UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

		For the quarterly period ended January 1, 2006

OR

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

		For the transition period from to

Commission File Number 0-19655

TETRA TECH, INC.

(Exact name of registrant as specified in its charter)

Delaware		95-4148514
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

3475 East Foothill Boulevard, Pasadena, California 91107
(Address of principal executive office and zip code)

(626) 351-4664
(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 periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ý Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No ý

As of February 1, 2006, 57,221,595 shares of the registrant’s common stock were outstanding.

PART I.

FINANCIAL INFORMATION

Item 1. Financial Statements

Tetra Tech, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except par value)

	January 1, 2006			October 2, 2005
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	14,692		$	26,861
Accounts receivable – net	315,654			304,905
Prepaid expenses and other current assets	25,835			20,936
Income taxes receivable	19,317			14,172
Current assets of discontinued operations	4,762			24,074
Total current assets	380,260			390,948

PROPERTY AND EQUIPMENT:
Equipment, furniture and fixtures	73,214			70,863
Leasehold improvements	9,057			9,021
Total	82,271			79,884
Accumulated depreciation and amortization	(50,652		)	(48,248		)
PROPERTY AND EQUIPMENT – NET	31,619			31,636

DEFERRED INCOME TAXES	8,203			8,926

INCOME TAXES RECEIVABLE	33,800			33,800

GOODWILL	159,175			159,175

INTANGIBLE ASSETS – NET	5,348			5,665

OTHER ASSETS	11,907			10,734

NON-CURRENT ASSETS OF DISCONTINUED OPERATIONS	11,635			7,251

TOTAL ASSETS	$	641,947		$	648,135

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	73,571		$	88,508
Accrued compensation	39,724			50,935
Billings in excess of costs on uncompleted contracts	45,165			48,560
Deferred income taxes	15,484			5,019
Current portion of long-term obligations	17,713			17,800
Other current liabilities	47,606			45,137
Current liabilities of discontinued operations	3,772			13,376
Total current liabilities	243,035			269,335

LONG-TERM OBLIGATIONS	84,026			74,138

NON-CURRENT LIABILITIES OF DISCONTINUED OPERATIONS	—			47

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ EQUITY
Preferred stock – authorized, 2,000 shares of $0.01 par value; no shares issued and outstanding at January 1, 2006 and October 2, 2005	—			—
Common stock – authorized, 85,000 shares of $0.01 par value; issued and outstanding, 57,156 and 57,048 shares as of January 1, 2006 and October 2, 2005, respectively	572			570
Additional paid-in capital	253,391			251,112
Accumulated other comprehensive income	724			757
Retained earnings	60,199			52,176
TOTAL STOCKHOLDERS’ EQUITY	314,886			304,615

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	641,947		$	648,135

See accompanying Notes to Condensed Consolidated Financial Statements.

Tetra Tech, Inc.

Condensed Consolidated Statements of Income

(unaudited – in thousands, except per share data)

	Three Months Ended
	January 1, 2006			January 2, 2005

Revenue	$	341,192		$	309,666
Subcontractor costs	111,433			83,799
Revenue, net of subcontractor costs	229,759			225,867

Other contract costs	185,372			188,549
Gross profit	44,387			37,318

Selling, general and administrative expensess	27,264			23,262
Income from operations	17,123			14,056

Interest expense – net	2,232			2,468
Income from continuing operations before income tax expense	14,891			11,588
Income tax expense	6,403			4,728
Income from continuing operations	8,488			6,860
Income (loss) from discontinued operations, net of tax	(465		)	1,043

Net income	$	8,023		$	7,903

Basic earnings per share:
Income from continuing operations	$	0.15		$	0.12
Income (loss) from discontinued operations, net of tax	(0.01		)	0.02
Net income	$	0.14		$	0.14

Diluted earnings per share:
Income from continuing operations	$	0.15		$	0.12
Income (loss) from discontinued operations, net of tax	(0.01		)	0.02
Net income	$	0.14		$	0.14

Weighted average common shares outstanding:
Basic	57,102			56,469
Diluted	57,641			56,977

See accompanying Notes to Condensed Consolidated Financial Statements.

Tetra Tech, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited – in thousands)

	Three Months Ended
	January 1, 2006			January 2, 2005
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income	$	8,023		$	7,903

Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization	3,523			4,233
Stock-based compensation	1,061			—
Deferred income taxes	11,234			251
Provision for losses on contracts and related receivables	2,054			2,528
(Gain) on sale of discontinued operations	(267		)	—
(Gain) loss on disposal of property and equipment	11			(60		)

Changes in operating assets and liabilities, net of effects of dispositions:
Accounts receivable	(3,983		)	(19,177		)
Prepaid expenses and other assets	(5,021		)	(1,689		)
Accounts payable	(18,021		)	(21,152		)
Accrued compensation	(11,657		)	(11,010		)
Billings in excess of costs on uncompleted contracts	(3,417		)	(3,658		)
Other current liabilities	(125		)	(3,592		)
Income taxes receivable/payable	(5,264		)	2,388
Net cash used in operating activities	(21,849		)	(43,035		)

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	(2,897		)	(3,274		)
Payments for business acquisitions	—			(7,012		)
Proceeds from sale of discontinued operations	1,660			—
Proceeds on sale of property and equipment	61			444
Net cash used in investing activities	(1,176		)	(9,842		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term obligations	(206		)	(807		)
Proceeds from borrowings under long-term obligations	10,000			25,000
Net proceeds from issuance of common stock	1,062			971
Net cash provided by financing activities	10,856			25,164

EFFECT OF EXCHANGE RATE CHANGES ON CASH	—			249

NET DECREASE IN CASH AND CASH EQUIVALENTS	(12,169		)	(27,464		)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	26,861			48,032
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	14,692		$	20,568

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	3,987		$	4,543
Income taxes, net of refunds received	$	44		$	7,506

See accompanying Notes to Condensed Consolidated Financial Statements.

TETRA TECH, INC.

Notes To Condensed Consolidated Financial Statements

1. Basis of Presentation

The accompanying condensed consolidated balance sheet as of January 1, 2006, the condensed consolidated statements of income for the three months ended January 1, 2006 and January 2, 2005, and the condensed consolidated statements of cash flows for the three months ended January 1, 2006 and January 2, 2005 of Tetra Tech, Inc. (the “Company”) are unaudited, and, in the opinion of management, include all adjustments necessary for a fair statement of the financial position and the results of operations for the periods presented.

The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 2, 2005. Certain prior year amounts have been reclassified to conform to the current year presentation due to discontinued operations. The results of operations for the three months ended January 1, 2006 are not necessarily indicative of the results to be expected for the fiscal year ending October 1, 2006.

2. Discontinued Operations

The results for Vertex Engineering Services, Inc. (VES), Tetra Tech Canada Ltd. (TTC) and Whalen & Company, Inc. (WAC) were accounted for as discontinued operations in the condensed consolidated financial statements for all periods presented herein. The VES and TTC operations were considered to be held for sale in fiscal 2005, and thus were classified as discontinued operations in the fourth quarter of fiscal 2005. The Company ceased all revenue producing activities for WAC, an operating unit in the communications segment, and its operations were considered abandoned in the first quarter of fiscal 2006. As such, WAC was accounted for as a discontinued operation in the financial statements for the first quarter of fiscal 2006.

In the first quarter of fiscal 2006, the Company entered into a stock purchase agreement to sell VES, an operating unit in the resource management segment. To date, the Company has received $1.2 million in cash and $9.2 million in a promissory note that bears interest at 5% to 7% per annum over the payment term and matures on November 1, 2009. This note receivable was included in non-current assets of discontinued operations on the condensed consolidated balance sheet as of January 1, 2006. The Company is continuing to negotiate the final terms of the sale and expects to recognize a modest gain upon final consummation of the sale.

In the first quarter of fiscal 2006, the Company sold TTC, an operating unit in the communications segment, for approximately $4.9 million. The purchase price is payable pursuant to a promissory note that bears interest at 5% to 7% per annum over the payment term and matures on December 1, 2007. This note receivable was included in other assets on the condensed consolidated balance sheet as of January 1, 2006. The Company received a payment subsequent to January 1, 2006 in the amount of $1.0 million. The Company will recognize a gain on the sale of TTC upon receipt of additional payments. In the first quarter of fiscal 2006, the Company made a revision in the amount of $0.3 million to loss on sale of discontinued operations that was recorded in the fourth quarter of fiscal 2005 associated with this sale. The impact of this revision is not material to the current or prior period financial statements.

The summarized, combined statements of operations for discontinued operations are as follows:

	Three Months Ended
	January 1, 2006			January 2, 2005
	(in thousands)

Revenue	$	9,633		$	38,677

Income (loss) before income tax expense (benefit)	(1,213		)	1,762
Income tax expense (benefit)	(481		)	719
Income (loss) from operations, net of tax	(732		)	1,043

Gain on sale of discontinued operations, net of tax	267			—

Income (loss) from discontinued operations, net of tax	$	(465	)	$	1,043

The current assets of discontinued operations include net accounts receivable of $4.7 million and $23.9 million as of January 1, 2006 and October 2, 2005, respectively. All other financial statement amounts are individually immaterial.

3. Stock-Based Compensation

As of January 1, 2006 the Company had the following share-based compensation plans:

• 1989 Stock Option Plan – Key employees were granted options to purchase an aggregate of 1,490,112 shares of the Company’s common stock at prices ranging from 100% to 110% of market value on the date of grant. The 1989 Stock Option Plan terminated in 1999, except as to outstanding options. All options granted by the Company were at least 100% of market value at the date of grant. Those options vested at 25% per year and became exercisable beginning one year from the date of grant, became fully vested in four years, and terminate no later than ten years from the date of grant.

• 1992 Incentive Stock Plan – Key employees were granted options to purchase an aggregate of 7,202,147 shares of the Company’s common stock at prices not less than 100% of market value on the date of grant. The 1992 Incentive Stock Plan terminated in December 2002, except as to the outstanding options. All options granted were at market value at the date of grant. These options became exercisable one year from the date of grant, became fully vested no later than five years, and terminate no later than ten years from the date of grant.

• 1992 Stock Option Plan for Non-employee Directors – Non-employee directors were granted options to purchase an aggregate of 178,808 shares of the Company’s common stock at prices not less than 100% of market value on the date of grant. This plan terminated in December 2002, except as to the outstanding options. All options granted were at market value on the date of grant. These options are fully vested and terminate no later than ten years from the date of grant.

• 2002 Stock Option Plan – Key employees may be granted options to purchase an aggregate of 4,000,000 shares of the Company’s common stock at prices not less than 100% of market value on the date of grant. All options granted were at market value on the date of grant. These options vest at 25% on the first anniversary of the grant date, and the balance vests monthly thereafter, such that these options become fully vested no later than four years from the date of grant. These options terminate no later than ten years from the date of grant.

• 2003 Outside Director Stock Option Plan – Non-employee directors are granted options to purchase an aggregate of up to 400,000 shares of the Company’s common stock at prices not less than 100% of the market value on the date of grant. All options granted were at the market value on the date of grant. These options vest and become exercisable on the first anniversary of the date of grant if the director has not ceased to be a director prior to such date, and terminate no later than ten years from the grant date.

• Employee Stock Purchase Plan (Purchase Plan) – Purchase rights to purchase common stock are granted to eligible full and part-time employees of the Company. Under the Purchase Plan, shares of common stock are issued upon exercise of the purchase rights. An aggregate of 2,373,290 shares may be issued pursuant to such exercise. The maximum amount that an employee can contribute during a purchase right period is $5,000, and the minimum contribution per payroll period is $25. The exercise price of a purchase right is the lesser of 100% of the fair market value of a share of common stock on the first day of the purchase rights period or 85% of the fair market value on the last day of the purchase rights period.

Prior to October 3, 2005, the Company applied Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for these plans. No stock-based compensation expense was recognized in the Company’s results of operations prior to fiscal 2006, as the exercise price was equal to the market price of the Company’s stock on the date of grant. In addition, the Company did not recognize any stock-based compensation expense for the Purchase Plan as it was intended to qualify under Section 423 of the Internal Revenue Code of 1986, as amended.

In the fourth quarter of fiscal 2005, the Company’s Board of Directors approved accelerating the vesting of certain outstanding, unvested stock options awarded to employees under the Company’s stock option plans, other than its 2003 Outside Director Stock Option Plan, with exercise prices greater than $16.95, the closing price of the Company’s common stock on September 6, 2005. As a result of this vesting acceleration, options to purchase approximately 1.6 million shares of the Company’s common stock became fully vested and immediately exercisable. As the exercise price of all modified options was greater than the market price of the Company’s underlying common stock on the date of their modification, no compensation expense was recorded in accordance with APB 25. The decision to accelerate vesting of these options was made primarily to eliminate the accounting charge in connection with future compensation expense the Company would otherwise recognize in its statements of operations with respect to these accelerated options upon the adoption of Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS 123R).

Effective October 3, 2005, the Company adopted the fair value recognition provisions of SFAS 123R, requiring the Company to recognize expense related to the fair value of its stock-based compensation awards. The Company elected the modified prospective transition method as permitted by SFAS 123R. Under this transition method, stock-based compensation expense for the three months ended January 1, 2006 includes: (a) compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of October 3, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), and (b) compensation expense for all stock-based compensation awards granted subsequent to October 2, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. In accordance with the modified prospective transition method of SFAS 123R, financial results for the prior period have not been adjusted.

As a result of adopting SFAS 123R on October 3, 2005, the Company’s income from continuing operations before income tax expense for the three months ended January 1, 2006 included a $1.1 million charge for stock-based compensation expense. This charge reduced both basic and diluted earnings per share from continuing operations by $0.02 for the three months ended January 1, 2006.

There was no tax benefit associated with the compensation costs resulting from the adoption of SFAS 123R for the current period since such costs related to incentive stock options. The Company may receive future tax benefits when these options are exercised. This caused the Company’s effective tax rate to increase by approximately 2.4% to approximately 43.0%.

Prior to the adoption of SFAS 123R, the Company reported all tax benefits resulting from the exercise of stock options as operating cash flows in its statements of cash flows. In accordance with SFAS 123R, the Company will present excess tax benefits from the exercise of stock options as financing cash flows. For the three months ended January 1, 2006, no excess tax benefits were reported as financing cash flows.

The table below illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation during the three-month period ended January 2, 2005:

	January 2, 2005
Net income as reported	$	7,903

Deduct: Stock-based employee compensation expense determined under fair value based method for all awards, net of related income tax effects	1,248
Pro forma net income	$	6,655

Earnings per share:
Basic – as reported	$	0.14
Basic – pro forma	$	0.12
Diluted – as reported	$	0.14
Diluted – pro forma	$	0.12

The following table summarizes the stock option transactions for the three months ended January 1, 2006:

	Number of Options (in thousands)		Weighted- Average Exercise Price per Share		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Balance, October 2, 2005	5,177		$	16.56
Granted	34		15.88
Exercised	(108	)	9.84
Canceled	(151	)	18.69

Outstanding as of January 1, 2006	4,952		$	16.63	6.52	$	10,901

Exercisable on January 1, 2006	3,591		$	17.15	5.66	$	8,729

For the period ended January 1, 2006, no shares were issued under the Purchase Plan.

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the first quarter of fiscal 2006, and the exercise price, times the number of shares) that would have been received by the option holders if they had exercised their options on January 1, 2006. This amount will change based on the fair market value of the Company’s stock. As of January 1, 2006, approximately $7.0 million of total unrecognized stock-based compensation cost is expected to be recognized over a weighted-average period of 2.3 years.

The weighted-average fair value of stock options granted during the three months ended January 1, 2006 and January 2, 2005 was $6.60 and $6.70, respectively. The aggregate intrinsic value of options (the amount by which the market price of the stock on a specific valuation date exceeded the market price of the stock on the date of grant) exercised during the three months ended January 1, 2006 and January 2, 2005 was $0.6 million and $1.3 million, respectively.

The fair value of the Company’s stock options was estimated on the date of grant using the Black-Scholes option-pricing model. The following assumptions were used in completing the model:

Black-Scholes Options Valuations Assumptions	January 1, 2006		January 2, 2005
Dividend yield	0.0	%	0.0	%
Expected stock price volatility	42.7 – 42.9	%	57.0	%
Risk-free rate of return, annual	3.7 – 3.8	%	3.7	%
Expected life (in years)	4.5 – 6.1		4.7

For purposes of the Black-Scholes pricing model, forfeitures are estimated based on historical experience. For the quarter ended January 1, 2006, the Company based its expected stock price volatility on a combination of historical and market-based implied volatility. Prior to October 3, 2005, the Company’s expected stock price volatility was based on historical experience. The Company’s risk-free rate of return was based on constant maturity rates provided by the U.S. Treasury. The expected life was based on historical experience.

Net cash proceeds from the exercise of stock options were $1.1 million and $1.0 million for the three months ended January 1, 2006 and January 2, 2005, respectively. The Company’s policy is to issue shares from its authorized shares upon the exercise of stock options. The income tax benefit realized from stock option exercises was $0.2 million and $0.1 million, respectively, for those same periods.

4. Earnings Per Share

Basic earnings per share (EPS) excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares and the weighted average number of shares of exchangeable stock (exchangeable shares) of the Company’s former subsidiary, TTC, outstanding for the period. The exchangeable shares were non-voting and exchangeable on a one-to-one basis, as adjusted for stock splits and stock dividends subsequent to the original issuance, for the Company’s common stock. As of April 3, 2005, all exchangeable shares (as adjusted for stock splits), were converted into the Company’s common stock. Diluted EPS is computed by dividing net income by the weighted average number of common shares outstanding, the weighted average number of exchangeable shares, and dilutive potential common shares for the period. The Company includes as potential common shares the weighted average dilutive effects of outstanding stock options using the treasury stock method.

The following table sets forth the number of weighted average shares used to compute basic and diluted EPS:

	Three Months Ended
	January 1, 2006			January 2, 2005
	(in thousands, except per share data)
Numerator:
Income from continuing operations	$	8,488		$	6,860
Income (loss) from discontinued operations	(465		)	1,043
Net income	$	8,023		$	7,903

Denominator for basic earnings per shares:
Weighted average shares	57,102			56,336
Exchangeable stock of a subsidiary	—			133
Denominator for basic earnings per share	57,102			56,469

Denominator for diluted earnings per share:
Denominator for basic earnings per share	57,102			56,469
Potential common shares:
Stock options	539			508
Denominator for diluted earnings per share	57,641			56,977

Basic earnings per share:
Income from continuing operations	$	0.15		$	0.12
Income (loss) from discontinued operations	(0.01		)	0.02
Net income	$	0.14		$	0.14

Diluted earnings per share:
Income from continuing operations	$	0.15		$	0.12
Income (loss) from discontinued operations	(0.01		)	0.02
Net income	$	0.14		$	0.14

For the three months ended January 1, 2006 and January 2, 2005, 4.5 million and 2.7 million options were excluded from the calculation of diluted potential common shares, respectively. For each period, options were excluded because their exercise prices exceeded the average market price for that period.

5. Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents totaled $14.7 million and $26.9 million as of January 1, 2006 and October 2, 2005, respectively.

6. Accounts Receivable – Net

Net accounts receivable consisted of the following as of January 1, 2006 and October 2, 2005:

	January 1, 2006			October 2, 2005
	(in thousands)

Billed	$	187,398		$	201,996
Unbilled	154,154			136,886
Contract retentions	8,915			7,908
Total accounts receivable – gross	350,467			346,790

Allowance for doubtful accounts	(34,813		)	(41,885		)
Total accounts receivable – net	$	315,654		$	304,905

Billings in excess of costs on uncompleted contracts	$	45,165		$	48,560

Billed accounts receivable represent amounts billed to clients that have not been collected. Unbilled accounts receivable represent revenue recognized but not yet billed pursuant to contract terms or billed after the accounting cut-off date. Substantially all unbilled receivables as of January 1, 2006 are expected to be billed and collected within 12 months. Contract retentions represent amounts withheld by clients until certain conditions are met or the project is completed, which may be several months or years. Allowances for doubtful accounts have been determined through reviews of specific amounts determined to be uncollectible and potential write-offs as a result of debtors that have filed for bankruptcy protection, plus an allowance for other amounts for which some potential loss is determined to be probable based on current events and circumstances.

The billed receivables related to federal government contracts were $59.6 million and $74.8 million as of January 1, 2006 and October 2, 2005, respectively. The federal government unbilled receivables were $65.6 million and $40.4 million as of January 1, 2006 and October 2, 2005, respectively.

Other than the federal government, no single client accounted for more than 10% of the Company’s accounts receivable as of January 1, 2006 and October 2, 2005.

7. Reportable Segments

The Company currently manages its business in three reportable segments: resource management, infrastructure and communications. The Company’s management established these segments based upon the services provided, the different marketing strategies associated with these services and the specialized needs of their respective clients. The resource management segment provides engineering and consulting services relating primarily to water quality and availability, environmental restoration, productive reuse of defense facilities and strategic environmental resource planning to both public and private organizations. The infrastructure segment provides engineering, system integration, program management and construction management services for the development, upgrade and replacement of civil, information systems and security infrastructure to both public and private organizations. The communications segment provides engineering, permitting, site acquisition and construction management services to state and local governments, telecommunications companies and cable operators.

As a result of the Company’s decision to exit the wireless communications business, the remaining portion of the communications business, known as the wired business, will represent a relatively small part of the Company’s overall business in future periods. The wired business serves clients and performs services that are similar in nature to those of the infrastructure business. These clients include state and local governments, telecommunications companies and cable operators and the services include engineering, permitting, site acquisition and construction management.

During the first quarter of fiscal 2006, the Company developed and started implementing the initial phase of a plan to combine operating units and re-align its management structure. The Company expects to continue this implementation during the remainder of fiscal 2006, and will continue to assess the impact, if any, of this plan on its reportable segment requirements.

The Company accounts for inter-segment sales and transfers as if the sales and transfers were to third parties; that is, by applying a negotiated fee onto the cost of the services performed. The Company’s management evaluates the performance of these reportable segments based upon their respective income from operations before

the effect of any acquisition-related amortization. All inter-company balances and transactions are eliminated in consolidation.

The following tables set forth summarized financial information concerning the Company’s reportable segments:

Reportable Segments:

	Resource Management		Infrastructure		Communications			Total
	(in thousands)
Three months ended January 1, 2006:
Revenue	$	239,129	$	92,022	$	21,302		$	352,453
Revenue, net of subcontractor costs	142,812		75,514		11,433			229,759
Gross profit	27,140		14,888		2,359			44,387
Segment income from operations	12,155		4,610		932			17,697
Depreciation expense	1,227		632		254			2,113

Three months ended January 2, 2005:
Revenue	$	208,875	$	93,656	$	15,832		$	318,363
Revenue, net of subcontractor costs	141,627		75,421		8,819			225,867
Gross profit (loss)	26,303		11,969		(954		)	37,318
Segment income (loss) from operations	14,372		4,102		(2,215		)	16,259
Depreciation expense	1,407		786		532			2,725

Reconciliations:

	Three Months Ended
	January 1, 2006			January 2, 2005
	(in thousands)
Revenue
Revenue from reportable segments	$	352,453		$	318,363
Elimination of inter-segment revenue	11,261			8,697
Total consolidated revenue	$	341,192		$	309,666

Income from operations
Segment income from operations	$	17,697		$	16,259
Other expense (1)	(256		)	(1,617		)
Amortization of intangibles	(318		)	(586		)
Total consolidated income from operations	$	17,123		$	14,056

(1) Other expense includes corporate costs not allowable or allocatable to the segments.

8. Major Clients

For the three months ended January 1, 2006 and January 2, 2005, the Company generated 11.2% and 4.9% of its revenue, respectively, from the U.S. Air Force, a component of the U.S. Department of Defense. The resource management and infrastructure segments reported revenue from the federal government. All three segments reported revenue from state and local government and commercial clients.

The following table presents revenue by client sector:

	Three Months Ended
	January 1, 2006		January 2, 2005
	(in thousands)
Client Sector
Federal government	$	174,450	$	153,387
State and local government	57,919		52,662
Commercial	106,580		101,453
International	2,243		2,164
Total	$	341,192	$	309,666

9. Comprehensive Income

The Company includes two components in its comprehensive income: net income during a period and other comprehensive income. Other comprehensive income consists of translation gains and losses from subsidiaries with functional currencies different than the Company’s reporting currency. Comprehensive income was $8.0 million and $8.4 million for the three months ended January 1, 2006 and January 2, 2005, respectively. The Company realized insignificant net translation losses for the three months ended January 1, 2006 and net translation gains of $0.5 million for the three months ended January 2, 2005.

10. Litigation

The Company is subject to certain claims and lawsuits typically filed against the engineering and consulting profession, alleging primarily professional errors or omissions. The Company carries professional liability insurance, subject to certain deductibles and policy limits, against such claims. However, in some actions, parties are seeking damages that exceed the Company’s insurance coverage or for which the Company is not insured. Management’s opinion is that the resolution of its current claims will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

The Company continues to be involved in the contract dispute with Horsehead Industries, Inc., doing business as Zinc Corporation of America (ZCA). In April 2002, a Washington County Court in Bartlesville, Oklahoma dismissed with prejudice the Company’s counter-claims relating to receivables due from ZCA and other costs. In December 2002, the Court rendered a judgment for $4.1 million and unquantified legal fees against the Company in this dispute. In February 2004, the Court quantified the previous award and ordered the Company to pay approximately $2.6 million in ZCA’s attorneys’ and consultants’ fees and expenses, together with post-judgment interest.

The Company has posted bonds and filed appeals with respect to the earlier judgments. On December 27, 2004, the Court of Civil Appeals of the State of Oklahoma rendered a decision relating to certain aspects of the Company’s appeals. In its decision, the Court vacated the $4.1 million verdict against the Company. In addition, the Court upheld the dismissal of the Company’s counter-claims. The Court has not yet ruled on the status of ZCA’s attorneys’ and consultants’ fees and expenses. Several legal alternatives remain available to both parties including appeals to the Oklahoma Supreme Court. On January 18, 2005, both the Company and ZCA filed petitions for rehearing with the Oklahoma Court of Civil Appeals. Although the Company’s legal counsel in these matters continues to believe that a favorable outcome is reasonably possible, final outcome of these matters cannot yet be accurately predicted. As a result, the Company continues to maintain $4.1 million in accrued liabilities relating to the original judgment, and a $2.6 million accrual for ZCA’s attorneys’ and consultants’ fees and expenses. Once the legal proceedings relating to ZCA are finally resolved, accruals will be adjusted accordingly.

11. Lease Exit Costs

In connection with the continuing consolidation of certain operations, and in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, the Company recorded certain charges related to the abandonment of certain leased facilities in fiscal 2004 and 2005. These amounts were recorded as selling, general and administrative expenses and are expected to be fully paid by December 2013. These facilities are no longer in use, and the estimated costs are net of reasonably estimated sublease income. During the first quarter of fiscal 2006, the Company reached a favorable settlement relating to a lease for premises previously vacated. Consequently, the Company adjusted the lease exit accrual by $0.8 million to account for this change. The Company did not record any additional charges in the first quarter of fiscal 2006 as there were no other charges required to be accrued by SFAS No. 146.

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

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements regarding future events and our future results that are subject to the safe harbor provisions created under the Securities Act of 1933 and the Securities Exchange Act of 1934. These statements are based on current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “may,” variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict, including those identified below, as well as under the heading “Risk Factors,” and elsewhere herein. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.

OVERVIEW

We are a leading provider of consulting, engineering and technical services in the areas of resource management as well as civil, security and communications infrastructure. As a consultant and engineer, we assist our clients in defining problems and developing innovative and cost-effective solutions. These services span the lifecycle of a project and include research and development, applied science and technology, engineering design, program management, construction management, and operations and maintenance.

Since our initial public offering in December 1991, we have increased the size and scope of our business, expanded our service offerings and diversified our client base and the markets we serve through strategic acquisitions and internal growth. We expect to focus on internal growth, and to continue to pursue complementary acquisitions that expand our geographic reach and increase the breadth and depth of our service offerings to address existing and emerging markets. As of January 1, 2006, we had approximately 7,000 full-time equivalent employees worldwide, located primarily in North America in approximately 250 locations.

In the first quarter of fiscal 2006, we sold one operating unit in the communications segment, entered into an agreement to sell an operating unit in the resource management segment, and discontinued the operations of another operating unit in the communications segment (as discussed below under “Acquisitions and Divestitures”). The results from these operating units have been reported as discontinued operations for all the reporting periods. Accordingly, the following discussions generally reflect summary results from our continuing operations unless otherwise noted. However, the net income and net income per share discussions include the impact of discontinued operations.

Our results of operations for the first quarter of fiscal 2006 were impacted by the adoption of SFAS 123R, which requires us to recognize a non-cash expense related to the fair value of our stock-based compensation awards. Under the fair value recognition provisions of SFAS 123R, stock-based compensation cost is estimated at the grant date based on the value of the award and is recognized as expense ratably over the requisite service period of the award. Determining the appropriate fair value model and calculating the fair value of stock-based awards at the grant date requires judgment, including estimating stock price volatility, forfeiture rates and expected option life. We elected to use the modified prospective transition method of adoption, which requires us to include this stock-based compensation charge in our results of operations beginning in the first quarter of 2006 without adjusting prior periods to include stock-based compensation expense. As a result of adopting SFAS 123R on October 3, 2005, our income from continuing operations before income tax expense for the three months ended January 1, 2006 included a $1.1 million charge for stock-based compensation expense.

We derive our revenue from fees for professional and technical services. As a service company, we are labor-intensive rather than capital-intensive. Our revenue is driven by our ability to attract and retain qualified and productive employees, identify business opportunities, secure new and renew existing client contracts, provide outstanding services to our clients and execute projects successfully. Our income is derived from our ability to

generate revenue and collect cash under our contracts in excess of our subcontractor costs, other contract costs, and selling, general and administrative (SG&A) expenses.

We provide our services to a diverse base of federal and state and local government agencies, as well as commercial and international clients. The following table presents the approximate percentage of our revenue, net of subcontractor costs, by client sector:

	Three Months Ended
Client Sector	January 1, 2006		January 2, 2005
Federal government	44.9	%	45.9	%
State and local government	18.6		17.6
Commercial	35.7		35.7
International	0.8		0.8
	100.0	%	100.0	%

We currently manage our business in three reportable segments: resource management, infrastructure and communications. Management established these segments based upon the services provided, the different marketing strategies associated with these services and the specialized needs of their respective clients. Our resource management segment provides engineering and consulting services relating primarily to water quality and availability, environmental restoration, productive reuse of defense facilities, and strategic environmental resource planning to both public and private organizations. Our infrastructure segment provides engineering, system integration, program management and construction management services for the development, upgrade and replacement of civil, information systems and security infrastructure to both public and private organizations. Our communications segment provides engineering, permitting, site acquisition and construction management services to state and local governments, telecommunications companies and cable operators.

As a result of our decision to exit the wireless communications business, the remaining portion of the communications business, known as our wired business, will represent a relatively small part of our overall business in future periods. Our wired business serves clients and performs services that are similar in nature to those of our infrastructure business. These clients include state and local governments, telecommunications companies and cable operators and the services include engineering, permitting, site acquisition and construction management.

During the first quarter of fiscal 2006, we developed and started implementing the initial phase of a plan to combine operating units and re-align the management structure. We expect to continue this implementation during the remainder of fiscal 2006, and will continue to assess the impact, if any, of this plan on our reportable segment requirements.

The following table presents the approximate percentage of our revenue, net of subcontractor costs, by reportable segment:

	Three Months Ended
Reportable Segment	January 1, 2006		January 2, 2005
Resource management	62.1	%	62.7	%
Infrastructure	32.9		33.4
Communications	5.0		3.9
	100.0	%	100.0	%

Contract revenue and contract costs are recorded primarily using the percentage-of-completion (cost-to-cost) method. Under this method, revenue is recognized in the ratio that contract costs incurred bear to total estimated costs. Revenue and profit on these contracts are subject to revision throughout the lives of the contracts and any required adjustments are made in the period in which the revisions become known. Losses on contracts are recorded in full as they are identified.

Our services are billed under three principal types of contracts: fixed-price, time-and-materials, and cost-plus. The following table presents the approximate percentage of our revenue, net of subcontractor costs, by contract type:

	Three Months Ended
Contract Type	January 1, 2006		January 2, 2005
Fixed-price	34.6	%	33.4	%
Time-and-materials	46.3		47.0
Cost-plus	19.1		19.6
	100.0	%	100.0	%

In the course of providing our services, we routinely subcontract services. Generally, these subcontractor costs are passed through to our clients and, in accordance with industry practice and generally accepted accounting principles (GAAP) in the United States, are included in revenue. Because subcontractor services can change significantly from project to project, changes in revenue may not be indicative of our business trends. Accordingly, we also report revenue less the cost of subcontractor services, and our discussion and analysis of financial condition and results of operations uses revenue, net of subcontractor costs, as the point of reference.

Our other contract costs include professional compensation and related benefits, together with certain direct and indirect overhead costs such as rents, utilities and travel. Professional compensation represents the majority of these costs. Our SG&A expenses are comprised primarily of marketing and bid and proposal costs, and our corporate headquarters’ costs related to the executive offices, corporate finance, accounting, administration and information technology. These costs are generally unrelated to specific client projects and can vary as expenses are incurred to support corporate activities and initiatives.

Our revenue, expenses and operating results may fluctuate significantly from quarter to quarter as a result of numerous factors, including:

• Unanticipated changes in contract performance that may affect profitability, particularly with contracts that are fixed-price or have funding limits;

• The seasonality of the spending cycle of our public sector clients, notably the federal government, and the spending patterns of our commercial sector clients;

• Budget constraints experienced by our federal, state and local government clients;

• Acquisitions or the integration of acquired companies;

• Divestiture or discontinuance of operating units;

• Employee hiring, utilization and turnover rates;

• The number and significance of client contracts commenced and completed during a quarter;

• Creditworthiness and solvency of clients;

• The ability of our clients to terminate contracts without penalties;

• Delays incurred in connection with a contract;

• The size, scope and payment terms of contracts;

• Contract negotiations on change orders and collections of related accounts receivable;

• The timing of expenses incurred for corporate initiatives;

• Reductions in the prices of services offered by our competitors;

• Threatened or pending litigation;

• Changes in accounting rules; and

• General economic or political conditions.

We experience seasonal trends in our business. Our revenue is typically lower in the first quarter of our fiscal year, primarily due to the Thanksgiving, Christmas and, in certain years, New Year’s holidays that fall within the first quarter. Many of our clients’ employees, as well as our own employees, take vacations during these holidays. This results in fewer billable hours worked on projects and, correspondingly, less revenue recognized. Our revenue is typically higher in the second half of the fiscal year, due to weather conditions during spring and summer that result in higher billable hours. In addition, our revenue is typically higher in the fourth quarter of the fiscal year due to the federal government’s fiscal year-end spending.

TREND ANALYSIS

General. To enhance the profitability of our operations, we continued the wind-down and divestiture of non-core businesses in the first quarter of fiscal 2006. Consequently, our operating results for the first quarter of fiscal 2006 reflect continued improvement compared to the same quarter last year.

Federal Government. In the first quarter of fiscal 2006, we experienced growth in our federal government business compared to the same quarter last year. This was due primarily to increased workload with the Environment Protection Agency (EPA) related to the emergency response to Hurricane Katrina. Our work with the U.S. Department of Defense (DoD) and the U.S. Department of Energy (DOE) also contributed to this growth. Overall, we believe that our federal government business will experience continuing growth in fiscal 2006 due in part to the unexploded ordnance (UXO) project in Iraq and increased Base Realignment and Closure (BRAC) spending.

State and Local Government. Our state and local government business improved in the first quarter of fiscal 2006 compared to the same quarter last year. This was due in large part to increased workload under our fiber-to-the-premises contracts. In addition, most states are forecasting budget surpluses in fiscal 2006, and we believe that our revenue from state and local government clients will continue to grow through the remainder of fiscal 2006.

Commercial. In the first quarter of fiscal 2006, our business with commercial clients also contributed to our revenue growth, particularly in the resource management segment, due to an upturn in the U.S. economy. Capital spending and discretionary environmental project funding increased in the second half of fiscal 2005, and we believe this improvement will continue through the first half of fiscal 2006. In the longer term, we believe our commercial business will continue to follow the general trends of the U.S. economy.

ACQUISITIONS AND DIVESTITURES

Acquisitions. In the first quarter of fiscal 2006, we made no acquisitions.

Divestitures. In the first quarter of fiscal 2006, we entered into an agreement to sell Vertex Engineering Services, Inc. (VES), an operating unit in the resource management segment. Also, we sold Tetra Tech Canada Ltd. (TTC), an operating unit in the communications segment, for approximately $4.9 million. In addition, we ceased all revenue producing activities for Whalen & Company, Inc. (WAC), an operating unit in the communications segment. Accordingly, these three operating units have been reported as discontinued operations for all reporting periods. Discontinued operations generated a total of $9.6 million and $38.7 million of revenue in the first quarter of fiscal 2006 and 2005, respectively.

RESULTS OF OPERATIONS

Overall, our results for the first quarter of fiscal 2006 were improved over those of the first quarter last year. The improvement resulted primarily from the wind-down of our non-core businesses and our focus on project performance to enhance profitability of our future results.

Consolidated Results

	Three Months Ended					Change
	January 1, 2006			January 2, 2005		$			%
	($ in thousands)

Revenue	$	341,192		$	309,666	$	31,526		10.2	%
Subcontractor costs	111,433			83,799		27,634			33.0
Revenue, net of subcontractor costs	229,759			225,867		3,892			1.7
Other contract costs	185,372			188,549		(3,177		)	(1.7	)
Gross profit	44,387			37,318		7,069			18.9
Selling, general and administrative expenses	27,264			23,262		4,002			17.2
Income from operations	17,123			14,056		3,067			21.8
Interest expense – net	2,232			2,468		(236		)	(9.6	)
Income from continuing operations before income tax expense	14,891			11,588		3,303			28.5
Income tax expense	6,403			4,728		1,675			35.4
Income from continuing operations	8,488			6,860		1,628			23.7
Income (loss) from discontinued operations, net of tax	(465		)	1,043		(1,508		)	(144.6	)

Net income	$	8,023		$	7,903	$	120		1.5

The following table presents the percentage relationship of certain items to revenue, net of subcontractor costs:

	Three Months Ended
	January 1, 2006		January 2, 2005

Revenue, net of subcontractor costs	100.0	%	100.0	%
Other contract costs	80.7		83.5

Gross profit	19.3		16.5
Selling, general and administrative expenses	11.9		10.3

Income from operations	7.4		6.2
Interest expense – net	0.9		1.1

Income from continuing operations before income tax expense	6.5		5.1
Income tax expense	2.8		2.1
Income from continuing operations	3.7		3.0

Income (loss) from discontinued operations, net of tax	(0.2	)	0.5

Net income	3.5	%	3.5	%

Revenue increased $31.5 million, or 10.2%, in the first quarter of fiscal 2006, compared to the first quarter of fiscal 2005. The increase was primarily due to growth in our federal work with the EPA, the DOE and the DoD. Substantially all of the growth in our federal work was related to Hurricane Katrina and Iraqi reconstruction. To a lesser extent, we also experienced increases in our state and local government business, particularly with fiber-to-the-premises projects, and in our commercial business due to an upturn in the U.S. economy.

Revenue, net of subcontractor costs, increased $3.9 million, or 1.7%, in the first quarter of fiscal 2006, compared to the first quarter of fiscal 2005, due to the reasons described above. However, we experienced higher subcontracting requirements related to our federal and state and local government contracts compared to the same quarter last year.

Other contract costs decreased $3.2 million, or 1.7%, in the first quarter of fiscal 2006, compared to the first quarter of fiscal 2005. This decrease resulted from increased emphasis on project and overhead cost controls and contract risk management. As a result, we improved the alignment of costs to our revenue base as we experienced significant reductions in overhead costs, charges taken on loss projects and project cost overruns. The decrease in other contract costs was partially offset by increased costs to service revenue growth. As a percentage of revenue, net of subcontractor costs, other contract costs were 80.7% in the first quarter 2006, compared to 83.5% in the first quarter of 2005.

Gross profit increased $7.1 million, or 18.9%, in the first quarter of fiscal 2006, compared to the first quarter of fiscal 2005. The increase resulted primarily from the fiber-to-the-premises projects in our wired communications business, the exit of certain non-core businesses and overhead efficiency in the infrastructure business. In resource management, our profitability was positively impacted by our disaster relief related work. As a percentage of revenue, net of subcontractor costs, gross profit was 19.3% in the first quarter of fiscal 2006, compared to 16.5% in first quarter of fiscal 2005, for the reasons described above.

SG&A expenses increased $4.0 million, or 17.2%, in the first quarter of fiscal 2006, compared to the first quarter of fiscal 2005. The increase was due partially to our adoption of SFAS 123R under which we recognized $1.1 million of stock-based compensation expense in SG&A. We also experienced higher SG&A expenses due to the growth of our business and increased marketing and business development costs. To a lesser extent, charges related to our compliance with the Sarbanes-Oxley Act of 2002 (SOX), litigation accruals and costs related to the implementation of our enterprise resource planning (ERP) system contributed to the increase. As a percentage of revenue, net of subcontractor costs, SG&A expenses increased to 11.9% in the first quarter of fiscal 2006, compared to 10.3% in the first quarter of fiscal 2005. Our SG&A expenses may continue to vary as we continue implementation of our ERP system and fund growth initiatives in fiscal 2006.

Net interest expense decreased $0.2 million, or 9.6%, in the first quarter of fiscal 2006, compared to the first quarter of fiscal 2005. The decrease was due to comparatively lower borrowings, partially offset by higher interest rates.

Income tax expense increased $1.7 million, or 35.4%, in the first quarter of fiscal 2006, compared to the same quarter of fiscal 2005 due to higher pre-tax income. The tax rate increased to 43.0% in the first quarter of fiscal 2006 from 40.8% in the same quarter last year primarily due to the non-deductibility of the SFAS 123R expense for incentive stock options.

Loss from discontinued operations was $0.5 million in the first quarter of fiscal 2006, compared to income from discontinued operations of $1.0 million in the same quarter last year. In the first quarter of fiscal 2006, we completed the sale of TTC and will recognize a gain on this sale upon receipt of additional payments. Accordingly, in the first quarter of fiscal 2006, we made a revision in the amount of $0.3 million to loss on sale of discontinued operations that was recorded in the fourth quarter of fiscal 2005 associated with this sale. The impact of this revision is not material to the current or prior period financial statements. Discontinued operations generated $9.6 million and $38.7 million of revenue in the first quarter of fiscal 2006 and 2005, respectively.

Results of Operations by Reportable Segment

Resource Management

	Three Months Ended				Change
	January 1, 2006		January 2, 2005		$		%
	($ in thousands)

Revenue, net of subcontractor costs	$	142,812	$	141,627	$	1,185	0.8	%
Other contract costs	115,672		115,324		348		0.3
Gross profit	$	27,140	$	26,303	$	837	3.2	%

The following table presents the percentage relationship of certain items to revenue, net of subcontractor costs:

	Three Months Ended
	January 1, 2006		January 2, 2005

Revenue, net of subcontractor costs	100.0	%	100.0	%
Other contract costs	81.0		81.4
Gross profit	19.0	%	18.6	%

Revenue, net of subcontractor costs, increased $1.2 million, or 0.8%, in the first quarter of fiscal 2006, compared to the first quarter of fiscal 2005. The revenue growth was primarily due to increased work with the federal government, particularly with the EPA and DOE. The increase was partially offset by a decline in our work with the DOD due to increased subcontracting requirements for Iraqi reconstruction work

Other contract costs increased $0.3 million, or 0.3%, in the first quarter of fiscal 2006, compared to the first quarter of fiscal 2005 due to increased costs to service revenue growth. The slight increase was partially offset by overhead cost reduction. As a percentage of revenue, net of subcontractor costs, other contract costs were 81.0% and 81.4% for the first quarters of fiscal 2006 and 2005, respectively.

Gross profit increased $0.8 million, or 3.2%, in the first quarter of fiscal 2006, compared to the first quarter of fiscal 2005, for the reasons described above. As a percentage of revenue, net of subcontractor costs, gross profit was 19.0% and 18.6% in the first quarters of fiscal 2006 and 2005, respectively.

Infrastructure

	Three Months Ended				Change
	January 1, 2006		January 2, 2005		$			%
	($ in thousands)

Revenue, net of subcontractor costs	$	75,514	$	75,421	$	93		0.1	%
Other contract costs	60,626		63,452		(2,826		)	(4.5	)
Gross profit	$	14,888	$	11,969	$	2,919		24.4	%

The following table presents the percentage relationship of certain items to revenue, net of subcontractor costs:

	Three Months Ended
	January 1, 2006		January 2, 2005

Revenue, net of subcontractor costs	100.0	%	100.0	%
Other contract costs	80.3		84.1
Gross profit	19.7	%	15.9	%

Revenue, net of subcontractor costs, remained relatively flat in the first quarter of fiscal 2006, compared to the first quarter of fiscal 2005. The slight increase in fiscal 2006 was primarily due to an increase in state and local government work, partially offset by a decline in commercial work.

Other contract costs decreased $2.8 million, or 4.5%, in the first quarter of fiscal 2006, compared to the first quarter of fiscal 2005. The decrease was primarily due to increased emphasis on project and overhead cost controls through project management programs, office consolidations and headcount reductions. As a percentage of revenue, net of subcontractor costs, other contract costs were 80.3% and 84.1% for the first quarters of fiscal 2006 and 2005, respectively.

Gross profit increased $2.9 million, or 24.4%, in the first quarter of fiscal 2006, compared to the first quarter of fiscal 2005, for the reasons described above. As a percentage of revenue, net of subcontractor costs, gross profit was 19.7% and 15.9% in the first quarters of fiscal 2006 and 2005, respectively.

Communications

	Three Months Ended					Change
	January 1, 2006		January 2, 2005			$			%
	($ in thousands)

Revenue, net of subcontractor costs	$	11,433	$	8,819		$	2,614		29.6	%
Other contract costs	9,074		9,773			(699		)	(7.2	)
Gross profit (loss)	$	2,359	$	(954	)	$	3,313		347.3	%

The following table presents the percentage relationship of certain items to revenue, net of subcontractor costs:

	Three Months Ended
	January 1, 2006		January 2, 2005

Revenue, net of subcontractor costs	100.0	%	100.0	%
Other contract costs	79.4		110.8
Gross profit (loss)	20.6	%	(10.8	)%

Revenue, net of subcontractor costs, increased $2.6 million, or 29.6% in the first quarter of fiscal 2006, compared to the first quarter of fiscal 2005. The increase was primarily due to growth in our fiber-to-the-premises work.

Other contract costs decreased $0.7 million, or 7.2%, in the first quarter of fiscal 2006, compared to the first quarter of fiscal 2005. The decrease resulted from the exit of non-core businesses, increased emphasis on contract risk management and reduction of workforce and facility overcapacity. The decrease was partially offset by the increased costs to service revenue growth. As a percentage of revenue, net of subcontractor costs, other contract costs were 79.4% and 110.8% in the first quarters of fiscal 2006 and 2005, respectively.

Gross profit increased $3.3 million, or 347.3%, in the first quarter of fiscal 2006, compared to the first quarter of fiscal 2005, for the reasons described above. As a percentage of revenue, net of subcontractor costs, gross profit was 20.6% in the first quarter of fiscal 2006 compared to gross loss of 10.8% in the first quarter of fiscal 2005.

Liquidity and Capital Resources

The following discussion generally reflects the impact of both continuing and discontinued operations unless otherwise noted.

Working Capital. As of January 1, 2006, our working capital was $137.2 million, an increase of $15.6 million from $121.6 million as of October 2, 2005. This increase was due primarily to a decrease in current liabilities, particularly accounts payable and accrued compensation. Cash and cash equivalents totaled $14.7 million as of January 1, 2006, compared to $26.9 million as of October 2, 2005.

Operating and Investing Activities. In the first quarter of fiscal 2006, net cash of $21.8 million was used in operating activities and $1.2 million was used in investing activities. In the first quarter of fiscal 2005, net cash of $43.0 million was used in operating activities and $9.8 million was used in investing activities. The improvement results from the aggressive management of our cash flow through improved contract payment terms, timely project billings and timely collections.

Our net accounts receivable from continuing operations increased $10.7 million, or 3.5%, to $315.7 million as of January 1, 2006 from $304.9 million as of October 2, 2005.

Capital Expenditures. Our capital expenditures for the first quarters of fiscal 2006 and 2005 were $2.9 million and $3.3 million, respectively. This reduction resulted from the significant decrease in equipment purchases in the communications business, which was historically capital-intensive, and lower capitalized costs associated with our ERP system, which is now in the implementation phase.

Debt Financing. We have a credit agreement with several financial institutions, which was amended in July 2004, December 2004 and May 2005 (Credit Agreement). The May 2005 amendment decreased the commitment under our revolving credit facility (Facility) from $235.0 million to $150.0 million. However, the maximum availability under the Facility is limited to $125.0 million unless we seek and receive additional approvals from our lenders. As part of the Facility, we may request standby letters of credit up to the aggregate sum of $100.0 million. The Facility matures on July 21, 2009, or earlier at our discretion, upon payment of all amounts due under the Facility. The May 2005 amendment also increased the pricing for borrowings under the Facility and revised our financial covenants.

As of January 1, 2006, we had $10.0 million in borrowings under the Facility. Standby letters of credit under the Facility totaled $11.9 million as of that date.

In May 2001, we issued two series of senior secured notes in the aggregate amount of $110.0 million (Senior Notes) under a note purchase agreement that was amended in September 2001, April 2003, December 2004 and May 2005 (Note Purchase Agreement). The Series A Notes, in the original amount of $92.0 million, are payable semi-annually and mature on May 30, 2011. The Series B Notes, in the original amount of $18.0 million, are payable semi-annually and mature on May 30, 2008. The May 2005 amendment increased the interest rates on the Series A Notes from 7.28% to 8.28% and on the Series B Notes from 7.08% to 8.08%. However, these interest rates will return to their pre-amendment rates if we meet certain covenant compliance criteria for three consecutive fiscal quarters. The May 2005 amendment also revised our financial covenants.

As of January 1, 2006, the outstanding principal balance on the Senior Notes was $89.7 million. Scheduled principal payments of $16.7 million are due on May 30, 2006 and, accordingly, were included in current portion of long-term obligations. The remaining $73.0 million was included in long-term obligations as of January 1, 2006.

In addition to the revised financial covenants, the amendments to the Credit Agreement and Note Purchase Agreement increased the restrictions on our ability to incur other debt, repurchase stock, engage in acquisitions or dispose of assets. Further, these agreements contain other restrictions, including but not limited to, the creation of liens and the payment of dividends on our capital stock (other than stock dividends). Borrowings under the Credit Agreement and Note Purchase Agreement are secured by our accounts receivable, the stock of certain of our subsidiaries and our cash, deposit accounts, investment property and financial assets. There were no significant changes to the Credit Agreement or Facility since October 2, 2005. Although we were not in compliance with certain financial covenants during fiscal 2005 before the May 2005 amendments, we met all compliance requirements from May 2005 through January 1, 2006. We expect to be in compliance over the next 12 months.

Capital Requirements. We expect that internally generated funds, our existing cash balances and borrowing capacity under the Credit Agreement will be sufficient to meet our capital requirements for the next 12 months.

Acquisitions. In conjunction with our investment strategy, we continuously evaluate the marketplace for strategic acquisition opportunities. Historically, due to our reputation, size, geographic presence and range of services, we have had numerous opportunities to acquire both privately-held companies and subsidiaries or divisions of publicly-held companies. Once an opportunity is identified, we examine the effect an acquisition may have on our long-range business strategy, as well as on our results of business operations. Generally, we proceed with an acquisition if we believe that the acquisition will have a positive effect on future operations and could strategically expand our service offerings. As successful integration and implementation are essential to achieve favorable results, no assurance can be given that all acquisitions will provide accretive results. Our strategy is to position ourselves to address existing and emerging markets. We view acquisitions as a key component of our growth strategy, and we intend to use both cash and our securities, as we deem appropriate, to fund such acquisitions. We may acquire other businesses that we believe are synergistic and will ultimately increase our revenue and net income, strengthen our strategic goals, provide critical mass with existing clients, and further expand our lines of service. These factors may contribute to a purchase price that results in a recognition of goodwill.

Inflation. We believe our operations have not been, and, in the foreseeable future, are not expected to be, materially adversely affected by inflation or changing prices due to the average duration of our projects and our ability to negotiate prices as contracts end and new contracts begin. However, current general economic conditions

RISK FACTORS

Set forth below and elsewhere in this Report and in other documents we file with the SEC are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Report.

Our quarterly and annual operating results may fluctuate significantly, which could have a negative effect on the price of our common stock

Our quarterly and annual revenue, expenses and operating results may fluctuate significantly because of a number of factors, including:

• Unanticipated changes in contract performance that may affect profitability, particularly with contracts that are fixed-price or have funding limits;

• The seasonality of the spending cycle of our public sector clients, notably the federal government, and the spending patterns of our commercial sector clients;

• Budget constraints experienced by our federal, state and local government clients;

• Acquisitions or the integration of acquired companies;

• Divestiture or discontinuance of operating units;

• Employee hiring, utilization and turnover rates;

• The number and significance of client contracts commenced and completed during the quarter;

• Creditworthiness and solvency of clients;

• The ability of our clients to terminate contracts without penalties;

• Delays incurred in connection with a contract;

• The size, scope and payment terms of contracts;

• Contract negotiations on change orders and collections of related accounts receivable;

• The timing of expenses incurred for corporate initiatives;

• Reductions in the prices of services offered by our competitors;

• Threatened or pending litigation;

• Changes in accounting rules; and

• General economic or political conditions.

Variations in any of these factors could cause significant fluctuations in our operating results from quarter to quarter and could result in net losses.

We derive the majority of our revenue from government agencies, and any disruption in government funding or in our relationship with those agencies could adversely affect our business

In the first quarter of fiscal 2006, we derived approximately 63.5% of our revenue, net of subcontractor costs, from contracts with federal, state and local government agencies. Federal government agencies are among our most significant clients. These agencies generated 44.9% of our revenue, net of subcontractor costs, in the first quarter of fiscal 2006 as follows: 23.3% from the DoD, 7.7% from the EPA, 5.4% from the DOE, and 8.5% from various other federal agencies. A significant amount of this revenue is derived under multi-year contracts, many of which are appropriated on an annual basis. As a result, at the beginning of a project, the related contract may be only partially funded, and additional funding is normally committed only as appropriations are made in each subsequent year. Our backlog includes only the projects that have funding appropriated.

The demand for our government-related services is generally related to the level of government program funding. Accordingly, the success and further development of our business depends, in large part, upon the continued funding of these government programs and upon our ability to obtain contracts under these programs. There are several factors that could materially affect our government contracting business, including the following:

• Changes in and delays or cancellations of government programs, requirements or appropriations;

• Budget constraints or policy changes resulting in delay or curtailment of expenditures relating to the services we provide;

• Re-competes of government contracts;

• The timing and amount of tax revenue received by federal, state and local governments;

• Curtailment of the use of government contracting firms;

• Competing political priorities and changes in the political climate with regard to the funding or operation of the services we provide;

• The adoption of new laws or regulations affecting our contracting relationships with the federal, state or local governments;

• Unsatisfactory performance on government contracts by us or one of our subcontractors, negative government audits, or other events that may impair our relationship with the federal, state or local governments;

• A dispute with or improper activity by any of our subcontractors; and

• General economic or political conditions.

These and other factors could cause government agencies to delay or cancel programs, to reduce their orders under existing contracts, to exercise their rights to terminate contracts or not to exercise contract options for renewals or extensions. Any of these actions could have a material adverse effect on our revenue or timing of contract payments from these agencies.

The loss of key personnel or our inability to attract and retain qualified personnel could significantly disrupt our business

We depend upon the efforts and skills of our executive officers, senior managers and consultants. With limited exceptions, we do not have employment agreements with any of these individuals. The loss of the services of any of these key personnel could adversely affect our business. Although we have obtained non-compete agreements from certain principals and stockholders of companies we have acquired, we generally do not have non-compete or employment agreements with key employees who were once equity holders of these companies. Further, many of our non-compete agreements have expired. We do not maintain key-man life insurance policies on any of our executive officers or senior managers. In addition, our consolidation efforts within our civil infrastructure business and our shift to a more centralized structure for the operation of our overall business could result in the loss of key employees.

Our future growth and success depends on our ability to attract and retain qualified scientists and engineers. The market for these professionals is competitive and we may not be able to attract and retain such professionals. We typically grant these employees stock options and a reduction in our stock price could impact our ability to retain these professionals.

Our use of the percentage-of-completion method of accounting could result in reduction or reversal of previously recorded revenue and profits

We account for most of our contracts on the percentage-of-completion method of accounting. Generally, our use of this method results in recognition of revenue and profit ratably over the life of the contract, based on the proportion of costs incurred to date to total costs expected to be incurred. The effect of revisions to revenue and estimated costs, including the achievement of award and other fees, is recorded when the amounts are known and can be reasonably estimated. Such revisions could occur in any period and their effects could be material. The uncertainties inherent in the estimating process make it possible for actual costs to vary from estimates, including reductions or reversals of previously recorded revenue and profit, and such differences could be material.

The value of our common stock could continue to be volatile

Our common stock has experienced substantial price volatility. In addition, the stock market has experienced extreme price and volume fluctuations that have affected the market price of many companies and that have often been unrelated to the operating performance of these companies. The overall market and the price of our common stock may continue to fluctuate greatly. The trading price of our common stock may be significantly affected by various factors, including:

• Quarter-to-quarter variations in our financial results, including revenue, profits, day sales in receivables, backlog, and other measures of financial performance or financial condition;

• Announcements by us or our competitors of significant events, including acquisitions;

• Resolution of threatened or pending litigation;

• Changes in investors’ and analysts’ perceptions of our business or any of our competitors’ businesses;

• Investors’ and analysts’ assessments of reports prepared or conclusions reached by third parties;

• Changes in environmental legislation;

• Investors’ perceptions of our performance of services in countries in which the U.S. military is engaged, including Afghanistan and Iraq;

• Broader market fluctuations; and

• General economic or political conditions.

Additionally, volatility or a lack of positive performance in our stock price may adversely affect our ability to retain key employees, many of whom are granted stock options, the value of which is dependent on the performance of our stock price.

Our failure to properly manage projects may result in additional costs or claims

Our engagements often involve large-scale, complex projects. The quality of our performance on such projects depends in large part upon our ability to manage the relationship with our clients, and to effectively manage the project and deploy appropriate resources, including third-party contractors and our own personnel, in a timely manner. If we miscalculate the resources or time we need to complete a project with capped or fixed fees, or the resources or time we need to meet contractual milestones, our operating results could be adversely affected. Further, any defects or errors, or failures to meet our clients’ expectations, could result in claims for damages against us. Our contracts generally limit our liability for damages that arise from negligent acts, errors, mistakes or omissions in rendering services to our clients. However, we cannot be sure that these contractual provisions will protect us from liability for damages in the event we are sued.

Over the past two fiscal years, we have experienced significant project cost overruns on the performance of fixed-price construction work. We have bid on and accepted contracts with unfavorable terms and conditions; performed on projects without properly defined scopes; maintained low levels of productivity and entered into projects that were outside our normal scope of services. Although we have implemented procedures intended to address these issues, no assurance can be given that we will not experience project management issues in the future.

There are risks associated with our acquisition strategy that could adversely impact our business and operating results

A significant part of our growth strategy is to acquire other companies that complement our lines of business or that broaden our technical capabilities and geographic presence. We expect to continue to acquire companies as an element of our growth strategy; however, our ability to make acquisitions is more restricted under the May 2005 amendments to our Credit Agreement and Note Purchase Agreement. Acquisitions involve certain known and unknown risks that could cause our actual growth or operating results to differ from our expectations or the expectations of securities analysts. For example:

• We may not be able to identify suitable acquisition candidates or to acquire additional companies on acceptable terms;

• We compete with others to acquire companies which may result in decreased availability of, or increased price for, suitable acquisition candidates;

• We may not be able to obtain the necessary financing, on favorable terms or at all, to finance any of our potential acquisitions;

• We may ultimately fail to consummate an acquisition even if we announce that we plan to acquire a company;

• We may not be able to retain key employees of an acquired company which could negatively impact that company’s future performance;

• We may fail to successfully integrate or manage these acquired companies due to differences in business backgrounds or corporate cultures;

• If we fail to successfully integrate any acquired company, our reputation could be damaged. This could make it more difficult to market our services or to acquire additional companies in the future; and

• These acquired companies may not perform as we expect and we may fail to realize anticipated revenue and profits.

In addition, our acquisition strategy may divert management’s attention away from our primary service offerings, result in the loss of key clients or key employees, and expose us to unanticipated problems or legal liabilities, including responsibility as a successor-in-interest for undisclosed or contingent liabilities of acquired businesses or assets.

Further, acquisitions may also cause us to:

• Issue common stock that would dilute our current stockholders’ ownership percentage;

• Assume liabilities, including environmental liabilities;

• Record goodwill that will be subject to impairment testing and potential periodic impairment charges;

• Incur amortization expenses related to certain intangible assets;

• Lose existing or potential contracts as a result of conflict of interest issues;

• Incur large and immediate write-offs; or

• Become subject to litigation.

Finally, acquired companies that derive a significant portion of their revenue from the federal government and that do not follow the same cost accounting policies and billing practices as we do may be subject to larger cost disallowances for greater periods than we typically encounter. If we fail to determine the existence of unallowable costs and establish appropriate reserves in advance of an acquisition, we may be exposed to material unanticipated liabilities, which could have a material adverse effect on our business.

Downturns in the financial markets and reductions in state and local government budgets could negatively impact the capital spending of our clients and adversely affect our revenue and operating results

Downturns in the capital markets can impact the spending patterns of certain clients. Our state and local government clients may face budget deficits that prohibit them from funding new or existing projects. In addition, our existing and potential clients may either postpone entering into new contracts or request price concessions. Difficult financing and economic conditions may cause some of our clients to delay payments for services we perform, thereby increasing the average number of days our receivables are outstanding. Further, these conditions may result in the inability of some of our clients to pay us for services that we have already performed. If we are not able to reduce our costs quickly enough to respond to the revenue decline from these clients, our operating results may be adversely affected. Accordingly, these factors affect our ability to forecast with any accuracy our future revenue and earnings from business areas that may be adversely impacted by market conditions.

If we are not able to successfully manage our growth strategy, our business and results of operations may be adversely affected

Our expected future growth presents numerous managerial, administrative, operational and other challenges. Our ability to manage the growth of our operations will require us to continue to improve our management information systems and our other internal systems and controls. In addition, our growth will increase our need to attract, develop, motivate and retain both our management and professional employees. The inability of our management to effectively manage our growth or the inability of our employees to achieve anticipated performance could have a material adverse effect on our business.

Adverse resolution of an Internal Revenue Service examination process may harm our financial results

We are currently under examination by the Internal Revenue Service (IRS) for fiscal years 1997 through 2003. The major issue raised by the IRS relates to the research and experimentation (R&E) credits that we recognized during the years under examination. The amount of credits recognized for financial statement purposes represents the amount that we estimate will be ultimately realizable. Should the IRS determine that the amount of R&E credits to which we are entitled is more or less than the amount recognized, we will recognize the difference as income tax expense in the period in which the determination is made. This may have a material adverse effect on our financial results.

If we do not successfully implement our new enterprise resource planning system, our cash flows may be impaired and we may incur further costs to integrate or upgrade our systems

In fiscal 2004, we began implementation of a new company-wide enterprise resource planning (ERP) system, principally for accounting and project management. During fiscal 2006, we plan to convert several of our large operating units to our ERP system. In the event we do not complete the project successfully, we may experience difficulty in accurately and timely reporting certain revenue and cost data. Further, we could experience reduced cash flows due to an inability to issue invoices to our clients and collect cash in a timely manner. It is also possible that the cost of completing this project could exceed our current projections and negatively impact future operating results.

Our international operations expose us to risks such as foreign currency fluctuations and different business cultures, laws and regulations

During the first quarter of fiscal 2006, we derived approximately 0.8% of our revenue, net of subcontractor costs, from international clients. Some contracts with our international clients are denominated in foreign currencies. As such, these contracts contain inherent risks including foreign currency exchange risk and the risk associated with expatriating funds from foreign countries. In addition, certain expenses are also denominated in foreign currencies. If our revenue and expenses denominated in foreign currencies increases, our exposure to foreign currency fluctuations may also increase. We periodically enter into forward exchange contracts to mitigate such foreign currency exposures.

In addition, the different business cultures associated with international operations may not be fully appreciated before we sign an agreement, and thereby expose us to risk. Likewise, we need to understand prior to signing a contract international laws and regulations, such as foreign tax and labor laws, and U.S. laws and regulations applicable to companies engaging in business outside of the U.S., such as the Foreign Corrupt Practices Act. For these reasons, pricing and executing international contracts is more difficult and carries more risk than pricing and executing domestic contracts. Our experience has also shown that it is typically more difficult to collect on international work that has been performed and billed.

Our revenue from commercial clients is significant, and the credit risks associated with certain of these clients could adversely affect our operating results

In the first quarter of fiscal 2006, we derived approximately 35.7% of our revenue, net of subcontractor costs, from commercial clients. We rely upon the financial stability and creditworthiness of these clients. To the extent the credit quality of these clients deteriorates or these clients seek bankruptcy protection, our ability to collect our receivables, and ultimately our operating results, may be adversely affected. Periodically, we have experienced bad debt losses.

As a government contractor, we are subject to a number of procurement rules and regulations and other public sector liabilities, any deemed violation of which could lead to fines or penalties or lost business

We must comply with and are affected by laws and regulations related to the formation, administration and performance of government contracts. For example, we must comply with Federal Acquisition Regulations, the Truth in Negotiations Act, Cost Accounting Standards and DoD security regulations, as well as many other rules and regulations. These laws and regulations affect how we do business with our clients and, in some instances, impose added costs on our business. A violation of these laws and regulations could result in the imposition of fines and penalties against us or the termination of our contracts. Moreover, as a federal government contractor, we must maintain our status as a responsible contractor. Failure to do so could lead to suspension or debarment, making us ineligible for federal government contracts and potentially ineligible for state and local government contracts.

Most of our government contracts are awarded through a regulated competitive bidding process, and the inability to complete existing government contracts or win new government contracts over an extended period could harm our operations and adversely affect our future revenue

Most of our government contracts are awarded through a regulated competitive bidding process. Some government contracts are awarded to multiple competitors, which increases overall competition and pricing pressure and may require us to make sustained post-award efforts to realize revenue under the government contracts. In addition, government clients can generally terminate or modify their contracts at their convenience. Moreover, even if we are qualified to work on a new government contract, we might not be awarded the contract because of existing government policies designed to protect small businesses and underrepresented minority contractors. The inability to complete existing government contracts or win new government contracts over an extended period could harm our operations and adversely affect our future revenue.

A negative government audit could result in an adverse adjustment of our revenue and costs, could impair our reputation, and could result in civil and criminal penalties

Government agencies, such as the Defense Contract Audit Agency, routinely audit and investigate government contractors. These agencies review a contractor’s performance under its contracts, cost structure and compliance with applicable laws, regulations and standards. If the agencies determine through these audits or reviews that we improperly allocated costs to specific contracts, they will not reimburse us for these costs. Therefore, an audit could result in substantial adjustments to our revenue and costs.

Further, although we have internal controls in place to oversee our government contracts, no assurance can be given that these controls are sufficient to prevent isolated violations of applicable laws, regulations and standards. If the agencies determine that we or one of our subcontractors engaged in improper conduct, we may be subject to civil or criminal penalties and administrative sanctions, payments, fines and suspension or prohibition from doing business with the government, any of which could materially affect our financial condition. In addition, we could suffer serious harm to our reputation.

Our business and operating results could be adversely affected by our inability to accurately estimate the overall risks, revenue or costs on a contract

We generally enter into three principal types of contracts with our clients: fixed-price, time-and-materials, and cost-plus. Under our fixed-price contracts, we receive a fixed price irrespective of the actual costs we incur and, consequently, we are exposed to a number of risks. These risks include underestimation of costs, problems with new technologies, unforeseen costs or difficulties, delays beyond our control, price increases for materials, and economic and other changes that may occur during the contract period. Under our time-and-materials contracts, we are paid for labor at negotiated hourly billing rates and for other expenses. Profitability on these contracts is driven by billable headcount and cost control. Many of our time-and-materials contracts are subject to maximum contract values and, accordingly, revenue relating to these contracts is recognized as if these contracts were fixed-price contracts. Under our cost-plus contracts, some of which are subject to contract ceiling amounts, we are reimbursed for allowable costs and fees, which may be fixed or performance-based. If our costs exceed the contract ceiling or are not allowable under the provisions of the contract or any applicable regulations, we may not be able to obtain reimbursement for all such costs.

Accounting for a contract requires judgments relative to assessing the contract’s estimated risks, revenue and costs, and on making judgments on other technical issues. Due to the size and nature of many of our contracts, the estimation of overall risk, revenue and cost at completion is complicated and subject to many variables. Changes in underlying assumptions, circumstances or estimates may also adversely affect future period financial performance. If we are unable to accurately estimate the overall revenue or costs on a contract, then we may experience a lower profit or incur a loss on the contract.

Our backlog is subject to cancellation and unexpected adjustments, and is an uncertain indicator of future operating results

Our backlog as of January 1, 2006 was approximately $869.0 million. We cannot guarantee that the revenue projected in our backlog will be realized or, if realized, will result in profits. In addition, project cancellations or scope adjustments may occur, from time to time, with respect to contracts reflected in our backlog. For example, certain of our contracts with the federal government and other clients are terminable at the discretion of the client with or without cause. These types of backlog reductions could adversely affect our revenue and margins. Accordingly, our backlog as of any particular date is an uncertain indicator of our future earnings.

The consolidation of our client base could adversely impact our business

Recently, there has been consolidation within our current and potential commercial client base, particularly in the telecommunications industry. Future consolidation activity could have the effect of reducing the number of our current or potential clients, and lead to an increase in the bargaining power of our remaining clients. This potential increase in bargaining power could create greater competitive pressures and effectively limit the rates we charge for our services. As a result, our revenue and margins could be adversely affected.

If our partners fail to perform their contractual obligations on a project, we could be exposed to legal liability, loss of reputation and profit reduction or loss on the project

We occasionally enter into subcontracts and other contractual arrangements so that we can jointly bid and perform on a particular project. Success on these joint projects depends in large part on whether our partners fulfill their contractual obligations satisfactorily. If any of our partners fails to satisfactorily perform their contractual obligations as a result of financial or other difficulties, we may be required to make additional investments and provide additional services in order to make up for our partner’s shortfall. If we are unable to adequately address our partner’s performance issues, then our client could terminate the joint project, exposing us to legal liability, loss of reputation and reduced profit or loss on the project.

Our inability to find qualified subcontractors could adversely affect the quality of our service and our ability to perform under certain contracts

Under some of our contracts, we depend on the efforts and skills of subcontractors for the performance of certain tasks. Our reliance on subcontractors varies from project to project. In the first quarter of fiscal 2006, subcontractor costs comprised 32.7% of our revenue. The absence of qualified subcontractors with which we have a satisfactory relationship could adversely affect the quality of our service and our ability to perform under some of our contracts.

Changes in existing environmental laws, regulations and programs could reduce demand for our environmental services, which could cause our revenue to decline

A significant amount of our resource management business is generated either directly or indirectly as a result of existing federal and state laws, regulations and programs related to pollution and environmental protection. Accordingly, a relaxation or repeal of these laws and regulations, or changes in governmental policies regarding the funding, implementation or enforcement of these programs, could result in a decline in demand for environmental services that may have a material adverse effect on our revenue.

Our industry is highly competitive and we may be unable to compete effectively

We provide specialized consulting, engineering and technical services in the areas of resource management, infrastructure and communications to a broad range of government and commercial sector clients. The market for our

services is highly competitive and we compete with many other firms. These firms range from small regional firms to large international firms. Some of our competitors have achieved substantially more market penetration in certain markets in which we compete. In addition, some of our competitors have substantially more experience, financial resources and/or financial flexibility than we do.

We compete for projects and engagements with a number of competitors that can vary from one to 100 firms. Historically, clients have chosen among competing firms based on technical capabilities, the quality and timeliness of the firm’s service, and geographic presence. If competitive pressures force us to make price concessions or otherwise reduce prices for our services, then our revenue and margins will decline and our results from operations would be harmed.

Restrictive covenants in our Credit Agreement and Note Purchase Agreement relating to our senior secured notes may restrict our ability to pursue certain business strategies

Our Credit Agreement and Note Purchase Agreement relating to our senior secured notes restrict our ability to, among other things:

• Incur additional indebtedness;

• Create liens securing debt or other encumbrances on our assets;

• Make loans or advances;

• Pay dividends or make distributions to our stockholders;

• Purchase or redeem our stock;

• Repay indebtedness that is junior to indebtedness under our Credit Agreement and Note Purchase Agreement;

• Acquire the assets of, or merge or consolidate with, other companies; and

• Sell, lease or otherwise dispose of assets.

Our Credit Agreement and Note Purchase Agreement also require that we maintain certain financial ratios, which we may not be able to achieve. We failed to meet these required financial ratios at the end of the second quarter of fiscal 2005. We obtained waivers of the technical defaults caused by these failures and amendments to these agreements in May 2005. The covenants in these agreements may impair our ability to finance future operations or capital needs or to engage in certain business activities.

Our services expose us to significant risks of liability and it may be difficult to obtain or maintain adequate insurance coverage

Our services involve significant risks of professional and other liabilities that may substantially exceed the fees we derive from our services. Our business activities could expose us to potential liability under various environmental laws and under workplace health and safety regulations. In addition, we sometimes assume liability by contract under indemnification agreements. We cannot predict the magnitude of such potential liabilities.

We obtain insurance from third parties to cover our potential risks and liabilities. It is possible that we may not be able to obtain adequate insurance to meet our needs, may have to pay an excessive amount for the insurance coverage we want, or may not be able to acquire any insurance for certain types of business risks.

Our liability for damages due to legal proceedings may harm our operating results or financial condition

We are a party to lawsuits in the normal course of business. Various legal proceedings are currently pending against us and certain of our subsidiaries alleging, among other things, breach of contract or tort in connection with the performance of professional services. We cannot predict the outcome of these proceedings with certainty. In some actions, parties are seeking damages that exceed our insurance coverage or for which we are not insured. If we sustain damages that exceed our insurance coverage or that are not covered by insurance, there could be a material adverse effect on our business, operating results or financial condition.

Our failure to implement and comply with our safety program could adversely affect our operating results or financial condition

Our safety program is a fundamental element of our overall approach to risk management, and the implementation of the safety program is a significant issue in our dealings with our clients. We maintain an enterprise-wide group of health and safety professionals to help ensure that the services we provide are delivered safely and in accordance with standard work processes. Unsafe job sites and office environments have the potential to increase employee turnover, increase the cost of a project to our clients, expose us to types and levels of risk that are fundamentally unacceptable, and raise our operating costs. The implementation of our safety processes and procedures are monitored by various agencies and rating bureaus, and may be evaluated by certain clients in cases in which safety requirements have been established in our contracts. If we fail to meet these requirements, or to properly implement and comply with our safety program, there could be a material adverse effect on our business, operating results or financial condition.

Our inability to obtain adequate bonding could have a material adverse effect on our future revenues and business prospects

Many of our clients require bid and performance and surety bonds. These bonds indemnify the client should we fail to perform our obligations under the contract. If a bond is required for a particular project and we are unable to obtain an appropriate bond, we cannot pursue that project. In some instances, we are required to partner with a small or disadvantaged business to pursue certain federal or state contracts. In connection with these partnerships, we are sometimes required to utilize our bonding capacity to cover all of the payment and performance obligations under the contract with the client. We have a bonding facility but, as is typically the case, the issuance of bonds under that facility is at the surety’s sole discretion. Moreover, due to events that can negatively affect the insurance and bonding markets, bonding may be more difficult to obtain or may only be available at significant additional cost. There can be no assurance that bonds will continue to be available to us on reasonable terms. Our inability to obtain adequate bonding and, as a result, to bid on new work could have a material adverse effect on our future revenues and business prospects.

We may be precluded from providing certain services due to conflict of interest issues

Many of our clients are concerned about potential or actual conflicts of interest in retaining management consultants. Federal government agencies have formal policies against continuing or awarding contracts that would create actual or potential conflicts of interest with other activities of a contractor. These policies, among other things, may prevent us from bidding for or performing government contracts resulting from or relating to certain work we have performed. In addition, services performed for a commercial or government client may create a conflict of interest that precludes or limits our ability to obtain work from other public or private organizations. We have, on occasion, declined to bid on projects because of these conflicts of interest issues.

Changes in accounting for equity-related compensation could impact the way we use stock-based compensation to attract and retain employees

On October 2, 2005, we adopted Statement of Financial Account Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS 123R), which requires the measurement and recognition of compensation expense for all stock-based compensation based on estimated fair values. As a result, our operating results for the first quarter of fiscal 2006 contain, and our operating results for future periods will contain, a charge for stock-based compensation related to employee stock options and the Employee Stock Purchase Plan. The application of SFAS 123R requires the use of an option-pricing model to determine the fair value of share-based payment awards. This determination of fair value is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because our employee stock options have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, in management’s opinion the existing valuation models may not provide an accurate measure of the fair value of our employee stock options. As a result of the adoption of SFAS 123R, our earnings for the first quarter of fiscal 2006 were lower than they would have been if we were not required to adopt SFAS 123R. The adoption of SFAS 123R will have an impact of approximately $4 million to $6 million on our results of operations in fiscal 2006.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are subject to certain claims and lawsuits typically filed against the engineering and consulting profession, alleging primarily professional errors or omissions. We carry professional liability insurance, subject to certain deductibles and policy limits, against such claims. Management is of the opinion that the resolution of these claims will not have a material adverse effect on our financial position, results of operations or cash flows.

We continue to be involved in the contract dispute with Horsehead Industries, Inc., doing business as Zinc Corporation of America (ZCA). In April 2002, a Washington County Court in Bartlesville, Oklahoma dismissed with prejudice our counter-claims relating to receivables due from ZCA and other costs. In December 2002, the Court rendered a judgment for $4.1 million and unquantified legal fees against us in this dispute. In February 2004, the Court quantified the previous award and ordered us to pay approximately $2.6 million in ZCA’s attorneys’ and consultants’ fees and expenses, together with post-judgment interest.

We have posted bonds and filed appeals with respect to the earlier judgments. On December 27, 2004, the Court of Civil Appeals of the State of Oklahoma rendered a decision relating to certain aspects of our appeals. In its decision, the Court vacated the $4.1 million verdict against us. In addition, the Court upheld the dismissal of our counter-claims. The Court has not yet ruled on the status of ZCA’s attorneys’ and consultants’ fees and expenses. Several legal alternatives remain available to both parties including appeals to the Oklahoma Supreme Court. On January 18, 2005, both we and ZCA filed petitions for rehearing with the Oklahoma Court of Civil Appeals. Although our legal counsel in these matters continues to believe that a favorable outcome is reasonably possible, final outcome of these matters cannot yet be accurately predicted. As a result, we continue to maintain $4.1 million in accrued liabilities relating to the original judgment, and a $2.6 million accrual for ZCA’s attorneys’ and consultants’ fees and expenses. Once the legal proceedings relating to ZCA are finally resolved, accruals will be adjusted accordingly.

Item 1A. Risk Factors

Information regarding risk factors appears in our Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading “Risk Factors” in Part 1, Item 2 of this Report, and in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended October 2, 2005. There has been no material changes from the risk factors previously disclosed in our fiscal 2005 Form 10-K, except for the addition of the risk factors entitled “Our failure to implement and comply with our safety program could adversely affect our operating results or financial condition,” and “Our inability to obtain adequate bonding could have a material adverse effect on our future revenues and business prospects” which appear in Part I, Item 2 of this Report.

Item 6. Exhibits

The following documents are filed as Exhibits to this Report:

31.1		Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Dated: February 10, 2006	TETRA TECH, INC.


	By:	/s/ Dan L. Batrack
		Dan L. Batrack
		Chief Executive Officer and Chief Operating Officer (Principal Executive Officer)


	By:	/s/ David W. King
		David W. King
		Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

	/s/ Dan L. Batrack
	Dan L. Batrack
	Chief Executive Officer and Chief Operating Officer
	(Principal Executive Officer)

	/s/ David W. King
	David W. King
	Chief Financial Officer and Treasurer
	(Principal Financial Officer)

/s/ Dan L. Batrack
Dan L. Batrack
Chief Executive Officer and Chief Operating Officer
February 10, 2006

/s/ David W. King
David W. King
Chief Financial Officer and Treasurer
February 10, 2006

Item 1. Financial Statements

Condensed Consolidated Balance Sheets

Condensed Consolidated Statements of Income

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

Liquidity and Capital Resources

Financial Market Risks

The value of our common stock could continue to be volatile

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Certification of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

		Condensed Consolidated Balance Sheets

		Condensed Consolidated Statements of Income

		Condensed Consolidated Statements of Cash Flows

		Notes to Condensed Consolidated Financial Statements

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Item 4.	Controls and Procedures

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings

Item 1A.	Risk Factors

Item 6.	Exhibits

SIGNATURES

	October 2, 2005		Reserve Utilization			January 1, 2006
			(in thousands)

Resource management	$	260	$	(20	)	$	240
Infrastructure	3,020		(1,020		)	2,000
Total	$	3,280	$	(1,040	)	$	2,240

Item 1. Financial Statements

Condensed Consolidated Balance Sheets

Condensed Consolidated Statements of Income

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

Liquidity and Capital Resources

Financial Market Risks

The value of our common stock could continue to be volatile

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Certification of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002