---

U.S. SECURITIES AND EXCHANGE COMMISSIONWashington, D.C.
20549

FORM 10-Q

|x | QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|- | -----------------------------------------------------------------------------------
|  |                                                                                    
|  | FOR THE QUARTERLY PERIOD ENDED June 30, 2002                                       
|  |                                                                                    
|o | TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|  |                                                                                    
|  | FOR THE TRANSITION PERIOD FROM ________TO________                                  

Commission
file number 0-25339

U.S. Laboratories Inc.

(Exact name of registrant as specified in
its charter)

|Delaware                                                      |  | 33-0586167                          
|------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                              |  |                                     
|7895 Convoy Court, Suite 18                                  
|San Diego, California 92111                                  
|(Address of principal executive offices)                     
|                                                             
|858-715-5800                                                 
|(Registrants telephone number, including area code)         

Check
whether the registrant (1) filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. YesxNoo

|Class                                  |  | Outstanding as of August 14, 2002
|-------------------------------------- |  | ---------------------------------
|Common Stock, $.01 par value per share |  | 5,127,625                        

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1



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U.S. Laboratories Inc.

Index

|                                                                                                                  | Page                                                                                 
|----------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------
|                                                                                                                  |                                                                                      
|Part I - Financial Information                                                                                    |                                                                                      
|                                                                                                                  |                                                                                      
|Item 1.                                                                                                           | Financial Statements                                                                 
|                                                                                                                  |                                                                                      
|Consolidated Condensed Balance Sheets at June 30, 2002 (unaudited) and December 31, 2001                          | 3                                                                                    
|                                                                                                                  |                                                                                      
|Consolidated Condensed Statements of Income For the Three and Six Months ended June 30, 2002 and 2001 (unaudited) | 5                                                                                    
|                                                                                                                  |                                                                                      
|Consolidated Condensed Statement of Stockholders Equity For the Six Months Ended June 30, 2002 (unaudited)       | 6                                                                                    
|                                                                                                                  |                                                                                      
|Consolidated Condensed Statements of Cash Flows For the Six Months Ended June 30, 2002 and 2001 (unaudited)       | 7                                                                                    
|                                                                                                                  |                                                                                      
|Notes to Consolidated Condensed Financial Statements                                                              | 9                                                                                    
|                                                                                                                  |                                                                                      
|Item 2.                                                                                                           | Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                                                                                  |                                                                                      
|Part II - Other Information                                                                                       |                                                                                      
|                                                                                                                  |                                                                                      
|Item 4.                                                                                                           | Submission of Matters to a Vote of Security Holders                                  
|                                                                                                                  |                                                                                      
|Item 5.                                                                                                           | Other Information                                                                    
|                                                                                                                  |                                                                                      
|Item 6.                                                                                                           | Exhibits and Reports on Form 8-K                                                     
|                                                                                                                  |                                                                                      
|Signatures                                                                                                        | 27                                                                                   
|                                                                                                                  |                                                                                      

2



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U.S. LABORATORIES INC. AND SUBSIDIARIESCONSOLIDATED CONDENSED BALANCE SHEETS June 30, 2002 (Unaudited ) and December 31, 2001

|               |                                                                                                      |                      |   | June 30, 2002 |            | December 31, 2001 |           
|-------------- | ---------------------------------------------------------------------------------------------------- | -------------------- | - | ------------- | ---------- | ----------------- | ----------
|               |                                                                                                      |                      |   |               |            |                   |           
|               |                                                                                                      |                      |   | (unaudited)   |            |                   |           
|ASSETS         |                                                                                                      |                      |   |               |            |                   |           
|Current assets |                                                                                                      |                      |   |               |            |                   |           
|               | Cash and cash equivalents                                                                            |                      | $ | 1,365,076     |            | $                 | 1,329,622 
|               | Accounts receivable, net of allowance for doubtful accounts of $703,818 and $546,049, respectively   |                      |   | 18,901,792    |            |                   | 14,400,067
|               | Unbilled receivables                                                                                 |                      |   | 2,441,077     |            |                   | 2,012,646 
|               | Prepaid expenses and other current assets                                                            |                      |   | 1,167,705     |            |                   | 503,951   
|               |                                                                                                      |                      |   |               |            |                   |           
|               |                                                                                                      | Total current assets |   |               | 23,875,650 |                   |           
|               | Furniture and equipment, net of accumulated depreciation of $5,665,335 and $2,578,462, respectively  |                      |   | 4,018,176     |            |                   | 3,194,595 
|               | Goodwill and intangibles, net of accumulated amortization of $1,099,509 and $1,026,592, respectively |                      |   | 20,735,451    |            |                   | 15,119,540
|               | Other assets                                                                                         |                      |   | 1,212,901     |            |                   | 382,854   
|               |                                                                                                      |                      |   |               |            |                   |           
|               |                                                                                                      | Total assets         |   | $             | 49,842,178 |                   | $         
|               |                                                                                                      |                      |   |               |            |                   |           

See accompanying notes

3



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U.S. LABORATORIES INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Continued) June 30, 2002 (Unaudited ) and December 31,
2001

|                                      |                                                                                                                               |  |                            |                                            | June 30, 2002 |            | December 31, 2001 |  
|------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------------------------------------------ | ------------- | ---------- | ----------------- | -
|                                      |                                                                                                                               |  |                            |                                            |               |            |                   |  
|                                      |                                                                                                                               |  |                            |                                            | (unaudited)   |            |                   |  
|LIABILITIES AND STOCKHOLDERS EQUITY  |                                                                                                                               |  |                            |                                            |               |            |                  
|Current liabilities                   |                                                                                                                               |  |                            |                                            |               |            |                  
|                                      | Notes payable, current portion                                                                                                |  | $                          | 5,063,304                                  |               | $          | 4,664,568         |  
|                                      | Accounts payable                                                                                                              |  |                            | 2,692,946                                  |               |            | 1,699,742         |  
|                                      | Accrued liabilities                                                                                                           |  |                            | 3,938,722                                  |               |            | 4,896,055         |  
|                                      | Income taxes payable                                                                                                          |  |                            |                                           |               |            | 137,450           |  
|                                      |                                                                                                                               |  |                            |                                            |               |            |                   |  
|                                      |                                                                                                                               |  | Total current liabilities  |                                            |               | 11,694,972 |                   |  
|Deferred income taxes                 |                                                                                                                               |  |                           |                                            |               | 204,212    |                  
|Notes payable, net of current portion |                                                                                                                               |  | 9,871,091                  |                                            |               | 3,347,012  |                  
|                                      |                                                                                                                               |  |                            |                                            |               |            |                   |  
|                                      |                                                                                                                               |  | Total liabilities          |                                            |               | 21,566,063 |                   |  
|Stockholders equity                  |                                                                                                                               |  |                            |                                            |               |            |                  
|                                      | Preferred stock, $.01 par value 5,000,000 shares authorized none issued and outstanding                                       |  |                            |                                           |               |            |                  |  
|                                      | Common stock, $.01 par value 50,000,000 shares authorized 5,127,625 and 4,814,855 shares issued and outstanding, respectively |  |                            | 51,277                                     |               |            | 48,150            |  
|                                      | Treasury stock, at cost, none and 96,735 shares, respectively                                                                 |  |                            |                                           |               |            | (644,454          | )
|                                      | Additional paid-in-capital                                                                                                    |  |                            | 20,615,521                                 |               |            | 16,802,298        |  
|                                      | Note receivable from stockholder                                                                                              |  |                            | (140,863                                   | )             |            | (140,863          | )
|                                      | Retained earnings                                                                                                             |  |                            | 7,750,180                                  |               |            | 5,929,105         |  
|                                      |                                                                                                                               |  |                            |                                            |               |            |                   |  
|                                      |                                                                                                                               |  | Total stockholders equity |                                            |               | 28,276,115 |                   |  
|                                      |                                                                                                                               |  |                            |                                            |               |            |                   |  
|                                      |                                                                                                                               |  |                            | Total liabilities and stockholders equity |               | $          | 49,842,178        |  
|                                      |                                                                                                                               |  |                            |                                            |               |            |                   |  
|                                      |                                                                                                                               |  |                            |                                            |               |            |                   |  

See accompanying notes

4



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U. S. LABORATORIES INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOMEFor the Three Months and Six Months Ended June 30, 2002 and 2001 (unaudited)

|                                             |                  |                              |            | For the Three Months Ended June 30, |          | For the Six Months Ended June 30, |          
|-------------------------------------------- | ---------------- | ---------------------------- | ---------- | ----------------------------------- | -------- | --------------------------------- | ---------
|                                             |                  |                              |            |                                     |          |                                   |          
|                                             |                  |                              |            | 2002                                |          | 2001                              |          
|                                             |                  |                              |            |                                     |          |                                   |          
|                                             |                  |                              |            | (unaudited)                         |          | (unaudited)                       |          
|                                             |                  |                              |            |                                     |          |                                   |          
|Revenue                                      |                  | $                            | 19,932,481 |                                     | $        | 12,838,987                        |          
|Cost of goods sold                           |                  |                              | 11,706,142 |                                     |          | 7,680,012                         |          
|                                             |                  |                              |            |                                     |          |                                   |          
|Gross profit                                 |                  |                              | 8,226,339  |                                     |          | 5,158,975                         |          
|                                             |                  |                              |            |                                     |          |                                   |          
|Selling, general and administrative expenses |                  |                              | 6,311,345  |                                     |          | 3,917,136                         |          
|                                             |                  |                              |            |                                     |          |                                   |          
|Income from operations                       |                  |                              | 1,914,994  |                                     |          | 1,241,839                         |          
|                                             |                  |                              |            |                                     |          |                                   |          
|Other income (expense)                       |                  |                              |            |                                     |          |                                   |          
|                                             | Interest expense |                              |            | (170,307                            | )        |                                   | (50,289  
|                                             | Interest income  |                              |            | 37                                  |          |                                   | 3,140    
|                                             | Other, net       |                              |            | 4,192                               |          |                                   | (23,016  
|                                             |                  |                              |            |                                     |          |                                   |          
|                                             |                  | Total other income (expense) |            |                                     | (166,078 | )                                 |          
|Income before provision for income taxes     |                  |                              | 1,748,916  |                                     |          | 1,171,674                         |          
|Provision for income taxes                   |                  |                              | 711,403    |                                     |          | 469,993                           |          
|                                             |                  |                              |            |                                     |          |                                   |          
|Net income                                   |                  | $                            | 1,037,513  |                                     | $        | 701,681                           |          
|                                             |                  |                              |            |                                     |          |                                   |          
|Earnings per share:                          |                  |                              |            |                                     |          |                                   |          
|                                             | Basic            |                              | $          | .20                                 |          | $                                 | .19      
|                                             |                  |                              |            |                                     |          |                                   |          
|                                             | Diluted          |                              | $          | .20                                 |          | $                                 | .16      
|                                             |                  |                              |            |                                     |          |                                   |          
|Weighted average shares outstanding:         |                  |                              |            |                                     |          |                                   |          
|                                             | Basic            |                              |            | 4,993,741                           |          |                                   | 3,705,335
|                                             | Diluted          |                              |            | 5,191,558                           |          |                                   | 4,480,946

See accompanying notes

5



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U.S. LABORATORIES INC. AND SUBSIDIARIESCONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS EQUITY For the Six Months Ended June 30, 2002 (unaudited)

|                                                               |  |              |   |   |                |   |   |                            |   |   |            |                   |   | Note Receivable From Stockholder |   |       |           |  |   |            | 
|-------------------------------------------------------------- |  | ------------ | - | - | -------------- | - | - | -------------------------- | - | - | ---------- | ----------------- | - | -------------------------------- | - | ----- | --------- |  | - | ---------- | 
|                                                               |  | Common Stock |   |   |                |   |   | Additional Paid-In Capital |   |   |            |                   |   |                                  |   |       |          
|                                                               |  |              |   |   | Treasury Stock |   |   |                            |   |   |            | Retained Earnings |   |                                  |   |      
|                                                               |  | Shares       |   |   | Amount         |   |   |                            |   |   |            |                   |   |                                  |   | Total |          
|                                                               |  |              |   |   |                |   |   |                            |   |   |            |                   |   |                                  |  
|Balance, December 31, 2001                                     |  | 4,814,855    |   | $ | 48,150         |   | $ | (644,454                   | ) | $ | 16,802,298 |                   | $ | (140,863                         | ) | $     | 5,929,105 |  | $ | 21,994,236 | 
|Issuance of common stock                                       |  | 201,155      |   |   | 2,012          |   |   |                            |   |   | 2,753,001  |                   |   |                                  |   |       |           |  |   | 2,755,013  | 
|Exercise of common stock options (net of related tax benefits) |  | 126,350      |   |   | 1,262          |   |   |                            |   |   | 1,118,879  |                   |   |                                  |   |       |           |  |   | 1,120,141  | 
|Redemption of common stock warrants (net of costs)             |  | 82,000       |   |   | 820            |   |   |                            |   |   | 584,830    |                   |   |                                  |   |       |           |  |   | 585,650    | 
|Retirement of treasury stock, at cost                          |  | (96,735      | ) |   | (967           | ) |   | 644,454                    |   |   | (643,487   | )                 |   |                                  |   |       |           |  |   |           | 
|Net income                                                     |  |              |   |   |                |   |   |                            |   |   |            |                   |   |                                  |   |       | 1,821,075 |  |   | 1,821,075  | 
|                                                               |  |              |   |   |                |   |   |                            |   |   |            |                   |   |                                  |   |       |           |  |   |            | 
|Balance, June 30, 2002                                         |  | 5,127,625    |   | $ | 51,277         |   | $ |                           |   | $ | 20,615,521 |                   | $ | (140,863                         | ) | $     | 7,750,180 |  | $ | 28,276,115 | 
|                                                               |  |              |   |   |                |   |   |                            |   |   |            |                   |   |                                  |   |       |           |  |   |            | 

See accompanying notes

6



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U.S. LABORATORIES INC. AND SUBSIDIARIESCONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 2002 and 2001 (unaudited)

|                                     |                                                                                  |                                         |   | For the Six Months Ended June 30, |           
|------------------------------------ | -------------------------------------------------------------------------------- | --------------------------------------- | - | --------------------------------- | ----------
|                                     |                                                                                  |                                         |   |                                   |           
|                                     |                                                                                  |                                         |   | 2002                              |           
|                                     |                                                                                  |                                         |   |                                   |           
|                                     |                                                                                  |                                         |   | (unaudited)                       |           
|                                     |                                                                                  |                                         |   |                                   |           
|Cash flows from operating activities |                                                                                  |                                         |   |                                   |           
|                                     | Net income                                                                       |                                         | $ | 1,821,075                         |           
|                                     | Adjustments to reconcile net income to net cash flows from operating activities: |                                         |   |                                   |           
|                                     |                                                                                  | Amortization                            |   |                                   | 72,917    
|                                     |                                                                                  | Depreciation                            |   |                                   | 558,956   
|                                     |                                                                                  | Loss on sale of furniture and equipment |   |                                   | (7,858    
|                                     | Changes in assets and liabilities, excluding the effects of businesses acquired: |                                         |   |                                   |           
|                                     |                                                                                  | Accounts receivable                     |   |                                   | (218,540  
|                                     |                                                                                  | Unbilled receivables                    |   |                                   | (428,431  
|                                     |                                                                                  | Prepaid expenses                        |   |                                   | (112,660  
|                                     |                                                                                  | Other assets                            |   |                                   | (105,964  
|                                     |                                                                                  | Accounts payable                        |   |                                   | (786,760  
|                                     |                                                                                  | Accrued liabilities                     |   |                                   | (2,125,795
|                                     |                                                                                  | Income tax payable                      |   |                                   | (832,510  
|                                     |                                                                                  |                                         |   |                                   |           
|                                     | Net cash used in operating activities                                            |                                         |   | (2,165,570                        | )         
|                                     |                                                                                  |                                         |   |                                   |           
|Cash flows from investing activities |                                                                                  |                                         |   |                                   |           
|                                     | Purchase of furniture and equipment, net of disposals.                           |                                         |   | (359,267                          | )         
|                                     | Acquisitions of businesses, net of cash acquired                                 |                                         |   | (1,422,653                        | )         
|                                     |                                                                                  |                                         |   |                                   |           
|                                     | Net cash used in investing activities                                            |                                         |   | (1,781,920                        | )         
|                                     |                                                                                  |                                         |   |                                   |           

See accompanying notes

7



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U.S. LABORATORIES INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 2002 and 2001
(unaudited)

|                                                  |                                               |                                           |           |                                           |           | For the Six Months EndedJune 30, |           
|------------------------------------------------- | --------------------------------------------- | ----------------------------------------- | --------- | ----------------------------------------- | --------- | -------------------------------- | ----------
|                                                  |                                               |                                           |           |                                           |           |                                  |           
|                                                  |                                               |                                           |           |                                           |           | 2002                             |           
|                                                  |                                               |                                           |           |                                           |           |                                  |           
|                                                  |                                               |                                           |           |                                           |           | (unaudited)                      |           
|Cash flows from financing activities              |                                               |                                           |           |                                           |           |                                  |           
|                                                  | (Decrease) increase in bank overdraft         |                                           | $         | (2,733                                    | )         | $                                | 254,205   
|                                                  | Borrowings (repayments) on notes payable, net |                                           |           | 2,538,926                                 |           |                                  | (2,732,168
|                                                  | Issuances of common stock                     |                                           |           | 1,446,751                                 |           |                                  | 10,253,227
|                                                  |                                               |                                           |           |                                           |           |                                  |           
|                                                  |                                               | Net cash provided by financing activities |           |                                           | 3,982,944 |                                  |           
|                                                  |                                               |                                           |           |                                           |           |                                  |           
|                                                  |                                               |                                           |           | Net increase in cash and cash equivalents |           |                                  | 35,454    
|Cash and cash equivalents, beginning of period    |                                               |                                           | 1,329,622 |                                           |           | 460,801                          |           
|                                                  |                                               |                                           |           |                                           |           |                                  |           
|Cash and cash equivalents, end of period          |                                               | $                                         | 1,365,076 |                                           | $         | 7,121,837                        |           
|                                                  |                                               |                                           |           |                                           |           |                                  |           
|Supplemental disclosures of cash flow information |                                               |                                           |           |                                           |           |                                  |           
|                                                  |                                               | Interest paid                             |           | $                                         | 306,758   |                                  | $         
|                                                  |                                               |                                           |           |                                           |           |                                  |           
|                                                  |                                               | Income taxes paid                         |           | $                                         | 1,634,934 |                                  | $         
|                                                  |                                               |                                           |           |                                           |           |                                  |           
|                                                  |                                               |                                           |           |                                           |           |                                  |           

Supplemental disclosure of non-cash information

In 2002 and 2001 employee stock
options were exercised to purchase common stock of the Company, which allowed the Company to reduce its income taxes payable.  The Company recorded stock option income tax benefits of $320,000 and $429,000 for the six months ended June 30, 2002
and 2001, respectively.

In the second quarter of 2002, the Company issued common stock of $2,694,013 in connection with  the purchase of Terra-Mar,
Inc.

See accompanying notes

8



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U.S. LABORATORIES INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS June 30, 2002 (unaudited)

NOTE 1 - ORGANIZATION AND BUSINESS

| | US Laboratories Inc. and its subsidiaries (collectively the Company) offer engineering and design services, project management, construction quality control,
structural engineering and design, environmental engineering and inspection and testing to construction companies and various government agencies.  The Company operates throughout the United States with facilities in California, Florida,
Illinois, Nevada, New Jersey, Pennsylvania, Texas, Virginia and Washington.  Readers of this report should refer to additional information included in the annual report filed on Form 10K-SB for the year ended December 31, 2001.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | On May 1, 2002, US Laboratories Inc. purchased 100% of the common stock of Terra-Mar, Inc.  Terra-Mar is a provider of engineering and design services, environmental and
geotechnical engineering and inspection, construction materials testing and drilling operations primarily to governmental clients.  Terra-Mar's operations are geographically concentrated in Texas.                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | The total purchase price for Terra-Mar, Inc. was $8,569,013.  Under the agreement $3,000,000 of the purchase price was paid in cash at closing; $2,875,000 of the purchase
price consisted of unsecured promissory notes and a portion was paid in common stock with a value of $2,694,013.                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | The Company has accounted for this acquisition under Statement of Financial Accounting Standard No. 141 on Business Combinations and has preliminarily recorded $250,000 for
identifiable intangible assets relating to contracts.                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at May 1, 2002, the date of acquisition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 



| | Current assets                                                       |                       | $ | 6,420,985 |           
| | -------------------------------------------------------------------- | --------------------- | - | --------- | ----------
| | Furniture and fixtures (net)                                         |                       |   | 1,015,412 |           
| | Intangible assets-contracts (four year weighted-average useful life) |                       |   | 250,000   |           
| | Goodwill                                                             |                       |   | 5,438,828 |           
| |                                                                      |                       |   |           |           
| |                                                                      | Total assets acquired |   |           | 13,125,225
| | Total liabilities assumed                                            |                       |   | 4,556,212 |           
| |                                                                      |                       |   |           |           
| | Net assets acquired                                                  |                       | $ | 8,569,013 |           
| |                                                                      |                       |   |           |           

9



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U.S. LABORATORIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) June 30, 2002 (unaudited)

NOTE 1 - ORGANIZATION AND BUSINESS (continued)

| | The results of operations of the acquired business has been included in the Companys consolidated statements of income since the respective date of the
acquisition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | If the Terra-Mar acquisition had occurred on January 1, 2001, the Companys unaudited pro forma revenue would have been $80,881,994 and $42,126,127 for the year ended
December 31, 2001 and six months ended June 30, 2002 respectively.  Unaudited pro forma net income and earnings per share for the year ended December 31, 2001, would have been $4,684,151 and $1.01, on 4,659,898 fully diluted weighted shares
outstanding respectively.  Unaudited pro forma net income and earnings per share for the six months ended June 30, 2002 would have been $2,272,787 and $.45 on 5,097,870 fully diluted weighted shares outstanding respectively. The unaudited pro
forma information also reflects the Company's acquisition of the Robert W. Hunt Co. which was effective October 31, 2001.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES

| | General - Interim Unaudited Financial Information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As contemplated by the rules and regulations of the Securities and Exchange Commission the accompanying financial statements and footnotes have been condensed and therefore do
not contain all disclosures required by generally accepted accounting principals.  The interim financial data is unaudited.  However, in the opinion of the Company the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the financial position and results for the interim periods.  The Companys interim results are not necessarily indicative of the results to be expected for the full year.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Unbilled Receivables                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Unbilled receivables represent amounts earned under contracts in progress but not billable at the respective balance sheet dates.  The Company anticipates that
substantially all of such unbilled amounts will be billed and collected over the next twelve months.                                                                                                                                                                                                                                                                                                                                                                                        

10



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U.S. LABORATORIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) June 30, 2002 (unaudited)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

| | Revenue Recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Revenue from services performed, including fixed-price and unit-price contracts, is recorded as earned over the duration of the contract, which approximates the percentage of
completion method.  At the time losses on a contract become known, the entire amount of the estimated loss is recognized in the financial statements.                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Net Income Per Share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | For the six months ended June 31, 2001 and 2002, basic earnings per share is computed by dividing net income to common stockholders by the weighted-average number of common
shares outstanding during the accounting period.  Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been
outstanding if the potential additional common shares had been issued and were dilutive.                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Recently Issued Accounting Pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | In June 1998, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) No.133, Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS No. 137 and No. 138; this pronouncement is effective for financial statements with fiscal years beginning after June 15, 2000.  SFAS No. 133, as amended, established
accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities.  The adoption of SFAS No. 133, as amended did not effect the Companys interim
financial position or results of operations.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | In June 2001, the FASB issued SFAS No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning
after December 15, 2001.  Under the new rules, goodwill (and intangible assets deemed to have indefinite lives) will no longer be amortized but will be subject to annual impairment tests in accordance with the statements.  Other intangible
assets will continue to be amortized over their useful lives.                                                                                                                                                                                                                  

11



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U.S. LABORATORIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) June 30, 2002 (unaudited)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

| | The Company has applied the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002.  Application of the goodwill
nonamortization provisions of the statement resulted in an increase in net income of approximately $38,000 ($.01 per share) after taxes for the second quarter, 2002 and approximately $76,000 ($.02 per share) after taxes for the six months ended June
30, 2002 based on current diluted weighted average outstanding shares.  The Company has performed the first of the required impairment tests of goodwill as of January 1, 2002 and determined that there was no effect on the earnings and financial
position of the Company at that date.                                                                                                         
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | In June 2001, the FASB issued SFAS No. 143 Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated asset retirement costs.  The Company will implement SFAS No. 143 in the first quarter of 2003 and has not yet made a final determination of its impact on the
financial statements.                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | In August 2001, the FASB issued SFAS No. 144 Accounting for the Impairment of Disposal of Long-Lived Assets, which addresses financial accounting and reporting for
impairment or disposal of long-lived assets.  It supersedes FASB SFAS No. 121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and supersedes certain provisions of APB Opinion No. 30
Reporting the Results of Operations Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions and amends Accounting Research Bulletin No. 51 Consolidated
Financial Statements.  The Company has implemented SFAS No. 144 for the first quarter of 2002 and has determined that there is no impact on the financial statements.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Reclassifications                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | The Company has reclassified certain prior year financial statement accounts to conform to the current year presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

12



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U.S. LABORATORIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) June 30, 2002 (unaudited)

NOTE 3 - FURNITURE AND EQUPMENT

| | Furniture and equipment consisted of the following:
| | ---------------------------------------------------

| |                                |       |   | June 30, 2002 |           | December 31, 2001 |          
| | ------------------------------ | ----- | - | ------------- | --------- | ----------------- | ---------
| |                                |       |   |               |           |                   |          
| | Automobiles and trucks         |       | $ | 3,899,282     |           | $                 | 1,580,886
| | Furniture and fixtures         |       |   | 681,610       |           |                   | 577,110  
| | Office hardware and software   |       |   | 1,692,555     |           |                   | 1,239,981
| | Machinery and equipment        |       |   | 2,956,563     |           |                   | 1,977,081
| | Leasehold improvements         |       |   | 453,501       |           |                   | 397,999  
| |                                |       |   |               |           |                   |          
| |                                |       |   |               | 9,683,511 |                   |          
| | Less: accumulated depreciation |       |   | 5,665,335     |           |                   | 2,578,462
| |                                |       |   |               |           |                   |          
| |                                | Total |   | $             | 4,018,176 |                   | $        
| |                                |       |   |               |           |                   |          

NOTE 4 - NOTES PAYABLE

| | Notes payable, which includes principal and accrued interest, consists of the following:
| | ----------------------------------------------------------------------------------------

| |                                                                                                                               |  | June 30, 2002 |            | December 31, 2001 |  
| | ----------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ---------- | ----------------- | -
| |                                                                                                                               |  |               |            |                   |  
| | Secured credit facilities, with monthly payments including interest at variable prime, and fixed rates ranging from 7% to 14% |  | $             | 8,865,404  |                   | $
| | Notes payable due in installments, with interest ranging from 7% to 10%                                                       |  |               | 6,068,991  |                   |  
| |                                                                                                                               |  |               |            |                   |  
| |                                                                                                                               |  |               | 14,934,395 |                   |  
| | Less current portion                                                                                                          |  |               | 5,063,304  |                   |  
| |                                                                                                                               |  |               |            |                   |  
| | Notes payable, net of current portion                                                                                         |  | $             | 9,871,091  |                   | $
| |                                                                                                                               |  |               |            |                   |  

13



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U.S. LABORATORIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) June 30, 2002 (unaudited)

NOTE 4 - NOTES PAYABLE (Continued)

| | The Company has a line of credit facility, totaling $12,000,000 at June 30, 2002, which expires on May 31, 2004 and $6,000,000 at December 31, 2001.  The available unused
balance of this facility at June 30, 2002 was $5,185,000 and $3,535,000 at December 31, 2001.  This credit facility is used for working capital purposes and is secured by assets of the Company.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                             
| | The credit agreement requires that the Company maintain various financial and other covenants.  At June 30, 2002 the Company was in compliance with its required
covenants.                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                             
| | Additionally, the Company has obtained a $750,000 line of credit in the first quarter, 2002 for vehicle financing and capital purchases and the available unused balance at
June 30, 2002 was $675,000.                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                             
| | The notes payable due in installments arose from the acquisitions of businesses.                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                             
| | At June 30, 2002, future maturities of notes payable are as follows:                                                                                                                                                                                                                                                                                                        

| | Quarter Ending    |       |   |           |           
| | ----------------- | ----- | - | --------- | ----------
| |                   |       |   |           |           
| | 2003              |       | $ | 5,063,304 |           
| | 2004              |       |   | 8,110,822 |           
| | 2005              |       |   | 916,998   |           
| | 2006 & thereafter |       |   | 843,271   |           
| |                   |       |   |           |           
| |                   | Total |   | $         | 14,934,395
| |                   |       |   |           |           

NOTE 5 - RELATED PARTY TRANSACTIONS

| | Due from Stockholder                                                                                                                                                                                                   
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                        
| | At June 30, 2002 and December 31, 2001 the Company had amounts due from the largest stockholder of $140,863.  The total amount is due in 2005 and is non-interest bearing.
The amount is shown in stockholders equity.

14



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U.S. LABORATORIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) June 30, 2002 (unaudited)

NOTE 6 - STOCK OPTION PLAN

| | In July 1998, the Board of Directors adopted and approved the 1998 Stock Option Plan (the Option Plan) under which a total of 500,000 shares of common stock have
been reserved for issuance. In June 2002, the Board of Directors and the stockholders approved an increase in the number of shares reserved under the Option Plan to 1,200,000. Options under this plan may be granted to employees, officers, directors
and consultants of the Company.  The exercise price of the options is determined by the Board of Directors, but the exercise price may not be less than 100% of the fair market value on the date of grant. Options vest over periods not to exceed
5 years. At June 30, 2002, the Company had 438,950 stock options outstanding at an exercise price ranging from $6.00 to $15.00 per share, of which 371,463 stock options were exercisable.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 7 - WARRANTS

| | In 1998, the Board of Directors approved the grant of 135,000 stock warrants to certain employees of the Company. The warrants entitled the holder to purchase, Company common
stock at a price of $6.00 per share. The warrants are exercisable at the earlier of (i) the date on which the closing price of a share of the Companys common stock as reported on Nasdaq is greater than $12.00 or (ii) the date on which the
audited consolidated earnings for any fiscal year are at least twice the base period earnings of $841,041. The warrants expire upon termination or November 1, 2001. In the second and fourth quarters of 2001, 135,000 of the outstanding warrants were
exercised.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | The Company has granted warrants to purchase shares of common stock to consultants.  As of June 30, 2002 consultants held warrants to purchase a total of 88,585 shares of
common stock.  Deferred compensation of $249,950 related to these consultant warrants was amortized to expense in accordance with FASB Interpretation No. 28 through June 30, 2002.                                                                                                                                                                                                                                                                                                                                    

NOTE 8 - SEGMENT DISCLOSURE

| | The Company has adopted SFAS No. 131 - Disclosure about Segments of an Enterprise and Related Information.  The Companys business is to provide professional and
technical services.  The Company provides its services from offices located primarily throughout the United States.  In accordance with the provisions of SFAS 131, the Company has concluded that its operations may be aggregated into one
reportable segment for purposes of this disclosure.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

15



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U.S. LABORATORIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) June 30, 2002 (unaudited)

NOTE 9 - CONTINGENT MATTERS

| | The Company is involved in various legal and claim proceedings which are incidental to its business, and in the Companys opinion will not have a material adverse effect
upon the Companys financial position.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 10 - STOCKHOLDERS EQUITY

| | On September 13, 2001, the Companys Board of Directors authorized a stock repurchase program.  The program allows the Company to repurchase up to $1,500,000 of
common stock from time to time for general corporate purposes. As of June 30, 2002, 57,800 shares have been repurchased at a total cost of $487,031 pursuant to this buyback program.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                       
| | Effective January 1, 2002, the Companys Board of Directors authorized the Company to retire all 96,735 shares of its common stock previously held in treasury.                                                                                                                                                                                       

NOTE 11 - EARNINGS PER SHARE DATA

| | The following table sets forth the computation of basic and diluted earnings per share for the periods indicated.
| | -----------------------------------------------------------------------------------------------------------------

| |                                                                                      |        |   | Six Months Ended June 30, |          
| | ------------------------------------------------------------------------------------ | ------ | - | ------------------------- | ---------
| |                                                                                      |        |   | 2002                      |          
| |                                                                                      |        |   |                           |          
| | Basic:                                                                               |        |   |                           |          
| | Net Income                                                                           |        | $ | 1,821,075                 |          
| | Weighted Average shares outstanding                                                  |        |   | 4,870,075                 |          
| | Basic EPS                                                                            |        |   | .37                       |          
| | Diluted:                                                                             |        |   |                           |          
| | Net Income                                                                           |        | $ | 1,821,075                 |          
| | Weighted Average shares outstanding                                                  |        |   | 4,870,075                 |          
| | Net effect of dilutive stock options & warrants - based on the treasury stock method |        |   | 227,795                   |          
| |                                                                                      |        |   |                           |          
| |                                                                                      | Totals |   |                           | 5,097,870
| |                                                                                      |        |   |                           |          
| | Diluted EPS                                                                          |        |   | .36                       |          

16



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U.S. LABORATORIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) June 30, 2002 (unaudited)

NOTE 11 - EARNINGS PER SHARE DATA (continued)

| | During the second quarter of 2002, 78,000 warrants to consultants and underwriters were exercised at prices of $6.00 to $7.71.               
| | ---------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                              
| | During the second quarter of 2002, employees exercised stock options to acquire 40,250 shares at exercise prices of $3.88 to $8.70 per share.

17



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

Financial Condition and Results of Operations

Critical Accounting Policies.The Companys discussion and analysis of its financial
condition and results of operations is based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The Companys significant accounting
policies are described in footnotes accompanying the consolidated financial statements.  The preparation of the consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Management continually evaluates its estimates that are deemed critical to the determination of its operating results.  These include estimates
relating to unbilled receivables, bad debt expense, the valuation of certain assets, and accrued liabilities.  Estimates are based on information available as of the date of the financial statements and, accordingly, actual results could differ
from these estimates.

In accordance with recent Securities and Exchange Commission guidance, those
material accounting policies that we believe are the most critical to an investors understanding of our financial results and condition and require complex management judgment have been expanded and are discussed below.  Information
regarding our other accounting policies is included in our Annual Report on Form 10-KSB for the year ended December 31, 2001.

Revenue.  We often provide services for our major clients under arrangements involving continuing service agreements. 
These arrangements are usually on a time-andmaterials, costs-plus-fixed-fee, or a fixed-price basis, and are usually terminable on advance notice by either party.  Approximately 65% of our projects are on a time-and-materials basis, under
which we bill our clients at fixed hourly rates plus expenses for subcontracted services and materials used.  An additional 30% of our work is performed under cost-plus-fixed-fee agreements, under which we and the client agree to a budgeted
contract, with the client covering overruns and receiving credit for any savings realized under budget.  Fixed-price arrangements, under which we perform a stated service for a set price, regardless of the time and materials cost involved,
represented approximately 5% of our business.

18



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Financial Condition and Results of Operations (continued)

We have undertaken, and may undertake in the future, projects in which we guarantee performance based upon defined operating
specifications or guaranteed delivery dates or both.  Unsatisfactory performance or unanticipated difficulties in completing these projects may result in client dissatisfaction and reduction in payment to us or payment of damages by us to our
clients or other persons.  Either of these results could have a material adverse effect on our financial condition or our results of operations.  Certain contracts involving government agencies are priced at cost or agreed-upon labor rates
plus overhead.  Our overhead rates are subject to audit and could result in price reductions associated with disallowed overhead costs or methods used to derive overhead rates.

Contract revenues are recognized as services are performed over the duration of the contract, which approximates the percentage of
completion method on a cost-to-cost basis.  This method of revenue recognition requires the Company to prepare estimates of costs at the beginning of projects, which are then revised as changes to project scope, timing etc. occur.  In
making such estimates, judgments are requires to elevate contingencies such as potential variances in schedule, the cost of labor and material, liability claims, contract disputes or achievement of contractual performance standards.  Changes in
such estimates, if any, are recognized in the period they are determined.

Goodwill.  Since 1993,
we have implemented a strategy of establishing a national infrastructure of branch office locations and diversifying our service offerings.  Acquisitions have been and will continue to be a key element of our growth strategy.  We plan to
apply our expertise in assimilating acquired companies personnel and branch operations onto our existing infrastructure and expanding acquired companies service and product offerings to existing clients.

In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 142
(SFAS 142), Goodwill and Other Intangible Assets.  SFAS 142 supercedes Accounting Principles Board Opinion No. 17 and addresses the financial accounting and reporting standards for goodwill and intangible assets subsequent to
their initial recognition.  SFAS 142 requires the goodwill be separately disclosed from other intangible assets in the balance sheet, and no longer be amortized.  It also requires that goodwill and other intangible assets be evaluated for
impairment at least annually.  We adopted SFAS 142 on June 30, 2001 and ceased to amortize goodwill for acquisitions made on June 30, 2001 or thereafter.

As part of our adoption of SFAS 142, we completed the initial impairment tests during the first quarter of fiscal year 2002, and
these tests resulted in no impairment.

19



---

Financial Condition and Results of Operations (continued)

Six months and three months ended June 30, 2002 and 2001.

Revenue.Revenues for the six months ended June 30, 2002 were $35,975,124 versus $23,366,182 for
the same six month period ending June 30, 2001 for an increase of 54%.  For the three months ended June 30, 2002, the Company had revenues of $19,932,481 which represents an increase of 55% over the comparable three month period ended June 30,
2001 and the highest for any quarter in the Companys history.  For the six months ending June 30, 2002 the Company experienced an internal growth rate of approximately 41% due to an influx of major contracts primarily in the California
and Illinois operations of the Company with the remaining 13% attributed to the expansion of operations through the acquisition of an engineering service company in the second quarter of 2002.

Gross Profit.  Gross profit for the six months ended June 30, 2002 was $14,658,145 versus
$9,566,522, an increase of 53% over the same period in 2001.  For the three months ended June 30, 2002, the Company had gross profit of $8,266,339 which represents an increase of 59% over the comparable period ending June 30, 2001.  This
increase in gross profit was due primarily to the increase in revenues described above.

The gross
profit as a percentage of revenues was 40.8% for the six months ended 2002 as compared to 40.9% for the six months ended 2001.  The decrease in our overall gross profit percentage between periods is partly attributable to Unitek Energy Services
Group, Inc., which was started in August 2001, and which negatively impacted the second quarter results as this is a start up operation in the energy inspection business and had a gross profit of 27.3% through the second quarter, 2002.

Additionally, the Company had reduced revenues in its subsidiary Testing-Engineers Nevada Inc., in the second
quarter, 2002 which impacted its gross profit in the second quarter, 2002 and the six months ended June 30, 2002.  The gross profit for this subsidiary decreased to 30.8% through June 30, 2002 from 39.3% in the comparable six month period last
year.

Selling General and Administrative (SG&A).For the six
months ended June 30, 2002, SG&A expenses for the Company were $11,293,452 versus $7,476,530, over the comparable period ending June 30, 2001 an increase of 51%.  For the three months ended June 30, 2002 SG&A expenses for the Company
were $6,311,395 versus $3,917,136 over the comparable period ending June 30, 2001 for an increase of 61%.  This increase is primarily due to increased costs for the mergers and acquisition department and additional management personnel and
related expenses required to manage the Companys acquisitions and for the overhead expenses attributable to the start-up of the new business, Unitek Energy Services Group, Inc.  As a percentage of revenues, the SG&A expenses increased
to 32% for the three month period ending June 30, 2002 as compared to 31% over the comparable period ending June 30, 2001.  This increase was due to added expenses of the acquisition made in May 2002 and increased interest expenses in the
second quarter.  As a percentage of revenues, the SG&A expenses declined to 31% for the six months ended June 30, 2002 as compared to 32% for the same period last year.

20



---

Financial Condition and Results of Operations (continued)

For the six months ended June 30, 2002, the Company recorded amortization of intangible assets of $72,917 and during the six months
ended June 31, 2001, the Company recorded goodwill amortization of $108,202, which are included in SG&A expense.  Intangible assets are being amortized over a period not exceeding four years whereas goodwill was amortized over a period up
to twenty years in 2001.

Interest Expense.Interest expense for the
six months ended June 30, 2002, increased to $306,758 versus $122,919 over the same period in 2001.  For the three months ended June 30, 2002 interest expense was $170,307 versus $50,289 for the comparable three month period ending June 30,
2001.  Interest expense increased primarily to accruing interest expense of $144,000 on the acquisition notes related to the purchase of the Robert W. Hunt Company and Terra-Mar Inc.

Income Before Provision for Income Taxes.Income before provision for income taxes for the six
months ended June 30, 2002 was $3,070,953, versus $1,953,824 for an increase of 57% over the same period in 2001.  For the three months ended June 30, 2002 the income was $1,748,916 versus $1,171,674 for an increase of 49% for the comparable
period ending June 30, 2002.  The year to date profit increased primarily due to acquisitions, internal growth and a decrease in selling, general and administrative (SG&A) expenses as a percentage of revenues.

Provision for Income Taxes.The combined effective tax rate for the six months ending
June 30, 2002 was 40.7% versus 40.0% for the six months ending June 30, 2001 and also 40.7% for the three months ended June 30, 2002 versus 40.0% for the three months ended June 30, 2001.  The Company will obtain a tax benefit due to the
exercise of employee stock options in 2002 and this is reflected in the effective tax rate.

Net
Income.Net income for the six months ended June 30, 2002 was $1,821,075 compared to $1,170,948, in the comparable period last year for an increase of 56%.  For the three months ended June 30, 2002, net income
was $1,037,513 versus $701,681 for the same period last year for an increase of 48%.  The increase in net income was primarily due to the inclusion of the results of accretive acquisitions, internal growth and the decrease as a percentage of
revenue in SG&A expenses.

Liquidity and Capital Resources

During the six months ended June 30, 2002, the Companys net cash used in operating activities was $2,634,120, a decrease of
$2,180,274 over the same period in 2001, primarily due to the decrease in accrued liabilities and an increase in accounts receivable collections at the end of the second quarter 2002.  Accrued liabilities decreased due to the timing and payment
of these liabilities. Accounts receivable days sales outstanding (DSO) at June 30, 2002 decreased to 95 days from 100 days at December 31, 2001 for an improvement of 5 days.

21



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Financial Condition and Results of Operations (continued)

The Company has a $12,000,000 revolving working capital line of credit facility as part of the Companys ongoing efforts to
ensure appropriate levels of liquidity.  At June 30, 2002, this working capital line of credit balance was $6,815,000.  In the second quarter of 2002, the due date of this line of credit was extended to May 31, 2004.

In the second quarter 2002, the Company entered into a $750,000 capital purchases line of credit.  This line of credit
is used for vehicle, computer and test equipment purchases of the Company and $675,000 was available at June 30, 2002.

These credit facilities are secured by the assets of the Company and its subsidiaries and bear interest based at the variable prime
rate minus .25% except for the $750,000 capital purchase line of credit, which bears interest at fixed rates of 6.9% to 7.6%.

Management believes that its available cash and cash equivalents as well as cash generated from operations will be sufficient to
meet its cash requirements for at least the next twelve months.  The Company, nevertheless, is currently negotiating with a number of lenders to secure credit facilities that can be used to finance additional acquisitions and equipment
purchases.

During the remainder of 2002, the Company intends to actively continue its search for
accretive acquisitions in order to expand its geographical representation and enhance its technical capabilities when it is economic to do so.  Additionally, the Company is continuing to pursue start up opportunities in the energy inspection
business, which may require additional capital expenditure funding and start up capital.

As of June 30,
2002 total assets of the Company were $49,842,178 as compared to $36,943,275 as of December 31, 2001.  Total stockholders equity is $28,276,115 as of June 30, 2002 as compared to $21,994,236 as of December 31, 2001 for an increase of
$6,281,879.  This increase was primarily due to the continuing profitability of the Company, the exercise of stock options for company stock, the issuance of common stock in connection with an acquisition and the retirement of treasury shares
in the first quarter, 2002.

Working capital increased to $12,180,678 at June 30, 2002 from $6,848,471
at December 31, 2001 for an improvement of $5,332,207, due primarily to the acquisition made on May 1, 2002.

On September 17, 2001, the Companys Board of Directors authorized a stock repurchase program.  The program allows the Company to repurchase up to $1,500,000 of common stock from time to time for general corporate purposes. 
As of June 30, 2002, 57,800 shares have been repurchased at a total cost of $487,031 for this buyback program.  Effective January 1, 2002 the Companys Board of Directors authorized the Company to retire all 96,735 shares previously held
in treasury.

22



---

Financial Condition and Results of Operations (continued)

Management Indebtedness

At June 30, 2002 the Company had amounts due from the largest stockholder of $140,863.  The total amount is due on September
20, 2005 in one payment, is non interest bearing and is included in stockholders equity.

Inflation

Currently, inflation does not significantly affect our operations, and we do not expect inflation to affect our operations
materially in the foreseeable future.

Backlog

Backlog includes anticipated revenue from services on major long-term contracts or continuing service agreements that provide for authorization of funding on a task or fiscal period basis.  Excluded from backlog are anticipated
revenues from smaller projects done without long-term contracts or service agreements.  The backlog increased to $64.8 million as of June 30, 2002 from $33.7 million at the end of the second quarter, 2001, an increase of $31.1 million or 92%
from the period ending June 30, 2001 due to internal growth and prior acquisitions.

Forward Looking and Cautionary Statements

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995.  All statements other than statements of historical fact made in this Form 10-Q are forward looking.  Statements containing words such as anticipates, believes, expects,
intends and similar expressions are generally forward-looking statements.  These statements reflect managements current expectations and involve a number of risks and uncertainties.  Our actual results may differ
materially from managements expectations for a variety of reasons, including, among others, any failure by us to identify suitable targets for acquisition or to integrate acquired companies effectively into our business; professional liability
for structural failure, property damage, personal injury or economic loss; failure by us to properly establish prices on fixed-price contracts; competitive pressures; our ability to attract and retain key personnel; and other risks detailed from
time to time in reports filed by us with the Securities and Exchange Commission, including our Annual Report on Form 10-KSB for the year ended December 31, 2001.

23



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Part II

Item 4. 
Submission of Matters to a Vote of Security Holders.

On June 22, 2002, the Companys Annual Meeting of Stockholders was held in Rancho Bernardo, California, for the
following purposes:

| | (a) |  | The following directors were elected to serve one-year terms to expire at the year 2003 Annual Meeting of Stockholders:
| | --- |  | -----------------------------------------------------------------------------------------------------------------------
| |     |  |                                                                                                                        

| | ELECTION OF DIRECTORS |  | FOR       |  | AGAINST |  | ABSTAIN | 
| | --------------------- |  | --------- |  | ------- |  | ------- | 
| |                       |  |           |  |         |  |         | 
| | Dickerson Wright      |  | 4,314,776 |  | 0       |  | 281,716 | 
| | Donald C. Alford      |  | 4,314,776 |  | 0       |  | 281,716 | 
| | Martin B. Lowenthal   |  | 4,315,076 |  | 0       |  | 281,716 | 
| | Joseph Wasilewski     |  | 4,314,776 |  | 0       |  | 158,016 | 
| | James L. McCumber     |  | 4,438,476 |  | 0       |  | 157,516 | 
| | Robert E. Petersen    |  | 4,438,976 |  | 0       |  | 281,416 | 
| | James Vogler          |  | 4,438,276 |  | 0       |  | 158,216 | 
| | Roy Moore             |  | 4,312,576 |  | 0       |  | 281,916 | 
| | Berry Grubbs          |  | 4,314,576 |  | 0       |  | 281,916 | 

| | (b) |  | The Stockholders approved the Companys 1998 Stock Option Plan, as amended, which authorizes the grant of  options issuable under the plan to 1,200,000 by the
Compensation Committee of the Board of Directors. 
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |  |                                                                                                                                                                                                                  
| |     |  | The total number of votes cast for, against and abstained was 2,507,256; 333,553; and 13,793, respectively.                                                                                                      
| |     |  |                                                                                                                                                                                                                  
| | (c) |  | The Stockholders approved the Companys 1999 Stock Incentive Plan, as amended, which authorizes the grant of common stock up to 200,000 shares for award by the Compensation
Committee of the Board of Directors.
| |     |  |                                                                                                                                                                                                                  
| |     |  | The total number of votes cast for, against and abstained was 2,650,903; 187,006; and 16,693, respectively.                                                                                                      

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Item 5.          
Other Information

On August 9, 2002, the Company announced that it entered into an Agreement and Plan of Merger, dated as of August 8, 2002 (the Merger Agreement),
with Bureau Veritas, S.A., a societe anonyme organized under the laws of the French Republic (the Parent), and Voice Acquisition Corp., a Delaware corporation and an indirect wholly owned subsidiary of the Parent
(Purchaser).  The Merger Agreement provides for the commencement by Purchaser of a tender offer to purchase for cash all of the outstanding shares of common stock, par value $0.01 per share, of the Company (the Shares)
at a price of $14.50 per share, subject to the satisfaction of the conditions to the consummation of the tender set forth in the Merger Agreement (the Tender Offer) and, following the purchase of the Shares pursuant to the Tender Offer,
a merger (the Merger) of Purchaser into the Company.  In addition, the Company agreed to cause each then outstanding option and warrant to purchase Shares to be canceled by the Company in consideration of the payment to the holders
of the options or warrants of cash in an amount equal to the excess, if any, of $14.50 per Share over the per Share exercise price of such options or warrants, multiplied by the number of Shares underlying such option or warrant.  Pursuant to
the Merger Agreement, at the effective time of the Merger, each outstanding  Share, other than Shares as to which dissenters rights have been duly asserted and perfected under the Delaware General Corporation Law and Shares held by the
Company, the Parent, Purchaser or any other subsidiary of the Parent, will be converted into the right to receive $14.50 per share in cash, without interest (the Merger Consideration).  Shares that are held by the Company as
treasury stock and any Shares owned by the Parent, Purchaser or any other subsidiary of the Parent will be canceled and retired and will cease to exist and no Merger Consideration will be delivered in exchange therefor.

The Merger Agreement also contains a number of representations, warranties and covenants by the parties.  The Merger is subject to a number of conditions, and the Merger Agreement may be terminated under certain
circumstances, all as set forth in the Merger Agreement.  The parties do not believe that a filing under the Exon-Florio Amendment to the Defense Production Act of 1950 will be required in connection with the proposed transaction.

The Parent, Purchaser, and Dickerson Wright, the Chairman and Chief Executive Officer of the Company (Wright), who beneficially owns 1,878,097 Shares, including shares underlying options (the
Wright Shares), have entered into a Tender and Support Agreement, dated as of August 8, 2002 (the Tender Agreement), pursuant to which Wright has agreed, among other things, (i) to tender in the Tender Offer all of the Wright
Shares now owned or that may hereafter be acquired by Wright, (ii) to appoint certain officers of the Parent as his proxy to vote the Wright Shares in connection with the Merger Agreement, and (iii) not to transfer any of the Wright Shares. 
The Tender Agreement terminates in the event that the Merger Agreement is terminated.

In addition, Wright, Purchaser and Bureau Veritas Holdings, Inc., a Delaware corporation and wholly-owned
subsidiary of the Parent, have entered into a Contingent Payment Agreement, dated as of August 8, 2002 (the Contingent Payment Agreement), pursuant to which $5,000,000 of the consideration otherwise payable to Wright in respect of the
Wright

25



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Shares (the Escrowed Amount) will be deposited upon the consummation of the Tender Offer in an escrow pursuant to an Escrow Agreement.  Under the Contingent
Payment Agreement, Wright will be entitled to receive all or a portion of the Escrowed Amount if the earnings before interest and taxes of the Company for the year ending December 31, 2002, as calculated pursuant to the Contingent Payment Agreement
(EBIT), exceeds $8 million.  Wright will receive the entire Escrowed Amount if the Companys EBIT exceeds $8.5 million and will receive none of the Escrowed Amount if the Companys EBIT is less than $8.0 million. 
Between these amounts. Wright will receive a portion of the Escrowed Amount in accordance with a schedule to the Contingent Payment Agreement.

Wright, at the request of Parent, and the Company have
also entered into an employment agreement, dated as of August 8, 2002 (the Employment Agreement), which will become effective upon the consummation of the Offer.

|Item 6. |  | Exhibits and Reports Form 8-K
|------- |  | -----------------------------
|        |  |                              
|a.      |  | Exhibits                     
|        |  |                              
|        |  | None                         
|        |  |                              
|b.      |  | Report on Form 8-K           
|        |  |                              
|        |  | None                         

26



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SIGNATURES

In accordance with the requirements of the Securities
Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

|                       |  |  | U.S. LaboratoriesInc.                      | 
|---------------------- |  |  | ------------------------------------------ | 
|                       |  |  |                                            | 
|Dated: August 14, 2002 |  |  | /S/ Dickerson Wright                       | 
|                       |  |  |                                            | 
|                       |  |  | Dickerson Wright, President                | 
|                       |  |  |                                            | 
|Dated: August 14, 2002 |  |  | /S/ Joseph M. Wasilewski                   | 
|                       |  |  |                                            | 
|                       |  |  | Joseph M. Wasilewski,                      | 
|                       |  |  | Vice President and Chief Financial Officer

27