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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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Form 10-K



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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31,
2003

Commission File Number 0-26561

The Keith Companies, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|California                                                         |  | 33-0203193                              
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification No.)

19 Technology Drive, Irvine, California
92618

(Address of principal executive offices and
zip code)


Registrants telephone number, including
area code:

(949) 923-6001


Securities registered pursuant to
Section 12(b) of the Act:

None


Securities registered pursuant to
Section 12(g) of the Act:

Common Stock, $0.001 par value


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

Indicate
by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or
any amendment to this
Form 10-K. þ

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

The number of
outstanding shares of the registrants common stock as of
February 6, 2004 was 7,673,720 shares. Based on the closing
sale price on the NASDAQ National Market on June 30, 2003,
the aggregate market value of the registrants common stock
held by non-affiliates was approximately $63,000,000.1

DOCUMENTS INCORPORATED BY REFERENCE

Part III
incorporates certain information by reference from the
registrants definitive proxy statement for the Annual
Meeting of Shareholders scheduled to be held on May 18,
2004.



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1For
purposes of this calculation, shares owned by executive officers
and directors have been deemed to be owned by affiliates. This
determination of affiliate status is not necessarily a
conclusive determination for other purposes.









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THE KEITH COMPANIES, INC.

ANNUAL REPORT ON FORM 10-K



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Table of Contents






|             |     |                                                                                           |                                      |      |    |    | 
|------------ | --- | ----------------------------------------------------------------------------------------- | ------------------------------------ | ---- | -- | -- | 
|             |     |                                                                                           |                                      | Page
|             |     |                                                                                           |                                      |     
|PART I      
|Item 1.      |     | Business                                                                                  |                                      |      | 1  |   
|Item 2.      |     | Properties                                                                                |                                      |      | 12 |   
|Item 3.      |     | Legal Proceedings                                                                         |                                      |      | 13 |   
|Item 4.      |     | Submission of Matters to a
    Vote of Security Holders                                   |                                      |      | 13 |   
|PART II     
|Item 5.      |     | Market for Our Common Equity
    and Related Stockholder Matters                          |                                      |      | 14 |   
|Item 6.      |     | Selected Financial Data                                                                   |                                      |      | 15 |   
|Item 7.      |     | Managements Discussion
    and Analysis of Financial Condition and Results of Operations |                                      |      | 17 |   
|Item 7A.     |     | Quantitative and Qualitative
    Disclosures About Market Risk                            |                                      |      | 31 |   
|Item 8.      |     | Consolidated Financial
    Statements and Supplementary Data                              |                                      |      | 33 |   
|Item 9.      |     | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure  |                                      |      | 55 |   
|Item 9A.     |     | Controls and Procedures                                                                   |                                      |      | 55 |   
|PART III    
|Item 10.     |     | Directors and Executive Officers                                                          |                                      |      | 55 |   
|Item 11.     |     | Executive Compensation                                                                    |                                      |      | 55 |   
|Item 12.     |     | Security Ownership of Certain Beneficial Owners
    and Management                        |                                      |      | 55 |   
|Item 13.     |     | Certain Relationships and Related Transactions                                            |                                      |      | 55 |   
|Item 14.     |     | Principal Accountant Fees and Services                                                    |                                      |      | 55 |   
|PART IV     
|Item 15.     |     | Exhibits, Financial
    Statement Schedules and Reports on Form 8-K                       |                                      |      | 56 |   
|             | (a) |                                                                                           | 1. Consolidated Financial Statements |      |    | 56 | 
|             |     | 2. Financial Statement Schedules                                                          |                                      |      | 56 |   
|             |     | 3. Exhibits                                                                               |                                      |      | 56 |   
|             | (b) |                                                                                           | Reports on Form 8-K                  |      |    | 57 | 
|Signatures   |     |                                                                                           | 58                                   |     
|EXHIBIT 21.0
|EXHIBIT 23.1
|EXHIBIT 31.1
|EXHIBIT 31.2
|EXHIBIT 32.1
|EXHIBIT 32.2



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PART I

SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS

This Annual Report on Form 10-K contains
certain forward-looking statements, including and/or concerning
among others:



| |   |                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------
| |  | forecasts of earnings, revenue or other financial
    items;                                                                          
|
| |  | anticipated growth in the real estate development
    and public works/infrastructure industry and the
    energy/industrial industry;
|
| |  | our business strategy for expanding our presence
    in these industries;                                                             
|
| |  | anticipated growth and economic expansion in the
    Western and Midwestern United States;                                            
|
| |  | anticipated trends in our financial condition and
    results of operations;                                                          
|
| |  | anticipated growth in the pace and size of our
    acquisitions;                                                                      
|
| |  | anticipated impact of future acquisitions on the
    condition of our business by industry and geographic location;                   
|
| |  | the long-term nature of our projects;                                                                                                 
|
| |  | our ability to attract and retain employees;                                                                                          
|
| |  | our business strategy for integrating businesses
    that we acquire;                                                                 
|
| |  | our ability to sustain our growth and
    profitability; and                                                                          
|
| |  | our ability to distinguish ourselves from our
    current and future competitors.                                                     

We generally identify forward-looking statements
in this Report using words like believe,
expect, estimate, may,
plan, should plan, project,
contemplate, anticipate,
predict or similar expressions. You may find some of
these statements under Managements Discussion and
Analysis of Financial Condition and Results of Operations,
and Business and elsewhere is this Report. These
statements involve known and unknown risks, uncertainties and
other factors, including those described in the Risk
Factors section, that may cause our or our industrys
actual results, levels of activity, performance or achievements
to differ from any future results, levels of activity,
performance or achievements expressed or implied by these
forward-looking statements. Except as required by applicable
law, including the securities laws of the United States, and the
rules and regulations of the Securities and Exchange Commission,
we do not plan to publicly update or revise any forward-looking
statements after we file this Report, whether as a result of any
new information, future events or otherwise.






|        |         
|------- | --------
|Item 1. | Business

General

We are a full service engineering and consulting
services firm providing professional services on a wide range of
projects to the real estate development and public
works/infrastructure industry, and to the energy/industrial
industry. We benefit from a diverse public and private client
base including real estate developers, residential and
commercial builders, architects, cities, counties, water
districts, state and federal agencies, land owners, commercial
retailers, energy providers and various manufacturers. Our
professional staff and project workers provide a comprehensive
menu of services that are needed to effectively manage, engineer
and design infrastructure and state-of-the-art facilities.

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The following illustrates the range of services
that we offer:

(INDUSTRIES SERVED CHART)

From 1999 through 2003, our net revenue has grown
by a compounded annual growth rate of 23% and our net income
from continuing operations has grown at a compounded annual
growth rate of 38%. We have accomplished this through both our
acquisition strategy to diversify the scope of our services and
our geographic presence and through internal growth. We have
acquired eight companies since December 1, 1997 and as of
March 1, 2004 operate from 14 primary divisions in
7 states: California, Nevada, Utah, Arizona, Oregon, Texas
and Michigan. In addition, we also have small operating
activities in Brazil.

Industries Served

We serve the real estate development and public
works/infrastructure industry, and the energy/industrial
industry.



| |                                                             
| | ------------------------------------------------------------
| | Real Estate Development and Public Works/
    Infrastructure

Real Estate
Development

Residential, commercial, golf, and other
recreational developers use technical consultants to provide
planning and environmental services to create land use plans,
write the supporting planning and environmental documents and
process entitlements and permits through governmental
authorities. Technical consultants also assist clients with
obtaining approvals and permits from federal, state and local
agencies. After projects are approved by governmental agencies,
developers need surveying, mapping, and civil engineering
services to survey development sites, create accurate boundary
and base maps, and provide engineering designs for grading,
streets, sewer and water pipelines and facilities, utilities and
drainage facilities. Upon completion of the design phase,
surveyors provide construction staking services to identify the
precise locations of streets, utilities, pipelines, and other
facilities. In culturally sensitive areas, developers may also
require environmental

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and archaeology services for planning and
assistance with environmental approvals as well as construction
and post-construction phase monitoring services.


Residential development includes large-scale
communities, senior citizen and retirement communities, single
family homes, condominiums and apartments. Commercial
development includes the development and construction of retail,
office, hotel and industrial facilities. Golf and recreational
facility development includes golf courses, driving ranges,
parks, clubhouses, theme parks, resorts and lakes.

There are generally two types of real estate
development clients: the land developer and the builder. Some
take on characteristics of both. Developers generally must look
long-term, utilize longer-term investment financing and evaluate
the performance of projects across multiple business cycles. The
developer pursues land development rights and implements the
process of designing and constructing infrastructure utility,
roadway and landform grading improvements. A developers
projects often span several years or even decades. The builder,
on the other hand, generally provides an end-user product,
including homes, retail stores, restaurants or clubhouses. The
builders approach is generally based upon current and
relatively short-term economic conditions. Financing for a
builders work is often construction-oriented and
anticipates short-term returns. The builder often buys property
that has already been zoned, graded and otherwise improved by
the land developer.

Public Works/
Infrastructure

Water resources, transportation, and other public
works projects provide ongoing, more reliable sources of revenue
for engineering firms and consultants than private real estate
development activities which may decline during unfavorable
economic periods. These public projects are often long-term and
have historically provided more determinable and consistent
revenue streams than non-publicly funded projects. In the last
couple of years, the public works/infrastructure industry
segment has shown a high interest in assessing the security of
these facilities in addition to enhancing the quality and
availability of them.

Water Resources.Water resource services encompass the study and analysis of
rainfall, water collection and distribution, use of water for
cleanliness, nourishment and irrigation and the treatment and
disposal of used or contaminated water. Due to the multiple
demands for municipal, environmental and agricultural uses,
water is a resource requiring extensive management throughout
the United States. As populations continue to grow and higher
standards are placed on protecting the environment without
sacrificing the supply and quality of water, water districts,
public agencies, agricultural users and municipalities are faced
with the challenge of managing their water supplies more
efficiently.

Protecting communities from natural disasters
such as floods and mudflows, cleaning natural waterways,
eliminating pollution from storm runoff flowing into the ocean
and protecting and enhancing natural riparian resources are
among the missions of public water-managing agencies. Private
developers also address these issues as part of their land
development.

Transportation.Highly experienced transportation planners, engineers, and
designers provide the entire spectrum of resources necessary to
effectively engineer and design state-of-the-art transportation
infrastructure. Engineers develop street, major arterial and
highway designs in cooperation with federal, state and local
agencies to improve transportation networks. Highway and
interchange projects require engineering designs for roadways
and interchanges for the placement or relocation of sewer and
water pipelines and utility lines and for rainfall run-off
management. They also require surveying services for
establishment of proper rights of way for these facilities.



| |                   
| | ------------------
| | Energy/ Industrial

The energy/industrial industry consists of
manufacturing facilities, processing facilities, power
generation and distribution, and production/refining methods and
systems. Power plants, machines, assembly lines, factories and
refineries require mechanical, electrical and process
engineering services to enable utilization of

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new processes and to improve efficiency and
reliability of their production effort. Comprehensive
engineering services that are required include:




| |   |                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------
| |  | Design or redesign of electrical, heating,
    ventilation and air conditioning systems;                       
|
| |  | Mechanical equipment design;                                                                                   
|
| |  | Equipment selection and purchasing;                                                                            
|
| |  | Design of integrated computer and monitoring
    device systems to control manufacturing and process equipment;
|
| |  | Chemical/process engineering;                                                                                  
|
| |  | Energy generation and usage consulting;                                                                        
|
| |  | Fire protection engineering;                                                                                   
|
| |  | Material handling and process flow planning;                                                                   
|
| |  | Automation and robotics design;                                                                                
|
| |  | Construction management and installation
    supervision;                                                      
|
| |  | Plant testing during construction and start-up;                                                                
|
| |  | Plant operations and maintenance;                                                                              
|
| |  | Project management; and                                                                                        
|
| |  | Computer programming.                                                                                          

Projects that utilize mechanical, electrical and
process engineering and consulting services include:



| |   |                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Energy/ Power Generation and Management: power
    plants, natural gas/electrical systems and distribution systems;                                            
|
| |  | High Tech Facilities: biotechnology,
    pharmaceutical and laboratory facilities, computer centers,
    control rooms and research and development facilities;
|
| |  | Heavy Manufacturing: automotive assembly, and
    pulp and paper processing;                                                                                   
|
| |  | Consumer Products: beverage, household products,
    packaging, and food processing;                                                                           
|
| |  | Educational Facilities: school and university
    buildings and campuses; and                                                                                  
|
| |  | Public Facilities/ Utilities: medical buildings,
    hospitals, and publicly owned or occupied buildings.                                                      

We believe there is a long-term trend in the
manufacturing and assembly industries toward automation and
increased efficiency. As these industries grow in the future, so
does their need for engineering, design and consulting services
to automate and increase the efficiency of new and existing
facilities.

The Keith Companies Advantage

The engineering and consulting services
industries are highly fragmented, ranging from a large number of
relatively small local firms to large, multi-national firms.
Management believes we are among the leading engineering and
consulting services firms serving our primary industries. We
believe that we can further enhance our position in the
industries which we serve for the following reasons:

Reputation

We have a reputation for providing high quality
services, which is strengthened due to the personal
relationships developed between our staff and representatives of
clients and agencies. We have been awarded many projects either
due to our expertise in working with an agency or project type
or because a particular

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client desires to work with, and can count on,
specific project managers. In addition, we have received
numerous awards for technical excellence including:




| |   |                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Three Engineer of Merit Awards from The American
    Society of Civil Engineering  Orange County Branch                                                      
|
| |  | Water Quality Awards for Innovational Excellence
    from The Michigan Association of County Drain Commissioners                                              
|
| |  | Award of Excellence  Honor Award from
    the City of Rancho Cucamonga, California for design excellence                                                     
|
| |  | Engineering Project Achievement Award from the
    Orange County Engineering Council                                                                          
|
| |  | Project Achievement Award from the American
    Society of Civil Engineers  Orange County Branch                                                             
|
| |  | Outstanding Environmental Analysis
    Document  Large Jurisdiction Award from the
    Association of Environmental Professionals  Inland
    Empire Chapter
|
| |  | Outstanding Environmental Analysis Document Award
    from the Association of Environmental Professionals                                                     
|
| |  | Letter of Appreciation from the State of
    California Department of General Services                                                                        
|
| |  | Project of the Year from the Orange County Branch
    of the American Society of Civil Engineers                                                              

Industry and
Professional Experience

We believe that our senior management has the
proven ability to execute our business plan and capitalize on
new opportunities. Since December 1, 1997, management has
closed eight acquisitions, enabling us to diversify both our
revenue base and our geographic scope. Acquisitions continue to
be a key component of our business plan. In most of the
acquisitions, we have retained the management teams of the
acquired companies and provided the financial and management
controls to promote sustainable growth. This enables the
acquired management team to run their business as they know
best. In addition, the entire management team, from project
manager to senior executive manager, is particularly adept at
the relationship side of the business that plays a critical role
in the world of engineering and consulting services.

We recognize that our employees are our most
valuable resource for providing continuing quality service and
for obtaining new work. During employee selection and as part of
the acquisition criteria, we require that the personnel whom we
add to our team have significant experience in the industries
that we serve. We supplement this industry experience by
supporting continuing education seminars, design forums and
training programs.

Full Service
Approach

We provide a full complement of engineering and
consulting services. Since many consulting and engineering
services firms specialize in only one or a few services, a
project owner may often be required to engage several
engineering and/or consulting firms during the various phases of
a project. The phases range from identifying and evaluating
whether to acquire land or facilities, to designing, engineering
and managing the construction of the finished project. In many
cases, in addition to providing services during various phases
of a project, we provide monitoring and maintenance services on
projects after construction is complete. We believe that clients
realize significant cost and time savings and maintain
consistent quality by concentrating their engineering and
consulting services in as few firms as practicable.

Cross-Marketing

Due to our reputation within industries we serve
and due to our varied technical expertise, we have frequently
increased the scope of services provided to a client from an
initial engagement, such as large-scale land planning, to
include other services, for example mapping, surveying and
end-user site design. When we

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expand into new geographic regions, we have
successfully cross-sold between our divisions and/or our various
industries and intend to continue to cross-sell the services we
offer.


Because our professionals provide many
preliminary services for projects, we are frequently asked to
provide additional services as a project progresses. In
performing the preliminary services during the initial phases of
a project, we obtain background information and data relating to
the project that may be inefficient and costly for another firm
to compile. Consequently, we are often more knowledgeable about
a project, and are able to provide additional services more
efficiently. As a result, we are often engaged to perform
additional engineering and consulting services as a project
progresses.

Effective
Organizational Structure

We believe that our organizational structure
allows us to compete effectively with small- and mid-sized local
firms as well as with large regional, national and international
firms. Our organizational structure combines the efficiencies
associated with centralization and the flexibility of
decentralization. When appropriate, our primary administrative
functions are centralized in our corporate headquarters in
Irvine, California allowing us to reduce duplicative functions
and personnel at our divisional offices. We believe that this
centralization allows the management at our divisional offices
the freedom to focus on identifying new business opportunities
and overseeing the services they provide, and also allows our
project managers the flexibility to focus on being responsive to
client needs. Since our divisions are managed by technical
professionals with excellent client relationships and industry
reputations, we promote decentralization of those aspects of our
business which involve technical and client relationships.

Business Strategy

Our objective is to strengthen our position as a
leading provider of engineering and consulting services while
growing our geographic presence and enhancing the services we
offer. To achieve this objective, we have developed a strategy
with the following key elements:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Maintain High Quality
    Service.To maintain high quality
    service, we focus on being responsive to customers and working
    diligently and responsibly to maintain schedules and budgets. As
    a result of our focus on quality and timely service, we believe
    that we have established an excellent reputation in most of the
    markets we serve. We intend to continue providing high quality
    services as we expand our geographic presence and our service
    offerings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Continue to Recruit and Retain Highly
    Qualified Personnel.We believe that
    recruiting and retaining skilled professionals is crucial to our
    success and growth. As a result, we intend to continue to
    recruit experienced and talented individuals who can provide
    quality services and innovative solutions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Enhance and Strengthen Existing Client
    Relationships.By maintaining strong
    relationships with existing clients and promoting the
    cross-selling of services, we believe that we can further
    enhance our reputation and business opportunities. By focusing
    our efforts in this area, we can utilize the time that we spend
    with our clients on active work to promote additional services
    to them and gain additional contract opportunities for us. We
    believe that our existing relationships between our clients and
    employees is one of our greatest business development assets.                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Expand Services in Public Works/
    Infrastructure, and Energy/ Industrial
    Industries.To diminish our
    susceptibility to the economic cycles affecting any particular
    industry, we intend to continue expanding our work in public
    works/infrastructure and energy/industrial. Much of our
    expertise, including Computer Aided Drafting (CAD)
    work, certain engineering specialties and administrative
    functions, can provide support across industries in the event
    that a particular industry segment experiences economic
    downturns. We believe that by expanding our services into
    industries which follow different economic cycles, we are able
    to reassign talented employees to other project types and help
    provide stability for our core staff, management and profit
    levels. Our acquisitions of John M. Tettemer &
    Associates Ltd.; ESI, Engineering Services Incorporated;
    Thompson-Hysell, Inc.; Pacific Engineering

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | Corporation; Universal Energy, Inc.; and ALNM
    Group Inc. have enhanced our ability to expand our services,
    some of which follow different economic cycles.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Expand
    Geographically.To diminish the impact
    of regional economic cycles and to further enhance cross-selling
    opportunities, we intend to continue to expand our geographic
    presence through acquisitions, possibly opening additional
    divisional offices and by marketing our services to clients with
    national and international needs. Our geographic growth may
    provide us with broader access to employee pools, work-sharing
    between regions and new business opportunities. We believe that
    our acquisitions of ESI, Engineering Services Incorporated;
    Thompson-Hysell; Crosby, Mead, Benton & Associates;
    Hook & Associates Engineering, Inc.; Pacific
    Engineering Corporation; Universal Energy, Inc. and ALNM Group,
    Inc. have enabled us to more effectively sell additional
    services in the entire Southwest and the Midwest.
|
| |  | Expand and Enhance Technical
    Capabilities.We intend to build upon
    our reputation as a quality provider of engineering and
    consulting services as we diversify our services to meet demands
    of our clients, industry segments and new markets. As part of
    our effort to continue diversifying the scope of our services,
    we intend to pursue strategic partnering relationships and
    acquisitions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

Acquisition Strategy

We intend to continue to pursue acquisitions that
complement our business strategy and enhance our range of
services, geographic presence and/or client base. We believe
that strategic acquisitions will enable us to more efficiently
serve the diverse technical and geographic needs of, and secure
additional business from, national and international clients.

In general, the key criteria we consider when
evaluating potential acquisitions include services offered,
reputation, corporate culture, price, profitability and
geographic location.

The following table sets forth information
regarding our eight acquisitions since December 1, 1997:

|                 |  |                                        |  |                                       |  |                                                                              
|---------------- |  | -------------------------------------- |  | ------------------------------------- |  | -----------------------------------------------------------------------------
|                 |  |                                        |  | Primary Markets                       |  |                                                                              
|Acquisition Date |  | Company Acquired                       |  | Currently Served                      |  | Services Offered                                                             
|                 |  |                                        |  |                                       |  |                                                                              
|December 1997    |  | ESI, Engineering Services Incorporated |  | Northern California                   |  | Energy/industrial services                                                   
|August 1998      |  | John M. Tettemer and Associates, Ltd.  |  | Southern California                   |  | Water resources engineering services                                         
|July 1999        |  | Thompson-Hysell, Inc.                  |  | Northern and Central California; Utah |  | Land development design & water
    resources engineering services           
|October 2000     |  | Crosby, Mead, Benton & Associates      |  | Southern California                   |  | Land development design, infrastructure design
    and landscape architecture
|January 2001     |  | Hook & Associates Engineering, Inc.    |  | Arizona                               |  | Land development and transportation services                                 
|September 2001   |  | Pacific Engineering Corporation        |  | Oregon; Washington                    |  | Energy/industrial services                                                   
|November 2001    |  | Universal Energy, Inc.                 |  | National, International               |  | Power plant operations, training, testing, and
    start-up                  
|March 2002       |  | ALNM Group, Inc.                       |  | Michigan                              |  | Environmental, water resources, and other
    engineering services           

Consideration for the companies we have acquired
has included cash, shares of our common stock, promissory notes,
or a combination of these forms of consideration. The
consideration is sometimes subject to

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earn-out or adjustment provisions. Additionally,
in connection with these acquisitions, we have entered into
non-competition agreements with principals of the acquired
company.


Services Provided

We provide a broad range of services, including
civil engineering, surveying and mapping, land planning,
environmental services, cultural resources services,
construction management, site acquisition, water resource
engineering, and other services needed by the industrial,
process and manufacturing industry, including instrumentation
and control systems engineering, fire protection engineering,
electrical engineering, mechanical engineering, chemical process
engineering, start-up and testing, and operations and
maintenance.



| |                           
| | --------------------------
| | Civil Engineering Services

General civil engineering is often referred to as
everything designed from the ground down because
most of the constructed improvements involved lie on the surface
of, or below the ground. Our civil engineering services include
project feasibility and due diligence analysis; development cost
projections; access and circulation analysis; infrastructure
design and analysis; pro forma cost studies; project management;
preparation of construction documents; tentative mapping; flood
plain studies; sewer, water and drainage design; street and
highway design; site and sub-division design; and grading design.



| |                               
| | ------------------------------
| | Surveying and Mapping Services

Surveying and mapping services include, among
other things, the establishment of boundaries for preliminary
engineering, construction layout, as-built surveys and the
identification of features of a parcel of land that directly
affect a projects design. It is common for our surveying
and mapping teams to be the first in and the last
out for a construction project. We provide surveying and
mapping services through teams of skilled professionals that
utilize sophisticated technology, including global positioning
systems that utilize satellite technology to survey and navigate
land, geographic information systems, and field-to-office
digital and electronic data capture to produce information that
serves as the foundation for a variety of planning and
engineering analysis and design endeavors. We believe that we
were among the first engineering and surveying consultants to
utilize global positioning systems with geographic information
systems to perform precise ground surveys.



| |                       
| | ----------------------
| | Land Planning Services

Planning services include both physical planning
and policy planning. Physical planning is graphical and includes
conceptual drawings, sketches and layouts of communities and
identifies land uses and residential and commercial
neighborhoods. The resulting plan often becomes the basis for
the preparation of engineering plans. To complement a physical
plan, policy planning entails the preparation of supporting text
and documents that establish procedures, requirements and
guidelines for visual appearance or detailed permitting
approvals under which the physical plan may be implemented.

Our planning services are designed to assist
clients with maximizing the potential uses of real estate and
other limited resources. We provide plans that take into account
government regulations, effective and creative use of land
assets, and the expectations and needs of the community.



| |                       
| | ----------------------
| | Environmental Services

Our environmental services include biological
studies, permit processing, environmental document preparation
and mitigation monitoring. We assist clients with the complex
federal, state, and local permitting process enabling them to
successfully implement private and public projects. Our
environmental staff offers the technical proficiency to provide
one-stop preparation of environmental documents that conform to
current regulatory requirements.

Our staff is experienced with the preparation of
complex and challenging environmental planning documents such as
Environmental Impact Reports, Environmental Impact Statements,
initial studies and

8



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environmental assessments. Our experience
includes the preparation of documents that comply with the
California Environmental Quality Act (CEQA) and the National
Environmental Policy Act (NEPA). Our environmental staff has
been instrumental in developing permit strategy consensus among
federal agencies such as the Army Corps of Engineers,
U.S. Fish and Wildlife, the Environmental Protection Agency
and the State of California.




| |                            
| | ---------------------------
| | Cultural Resources Services

We perform archaeological and paleontological
studies that range from site review and records analysis to a
discussion of measures to protect sensitive or valuable cultural
resources. Further, we conduct field sampling and testing to
establish or verify findings of a site review and previously
documented information to determine both the quantity and
quality of culturally valuable materials for a given site. Many
environmental impact analyses result in requirements to protect
significant cultural resources that may exist on a property,
such as native American community settings, artifacts, and
burial sites.

We have provided monitoring of construction
activities on numerous projects and have also completed complex
excavations in coordination with state and federal agencies and
native American representatives.



| |                                 
| | --------------------------------
| | Construction Management Services

Construction management services are an efficient
bundling of some of the other services that we
provide. During construction management assignments, we direct
development and construction tasks, including the preparation of
cost projections, entitlement and feasibility analysis,
professional consultant selection and supervision, contractor
bidding and construction supervision. We provide these services
in discrete components or as a comprehensive package for private
development and public works clients.



| |                          
| | -------------------------
| | Site Acquisition Services

Site acquisition services include the selection
of prospective properties that fit defined criteria, identifying
and overcoming restrictions against the intended use of
properties, negotiating agreements for the acquisition and
implementing the acquisition and final use of properties. We
provide site acquisition services to assist clients with
obtaining the most appropriate real estate for their particular
needs or to assist them in assessing the quality and reliability
of existing equipment and facilities in the energy industry. For
example, a property intended for the development of multi-family
housing will have characteristics which vary greatly from that
of a property intended for the siting of a heavy industrial
facility.



| |                                     
| | ------------------------------------
| | Water Resources Engineering Services

Our water resources engineering services consist
of financial planning, feasibility studies, storm water
management, demand forecasting, hydraulic analysis and water
flow studies to develop system master plans in addition to
designing conventional systems of pipes, channels and dams.



| |                                                                      
| | ---------------------------------------------------------------------
| | Instrumentation/ Control Systems Integration
    Engineering Services

Our professionals integrate equipment selection,
maintenance requirements and spare parts inventory by designing,
selecting and reviewing mechanical, piping and electrical
layouts, and providing operations and maintenance, training,
start-up and emergency procedures during the design of
contemporary processes or the automation of outdated
manufacturing processes. These services are essential to
creating an efficient operating facility.



| |                                     
| | ------------------------------------
| | Fire Protection Engineering Services

We provide fire protection engineering services
in connection with both new construction and the renovation or
modification of existing facilities to assist clients in
defining and providing an acceptable level of fire safety in a
cost-effective manner.

9



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##### Table of Contents





| |                                
| | -------------------------------
| | Electrical Engineering Services

These services include the design of electrical
power systems for buildings, manufacturing plants and
miscellaneous facilities; design of lighting systems; and
selection of other equipment that delivers or uses electrical
power. We design various types of electrical power generation
systems and power distribution systems. We also provide
cogeneration and backup emergency power supply designs for
university campuses and multiple building commercial facilities.



| |                                
| | -------------------------------
| | Mechanical Engineering Services

These services are required to design energy
systems, heating, ventilation, air conditioning
(HVAC) systems, plumbing systems, water distribution
systems and fire protection systems for facilities and
buildings. We provide engineering design for HVAC systems and
boiler, chilled water, compressed air, and other building
facilities. Additionally, we provide mechanical engineering
expertise for production line automation and manufacturing
engineering support.



| |                                           
| | ------------------------------------------
| | Chemical/ Process Engineering
    Services

Our chemical/ process engineers design systems
for a variety of manufacturing and industrial facilities and
processes like food and beverage, pharmaceutical, chemical and
petroleum facilities.



| |                                                  
| | -------------------------------------------------
| | Start-Up, Testing, Operations and
    Maintenance

As plants, whether they are power generation or
wastewater treatment, are constructed they require a significant
amount of testing during the construction process to insure that
various functions are performing as designed and expected. This
work includes testing the system processes, electrical
equipment, instrument calibration, and numerous other tests to
insure that the plant will function as intended when it becomes
operational. It then needs to be started and monitored, and the
permanent staff for the plant must be trained to operate and
manage it. We provide various plant services including testing,
start up, and training for power plants. In addition, we provide
operations and maintenance services for water and wastewater
plants and have the ability to provide the same for power plants.

Business Development and Marketing

Our business development and marketing activities
consist of identifying target markets, developing strategies for
pursuing these targets and supporting marketing activities
company-wide by coordinating corporate promotional and
professional activities. We use a client service value-added
approach to our business development and marketing efforts by
employing a variety of techniques to obtain contracts with new
clients, repeat business with existing clients, and to maintain
a positive reputation.

Additionally, our business development and
marketing efforts assist our management and clients in assuring
quality performance, client satisfaction, and new opportunities.
To accomplish this, we provide our clients with referrals for
project partners and financing sources, assist with legislative
matters and monitor in-house performance. Finally, we identify
new projects and prospective clients in each of the markets in
which we are active. This is achieved through the use of many
resources including: geographic information systems and aerial
maps, project and contact databases, the Internet, lead tracking
publications, and industry networking relationships. We pursue
the companies, agencies, projects and markets that we believe
have financial strength, long-term growth potential and
established reputations.

Our growing list of services provides us with the
opportunity to cross-market and sell additional services to our
clients. We intend to further promote our broad service
capabilities and continue to take advantage of our ability to
increase our revenue by cross-selling services to existing
clients and thereby to increase the number of services being
provided to existing clients.

One of the keys to being successful in
cross-marketing our services is to ensure that all of our
managers understand the complete capabilities of our company,
including our full range of services and the geographic
locations and industries in which we offer and provide our
services. We give presentations to our staff to

10



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educate them on our full capabilities and to
encourage them to identify cross-marketing opportunities. In
addition, we have implemented a formal cross-marketing program.
We have produced various tools to highlight pertinent
information on each of the companys divisions. These are
available to all managers in each division as part of an
approach geared to facilitate easy lead sharing
between divisions and to maximize the effectiveness of our
cross-marketing efforts. We promote successful cross-selling
efforts and have been awarded numerous new or extended contracts
as a direct result of this effort. In order to assist our
cross-selling efforts, our divisional offices provide summaries
of significant proposals to our corporate business development
department for review of potential cross-selling and business
enhancement opportunities.


One of our most effective methods of developing
client relationships and winning new contracts has been our
Executive Land Search Program. In our map rooms, we
have computerized geographic information systems maps, aerial
maps and city and county maps. We use these maps along with
corresponding database information to identify and track a
multitude of existing and potential projects. We meet with
existing and prospective clients and refer available projects to
them.

Clients

Our primary private sector clients consist of
real estate developers, builders, major manufacturers and energy
providers. Our public sector clients include water and school
districts, metropolitan planning organizations, transportation
authorities and local, state and federal agencies. The following
is a partial list of some of our representative clients:

|                                  |  |                                                   
|--------------------------------- |  | --------------------------------------------------
|Real Estate                       |  | Public Works/Infrastructure                       
|                                  |  |                                                   
|Centex Homes                      |  | Ann Arbor Transportation Authority                
|D.R. Horton                       |  | Central Valley Water Reclamation Facility Board   
|Lennar Homes                      |  | City of Anaheim, California                       
|Pulte Home Corporation/ Del Webb  |  | City of Fenton, Michigan                          
|Pardee Homes                      |  | Coachella Valley Water District                   
|Shea Homes                        |  | Inland Empire Utilities Agency                    
|The Irvine Company                |  | Metropolitan Water District of Southern California
|Thomas & Mack Development Company |  | Pittsfield Charter Township, Michigan             

|                                      |  | 
|------------------------------------- |  | 
|Energy/Industrial                     |  | 
|                                      |  | 
|Bonneville Power Administration       |  | 
|ChevronTexaco                         |  | 
|New United Motors Manufacturing, Inc. |  | 
|University of Michigan                |  | 
|Weyerhaeuser Company                  |  | 

No individual client accounted for more than 10%
of our net revenue in 2001, 2002 or 2003.

Backlog

Our gross revenue backlog for fixed price
contracts and time and material contacts with not-to-exceed
provisions as of December 31, 2003, was approximately
$58 million as compared to $51 million at
December 31, 2002. Our backlog represents an estimate of
the remaining future gross revenue from existing signed
contracts, and contracts which have been awarded with a defined
scope of work and contract value and on which we have begun work
with verbal client approval. We do not believe that backlog is
fully indicative of the amount of potential future revenue that
we may achieve due to the short-term nature of the contracts
under which we generally provide our services compared to the
long-term nature of the projects and since our contracts are
subject to cancellations and/or scope adjustments.

11



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##### Table of Contents



Competition

The market for our services is highly
competitive. We compete with a variety of firms ranging from
small, local firms to national and international firms that are
much larger than we are. We perform engineering and consulting
services for a broad spectrum of markets including energy,
residential, commercial, recreational, public works, industrial,
process and manufacturing. We believe that our competitive
advantages include our multiple industries and services,
reputation, organizational structure and business strategy. We
believe that the principal factors in the engineering and
consulting services selection criteria include:



| |   |                       
| | - | ----------------------
| |  | quality of service,   
|
| |  | relevant experience,  
|
| |  | staffing capabilities,
|
| |  | reputation,           
|
| |  | geographic presence,  
|
| |  | stability, and        
|
| |  | price.                

Employees

As of January 31, 2004, we had approximately
775 employees and project workers. Believing that our success
depends significantly upon attracting and retaining talented,
innovative and experienced professionals, we are comprised of
highly skilled personnel with significant industry experience
and strong client relationships. We employ licensed civil
engineers, mechanical engineers, electrical engineers, land
surveyors, landscape architects, certified planners, information
technology specialists, power plant personnel, geodesists and
archaeologists, among others.

At December 31, 2003, none of our employees
were a party to a collective bargaining agreement other than
approximately 10% of our employees whom we employ as field
surveyors in California. Our field survey employees in our
Southern California offices are covered by a Master Labor
Agreement between the International Union of Operating Engineers
Local Union No. 12 and the Southern California Association
of Civil Engineers and Land Surveyors, which expires in October
2004. Our field survey employees in our Northern California
offices are covered by a Master Agreement between the Bay
Counties Civil and Land Surveyors Association and Operating
Engineers Local Union No. 3, which expires in March 2005.

Available Information

We maintain a website with the address
www.keithco.com. We are not including the information
contained on our website as a part of, or incorporating it by
reference into, this Annual Report on Form 10-K. We make
available free of charge, through our website via a hyperlink to
a third party service, our Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on
Form 8-K, and amendments to these reports, as soon as
reasonably practicable after we electronically file that
material with, or furnish such material to, the Securities and
Exchange Commission.






|        |           
|------- | ----------
|Item 2. | Properties

We occupy offices and facilities in various
locations in California, Nevada, Utah, Arizona, Oregon, Texas
and Michigan. Our corporate headquarters are located in Irvine,
California and consist of approximately 63,000 square feet
of space. Our corporate headquarters lease expires in October
2009. We believe that our existing office space is adequate to
meet our current and foreseeable future requirements.

12



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|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

We are party to various legal proceedings that
arise in the ordinary course of our business. Based on our
experience, the nature of our current proceedings and our
insurance policy coverage for such matters, the ultimate
disposition of these matters should not have a material adverse
effect on our financial position, liquidity or results of
operations.






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

No matters were submitted to a vote of security
holders during the quarter ended December 31, 2003.

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##### Table of Contents






PART II






|        |                                                                 
|------- | ----------------------------------------------------------------
|Item 5. | Market for Our Common Equity and Related
    Stockholder Matters

Our common stock is traded on the Nasdaq National
Market under the symbol TKCI. The following table
sets forth the low and high closing bid prices per share of our
common stock for each calendar quarter indicated as reported on
the Nasdaq National Market.

|                              |  |     |       |      |  |   |       | 
|----------------------------- |  | --- | ----- | ---- |  | - | ----- | 
|                              |  | Low |       | High
|                              |  |     |       |     
|Year Ended December 31, 2002: |  |     |       |      |  |   |       | 
|First Quarter                 |  | $   | 10.05 |      |  | $ | 12.91 | 
|Second Quarter                |  |     | 12.53 |      |  |   | 16.00 | 
|Third Quarter                 |  |     | 9.15  |      |  |   | 15.20 | 
|Fourth Quarter                |  |     | 9.34  |      |  |   | 13.07 | 
|Year Ended December 31, 2003: |  |     |       |      |  |   |       | 
|First Quarter                 |  | $   | 9.12  |      |  | $ | 12.83 | 
|Second Quarter                |  |     | 9.55  |      |  |   | 10.95 | 
|Third Quarter                 |  |     | 9.95  |      |  |   | 13.38 | 
|Fourth Quarter                |  |     | 11.97 |      |  |   | 14.30 | 

We have not declared or paid any cash dividends
on our capital stock and do not anticipate paying cash dividends
on our common stock in the foreseeable future. In addition, our
credit agreement with our bank restricts the payment of
dividends without the banks consent.

Recent Issuances of Unregistered
Securities

In connection with our acquisition of Crosby,
Mead, Benton & Associates (CMB) in October
2000, the purchase agreement provided for the issuance of
unregistered shares of our common stock to the former
shareholders of that company, subject to certain adjustments as
stated in the agreement. We issued the former shareholders of
CMB 35,905 shares of our common stock with a value of
$188,000 during 2001, and 32,924 shares of our common stock
with a value of $253,000 during 2002. These shares were issued
in transactions exempt from the registration requirements of the
Securities Act of 1933, as amended, pursuant to
Section 4(2) thereof.

In connection with the acquisition of Hook
Associates Engineering, Inc. (Hook) in January 2001,
the purchase agreement provided for the issuance of unregistered
shares of our common stock to the former shareholders of that
company, subject to certain adjustments as stated in the
agreement. We issued the former shareholders of Hook
34,188 shares of our common stock with a value of $500,000
in 2001. These shares were issued in transactions exempt from
the registration requirements of the Securities Act of 1933, as
amended, pursuant to Section 4(2) thereof.

In connection with our acquisition of Universal
Energy, Inc. (UEI) in November 2001, the former
shareholders are eligible for additional consideration, which
may affect the purchase price as a result of an earn-out
provision. As part of this earn-out, which is based on certain
profitability targets for 2002, 2003, and 2004, we may be
obligated to issue additional shares of our common stock to be
determined under the earn-out provision of the agreement. If
issued, these shares are to be issued in three installments in
May 2003, May 2004 and May 2005. In May 2003, we issued
70,907 shares of our common stock with a value of $714,000
related to the 2002 portion of the earn-out. UEI did not meet
its profitability target related to 2003, and therefore, we do
not expect to issue any shares in 2004 related to this. The
issuance of future shares is subject to certain adjustments as
stated in the agreement. These shares are expected to be issued
in transactions exempt from the registration requirements of the
Securities Act of 1933, as amended, pursuant to
Section 4(2) thereof.

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In connection with our acquisition of ALNM Group,
Inc. (ALNM) in March 2002, the purchase agreement
provided for the issuance of unregistered shares of our common
stock to the former shareholders of that company. We issued the
former shareholders of ALNM 141,856 shares of our common
stock in 2002 with a value of $1,569,000 and estimate
approximately 75,000 shares of our common stock or $792,000
in value of shares to be issued in 2004. The issuance of future
shares is subject to certain adjustments as stated in the
agreement. These shares were, and are expected to be, issued in
transactions exempt from the registration requirements of the
Securities Act of 1933, as amended, pursuant to
Section 4(2) thereof.






|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

The selected financial data includes the
consolidated financial statement data for the periods presented.

The statement of income data for the years ended
December 31, 2001, 2002 and 2003, and the balance sheet
data as of December 31, 2002 and 2003, have been derived
from our audited consolidated financial statements which are
included elsewhere in this Annual Report on Form 10-K. The
statements of income data for the years ended December 31,
1999 and 2000, and the balance sheet data as of
December 31, 1999, 2000 and 2001, have been derived from
our audited consolidated financial statements which are not
included in this Annual Report on Form 10-K.

The following information should be read in
conjunction with our consolidated financial statements and the
related notes and our Managements Discussion and Analysis
of Financial Condition and Results of Operations which are
included elsewhere in this Annual Report on Form 10-K.

|                          |                                                                |                                                                          |   |        |        |      |   |        |        |      |   |        |        |  |   |         |        |  |   |        |        | 
|------------------------- | -------------------------------------------------------------- | ------------------------------------------------------------------------ | - | ------ | ------ | ---- | - | ------ | ------ | ---- | - | ------ | ------ |  | - | ------- | ------ |  | - | ------ | ------ | 
|                          |                                                                |                                                                         
|                          |                                                                | Years Ended December 31,                                                
|                          |                                                                |                                                                         
|                          |                                                                | 1999                                                                     |   | 2000   |        | 2001 |   | 2002   |        | 2003
|                          |                                                                |                                                                          |   |        |        |      |   |        |        |     
|                          |                                                                |                                                                         
|                          |                                                                | (Dollars in thousands, except for share data)                           
|Statement of Income Data: |                                                                |                                                                          |   |        |        |      |   |        |        |      |   |        |        |  |   |         |        |  |   |       
|                          | Gross revenue                                                  |                                                                          | $ | 43,084 |        |      | $ | 57,835 |        |      | $ | 74,314 |        |  | $ | 106,487 |        |  | $ | 99,950 |       
|                          |                                                                |                                                                          |   |        |        |      |   |        |        |      |   |        |        |  |   |         |        |  |   |       
|                          |                                                                | Net revenue                                                              |   |        | 39,636 |      |   |        | 53,381 |      |   |        | 66,844 |  |   |         | 91,598 |  |   |        | 90,744 | 
|                          | Costs of revenue                                               |                                                                          |   | 26,987 |        |      |   | 34,362 |        |      |   | 42,970 |        |  |   | 59,716  |        |  |   | 58,837 |       
|                          |                                                                |                                                                          |   |        |        |      |   |        |        |      |   |        |        |  |   |         |        |  |   |       
|                          |                                                                | Gross profit                                                             |   |        | 12,649 |      |   |        | 19,019 |      |   |        | 23,874 |  |   |         | 31,882 |  |   |        | 31,907 | 
|                          | Selling, general and administrative expenses                   |                                                                          |   | 8,343  |        |      |   | 10,834 |        |      |   | 14,015 |        |  |   | 19,105  |        |  |   | 20,592 |       
|                          |                                                                |                                                                          |   |        |        |      |   |        |        |      |   |        |        |  |   |         |        |  |   |       
|                          |                                                                | Income from operations                                                   |   |        | 4,306  |      |   |        | 8,185  |      |   |        | 9,859  |  |   |         | 12,777 |  |   |        | 11,315 | 
|                          | Interest income                                                |                                                                          |   | 13     |        |      |   | 31     |        |      |   | 552    |        |  |   | 384     |        |  |   | 279    |       
|                          | Interest expense (income), net                                 |                                                                          |   | 807    |        |      |   | 341    |        |      |   | 263    |        |  |   | (47     | )      |  |   | 15     |       
|                          | Other expenses (income), net                                   |                                                                          |   | 29     |        |      |   | (44    | )      |      |   | 54     |        |  |   | (625    | )      |  |   | (259   | )     
|                          |                                                                |                                                                          |   |        |        |      |   |        |        |      |   |        |        |  |   |         |        |  |   |       
|                          |                                                                | Income before provision for income taxes and
    discontinued operations |   |        | 3,483  |      |   |        | 7,919  |      |   |        | 10,094 |  |   |         | 13,833 |  |   |        | 11,838 | 
|                          | Provision for income taxes                                     |                                                                          |   | 1,466  |        |      |   | 3,199  |        |      |   | 3,916  |        |  |   | 5,397   |        |  |   | 4,617  |       
|                          |                                                                |                                                                          |   |        |        |      |   |        |        |      |   |        |        |  |   |         |        |  |   |       
|                          |                                                                | Income from continuing operations                                        |   |        | 2,017  |      |   |        | 4,720  |      |   |        | 6,178  |  |   |         | 8,436  |  |   |        | 7,221  | 
|                          | Loss from discontinued operations, net of income
    taxes     |                                                                          |   |       |        |      |   |       |        |      |   | 329    |        |  |   | 628     |        |  |   |       |       
|                          |                                                                |                                                                          |   |        |        |      |   |        |        |      |   |        |        |  |   |         |        |  |   |       
|                          |                                                                | Net income                                                               |   |        | 2,017  |      |   |        | 4,720  |      |   |        | 5,849  |  |   |         | 7,808  |  |   |        | 7,221  | 
|                          | Reversal of redeemable securities to redemption
    value, net |                                                                          |   | 230    |        |      |   |       |        |      |   |       |        |  |   |        |        |  |   |       |       
|                          |                                                                |                                                                          |   |        |        |      |   |        |        |      |   |        |        |  |   |         |        |  |   |       
|                          |                                                                | Net income available to common shareholders                              |   | $      | 2,247  |      |   | $      | 4,720  |      |   | $      | 5,849  |  |   | $       | 7,808  |  |   | $      | 7,221  | 
|                          |                                                                |                                                                          |   |        |        |      |   |        |        |      |   |        |        |  |   |         |        |  |   |       

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|                                                          |  |                                               |           |      |  |      |           |      |  |      |           |  |  |   |           |  |  |   |           | 
|--------------------------------------------------------- |  | --------------------------------------------- | --------- | ---- |  | ---- | --------- | ---- |  | ---- | --------- |  |  | - | --------- |  |  | - | --------- | 
|                                                          |  |                                              
|                                                          |  | Years Ended December 31,                     
|                                                          |  |                                              
|                                                          |  | 1999                                          |           | 2000 |  | 2001 |           | 2002 |  | 2003
|                                                          |  |                                               |           |      |  |      |           |      |  |     
|                                                          |  |                                              
|                                                          |  | (Dollars in thousands, except for share data)
|Earnings per share from continuing
    operations-diluted |  | $                                             | 0.50      |      |  | $    | 0.89      |      |  | $    | 0.87      |  |  | $ | 1.07      |  |  | $ | 0.91      | 
|                                                          |  |                                               |           |      |  |      |           |      |  |      |           |  |  |   |           |  |  |   |           | 
|Earnings per sharediluted                                |  | $                                             | 0.50      |      |  | $    | 0.89      |      |  | $    | 0.82      |  |  | $ | 0.99      |  |  | $ | 0.91      | 
|                                                          |  |                                               |           |      |  |      |           |      |  |      |           |  |  |   |           |  |  |   |           | 
|Weighted average shares outstandingdiluted               |  |                                               | 4,515,033 |      |  |      | 5,299,679 |      |  |      | 7,092,505 |  |  |   | 7,868,877 |  |  |   | 7,957,344 | 
|                                                          |  |                                               |           |      |  |      |           |      |  |      |           |  |  |   |           |  |  |   |           | 

|                    |                                             |                    |   |        |  |      |   |        |  |      |   |        |  |  |   |        |  |  |   |        | 
|------------------- | ------------------------------------------- | ------------------ | - | ------ |  | ---- | - | ------ |  | ---- | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|                    |                                             |                   
|                    |                                             | As of December 31,
|                    |                                             |                   
|                    |                                             | 1999               |   | 2000   |  | 2001 |   | 2002   |  | 2003
|                    |                                             |                    |   |        |  |      |   |        |  |     
|Balance Sheet Data: |                                             |                    |   |        |  |      |   |        |  |      |   |        |  |  |   |        |  |  |   |       
|                    | Working capital                             |                    | $ | 7,213  |  |      | $ | 7,343  |  |      | $ | 38,781 |  |  | $ | 39,613 |  |  | $ | 47,416 | 
|                    | Total assets                                |                    |   | 23,661 |  |      |   | 33,312 |  |      |   | 71,492 |  |  |   | 82,226 |  |  |   | 87,536 | 
|                    | Total debt, excluding issuable common stock |                    |   | 4,835  |  |      |   | 5,745  |  |      |   | 1,912  |  |  |   | 70     |  |  |   |       | 
|                    | Total shareholders equity                  |                    |   | 12,836 |  |      |   | 18,239 |  |      |   | 53,733 |  |  |   | 63,612 |  |  |   | 71,962 | 

16



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##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

You should read the following discussion and
analysis together with our consolidated financial statements and
related notes included elsewhere in this Report. Some of the
information contained in this discussion and analysis or set
forth elsewhere in this Report, including information with
respect to our plans and strategies for our business, includes
forward-looking statements that involve risks and uncertainties.
You should review the Risk Factors section of this
Report for a discussion of important factors that could cause
actual results to differ materially from the results described
in or implied by the forward-looking statements contained in
this Report.

Overview



| |        
| | -------
| | Revenue

We derive most of our revenue from professional
service activities. The majority of these activities are billed
under various types of contracts with our clients, including
fixed price and time-and-materials contracts. Most of our
time-and-material contracts have not-to-exceed provisions. For
contracts with either a fixed price or a not-to-exceed
provision, revenue is recognized under the percentage of
completion method of accounting based on the proportion of
actual direct contract costs incurred to total estimated direct
contract costs. We believe that costs incurred are the best
available measure of progress towards completion on these
contracts. In the course of providing services, we sometimes
subcontract for various services. These costs are included in
billings to clients and are included in our gross revenue.
Because subcontractor services can change significantly from
project to project, changes in gross revenue may not be
indicative of business trends. Accordingly, we also report net
revenue, which is gross revenue less reimbursable subcontractor
costs. Our revenue is generated from a large number of
relatively small contracts.



| |                 
| | ----------------
| | Costs of Revenue

Costs of revenue include labor, non-reimbursable
costs, materials and various direct and indirect overhead costs
including rent, utilities and depreciation. Direct labor
employees work predominantly at our offices and at the
clients job sites. The number of direct labor employees
assigned to a contract will vary according to the size,
complexity, duration and demands of the project. Contract
terminations, completions, scheduling delays and contract
proposal activity may result in periods when direct labor
employees are not fully utilized. As we continue to grow, we
anticipate that we will continue to add professional and
administrative staff to support our growth. These professionals
are in great demand and are likely to remain a limited resource
for the foreseeable future. The significant competition for
employees with the skills we require creates wage pressures on
professional compensation. We attempt to increase our billing
rates to customers to compensate for wage increases; however,
there can be a lag before wage increases can be incorporated
into our existing contracts. Some expenses, primarily long-term
leases, are fixed and cannot be adjusted in reaction to an
economic downturn.



| |                                                 
| | ------------------------------------------------
| | Selling, General and Administrative
    Expenses

Selling, general and administrative expenses
primarily consist of corporate costs related to finance and
accounting, information technology, business development and
marketing, contract proposals, executive salaries, provisions
for doubtful accounts and other indirect overhead costs.



| |                                                           
| | ----------------------------------------------------------
| | Critical Accounting Policies and
    Significant Estimates

The accounting policies that are most important
to the portrayal of our financial condition and results of
operations, and require managements most difficult,
subjective or complex judgements, are considered to be our
critical accounting policies. Because of the uncertainties
inherent in making assumptions and estimates regarding unknown
future outcomes, future events may result in significant
differences between estimates and actual results. We believe
that each of the assumptions and estimates are appropriate in
the circumstances, and represent the most likely future outcome.
The following is what we believe are the critical accounting
policies most affected by management estimates and judgements.

17



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##### Table of Contents



Revenue and Cost Recognition Estimates on
Contracts.We use estimates in
recognizing revenue related to our contracts with fixed price or
not-to-exceed provisions. For these contracts, revenue is
recognized under the percentage of completion method of
accounting based on the proportion of actual direct contract
costs incurred to total estimated direct contract costs. We
believe that costs incurred are the best available measure of
progress towards completion on these contracts. Estimating the
total estimated direct contract cost is a subjective process and
requires the use of our best estimates based upon the current
information known by us at that point in time. Our estimate of
total direct contract cost has a direct impact on the revenue
recognized by us. If our current estimate of total direct
contract costs turns out to be higher than our previous
estimates of total direct contract cost, then we would have over
recognized revenue for that previous period. Conversely, if our
current estimates of total direct contract costs turns out to be
lower than our previous estimates of total direct contract
costs, we would have under recognized revenue for that previous
period. In both cases, a job to date adjustment would be made to
true-up revenue as a change in estimate applied prospectively.

Goodwill.We use
estimates in order to determine if goodwill has been impaired.
An impairment loss may be recognized if the carrying amount of a
reporting units net book value exceeds the estimated fair
value of the reporting unit. We arrive at the estimated fair
value of a reporting unit by using a variety of customary
valuation methods, such as discounted cash flow analysis and
multiples of net revenue and earnings before interest and taxes.
These valuation methods use a variety of assumptions such as
future billable employee headcount, net revenue per billable
employee, operating income, cash flow, discount rates and
multiples. Estimating fair value of a reporting unit is a
subjective process and requires the use of our best estimates.
We will perform our valuation analysis at least annually or if
an event occurs or circumstances change that would indicate the
carrying amount of goodwill may be impaired. If our estimates or
assumptions change from those used in our current valuation, we
may be required to recognize an impairment loss in future
periods.

Provision for Doubtful
Accounts.We use estimates in arriving
at our allowance for doubtful accounts related to our contracts
and trade receivables. These estimates are based on our best
assessment as to the collectibility of the related receivable
balance. Each quarter, we re-evaluate our estimates to assess
the adequacy of our allowance for doubtful accounts and adjust
the allowance for doubtful accounts as necessary. Factors
considered in arriving at our allowance for doubtful accounts,
include among other things, historical and anticipated client
default rates at the various aging categories of contract and
trade receivables and the overall business environment/ economy.
Future collections of receivables that are different from our
current estimates will affect results of operations in future
periods.

Discretionary Bonus
Plan.During 2003, we implemented a
discretionary bonus plan. Under this bonus plan, we may award an
annual cash performance bonus to our employees provided that our
annual actual results exceed a pre-established annual target. We
review the need for a bonus accrual on a quarterly basis by
comparing our actual quarterly results and our estimated results
for the remainder of the year to our annual pre-established
target. Estimating our future results is a subjective process
and requires the use of our best estimates based upon the
current information known to us at that point in time. As a
result of potential changes to our estimates, our quarterly
results may be significantly affected by adjustments to the
bonus accrual. In the fourth quarter of 2003, we made our final
adjustment to the 2003 bonus accrual. Any annual bonus award
under this plan is at the discretion of the Compensation
Committee of the Board of Directors.



| |                                                    
| | ---------------------------------------------------
| | Impact of Our Industry Diversification
    Strategy

To help reduce our susceptibility to economic
cycles affecting the real estate development industry, we intend
to expand our work in the public works/ infrastructure and the
energy/ industrial industries as feasible, based upon such items
as economic and market conditions. We believe that among other
business initiatives, our acquisition strategy may play a
significant role in contributing to this objective. The
acquisitions of Pacific Engineering Corporation
(PEC) and Universal Energy Inc. (UEI)
during 2001, ALNM Group, Inc. (ALNM) in 2002 and
anticipated future acquisitions, many of which may include
engineering services outside of the real estate development
industry, may have a significant impact on our future net
revenue mix. Due to these and potential future acquisitions, we
anticipate that our margins may be affected by the decreased
business concentration from the real estate development industry
which has historically yielded higher margins than services
provided to the public works/ infrastructure and energy/
industrial industries.

18



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##### Table of Contents



Results of Operations

The following table sets forth supplemental
consolidated operating results for each of the periods presented
as a percentage of net revenue:

|                                                           |                                                                          |                          |       |       |   |      |       |       |   |  |       |       |  
|---------------------------------------------------------- | ------------------------------------------------------------------------ | ------------------------ | ----- | ----- | - | ---- | ----- | ----- | - |  | ----- | ----- | -
|                                                           |                                                                          |                         
|                                                           |                                                                          | Years Ended December 31,
|                                                           |                                                                          |                         
|                                                           |                                                                          | 2003                     |       | 2002  |   | 2001
|                                                           |                                                                          |                          |       |       |   |     
|Gross revenue                                              |                                                                          |                          | 110.1 | %     |   |      | 116.3 | %     |   |  | 111.2 | %    
|Subcontractor costs                                        |                                                                          |                          | 10.1  |       |   |      | 16.3  |       |   |  | 11.2  |      
|                                                           |                                                                          |                          |       |       |   |      |       |       |   |  |       |      
|                                                           | Net revenue                                                              |                          |       | 100.0 |   |      |       | 100.0 |   |  |       | 100.0 |  
|Costs of revenue                                           |                                                                          |                          | 64.8  |       |   |      | 65.2  |       |   |  | 64.3  |      
|                                                           |                                                                          |                          |       |       |   |      |       |       |   |  |       |      
|                                                           | Gross profit                                                             |                          |       | 35.2  |   |      |       | 34.8  |   |  |       | 35.7  |  
|Selling, general and administrative expenses               |                                                                          |                          | 22.7  |       |   |      | 20.9  |       |   |  | 21.0  |      
|                                                           |                                                                          |                          |       |       |   |      |       |       |   |  |       |      
|                                                           | Income from operations                                                   |                          |       | 12.5  |   |      |       | 13.9  |   |  |       | 14.7  |  
|Interest income                                            |                                                                          |                          | 0.3   |       |   |      | 0.4   |       |   |  | 0.8   |      
|Interest expense (income), net                             |                                                                          |                          | 0.0   |       |   |      | (0.1  | )     |   |  | 0.3   |      
|Other (income) expenses, net                               |                                                                          |                          | (0.3  | )     |   |      | (0.7  | )     |   |  | 0.1   |      
|                                                           |                                                                          |                          |       |       |   |      |       |       |   |  |       |      
|                                                           | Income before provision for income taxes and
    discontinued operations |                          |       | 13.1  |   |      |       | 15.1  |   |  |       | 15.1  |  
|Provision for income taxes                                 |                                                                          |                          | 5.1   |       |   |      | 5.9   |       |   |  | 5.9   |      
|                                                           |                                                                          |                          |       |       |   |      |       |       |   |  |       |      
|Income from continuing operations                          |                                                                          |                          | 8.0   |       |   |      | 9.2   |       |   |  | 9.2   |      
|Loss from discontinued operations, net of income
    taxes |                                                                          |                          | 0.0   |       |   |      | (0.7  | )     |   |  | (0.4  | )    
|                                                           |                                                                          |                          |       |       |   |      |       |       |   |  |       |      
|                                                           | Net income                                                               |                          |       | 8.0   | % |      |       | 8.5   | % |  |       | 8.8   | %
|                                                           |                                                                          |                          |       |       |   |      |       |       |   |  |       |      

The following table sets forth the Companys
consolidated statements of income for the years ended
December 31, 2003 and 2002 and includes the dollar and
percentage change:

|                                                           |                                                                          |                          |        |        |  |        |         |        |  |   |        |        |   |  |        |       |   
|---------------------------------------------------------- | ------------------------------------------------------------------------ | ------------------------ | ------ | ------ |  | ------ | ------- | ------ |  | - | ------ | ------ | - |  | ------ | ----- | --
|                                                           |                                                                          |                         
|                                                           |                                                                          | Years Ended December 31,
|                                                           |                                                                          |                         
|                                                           |                                                                          |                          |        | $      |  | %     
|                                                           |                                                                          | 2003                     |        | 2002   |  | Change |         | Change
|                                                           |                                                                          |                          |        |        |  |        |         |       
|                                                           |                                                                          |                         
|                                                           |                                                                          | (Dollars in thousands)  
|Gross revenue                                              |                                                                          | $                        | 99,950 |        |  | $      | 106,487 |        |  | $ | (6,537 | )      |   |  | (6.1   | )%   
|Subcontractor costs                                        |                                                                          |                          | 9,206  |        |  |        | 14,889  |        |  |   | (5,683 | )      |   |  | (38.2  | )    
|                                                           |                                                                          |                          |        |        |  |        |         |        |  |   |        |        |   |  |        |      
|                                                           | Net revenue                                                              |                          |        | 90,744 |  |        |         | 91,598 |  |   |        | (854   | ) |  |        | (0.9  | ) 
|Costs of revenue                                           |                                                                          |                          | 58,837 |        |  |        | 59,716  |        |  |   | (879   | )      |   |  | (1.5   | )    
|                                                           |                                                                          |                          |        |        |  |        |         |        |  |   |        |        |   |  |        |      
|                                                           | Gross profit                                                             |                          |        | 31,907 |  |        |         | 31,882 |  |   |        | 25     |   |  |        | 0.1   |   
|Selling, general and administrative expenses               |                                                                          |                          | 20,592 |        |  |        | 19,105  |        |  |   | 1,487  |        |   |  | 7.8    |      
|                                                           |                                                                          |                          |        |        |  |        |         |        |  |   |        |        |   |  |        |      
|                                                           | Income from operations                                                   |                          |        | 11,315 |  |        |         | 12,777 |  |   |        | (1,462 | ) |  |        | (11.4 | ) 
|Interest income                                            |                                                                          |                          | 279    |        |  |        | 384     |        |  |   | (105   | )      |   |  | (27.3  | )    
|Interest expense (income), net                             |                                                                          |                          | 15     |        |  |        | (47     | )      |  |   | (62    | )      |   |  | (131.9 | )    
|Other (income) expenses, net                               |                                                                          |                          | (259   | )      |  |        | (625    | )      |  |   | (366   | )      |   |  | (58.6  | )    
|                                                           |                                                                          |                          |        |        |  |        |         |        |  |   |        |        |   |  |        |      
|                                                           | Income before provision for income taxes and
    discontinued operations |                          |        | 11,838 |  |        |         | 13,833 |  |   |        | (1,995 | ) |  |        | (14.4 | ) 
|Provision for income taxes                                 |                                                                          |                          | 4,617  |        |  |        | 5,397   |        |  |   | (780   | )      |   |  | (14.5  | )    
|                                                           |                                                                          |                          |        |        |  |        |         |        |  |   |        |        |   |  |        |      
|Income from continuing operations                          |                                                                          |                          | 7,221  |        |  |        | 8,436   |        |  |   | (1,215 | )      |   |  | (14.4  | )    
|Loss from discontinued operations, net of income
    taxes |                                                                          |                          |       |        |  |        | 628     |        |  |   | 628    |        |   |  | (100.0 | )    
|                                                           |                                                                          |                          |        |        |  |        |         |        |  |   |        |        |   |  |        |      
|                                                           | Net income                                                               |                          | $      | 7,221  |  |        | $       | 7,808  |  |   | $      | (587   | ) |  |        | (7.5  | )%
|                                                           |                                                                          |                          |        |        |  |        |         |        |  |   |        |        |   |  |        |      

19



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##### Table of Contents





| |                                                        
| | -------------------------------------------------------
| | Years Ended December 31, 2003 and
    December 31, 2002

Net Revenue.Net
revenue for 2003 decreased $0.9 million, or 0.9%, to
$90.7 million compared to $91.6 million for 2002. This
decrease in net revenue was partially offset by
$1.4 million in additional net revenue during 2003 related
to the acquisition of ALNM Group, Inc. (ALNM), in
March 2002, as compared to the same period in 2002. Excluding
the net revenue from the ALNM acquisition, net revenue decreased
by $2.3 million, or 2.5%. This decrease was primarily a
result of a continued slowdown in our energy/ industrial
industry segment due to a slowdown in the pace of construction
of new power plants and/or alternative power solutions and a
general decrease in capital spending in the energy/ industrial
industry, coupled with the completion of a large contract in our
energy/industrial segment which had significant activity during
2002, and lower net revenue from our Arizona office, which was
part of the acquisition of Hook & Associates
Engineering, Inc. (Hook) in January 2001. The
decline in net revenue was partially offset by increased net
revenue generated from our real estate services due to a strong
California residential real estate market.

Subcontractor costs, as a percentage of net
revenue, decreased to 10.1% during 2003 as compared to 16.3%
during 2002. The decrease was primarily due to a decrease in
subcontractor costs related to several large contracts in 2002
in our energy/ industrial segment.

Market uncertainties in the power generation
portion of the energy industry have caused a decline in the pace
of construction of new power plants and/or alternative power
solutions and a general decrease in capital spending in the
energy/ industrial industry. As a result, our energy/ industrial
segment continued to experience a reduction in net revenue
during 2003. If this market uncertainty continues, it may cause
further reductions in net revenue and therefore continue to
negatively impact net income from our energy/ industrial segment.

Although we have not experienced a significant
decrease in net revenue from our public works/ infrastructure
industry during 2003 as compared to 2002, certain current
conditions, including a weak economy in the public works/
infrastructure industry, especially in the Greater Southeast
Michigan area, lead us to believe that we may experience an
adverse impact to net revenue and net income related to this
industry.

Gross Profit.Gross
profit for 2003 remained flat at $31.9 million compared to
2002. Excluding the additional 2003 gross profit of
$0.3 million generated from the acquisition of ALNM in
March 2002, gross profit decreased by $0.3 million. This
decrease was mainly due to lower gross profit from our energy/
industrial segment, along with the completion of a large
contract in our energy/ industrial segment which had significant
activity during 2002, and $0.4 million of additional
expense related to the discretionary bonus plan. These decreases
were offset by strong gross profit from our real estate
services. For 2003, gross profit as a percentage of net revenue
increased to 35.2% as compared to 34.8% during 2002. This
increase was primarily due to strong gross profit from our real
estate services, which was partially offset by lower gross
profit from our energy/ industrial segment.

As noted above, due to a continuing decline in
the pace of construction of new power plants and/or alternative
power solutions and a general decrease in capital spending in
the energy/ industrial industry, our energy/ industrial segment
experienced a reduction in its gross profit during 2003. If this
decline continues, it may cause our energy/ industrial segment
to experience a continued reduction of gross profit and
therefore also a reduction in net income.

We have experienced a slight decrease in gross
profit from our public works/ infrastructure industry during
2003 as compared to 2002. Certain current conditions, including
a weak economy in the public works/ infrastructure industry,
especially in the Greater Southeast Michigan area, lead us to
believe we may experience a further decline in our gross profit
and net income related to this industry.

Selling, General and Administrative
Expenses.During 2003, selling,
general and administrative expenses (SG&A)
increased $1.5 million, or 7.8%, to $20.6 million
compared to $19.1 during 2002. The increase in SG&A during
2003 was primarily due to the increase in SG&A costs
attributable to ALNM, and increases in: legal fees, proposal
activities, employee placement fees for new hires, and the
provision for doubtful accounts. During 2003, SG&A as a
percentage of net revenue increased to 22.7% compared to 20.9%
during 2002 primarily due to increases in the items discussed
above.

20



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##### Table of Contents



Interest Income.Interest income during 2003 decreased by $105,000 as compared to
2002. This decrease in interest income resulted from lower
yields earned on cash and securities, partially offset by an
increase in the average balance of cash and securities as
compared to 2002.

Interest Expense.Interest expense during 2003 increased by $62,000 compared to
2002. The increase in interest expense was primarily
attributable to a $130,000 reduction of interest expense during
2002 associated with an acquisition modification agreement
related to Hook which resulted in the cancellation of a
$1.3 million acquisition note payable.

Other (Income) Expenses,
net.Other income during 2003
decreased by $366,000 as compared to 2002. This decrease was
primarily associated with a $687,000 increase in other income
during 2002 resulting from purchase price adjustments in
connection with the acquisitions of Crosby Mead
Benton & Associates (CMB) and Hook. This
decrease was partially offset by a net $230,000 sublease
termination fee recognized by us during 2003 related to one of
our facilities which we had subleased and $73,000 in other
income recognized during 2003 associated with a purchase price
adjustment related to the acquisition of ALNM.

Income Taxes.The
provision for income taxes during 2003 was $4.6 million
compared to $5.4 million for 2002. This decrease in
provision for income taxes during 2003 resulted from a lower
taxable base. Our effective tax rate was 39% during 2003 and
2002.

Discontinued
Operations.We closed down the
operations of three divisions during 2002. Two of these
divisions were part of our operations in Colorado and Wyoming
from our acquisition of Hook, and the third was our internally
created Communication division located in California. In
accordance with accounting principles generally accepted in the
United States of America, the activities of these divisions were
segregated and reported as discontinued operations during 2002.

The following table sets forth the Companys
consolidated statements of income for the years ended
December 31, 2002 and 2001 and includes the dollar and
percentage change:

|                                                           |                                                                          |                          |         |        |  |        |        |        |  |   |        |        |  |  |         |      |  
|---------------------------------------------------------- | ------------------------------------------------------------------------ | ------------------------ | ------- | ------ |  | ------ | ------ | ------ |  | - | ------ | ------ |  |  | ------- | ---- | -
|                                                           |                                                                          |                         
|                                                           |                                                                          | Years Ended December 31,
|                                                           |                                                                          |                         
|                                                           |                                                                          |                          |         | $      |  | %     
|                                                           |                                                                          | 2002                     |         | 2001   |  | Change |        | Change
|                                                           |                                                                          |                          |         |        |  |        |        |       
|                                                           |                                                                          |                         
|                                                           |                                                                          | (Dollars in thousands)  
|Gross revenue                                              |                                                                          | $                        | 106,487 |        |  | $      | 74,314 |        |  | $ | 32,173 |        |  |  | 43.3    | %   
|Subcontractor costs                                        |                                                                          |                          | 14,889  |        |  |        | 7,470  |        |  |   | 7,419  |        |  |  | 99.3    |     
|                                                           |                                                                          |                          |         |        |  |        |        |        |  |   |        |        |  |  |         |     
|                                                           | Net revenue                                                              |                          |         | 91,598 |  |        |        | 66,844 |  |   |        | 24,754 |  |  |         | 37.0 |  
|Costs of revenue                                           |                                                                          |                          | 59,716  |        |  |        | 42,970 |        |  |   | 16,746 |        |  |  | 39.0    |     
|                                                           |                                                                          |                          |         |        |  |        |        |        |  |   |        |        |  |  |         |     
|                                                           | Gross profit                                                             |                          |         | 31,882 |  |        |        | 23,874 |  |   |        | 8,008  |  |  |         | 33.5 |  
|Selling, general and administrative expenses               |                                                                          |                          | 19,105  |        |  |        | 14,015 |        |  |   | 5,090  |        |  |  | 36.3    |     
|                                                           |                                                                          |                          |         |        |  |        |        |        |  |   |        |        |  |  |         |     
|                                                           | Income from operations                                                   |                          |         | 12,777 |  |        |        | 9,859  |  |   |        | 2,918  |  |  |         | 29.6 |  
|Interest income                                            |                                                                          |                          | 384     |        |  |        | 552    |        |  |   | (168   | )      |  |  | (30.4   | )   
|Interest (income) expense, net                             |                                                                          |                          | (47     | )      |  |        | 263    |        |  |   | 310    |        |  |  | 117.9   |     
|Other (income) expenses, net                               |                                                                          |                          | (625    | )      |  |        | 54     |        |  |   | 679    |        |  |  | 1,257.4 |     
|                                                           |                                                                          |                          |         |        |  |        |        |        |  |   |        |        |  |  |         |     
|                                                           | Income before provision for income taxes and
    discontinued operations |                          |         | 13,833 |  |        |        | 10,094 |  |   |        | 3,739  |  |  |         | 37.0 |  
|Provision for income taxes                                 |                                                                          |                          | 5,397   |        |  |        | 3,916  |        |  |   | 1,481  |        |  |  | 37.8    |     
|                                                           |                                                                          |                          |         |        |  |        |        |        |  |   |        |        |  |  |         |     
|Income from continuing operations                          |                                                                          |                          | 8,436   |        |  |        | 6,178  |        |  |   | 2,258  |        |  |  | 36.5    |     
|Loss from discontinued operations, net of income
    taxes |                                                                          |                          | 628     |        |  |        | 329    |        |  |   | 299    |        |  |  | 90.9    |     
|                                                           |                                                                          |                          |         |        |  |        |        |        |  |   |        |        |  |  |         |     
|                                                           | Net income                                                               |                          | $       | 7,808  |  |        | $      | 5,849  |  |   | $      | 1,959  |  |  |         | 33.5 | %
|                                                           |                                                                          |                          |         |        |  |        |        |        |  |   |        |        |  |  |         |     

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| |                                                        
| | -------------------------------------------------------
| | Years Ended December 31, 2002 and
    December 31, 2001

Net Revenue.The
growth in net revenue for 2002 compared to 2001 is primarily
attributable to acquisitions, which contributed
$22.5 million in net revenue. The acquired companies mainly
contributing to this net revenue growth include: PEC, UEI, and
ALNM, whose operations have been included in the consolidated
financial statements since October 2001, December 2001 and March
2002, respectively. Excluding the net revenue from these
acquisitions, net revenue increased by $2.2 million, or
3.3%, compared to 2001. The increase in net revenue, excluding
acquisitions, primarily resulted from (i) a strong Southern
California residential real estate market, which continued to
experience an increase in demand, and (ii) higher net
revenue derived from the Companys water resource services.
These increases were partially offset by a decrease in net
revenue generated by the Companys Arizona office which is
part of the Hook operations coupled with lower net revenue
generated from the Companys Orange County office resulting
mainly from a continued weak commercial and industrial real
estate market. Subcontractor costs, as a percentage of net
revenue, increased to 16.3% during 2002 compared to 11.2% during
2001, resulting largely from an increase in subcontractor costs
related to several large contracts in the energy/ industrial
industry.

Difficulties in the power generation segment of
the energy industry have caused a decline in the pace of
construction of new power plants and/or alternative power
solutions. As a result, our energy/ industrial industry began to
experience a reduction in net revenue during the fourth quarter
of 2002. If the difficulties continue, they may cause further
reductions in net revenue and therefore net income in our
energy/ industrial industry.

Gross Profit.The
increase in gross profit was mainly attributable to
acquisitions, which added gross profit of $7.2 million
during 2002 compared to the prior year. Excluding the gross
profit from acquisitions, gross profit increased
$0.8 million or 3.4% during 2002 as compared to 2001. This
increase was primarily attributable to strong gross profit
resulting from continued demand for residential real estate in
Southern California and higher gross profit generated from the
Companys water resource services, all of which were
partially offset by lower gross profit from (i) the Hook
Arizona office, (ii) one of our Northern California
offices, and (iii) our UEI division, as mentioned above.

As a percentage of net revenue, gross profit
decreased to 34.8% during 2002 from 35.7% during 2001. The
percentage decrease was primarily related to lower margins
related to the Companys energy/ industrial industry, the
Hook Arizona office, and ALNM which mainly provides services in
the public works/ infrastructure industry.

The increase in the costs of revenue was
primarily attributable to increased expenses associated with the
growth in our total direct employee base, which grew from an
average of 510 in 2001 to 673 in 2002. This increase is
primarily a result of acquisitions.

As noted above, due to a continuing decline in
the pace of construction of new power plants, and/or alternative
power solutions, our energy/ industrial industry experienced a
reduction in its gross profit in the fourth quarter of 2002. If
this decline continues, it may cause our energy/ industrial
industry to experience a continued reduction of gross profits
and therefore also a reduction in net income.

Selling, General and Administrative
Expenses.The increase in selling,
general and administrative expenses was primarily related to
acquisitions, an increase in corporate administrative costs, and
an increase in the provision for doubtful accounts, all of which
were partially offset by the elimination of goodwill
amortization, as compared to 2001. Acquired companies
contributed $3.9 million of additional selling, general and
administrative expenses in 2002 as compared to 2001. As a
percentage of net revenue, selling, general and administrative
expenses decreased slightly to 20.9% during 2002 from 21.0%
during 2001, mainly from the elimination of goodwill
amortization which was partially offset by the increase in the
provision for doubtful accounts.

Interest Income.The
decrease in interest income resulted from lower yields on cash
and securities, partially offset by an increase in the average
balance of cash and securities as compared to 2001.

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Interest Expense.The decrease in interest expense was primarily attributable to a
reduction of interest expense associated with the acquisition
modification agreement (as discussed under the Liquidity
and Capital Resources section) related to Hook, which
resulted in the cancellation of a $1.3 million acquisition
note payable and the overall reduction of debt as compared to
2001.

Other Income (Expenses),
net.The increase in other income was
primarily associated with $687,000 resulting from a purchase
price adjustment in connection with the acquisitions of CMB and
Hook.

Income Taxes.The
increase in provision for income taxes resulted primarily from
higher pre-tax income and a slightly higher effective tax rate
during 2002. Our effective income tax rate was approximately
39.0% during 2002 compared to 38.8% during 2001.

Discontinued
Operations.The loss from discontinued
operations is attributable to the closure of three of our
divisions during 2002. Two of these divisions related to our
Hook operations located in Colorado and Wyoming, and, the third
was our internally created Communication division which was
located in California. In accordance with accounting principles
generally accepted in the United States of America, the
activities of these divisions have been segregated and reported
as discontinued operations during 2002 and 2001. The increase in
the loss from discontinued operations was mainly due to
continuing difficult market conditions and deteriorating
operating results in Colorado.

Related Party

In March 2001, we entered into change in control
agreements with Aram H. Keith, our chief executive officer and
chairman of the board, Eric C. Nielsen, our president and chief
operating officer, and Gary C. Campanaro, our chief financial
officer and secretary, and a director of our company. These
agreements provide that if the executive officers
employment with us terminates as a result of an involuntary or
constructive termination (as these terms are defined in the
agreements) at any time within two years following a change in
control, then, in addition to other benefits, the executive
officer will receive a one-time payment, equal to two times the
executive officers highest annual level of total cash
compensation (including any and all bonus amounts) paid by us to
that executive officer during any one of the three consecutive
calendar years (inclusive of the year of termination)
immediately prior to termination. The executive officer also is
entitled to receive a payment by us to offset any excise tax
under the Internal Revenue Code of 1986, as amended, that has
been levied against the executive officer for payments that we
have made to him. In addition, any unvested options previously
granted to the executive officer will immediately vest and
become exercisable as of the date of termination and remain
exercisable until their respective expiration dates.

We have not entered into any material related
party transactions during 2003.

Liquidity and Capital Resources

Cash and cash equivalents combined with
securities held-to-maturity totaled $28.9 million as of
December 31, 2003, compared to $23.5 million as of
December 31, 2002, an increase of $5.4 million.
Working capital as of December 31, 2003 was
$47.4 million compared to $39.6 million as of
December 31, 2002, an increase of $7.8 million. Our
debt to equity ratio (excluding the effect of issuable common
stock) at both December 31, 2003 and December 31, 2002
was 0.00 to 1.

Cash Flows From Operating
Activities.Net cash provided by
operating activities decreased $2.7 million, to
$7.4 million during 2003 compared to $10.1 million
during 2002. The decrease in net cash provided by operating
activities during 2003 as compared to 2002 was primarily the
result of lower net income, partially offset by a purchase price
adjustment and changes in operating assets and liabilities, net
of effects from acquisitions.

Cash Flows From Investing
Activities.Net cash used in investing
activities totaled $3.6 million for 2003 compared to
$1.4 million for 2002, an increase of $2.2 million.
This increase in net cash used in investing activities was
primarily due to a significant increase in cash used to purchase
securities held-to-maturity, substantially offset by a decrease
in cash used for acquisitions.

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Cash Flows From Financing
Activities.Net cash provided by
financing activities increased by $789,000 to $243,000 for 2003
compared to net cash used in financing activities of $546,000
for 2002. This increase in net cash provided by financing
activities resulted primarily from a decrease of principal
payments on our debt and capital lease obligations during 2003.

The Company has available a $10.0 million
unsecured line of credit consisting of four components:
(i) an acquisition component, (ii) an equipment and
vehicle financing component, (iii) a standby letter of
credit component, and (iv) a working capital component. The
line provides up to a maximum of $5.0 million to finance
acquisitions, up to a maximum of $3.0 million to finance
equipment and vehicle purchases, up to a maximum of
$1.0 million for standby letters of credit, and up to a
maximum of $10.0 million less the aggregate outstanding
principal balance of the acquisition, equipment and vehicle, and
standby letter of credit components for working capital. The
line bears interest at either a range of 0.25% below prime to
prime, or a range of 1.25% to 1.75% over LIBOR depending on the
Companys ability to meet certain financial covenants. All
components of the line of credit mature in June 2005. This line
of credit agreement restricts the payment of dividends without
the banks consent. As of December 31, 2003, the
Company had utilized the letter of credit component of this line
of credit to issue a $229,000 stand-by letter of credit. The
Company did not have any outstanding balances under this line of
credit agreement as of December 31, 2002.

Our financial statements for 2003 reflect the
reduction of the purchase price of ALNM which we acquired in
March 2002. Under the terms of the purchase agreement, the
obligation to issue $1.5 million in shares of our common
stock was reduced to approximately $0.8 million.

On occasion, we will enter into purchase
agreements related to acquisitions which provide for future
purchase price payments or earn-outs as a result of
achieving certain operating results by the acquired companies.
As a result of these earn-out provisions, we may be obligated to
pay additional consideration in future periods. Current
accounting principles require that these earn-outs be accrued on
our balance sheet only at the point at which the earn-out period
has elapsed and the performance targets have been met. As of
December 31, 2003, we have one year remaining on an
earn-out and we may be obligated to pay a maximum of
$7.4 million in additional purchase price related to our
acquisitions, of which 50% will be paid in cash with the
remaining 50% to be paid out in our common stock. Such potential
earn-outs are not currently reflected on our balance sheet as
the earn-out period has not elapsed and, therefore, the
achievement of the performance target is currently unknown.

We do not hold any derivative financial
instruments for trading purposes or otherwise. In addition, we
presently do not enter into any hedging type activities to
manage our exposure to foreign currency risk associated with our
Brazilian operation. Our Brazilian operation, which provides
services to our energy/ industrial segment, generated
approximately $0.5 million in net revenue during 2003.
Furthermore, we have not engaged in energy or commodity trading
activities and do not anticipate doing so in the future, nor do
we have any transactions involving unconsolidated entities,
special purpose entities, or variable interest entities.

The following summarizes our contractual
obligations as of December 31, 2003, and the effect such
obligations are expected to have on liquidity and cash flows in
the future.

|                                   |  |                        |            |           |  |       |           |       |  |           |           |  |  |   |           |  |  |   |         | 
|---------------------------------- |  | ---------------------- | ---------- | --------- |  | ----- | --------- | ----- |  | --------- | --------- |  |  | - | --------- |  |  | - | ------- | 
|                                   |  |                       
|                                   |  | Payments Due by Period
|                                   |  |                       
|                                   |  |                        |            | Less Than |  | 1 - 3 |           | 3 - 5 |  | More Than
|                                   |  | Total                  |            | 1 Year    |  | Years |           | Years |  | 5 Years  
|                                   |  |                        |            |           |  |       |           |       |  |          
|Operating lease obligations        |  | $                      | 13,724,000 |           |  | $     | 3,808,000 |       |  | $         | 6,072,000 |  |  | $ | 2,866,000 |  |  | $ | 978,000 | 
|                                   |  |                        |            |           |  |       |           |       |  |           |           |  |  |   |           |  |  |   |         | 
|Total contractual cash obligations |  | $                      | 13,724,000 |           |  | $     | 3,808,000 |       |  | $         | 6,072,000 |  |  | $ | 2,866,000 |  |  | $ | 978,000 | 
|                                   |  |                        |            |           |  |       |           |       |  |           |           |  |  |   |           |  |  |   |         | 

Future Cash Requirements

We expect to fund our future liquidity needs
primarily from (i) operating cash flows, (ii) existing
balances of cash and cash equivalents and securities
held-to-maturity, and (iii) borrowings under our
$10.0 million unsecured revolving line of credit, which we
have not utilized as of December 31, 2003 other than to
issue a $229,000 stand-by letter of credit. We believe these
sources of funds will be sufficient to provide

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for our operations and planned capital
expenditures and satisfy our debt obligations over the next
twelve months. We expect our capital expenditures in fiscal 2004
to range between approximately $2.0 million to
$3.0 million.


We also intend to use available liquidity to
continue our acquisition strategy. We continue to examine
acquisitions of complementary businesses and anticipate that our
liquidity will be sufficient to provide for potential
acquisitions for the next twelve months. However, the pace and
size of acquisitions are difficult to predict. We may complete
more or fewer acquisitions than we currently contemplate
depending on the opportunities that present themselves, and our
cash requirements may change accordingly.

Effect of Recent Accounting
Pronouncements

In May 2003, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
(SFAS) No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities
and Equity. SFAS No. 150 requires issuers to
classify as liabilities (or assets in some circumstances) three
classes of freestanding financial instruments that embody
obligations for the issuer. The provisions of this statement are
effective for financial instruments entered into or modified
after May 31, 2003 and are otherwise effective at the
beginning of the first interim period beginning after
June 15, 2003. The adoption of this statement did not have
a material effect on our financial condition, results of
operations, or cash flows.

In April 2002 and July 2002, the Financial
Accounting Standard Board (FASB) issued Statements
of Financial Accounting Standard No. 145, Rescission
of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections
(SFAS 145), and No. 146 Accounting
for Costs Associated with Exit or Disposal Activities
(SFAS 146), respectively. SFAS 145
prescribes amendments to existing pronouncements on accounting
for early retirements of debt. The provisions of this statement
are effective for financial statements issued on or after
May 15, 2002. SFAS 146 addresses issues pertaining to
costs associated with exit or disposal activities initiated
after December 31, 2002. The adoption of these standards
did not have a material effect on the Companys financial
condition, results of operations or cash flows.

Inflation

Although our operations can be influenced by
general economic trends, we do not believe that inflation had a
significant impact on our results of operations for the periods
presented. Due to the short-term nature of most of our
contracts, if costs of revenue increase, we will attempt to pass
these increases on to our clients; however, there can be a lag
before these increases in costs can be incorporated into our
existing contracts.

The following discussion summarizes material
risks which you should carefully consider before you decide to
invest in our common stock or to maintain or increase your
investment. Any of the following risks, if they actually occur,
would likely harm our business. The trading price of our common
stock could then decline, and you may lose all or part of the
money you paid to buy our common stock.

Risk Factors  Risks Related To Our
Industries



| |                                                                               
| | ------------------------------------------------------------------------------
| | Our business could suffer if there is a
    downturn in the real estate market

During 2003, approximately 67% of our net revenue
was rendered in connection with commercial and residential real
estate development projects. Reduced demand in the real estate
market would likely decrease the demand for our services. A
decrease in the demand for our services could result in cash
flow difficulties and potential operating losses for our company.

The real estate market and, therefore, our
business, may be impacted by a number of factors, which may
include:



| |   |                                                                                    
| | - | -----------------------------------------------------------------------------------
| |  | changes in employment levels and other national
    and local economic conditions; 
|
| |  | changes in interest rates and in the
    availability, cost and terms of financing;

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| |   |                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------
| |  | the impact of present or future environmental,
    zoning or other laws and regulations;              
|
| |  | changes in real estate tax rates and assessments
    and other operating expenses;                    
|
| |  | changes in levels of government spending and
    fiscal policies; and                                 
|
| |  | earthquakes and other natural or manmade
    disasters and other factors which are beyond our control.



| |                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We derive revenue from contracts with
    government agencies. Any disruption in government funding or in
    our relationship with those agencies could adversely affect our
    business

The demand for our services is related to the
level of government program funding that is allocated to
rebuild, improve and expand the nations infrastructure. We
believe that the success and further development of our business
depends, in part, upon the continued funding of these government
programs and upon our ability to participate in these government
programs. We cannot assure you that governments will have the
available resources to fund these programs, that these programs
will continue to be funded even if governments have available
financial resources or that we will continue to win government
contracts.

Some of these government contracts are subject to
renewal or extensions annually, so we cannot be assured of our
continued work under these contracts in the future. Unsuccessful
bidders may protest or challenge the award of these contracts.
In addition, government agencies can terminate these contracts
at their convenience. As a result, we may incur costs in
connection with the termination of these contracts and suffer a
loss of business. Also, contracts with government agencies are
subject to substantial regulation and an audit of actual costs
incurred. Consequently, there may be a downward adjustment to
our revenue if billed recoverable costs exceed actual
recoverable costs.



| |                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We derive revenue from engineering services
    provided to the energy industry. Continued delay and reduction
    in the pace of construction for new power plants, cogeneration
    facilities, and electrical distribution facilities has had, and
    may continue to have an adverse affect on our
    business

The demand for our services is related to the
level and pace of construction of energy related solutions. We
believe that the success and further development of this aspect
of our business depends, in part, upon the need for and funding
of these projects. High energy prices, power shortages, and
pressure at state and federal levels for increased supply
resulted in the increased demand for energy related solutions
with an unprecedented number of new power plants, cogeneration
facilities, and electrical distribution facilities announced in
2001. However, a weakening demand and softening economy combined
with a decline in energy prices have caused builders of such
energy related solutions to reconsider planned projects. Many
have announced downsizings or cancellations of new power plants
and/or alternative power solutions. The decline in the pace of
construction of new power plants and/or alternative power
solutions has had, and may continue to have, an adverse affect
on our energy/industrial segment.



| |                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may have difficulty in attracting and
    retaining qualified professionals, which may harm our reputation
    in the marketplace and restrict our ability to implement our
    business strategy

We derive our revenue almost exclusively from
services performed by our professionals. We may not be able to
attract and retain the desired number of professionals over the
short or long-term. There is significant competition for
professionals with the skills necessary for the provision of our
services from major and boutique consulting, engineering,
research and other professional service firms. We believe that
our existing relationships between our clients and our employees
is one of our greatest business development assets. Our
inability to attract and retain qualified professionals could
impede our ability to secure and complete engagements, in which
event, we may lose market share and our revenue and profit may
decline.



| |                                                                                                
| | -----------------------------------------------------------------------------------------------
| | Terrorism and related conflicts may have a
    material adverse effect on our operating results

The terrorist attacks that took place in the
United States on September 11, 2001, along with the United
States military campaign against terrorism in Afghanistan, Iraq
and elsewhere, and ongoing violence in the Middle East have
created many economic and political uncertainties, some of which
had and may materially

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affect the markets in which we operate, and our
operations and profitability. The short-term and long-term
effects of these developments on our customers, the markets for
our services and the U.S. economy are uncertain. The
consequences of any terrorist attacks, or any armed conflicts,
are unpredictable, and we may not be able to foresee events that
could have an adverse effect on our markets, or our business.


Risk Factors  Risks Related To Our
Business



| |                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------
| | Our revenue, income and cash flow could
    decline if there is a downturn in the California economy or real
    estate market

During 2003, approximately 72% of our net revenue
was derived from services rendered in California. Poor economic
conditions in California may significantly reduce the demand for
our services and decrease our revenue and profits. From 1991 to
1996, our business was negatively impacted during the real
estate market downturn in Southern California, and we
experienced cash flow difficulties and substantial operating
losses.



| |                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to effectively manage our
    growth, we could incur unforeseen costs or delays and our
    reputation and reliability in the marketplace could be
    damaged

We have grown rapidly and intend to pursue
further growth, through acquisitions and otherwise, as part of
our business strategy but we may not be able to manage our
growth effectively and efficiently. Our inability to manage our
growth effectively and efficiently could cause us to incur
unforeseen costs, time delays or other negative impacts, any of
which could cause a decline in our revenue and profitability.
Our rapid growth has presented and will continue to present
numerous administrative and operational challenges, including
the management of an expanding array of engineering and
consulting services, the assimilation of financial reporting
systems, increased pressure on our senior management and
increased demand on our systems and internal controls.



| |                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to successfully implement
    our acquisition strategy, we may not meet our current
    expectations of growth and/or operating results

Our growth strategy includes the strategic
acquisition of companies that expand our service offerings and
geographic presence, including acquisitions that may be larger
than our historic acquisitions. If we are unsuccessful in
implementing our acquisition strategy, we could fail to achieve
the revenue and profitability growth that we currently expect.
We may not be successful in implementing our acquisition
strategy for a number of reasons, including the following:



| |   |                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We may fail to consummate an acquisition even if
    an announcement had been made to acquire a target company;                                                                                                                               
|
| |  | As the engineering industry consolidates,
    suitable acquisition candidates are expected to become more
    difficult to locate and may only be available at an increased
    price or under terms that are less favorable than in the past;
|
| |  | We may not be able to arrange suitable financing
    to consummate an acquisition;                                                                                                                                                            
|
| |  | We may not be successful in integrating an
    acquired companys professionals, clientele and culture
    into ours;                                                                                                                         
|
| |  | We may not be successful in generating the same
    level of operating performance that an acquired company
    experienced prior to the acquisition;                                                                                         
|
| |  | As we expand our service offerings and geographic
    presence, we may not be able to maintain the current level of
    quality of services;                                                                                                  
|
| |  | We may not be able to maintain our reputation in
    an acquired entitys geographic area or service offerings
    and as a consequence our ability to attract and retain clients
    in those or other areas may be negatively impacted;     
|
| |  | An acquired company may be less profitable than
    us resulting in reduced profit margins; and                                                                                                                                               

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| |   |                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The acquisition and subsequent integration of an
    acquired company may require a significant amount of
    managements time, diverting their attention from our
    existing operations and clients, which could result in the loss
    of key employees or clients.



| |                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If our estimates or assumptions used in
    arriving at the fair value of acquired entities change from
    those used in our current valuations, we may be required to
    recognize a goodwill impairment loss

We use estimates in order to determine if
goodwill has been impaired. An impairment loss may be required
to be recognized if the carrying amount of a reporting
units net book value exceeds the estimated fair value of
the reporting unit. We arrive at the estimated fair value of a
reporting unit by using a variety of customary valuation
methods, such as discounted cash flow analysis and multiples of
net revenue and earnings before interest and taxes. These
valuation methods use a variety of assumptions such as future
billable employee headcount, net revenue per billable employee,
operating income, cash flow, discount rates and multiples.
Estimating fair value of a reporting unit is a subjective
process and requires the use of our best estimates. If our
estimates or assumptions change from those used in our current
valuation, we may be required to recognize an impairment loss.
As of December 31, 2003, our goodwill balance, net of
accumulated amortization was $23.1 million. We no longer
amortize goodwill due to our adoption of SFAS No. 142
Goodwill and Other Intangible Assets.



| |                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------
| | We could lose money if we fail to
    accurately estimate our costs on fixed-price contracts and/or
    contracts with not-to-exceed provisions

We expect to perform services under contracts
that may limit our profitability. Under fixed-price contracts we
perform services at a stipulated price. Under time-and-materials
contracts with not-to-exceed provisions, we are reimbursed for
the number of labor hours expended at an established hourly rate
plus the cost of materials incurred, subject, however, to a
stated maximum dollar amount for the services to be provided
under the contract. In both of these types of contracts, we
agree to provide our services based on our estimate of the costs
a particular project will involve. Our estimates are not always
accurate. Underestimation of costs for these types of contracts
may cause us to incur losses or result in a project not being as
profitable as we expected. We may fail to estimate costs
accurately for a number of reasons, including:



| |   |                                                                                                
| | - | -----------------------------------------------------------------------------------------------
| |  | weakness in the management of our projects;                                                    
|
| |  | loss of efficiency resulting from
    cross-utilization of office staff from various locations;
|
| |  | changes in the costs of goods and services that
    may occur during the contract period;      
|
| |  | problems with new technologies; and                                                            
|
| |  | delays beyond our control.                                                                     



| |                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------
| | Our backlog is an uncertain indicator of
    future financial performance and is subject to adjustment or
    cancellation

Our gross revenue backlog for fixed price
contracts and time-and-materials contracts with not-to-exceed
provisions as of December 31, 2003 was approximately
$57.9 million. We cannot assure you that the entire balance
of our backlog will convert into revenue since our contracts are
subject to scope adjustments and/or cancellations. These types
of scope adjustments or cancellations may result in a reduction
in our backlog which could adversely affect our revenue and
profit.



| |                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The loss of Mr. Keith could adversely
    affect our business, including our ability to secure and
    complete engagements and attract and retain
    employees

We do not have an employment agreement with, or
maintain key man life insurance on Aram H. Keith, our chief
executive officer. If we lose the services of Mr. Keith, we
may be less likely to secure or complete contracts and to
attract and retain additional employees. The efforts, abilities,
business generation capabilities and name recognition of
Mr. Keith are important to our success in those activities.

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| |                                                                                   
| | ----------------------------------------------------------------------------------
| | If our employees leave our company and join
    a competitor, we may lose business

Our employees might leave our company and become
competitors of ours. If this happens, we may lose additional
employees and some of our existing clients that have formed
relationships with our former employees. In addition, we may
lose future clients to a former employee as a new competitor. In
either event, we could lose clients and revenue, and our
profitability could decline.



| |                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Adverse weather conditions or acts of God
    may cause a delay or elimination of our net revenue otherwise
    recognized and adversely affect our profitability

Field activities are generally performed outdoors
and may include surveying, archeology, plant start-up and
testing, and plant operations. Certain weather conditions or
acts of God (such as fire, floods, etc.) may cause postponements
in the initiation and/or completion of our field activities
and/or may hinder the ability of our office employees to arrive
at work, which may result in a delay or elimination of revenue
that otherwise would have been recognized, while certain costs
will continue to be incurred. Adverse weather conditions or acts
of God may also delay or eliminate our initiation and/or
completion of the various phases of work relating to our other
engineering services that commence concurrent with or subsequent
to field activities. Any delay in completion of the field,
office and/or other activities may require us to incur
additional costs attributable to overtime work necessary to meet
the clients required schedule. Due to various factors, a
delay in the commencement or completion of a project may also
result in a cancellation of the contract. As a result, our net
revenue and profitability may be adversely affected.



| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | Our business may expose us to liability in
    excess of our current insurance coverage

We are exposed to potential liabilities to
clients for errors or omissions in the services we perform.
These liabilities could exceed our current insurance coverage
and the fees we derive from those services. We cannot always
predict the magnitude of these potential liabilities but claims
could be significant. A partially or completely uninsured claim,
if successful and of significant magnitude, could result in
substantial losses.

We currently maintain general liability,
umbrella, professional liability, directors and officers
liability, and various types of other insurance policies. Claims
may be made against us which exceed the limits of these
policies, in which case we would be liable to pay these claims
from our assets. Our professional liability and directors and
officers liability policies are claims made policies
and only claims made during the term of the policy are covered.
If we terminate our policies and do not obtain retroactive
coverage, we would be uninsured for claims made after
termination even if these claims are based on events or acts
that occurred during the term of the policy. Our insurance
policies typically have various exceptions to the claims covered
and also require us to assume some costs of the claim even
though a portion of the claim may be covered, resulting in
potential liability to us. Further, our expansion into new
services or geographic areas could result in our failure to
obtain coverage for these services or areas, or the coverage
being offered may be at a higher cost than our current coverage.
Due to the current insurance environment, we have experienced
and may continue to experience an increase in our insurance
premiums. We may not be able to pass these increases on to our
clients in increased billing rates.



| |                                                                                                       
| | ------------------------------------------------------------------------------------------------------
| | If we are unable to engage qualified
    subcontractors, we may lose projects, revenue and
    clients

We often contract with outside companies to
perform designated portions of the services we perform for our
clients. If we are unable to engage subcontractors, our ability
to perform under some of our contracts may be impeded and the
quality of our service may decline. As a consequence, we may
lose projects, revenue and clients. Subcontractor costs
accounted for approximately 10% of our net revenue during 2003.



| |                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We derive revenue from contracts for work
    performed in foreign countries which are subject to a number of
    risks that could adversely affect the results from these
    contracts

International business is subject to the
customary risks associated with international transactions,
including political risks, local law and taxes, difficulty in
enforcing contracts, the potential imposition of trade or
currency exchange restrictions, tariff increases and
difficulties or delays in collecting accounts receivables.

29



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##### Table of Contents



Weak foreign economies and/or a weakening of
foreign currencies against the U.S. dollar could have a
material adverse effect on our business, financial condition and
results of operations. We presently do not enter into any
hedging type activities to manage our exposure to foreign
currency risk associated with our Brazilian operations.


Risk Factors  Risks Related To
Ownership of Our Stock



| |                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------
| | Our stock price may decrease, which could
    result in significant losses for investors or adversely affect
    our business

The following factors could cause the market
price of our common stock to decrease, perhaps substantially:



| |   |                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the failure of our quarterly operating results to
    meet expectations;                                                                                                                                                               
|
| |  | adverse developments in the worldwide economy,
    the financial markets, the engineering and consulting services
    market, the real estate market, the public works/infrastructure
    market, and/or the energy/ industrial market;
|
| |  | changes in interest rates;                                                                                                                                                                                                             
|
| |  | our failure to meet securities analysts
    expectations;                                                                                                                                                                             
|
| |  | changes in accounting principles;                                                                                                                                                                                                      
|
| |  | sales of common stock by existing shareholders or
    holders of options;                                                                                                                                                              
|
| |  | announcements of key developments by our
    competitors;                                                                                                                                                                              
|
| |  | the reaction of markets and securities analysts
    to announcements and developments involving our company; and                                                                                                                       
|
| |  | resolution of threatened or pending litigation.                                                                                                                                                                                        

In the past, securities class action litigation
has often been brought against a company following periods of
volatility in the market price of its securities. We may in the
future be the target of similar litigation. Securities
litigation could result in substantial costs and divert
managements attention and resources.



| |                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------
| | Insiders have substantial control over us,
    which could limit your ability to influence the outcome of key
    transactions

Our executive officers and directors, in the
aggregate, hold approximately 17% of our outstanding common
stock. These shareholders, if they act together, can have
significant influence over most matters requiring approval by
our shareholders, including the election of directors and the
approval of mergers or other business combination transactions.



| |                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we need to sell or issue additional
    shares of common stock and/or incur additional debt to finance
    future acquisitions, your stock ownership could be diluted and
    our results of operations could be adversely
    affected

Our business strategy is to expand into new
markets and enhance our position in existing markets through the
acquisitions of complementary businesses. In order to
successfully complete targeted acquisitions or to fund our other
activities, we may issue additional equity securities that could
dilute your stock ownership. We may also incur additional debt
if we acquire another company, and this could negatively impact
our results of operations.

30



---



##### Table of Contents





| |                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our board of directors has the ability to
    discourage takeover attempts, which may reduce or eliminate your
    ability to sell your shares for a premium in a change of control
    transaction

Our amended and restated articles of
incorporation provide us with the ability to issue blank check
preferred stock without consulting our shareholders. As a
result, our board of directors may frustrate a takeover attempt
by issuing shares to a friendly shareholder or acquirer,
implementing a poison pill or otherwise creating features of
newly issued preferred stock.



| |                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------
| | Shares of our common stock eligible for
    public sale could cause the market price of our stock to drop,
    even if our business is doing well

We currently have approximately 7.7 million
shares of common stock outstanding. Sales of a substantial
number of shares of our common stock in the public market, or
the perception that these sales could occur, could adversely
affect the market price for our common stock. Certain
shareholders hold large numbers of shares which they are able to
sell in the public market. Significant sales of these shares
could cause the market price of our common stock to decline
regardless of the performance of our business. These sales also
might make it difficult for us to sell equity securities in the
future at a time and at a price that we deem appropriate.



| |                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our common stock is thinly traded.
    Consequently, it may be difficult for shareholders to sell our
    common stock, which may result in losses for
    investors

The average daily trading volume, excluding block
trades, for our common stock on the Nasdaq National Market was
approximately 14,000 shares from January 1, 2003
through December 31, 2003. Accordingly, the market price of
our common stock is subject to significant fluctuations that may
have been, and may continue to be, exaggerated due to the lack
of an active trading market for our common stock. This negative
factor may make it difficult for shareholders to sell the
Companys common stock, which may result in losses for
investors.






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk

We are exposed to interest rate changes primarily
as a result of our cash and cash equivalents (Cash),
securities held-to-maturity (Securities) and line of
credit, which are used to maintain liquidity and to fund capital
expenditures and our expansion. Due to our large balance of Cash
and Securities, our earnings and cash flows may be materially
impacted by changes in interest rates. The Company intends to
hold all of its Securities until maturity, and therefore, should
not bear any interest rate risk due to early disposition. Due to
the relatively immaterial levels of our current debt (which was
zero as of December 31, 2003), our earnings and cash flows
should not be materially impacted by changes in interest rates
on our debt. Our bank line of credit is based on variable
interest rates and is therefore affected by changes in market
rates. We do not enter into derivative or interest rate hedging
transactions.

The table below presents the principal amounts of
Securities, along with the weighted average interest rates, fair
values and expected maturity by year to evaluate the expected
cash flows and sensitivity to interest rate changes as of
December 31, 2003.

|                                          |  |      |           |          |  |   |           |  
|----------------------------------------- |  | ---- | --------- | -------- |  | - | --------- | -
|                                          |  |      |           | Fair    
|                                          |  | 2004 |           | Value(1)
|                                          |  |      |           |         
|Securities held-to-maturity (non-trading) |  | $    | 4,600,000 |          |  | $ | 4,600,000 |  
|Weighted average interest rate(2)         |  |      | 1.16      | %        |  |   | 1.16      | %



---



|    |                                                                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The fair value for Securities was based on the
    quoted market price of such securities as of December 31,
    2003.                                                                                                                                        
|   
|(2) | The Companys Securities are invested in
    federally tax-exempt bonds. The weighted average interest rate
    shown above is a combination of pre-tax interest rate for
    taxable securities and an after tax interest rate for tax-exempt
    securities.

31



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##### Table of Contents



As the table incorporates only those exposures
that existed as of December 31, 2003, it does not consider
those exposures or positions which could arise after that date.
Moreover, because firm commitments are not presented in the
table above, the information presented in the table has limited
predictive value. Our ultimate realized gain or loss with
respect to interest rate fluctuations will depend on those
exposures or positions that arise during the period and interest
rates.

32



---



##### Table of Contents








|        |                                                             
|------- | ------------------------------------------------------------
|Item 8. | Consolidated Financial Statements and
    Supplementary Data

|                                                                                                         |  |      |    | 
|-------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                         |  | Page
|                                                                                                         |  |     
|Independent Auditors Report                                                                             |  |      | 34 | 
|Consolidated Balance Sheets as of
    December 31, 2002 and 2003                                         |  |      | 35 | 
|Consolidated Statements of Income for the years
    ended December 31, 2001, 2002 and 2003               |  |      | 36 | 
|Consolidated Statements of Shareholders
    Equity for the years ended December 31, 2001, 2002 and 2003 |  |      | 37 | 
|Consolidated Statements of Cash Flows for the
    years ended December 31, 2001, 2002 and 2003           |  |      | 38 | 
|Notes to Consolidated Financial Statements                                                               |  |      | 39 | 

33



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##### Table of Contents



INDEPENDENT AUDITORS REPORT

The Board of Directors and Shareholders

The Keith Companies, Inc.:


We have audited the accompanying consolidated
balance sheets of The Keith Companies, Inc. and subsidiaries as
of December 31, 2002 and 2003, and the related consolidated
statements of income, shareholders equity, and cash flows
for each of the years in the three-year period ended
December 31, 2003. These consolidated financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of The Keith Companies, Inc.
and subsidiaries as of December 31, 2002 and 2003, and the
results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2003, in
conformity with accounting principles generally accepted in the
United States of America.



| |             
| | ------------
| | /s/ KPMG LLP

Orange County, California

February 6, 2004


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THE KEITH COMPANIES, INC. AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                                                                        |                                                                                                                                                              |                                            |            |            |            |  |            |            |            | 
|--------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ---------- | ---------- | ---------- |  | ---------- | ---------- | ---------- | 
|                                                                                        |                                                                                                                                                              |                                           
|                                                                                        |                                                                                                                                                              | December 31,                              
|                                                                                        |                                                                                                                                                              |                                           
|                                                                                        |                                                                                                                                                              | 2002                                       |            | 2003      
|                                                                                        |                                                                                                                                                              |                                            |            |           
|ASSETS                                                                                 
|Current assets:                                                                         |                                                                                                                                                              |                                            |            |            |            |  |            |           
|                                                                                        | Cash and cash equivalents                                                                                                                                    |                                            | $          | 20,333,000 |            |  | $          | 24,277,000 |           
|                                                                                        | Securities held-to-maturity                                                                                                                                  |                                            |            | 3,164,000  |            |  |            | 4,600,000  |           
|                                                                                        | Contracts and trade receivables, net of allowance
    for doubtful accounts of $1,123,000 and $1,328,000 at
    December 31, 2002 and 2003, respectively     |                                            |            | 18,771,000 |            |  |            | 19,844,000 |           
|                                                                                        | Costs and estimated earnings in excess of billings                                                                                                           |                                            |            | 10,392,000 |            |  |            | 9,997,000  |           
|                                                                                        | Prepaid expenses and other currents assets                                                                                                                   |                                            |            | 1,367,000  |            |  |            | 1,468,000  |           
|                                                                                        |                                                                                                                                                              |                                            |            |            |            |  |            |           
|                                                                                        |                                                                                                                                                              | Total current assets                       |            |            | 54,027,000 |  |            |            | 60,186,000 | 
|Equipment and leasehold improvements, net                                               |                                                                                                                                                              |                                            | 4,831,000  |            |            |  | 4,067,000  |           
|Goodwill, net of accumulated amortization of
    $761,000 at December 31, 2002 and 2003 |                                                                                                                                                              |                                            | 23,056,000 |            |            |  | 23,059,000 |           
|Other assets                                                                            |                                                                                                                                                              |                                            | 312,000    |            |            |  | 224,000    |           
|                                                                                        |                                                                                                                                                              |                                            |            |            |            |  |            |           
|                                                                                        |                                                                                                                                                              | Total assets                               |            | $          | 82,226,000 |  |            | $          | 87,536,000 | 
|                                                                                        |                                                                                                                                                              |                                            |            |            |            |  |            |           
|                                                                                       
|LIABILITIES AND SHAREHOLDERS
    EQUITY                                               
|Current liabilities:                                                                    |                                                                                                                                                              |                                            |            |            |            |  |            |           
|                                                                                        | Current portion of long-term debt and capital
    lease obligations                                                                                          |                                            | $          | 52,000     |            |  | $          |           |           
|                                                                                        | Trade accounts payable                                                                                                                                       |                                            |            | 1,818,000  |            |  |            | 1,640,000  |           
|                                                                                        | Accrued employee compensation                                                                                                                                |                                            |            | 3,722,000  |            |  |            | 4,037,000  |           
|                                                                                        | Current portion of deferred tax liabilities                                                                                                                  |                                            |            | 3,065,000  |            |  |            | 2,444,000  |           
|                                                                                        | Other accrued liabilities                                                                                                                                    |                                            |            | 4,484,000  |            |  |            | 3,078,000  |           
|                                                                                        | Billings in excess of costs and estimated earnings                                                                                                           |                                            |            | 1,273,000  |            |  |            | 1,571,000  |           
|                                                                                        |                                                                                                                                                              |                                            |            |            |            |  |            |           
|                                                                                        |                                                                                                                                                              | Total current liabilities                  |            |            | 14,414,000 |  |            |            | 12,770,000 | 
|Long-term debt and capital lease obligations,
    less current portion                  |                                                                                                                                                              |                                            | 18,000     |            |            |  |           |           
|Issuable common stock                                                                   |                                                                                                                                                              |                                            | 2,215,000  |            |            |  | 792,000    |           
|Deferred tax liabilities                                                                |                                                                                                                                                              |                                            | 1,675,000  |            |            |  | 1,560,000  |           
|Accrued rent                                                                            |                                                                                                                                                              |                                            | 292,000    |            |            |  | 452,000    |           
|                                                                                        |                                                                                                                                                              |                                            |            |            |            |  |            |           
|                                                                                        |                                                                                                                                                              | Total liabilities                          |            |            | 18,614,000 |  |            |            | 15,574,000 | 
|                                                                                        |                                                                                                                                                              |                                            |            |            |            |  |            |           
|Shareholders equity:                                                                   |                                                                                                                                                              |                                            |            |            |            |  |            |           
|                                                                                        | Preferred stock, $0.001 par value.
    Authorized 5,000,000 shares; no shares issued or outstanding                                                          |                                            |            |           |            |  |            |           |           
|                                                                                        | Common stock, $0.001 par value. Authorized
    100,000,000 shares ; issued and outstanding 7,514,140 and
    7,653,935 shares in 2002 and 2003, respectively |                                            |            | 8,000      |            |  |            | 8,000      |           
|                                                                                        | Additional paid in capital                                                                                                                                   |                                            |            | 44,166,000 |            |  |            | 45,295,000 |           
|                                                                                        | Retained earnings                                                                                                                                            |                                            |            | 19,438,000 |            |  |            | 26,659,000 |           
|                                                                                        |                                                                                                                                                              |                                            |            |            |            |  |            |           
|                                                                                        |                                                                                                                                                              | Total shareholders equity                 |            |            | 63,612,000 |  |            |            | 71,962,000 | 
|                                                                                        |                                                                                                                                                              |                                            |            |            |            |  |            |           
|Commitments and contingencies (Notes 6, 9,
    10, 17, and 18)                          |                                                                                                                                                              |                                            |            |            |            |  |            |           
|                                                                                        |                                                                                                                                                              | Total liabilities and shareholders equity |            | $          | 82,226,000 |  |            | $          | 87,536,000 | 
|                                                                                        |                                                                                                                                                              |                                            |            |            |            |  |            |           

See accompanying notes to consolidated financial
statements.

35



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##### Table of Contents



THE KEITH COMPANIES, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

|                                                                                 |                                                                          |                          |            |            |   |      |             |            |   |   |            |            | 
|-------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | ------------------------ | ---------- | ---------- | - | ---- | ----------- | ---------- | - | - | ---------- | ---------- | 
|                                                                                 |                                                                          |                         
|                                                                                 |                                                                          | Years Ended December 31,
|                                                                                 |                                                                          |                         
|                                                                                 |                                                                          | 2001                     |            | 2002       |   | 2003
|                                                                                 |                                                                          |                          |            |            |   |     
|Gross revenue                                                                    |                                                                          | $                        | 74,314,000 |            |   | $    | 106,487,000 |            |   | $ | 99,950,000 |           
|Subcontractor costs                                                              |                                                                          |                          | 7,470,000  |            |   |      | 14,889,000  |            |   |   | 9,206,000  |           
|                                                                                 |                                                                          |                          |            |            |   |      |             |            |   |   |            |           
|                                                                                 | Net revenue                                                              |                          |            | 66,844,000 |   |      |             | 91,598,000 |   |   |            | 90,744,000 | 
|Costs of revenue                                                                 |                                                                          |                          | 42,970,000 |            |   |      | 59,716,000  |            |   |   | 58,837,000 |           
|                                                                                 |                                                                          |                          |            |            |   |      |             |            |   |   |            |           
|                                                                                 | Gross profit                                                             |                          |            | 23,874,000 |   |      |             | 31,882,000 |   |   |            | 31,907,000 | 
|Selling, general and administrative expenses                                     |                                                                          |                          | 14,015,000 |            |   |      | 19,105,000  |            |   |   | 20,592,000 |           
|                                                                                 |                                                                          |                          |            |            |   |      |             |            |   |   |            |           
|                                                                                 | Income from operations                                                   |                          |            | 9,859,000  |   |      |             | 12,777,000 |   |   |            | 11,315,000 | 
|Interest income                                                                  |                                                                          |                          | 552,000    |            |   |      | 384,000     |            |   |   | 279,000    |           
|Interest expense (income), net                                                   |                                                                          |                          | 263,000    |            |   |      | (47,000     | )          |   |   | 15,000     |           
|Other expenses (income), net                                                     |                                                                          |                          | 54,000     |            |   |      | (625,000    | )          |   |   | (259,000   | )         
|                                                                                 |                                                                          |                          |            |            |   |      |             |            |   |   |            |           
|                                                                                 | Income before provision for income taxes and
    discontinued operations |                          |            | 10,094,000 |   |      |             | 13,833,000 |   |   |            | 11,838,000 | 
|Provision for income taxes                                                       |                                                                          |                          | 3,916,000  |            |   |      | 5,397,000   |            |   |   | 4,617,000  |           
|                                                                                 |                                                                          |                          |            |            |   |      |             |            |   |   |            |           
|                                                                                 | Income from continuing operations                                        |                          |            | 6,178,000  |   |      |             | 8,436,000  |   |   |            | 7,221,000  | 
|Loss from discontinued operations, net of income
    taxes                       |                                                                          |                          | 329,000    |            |   |      | 628,000     |            |   |   |           |           
|                                                                                 |                                                                          |                          |            |            |   |      |             |            |   |   |            |           
|                                                                                 | Net income                                                               |                          | $          | 5,849,000  |   |      | $           | 7,808,000  |   |   | $          | 7,221,000  | 
|                                                                                 |                                                                          |                          |            |            |   |      |             |            |   |   |            |           
|Earnings per share from continuing operations:                                   |                                                                          |                          |            |            |   |      |             |            |   |   |            |           
|                                                                                 | Basic                                                                    |                          | $          | 0.94       |   |      | $           | 1.15       |   |   | $          | 0.95       | 
|                                                                                 |                                                                          |                          |            |            |   |      |             |            |   |   |            |           
|                                                                                 | Diluted                                                                  |                          | $          | 0.87       |   |      | $           | 1.07       |   |   | $          | 0.91       | 
|                                                                                 |                                                                          |                          |            |            |   |      |             |            |   |   |            |           
|Earnings (loss) per share from discontinued
    operations, net of income taxes: |                                                                          |                          |            |            |   |      |             |            |   |   |            |           
|                                                                                 | Basic                                                                    |                          | $          | (0.05      | ) |      | $           | (0.09      | ) |   | $          |           | 
|                                                                                 |                                                                          |                          |            |            |   |      |             |            |   |   |            |           
|                                                                                 | Diluted                                                                  |                          | $          | (0.05      | ) |      | $           | (0.08      | ) |   | $          |           | 
|                                                                                 |                                                                          |                          |            |            |   |      |             |            |   |   |            |           
|Earnings per share:                                                              |                                                                          |                          |            |            |   |      |             |            |   |   |            |           
|                                                                                 | Basic                                                                    |                          | $          | 0.89       |   |      | $           | 1.06       |   |   | $          | 0.95       | 
|                                                                                 |                                                                          |                          |            |            |   |      |             |            |   |   |            |           
|                                                                                 | Diluted                                                                  |                          | $          | 0.82       |   |      | $           | 0.99       |   |   | $          | 0.91       | 
|                                                                                 |                                                                          |                          |            |            |   |      |             |            |   |   |            |           
|Weighted average number of shares outstanding:                                   |                                                                          |                          |            |            |   |      |             |            |   |   |            |           
|                                                                                 | Basic                                                                    |                          |            | 6,604,367  |   |      |             | 7,363,073  |   |   |            | 7,615,264  | 
|                                                                                 |                                                                          |                          |            |            |   |      |             |            |   |   |            |           
|                                                                                 | Diluted                                                                  |                          |            | 7,092,505  |   |      |             | 7,868,877  |   |   |            | 7,957,344  | 
|                                                                                 |                                                                          |                          |            |            |   |      |             |            |   |   |            |           

See accompanying notes to consolidated financial
statements.

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##### Table of Contents



THE KEITH COMPANIES, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY

Years Ended December 31, 2001, 2002 and
2003


|                                           |  |             |           |        |  |            |       |          |  |       |            |   |  |   |            |  |  |   |            |  
|------------------------------------------ |  | ----------- | --------- | ------ |  | ---------- | ----- | -------- |  | ----- | ---------- | - |  | - | ---------- |  |  | - | ---------- | -
|                                           |  |             |           |        |  | Additional |       |          |  |      
|                                           |  | Shares      |           | Common |  | Paid-In    |       | Retained |  |      
|                                           |  | Outstanding |           | Stock  |  | Capital    |       | Earnings |  | Total
|                                           |  |             |           |        |  |            |       |          |  |      
|Balance at December 31, 2000               |  |             | 5,115,882 |        |  | $          | 5,000 |          |  | $     | 12,453,000 |   |  | $ | 5,781,000  |  |  | $ | 18,239,000 |  
|Issuance of common stock                   |  |             | 1,970,093 |        |  |            | 2,000 |          |  |       | 28,601,000 |   |  |   |           |  |  |   | 28,603,000 |  
|Stock options exercised                    |  |             | 278,709   |        |  |            |      |          |  |       | 596,000    |   |  |   |           |  |  |   | 596,000    |  
|Tax benefit from exercise of stock options |  |             |          |        |  |            |      |          |  |       | 879,000    |   |  |   |           |  |  |   | 879,000    |  
|Net income                                 |  |             |          |        |  |            |      |          |  |       |           |   |  |   | 5,849,000  |  |  |   | 5,849,000  |  
|Repurchase of common stock                 |  |             | (55,000   | )      |  |            |      |          |  |       | (433,000   | ) |  |   |           |  |  |   | (433,000   | )
|                                           |  |             |           |        |  |            |       |          |  |       |            |   |  |   |            |  |  |   |            |  
|Balance at December 31, 2001               |  |             | 7,309,684 |        |  |            | 7,000 |          |  |       | 42,096,000 |   |  |   | 11,630,000 |  |  |   | 53,733,000 |  
|Issuance of common stock                   |  |             | 174,783   |        |  |            | 1,000 |          |  |       | 1,822,000  |   |  |   |           |  |  |   | 1,823,000  |  
|Stock options exercised                    |  |             | 29,673    |        |  |            |      |          |  |       | 159,000    |   |  |   |           |  |  |   | 159,000    |  
|Tax benefit from exercise of stock options |  |             |          |        |  |            |      |          |  |       | 89,000     |   |  |   |           |  |  |   | 89,000     |  
|Net income                                 |  |             |          |        |  |            |      |          |  |       |           |   |  |   | 7,808,000  |  |  |   | 7,808,000  |  
|                                           |  |             |           |        |  |            |       |          |  |       |            |   |  |   |            |  |  |   |            |  
|Balance at December 31, 2002               |  |             | 7,514,140 |        |  |            | 8,000 |          |  |       | 44,166,000 |   |  |   | 19,438,000 |  |  |   | 63,612,000 |  
|Issuance of common stock                   |  |             | 70,907    |        |  |            |      |          |  |       | 714,000    |   |  |   |           |  |  |   | 714,000    |  
|Stock options exercised                    |  |             | 68,888    |        |  |            |      |          |  |       | 309,000    |   |  |   |           |  |  |   | 309,000    |  
|Tax benefit from exercise of stock options |  |             |          |        |  |            |      |          |  |       | 69,000     |   |  |   |           |  |  |   | 69,000     |  
|Deferred compensation                      |  |             |          |        |  |            |      |          |  |       | 37,000     |   |  |   |           |  |  |   | 37,000     |  
|Net income                                 |  |             |          |        |  |            |      |          |  |       |           |   |  |   | 7,221,000  |  |  |   | 7,221,000  |  
|                                           |  |             |           |        |  |            |       |          |  |       |            |   |  |   |            |  |  |   |            |  
|Balance at December 31, 2003               |  |             | 7,653,935 |        |  | $          | 8,000 |          |  | $     | 45,295,000 |   |  | $ | 26,659,000 |  |  | $ | 71,962,000 |  
|                                           |  |             |           |        |  |            |       |          |  |       |            |   |  |   |            |  |  |   |            |  

See accompanying notes to consolidated financial
statements.

37



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##### Table of Contents



THE KEITH COMPANIES, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                      |                                                                                                   |                                                    |                                                         |             |            |             |           |            |            |            |           |            |            |            |  
|------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------- | -------------------------------------------------- | ------------------------------------------------------- | ----------- | ---------- | ----------- | --------- | ---------- | ---------- | ---------- | --------- | ---------- | ---------- | ---------- | -
|                                                                                      |                                                                                                   |                                                   
|                                                                                      |                                                                                                   | Years Ended December 31,                          
|                                                                                      |                                                                                                   |                                                   
|                                                                                      |                                                                                                   | 2001                                               |                                                         | 2002        |            | 2003       
|                                                                                      |                                                                                                   |                                                    |                                                         |             |            |            
|Cash flows from operating
    activities:                                             |                                                                                                   |                                                    |                                                         |             |            |             |           |            |            |            |           |           
|Net income                                                                            |                                                                                                   | $                                                  | 5,849,000                                               |             |            | $           | 7,808,000 |            |            | $          | 7,221,000 |           
|Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                                                                   |                                                    |                                                         |             |            |             |           |            |            |            |           |           
|                                                                                      | Depreciation and amortization                                                                     |                                                    |                                                         | 2,349,000   |            |             |           | 2,283,000  |            |            |           | 2,231,000  |           
|                                                                                      | Loss on sale/ impairment of equipment                                                             |                                                    |                                                         | 23,000      |            |             |           | 93,000     |            |            |           | 29,000     |           
|                                                                                      | Reduction in purchase price of acquired companies                                                 |                                                    |                                                         |            |            |             |           | (769,000   | )          |            |           | (137,000   | )         
|                                                                                      | Tax benefit from exercise of stock options                                                        |                                                    |                                                         | 879,000     |            |             |           | 89,000     |            |            |           | 69,000     |           
|                                                                                      | Stock compensation expense                                                                        |                                                    |                                                         |            |            |             |           |           |            |            |           | 37,000     |           
|                                                                                      | Changes in operating assets and liabilities, net
    of effects from acquisitions:                |                                                    |                                                         |             |            |             |           |            |            |            |           |            |           
|                                                                                      |                                                                                                   | Contracts and trade receivables, net               |                                                         |             | 659,000    |             |           |            | 3,369,000  |            |           |            | (1,269,000 | )         
|                                                                                      |                                                                                                   | Costs and estimated earnings in excess of billings |                                                         |             | (1,807,000 | )           |           |            | (1,545,000 | )          |           |            | 304,000    |           
|                                                                                      |                                                                                                   | Prepaid expenses and other current assets          |                                                         |             | (366,000   | )           |           |            | 108,000    |            |           |            | (53,000    | )         
|                                                                                      |                                                                                                   | Trade accounts payable and accrued liabilities     |                                                         |             | 277,000    |             |           |            | (270,000   | )          |           |            | (652,000   | )         
|                                                                                      |                                                                                                   | Billings in excess of costs and estimated earnings |                                                         |             | (341,000   | )           |           |            | (1,042,000 | )          |           |            | 298,000    |           
|                                                                                      |                                                                                                   | Deferred tax liabilities                           |                                                         |             | 306,000    |             |           |            | (28,000    | )          |           |            | (728,000   | )         
|                                                                                      |                                                                                                   |                                                    |                                                         |             |            |             |           |            |            |            |           |           
|                                                                                      |                                                                                                   |                                                    | Net cash provided by operating activities               |             |            | 7,828,000   |           |            |            | 10,096,000 |           |            |            | 7,350,000  |  
|                                                                                      |                                                                                                   |                                                    |                                                         |             |            |             |           |            |            |            |           |           
|Cash flows from investing
    activities:                                             |                                                                                                   |                                                    |                                                         |             |            |             |           |            |            |            |           |           
|                                                                                      | Net cash expended for acquisitions                                                                |                                                    |                                                         | (5,834,000  | )          |             |           | (8,048,000 | )          |            |           | (722,000   | )         
|                                                                                      | Additions to equipment and leasehold improvements                                                 |                                                    |                                                         | (1,575,000  | )          |             |           | (1,872,000 | )          |            |           | (1,548,000 | )         
|                                                                                      | Proceeds from (purchase of) securities
    held-to-maturity                                       |                                                    |                                                         | (11,521,000 | )          |             |           | 8,357,000  |            |            |           | (1,436,000 | )         
|                                                                                      | Proceeds from sales of equipment                                                                  |                                                    |                                                         | 15,000      |            |             |           | 134,000    |            |            |           | 57,000     |           
|                                                                                      |                                                                                                   |                                                    |                                                         |             |            |             |           |            |            |            |           |           
|                                                                                      |                                                                                                   |                                                    | Net cash used in investing activities                   |             |            | (18,915,000 | )         |            |            | (1,429,000 | )         |            |            | (3,649,000 | )
|                                                                                      |                                                                                                   |                                                    |                                                         |             |            |             |           |            |            |            |           |           
|Cash flows from financing
    activities:                                             |                                                                                                   |                                                    |                                                         |             |            |             |           |            |            |            |           |           
|                                                                                      | Payments on line of credit, net                                                                   |                                                    |                                                         | (2,294,000  | )          |             |           |           |            |            |           |           |           
|                                                                                      | Principal payments on long-term debt and capital
    lease obligations, including current portion |                                                    |                                                         | (3,528,000  | )          |             |           | (705,000   | )          |            |           | (52,000    | )         
|                                                                                      | Repurchase of common stock                                                                        |                                                    |                                                         | (433,000    | )          |             |           |           |            |            |           |           |           
|                                                                                      | Proceeds from exercise of stock options                                                           |                                                    |                                                         | 596,000     |            |             |           | 159,000    |            |            |           | 295,000    |           
|                                                                                      | Net proceeds from stock offering                                                                  |                                                    |                                                         | 27,915,000  |            |             |           |           |            |            |           |           |           
|                                                                                      |                                                                                                   |                                                    |                                                         |             |            |             |           |            |            |            |           |           
|                                                                                      |                                                                                                   |                                                    | Net cash provided by (used in) financing
    activities |             |            | 22,256,000  |           |            |            | (546,000   | )         |            |            | 243,000    |  
|                                                                                      |                                                                                                   |                                                    |                                                         |             |            |             |           |            |            |            |           |           
|                                                                                      |                                                                                                   |                                                    | Net increase in cash and cash equivalents               |             |            | 11,169,000  |           |            |            | 8,121,000  |           |            |            | 3,944,000  |  
|                                                                                      | Cash and cash equivalents, beginning of year                                                      |                                                    |                                                         | 1,043,000   |            |             |           | 12,212,000 |            |            |           | 20,333,000 |           
|                                                                                      |                                                                                                   |                                                    |                                                         |             |            |             |           |            |            |            |           |           
|                                                                                      | Cash and cash equivalents, end of year                                                            |                                                    | $                                                       | 12,212,000  |            |             | $         | 20,333,000 |            |            | $         | 24,277,000 |           
|                                                                                      |                                                                                                   |                                                    |                                                         |             |            |             |           |            |            |            |           |           

See supplemental cash flow information at
Note 15.

See accompanying notes to consolidated financial
statements.

38



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##### Table of Contents



THE KEITH COMPANIES, INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Years Ended December 31, 2001, 2002, and
2003




|    |                                           
|--- | ------------------------------------------
|(1) | Organization and Basis of
    Presentation

The Keith Companies, Inc. (TKCI), is
incorporated in the state of California and has been conducting
business since 1983. TKCI is a full service engineering and
consulting services firm providing professional services on a
wide range of short and long-term projects pursuant to mainly
short-term contracts to the real estate development and public
works/infrastructure industry, and the energy/industrial
industry. These services are rendered principally in California,
Nevada, Utah, Arizona, Oregon, Texas, and Michigan. References
to TKCI or the Company mean the Company
and all of its wholly-owned subsidiaries.

The Company provides a full range of services
from initial site acquisition studies through construction
support services to clients operating in a variety of market
sectors. The Company benefits from a diverse public and private
client base including real estate developers, residential and
commercial builders, architects, cities, counties, water
districts, state and federal agencies, land owners, commercial
retailers, energy providers and various manufacturers. The
Companys professional staff provides a comprehensive menu
of services that are needed to effectively manage, engineer and
design infrastructure and state-of-the-art facilities.



|    |                                               
|--- | ----------------------------------------------
|(2) | Summary of Significant Accounting
    Policies



| |                            
| | ---------------------------
| | Principles of Consolidation

The consolidated financial statements of the
Company are prepared in accordance with accounting principles
generally accepted in the United States of America. All material
intercompany transactions and balances have been eliminated in
consolidation.



| |                          
| | -------------------------
| | Cash and Cash Equivalents

Cash equivalents are primarily comprised of
highly liquid debt instruments with maturities of three months
or less when purchased. The Companys excess cash is
managed by two financial institutions and, therefore, may be
subject to certain concentration of credit risks.



| |                            
| | ---------------------------
| | Securities Held-to-Maturity

The Company accounts for its securities as
held-to-maturity (Securities) under the provisions
of Statement of Financial Accounting Standards
(SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Under
SFAS No. 115, the Company is required to classify its
Securities in one of three categories: trading,
available-for-sale, or held-to-maturity. Trading securities are
bought and held principally for the purpose of selling them in
the near term. Held-to-maturity securities are those securities
for which the Company has the intent and ability to hold until
maturity. All other securities not included in trading or
held-to-maturity categories are classified as
available-for-sale. The Company has the ability and intent to
hold all of its Securities until maturity and therefore, has
classified its Securities as held-to-maturity. Accordingly, the
Securities are stated at amortized cost. The Companys
Securities are invested in highly liquid investment grade
short-term debt securities.



| |                                    
| | -----------------------------------
| | Allowance for Doubtful
    Accounts

The Company maintains an allowance for doubtful
accounts for estimated losses resulting from the inability to
collect on its contracts and trade receivables. The Company uses
estimates in arriving at its allowance for doubtful accounts
which are based on its best assessment as to the collectibility
of the related receivable balance.

39



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##### Table of Contents



THE KEITH COMPANIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                                              
| | ---------------------------------------------
| | Revenue and Cost Recognition on
    Contracts

The Company enters into fixed fee contracts and
contracts that provide for fees on a time-and-materials basis,
most of which have not-to-exceed provisions. Contracts typically
vary in length between six months and three years. However, many
contracts are for small increments of work, which can be
completed in less than six months. For contracts with a fixed
fee or a not-to-exceed provision, revenue is recognized on the
percentage of completion method of accounting based on the
proportion of actual direct contract costs incurred to total
estimated direct contract costs. Management considers costs
incurred to be the best available measure of progress on
contracts. For time and material contracts, revenue is
recognized as earned.

In the course of providing its services, the
Company sometimes subcontracts with various providers and
professionals like technical consultants, product suppliers and
installers, landscape architects, architects, geotechnical
engineers, structural engineers, traffic engineers, and aerial
photographers. These costs are included in the billings to the
clients and are included in the Companys gross revenue.
Because subcontractor services can change significantly from
project to project, changes in gross revenue may not be
indicative of business trends. Accordingly, the Company also
reports net revenue, which is gross revenue less subcontractor
costs.

Costs of revenue include labor, non-reimbursable
costs, materials and various direct and indirect overhead costs
including rent, utilities and depreciation. General and
administrative costs are charged to expense as incurred.
Provisions for estimated losses on uncompleted contracts are
made in the period in which the losses are determined. Changes
in job performance, job conditions and estimated profitability,
including final contract settlements, may result in revisions to
costs and income and are recognized in the period in which the
revisions are determined. Additional revenue resulting from
requests for additional work due to changes in the scope of
engineering services to be rendered, are included in revenue
when realization is probable and can be estimated with
reasonable certainty.

Costs and estimated earnings in excess of
billings represents revenue recognized in excess of amounts
billed on the respective uncompleted engineering contracts.
Billings in excess of costs and estimated earnings represents
amounts billed in excess of revenue recognized on the respective
uncompleted contracts.

At December 31, 2002 and 2003, the Company
had no significant amounts included in contracts and trade
receivables or trade accounts payable representing amounts
retained pending contract or subcontractor completion.



| |                                         
| | ----------------------------------------
| | Equipment and Leasehold
    Improvements

Equipment and leasehold improvements are stated
at cost, while capital leased assets are stated at the lesser of
the present value of future minimum lease payments or fair
value. Depreciation/amortization is provided on a straight-line
basis over the estimated useful lives of the assets, as follows:

|                       |  |  |                | 
|---------------------- |  |  | -------------- | 
|Equipment              |  |  | 3 to 10  years | 
|Leasehold improvements |  |  | 1 to 7 years   | 

When assets are sold or otherwise retired, the
related cost and accumulated depreciation/amortization are
removed from the accounts and the resulting gain or loss is
included in other expenses (income), net in the accompanying
consolidated statements of income.



| |         
| | --------
| | Goodwill

Goodwill represents the excess of the purchase
price over the estimated fair value of the tangible and
intangible net assets acquired and liabilities assumed. Prior to
the adoption of SFAS No. 142 Goodwill and Other
Intangible Assets effective January 1, 2002, goodwill
was being amortized over 25 years. Beginning

40



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##### Table of Contents



THE KEITH COMPANIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

January 1, 2002, goodwill is no longer
amortized and is required to be tested for impairment on an
annual basis or more frequently if an event occurs or
circumstances change that would indicate that the carrying
amount may be impaired (see Note 5 Goodwill).



| |             
| | ------------
| | Income Taxes

The Company accounts for income taxes under the
asset and liability method in accordance with
SFAS No. 109, Accounting for Income Taxes,
which requires recognition of deferred tax assets and
liabilities for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
and operating loss and tax credit carry forwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
The Company considers recording a valuation allowance to reflect
the estimated amount of deferred tax assets which may not be
realized. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date.



| |                  
| | -----------------
| | Stock Option Plan

The Company accounts for its stock options and
restricted shares in accordance with the provisions of
Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to
Employees, and related interpretations. The Company has
not recorded any compensation expense related to the granting of
stock options. The Company, however, has recorded compensation
expense related to the granting of restricted shares in 2003
(see Note 10 Common Stock and Stock Plans).
SFAS No. 123, Accounting for Stock Based
Compensation, permits entities to recognize the fair value
of all stock-based awards on the date of grant as an expense
over the vesting period. Alternatively, SFAS No. 123
allows entities to continue to apply the provisions of APB
Opinion No. 25; however, SFAS No. 148,
Accounting for Stock Based Compensation 
Transition and Disclosure, requires pro forma net income
disclosures as if the fair-value-based method defined in
SFAS No. 123 had been applied. The Company has elected
to continue to apply the provisions of APB Opinion No. 25
and to provide the pro forma disclosure specified by
SFAS No. 148.

41



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##### Table of Contents



THE KEITH COMPANIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Had the Company determined compensation cost
based on the fair value at the grant date for its stock options
(using the Black-Scholes method) and restricted shares under
SFAS No. 123, the Companys net income would have
been adjusted to the pro forma amounts indicated below:

|                            |                         |                                                                                                                  |   |           |          |      |   |           |          |   |   |           |          |  
|--------------------------- | ----------------------- | ---------------------------------------------------------------------------------------------------------------- | - | --------- | -------- | ---- | - | --------- | -------- | - | - | --------- | -------- | -
|                            |                         |                                                                                                                 
|                            |                         | Years Ended December 31,                                                                                        
|                            |                         |                                                                                                                 
|                            |                         | 2001                                                                                                             |   | 2002      |          | 2003
|                            |                         |                                                                                                                  |   |           |          |     
|Net income:                 |                         |                                                                                                                  |   |           |          |      |   |           |          |   |   |          
|                            | Net income, as reported |                                                                                                                  | $ | 5,849,000 |          |      | $ | 7,808,000 |          |   | $ | 7,221,000 |         
|                            |                         | Add: Employee compensation expense related to
    restricted shares, included in net income, net of taxes        |   |           |         |      |   |           |         |   |   |           | 23,000   |  
|                            |                         | Deduct: Stock-based employee compensation expense
    determined under the fair-value based method, net of taxes |   |           | (353,000 | )    |   |           | (404,000 | ) |   |           | (472,000 | )
|                            |                         |                                                                                                                  |   |           |          |      |   |           |          |   |   |          
|                            | Pro forma net income    |                                                                                                                  | $ | 5,496,000 |          |      | $ | 7,404,000 |          |   | $ | 6,772,000 |         
|                            |                         |                                                                                                                  |   |           |          |      |   |           |          |   |   |          
|Basic earnings per share:   |                         |                                                                                                                  |   |           |          |      |   |           |          |   |   |          
|                            | As reported             |                                                                                                                  |   | $0.89     |          |      |   | $1.06     |          |   |   | $0.95     |         
|                            | Pro forma               |                                                                                                                  |   | $0.83     |          |      |   | $1.01     |          |   |   | $0.89     |         
|Diluted earnings per share: |                         |                                                                                                                  |   |           |          |      |   |           |          |   |   |          
|                            | As reported             |                                                                                                                  |   | $0.82     |          |      |   | $0.99     |          |   |   | $0.91     |         
|                            | Pro forma               |                                                                                                                  |   | $0.77     |          |      |   | $0.94     |          |   |   | $0.85     |         

The following represents assumptions used to
estimate the fair value of stock options granted as determined
using the Black-Scholes option pricing model:

|                                                                         |  |                          |      |      |  |      |      |   |  |   |      |  
|------------------------------------------------------------------------ |  | ------------------------ | ---- | ---- |  | ---- | ---- | - |  | - | ---- | -
|                                                                         |  |                         
|                                                                         |  | Years Ended December 31,
|                                                                         |  |                         
|                                                                         |  | 2001                     |      | 2002 |  | 2003
|                                                                         |  |                          |      |      |  |     
|Weighted average stock price per share of common
    stock at grant date |  | $                        | 7.69 |      |  | $    | 8.21 |   |  | $ | 8.76 |  
|Weighted average exercise price per stock option
    granted             |  | $                        | 7.69 |      |  | $    | 8.21 |   |  | $ | 8.76 |  
|Expected volatility                                                      |  |                          | 76.2 | %    |  |      | 68.4 | % |  |   | 61.8 | %
|Risk-free interest rate                                                  |  |                          | 4.2  | %    |  |      | 2.7  | % |  |   | 3.2  | %
|Expected option term (years)                                             |  |                          | 5    |      |  |      | 5    |   |  |   | 5    |  
|Stock dividend yield                                                     |  |                          | 0.0  | %    |  |      | 0.0  | % |  |   | 0.0  | %

The weighted average fair value of stock options
granted during the years ended December 2001, 2002, and 2003 was
$8.91, $7.76, and $5.61 per share, respectively.



| |                   
| | ------------------
| | Earnings Per Share

Basic earnings per share (EPS) is
computed by dividing net income during the period by the
weighted average number of common shares outstanding during each
period. Diluted EPS is computed by dividing net income during
the period by the weighted average number of shares that would
have been outstanding assuming the issuance of dilutive
potential common shares as if outstanding during the reporting
period, net of shares assumed to be repurchased using the
treasury stock method.

42



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##### Table of Contents



THE KEITH COMPANIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following is a reconciliation of the
denominator for the basic EPS computation to the denominator of
the diluted EPS computation.

|                                                                                                                                                    |  |                          |           |      |  |      |           |  |  |  |           | 
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | --------- | ---- |  | ---- | --------- |  |  |  | --------- | 
|                                                                                                                                                    |  |                         
|                                                                                                                                                    |  | Years Ended December 31,
|                                                                                                                                                    |  |                         
|                                                                                                                                                    |  | 2001                     |           | 2002 |  | 2003
|                                                                                                                                                    |  |                          |           |      |  |     
|Weighted average shares used for the basic EPS
    computation                                                                                      |  |                          | 6,604,367 |      |  |      | 7,363,073 |  |  |  | 7,615,264 | 
|Incremental shares from the assumed exercise of
    dilutive stock options, restricted shares, stock warrants, and
    contingently issuable shares |  |                          | 488,138   |      |  |      | 505,804   |  |  |  | 342,080   | 
|                                                                                                                                                    |  |                          |           |      |  |      |           |  |  |  |           | 
|Weighted average shares used for the diluted EPS
    computation                                                                                    |  |                          | 7,092,505 |      |  |      | 7,868,877 |  |  |  | 7,957,344 | 
|                                                                                                                                                    |  |                          |           |      |  |      |           |  |  |  |           | 

In conjunction with certain acquisitions, the
Company agreed to pay consideration consisting of shares of its
common stock (see Note 6). As a result, the Company
estimated and included 169,989, 260,917 and 75,454 weighted
average contingently issuable shares in its weighted average
shares used for the diluted EPS computation for the years ended
December 31, 2001, 2002 and 2003, respectively.

There were 84,959, 138,693 and 167,965
anti-dilutive weighted stock options excluded from the above
calculation in 2001, 2002 and 2003, respectively.



| |                                                                             
| | ----------------------------------------------------------------------------
| | Use of Estimates in the Preparation of
    Consolidated Financial Statements

The preparation of these consolidated financial
statements, in conformity with accounting principles generally
accepted in the United States of America, requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the consolidated financial
statements and the amounts of revenue and expenses reported
during the periods. Actual results may differ from the estimates
and assumptions used in preparing these consolidated financial
statements.



| |                        
| | -----------------------
| | Risks and Uncertainties

As of December 31, 2003, approximately 10%
of the Companys work force is covered by collective
bargaining agreements that expire during 2004 and 2005.



| |                  
| | -----------------
| | Reclassifications

Certain 2001 and 2002 balances have been
reclassified to conform to the presentation used in 2003.



|    |                        
|--- | -----------------------
|(3) | Discontinued Operations

During 2002, the Company closed three of its
divisions. Two of these divisions relate to the Companys
acquisition of Hook & Associates Engineering, Inc.
(Hook) and were located in Colorado and Wyoming. The
third closure related to the Companys internally developed
Communication division, which was located in California. The
closures were primarily due to lower than expected operating
results and continuing difficult market conditions. In
accordance with accounting principles generally accepted in the
United State of America (GAAP), the balances and
activities of these divisions have been segregated and reported
as discontinued operations for the current year and all prior
years effected.

43



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##### Table of Contents



THE KEITH COMPANIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |                                   
|--- | ----------------------------------
|(4) | Secondary Offering of Common Stock

Secondary Offering.In May 2001, the Company completed a secondary offering of an
aggregate of 2.3 million shares of common stock (including
an over-allotment of 300,000 shares), of which
1.9 million shares were sold by the Company and
400,000 shares were sold by selling shareholders. The
public offering price was $16.00 per share, which resulted
in proceeds to the Company, net of underwriting fees and
offering expenses, of approximately $27.9 million.

The Company used a portion of the net proceeds
from the secondary offering to repay debt, for general corporate
purposes, including working capital and to aid in completing
acquisitions. The remaining balance of the net proceeds has been
invested in highly liquid investment grade short-term debt
securities held to maturity.



|    |         
|--- | --------
|(5) | Goodwill

Effective January 1, 2002, the Company
adopted SFAS No. 142. Under this standard, goodwill is
no longer amortized. Therefore, no goodwill amortization expense
was incurred during the years ended December 31, 2002 and
2003. Beginning January 1, 2002, goodwill is required to be
tested for impairment on an annual basis, and is required to be
tested for impairment between annual tests if an event occurs or
circumstances change that would indicate the carrying amount may
be impaired. The table below shows the as adjusted effect on net
income, basic earnings per share and diluted earnings per share
had SFAS No. 142, which eliminated goodwill
amortization, been applied in 2001:

|                                                          |  |                          |           |      |  |      |           |  |  |   |           | 
|--------------------------------------------------------- |  | ------------------------ | --------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                                                          |  |                         
|                                                          |  | Years Ended December 31,
|                                                          |  |                         
|                                                          |  | 2001                     |           | 2002 |  | 2003
|                                                          |  |                          |           |      |  |     
|Net income:                                               |  |                          |           |      |  |      |           |  |  |   |           | 
|Reported net income                                       |  | $                        | 5,849,000 |      |  | $    | 7,808,000 |  |  | $ | 7,221,000 | 
|Add back: Goodwill amortization (net of income
    taxes) |  |                          | 264,000   |      |  |      |          |  |  |   |          | 
|                                                          |  |                          |           |      |  |      |           |  |  |   |           | 
|Adjusted net income                                       |  | $                        | 6,113,000 |      |  | $    | 7,808,000 |  |  | $ | 7,221,000 | 
|                                                          |  |                          |           |      |  |      |           |  |  |   |           | 
|Basic earnings per share:                                 |  |                          |           |      |  |      |           |  |  |   |           | 
|Reported basic earnings per share                         |  | $                        | 0.89      |      |  | $    | 1.06      |  |  | $ | 0.95      | 
|Add back: Goodwill amortization (net of income
    taxes) |  |                          | 0.04      |      |  |      |          |  |  |   |          | 
|                                                          |  |                          |           |      |  |      |           |  |  |   |           | 
|Adjusted basic earnings per share                         |  | $                        | 0.93      |      |  | $    | 1.06      |  |  | $ | 0.95      | 
|                                                          |  |                          |           |      |  |      |           |  |  |   |           | 
|Diluted earnings per share:                               |  |                          |           |      |  |      |           |  |  |   |           | 
|Reported diluted earnings per share                       |  | $                        | 0.82      |      |  | $    | 0.99      |  |  | $ | 0.91      | 
|Add back: Goodwill amortization (net of income
    taxes) |  |                          | 0.04      |      |  |      |          |  |  |   |          | 
|                                                          |  |                          |           |      |  |      |           |  |  |   |           | 
|Adjusted diluted earnings per share                       |  | $                        | 0.86      |      |  | $    | 0.99      |  |  | $ | 0.91      | 
|                                                          |  |                          |           |      |  |      |           |  |  |   |           | 

For financial reporting purposes, the Company has
grouped its operations into two primary reportable segments:
Real Estate Development and Public Works/ Infrastructure
(REPWI) and Energy/ Industrial (EI). The
changes in the carrying amount of goodwill as reported by each
reportable segment for the year ended December 31, 2003 is
as follows:

|                                |  |       |            |    |  |       |           |  |  |   |            | 
|------------------------------- |  | ----- | ---------- | -- |  | ----- | --------- |  |  | - | ---------- | 
|                                |  | REPWI |            | EI |  | Total
|                                |  |       |            |    |  |      
|Balance as of December 31, 2002 |  | $     | 18,191,000 |    |  | $     | 4,865,000 |  |  | $ | 23,056,000 | 
|Purchase price adjustments      |  |       | (34,000    | )  |  |       | 37,000    |  |  |   | 3,000      | 
|                                |  |       |            |    |  |       |           |  |  |   |            | 
|Balance as of December 31, 2003 |  | $     | 18,157,000 |    |  | $     | 4,902,000 |  |  | $ | 23,059,000 | 
|                                |  |       |            |    |  |       |           |  |  |   |            | 

44



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##### Table of Contents



THE KEITH COMPANIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Consistent with the Companys policy, the
Company performed its 2002 and 2003 annual goodwill impairment
test during the fourth quarter of those years, which resulted in
no changes in the carrying value of goodwill at
December 31, 2002 and 2003.



|    |             
|--- | ------------
|(6) | Acquisitions



| |                 
| | ----------------
| | ALNM Group, Inc.

Effective March 1, 2002, the Company
acquired all the outstanding shares of common stock of ALNM
Group, Inc. (ALNM) for an adjusted purchase price of
$10.1 million. The results of ALNMs operations have
been included in the consolidated financial statements since
March 2002. ALNM, based in Michigan, specializes in government
services, with expertise in environmental, civil, mechanical and
electrical engineering as well as planning and surveying. The
acquisition expanded TKCIs geographic coverage and
enhanced TKCIs array of services it offers to clients in
the public works and infrastructure industries. The adjusted
purchase price consists of $7.7 million which was paid in
cash and $2.4 million of the Companys common stock,
of which $1,569,000 was issued in 2002 and an estimated $792,000
in value of shares is to be issued in 2004.

In accordance with SFAS No. 141, this
acquisition was accounted for using the purchase method of
accounting. Therefore, the Company recorded adjusted goodwill of
$8,220,000, which represents the excess of the adjusted purchase
price over the fair value of the net tangible and identifiable
intangible assets acquired and liabilities assumed.



| |                       
| | ----------------------
| | Universal Energy, Inc.

On November 30, 2001, the Company acquired
all the outstanding shares of common stock of Universal Energy,
Inc. (UEI) and its wholly owned subsidiary Amerex
International, Inc. for an adjusted purchase price of
$4.7 million. The results of UEIs operations have
been included in the consolidated financial statements since
December 2001. UEI, which is based in Texas, provides start-up
management, technical support, facility acquisition analysis,
operations and maintenance, and manpower augmentation to the
power industry. This acquisition has enhanced TKCIs
geographic coverage and has expanded TKCIs package of
services it can offer to clients in the power and energy
industries. The adjusted purchase price consists of
$4.0 million which was paid in cash and $714,000 paid in
the Companys common stock. In addition, the former
shareholders may be eligible for additional consideration which
may affect the purchase price as a result of an earn-out
provision. Under the earn-out provision, the former shareholders
may be eligible to receive future cash and stock payments based
on certain profitability targets during 2004.

In accordance with SFAS No. 141, this
acquisition was accounted for using the purchase method of
accounting. Therefore, the Company recorded adjusted goodwill of
$3,313,000, which represents the excess of the adjusted purchase
price over the fair value of the net tangible and intangible
assets acquired and liabilities assumed.



| |                                    
| | -----------------------------------
| | Pacific Engineering
    Corporation

On September 28, 2001, the Company acquired
substantially all of the assets and assumed substantially all of
the liabilities of Pacific Engineering Corporation
(PEC) for an adjusted purchase price of $2,212,000,
paid in cash. The results of PECs operations have been
included in the consolidated financial statements since October
2001. PEC is an Oregon based engineering and design services
firm specializing in the fields of power transmission and
distribution, hydroelectric energy facilities, and other utility
infrastructure services. The acquisition has diversified TKCI
geographically, as well as increased TKCIs service
offerings through a new expertise in power transmission and
hydroelectric power.

45



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##### Table of Contents



THE KEITH COMPANIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

In accordance with SFAS No. 141, this
acquisition was accounted for using the purchase method of
accounting. Therefore, the Company recorded adjusted goodwill of
$1,589,000, which represents the excess of the adjusted purchase
price over the fair value of the net tangible and intangible
assets acquired and liabilities assumed.



| |                                        
| | ---------------------------------------
| | Hook & Associates Engineering,
    Inc.

On January 31, 2001, the Company acquired
substantially all of the assets and assumed substantially all of
the liabilities of Hook & Associates Engineering, Inc.
(Hook) for an adjusted purchase price of $3,510,000.
The adjusted purchase price reflects the reduction of
consideration resulting from a modification agreement in July
2002, which resulted in the Company reducing goodwill, certain
operating assets, and interest expense by $282,000, $178,000,
and $130,000 respectively, and increasing other income by
$379,000. The results of Hooks operations have been
included in the consolidated financial statements since February
2001. This acquisition was accounted for using the purchase
method of accounting. Accordingly, the Company recorded adjusted
goodwill of $2,440,000, which represents the excess of the
adjusted purchase price over the fair value of the net tangible
and identifiable intangible assets acquired and liabilities
assumed. Such amount was amortized over a period of
25 years through December 31, 2001.



|    |                                     
|--- | ------------------------------------
|(7) | Equipment and Leasehold Improvements

Equipment and leasehold improvements at
December 31, 2002 and 2003 consist of the following:

|                                          |                                           |      |            |           |  |   |             |           | 
|----------------------------------------- | ----------------------------------------- | ---- | ---------- | --------- |  | - | ----------- | --------- | 
|                                          |                                           | 2002 |            | 2003     
|                                          |                                           |      |            |          
|Equipment                                 |                                           | $    | 12,815,000 |           |  | $ | 14,075,000  |          
|Leasehold improvements                    |                                           |      | 613,000    |           |  |   | 544,000     |          
|Accumulated depreciation and amortization |                                           |      | (8,597,000 | )         |  |   | (10,552,000 | )        
|                                          |                                           |      |            |           |  |   |             |          
|                                          | Equipment and leasehold improvements, net |      | $          | 4,831,000 |  |   | $           | 4,067,000 | 
|                                          |                                           |      |            |           |  |   |             |          



|    |             
|--- | ------------
|(8) | Indebtedness



| |                                                                 
| | ----------------------------------------------------------------
| | Line of Credit, Long-Term Debt and Capital
    Lease Obligations

|                                    |  |              |         |      |  |   |   | 
|----------------------------------- |  | ------------ | ------- | ---- |  | - | - | 
|                                    |  |             
|                                    |  | December 31,
|                                    |  |             
|                                    |  | 2002         |         | 2003
|                                    |  |              |         |     
|Capital lease obligations and other |  |              | 70,000  |      |  |   |  | 
|Less current portion                |  |              | (52,000 | )    |  |   |  | 
|                                    |  |              |         |      |  |   |   | 
|                                    |  | $            | 18,000  |      |  | $ |  | 
|                                    |  |              |         |      |  |   |   | 

The Company has available a $10.0 million
unsecured line of credit consisting of four components:
(i) an acquisition component, (ii) an equipment and
vehicle financing component, (iii) a standby letter of
credit component, and (iv) a working capital component. The
line provides up to a maximum of $5.0 million to finance
acquisitions, up to a maximum of $3.0 million to finance
equipment and vehicle purchases, up to a maximum of
$1.0 million for standby letters of credit, and up to a
maximum of $10.0 million less the aggregate outstanding
principal balance of the acquisition, equipment and vehicle, and
standby letter of credit components for working capital. The
line bears interest at either a range of 0.25% below prime to
prime, or a range of 1.25% to 1.75% over LIBOR depending on the
Companys ability to meet certain financial covenants. All
components of the line of credit mature in June 2005. This line
of credit agreement restricts the payment of dividends without
the banks consent. As of December 31, 2003, the
Company had utilized the letter of credit component of this line
of credit to issue a $229,000 stand-by letter of credit. The
Company did not have any outstanding balances under this line of
credit agreement as of December 31, 2002.

46



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##### Table of Contents



THE KEITH COMPANIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |       
|--- | ------
|(9) | Leases

The Company has several noncancelable operating
leases, primarily for office facilities, that expire through
2009. These facility leases generally contain renewal options
for periods ranging from one to five years and require the
Company to pay costs, including common area maintenance and
insurance charges. Rental expense for operating leases during
2001, 2002 and 2003 totaled $3,109,000, $4,147,000 and
$4,148,000, respectively.

Certain facilities have been subleased and also
provide for reimbursement of various common area maintenance
charges. Rental expense has been reduced for sublease income of
$9,000, $233,000 and $335,000 for the years ended
December 31, 2001, 2002 and 2003, respectively. Future
minimum lease payments as of December 31, 2003 are as
follows:

|                          |            |                                     |   |           |            | 
|------------------------- | ---------- | ----------------------------------- | - | --------- | ---------- | 
|                          |            | Operating                          
|                          |            | Leases                             
|                          |            |                                    
|Years ending December 31: |            |                                     |   |          
|                          | 2004       |                                     | $ | 3,808,000 |           
|                          | 2005       |                                     |   | 3,519,000 |           
|                          | 2006       |                                     |   | 2,553,000 |           
|                          | 2007       |                                     |   | 1,512,000 |           
|                          | 2008       |                                     |   | 1,354,000 |           
|                          | Thereafter |                                     |   | 978,000   |           
|                          |            |                                     |   |          
|                          |            | Total future minimum lease payments |   | $         | 13,724,000 | 
|                          |            |                                     |   |          



|     |                             
|---- | ----------------------------
|(10) | Common Stock and Stock Plans



| |                  
| | -----------------
| | Stock Option Plan

In 1994, TKCI adopted a stock option plan (the
Plan) under which common stock of TKCI was available for grant.
The number of authorized shares to be granted under the Plan is
1,600,000. Under this plan, restricted shares may also be
granted. Stock options have been granted with an exercise price
equal to or greater than the stocks estimated fair market
value at the date of grant. All stock options granted in
connection with the Plan have a ten year term, vest and become
exercisable ratably each year for a period of up to five years
from the grant date. Stock option activity under the Plan during
the periods indicated is as follows:

|                             |           |               |         |                  |   |   |      |       | 
|---------------------------- | --------- | ------------- | ------- | ---------------- | - | - | ---- | ----- | 
|                             |           | Number of     |         | Weighted-Average
|                             |           | Stock Options |         | Exercise Price  
|                             |           |               |         |                 
|Balance at December 31, 2000 |           |               | 872,459 |                  |   | $ | 5.51 |      
|                             | Granted   |               |         | 181,650          |   |   |      | 14.03 | 
|                             | Exercised |               |         | (189,959         | ) |   |      | 3.13  | 
|                             | Forfeited |               |         | (66,338          | ) |   |      | 9.42  | 
|                             |           |               |         |                  |   |   |      |      
|Balance at December 31, 2001 |           |               | 797,812 |                  |   | $ | 7.69 |      
|                             | Granted   |               |         | 115,500          |   |   |      | 13.27 | 
|                             | Exercised |               |         | (29,673          | ) |   |      | 5.37  | 
|                             | Forfeited |               |         | (44,161          | ) |   |      | 13.89 | 
|                             |           |               |         |                  |   |   |      |      

47



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##### Table of Contents



THE KEITH COMPANIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|                             |           |               |         |                  |   |   |      |       | 
|---------------------------- | --------- | ------------- | ------- | ---------------- | - | - | ---- | ----- | 
|                             |           | Number of     |         | Weighted-Average
|                             |           | Stock Options |         | Exercise Price  
|                             |           |               |         |                 
|Balance at December 31, 2002 |           |               | 839,478 |                  |   | $ | 8.21 |      
|                             | Granted   |               |         | 154,500          |   |   |      | 10.03 | 
|                             | Exercised |               |         | (68,888          | ) |   |      | 4.47  | 
|                             | Forfeited |               |         | (54,886          | ) |   |      | 9.35  | 
|                             |           |               |         |                  |   |   |      |      
|Balance at December 31, 2003 |           |               | 870,204 |                  |   | $ | 8.76 |      
|                             |           |               |         |                  |   |   |      |      

The weighted average remaining contractual life
and weighted average exercise price of stock options outstanding
and exercisable as of December 31, 2003, were as follows:

|                 |  |               |         |                  |  |          |      |               |  |          |       |  |  |  |         |  |  |   |       | 
|---------------- |  | ------------- | ------- | ---------------- |  | -------- | ---- | ------------- |  | -------- | ----- |  |  |  | ------- |  |  | - | ----- | 
|                 |  |               |         |                 
|                 |  | Outstanding   |         | Exercisable     
|                 |  |               |         |                 
|                 |  |               |         | Weighted         |  |          |      |              
|                 |  |               |         | Average          |  | Weighted |      |               |  | Weighted
|                 |  | Number of     |         | Remaining        |  | Average  |      | Number of     |  | Average 
|Range of         |  | Stock Options |         | Contractual Life |  | Exercise |      | Stock Options |  | Exercise
|Exercise Prices  |  | Outstanding   |         | (Years)          |  | Price    |      | Exercisable   |  | Price   
|                 |  |               |         |                  |  |          |      |               |  |         
|$2.70 to $5.12   |  |               | 244,383 |                  |  |          | 4.61 |               |  | $        | 3.64  |  |  |  | 195,283 |  |  | $ | 3.36  | 
|$5.31 to $9.90   |  |               | 305,421 |                  |  |          | 5.83 |               |  |          | 8.74  |  |  |  | 232,705 |  |  |   | 8.68  | 
|$10.01 to $22.00 |  |               | 320,400 |                  |  |          | 8.60 |               |  |          | 12.68 |  |  |  | 52,860  |  |  |   | 15.11 | 
|                 |  |               |         |                  |  |          |      |               |  |          |       |  |  |  |         |  |  |   |       | 
|                 |  |               | 870,204 |                  |  |          | 6.51 |               |  | $        | 8.76  |  |  |  | 480,848 |  |  | $ | 7.23  | 
|                 |  |               |         |                  |  |          |      |               |  |          |       |  |  |  |         |  |  |   |       | 

At December 31, 2001, 2002 and 2003, the
number of shares of common stock subject to exercisable stock
options were 296,328, 412,972 and 480,848, respectively, and the
weighted-average exercise prices of those stock options were
$5.54, $6.22 and $7.23, respectively.

In 2003, 20,000 restricted shares were granted to
certain employees which vest over a 3 year period. The fair
value of the restricted shares at the date of grant was
$205,000. The deferred compensation of $205,000 is being
expensed ratably over the vesting period to compensation expense
and resulted in $23,000 of compensation expense, net of taxes,
during 2003.

At December 31, 2003 there were 380,658
stock options and restricted shares available for grant under
the Plan.



| |               
| | --------------
| | Stock Warrants

The Company issued stock warrants to purchase
150,000 shares of the Companys common stock in
connection with the acquisitions of Thompson-Hysell, Inc., John
M. Tettemer and Associates, Ltd., and ESI, Engineering Services
Incorporated. Warrants were generally granted with an exercise
price equal to or greater than the underlying stocks
estimated fair market value at the date of grant, vested
immediately and were exercisable at any time until the
expiration date. All warrants were exercised as of
December 31, 2001.



|     |                       
|---- | ----------------------
|(11) | Employee Benefit Plans

The Company has a defined contribution 401(k)
plan covering a majority of its employees. This plan is designed
to be tax deferred in accordance with the provisions of
Section 401(k) of the Internal Revenue Code. Employees may
contribute from 1% to 50%, subject to limitations, of
compensation on a tax-deferred basis through a salary reduction
arrangement. The Companys employer contribution is 100% of
the first 3%, plus 50% of the next 2% of employee contributions,
vesting immediately. During 2001, 2002 and 2003, the Company
incurred $1,020,000, $1,444,000 and $1,423,000, respectively,
related to its 401(k) plans, which represented the
Companys entire obligations under the employer matching
contribution program for the years ended December 31, 2001,
2002 and 2003.

48



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##### Table of Contents



THE KEITH COMPANIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|     |             
|---- | ------------
|(12) | Income Taxes

The provision for income taxes consists of the
following:

|                                                          |                                  |                          |           |           |           |      |           |           |           |   |           |           |           |  
|--------------------------------------------------------- | -------------------------------- | ------------------------ | --------- | --------- | --------- | ---- | --------- | --------- | --------- | - | --------- | --------- | --------- | -
|                                                          |                                  |                         
|                                                          |                                  | Years Ended December 31,
|                                                          |                                  |                         
|                                                          |                                  | 2001                     |           | 2002      |           | 2003
|                                                          |                                  |                          |           |           |           |     
|Current:                                                  |                                  |                          |           |           |           |      |           |           |           |   |           |          
|                                                          | Federal                          |                          | $         | 2,701,000 |           |      | $         | 3,738,000 |           |   | $         | 4,347,000 |          
|                                                          | State                            |                          |           | 700,000   |           |      |           | 899,000   |           |   |           | 929,000   |          
|                                                          | Foreign                          |                          |           |          |           |      |           |          |           |   |           | 77,000    |          
|                                                          |                                  |                          |           |           |           |      |           |           |           |   |           |          
|                                                          |                                  | Subtotal                 |           |           | 3,401,000 |      |           |           | 4,637,000 |   |           |           | 5,353,000 |  
|                                                          |                                  |                          |           |           |           |      |           |           |           |   |           |          
|Deferred:                                                 |                                  |                          |           |           |           |      |           |           |           |   |           |          
|                                                          | Federal                          |                          |           | 267,000   |           |      |           | 276,000   |           |   |           | (608,000  | )        
|                                                          | State                            |                          |           | 39,000    |           |      |           | 79,000    |           |   |           | (128,000  | )        
|                                                          |                                  |                          |           |           |           |      |           |           |           |   |           |          
|                                                          |                                  | Subtotal                 |           |           | 306,000   |      |           |           | 355,000   |   |           |           | (736,000  | )
|                                                          |                                  |                          |           |           |           |      |           |           |           |   |           |          
|                                                          |                                  | Total                    |           | $         | 3,707,000 |      |           | $         | 4,992,000 |   |           | $         | 4,617,000 |  
|                                                          |                                  |                          |           |           |           |      |           |           |           |   |           |          
|Provision for income taxes from continuing
    operations |                                  | $                        | 3,916,000 |           |           | $    | 5,397,000 |           |           | $ | 4,617,000 |          
|Provision (benefit) from discontinued operations          |                                  |                          | (209,000  | )         |           |      | (405,000  | )         |           |   |          |          
|                                                          |                                  |                          |           |           |           |      |           |           |           |   |           |          
|                                                          | Total provision for income taxes |                          | $         | 3,707,000 |           |      | $         | 4,992,000 |           |   | $         | 4,617,000 |          
|                                                          |                                  |                          |           |           |           |      |           |           |           |   |           |          

A reconciliation of income tax expense at the
federal statutory rate of 34% to the Companys provision
for income taxes is as follows:

|                                                                |       |                          |           |         |   |      |           |        |   |   |           |        | 
|--------------------------------------------------------------- | ----- | ------------------------ | --------- | ------- | - | ---- | --------- | ------ | - | - | --------- | ------ | 
|                                                                |       |                         
|                                                                |       | Years Ended December 31,
|                                                                |       |                         
|                                                                |       | 2001                     |           | 2002    |   | 2003
|                                                                |       |                          |           |         |   |     
|Computed expected federal income tax
    expense              |       | $                        | 3,432,000 |         |   | $    | 4,704,000 |        |   | $ | 4,025,000 |       
|State income tax expense, net of federal income
    tax benefit |       |                          | 513,000   |         |   |      | 699,000   |        |   |   | 533,000   |       
|                                                                | Other |                          |           | (29,000 | ) |      |           | (6,000 | ) |   |           | 59,000 | 
|                                                                |       |                          |           |         |   |      |           |        |   |   |           |       
|                                                                |       | $                        | 3,916,000 |         |   | $    | 5,397,000 |        |   | $ | 4,617,000 |       
|                                                                |       |                          |           |         |   |      |           |        |   |   |           |       

Current income tax expense does not reflect a
$879,000, $89,000 and $69,000 tax benefit related to the
exercise of employee stock options during 2001, 2002 and 2003,
respectively. The tax benefit related to the exercise of
employee stock options was recorded to additional paid-in
capital in the accompanying consolidated statements of
shareholders equity.

49



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##### Table of Contents



THE KEITH COMPANIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The tax effects of temporary differences that
give rise to significant portions of deferred tax assets and
liabilities are as follows:

|                          |                                                    |                                |   |           |           |  |   |           |           | 
|------------------------- | -------------------------------------------------- | ------------------------------ | - | --------- | --------- |  | - | --------- | --------- | 
|                          |                                                    |                               
|                          |                                                    | December 31,                  
|                          |                                                    |                               
|                          |                                                    | 2002                           |   | 2003     
|                          |                                                    |                                |   |          
|Deferred tax assets:      |                                                    |                                |   |           |           |  |   |          
|                          | Accrued liabilities and employee compensation      |                                | $ | 401,000   |           |  | $ | 578,000   |          
|                          | Billings in excess of costs and estimated earnings |                                |   | 497,000   |           |  |   | 613,000   |          
|                          | Allowance for doubtful accounts                    |                                |   | 529,000   |           |  |   | 470,000   |          
|                          | State tax                                          |                                |   | 220,000   |           |  |   | 301,000   |          
|                          | Other                                              |                                |   | 267,000   |           |  |   | 190,000   |          
|                          |                                                    |                                |   |           |           |  |   |          
|                          |                                                    | Total deferred tax assets      |   |           | 1,914,000 |  |   |           | 2,152,000 | 
|                          |                                                    |                                |   |           |           |  |   |          
|Deferred tax liabilities: |                                                    |                                |   |           |           |  |   |          
|                          | Equipment and improvements, net                    |                                |   | 363,000   |           |  |   | 270,000   |          
|                          | Section 481, change from cash to accrual           |                                |   | 1,175,000 |           |  |   | 692,000   |          
|                          | Costs and estimated earnings in excess of billings |                                |   | 4,056,000 |           |  |   | 3,902,000 |          
|                          | Goodwill amortization                              |                                |   | 584,000   |           |  |   | 833,000   |          
|                          | Prepaid expenses                                   |                                |   | 236,000   |           |  |   | 248,000   |          
|                          | Other                                              |                                |   | 240,000   |           |  |   | 211,000   |          
|                          |                                                    |                                |   |           |           |  |   |          
|                          |                                                    | Total deferred tax liabilities |   |           | 6,654,000 |  |   |           | 6,156,000 | 
|                          |                                                    |                                |   |           |           |  |   |          
|                          |                                                    | Net deferred tax liabilities   |   | $         | 4,740,000 |  |   | $         | 4,004,000 | 
|                          |                                                    |                                |   |           |           |  |   |          

The Company considers recording a valuation
allowance in accordance with the provisions of
SFAS No. 109 to reflect the estimated amount of
deferred tax assets which may not be realized. In assessing the
realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which
those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in
making this assessment, and believes it is more likely than not
the Company will realize the benefits of its deferred tax assets.

As of December 31, 2003, the Company had no
federal or state net operating loss carryforwards available to
offset future taxable income.



|     |                                
|---- | -------------------------------
|(13) | Segment and Related Information

The Company evaluates performance and makes
resource allocation decisions based on the overall type of
services provided to customers. For financial reporting
purposes, the Company has grouped its operations into two
reportable segments: Real Estate Development and Public Works/
Infrastructure (REPWI) and Energy/ Industrial
(EI). The REPWI segment primarily provides
engineering and consulting services for the development of both
private projects (such as residential communities, commercial
and industrial properties and recreational projects), and public
works/ infrastructure projects (such as transportation and
water/ sewage facilities). The EI segment provides the technical
expertise and management required to design and test
manufacturing facilities and processes and to facilitate the
construction, through design, testing, and startup support of
primary and alternate electrical power systems for power
generators and large scale power consumers.

50



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##### Table of Contents



THE KEITH COMPANIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The acquisition of Hook in January 2001 and ALNM
in March 2002 are reported as part of the Companys REPWI
reporting segment, while the acquisition of PEC in September
2001 and UEI in November 2001 are reported as part of the
Companys EI reporting segment.

The following tables set forth information
regarding the Companys operating segments as of and for
the years ended December 31, 2001, 2002 and 2003:

|                                  |  |                              |            |           |  |       |            |              |  |   |            |   |  |   |            |  
|--------------------------------- |  | ---------------------------- | ---------- | --------- |  | ----- | ---------- | ------------ |  | - | ---------- | - |  | - | ---------- | -
|                                  |  |                             
|                                  |  | Year Ended December 31, 2001
|                                  |  |                             
|                                  |  |                              |            | Corporate |  |      
|                                  |  | REPWI                        |            | EI        |  | Costs |            | Consolidated
|                                  |  |                              |            |           |  |       |            |             
|Net revenue                       |  | $                            | 60,069,000 |           |  | $     | 6,775,000  |              |  | $ |           |   |  | $ | 66,844,000 |  
|Income from operations            |  | $                            | 15,016,000 |           |  | $     | 1,271,000  |              |  | $ | (6,428,000 | ) |  | $ | 9,859,000  |  
|Loss from discontinued operations |  | $                            | (538,000   | )         |  | $     |           |              |  | $ |           |   |  | $ | (538,000   | )
|Identifiable assets               |  | $                            | 58,994,000 |           |  | $     | 12,498,000 |              |  | $ |           |   |  | $ | 71,492,000 |  

|                                  |  |                              |            |           |  |       |            |              |  |   |            |   |  |   |            |  
|--------------------------------- |  | ---------------------------- | ---------- | --------- |  | ----- | ---------- | ------------ |  | - | ---------- | - |  | - | ---------- | -
|                                  |  |                             
|                                  |  | Year Ended December 31, 2002
|                                  |  |                             
|                                  |  |                              |            | Corporate |  |      
|                                  |  | REPWI                        |            | EI        |  | Costs |            | Consolidated
|                                  |  |                              |            |           |  |       |            |             
|Net revenue                       |  | $                            | 71,208,000 |           |  | $     | 20,390,000 |              |  | $ |           |   |  | $ | 91,598,000 |  
|Income from operations            |  | $                            | 16,560,000 |           |  | $     | 3,961,000  |              |  | $ | (7,744,000 | ) |  | $ | 12,777,000 |  
|Loss from discontinued operations |  | $                            | (1,033,000 | )         |  | $     |           |              |  | $ |           |   |  | $ | (1,033,000 | )
|Identifiable assets               |  | $                            | 71,850,000 |           |  | $     | 10,376,000 |              |  | $ |           |   |  | $ | 82,226,000 |  

|                                  |  |                              |            |           |  |       |            |              |  |   |            |   |  |   |            | 
|--------------------------------- |  | ---------------------------- | ---------- | --------- |  | ----- | ---------- | ------------ |  | - | ---------- | - |  | - | ---------- | 
|                                  |  |                             
|                                  |  | Year Ended December 31, 2003
|                                  |  |                             
|                                  |  |                              |            | Corporate |  |      
|                                  |  | REPWI                        |            | EI        |  | Costs |            | Consolidated
|                                  |  |                              |            |           |  |       |            |             
|Net revenue                       |  | $                            | 78,430,000 |           |  | $     | 12,314,000 |              |  | $ |           |   |  | $ | 90,744,000 | 
|Income from operations            |  | $                            | 19,070,000 |           |  | $     | 827,000    |              |  | $ | (8,582,000 | ) |  | $ | 11,315,000 | 
|Loss from discontinued operations |  | $                            |           |           |  | $     |           |              |  | $ |           |   |  | $ |           | 
|Identifiable assets               |  | $                            | 78,342,000 |           |  | $     | 9,194,000  |              |  | $ |           |   |  | $ | 87,536,000 | 



| |                        
| | -----------------------
| | Business Concentrations

In 2001, 2002 and 2003, the Company had no
customers which represented greater than 10% of consolidated net
revenue. No customers represented greater than 10% of net
contract and trade receivables at December 31, 2002 and
2003.



|     |                                    
|---- | -----------------------------------
|(14) | Fair Value of Financial Instruments

The carrying amounts of the Companys
financial instruments reported in the accompanying consolidated
balance sheets for cash and cash equivalents, securities
held-to-maturity, contracts and trade receivables, costs and
estimated earnings in excess of billings, trade accounts
payable, accrued employee compensation, other accrued
liabilities, and billings in excess of costs and estimated
earnings approximate their fair values due to the short-term
nature of these instruments.

51



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##### Table of Contents



THE KEITH COMPANIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|     |                                   
|---- | ----------------------------------
|(15) | Supplemental Cash Flow Information

|                                                  |                                             |                                                            |   |           |         |      |   |           |           |  |   |           |         | 
|------------------------------------------------- | ------------------------------------------- | ---------------------------------------------------------- | - | --------- | ------- | ---- | - | --------- | --------- |  | - | --------- | ------- | 
|                                                  |                                             |                                                           
|                                                  |                                             | Years Ended December 31,                                  
|                                                  |                                             |                                                           
|                                                  |                                             | 2001                                                       |   | 2002      |         | 2003
|                                                  |                                             |                                                            |   |           |         |     
|Supplemental disclosure of cash flow information: |                                             |                                                            |   |           |         |      |   |           |           |  |   |          
|                                                  | Cash paid during the year for interest      |                                                            | $ | 275,000   |         |      | $ | 34,000    |           |  | $ | 16,000    |        
|                                                  |                                             |                                                            |   |           |         |      |   |           |           |  |   |          
|                                                  | Cash paid during the year for income taxes  |                                                            | $ | 1,661,000 |         |      | $ | 3,808,000 |           |  | $ | 6,152,000 |        
|                                                  |                                             |                                                            |   |           |         |      |   |           |           |  |   |          
|                                                  | Noncash financing and investing activities: |                                                            |   |           |         |      |   |           |           |  |   |           |        
|                                                  |                                             | Purchase price adjustment to issuable common stock         |   | $         |        |      |   | $         | 715,000   |  |   | $         | 708,000 | 
|                                                  |                                             |                                                            |   |           |         |      |   |           |           |  |   |          
|                                                  |                                             | Cancellation of note payable                               |   | $         |        |      |   | $         | 1,300,000 |  |   | $         |        | 
|                                                  |                                             |                                                            |   |           |         |      |   |           |           |  |   |          
|                                                  |                                             | Purchase price adjustment to other accrued
    liabilities |   | $         |        |      |   | $         | 890,000   |  |   | $         |        | 
|                                                  |                                             |                                                            |   |           |         |      |   |           |           |  |   |          
|                                                  |                                             | Cancellation of issuable common stock                      |   | $         |        |      |   | $         | 1,490,000 |  |   | $         |        | 
|                                                  |                                             |                                                            |   |           |         |      |   |           |           |  |   |          
|                                                  |                                             | Issuable common stock issued                               |   | $         | 688,000 |      |   | $         | 1,822,000 |  |   | $         | 714,000 | 
|                                                  |                                             |                                                            |   |           |         |      |   |           |           |  |   |          

The initial purchase price allocation related to
the acquisitions of Hook, PEC and UEI in 2001 and ALNM in 2002
resulted in the following increases:

|                                                                       |  |      |            |      |  |   |            |  
|---------------------------------------------------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | -
|                                                                       |  | 2001 |            | 2002
|                                                                       |  |      |            |     
|Contracts and trade receivables                                        |  | $    | (7,187,000 | )    |  | $ | (3,208,000 | )
|Costs and estimated earnings in excess of billings                     |  |      | (129,000   | )    |  |   | (843,000   | )
|Prepaid expenses and other current assets                              |  |      | (34,000    | )    |  |   | (124,000   | )
|Goodwill                                                               |  |      | (6,479,000 | )    |  |   | (8,421,000 | )
|Equipment and leasehold improvements                                   |  |      | (745,000   | )    |  |   | (492,000   | )
|Other assets                                                           |  |      | (116,000   | )    |  |   | (87,000    | )
|Line of credit                                                         |  |      | 269,000    |      |  |   |           |  
|Billings in excess of costs and estimated earnings                     |  |      | 1,723,000  |      |  |   |           |  
|Long-term debt, including current portion                              |  |      | 1,720,000  |      |  |   |           |  
|Accounts payable, accrued expenses and other
    liabilities           |  |      | 3,210,000  |      |  |   | 1,046,000  |  
|Deferred tax liabilities                                               |  |      | 734,000    |      |  |   | 1,532,000  |  
|Issuable common stock                                                  |  |      | 1,200,000  |      |  |   | 3,300,000  |  
|                                                                       |  |      |            |      |  |   |            |  
|Net initial cash expended for acquisitions                             |  | $    | (5,834,000 | )    |  | $ | (7,297,000 | )
|Additional cash expended during the year for
    previous acquisitions |  |      |           |      |  |   | (751,000   | )
|                                                                       |  |      |            |      |  |   |            |  
|Cash expended for acquisitions                                         |  | $    | (5,834,000 | )    |  | $ | (8,048,000 | )
|                                                                       |  |      |            |      |  |   |            |  

52



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##### Table of Contents



THE KEITH COMPANIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|     |                                  
|---- | ---------------------------------
|(16) | Valuation and Qualifying Accounts

For the years ending December 31, 2001, 2002
and 2003, the following is supplementary information regarding
valuation and qualifying accounts:

|                                 |      |              |   |               |  |            |   |                |   |  |   |          |   |  |   |           | 
|-------------------------------- | ---- | ------------ | - | ------------- |  | ---------- | - | -------------- | - |  | - | -------- | - |  | - | --------- | 
|                                 |      | Balance at   |   | Provision for |  |            |   |               
|                                 |      | Beginning of |   | Doubtful      |  |            |   | Balance at End
|                                 |      | Period       |   | Accounts      |  | Deductions |   | of Period     
|                                 |      |              |   |               |  |            |   |               
|Allowance for doubtful accounts: |      |              |   |               |  |            |   |                |   |  |   |          |   |  |   |          
|                                 | 2001 |              | $ | 1,166,000     |  |            | $ | (112,000       | ) |  | $ | (103,000 | ) |  | $ | 951,000   | 
|                                 | 2002 |              | $ | 951,000       |  |            | $ | 467,000        |   |  | $ | (295,000 | ) |  | $ | 1,123,000 | 
|                                 | 2003 |              | $ | 1,123,000     |  |            | $ | 483,000        |   |  | $ | (278,000 | ) |  | $ | 1,328,000 | 



|     |                              
|---- | -----------------------------
|(17) | Commitments and Contingencies

The Company is also involved in various legal
proceedings that arise in the ordinary course of business. Based
on the Companys experience, the nature of our current
proceedings and our insurance coverage for such matters, the
ultimate disposition of these matters should not have a material
adverse effect on the Companys financial position,
liquidity or results of operations.



|     |                
|---- | ---------------
|(18) | Related Parties

The Company entered into change in control
agreements with Aram H. Keith, our chief executive officer and
chairman of the board, Eric C. Nielsen, our president and chief
operating officer, and Gary C. Campanaro, our chief financial
officer, secretary and a director of our company. These
agreements provide that if the executive officers
employment with us terminates as a result of an involuntary or
constructive termination (as these terms are defined in the
agreements) at any time within two years following a change in
control, then, in addition to other benefits, the executive
officer will receive a one-time payment, equal to two times the
executive officers highest annual level of total cash
compensation (including any and all bonus amounts) paid by us to
that executive officer during any one of the three consecutive
calendar years (inclusive of the year of termination)
immediately prior to termination. The executive officer also is
entitled to receive a payment by us to offset any excise tax
under the Internal Revenue Code of 1986, as amended, that has
been levied against the executive officer for payments that we
have made to him. In addition, any unvested options previously
granted to the executive officer will immediately vest and
become exercisable as of the date of termination and remain
exercisable until their respective expiration dates.



|     |                                                    
|---- | ---------------------------------------------------
|(19) | Supplementary Financial Information
    (Unaudited)

The following is unaudited supplementary
financial information for 2002 and 2003:

|                                                   |  |                             |            |          |  |               |            |              |  |   |            |  |  |   |            | 
|-------------------------------------------------- |  | --------------------------- | ---------- | -------- |  | ------------- | ---------- | ------------ |  | - | ---------- |  |  | - | ---------- | 
|                                                   |  |                            
|                                                   |  | For the Quarters Ended 2002
|                                                   |  |                            
|                                                   |  | March 31,                   |            | June 30, |  | September 30, |            | December 31,
|                                                   |  |                             |            |          |  |               |            |             
|Net revenue                                        |  | $                           | 20,803,000 |          |  | $             | 23,651,000 |              |  | $ | 24,810,000 |  |  | $ | 22,334,000 | 
|Gross profit                                       |  |                             | 7,111,000  |          |  |               | 8,015,000  |              |  |   | 9,019,000  |  |  |   | 7,737,000  | 
|Income from continuing operations                  |  |                             | 1,544,000  |          |  |               | 2,071,000  |              |  |   | 3,024,000  |  |  |   | 1,797,000  | 
|Loss from discontinued operations                  |  |                             | 105,000    |          |  |               | 193,000    |              |  |   | 233,000    |  |  |   | 97,000     | 
|Net income                                         |  |                             | 1,439,000  |          |  |               | 1,878,000  |              |  |   | 2,791,000  |  |  |   | 1,700,000  | 
|Basic earning per share from continuing operations |  | $                           | 0.21       |          |  | $             | 0.28       |              |  | $ | 0.41       |  |  | $ | 0.24       | 

53



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##### Table of Contents



THE KEITH COMPANIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|                                                        |  |                             |            |          |  |               |            |              |  |   |            |  |  |   |            | 
|------------------------------------------------------- |  | --------------------------- | ---------- | -------- |  | ------------- | ---------- | ------------ |  | - | ---------- |  |  | - | ---------- | 
|                                                        |  |                            
|                                                        |  | For the Quarters Ended 2003
|                                                        |  |                            
|                                                        |  | March 31,                   |            | June 30, |  | September 30, |            | December 31,
|                                                        |  |                             |            |          |  |               |            |             
|Net revenue                                             |  | $                           | 22,346,000 |          |  | $             | 22,777,000 |              |  | $ | 22,854,000 |  |  | $ | 22,767,000 | 
|Gross profit                                            |  |                             | 7,404,000  |          |  |               | 7,788,000  |              |  |   | 8,485,000  |  |  |   | 8,230,000  | 
|Income from continuing operations                       |  |                             | 1,398,000  |          |  |               | 1,729,000  |              |  |   | 2,203,000  |  |  |   | 1,891,000  | 
|Net income                                              |  |                             | 1,398,000  |          |  |               | 1,729,000  |              |  |   | 2,203,000  |  |  |   | 1,891,000  | 
|Basic earnings per share from continuing
    operations |  | $                           | 0.18       |          |  | $             | 0.23       |              |  | $ | 0.29       |  |  | $ | 0.25       | 

54



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##### Table of Contents








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

We have had no disagreements on accounting or
financial disclosure matters with our independent auditors.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

We maintain disclosure controls and procedures
that are designed to ensure that information required to be
disclosed in our Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the
SECs rules and forms, and that such information is
accumulated and communicated to our management, including our
chief executive officer and chief financial officer, as
appropriate, to allow timely decisions regarding required
disclosure. As of the end of the period covered by this report,
we carried out an evaluation, under the supervision and with the
participation of our chief executive officer and chief financial
officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on this evaluation,
our chief executive officer and chief financial officer
concluded that our disclosure controls and procedures are
effective in timely alerting them to material information
required to be included in our periodic SEC reports.

In accordance with SEC requirements, our chief
executive officer and chief financial officer note that, since
the date of the most recent evaluation of our disclosure
controls and procedures to the date of our Annual Report on
Form 10-K, there have been no significant changes in our
internal controls or in other factors that could significantly
affect internal controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Our management, including the chief executive
officer and our chief financial officer, does not expect that
our disclosure controls or our internal controls will prevent
all error and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect
the fact that there are resource constraints, and the benefits
of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the
Company have been detected. These inherent limitations include
the realities that judgements in decision-making can be faulty
and that breakdowns can occur because of simple errors or
mistakes. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more
people, or by management override of the control. The design of
any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can
be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions; over time,
controls may become inadequate because of changes in conditions,
or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or
fraud may occur and not be detected.




PART III

The information required by Items 10 through
14 of this report is set forth in the sections entitled
Directors and Executive Officers, Executive
Compensation, Security Ownership of Certain
Beneficial Owners and Management, Certain
Relationships and Related Transactions, and
Principal Accountant Fees and Services in our Proxy
Statement for our 2004 Annual Meeting of Shareholders. That
information is incorporated in this Report and made a part
hereof by reference.

55



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##### Table of Contents






PART IV






|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K

(a) The following documents are filed as
part of this report:



| |                                       
| | --------------------------------------
| | (1) Consolidated Financial Statements.



| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | The following Consolidated Financial Statements
    and the Independent Auditors Report are on pages 34
    through 54 hereof:
|
| | Independent Auditors Reports.                                                                                                 
|
| | Consolidated Balance Sheets as of
    December 31, 2002 and 2003                                                               
|
| | Consolidated Statements of Income for the years
    ended December 31, 2001, 2002 and 2003                                     
|
| | Consolidated Statements of Shareholders
    Equity for the years ended December 31, 2001, 2002 and 2003                       
|
| | Consolidated Statements of Cash Flows for the
    years ended December 31, 2001, 2002 and 2003                                 
|
| | Notes to Consolidated Financial Statements                                                                                     



| |                                   
| | ----------------------------------
| | (2) Financial Statement Schedules.



| |                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | All Financial Statement Schedules have been
    omitted because they are not applicable or because the
    applicable disclosures have been included in the Consolidated
    Financial Statements or in the Notes thereto.



| |              
| | -------------
| | (3) Exhibits.

|        |       |             |  |                                                                                                                                                                                                                                                                                                                               
|------- | ----- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 3.1   |             |  | Amended and Restated Articles of Incorporation of
    the registrant (incorporated herein by this reference to
    Exhibit 3.1 to the registrants registration statement
    of Form S-1, registration number 333-77273).                                                                                                    
|        | 3.2   |             |  | Amended and Restated Bylaws of the registrant
    (incorporated herein by this reference to Exhibit 3.1 to
    the registrants quarterly report on Form 10-Q for the
    period ended June 30, 2001).                                                                                                                        
|        | 4.1   |             |  | Amended and Restated 1994 Stock Incentive Plan
    (incorporated herein by this reference to Exhibit 4.1 to
    the registrants registration statement on Form S-8,
    registration Number 333-61312).                                                                                                                      
|        | 10.14 |             |  | Severance Agreement between the registrant and
    Aram H. Keith (incorporated herein by this reference to
    Exhibit 10.14 to the registrants annual report on
    Form 10-K for the period ended December 31, 2001).                                                                                                      
|        | 10.15 |             |  | Severance Agreement between the registrant and
    Eric C. Nielsen (incorporated herein by this reference to
    Exhibit 10.15 to the registrants annual report on
    Form 10-K for the period ended December 31, 2001).                                                                                                    
|        | 10.16 |             |  | Severance Agreement between the registrant and
    Gary C. Campanaro (incorporated herein by this reference to
    Exhibit 10.16 to the registrants annual report on
    Form 10-K for the period ended December 31, 2001).                                                                                                  
|        | 10.17 |             |  | Fourth Amendment to Credit Agreement dated
    January 31, 2001 by and between the Registrant, HEA
    Acquisition, Inc. and Wells Fargo Bank, National Association
    (incorporated herein by this reference to Exhibit 10.17 to
    the registrants quarterly report on Form 10-Q for the
    period ended June 30, 2001).
|        | 10.18 |             |  | Fifth Amendment to Credit Agreement dated
    April 27, 2001 by and between the Registrant, HEA
    Acquisition, Inc. and Wells Fargo Bank, National Association
    (incorporated herein by this reference to Exhibit 10.18 to
    the registrants quarterly report on Form 10-Q for the
    period ended June 30, 2001).   

56



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##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                                                                                                         
|------- | ----- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.19 |             |  | Credit Agreement dated September 4, 2001 by
    and between the Registrant and Wells Fargo Bank, National
    Association (incorporated herein by this reference to
    Exhibit 10.19 to the registrants quarterly report on
    Form 10-Q for the period ended September 30, 2001).   
|        | 10.20 |             |  | Line of Credit Note dated September 4, 2001
    by and between the Registrant and Wells Fargo Bank, National
    Association (incorporated herein by this reference to
    Exhibit 10.20 to the registrants quarterly report on
    Form 10-Q for the period ended September 30, 2001).
|        | 10.21 |             |  | Third Amendment to Credit Agreement Dated
    September 4, 2001 by and between the Registrant and Wells
    Fargo Bank, National Association                                                                                                                                            
|        | 21.0  |             |  | List of Subsidiaries*                                                                                                                                                                                                                                                                   
|        | 23.1  |             |  | Consent of Independent Auditors*                                                                                                                                                                                                                                                        
|        | 31.1  |             |  | Certification of Chief Executive Officer Pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002 Dated
    March 8, 2004                                                                                                                                                          
|        | 31.2  |             |  | Certification of Chief Financial Officer Pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002 Dated
    March 8, 2004                                                                                                                                                          
|        | 32.1  |             |  | Certification of Chief Executive Officer Pursuant
    to 18 U.S.C. Section 1350, as Adopted Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002 Dated
    March 8, 2004                                                                                                       
|        | 32.2  |             |  | Certification of Chief Financial Officer Pursuant
    to 18 U.S.C. Section 1350, as Adopted Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002 Dated
    March 8, 2004                                                                                                       



---



|  |                
|- | ---------------
|* | Filed herewith.

(b) Reports on Form 8-K.

On November 6, 2003 we filed a Current
Report on Form 8-K, Items 5 and 12, relating to a
press release announcing 2003 Third Quarter Results and Earnings
Guidance.

On February 12, 2004, we filed a Current
Report on Form 8-K, Items 5 and 12, relating to a
press release announcing 2003 Year End Results and Earnings
Guidance.

57



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934,
The Keith Companies, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.



| |                          
| | -------------------------
| | THE KEITH COMPANIES, INC.



| |     |                  
| | --- | -----------------
| | By: | /s/ ARAM H. KEITH

| |                        
| | -----------------------
| |                        
| | Aram H. Keith          
| | Chief Executive Officer

March 8, 2004

KNOWN BY ALL MEN THESE PRESENTS, that each person
whose signature appears below constitutes and appoints Aram H.
Keith and Gary C. Campanaro, or any one of them, his
attorney-in-fact and agents with full power of substitution and
re-substitution, for him and his name, place and stead, in any
and all capacities, to sign any or all amendments to this
Form 10-K and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to
be done in and about the foregoing, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either
of them, or their substitutes, may lawfully do or cause to be
done by virtue hereof.

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following on behalf of The Keith Companies, Inc. and in the
capacities and on the date indicated.

|                                       |  |                                                                                                  |  |               |  | 
|-------------------------------------- |  | ------------------------------------------------------------------------------------------------ |  | ------------- |  | 
|                                       |  |                                                                                                  |  |              
|Signature                              |  | Title                                                                                            |  | Date         
|                                       |  |                                                                                                  |  |              
|                                      
|/s/ ARAM H. KEITHAram H. Keith         |  | Chief Executive Officer, Chairman of the Board
    and Director (Principal Executive Officer)    |  | March 8, 2004
|                                      
|/s/ GARY C. CAMPANAROGary C. Campanaro |  | Chief Financial Officer, Secretary and Director
    (Principal Financial and Accounting Officer) |  | March 8, 2004
|                                      
|/s/ GEORGE DEUKMEJIANGeorge Deukmejian |  | Director                                                                                         |  | March 8, 2004
|                                      
|/s/ CHRISTINE D. IGERChristine D. Iger |  | Director                                                                                         |  | March 8, 2004
|                                      
|/s/ EDWARD R. MULLEREdward R. Muller   |  | Director                                                                                         |  | March 8, 2004

58



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##### Table of Contents



EXHIBIT INDEX


|        |       |             |  |                                                                                                                                                                                                                                                                                                                               
|------- | ----- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 3.1   |             |  | Amended and Restated Articles of Incorporation of
    the registrant (incorporated herein by this reference to
    Exhibit 3.1 to the registrants registration statement
    of Form S-1, registration number 333-77273).                                                                                                    
|        | 3.2   |             |  | Amended and Restated Bylaws of the registrant
    (incorporated herein by this reference to Exhibit 3.1 to
    the registrants quarterly report on Form 10-Q for the
    period ended June 30, 2001).                                                                                                                        
|        | 4.1   |             |  | Amended and Restated 1994 Stock Incentive Plan
    (incorporated herein by this reference to Exhibit 4.1 to
    the registrants registration statement on Form S-8,
    registration Number 333-61312).                                                                                                                      
|        | 10.14 |             |  | Severance Agreement between the registrant and
    Aram H. Keith (incorporated herein by this reference to
    Exhibit 10.14 to the registrants annual report on
    Form 10-K for the period ended December 31, 2001).                                                                                                      
|        | 10.15 |             |  | Severance Agreement between the registrant and
    Eric C. Nielsen (incorporated herein by this reference to
    Exhibit 10.15 to the registrants annual report on
    Form 10-K for the period ended December 31, 2001).                                                                                                    
|        | 10.16 |             |  | Severance Agreement between the registrant and
    Gary C. Campanaro (incorporated herein by this reference to
    Exhibit 10.16 to the registrants annual report on
    Form 10-K for the period ended December 31, 2001).                                                                                                  
|        | 10.17 |             |  | Fourth Amendment to Credit Agreement dated
    January 31, 2001 by and between the Registrant, HEA
    Acquisition, Inc. and Wells Fargo Bank, National Association
    (incorporated herein by this reference to Exhibit 10.17 to
    the registrants quarterly report on Form 10-Q for the
    period ended June 30, 2001).
|        | 10.18 |             |  | Fifth Amendment to Credit Agreement dated
    April 27, 2001 by and between the Registrant, HEA
    Acquisition, Inc. and Wells Fargo Bank, National Association
    (incorporated herein by this reference to Exhibit 10.18 to
    the registrants quarterly report on Form 10-Q for the
    period ended June 30, 2001).   
|        | 10.19 |             |  | Credit Agreement dated September 4, 2001 by
    and between the Registrant and Wells Fargo Bank, National
    Association (incorporated herein by this reference to
    Exhibit 10.19 to the registrants quarterly report on
    Form 10-Q for the period ended September 30, 2001).                                         
|        | 10.20 |             |  | Line of Credit Note dated September 4, 2001
    by and between the Registrant and Wells Fargo Bank, National
    Association (incorporated herein by this reference to
    Exhibit 10.20 to the registrants quarterly report on
    Form 10-Q for the period ended September 30, 2001).                                      
|        | 10.21 |             |  | Third Amendment to Credit Agreement Dated
    September 4, 2001 by and between the Registrant and Wells
    Fargo Bank, National Association                                                                                                                                                                                  
|        | 21.0  |             |  | List of Subsidiaries*                                                                                                                                                                                                                                                                                                         
|        | 23.1  |             |  | Consent of Independent Auditors*                                                                                                                                                                                                                                                                                              
|        | 31.1  |             |  | Certification of Chief Executive Officer Pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002 Dated
    March 8, 2004                                                                                                                                                                                                
|        | 31.2  |             |  | Certification of Chief Financial Officer Pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002 Dated
    March 8, 2004                                                                                                                                                                                                
|        | 32.1  |             |  | Certification of Chief Executive Officer Pursuant
    to 18 U.S.C. Section 1350, as Adopted Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002 Dated
    March 8, 2004                                                                                                                                             
|        | 32.2  |             |  | Certification of Chief Financial Officer Pursuant
    to 18 U.S.C. Section 1350, as Adopted Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002 Dated
    March 8, 2004                                                                                                                                             



---



|  |                
|- | ---------------
|* | Filed herewith.

59