				—				26,464
Accounts payable and subcontractors payable			6,591				175,523				25,831				—				207,945
Accrued salaries and wages			4,466				150,664				20,844				—				175,974
Accrued expenses and other			17,884				37,910				6,801				—				62,595
Billings in excess of costs and accrued earnings on contracts in process			—				85,921				23,549				—				109,470
Total current liabilities			32,298				502,790				80,603				(25,963	)			589,728
Long-term debt			311,527				22,818				724				—				335,069
Deferred income taxes			44,852				—				—				—				44,852
Other long-term liabilities			60,346				42,002				2,685				—				105,033
Total liabilities			449,023				567,610				84,012				(25,963	)			1,074,682
Stockholders’ equity:
Total stockholders’ equity			1,309,102				550,248				108,603				(658,851	)			1,309,102
		$	1,758,125			$	1,117,858			$	192,615			$	(684,814	)		$	2,383,784