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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,
2002

Commission File Number 0-26561




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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 25, 2003 was
7,518,110 shares. Based on the closing sale price on the NASDAQ
National Market on June 28, 2002, the aggregate market
value of the registrants common stock held by
non-affiliates was approximately $91,100,000.(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 20, 2003.



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|    |                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | For 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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TABLE OF CONTENTS



|             |                                                                                               |                                          |                                  |  |  |  |  | 
|------------ | --------------------------------------------------------------------------------------------- | ---------------------------------------- | -------------------------------- |  |  |  |  | 
|PART I      
|             | Item 1. Business                                                                             
|             | Item 2. Properties                                                                           
|             | Item 3. Legal Proceedings                                                                    
|             | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II     
|             | Item 5. Market for Our Common Equity and Related Stockholder Matters                         
|             | Item 6. Selected Financial Data                                                              
|             | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|             | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|             | Item 8. Consolidated Financial Statements and Supplementary Data                             
|             | Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 
|PART III    
|             | Item 10. Directors and Executive Officers                                                    
|             | Item 11. Executive Compensation                                                              
|             | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|             | Item 13. Certain Relationships and Related Transactions                                      
|             | Item 14. Controls and Procedures                                                             
|PART IV     
|             | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|             |                                                                                               | (a) 1. Consolidated Financial Statements
|             |                                                                                               |                                          | 2. Financial Statement Schedules
|             |                                                                                               |                                          | 3. Exhibits                     
|             |                                                                                               | (b) Reports on Form 8-K                 
|SIGNATURES  
|EXHIBIT 21.0
|EXHIBIT 23.1
|EXHIBIT 99.1
|EXHIBIT 99.2



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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                                                                         |    |      | 12 | 
|Item 4.    |  | Submission of Matters to a Vote of Security
    Holders                                   |    |      | 12 | 
|PART II   
|Item 5.    |  | Market for Our Common Equity and Related
    Stockholder Matters                          |    |      | 13 | 
|Item 6.    |  | Selected Financial Data                                                                   |    |      | 14 | 
|Item 7.    |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |    |      | 15 | 
|Item 7A.   |  | Quantitative and Qualitative Disclosures About
    Market Risk                            |    |      | 29 | 
|Item 8.    |  | Consolidated Financial Statements and
    Supplementary Data                              |    |      | 31 | 
|Item 9.    |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure  |    |      | 53 | 
|PART III  
|Item 10.   |  | Directors and Executive Officers                                                          |    |      | 53 | 
|Item 11.   |  | Executive Compensation                                                                    |    |      | 53 | 
|Item 12.   |  | Security Ownership of Certain Beneficial Owners
    and Management                        |    |      | 53 | 
|Item 13.   |  | Certain Relationships and Related Transactions                                            |    |      | 53 | 
|Item 14.   |  | Controls and Procedures                                                                   |    |      | 53 | 
|PART IV   
|Item 15.   |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                       |    |      | 53 | 
|(a)        |  | 1.  Consolidated Financial Statements                                                     |    |      | 53 | 
|           |  | 2.  Financial Statement Schedules                                                         |    |      | 53 | 
|           |  | 3.  Exhibits                                                                              |    |      | 54 | 
|(b)        |  | Reports on Form 8-K                                                                       |    |      | 54 | 
|Signatures |  |                                                                                           | 55 |     

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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 among others:



| |   |                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------
| |  | forecasts of earnings, revenue or other financial
    items;                                                                
|
| |  | anticipated growth in the real estate
    development, public works/ infrastructure and the industrial/
    energy industry;
|
| |  | our business strategy for expanding our presence
    in these industries;                                                   
|
| |  | anticipated growth and economic expansion in the
    western 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 distribute and 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 industrial/ energy 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:

(FLOW CHART)

From 1998 through 2002, our net revenue has grown
by a compounded annual growth rate of 33% and our net income
from continuing operations has grown at a compounded annual
growth rate of 50%. 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, 2003 operate from 14 offices in
7 states: California, Nevada, Utah, Arizona, Oregon, Texas
and Michigan in addition to our operating activities in Brazil.

Industries Served

We serve the real estate development and public
works/ infrastructure industry, and the industrial/ energy
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 and archaeology services for planning and
assistance with environmental approvals as well as construction
and post-construction phase monitoring services.

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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

Transportation, water resources, 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. Recently, 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.

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.

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 some
of the missions of public water-managing agencies. Private
developers also address these issues as part of their land
development.



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

The industrial/ energy 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 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;                                                            

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| |   |                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------
| |  | 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 continued trend in the
manufacturing and assembly industries toward automation and
increased efficiency. As these industries grow, 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 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

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| |   |                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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  2001 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. This is a crucial point
as 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 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

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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 Industrial/
    Energy.To diminish our susceptibility
    to the economic cycles affecting any particular industry, we
    intend to continue expanding our work in public works/
    infrastructure and industrial/ energy. Much of our expertise,
    including CAD technicians, certain engineering specialists and
    administrative support, 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 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | 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
    recently 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:

|               |  |                                        |  |                                       |  |                                                                              
|-------------- |  | -------------------------------------- |  | ------------------------------------- |  | -----------------------------------------------------------------------------
|Acquisition    |  |                                        |  | Primary                               |  |                                                                              
|Date           |  | Company Acquired                       |  | Markets Currently Served              |  | Services Offered                                                             
|               |  |                                        |  |                                       |  |                                                                              
|December 1997  |  | ESI, Engineering Services Incorporated |  | Northern California                   |  | Industrial/ energy 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                    |  | Industrial/ energy 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 earn-out or adjustment
provisions. Additionally, in connection with these acquisitions,
we have entered into non-competition agreements with principals
or key employees 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, 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.

7



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##### Table of Contents





| |                           
| | --------------------------
| | 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 environmental assessments. Our experience
includes the preparation of documents that comply with the
California Environmental Quality Act (CEQA) and the National
Environmental Policy Act. 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

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##### Table of Contents



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.



| |                                    
| | -----------------------------------
| | 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.

9



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We provide engineering design for HVAC systems,
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 these various plant services including
testing, start up, and training in addition to currently
providing workforce along with our intimate understanding of the
background of plants to operate, manage and maintain it during
its fully operational stage.

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 formal presentations to our staff to 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 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

10



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##### Table of Contents



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

Centex Homes

D.R. Horton


Lennar Homes


Pulte Home Corporation/Del Webb


Pardee Homes


Shea Homes


The Irvine Company


Thomas & Mack Development Company


Public Works/Infrastructure


City of Anaheim

City of Rancho Mirage


Central Valley Water Reclamation Facility Board


Coachella Valley Water District


Inland Empire Utilities Agency


Metropolitan Water District of Southern California


Orange County Transportation Authority


Industrial/Energy

Bonneville Power Administration

California Energy Commission


ChevronTexaco


Kellogg Co.


New United Motors Manufacturing, Inc.


Weyerhaeuser Company


No individual client accounted for more than 10%
of our net revenue in 2000, 2001 or 2002.

Backlog

At December 31, 2002, our gross revenue
backlog was approximately $51 million as compared to
$42 million at December 31, 2001. 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 because of the
short-term nature of the contracts under which we generally
provide our services compared to the long-term nature of the
projects.

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           

11



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##### Table of Contents





| |   |                    
| | - | -------------------
| |  | geographic presence
|
| |  | stability          
|
| |  | price              

Employees

As of February 28, 2003, we had
approximately 850 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, 2002, none of our employees
were a party to a collective bargaining agreement other than
approximately 8% 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.






|        |                  
|------- | -----------------
|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, 2002.

12



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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, 2001: |  |     |       |      |  |   |       | 
|First Quarter                 |  | $   | 8.03  |      |  | $ | 26.44 | 
|Second Quarter                |  |     | 15.02 |      |  |   | 24.00 | 
|Third Quarter                 |  |     | 7.51  |      |  |   | 21.99 | 
|Fourth Quarter                |  |     | 7.31  |      |  |   | 10.86 | 
|Year Ended December 31, 2002: |  |     |       |      |  |   |       | 
|First Quarter                 |  | $   | 9.91  |      |  | $ | 13.00 | 
|Second Quarter                |  |     | 12.49 |      |  |   | 16.24 | 
|Third Quarter                 |  |     | 8.91  |      |  |   | 15.22 | 
|Fourth Quarter                |  |     | 9.11  |      |  |   | 13.08 | 

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 will be issued in three installments in May
2003, May 2004 and May 2005. Our preliminary analysis of the
earn-out indicates that we may issue shares of our common stock
totaling approximately $700,000 in value related to the 2002
portion of the earn-out. 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.

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

13



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##### Table of Contents



that company. Our common stock is to be issued in
two installments: 141,856 shares were issued in 2002 with a
value of $1,569,000, with the remaining $1,500,000 in value of
shares to be issued in 2003. 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, 2000, 2001 and 2002, and the balance sheet
data as of December 31, 2001 and 2002, 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,
1998 and 1999, and the balance sheet data as of
December 31, 1998, 1999 and 2000, 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,                                                
|                          |                                                                            |                                                                         
|                          |                                                                            | 1998                                                                     |   | 1999      |        | 2000 |   | 2001      |        | 2002
|                          |                                                                            |                                                                          |   |           |        |      |   |           |        |     
|                          |                                                                            |                                                                         
|                          |                                                                            | (Dollars in thousands, except for per share data)                       
|Statement of Income Data: |                                                                            |                                                                          |   |           |        |      |   |           |        |      |   |           |        |  |   |           |        |  |   |          
|                          | Gross revenue                                                              |                                                                          | $ | 34,021    |        |      | $ | 43,084    |        |      | $ | 57,835    |        |  | $ | 74,314    |        |  | $ | 106,487   |       
|                          |                                                                            |                                                                          |   |           |        |      |   |           |        |      |   |           |        |  |   |           |        |  |   |          
|                          |                                                                            | Net revenue                                                              |   |           | 29,182 |      |   |           | 39,636 |      |   |           | 53,381 |  |   |           | 66,844 |  |   |           | 91,598 | 
|                          | Costs of revenue                                                           |                                                                          |   | 19,287    |        |      |   | 26,987    |        |      |   | 34,362    |        |  |   | 42,970    |        |  |   | 59,716    |       
|                          |                                                                            |                                                                          |   |           |        |      |   |           |        |      |   |           |        |  |   |           |        |  |   |          
|                          |                                                                            | Gross profit                                                             |   |           | 9,895  |      |   |           | 12,649 |      |   |           | 19,019 |  |   |           | 23,874 |  |   |           | 31,882 | 
|                          | Selling, general and administrative expenses                               |                                                                          |   | 5,858     |        |      |   | 8,343     |        |      |   | 10,834    |        |  |   | 14,015    |        |  |   | 19,105    |       
|                          |                                                                            |                                                                          |   |           |        |      |   |           |        |      |   |           |        |  |   |           |        |  |   |          
|                          |                                                                            | Income from operations                                                   |   |           | 4,037  |      |   |           | 4,306  |      |   |           | 8,185  |  |   |           | 9,859  |  |   |           | 12,777 | 
|                          | Interest income                                                            |                                                                          |   | 4         |        |      |   | 13        |        |      |   | 31        |        |  |   | 552       |        |  |   | 384       |       
|                          | Interest expense (income), net                                             |                                                                          |   | 967       |        |      |   | 807       |        |      |   | 341       |        |  |   | 263       |        |  |   | (47       | )     
|                          | Other expenses (income), net                                               |                                                                          |   | 70        |        |      |   | 29        |        |      |   | (44       | )      |  |   | 54        |        |  |   | (625      | )     
|                          |                                                                            |                                                                          |   |           |        |      |   |           |        |      |   |           |        |  |   |           |        |  |   |          
|                          |                                                                            | Income before provision for income taxes and
    discontinued operations |   |           | 3,004  |      |   |           | 3,483  |      |   |           | 7,919  |  |   |           | 10,094 |  |   |           | 13,833 | 
|                          | Provision for income taxes                                                 |                                                                          |   | 1,350     |        |      |   | 1,466     |        |      |   | 3,199     |        |  |   | 3,916     |        |  |   | 5,397     |       
|                          |                                                                            |                                                                          |   |           |        |      |   |           |        |      |   |           |        |  |   |           |        |  |   |          
|                          |                                                                            | Income from continuing operations                                        |   |           | 1,654  |      |   |           | 2,017  |      |   |           | 4,720  |  |   |           | 6,178  |  |   |           | 8,436  | 
|                          | Loss from discontinued operations, net of income
    taxes                 |                                                                          |   |          |        |      |   |          |        |      |   |          |        |  |   | 329       |        |  |   | 628       |       
|                          |                                                                            |                                                                          |   |           |        |      |   |           |        |      |   |           |        |  |   |           |        |  |   |          
|                          |                                                                            | Net income                                                               |   |           | 1,654  |      |   |           | 2,017  |      |   |           | 4,720  |  |   |           | 5,849  |  |   |           | 7,808  | 
|                          | Reversal (accretion) of redeemable
    securities to redemption value, net |                                                                          |   | (230      | )      |      |   | 230       |        |      |   |          |        |  |   |          |        |  |   |          |       
|                          |                                                                            |                                                                          |   |           |        |      |   |           |        |      |   |           |        |  |   |           |        |  |   |          
|                          |                                                                            | Net income available to common shareholders                              |   | $         | 1,424  |      |   | $         | 2,247  |      |   | $         | 4,720  |  |   | $         | 5,849  |  |   | $         | 7,808  | 
|                          |                                                                            |                                                                          |   |           |        |      |   |           |        |      |   |           |        |  |   |           |        |  |   |          
|                          | Earnings per share from continuing
    operations-diluted                  |                                                                          | $ | 0.39      |        |      | $ | 0.50      |        |      | $ | 0.89      |        |  | $ | 0.87      |        |  | $ | 1.07      |       
|                          |                                                                            |                                                                          |   |           |        |      |   |           |        |      |   |           |        |  |   |           |        |  |   |          
|                          | Earnings per share  diluted                                               |                                                                          | $ | 0.39      |        |      | $ | 0.50      |        |      | $ | 0.89      |        |  | $ | 0.82      |        |  | $ | 0.99      |       
|                          |                                                                            |                                                                          |   |           |        |      |   |           |        |      |   |           |        |  |   |           |        |  |   |          
|                          | Weighted average shares outstanding 
    diluted                          |                                                                          |   | 3,635,474 |        |      |   | 4,515,033 |        |      |   | 5,299,679 |        |  |   | 7,092,505 |        |  |   | 7,868,877 |       
|                          |                                                                            |                                                                          |   |           |        |      |   |           |        |      |   |           |        |  |   |           |        |  |   |          

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|                    |                                      |                    |   |        |   |      |   |        |  |      |   |        |  |  |   |        |  |  |   |        | 
|------------------- | ------------------------------------ | ------------------ | - | ------ | - | ---- | - | ------ |  | ---- | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|                    |                                      |                   
|                    |                                      | As of December 31,
|                    |                                      |                   
|                    |                                      | 1998               |   | 1999   |   | 2000 |   | 2001   |  | 2002
|                    |                                      |                    |   |        |   |      |   |        |  |     
|Balance Sheet Data: |                                      |                    |   |        |   |      |   |        |  |      |   |        |  |  |   |        |  |  |   |       
|                    | Working capital                      |                    | $ | 5,180  |   |      | $ | 7,213  |  |      | $ | 7,343  |  |  | $ | 38,781 |  |  | $ | 39,613 | 
|                    | Total assets                         |                    |   | 14,530 |   |      |   | 23,661 |  |      |   | 33,312 |  |  |   | 71,492 |  |  |   | 82,226 | 
|                    | Total debt                           |                    |   | 9,667  |   |      |   | 4,835  |  |      |   | 5,745  |  |  |   | 1,912  |  |  |   | 70     | 
|                    | Total shareholders equity (deficit) |                    |   | (301   | ) |      |   | 12,836 |  |      |   | 18,239 |  |  |   | 53,733 |  |  |   | 63,612 | 




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 is 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 at completion. 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
subcontractor 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 and scheduling delays 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.

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Critical
Accounting Policies and Significant Estimates

Under accounting principles generally accepted in
the United States of America, management is required to make
assumptions and estimates that directly impact the consolidated
financial statements and related disclosures. Because of the
uncertainties inherent in making assumptions and estimates,
actual results in future periods may differ significantly from
our assumptions and estimates. Management bases its assumptions
and estimates on historical experience and on various other
factors believed to be reasonable under the circumstances. The
following represents what management believes are the critical
accounting policies most affected by changes in management
estimates and judgments.

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 such 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 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 estimation of
total estimated contract cost has a direct impact on the revenue
recognized by us. If our current estimate of total contract
costs turns out to be higher than our previous estimates of
total contract cost, then we would have over recognized revenue
for that previous period. Conversely, if our current estimates
of total contract costs turns out to be lower than our previous
estimates of total 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.

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. Future collections of receivables that are different
from our current estimates will affect results of operations in
future periods.

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, 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 annually as well as when 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.

Impact of Our
Industry Diversification Strategy

To help reduce our susceptibility to economic
cycles affecting the real estate development industry, we intend
to continue expanding our work in the public works/
infrastructure and the industrial/energy industries. 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 and
Universal Energy Inc. during 2001, ALNM Group, Inc. 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 industrial/
energy industries.

Key
Events



| |   |                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In October 2000, we acquired Crosby Mead Benton
    & Associates (CMB) which provides engineering
    and design services for real estate projects in Southern
    California.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In January 2001, we acquired substantially all of
    the assets and assumed substantially all of the liabilities of
    Hook & Associates Engineering, Inc. (Hook), an
    engineering and consulting services firm with offices located in
    Phoenix, Arizona, Denver, Colorado and Cheyenne, Wyoming,
    providing a full range of services to clients in an array of
    industries including real estate development and public
    works/infrastructure.
|
| |  | In May 2001, we 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 net proceeds of
    approximately $27.9 million.                                                            
|
| |  | In September 2001, we acquired substantially all
    of the assets and assumed substantially all of the liabilities
    of Pacific Engineering Corporation (PEC), 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.                                                                                
|
| |  | In November 2001, we acquired Texas based
    Universal Energy, Inc. (UEI) and its wholly-owned
    subsidiary Amerex International, Inc., which provide start-up
    management, technical support, facility acquisition analysis,
    operations and maintenance, and manpower augmentation to the
    power industry.                                                                                                                                         
|
| |  | In March 2002, we acquired Michigan based ALNM
    Group, Inc. (ALNM) which specializes in government
    services with expertise in environmental, civil, mechanical and
    electrical engineering, and surveying.                                                                                                                                                                                                                                             
|
| |  | In 2002, we closed three of our divisions. 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. The
    closures were primarily due to lower than expected operating
    results and continuing difficult market conditions.                                                                                       

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,
|                                                           |                                                                          |                         
|                                                           |                                                                          | 2002                     |       | 2001  |   | 2000
|                                                           |                                                                          |                          |       |       |   |     
|Gross revenue                                              |                                                                          |                          | 116.3 | %     |   |      | 111.2 | %     |   |  | 108.3 | %    
|Subcontractor costs                                        |                                                                          |                          | 16.3  |       |   |      | 11.2  |       |   |  | 8.3   |      
|                                                           |                                                                          |                          |       |       |   |      |       |       |   |  |       |      
|                                                           | Net revenue                                                              |                          |       | 100.0 |   |      |       | 100.0 |   |  |       | 100.0 |  
|Costs of revenue                                           |                                                                          |                          | 65.2  |       |   |      | 64.3  |       |   |  | 64.4  |      
|                                                           |                                                                          |                          |       |       |   |      |       |       |   |  |       |      
|                                                           | Gross profit                                                             |                          |       | 34.8  |   |      |       | 35.7  |   |  |       | 35.6  |  
|Selling, general and administrative expenses               |                                                                          |                          | 20.9  |       |   |      | 21.0  |       |   |  | 20.3  |      
|                                                           |                                                                          |                          |       |       |   |      |       |       |   |  |       |      
|                                                           | Income from operations                                                   |                          |       | 13.9  |   |      |       | 14.7  |   |  |       | 15.3  |  
|Interest income                                            |                                                                          |                          | 0.4   |       |   |      | 0.8   |       |   |  | 0.1   |      
|Interest expense (income), net                             |                                                                          |                          | (0.1  | )     |   |      | 0.3   |       |   |  | 0.7   |      
|Other expenses (income), net                               |                                                                          |                          | (0.7  | )     |   |      | 0.1   |       |   |  | (0.1  | )    
|                                                           |                                                                          |                          |       |       |   |      |       |       |   |  |       |      
|                                                           | Income before provision for income taxes and
    discontinued operations |                          |       | 15.1  |   |      |       | 15.1  |   |  |       | 14.8  |  
|Provision for income taxes                                 |                                                                          |                          | 5.9   |       |   |      | 5.9   |       |   |  | 6.0   |      
|                                                           |                                                                          |                          |       |       |   |      |       |       |   |  |       |      
|Income from continuing operations                          |                                                                          |                          | 9.2   |       |   |      | 9.2   |       |   |  | 8.8   |      
|Loss from discontinued operations, net of income
    taxes |                                                                          |                          | (0.7  | )     |   |      | (0.4  | )     |   |  | 0.0   |      
|                                                           |                                                                          |                          |       |       |   |      |       |       |   |  |       |      
|                                                           | Net income                                                               |                          |       | 8.5   | % |      |       | 8.8   | % |  |       | 8.8   | %
|                                                           |                                                                          |                          |       |       |   |      |       |       |   |  |       |      

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The following table sets forth the Companys
consolidated statement of income for the year ended
December 31, 2002 and includes the dollar and percentage
change compared to the prior fiscal year:

|                                                           |            |                                                                          |         |       |        |        |        |        |        |   |        |       |        |  |          |      |      | 
|---------------------------------------------------------- | ---------- | ------------------------------------------------------------------------ | ------- | ----- | ------ | ------ | ------ | ------ | ------ | - | ------ | ----- | ------ |  | -------- | ---- | ---- | 
|                                                           |            |                                                                         
|                                                           |            | 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 expense (income), net                             |            |                                                                          | (47     | )     |        |        | 263    |        |        |   | (310   | )     |        |  | (117.9   | )   
|Other expenses (income), 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 | %   
|                                                           |            |                                                                          |         |       |        |        |        |        |        |   |        |       |        |  |          |     



| |                                                        
| | -------------------------------------------------------
| | 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: Pacific
Engineering Corporation (PEC), Universal Energy Inc.
(UEI), and ALNM Group, Inc. (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 industrial and energy
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 industrial/ energy 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
industrial/energy 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

18



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##### Table of Contents



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 industrial and energy 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 industrial/ energy industry experienced a
reduction in its gross profit in the fourth quarter of 2002. If
this decline continues, it may cause our industrial/ energy
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 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.

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.The
increase in other income was primarily associated with $687,000
resulting from a purchase price adjustment in connection with
the acquisition 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.

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##### Table of Contents



The following table sets forth the Companys
consolidated statement of income for the year ended
December 31, 2001 and includes the dollar and percentage
change compared to the prior fiscal year:

|                                                           |                                                                           |                          |        |        |  |        |        |        |  |   |        |        |  |  |         |      |  
|---------------------------------------------------------- | ------------------------------------------------------------------------- | ------------------------ | ------ | ------ |  | ------ | ------ | ------ |  | - | ------ | ------ |  |  | ------- | ---- | -
|                                                           |                                                                           |                         
|                                                           |                                                                           | Years Ended December 31,
|                                                           |                                                                           |                         
|                                                           |                                                                           |                          |        | $      |  | %     
|                                                           |                                                                           | 2001                     |        | 2000   |  | Change |        | Change
|                                                           |                                                                           |                          |        |        |  |        |        |       
|                                                           |                                                                           |                         
|                                                           |                                                                           | (Dollars in thousands)  
|Gross revenue                                              |                                                                           | $                        | 74,314 |        |  | $      | 57,835 |        |  | $ | 16,479 |        |  |  | 28.5    | %   
|Subcontractor costs                                        |                                                                           |                          | 7,470  |        |  |        | 4,454  |        |  |   | 3,016  |        |  |  | 67.7    |     
|                                                           |                                                                           |                          |        |        |  |        |        |        |  |   |        |        |  |  |         |     
|                                                           | Net revenue                                                               |                          |        | 66,844 |  |        |        | 53,381 |  |   |        | 13,463 |  |  |         | 25.2 |  
|Costs of revenue                                           |                                                                           |                          | 42,970 |        |  |        | 34,362 |        |  |   | 8,608  |        |  |  | 25.1    |     
|                                                           |                                                                           |                          |        |        |  |        |        |        |  |   |        |        |  |  |         |     
|                                                           | Gross profit                                                              |                          |        | 23,874 |  |        |        | 19,019 |  |   |        | 4,855  |  |  |         | 25.5 |  
|Selling, general and administrative expenses               |                                                                           |                          | 14,015 |        |  |        | 10,834 |        |  |   | 3,181  |        |  |  | 29.4    |     
|                                                           |                                                                           |                          |        |        |  |        |        |        |  |   |        |        |  |  |         |     
|                                                           | Income from operations                                                    |                          |        | 9,859  |  |        |        | 8,185  |  |   |        | 1,674  |  |  |         | 20.5 |  
|Interest income                                            |                                                                           |                          | 552    |        |  |        | 31     |        |  |   | 521    |        |  |  | 1,680.6 |     
|Interest expense                                           |                                                                           |                          | 263    |        |  |        | 341    |        |  |   | (78    | )      |  |  | (22.9   | )   
|Other expenses (income), net                               |                                                                           |                          | 54     |        |  |        | (44    | )      |  |   | 98     |        |  |  | (222.7  | )   
|                                                           |                                                                           |                          |        |        |  |        |        |        |  |   |        |        |  |  |         |     
|                                                           | Income before provisions for income taxes and
    discontinued operations |                          |        | 10,094 |  |        |        | 7,919  |  |   |        | 2,175  |  |  |         | 27.5 |  
|Provision for income taxes                                 |                                                                           |                          | 3,916  |        |  |        | 3,199  |        |  |   | 717    |        |  |  | 22.4    |     
|                                                           |                                                                           |                          |        |        |  |        |        |        |  |   |        |        |  |  |         |     
|Income from continuing operations                          |                                                                           |                          | 6,178  |        |  |        | 4,720  |        |  |   | 1,458  |        |  |  | 30.9    |     
|Loss from discontinued operations, net of income
    taxes |                                                                           |                          | 329    |        |  |        |       |        |  |   | 329    |        |  |  |        |     
|                                                           |                                                                           |                          |        |        |  |        |        |        |  |   |        |        |  |  |         |     
|                                                           | Net income                                                                |                          | $      | 5,849  |  |        | $      | 4,720  |  |   | $      | 1,129  |  |  |         | 23.9 | %
|                                                           |                                                                           |                          |        |        |  |        |        |        |  |   |        |        |  |  |         |     

Years Ended
December 31, 2001 and December 31, 2000

Net Revenue.The net
revenue growth for 2001 compared to 2000 is primarily
attributable to acquisitions. The acquisitions of CMB, which
closed in the fourth quarter of 2000, and Hook, PEC, and UEI,
all of which closed in 2001, contributed $10.6 million
(excludes CMB results for the fourth quarter of 2001) to net
revenue during 2001 compared to 2000. Excluding the net revenue
from acquisitions, net revenue increased $2.9 million or
5.4%. The remaining net revenue growth was primarily due to
(i) growth in the Companys civil engineering services
resulting from the strong demand for real estate in Southern
California and Nevada, and (ii) the contribution of net
revenue from a new division. The new division is a civil
engineering office located in Ventura County, California, which
commenced operations during the fourth quarter of 2000. The new
division contributed approximately $400,000 to the
Companys net revenue during 2001. The above mentioned
increases in net revenue during 2001 were partially offset by
lower net revenue at one of the Companys Northern
California offices resulting from decreased activity on several
large projects with high profit margins. Subcontractor costs, as
a percentage of net revenue, increased to 11.2% during 2001
compared to 8.3% during 2000, resulting largely from an increase
in subcontractor costs related to several large contracts in our
industrial/ energy segment.

Gross Profit.The
increase in gross profit was primarily attributable to
acquisitions, which added gross profit of $4.3 million
during 2001 as compared to the prior year. Excluding the gross
profit from acquisitions, gross profit remained consistent with
that of the prior year. As a percentage of net revenue, gross
profit increased slightly to 35.7% during 2001 from 35.6% during
2000.

The increase in the cost of revenue is primarily
attributable to increased expenses associated with the growth in
our total direct employee base, which grew from an average of
412 in 2000 to 510 in 2001, coupled with an increase in
facilities expense. Such increases primarily resulted from
acquisitions.

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Selling, General and Administrative
Expenses.The increase in selling,
general and administrative expenses was primarily related to
acquisitions, goodwill amortization, and higher overall
corporate costs. As a percentage of net revenue, selling,
general and administrative expenses increased to 21.0% during
2001 from 20.3% during 2000. The percentage increase was
primarily related to higher administrative costs, additional
contract proposal time, goodwill amortization (see Effect of
Recent Accounting Pronouncements for discussion on the treatment
of goodwill), and higher legal services and settlement costs,
all of which were partially offset by a lower provision for
doubtful accounts.

Interest Income.The
increase in interest income resulted from interest earned on
securities purchased with a portion of the net proceeds
generated from the Companys May 2001 secondary offering.

Interest Expense.The decrease in interest expense was primarily due to the
repayment of a $2.4 million acquisition note in April 2001,
and the repayment of the outstanding balance on our line of
credit in May 2001. This decrease was partially offset by
increased interest expense related to a $1.3 million note
issued in connection with the Hook acquisition in January 2001.

Income Taxes.This
increase in provision for income taxes resulted primarily from a
higher taxable income base, mitigated by a lower effective
income tax rate during 2001. Our effective income tax rate was
approximately 38.8% during 2001 compared to 40.4% during 2000.

Discontinued
Operations.We closed down the
operations of three divisions during 2002. Two of these
divisions are related to our Hook operations in Colorado and
Wyoming, 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 have been segregated and
reported as discontinued operations during 2001. These divisions
did not exist in 2000, hence the increase in loss from
discontinued operations during 2001.

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,
chief operating officer and a director of our company, 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.

We have not entered into any material related
party transactions during 2002.

Liquidity and Capital Resources

Cash and cash equivalents combined with
securities held-to-maturity totaled $23.5 million as of
December 31, 2002, compared to $23.7 million as of
December 31, 2001. Working capital as of December 31,
2002 was $39.6 million compared to $38.8 million as of
December 31, 2001, an increase of $0.8 million. Our
debt to equity ratio (excluding the effect of issuable common
stock) as of December 31, 2002 improved to 0.001 to 1
compared to 0.04 to 1 at December 31, 2001.

Cash Flows From Operating
Activities.Net cash provided by
operating activities increased $2.3 million, or 29.0%, to
$10.1 million during 2002 compared to $7.8 million
during 2001. The increase in net cash provided by operating
activities was primarily a result of higher income before the
effects of depreciation and amortization, and an increase in
working capital, as compared to 2001.

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Cash Flows From Investing
Activities.Net cash used in investing
activities decreased by $17.5 million, to $1.4 million
during 2002 compared to $18.9 million during 2001. The
decrease in net cash used in investing activities was primarily
a result of the proceeds received from securities held to
maturity during 2002, partially offset by an increase in net
cash expended for acquisitions. Capital expenditures during 2002
were $1.9 million compared to $1.6 million during 2001.

Cash Flows From Financing Activities.Net cash used in financing activities
increased by $22.8 million, to $0.5 million during
2002 compared to $22.3 million of net cash provided by
financing activities during 2001. The reason for this change
from cash provided by financing activities to cash used in
financing activities was mainly due to our stock offering in
2001, which was partially offset by a reduction in principal
payments on our debt during 2002.

In September 2001, we entered into a
$10.0 million unsecured line of credit agreement consisting
of three components: (i) an acquisition component,
(ii) an equipment and vehicle financing component, and
(iii) 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 and up to a maximum of $10.0 million less the
aggregate outstanding principal balance of the acquisition, and
equipment and vehicle 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 our ability
to meet certain financial covenants. In September 2002, the line
of credit was amended to extend the maturity on the equipment
and vehicle financing components from September 2002 to
September 2003, and to extend the maturity on the acquisition
and working capital components from June 2003 to June 2004.
There were no amounts outstanding under this line of credit
agreement as of December 31, 2002.

In July 2002, we entered into a modification
agreement relating to the acquisition of Hook. Under this
agreement, the following obligations have been terminated: a
$1,300,000 acquisition note payable and $700,000 in issuable
common stock. Also under this agreement, the Company paid
$746,000 and may pay up to an additional $320,000 if certain
future conditions are met.

In July 2002, we exercised certain provisions
under the purchase agreement related to the CMB acquisition
which allowed us to reduce the purchase price and resulted in
the cancellation of an obligation to issue $559,000 in common
stock.

In November 2002, we entered into a 12 month
$1.3 million letter of credit securing a facility lease in
Irvine, California relating to the Companys Orange County,
Tettemer and Corporate divisions.

We do not hold any derivative financial
instruments for trading purposes or otherwise. 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 or special
purpose entities.

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 such 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, 2002, we may be obligated to pay a maximum of
$7.4 million over the next 2 years in additional
purchase price related to our acquisitions, of which
approximately 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.

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The following summarizes our contractual
obligations as of December 31, 2002, and the effect such
obligations are expected to have on liquidity and cash flows in
the future.

|                                   |  |                        |            |          |  |      |           |      |  |      |           |            |  |   |           |  |  |   |           |  |  |   |           | 
|---------------------------------- |  | ---------------------- | ---------- | -------- |  | ---- | --------- | ---- |  | ---- | --------- | ---------- |  | - | --------- |  |  | - | --------- |  |  | - | --------- | 
|                                   |  |                       
|                                   |  | Payments Due by Period
|                                   |  |                       
|                                   |  |                        |            | 2007 and
|                                   |  | Total                  |            | 2003     |  | 2004 |           | 2005 |  | 2006 |           | Thereafter
|                                   |  |                        |            |          |  |      |           |      |  |      |           |           
|Capital lease obligations          |  | $                      | 70,000     |          |  | $    | 52,000    |      |  | $    | 8,000     |            |  | $ | 9,000     |  |  | $ | 1,000     |  |  | $ |          | 
|Operating leases                   |  |                        | 18,334,000 |          |  |      | 4,737,000 |      |  |      | 3,578,000 |            |  |   | 3,267,000 |  |  |   | 2,418,000 |  |  |   | 4,334,000 | 
|                                   |  |                        |            |          |  |      |           |      |  |      |           |            |  |   |           |  |  |   |           |  |  |   |           | 
|Total contractual cash obligations |  | $                      | 18,404,000 |          |  | $    | 4,789,000 |      |  | $    | 3,586,000 |            |  | $ | 3,276,000 |  |  | $ | 2,419,000 |  |  | $ | 4,334,000 | 
|                                   |  |                        |            |          |  |      |           |      |  |      |           |            |  |   |           |  |  |   |           |  |  |   |           | 

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, 2002. We believe these
sources of funds will be sufficient to provide for our
operations and planned capital expenditures and satisfy our
scheduled principal and interest payment obligations on our debt
and capital lease obligations for the next twelve months. We
expect our capital expenditures in fiscal 2003 to range between
approximately $2.0 million to $2.5 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 December 2002, the FASB issued Statement of
Financial Accounting Standards (SFAS) No. 148,
Accounting for Stock-Based Compensation 
Transition and Disclosure. SFAS No. 148 amends SFAS
No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition
for a voluntary change to the fair value based method of
accounting for stock-based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial
statement of the method of accounting for stock-based employee
compensation and the effect of the method used on reported
results. Certain of the disclosure modifications are required
for fiscal years ending after December 15, 2002 and are
included in the notes to our financial statements. Although we
have adopted the disclosure requirements of SFAS No. 148,
we intend to continue applying Accounting Principles Board
Opinion No. 25 in accounting for stock-based employee
compensation.

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 Company does not believe that
the adoption of these standards will have a material effect on
the Companys financial condition, results of operations or
cash flows.

In October 2001, the Financial Accounting
Standard Board (FASB) issued Statements of Financial
Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS 144). SFAS 144
supersedes Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of, and requires
(i) the

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recognition and measurement of the impairment of
long-lived assets to be held and used and (ii) the
measurement of long-lived assets to be disposed of by sale. SFAS
144 is effective for fiscal years beginning after
December 15, 2001. The adoption of this standard did not
have a material effect on the Companys financial
condition, results of operations or cash flows.


In July 2001, the FASB issued SFAS No. 142,
Goodwill and Other Intangible Assets, which became
effective January 1, 2002. This statement requires that
goodwill and intangible assets with indefinite useful lives no
longer be amortized. Therefore, no goodwill amortization expense
was incurred during 2002. The Company is required to perform its
impairment test annually unless events or circumstances change
that would indicate the carrying value of goodwill has been
impaired. In addition, in the year of adoption, the Company was
also required to perform a transitional test of goodwill for
impairment as of January 1, 2002. The Company has completed
its transitional impairment testing and no changes to the
carrying value of goodwill were made. Accordingly, the adoption
of this standard did not have a material effect on the
Companys financial condition, results of operations or
cash flows.

In July 2001, the FASB issued SFAS No. 141,
Business Combinations which was effective upon
issuance. This statement requires that the purchase method of
accounting be used for all business combinations initiated after
June 30, 2001. The adoption of this standard 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 to our clients.

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

We estimate that during 2002, approximately 63%
of our services were 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;                   
|
| |  | 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

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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 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 in
our revenue if actual recoverable costs exceed billed
recoverable costs.



| |                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We derive revenue from engineering services
    provided to the energy industry. Continued disruption in the
    pace of construction for new power plants, cogeneration
    facilities, and electrical distribution facilities could
    adversely affect 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 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 projects
announcements 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 downsizing or cancellations of new
power plants and/or alternative power solutions. A continued
decline in the pace of construction of new power plants and/or
alternative power solutions could have an adverse affect on our
industrial/ energy industry.



| |                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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. 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 revenues and profit may decline.

Terrorism and
the uncertainty of war 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 and
elsewhere, ongoing violence in the Middle East and increasing
speculation regarding future military action against Iraq, have
created many economic and political uncertainties, some of which
may materially affect the markets in which we operate, and our
operations and profitability. The disruption of our business as
a result of these events, including disruptions and deferrals of
real estate development projects, had an immediate adverse
impact on our business. 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 that may result,
are unpredictable, and we may not be able to foresee events that
could have an adverse effect on our markets, or our business.

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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

We estimate that during 2002, approximately 65%
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 otherwise adversely impact our
business, any of which could cause a decline in our revenues 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, current expectations of our growth or
    operating results may not be met

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 as 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                                                                                                                                                                        
|
| |  | 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.

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| |                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, 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, 2002, our
goodwill balance was $23.1 million.



| |                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| | We could lose money if we fail to
    accurately estimate our costs on fixed-price contracts 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 it is subject to adjustment or
    cancellation

Our gross revenue backlog as of December 31,
2002 was approximately $51 million. There is no assurance 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.



| |                                                                                   
| | ----------------------------------------------------------------------------------
| | 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 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.

27



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| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | 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. Such
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 due to the large
size of the projects on which we typically provide services,
claims could be millions of dollars. A partially or completely
uninsured claim, if successful and of significant magnitude,
could result in substantial losses.

We currently maintain general liability
insurance, umbrella, professional liability, directors and
officers, 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 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. For 2002, subcontractor
costs accounted for approximately 16% of our net revenue.



| |                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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. 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.

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 industrial/energy market;
|
| |  | interest rates;                                                                                                                                                                                                                        
|
| |  | our failure to meet securities analysts
    expectations;                                                                                                                                                                             
|
| |  | changes in accounting principles;                                                                                                                                                                                                      
|
| |  | sales of common stock by existing shareholders or
    holders of options;                                                                                                                                                              

28



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| |   |                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------
| |  | 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 18% 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

Our business strategy is to expand into new
markets and enhance our position in existing markets through the
acquisition 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.



| |                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 due to 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 7.5 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, and could adversely
affect the market price for our common stock. Certain
shareholders hold large amounts 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.






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

We are exposed to interest rate changes primarily
as a result of our securities held-to-maturity, line of credit,
and long term debt, which are used to maintain liquidity and to
fund capital expenditures and our expansion. 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
borrowings, our earnings and cash flows should not be materially
impacted by changes in interest rates. 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.

29



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##### Table of Contents



The table below presents the principal amounts of
securities held-to-maturity, weighted average interest rates,
fair values and other items required by year of expected
maturity to evaluate the expected cash flows and sensitivity to
interest rate changes as of December 31, 2002.

|                                          |  |      |           |          |  |   |           |  
|----------------------------------------- |  | ---- | --------- | -------- |  | - | --------- | -
|                                          |  |      |           | Fair    
|                                          |  | 2003 |           | Value(1)
|                                          |  |      |           |         
|Securities held-to-maturity (non-trading) |  | $    | 3,164,000 |          |  | $ | 3,174,000 |  
|Weighted average interest rate(2)         |  |      | 1.85      | %        |  |   | 1.85      | %



---



|    |                                                                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The fair value for securities held-to-maturity
    was based on the quoted market price of such securities as of
    December 31, 2002.                                                                                                                                                             
|   
|(2) | Approximately 55% of the Companys
    securities held-to-maturity 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.

As the table incorporates only those exposures
that existed as of December 31, 2002, 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. As a result, 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.

30



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##### Table of Contents








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

|                                                                                                         |  |      |    | 
|-------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                         |  | Page
|                                                                                                         |  |     
|Independent Auditors Report                                                                             |  |      | 32 | 
|Consolidated Balance Sheets as of
    December 31, 2001 and 2002                                         |  |      | 33 | 
|Consolidated Statements of Income for the years
    ended December 31, 2000, 2001 and 2002               |  |      | 34 | 
|Consolidated Statements of Shareholders
    Equity for the years ended December 31, 2000, 2001 and 2002 |  |      | 35 | 
|Consolidated Statements of Cash Flows for the
    years ended December 31, 2000, 2001 and 2002           |  |      | 36 | 
|Notes to Consolidated Financial Statements                                                               |  |      | 37 | 

31



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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, 2001 and 2002, 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, 2002. 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, 2001 and 2002, and the
results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2002, in
conformity with accounting principles generally accepted in the
United States of America.



| |         
| | --------
| | KPMG LLP

Orange County, California

February 6, 2003


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##### Table of Contents



THE KEITH COMPANIES, INC. AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                                                                         |                                                                                                                                                             |                                            |            |            |            |  |            |            |            | 
|---------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ---------- | ---------- | ---------- |  | ---------- | ---------- | ---------- | 
|                                                                                         |                                                                                                                                                             |                                           
|                                                                                         |                                                                                                                                                             | December 31,                              
|                                                                                         |                                                                                                                                                             |                                           
|                                                                                         |                                                                                                                                                             | 2001                                       |            | 2002      
|                                                                                         |                                                                                                                                                             |                                            |            |           
|ASSETS                                                                                  
|Current assets:                                                                          |                                                                                                                                                             |                                            |            |            |            |  |            |           
|                                                                                         | Cash and cash equivalents                                                                                                                                   |                                            | $          | 12,212,000 |            |  | $          | 20,333,000 |           
|                                                                                         | Securities held-to-maturity                                                                                                                                 |                                            |            | 11,521,000 |            |  |            | 3,164,000  |           
|                                                                                         | Contracts and trade receivables, net of allowance
    for doubtful accounts of $951,000 and $1,123,000 at
    December 31, 2001 and 2002, respectively      |                                            |            | 18,618,000 |            |  |            | 18,771,000 |           
|                                                                                         | Costs and estimated earnings in excess of billings                                                                                                          |                                            |            | 8,270,000  |            |  |            | 10,392,000 |           
|                                                                                         | Prepaid expenses and other currents assets                                                                                                                  |                                            |            | 1,458,000  |            |  |            | 1,367,000  |           
|                                                                                         |                                                                                                                                                             |                                            |            |            |            |  |            |           
|                                                                                         |                                                                                                                                                             | Total current assets                       |            |            | 52,079,000 |  |            |            | 54,027,000 | 
|Equipment and leasehold improvements, net                                                |                                                                                                                                                             |                                            | 4,921,000  |            |            |  | 4,831,000  |           
|Goodwill, net of accumulated amortization of
    $761,000 at December 31, 2001 and 2002. |                                                                                                                                                             |                                            | 14,252,000 |            |            |  | 23,056,000 |           
|Other assets                                                                             |                                                                                                                                                             |                                            | 240,000    |            |            |  | 312,000    |           
|                                                                                         |                                                                                                                                                             |                                            |            |            |            |  |            |           
|                                                                                         |                                                                                                                                                             | Total assets                               |            | $          | 71,492,000 |  |            | $          | 82,226,000 | 
|                                                                                         |                                                                                                                                                             |                                            |            |            |            |  |            |           
|LIABILITIES AND SHAREHOLDERS
    EQUITY                                                
|Current liabilities:                                                                     |                                                                                                                                                             |                                            |            |            |            |  |            |           
|                                                                                         | Current portion of long-term debt and capital
    lease obligations                                                                                         |                                            | $          | 459,000    |            |  | $          | 52,000     |           
|                                                                                         | Trade accounts payable                                                                                                                                      |                                            |            | 2,376,000  |            |  |            | 1,818,000  |           
|                                                                                         | Accrued employee compensation                                                                                                                               |                                            |            | 3,091,000  |            |  |            | 3,722,000  |           
|                                                                                         | Current portion of deferred tax liabilities                                                                                                                 |                                            |            | 2,028,000  |            |  |            | 3,065,000  |           
|                                                                                         | Other accrued liabilities                                                                                                                                   |                                            |            | 2,961,000  |            |  |            | 4,484,000  |           
|                                                                                         | Billings in excess of costs and estimated earnings                                                                                                          |                                            |            | 2,383,000  |            |  |            | 1,273,000  |           
|                                                                                         |                                                                                                                                                             |                                            |            |            |            |  |            |           
|                                                                                         |                                                                                                                                                             | Total current liabilities                  |            |            | 13,298,000 |  |            |            | 14,414,000 | 
|Long-term debt and capital lease obligations,
    less current portion                   |                                                                                                                                                             |                                            | 1,453,000  |            |            |  | 18,000     |           
|Issuable common stock                                                                    |                                                                                                                                                             |                                            | 1,512,000  |            |            |  | 2,215,000  |           
|Deferred tax liabilities                                                                 |                                                                                                                                                             |                                            | 1,271,000  |            |            |  | 1,675,000  |           
|Accrued rent                                                                             |                                                                                                                                                             |                                            | 225,000    |            |            |  | 292,000    |           
|                                                                                         |                                                                                                                                                             |                                            |            |            |            |  |            |           
|                                                                                         |                                                                                                                                                             | Total liabilities                          |            |            | 17,759,000 |  |            |            | 18,614,000 | 
|                                                                                         |                                                                                                                                                             |                                            |            |            |            |  |            |           
|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 7,309,684 and
    7,514,140 shares in 2001 and 2002, respectively |                                            |            | 7,000      |            |  |            | 8,000      |           
|                                                                                         | Additional paid in capital                                                                                                                                  |                                            |            | 42,096,000 |            |  |            | 44,166,000 |           
|                                                                                         | Retained earnings                                                                                                                                           |                                            |            | 11,630,000 |            |  |            | 19,438,000 |           
|                                                                                         |                                                                                                                                                             |                                            |            |            |            |  |            |           
|                                                                                         |                                                                                                                                                             | Total shareholders equity                 |            |            | 53,733,000 |  |            |            | 63,612,000 | 
|                                                                                         |                                                                                                                                                             |                                            |            |            |            |  |            |           
|Commitments and contingencies (Notes 6, 9,
    10, 17, 18, and 19)                       |                                                                                                                                                             |                                            |            |            |            |  |            |           
|                                                                                         |                                                                                                                                                             | Total liabilities and shareholders equity |            | $          | 71,492,000 |  |            | $          | 82,226,000 | 
|                                                                                         |                                                                                                                                                             |                                            |            |            |            |  |            |           

See accompanying notes to consolidated financial
statements.

33



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##### Table of Contents



THE KEITH COMPANIES, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

|                                                                                 |                                                                          |                          |            |            |  |      |            |            |   |   |             |            |  
|-------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | ------------------------ | ---------- | ---------- |  | ---- | ---------- | ---------- | - | - | ----------- | ---------- | -
|                                                                                 |                                                                          |                         
|                                                                                 |                                                                          | Years Ended December 31,
|                                                                                 |                                                                          |                         
|                                                                                 |                                                                          | 2000                     |            | 2001       |  | 2002
|                                                                                 |                                                                          |                          |            |            |  |     
|Gross revenue                                                                    |                                                                          | $                        | 57,835,000 |            |  | $    | 74,314,000 |            |   | $ | 106,487,000 |           
|Subcontractor costs                                                              |                                                                          |                          | 4,454,000  |            |  |      | 7,470,000  |            |   |   | 14,889,000  |           
|                                                                                 |                                                                          |                          |            |            |  |      |            |            |   |   |             |           
|                                                                                 | Net revenue                                                              |                          |            | 53,381,000 |  |      |            | 66,844,000 |   |   |             | 91,598,000 |  
|Costs of revenue                                                                 |                                                                          |                          | 34,362,000 |            |  |      | 42,970,000 |            |   |   | 59,716,000  |           
|                                                                                 |                                                                          |                          |            |            |  |      |            |            |   |   |             |           
|                                                                                 | Gross profit                                                             |                          |            | 19,019,000 |  |      |            | 23,874,000 |   |   |             | 31,882,000 |  
|Selling, general and administrative expenses                                     |                                                                          |                          | 10,834,000 |            |  |      | 14,015,000 |            |   |   | 19,105,000  |           
|                                                                                 |                                                                          |                          |            |            |  |      |            |            |   |   |             |           
|                                                                                 | Income from operations                                                   |                          |            | 8,185,000  |  |      |            | 9,859,000  |   |   |             | 12,777,000 |  
|Interest income                                                                  |                                                                          |                          | 31,000     |            |  |      | 552,000    |            |   |   | 384,000     |           
|Interest expense (income), net                                                   |                                                                          |                          | 341,000    |            |  |      | 263,000    |            |   |   | (47,000     | )         
|Other (income) expenses, net                                                     |                                                                          |                          | (44,000    | )          |  |      | 54,000     |            |   |   | (625,000    | )         
|                                                                                 |                                                                          |                          |            |            |  |      |            |            |   |   |             |           
|                                                                                 | Income before provision for income taxes and
    discontinued operations |                          |            | 7,919,000  |  |      |            | 10,094,000 |   |   |             | 13,833,000 |  
|Provision for income taxes                                                       |                                                                          |                          | 3,199,000  |            |  |      | 3,916,000  |            |   |   | 5,397,000   |           
|                                                                                 |                                                                          |                          |            |            |  |      |            |            |   |   |             |           
|                                                                                 | Income from continuing operations                                        |                          |            | 4,720,000  |  |      |            | 6,178,000  |   |   |             | 8,436,000  |  
|Loss from discontinued operations, net of income
    taxes                       |                                                                          |                          |           |            |  |      | 329,000    |            |   |   | 628,000     |           
|                                                                                 |                                                                          |                          |            |            |  |      |            |            |   |   |             |           
|                                                                                 | Net income                                                               |                          | $          | 4,720,000  |  |      | $          | 5,849,000  |   |   | $           | 7,808,000  |  
|                                                                                 |                                                                          |                          |            |            |  |      |            |            |   |   |             |           
|Earnings per share from continuing operations:                                   |                                                                          |                          |            |            |  |      |            |            |   |   |             |           
|                                                                                 | Basic                                                                    |                          | $          | 0.95       |  |      | $          | 0.94       |   |   | $           | 1.15       |  
|                                                                                 |                                                                          |                          |            |            |  |      |            |            |   |   |             |           
|                                                                                 | Diluted                                                                  |                          | $          | 0.89       |  |      | $          | 0.87       |   |   | $           | 1.07       |  
|                                                                                 |                                                                          |                          |            |            |  |      |            |            |   |   |             |           
|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                                                                    |                          | $          | 0.95       |  |      | $          | 0.89       |   |   | $           | 1.06       |  
|                                                                                 |                                                                          |                          |            |            |  |      |            |            |   |   |             |           
|                                                                                 | Diluted                                                                  |                          | $          | 0.89       |  |      | $          | 0.82       |   |   | $           | 0.99       |  
|                                                                                 |                                                                          |                          |            |            |  |      |            |            |   |   |             |           
|Weighted average number of shares outstanding:                                   |                                                                          |                          |            |            |  |      |            |            |   |   |             |           
|                                                                                 | Basic                                                                    |                          |            | 4,983,692  |  |      |            | 6,604,367  |   |   |             | 7,363,073  |  
|                                                                                 |                                                                          |                          |            |            |  |      |            |            |   |   |             |           
|                                                                                 | Diluted                                                                  |                          |            | 5,299,679  |  |      |            | 7,092,505  |   |   |             | 7,868,877  |  
|                                                                                 |                                                                          |                          |            |            |  |      |            |            |   |   |             |           

See accompanying notes to consolidated financial
statements.

34



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##### Table of Contents



THE KEITH COMPANIES, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY

|                                           |  |             |           |        |  |            |       |          |  |       |            |   |  |   |            |  |  |   |            |  
|------------------------------------------ |  | ----------- | --------- | ------ |  | ---------- | ----- | -------- |  | ----- | ---------- | - |  | - | ---------- |  |  | - | ---------- | -
|                                           |  |             |           |        |  | Additional |       |          |  |      
|                                           |  | Shares      |           | Common |  | Paid-In    |       | Retained |  |      
|                                           |  | Outstanding |           | Stock  |  | Capital    |       | Earnings |  | Total
|                                           |  |             |           |        |  |            |       |          |  |      
|Balance at December 31, 1999               |  |             | 4,972,624 |        |  | $          | 5,000 |          |  | $     | 11,770,000 |   |  | $ | 1,061,000  |  |  | $ | 12,836,000 |  
|Issuance of common stock                   |  |             | 170,258   |        |  |            |      |          |  |       | 819,000    |   |  |   |           |  |  |   | 819,000    |  
|Net income                                 |  |             |          |        |  |            |      |          |  |       |           |   |  |   | 4,720,000  |  |  |   | 4,720,000  |  
|Repurchase of common stock                 |  |             | (27,000   | )      |  |            |      |          |  |       | (136,000   | ) |  |   |           |  |  |   | (136,000   | )
|                                           |  |             |           |        |  |            |       |          |  |       |            |   |  |   |            |  |  |   |            |  
|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 |  
|                                           |  |             |           |        |  |            |       |          |  |       |            |   |  |   |            |  |  |   |            |  

See accompanying notes to consolidated financial
statements.

35



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##### Table of Contents



THE KEITH COMPANIES, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                      |                                                                                                   |                                                    |                                                          |            |            |            |           |             |            |             |           |            |            |            |  
|------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------- | -------------------------------------------------- | -------------------------------------------------------- | ---------- | ---------- | ---------- | --------- | ----------- | ---------- | ----------- | --------- | ---------- | ---------- | ---------- | -
|                                                                                      |                                                                                                   |                                                   
|                                                                                      |                                                                                                   | Years Ended December 31,                          
|                                                                                      |                                                                                                   |                                                   
|                                                                                      |                                                                                                   | 2000                                               |                                                          | 2001       |            | 2002      
|                                                                                      |                                                                                                   |                                                    |                                                          |            |            |           
|Cash flows from operating
    activities:                                             |                                                                                                   |                                                    |                                                          |            |            |            |           |             |            |             |           |           
|Net income                                                                            |                                                                                                   | $                                                  | 4,720,000                                                |            |            | $          | 5,849,000 |             |            | $           | 7,808,000 |           
|Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                                                                   |                                                    |                                                          |            |            |            |           |             |            |             |           |           
|                                                                                      | Depreciation and amortization                                                                     |                                                    |                                                          | 1,558,000  |            |            |           | 2,349,000   |            |             |           | 2,283,000  |           
|                                                                                      | Loss on sale/impairment of equipment                                                              |                                                    |                                                          | 37,000     |            |            |           | 23,000      |            |             |           | 93,000     |           
|                                                                                      | Reduction in purchase price of acquired companies                                                 |                                                    |                                                          |           |            |            |           |            |            |             |           | (769,000   | )         
|                                                                                      | Tax benefit from exercise of stock options                                                        |                                                    |                                                          |           |            |            |           | 879,000     |            |             |           | 89,000     |           
|                                                                                      | Changes in operating assets and liabilities, net
    of effects from acquisitions:                |                                                    |                                                          |            |            |            |           |             |            |             |           |            |           
|                                                                                      |                                                                                                   | Contracts and trade receivables, net               |                                                          |            | (2,271,000 | )          |           |             | 659,000    |             |           |            | 3,369,000  |           
|                                                                                      |                                                                                                   | Costs and estimated earnings in excess of billings |                                                          |            | (1,297,000 | )          |           |             | (1,807,000 | )           |           |            | (1,545,000 | )         
|                                                                                      |                                                                                                   | Prepaid expenses and other current assets          |                                                          |            | (73,000    | )          |           |             | (366,000   | )           |           |            | 108,000    |           
|                                                                                      |                                                                                                   | Trade accounts payable and accrued liabilities     |                                                          |            | (540,000   | )          |           |             | 277,000    |             |           |            | (270,000   | )         
|                                                                                      |                                                                                                   | Billings in excess of costs and estimated earnings |                                                          |            | 249,000    |            |           |             | (341,000   | )           |           |            | (1,042,000 | )         
|                                                                                      |                                                                                                   | Deferred tax liabilities                           |                                                          |            | 629,000    |            |           |             | 306,000    |             |           |            | (28,000    | )         
|                                                                                      |                                                                                                   |                                                    |                                                          |            |            |            |           |             |            |             |           |           
|                                                                                      |                                                                                                   |                                                    | Net cash provided by operating activities                |            |            | 3,012,000  |           |             |            | 7,828,000   |           |            |            | 10,096,000 |  
|                                                                                      |                                                                                                   |                                                    |                                                          |            |            |            |           |             |            |             |           |           
|Cash flows from investing
    activities:                                             |                                                                                                   |                                                    |                                                          |            |            |            |           |             |            |             |           |           
|                                                                                      | Net cash expended for acquisitions                                                                |                                                    |                                                          | (1,383,000 | )          |            |           | (5,834,000  | )          |             |           | (8,048,000 | )         
|                                                                                      | Additions to equipment and leasehold improvements                                                 |                                                    |                                                          | (1,341,000 | )          |            |           | (1,575,000  | )          |             |           | (1,872,000 | )         
|                                                                                      | Proceeds from (purchase of) securities
    held-to-maturity                                       |                                                    |                                                          |           |            |            |           | (11,521,000 | )          |             |           | 8,357,000  |           
|                                                                                      | Proceeds from sales of equipment                                                                  |                                                    |                                                          | 3,000      |            |            |           | 15,000      |            |             |           | 134,000    |           
|                                                                                      |                                                                                                   |                                                    |                                                          |            |            |            |           |             |            |             |           |           
|                                                                                      |                                                                                                   |                                                    | Net cash used in investing activities                    |            |            | (2,721,000 | )         |             |            | (18,915,000 | )         |            |            | (1,429,000 | )
|                                                                                      |                                                                                                   |                                                    |                                                          |            |            |            |           |             |            |             |           |           
|Cash flows from financing
    activities:                                             |                                                                                                   |                                                    |                                                          |            |            |            |           |             |            |             |           |           
|                                                                                      | Payments on line of credit, net                                                                   |                                                    |                                                          | 651,000    |            |            |           | (2,294,000  | )          |             |           |           |           
|                                                                                      | Principal payments on long-term debt and capital
    lease obligations, including current portion |                                                    |                                                          | (1,520,000 | )          |            |           | (3,528,000  | )          |             |           | (705,000   | )         
|                                                                                      | Repurchase of common stock                                                                        |                                                    |                                                          | (136,000   | )          |            |           | (433,000    | )          |             |           |           |           
|                                                                                      | Proceeds from exercise of stock options                                                           |                                                    |                                                          | 188,000    |            |            |           | 596,000     |            |             |           | 159,000    |           
|                                                                                      | Net proceeds from stock offering                                                                  |                                                    |                                                          |           |            |            |           | 27,915,000  |            |             |           |           |           
|                                                                                      |                                                                                                   |                                                    |                                                          |            |            |            |           |             |            |             |           |           
|                                                                                      |                                                                                                   |                                                    | Net cash (used in) provided by financing
    activities  |            | $          | (817,000   | )         |             | $          | 22,256,000  |           |            | $          | (546,000   | )
|                                                                                      |                                                                                                   |                                                    |                                                          |            |            |            |           |             |            |             |           |           
|                                                                                      |                                                                                                   |                                                    | Net (decrease) increase in cash and cash
    equivalents |            |            | (526,000   | )         |             |            | 11,169,000  |           |            |            | 8,121,000  |  
|                                                                                      | Cash and cash equivalents, beginning of year                                                      |                                                    |                                                          | 1,569,000  |            |            |           | 1,043,000   |            |             | $         | 12,212,000 |           
|                                                                                      |                                                                                                   |                                                    |                                                          |            |            |            |           |             |            |             |           |           
|                                                                                      | Cash and cash equivalents, end of year                                                            |                                                    | $                                                        | 1,043,000  |            |            | $         | 12,212,000  |            |             | $         | 20,333,000 |           
|                                                                                      |                                                                                                   |                                                    |                                                          |            |            |            |           |             |            |             |           |           

See supplemental cash flow information at
Note 15.

See accompanying notes to consolidated financial
statements.

36



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##### Table of Contents



THE KEITH COMPANIES, INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Years ended December 31, 2000, 2001 and
2002




|    |                                           
|--- | ------------------------------------------
|(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 industrial/ energy
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 (SFAS
No. 115). 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. Included in the
Companys Securities balance is $1,300,000 representing
collateral related to a 12 month letter of credit, which is
securing a facility lease in Irvine, California and which
expires in November 2003.



| |                                              
| | ---------------------------------------------
| | 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

37



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##### Table of Contents



THE KEITH COMPANIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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
subcontractor 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, 2001 and 2002, 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 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 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.



| |             
| | ------------
| | 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.

38



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##### Table of Contents



THE KEITH COMPANIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |              
| | -------------
| | Stock Options

The Company accounts for its stock options 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 options. 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 expense over the vesting period.
Alternatively, SFAS No. 123 allows entities to
continue to apply the provisions of APB Opinion No. 25 and
provide 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 provide the pro forma
disclosure provisions of SFAS No. 123.

Had the Company determined compensation cost
based on the fair value at the grant date for its stock options
under SFAS No. 123, the Companys net income
would have been adjusted to the pro forma amount indicated below:

|                            |             |                          |   |           |  |      |   |           |  |  |   |           | 
|--------------------------- | ----------- | ------------------------ | - | --------- |  | ---- | - | --------- |  |  | - | --------- | 
|                            |             |                         
|                            |             | Years Ended December 31,
|                            |             |                         
|                            |             | 2000                     |   | 2001      |  | 2002
|                            |             |                          |   |           |  |     
|Net income:                 |             |                          |   |           |  |      |   |           |  |  |   |          
|                            | As reported |                          | $ | 4,720,000 |  |      | $ | 5,849,000 |  |  | $ | 7,808,000 | 
|                            | Pro forma   |                          | $ | 4,481,000 |  |      | $ | 5,496,000 |  |  | $ | 7,404,000 | 
|Basic earnings per share:   |             |                          |   |           |  |      |   |           |  |  |   |          
|                            | As reported |                          | $ | 0.95      |  |      | $ | 0.89      |  |  | $ | 1.06      | 
|                            | Pro forma   |                          | $ | 0.90      |  |      | $ | 0.83      |  |  | $ | 1.01      | 
|Diluted earnings per share: |             |                          |   |           |  |      |   |           |  |  |   |          
|                            | As reported |                          | $ | 0.89      |  |      | $ | 0.82      |  |  | $ | 0.99      | 
|                            | Pro forma   |                          | $ | 0.85      |  |      | $ | 0.77      |  |  | $ | 0.94      | 

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

|                                                                         |  |                          |      |      |  |      |      |   |  |   |      |  
|------------------------------------------------------------------------ |  | ------------------------ | ---- | ---- |  | ---- | ---- | - |  | - | ---- | -
|                                                                         |  |                         
|                                                                         |  | Years Ended December 31,
|                                                                         |  |                         
|                                                                         |  | 2000                     |      | 2001 |  | 2002
|                                                                         |  |                          |      |      |  |     
|Weighted average stock price per share of common
    stock at grant date |  | $                        | 5.50 |      |  | $    | 7.69 |   |  | $ | 8.21 |  
|Weighted average exercise price per option granted                       |  | $                        | 5.50 |      |  | $    | 7.69 |   |  | $ | 8.21 |  
|Expected volatility                                                      |  |                          | 51.5 | %    |  |      | 76.2 | % |  |   | 68.4 | %
|Risk-free interest rate                                                  |  |                          | 5.0  | %    |  |      | 4.2  | % |  |   | 2.74 | %
|Expected Option term (years)                                             |  |                          | 5    |      |  |      | 5    |   |  |   | 5    |  
|Stock dividend yield                                                     |  |                          | 0.0  | %    |  |      | 0.0  | % |  |   | 0.0  | %

The weighted average fair value of options
granted during the years ended December 2000, 2001, and 2002 was
$3.03, $8.91, and $7.76 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 the
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 during the reporting period, net of
shares assumed to be repurchased using the treasury stock
method. 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

39



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##### Table of Contents



THE KEITH COMPANIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

estimated and included 138,219, 169,989 and
260,917 weighted average contingently issuable shares in its
diluted EPS computation for the years ended December 31,
2000, 2001 and 2002, respectively.

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,
|                                                                                                                                   |  |                         
|                                                                                                                                   |  | 2000                     |           | 2001 |  | 2002
|                                                                                                                                   |  |                          |           |      |  |     
|Weighted average shares used for the basic EPS
    computation                                                                     |  |                          | 4,983,692 |      |  |      | 6,604,367 |  |  |  | 7,363,073 | 
|Incremental shares from the assumed exercise of
    dilutive stock options and stock warrants and contingently
    issuable shares |  |                          | 315,987   |      |  |      | 488,138   |  |  |  | 505,804   | 
|                                                                                                                                   |  |                          |           |      |  |      |           |  |  |  |           | 
|Weighted average shares used for the diluted EPS
    computation                                                                   |  |                          | 5,299,679 |      |  |      | 7,092,505 |  |  |  | 7,868,877 | 
|                                                                                                                                   |  |                          |           |      |  |      |           |  |  |  |           | 

There were 475,248, 84,959 and 138,693
anti-dilutive weighted potential common shares excluded from the
above calculation in 2000, 2001 and 2002, 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.

The accounting policies that are most important
to the portrayal of the Companys financial condition and
results of operations, and require managements most
difficult, subjective or complex judgements, are considered to
be 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. Management
believes that each of the assumptions and estimates are
appropriate in the circumstances, and represent the most likely
future outcome. Management believes the critical accounting
policies relate to estimates of costs to complete and revenue
recognition on contracts, estimates as to the assessment of
collectibility of contracts and trade receivables, and estimates
used to determine if goodwill is impaired.



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

As of December 31, 2002, approximately 8% of
the Companys work force is covered by collective
bargaining agreements that expire during 2004 and 2005.



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

Certain 2000 and 2001 balances have been
reclassified to conform to the presentation used in 2002.

(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

40



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##### Table of Contents



THE KEITH COMPANIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

in California. The closures were primarily due to
lower than expected operating results and continuing difficult
market conditions. In accordance with Generally Accepted
Accounting Principles (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.

(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 year ended December 31, 2002.
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 2000 and 2001:

|                                                          |  |                          |           |      |  |      |           |  |  |   |           | 
|--------------------------------------------------------- |  | ------------------------ | --------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                                                          |  |                         
|                                                          |  | Years Ended December 31,
|                                                          |  |                         
|                                                          |  | 2000                     |           | 2001 |  | 2002
|                                                          |  |                          |           |      |  |     
|Net income:                                               |  |                          |           |      |  |      |           |  |  |   |           | 
|Reported net income                                       |  | $                        | 4,720,000 |      |  | $    | 5,849,000 |  |  | $ | 7,808,000 | 
|Add back: Goodwill amortization (net of income
    taxes) |  |                          | 132,000   |      |  |      | 264,000   |  |  |   |          | 
|                                                          |  |                          |           |      |  |      |           |  |  |   |           | 
|Adjusted net income                                       |  | $                        | 4,852,000 |      |  | $    | 6,113,000 |  |  | $ | 7,808,000 | 
|                                                          |  |                          |           |      |  |      |           |  |  |   |           | 
|Basic earnings per share:                                 |  |                          |           |      |  |      |           |  |  |   |           | 
|Reported basic earnings per share                         |  | $                        | 0.95      |      |  | $    | 0.89      |  |  | $ | 1.06      | 
|Add back: Goodwill amortization (net of income
    taxes) |  |                          | 0.03      |      |  |      | 0.04      |  |  |   |          | 
|                                                          |  |                          |           |      |  |      |           |  |  |   |           | 
|Adjusted basic earnings per share                         |  | $                        | 0.98      |      |  | $    | 0.93      |  |  | $ | 1.06      | 
|                                                          |  |                          |           |      |  |      |           |  |  |   |           | 
|Diluted earnings per share:                               |  |                          |           |      |  |      |           |  |  |   |           | 
|Reported diluted earnings per share                       |  | $                        | 0.89      |      |  | $    | 0.82      |  |  | $ | 0.99      | 
|Add back: Goodwill amortization (net of income
    taxes) |  |                          | 0.02      |      |  |      | 0.04      |  |  |   |          | 
|                                                          |  |                          |           |      |  |      |           |  |  |   |           | 
|Adjusted diluted earnings per share                       |  | $                        | 0.91      |      |  | $    | 0.86      |  |  | $ | 0.99      | 
|                                                          |  |                          |           |      |  |      |           |  |  |   |           | 

For financial reporting purposes, the Company has
grouped its operations into two primary reportable segments:
Real Estate Development and Public Works/ Infrastructure
(REPWI) and Industrial/ Energy

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THE KEITH COMPANIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(IE). The changes in the carrying
amount of goodwill as reported by each reportable segment for
the year ended December 31, 2002 is as follows:

|                                 |  |       |            |    |  |       |           |  |  |   |            | 
|-------------------------------- |  | ----- | ---------- | -- |  | ----- | --------- |  |  | - | ---------- | 
|                                 |  | REPWI |            | IE |  | Total
|                                 |  |       |            |    |  |      
|Balance as of December 31, 2001  |  | $     | 10,457,000 |    |  | $     | 3,795,000 |  |  | $ | 14,252,000 | 
|Goodwill generated during period |  |       | 8,290,000  |    |  |       |          |  |  |   | 8,290,000  | 
|Purchase price adjustments       |  |       | (556,000   | )  |  |       | 1,070,000 |  |  |   | 514,000    | 
|                                 |  |       |            |    |  |       |           |  |  |   |            | 
|Balance as of December 31, 2002  |  | $     | 18,191,000 |    |  | $     | 4,865,000 |  |  | $ | 23,056,000 | 
|                                 |  |       |            |    |  |       |           |  |  |   |            | 

The Company has completed its transitional and
annual impairment testing and no changes to the carrying value
of goodwill were made as a result of the adoption of SFAS
No. 142. Subsequent impairment testing will take place
annually as well as when a triggering event indicating
impairment may have occurred.

(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
$10.8 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 $3.1 million to be paid in the Companys
common stock. Approximately $1.6 million in value of shares
was issued in 2002, with the remaining $1.5 million in
value of shares to be issued in 2003, which is subject to
certain adjustments as set forth in the purchase agreement.

In accordance with SFAS No. 141, this
acquisition was accounted for using the purchase method of
accounting. Therefore, the Company recorded adjusted goodwill of
$8,290,000, 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.

The following table summarizes the estimated fair
value of the assets acquired and liabilities assumed at the date
of the acquisition:

ALNM Group, Inc.

As of March 1, 2002





|                                     |  |   |            |  
|------------------------------------ |  | - | ---------- | -
|Current assets                       |  | $ | 4,658,000  |  
|Equipment and leasehold improvements |  |   | 492,000    |  
|Goodwill                             |  |   | 8,290,000  |  
|                                     |  |   |            |  
|Total assets acquired                |  |   | 13,440,000 |  
|Liabilities assumed                  |  |   | (2,610,000 | )
|                                     |  |   |            |  
|Net assets acquired                  |  | $ | 10,830,000 |  
|                                     |  |   |            |  



| |                       
| | ----------------------
| | 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

42



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THE KEITH COMPANIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

price of $3,309,000, paid in cash. 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 2002,
2003 and 2004. The Company completed the preliminary calculation
of the 2002 earn-out and recorded an estimated liability of
$1.4 million, of which 50% would be paid in the form of the
Companys common stock and 50% would be paid in cash. 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.

In accordance with SFAS No. 141, this
acquisition was accounted for using the purchase method of
accounting. Therefore, the Company recorded adjusted goodwill of
$3,273,000, 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 $2,215,000,
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.

In accordance with SFAS No. 141, this
acquisition was accounted for using the purchase method of
accounting. Therefore, the Company recorded adjusted goodwill of
$1,592,000, 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 $2,405,000, 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.



| |                                    
| | -----------------------------------
| | Crosby Mead Benton &
    Associates

On October 13, 2000, TKCI acquired all of
the outstanding shares of common stock of Crosby, Mead, Benton
& Associates (CMB) for an adjusted purchase
price of $1,828,000. The results of CMBs operations have
been included in the consolidated financial statements since
October 2001. This acquisition was accounted for using the
purchase method of accounting. Accordingly, the Company recorded
adjusted goodwill of $1,648,000, which represents the excess of
the purchase price over the fair value of the net tangible

43



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THE KEITH COMPANIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, 2001 and 2002 consist of the following:

|                                          |                                           |      |            |           |  |   |            |           | 
|----------------------------------------- | ----------------------------------------- | ---- | ---------- | --------- |  | - | ---------- | --------- | 
|                                          |                                           | 2001 |            | 2002     
|                                          |                                           |      |            |          
|Equipment                                 |                                           | $    | 11,331,000 |           |  | $ | 12,815,000 |          
|Leasehold improvements                    |                                           |      | 481,000    |           |  |   | 613,000    |          
|Accumulated depreciation and amortization |                                           |      | (6,891,000 | )         |  |   | (8,597,000 | )        
|                                          |                                           |      |            |           |  |   |            |          
|                                          | Equipment and leasehold improvements, net |      | $          | 4,921,000 |  |   | $          | 4,831,000 | 
|                                          |                                           |      |            |           |  |   |            |          

(8) Indebtedness



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

|                                    |  |              |           |      |  |   |         |  
|----------------------------------- |  | ------------ | --------- | ---- |  | - | ------- | -
|                                    |  |             
|                                    |  | December 31,
|                                    |  |             
|                                    |  | 2001         |           | 2002
|                                    |  |              |           |     
|Notes payable (see (a) below)       |  | $            | 1,300,000 |      |  | $ |        |  
|Capital lease obligations and other |  |              | 612,000   |      |  |   | 70,000  |  
|                                    |  |              |           |      |  |   |         |  
|                                    |  |              | 1,912,000 |      |  |   | 70,000  |  
|Less current portion                |  |              | (459,000  | )    |  |   | (52,000 | )
|                                    |  |              |           |      |  |   |         |  
|                                    |  | $            | 1,453,000 |      |  | $ | 18,000  |  
|                                    |  |              |           |      |  |   |         |  



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | A $1.3 million unsecured promissory note,
    bearing an interest rate of 8%, was executed in conjunction with
    the Asset Purchase Agreement dated January 31, 2001 between
    the Company and Hook related to the acquisition of substantially
    all of the assets and the assumption of substantially all of the
    liabilities of Hook. This note was cancelled in July 2002 in
    conjunction with the modification agreement relating to the Hook
    acquisition.

In September 2001, the Company entered into a
$10.0 million unsecured line of credit agreement consisting
of three components: (i) an acquisition component,
(ii) an equipment and vehicle financing component, and
(iii) 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 and up to a maximum of $10.0 million less the
aggregate outstanding principal balance of the acquisition, and
equipment and vehicle 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. In
September 2002, the line of credit was amended to extend the
maturity on the equipment and vehicle financing components from
September 2002 to September 2003, and to extend the maturity on
the acquisition and working capital components from June 2003 to
June 2004. This line of credit agreement restricts the payment
of dividends without the banks consent. There were no
amounts outstanding under this line of credit agreement as of
December 31, 2002.

In 2002, the Company entered into a 12 month
$1.3 million letter of credit securing a facility lease in
Irvine, California relating to the Companys Orange County,
Tettemer and Corporate divisions.

44



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##### Table of Contents



THE KEITH COMPANIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(9) Leases

The Company leases equipment and vehicles under
capital lease agreements that expire at various dates through
2006. The capital lease obligations are secured by certain
assets of the Company. The Company also 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 2000, 2001 and 2002 totaled $2,409,000,
$3,109,000 and $4,147,000, 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
$11,000, $9,000 and $233,000 for the years ended
December 31, 2000, 2001 and 2002, respectively. Future
minimum lease payments as of December 31, 2002 are as
follows:

|                                       |            |           |            |           |  |   |         |        | 
|-------------------------------------- | ---------- | --------- | ---------- | --------- |  | - | ------- | ------ | 
|                                       |            | Operating |            | Capital  
|                                       |            | Leases    |            | Leases   
|                                       |            |           |            |          
|Years ending December 31:              |            |           |            |           |  |   |         |       
|                                       | 2003.      |           | $          | 4,737,000 |  |   | $       | 58,000 | 
|                                       | 2004.      |           |            | 3,578,000 |  |   |         | 9,000  | 
|                                       | 2005.      |           |            | 3,267,000 |  |   |         | 6,000  | 
|                                       | 2006.      |           |            | 2,418,000 |  |   |         | 1,000  | 
|                                       | 2007.      |           |            | 1,702,000 |  |   |         |       | 
|                                       | Thereafter |           |            | 2,632,000 |  |   |         |       | 
|                                       |            |           |            |           |  |   |         |       
|Total future minimum lease payments    |            | $         | 18,334,000 |           |  |   | 74,000  |       
|                                       |            |           |            |           |  |   |         |       
|Less amounts representing interest     |            |           |            |           |  |   | (4,000  | )     
|                                       |            |           |            |           |  |   |         |       
|Total obligations under capital leases |            |           |            |           |  |   | 70,000  |       
|Less current portion                   |            |           |            |           |  |   | (52,000 | )     
|                                       |            |           |            |           |  |   |         |       
|Long-term capital lease obligations    |            |           |            |           |  | $ | 18,000  |       
|                                       |            |           |            |           |  |   |         |       

(10) Common Stock and Stock
Plans



| |                   
| | ------------------
| | Stock Option Plans

In 1994, TKCI adopted a stock option plan (the
Plan) under which common stock of TKCI was available for grant.
The number of authorized options to be granted under the Plan
was amended from 1,111,111 in 1999 to 1,600,000 in 2001. 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 issued in connection with the
Plan have ten-year terms that vest and become exercisable
ratably each year for a period of up to five

45



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##### Table of Contents



THE KEITH COMPANIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

years from the grant date. At December 31,
2002, there were 500,272 options available for grant under the
Plan. Stock option activity during the periods indicated is as
follows:

|                             |           |                    |         |                  |   |  |   |       | 
|---------------------------- | --------- | ------------------ | ------- | ---------------- | - |  | - | ----- | 
|                             |           | Number of Shares   |         | Weighted-average
|                             |           | Underlying Options |         | Exercise Price  
|                             |           |                    |         |                 
|Balance at December 31, 1999 |           |                    | 766,282 |                  |   |  |   |      
|                             | Granted   |                    |         | 178,150          |   |  | $ | 4.95  | 
|                             | Exercised |                    |         | (30,095          | ) |  | $ | 3.09  | 
|                             | Forfeited |                    |         | (41,878          | ) |  | $ | 6.69  | 
|                             |           |                    |         |                  |   |  |   |      
|Balance at December 31, 2000 |           |                    | 872,459 |                  |   |  |   |      
|                             | Granted   |                    |         | 181,650          |   |  | $ | 14.03 | 
|                             | Exercised |                    |         | (189,959         | ) |  | $ | 3.13  | 
|                             | Forfeited |                    |         | (66,338          | ) |  | $ | 9.42  | 
|                             |           |                    |         |                  |   |  |   |      
|Balance at December 31, 2001 |           |                    | 797,812 |                  |   |  |   |      
|                             | Granted   |                    |         | 115,500          |   |  | $ | 13.27 | 
|                             | Exercised |                    |         | (29,673          | ) |  | $ | 5.37  | 
|                             | Forfeited |                    |         | (44,161          | ) |  | $ | 13.89 | 
|                             |           |                    |         |                  |   |  |   |      
|Balance at December 31, 2002 |           |                    | 839,478 |                  |   |  |   |      
|                             |           |                    |         |                  |   |  |   |      

The weighted average remaining contractual life
and weighted average exercise price of options outstanding and
of options exercisable as of December 31, 2002, were as follows:

|                |  |             |         |              |  |          |      |             |  |          |       |  |  |  |         |  |  |   |       | 
|--------------- |  | ----------- | ------- | ------------ |  | -------- | ---- | ----------- |  | -------- | ----- |  |  |  | ------- |  |  | - | ----- | 
|                |  |             |         |              |  |         
|                |  | Outstanding |         |             
|                |  |             |         | Exercisable 
|                |  | Number of   |         | Weighted     |  |          |      |            
|                |  | Shares      |         | Average      |  | Weighted |      | Shares      |  | Weighted
|                |  | Underlying  |         | Remaining    |  | Average  |      | Underlying  |  | Average 
|Range of        |  | Options     |         | Contractual  |  | Exercise |      | Options     |  | Exercise
|Exercise Prices |  | Outstanding |         | Life (Years) |  | Price    |      | Exercisable |  | Price   
|                |  |             |         |              |  |          |      |             |  |         
|$2.70 to $4.82  |  |             | 287,577 |              |  |          | 5.15 |             |  | $        | 3.51  |  |  |  | 198,631 |  |  | $ | 3.06  | 
|$5.00 to $9.00  |  |             | 302,901 |              |  |          | 6.84 |             |  | $        | 8.26  |  |  |  | 168,561 |  |  | $ | 8.29  | 
|$9.33 to $22.00 |  |             | 249,000 |              |  |          | 8.52 |             |  | $        | 13.58 |  |  |  | 45,780  |  |  | $ | 12.29 | 
|                |  |             |         |              |  |          |      |             |  |          |       |  |  |  |         |  |  |   |       | 
|                |  |             | 839,478 |              |  |          |      |             |  |          |       |  |  |  | 412,972 |  |  |   |       | 
|                |  |             |         |              |  |          |      |             |  |          |       |  |  |  |         |  |  |   |       | 

At December 31, 2000, 2001 and 2002, the
number of shares of common stock subject to exercisable options
were 363,810, 296,328 and 412,972 respectively, and the
weighted-average exercise prices of those options were $4.22,
$5.54 and $6.22, respectively.



| |               
| | --------------
| | 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

As of December 31, 2002, the Company had two
defined contribution 401(k) plans, which commenced in 1980 and
1988, covering a majority of its employees. These plans are
designed to be tax deferred in

46



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##### Table of Contents



THE KEITH COMPANIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

accordance with the provisions of
Section 401(k) of the Internal Revenue Code. Effective
January 1, 2003, these two 401(k) plans were merged into
one Company plan. Employees may contribute from 1% to 50%,
subject to limitations, of compensation on a tax-deferred basis
through a salary reduction arrangement. Effective
January 1, 2000, the Company increased the employer
contribution percentage to 100% of the first 3%, plus 50% of the
next 2% of employee contributions, vesting immediately. During
2000, 2001 and 2002, the Company incurred $851,000, $1,020,000
and $1,444,000, 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, 2000, 2001 and 2002.

(12) Income Taxes

Income tax expense consists of the following:

|                                                          |         |                          |           |           |           |      |           |           |           |   |           |           |           | 
|--------------------------------------------------------- | ------- | ------------------------ | --------- | --------- | --------- | ---- | --------- | --------- | --------- | - | --------- | --------- | --------- | 
|                                                          |         |                         
|                                                          |         | Years Ended December 31,
|                                                          |         |                         
|                                                          |         | 2000                     |           | 2001      |           | 2002
|                                                          |         |                          |           |           |           |     
|Current:                                                  |         |                          |           |           |           |      |           |           |           |   |           |          
|                                                          | Federal |                          | $         | 2,036,000 |           |      | $         | 2,701,000 |           |   | $         | 3,738,000 |          
|                                                          | State   |                          |           | 534,000   |           |      |           | 700,000   |           |   |           | 899,000   |          
|                                                          |         |                          |           |           |           |      |           |           |           |   |           |          
|                                                          |         | Subtotal                 |           |           | 2,570,000 |      |           |           | 3,401,000 |   |           |           | 4,637,000 | 
|                                                          |         |                          |           |           |           |      |           |           |           |   |           |          
|Deferred:                                                 |         |                          |           |           |           |      |           |           |           |   |           |          
|                                                          | Federal |                          |           | 514,000   |           |      |           | 267,000   |           |   |           | 276,000   |          
|                                                          | State   |                          |           | 115,000   |           |      |           | 39,000    |           |   |           | 79,000    |          
|                                                          |         |                          |           |           |           |      |           |           |           |   |           |          
|                                                          |         | Subtotal                 |           |           | 629,000   |      |           |           | 306,000   |   |           |           | 355,000   | 
|                                                          |         |                          |           |           |           |      |           |           |           |   |           |          
|                                                          |         | Total                    |           | $         | 3,199,000 |      |           | $         | 3,707,000 |   |           | $         | 4,992,000 | 
|                                                          |         |                          |           |           |           |      |           |           |           |   |           |          
|Provision for income taxes from continuing
    operations |         | $                        | 3,199,000 |           |           | $    | 3,916,000 |           |           | $ | 5,397,000 |          
|Provision (benefit) from discontinued
    operations      |         |                          |          |           |           |      | (209,000  | )         |           |   | (405,000  | )        
|                                                          |         |                          |           |           |           |      |           |           |           |   |           |          
|Total provision for income taxes                          |         | $                        | 3,199,000 |           |           | $    | 3,707,000 |           |           | $ | 4,992,000 |          
|                                                          |         |                          |           |           |           |      |           |           |           |   |           |          

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,
|                                                                |  |                         
|                                                                |  | 2000                     |           | 2001 |  | 2002
|                                                                |  |                          |           |      |  |     
|Computed expected federal income tax
    expense              |  | $                        | 2,692,000 |      |  | $    | 3,432,000 |   |  | $ | 4,704,000 |  
|State income tax expense, net of federal income
    tax benefit |  |                          | 451,000   |      |  |      | 513,000   |   |  |   | 699,000   |  
|Other                                                           |  |                          | 56,000    |      |  |      | (29,000   | ) |  |   | (6,000    | )
|                                                                |  |                          |           |      |  |      |           |   |  |   |           |  
|                                                                |  | $                        | 3,199,000 |      |  | $    | 3,916,000 |   |  | $ | 5,397,000 |  
|                                                                |  |                          |           |      |  |      |           |   |  |   |           |  

Current income tax expense does not reflect a
$879,000 and $89,000 tax benefit related to the exercise of
employee stock options during 2001 and 2002, 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.

47



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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,                  
|                          |                                                    |                               
|                          |                                                    | 2001                           |   | 2002     
|                          |                                                    |                                |   |          
|Deferred tax assets:      |                                                    |                                |   |           |           |  |   |          
|                          | Accrued liabilities and employee compensation      |                                | $ | 333,000   |           |  | $ | 401,000   |          
|                          | Billings in excess of costs and estimated earnings |                                |   | 523,000   |           |  |   | 497,000   |          
|                          | Allowance for doubtful accounts                    |                                |   | 471,000   |           |  |   | 529,000   |          
|                          | State tax                                          |                                |   | 168,000   |           |  |   | 220,000   |          
|                          | Other                                              |                                |   | 119,000   |           |  |   | 267,000   |          
|                          |                                                    |                                |   |           |           |  |   |          
|                          |                                                    | Total deferred tax assets      |   |           | 1,614,000 |  |   |           | 1,914,000 | 
|                          |                                                    |                                |   |           |           |  |   |          
|Deferred tax liabilities: |                                                    |                                |   |           |           |  |   |          
|                          | Equipment and improvements, net                    |                                |   | 360,000   |           |  |   | 363,000   |          
|                          | Section 481, change from cash to accrual           |                                |   | 965,000   |           |  |   | 1,175,000 |          
|                          | Costs and estimated earnings in excess of billings |                                |   | 2,934,000 |           |  |   | 4,056,000 |          
|                          | Goodwill amortization                              |                                |   | 205,000   |           |  |   | 584,000   |          
|                          | Prepaid expenses                                   |                                |   | 162,000   |           |  |   | 236,000   |          
|                          | Other                                              |                                |   | 287,000   |           |  |   | 240,000   |          
|                          |                                                    |                                |   |           |           |  |   |          
|                          |                                                    | Total deferred tax liabilities |   |           | 4,913,000 |  |   |           | 6,654,000 | 
|                          |                                                    |                                |   |           |           |  |   |          
|                          |                                                    | Net deferred tax liabilities   |   | $         | 3,299,000 |  |   | $         | 4,740,000 | 
|                          |                                                    |                                |   |           |           |  |   |          

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, 2002, 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 Industrial/ Energy
(IE). 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 IE 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.

48



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##### Table of Contents



THE KEITH COMPANIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The acquisition of CMB in October 2000, 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 IE reporting segment.

The following tables set forth information
regarding the Companys operating segments as of and for
the years ended December 31, 2000, 2001 and 2002:

|                                  |  |                              |            |           |  |       |           |              |  |   |            |   |  |   |            | 
|--------------------------------- |  | ---------------------------- | ---------- | --------- |  | ----- | --------- | ------------ |  | - | ---------- | - |  | - | ---------- | 
|                                  |  |                             
|                                  |  | Year Ended December 31, 2000
|                                  |  |                             
|                                  |  |                              |            | Corporate |  |      
|                                  |  | REPWI                        |            | IE        |  | Costs |           | Consolidated
|                                  |  |                              |            |           |  |       |           |             
|Net revenue                       |  | $                            | 48,939,000 |           |  | $     | 4,442,000 |              |  | $ |           |   |  | $ | 53,381,000 | 
|Income from operations            |  | $                            | 12,433,000 |           |  | $     | 733,000   |              |  | $ | (4,981,000 | ) |  | $ | 8,185,000  | 
|Loss from discontinued operations |  | $                            |           |           |  | $     |          |              |  | $ |           |   |  | $ |           | 
|Identifiable assets               |  | $                            | 31,294,000 |           |  | $     | 2,018,000 |              |  | $ |           |   |  | $ | 33,312,000 | 

|                                  |  |                              |            |           |  |       |            |              |  |   |            |   |  |   |            |  
|--------------------------------- |  | ---------------------------- | ---------- | --------- |  | ----- | ---------- | ------------ |  | - | ---------- | - |  | - | ---------- | -
|                                  |  |                             
|                                  |  | Year Ended December 31, 2001
|                                  |  |                             
|                                  |  |                              |            | Corporate |  |      
|                                  |  | REPWI                        |            | IE        |  | 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                        |            | IE        |  | 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 |  



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

In 2000, 2001 and 2002, 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, 2001 and
2002.

(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, trade
accounts payable, accrued employee compensation, and other
accrued liabilities approximate their fair values due to the
short-term nature of these instruments.

At December 31, 2001, notes payable with
carrying amounts of $180,000, which approximates fair value, was
determined using estimates for similar debt instruments. At
December 31, 2001, the fair value of a note payable with a
carrying amount of $1,300,000 was not determinable due to the
nature of the financing (see Note 8).

49



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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,                                  
|                                                  |                                             |                                                           
|                                                  |                                             | 2000                                                       |   | 2001      |           | 2002
|                                                  |                                             |                                                            |   |           |           |     
|Supplemental disclosure of cash flow information: |                                             |                                                            |   |           |           |      |   |           |         |  |   |          
|                                                  | Cash paid during the year for interest      |                                                            | $ | 377,000   |           |      | $ | 275,000   |         |  | $ | 34,000    |          
|                                                  |                                             |                                                            |   |           |           |      |   |           |         |  |   |          
|                                                  | Cash paid during the year for income taxes  |                                                            | $ | 2,602,000 |           |      | $ | 1,661,000 |         |  | $ | 3,808,000 |          
|                                                  |                                             |                                                            |   |           |           |      |   |           |         |  |   |          
|                                                  | Noncash financing and investing activities: |                                                            |   |           |           |      |   |           |         |  |   |           |          
|                                                  |                                             | Purchase price adjustment to issuable common stock         |   | $         |          |      |   | $         |        |  |   | $         | 715,000   | 
|                                                  |                                             |                                                            |   |           |           |      |   |           |         |  |   |          
|                                                  |                                             | Purchase price adjustment to goodwill                      |   | $         | 1,670,000 |      |   | $         |        |  |   | $         | 383,000   | 
|                                                  |                                             |                                                            |   |           |           |      |   |           |         |  |   |          
|                                                  |                                             | 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 | 
|                                                  |                                             |                                                            |   |           |           |      |   |           |         |  |   |          

The initial purchase price allocation related to
the acquisitions of CMB in 2000, Hook, PEC and UEI in 2001 and
ALNM in 2002 resulted in the following increases:

|                                                                       |  |      |            |      |  |      |            |   |  |   |            |  
|---------------------------------------------------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                                                                       |  | 2000 |            | 2001 |  | 2002
|                                                                       |  |      |            |      |  |     
|Contracts and trade receivables                                        |  | $    | (2,642,000 | )    |  | $    | (7,187,000 | ) |  | $ | (3,208,000 | )
|Costs and estimated earnings in excess of billings                     |  |      |           |      |  |      | (129,000   | ) |  |   | (843,000   | )
|Prepaid expenses and other current assets                              |  |      | (33,000    | )    |  |      | (34,000    | ) |  |   | (124,000   | )
|Goodwill                                                               |  |      | (2,000,000 | )    |  |      | (6,479,000 | ) |  |   | (8,421,000 | )
|Equipment and leasehold improvements                                   |  |      | (214,000   | )    |  |      | (745,000   | ) |  |   | (492,000   | )
|Other assets                                                           |  |      | (71,000    | )    |  |      | (116,000   | ) |  |   | (87,000    | )
|Line of credit                                                         |  |      | 74,000     |      |  |      | 269,000    |   |  |   |           |  
|Billings in excess of costs and estimated earnings                     |  |      | 200,000    |      |  |      | 1,723,000  |   |  |   |           |  
|Long-term debt, including current portion                              |  |      | 503,000    |      |  |      | 1,720,000  |   |  |   |           |  
|Accounts payable, accrued expenses and other
    liabilities           |  |      | 1,335,000  |      |  |      | 3,210,000  |   |  |   | 1,046,000  |  
|Deferred tax liabilities                                               |  |      | 465,000    |      |  |      | 734,000    |   |  |   | 1,532,000  |  
|Issuable common stock                                                  |  |      | 1,000,000  |      |  |      | 1,200,000  |   |  |   | 3,300,000  |  
|                                                                       |  |      |            |      |  |      |            |   |  |   |            |  
|Net initial cash expended for acquisitions                             |  | $    | (1,383,000 | )    |  | $    | (5,834,000 | ) |  | $ | (7,297,000 | )
|Additional cash expended during the year for
    previous acquisitions |  |      |           |      |  |      |           |   |  |   | (751,000   | )
|                                                                       |  |      |            |      |  |      |            |   |  |   |            |  
|Cash expended for acquisitions                                         |  | $    | (1,383,000 | )    |  | $    | (5,834,000 | ) |  | $ | (8,048,000 | )
|                                                                       |  |      |            |      |  |      |            |   |  |   |            |  

50



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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, 2000, 2001
and 2002, the following is supplementary information regarding
valuation and qualifying accounts:

|                                 |      |              |   |                |  |            |   |               |   |  |   |          |   |  |   |           | 
|-------------------------------- | ---- | ------------ | - | -------------- |  | ---------- | - | ------------- | - |  | - | -------- | - |  | - | --------- | 
|                                 |      | Balance at   |   | Provisions for |  |            |   |              
|                                 |      | Beginning of |   | Doubtful       |  |            |   | Balance at   
|                                 |      | Period       |   | Accounts       |  | Deductions |   | End of Period
|                                 |      |              |   |                |  |            |   |              
|Allowance for doubtful accounts: |      |              |   |                |  |            |   |               |   |  |   |          |   |  |   |          
|                                 | 2000 |              | $ | 612,000        |  |            | $ | 671,000       |   |  | $ | (117,000 | ) |  | $ | 1,166,000 | 
|                                 | 2001 |              | $ | 1,166,000      |  |            | $ | (112,000      | ) |  | $ | (103,000 | ) |  | $ | 951,000   | 
|                                 | 2002 |              | $ | 951,000        |  |            | $ | 467,000       |   |  | $ | (295,000 | ) |  | $ | 1,123,000 | 

(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,
chief operating officer and a director of our company, 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) Subsequent Event

In January 2003, we acquired Universal Energy do
Brasil, Ltda. for a nominal amount. The acquisition was made by
exercising an option which was originally included in our
November 2001 acquisition of Universal Energy, Inc.

51



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##### Table of Contents



THE KEITH COMPANIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(20) Supplementary Financial Information
(Unaudited)

The following is unaudited supplementary
financial information for 2001 and 2002:

|                                                   |  |                             |            |         |  |              |            |             |  |   |            |  |  |   |            | 
|-------------------------------------------------- |  | --------------------------- | ---------- | ------- |  | ------------ | ---------- | ----------- |  | - | ---------- |  |  | - | ---------- | 
|                                                   |  |                            
|                                                   |  | For the Quarters Ended 2001
|                                                   |  |                            
|                                                   |  | March 31                    |            | June 30 |  | September 30 |            | December 31
|                                                   |  |                             |            |         |  |              |            |            
|Net revenue                                        |  | $                           | 16,202,000 |         |  | $            | 16,922,000 |             |  | $ | 16,669,000 |  |  | $ | 17,051,000 | 
|Gross profit                                       |  |                             | 5,729,000  |         |  |              | 6,272,000  |             |  |   | 6,169,000  |  |  |   | 5,704,000  | 
|Income from continuing operations                  |  |                             | 1,434,000  |         |  |              | 1,658,000  |             |  |   | 1,775,000  |  |  |   | 1,311,000  | 
|Loss from discontinued operations                  |  |                             | 60,000     |         |  |              | 71,000     |             |  |   | 87,000     |  |  |   | 111,000    | 
|Net income                                         |  |                             | 1,374,000  |         |  |              | 1,587,000  |             |  |   | 1,688,000  |  |  |   | 1,200,000  | 
|Basic earning per share from continuing operations |  | $                           | 0.27       |         |  | $            | 0.25       |             |  | $ | 0.24       |  |  | $ | 0.18       | 

|                                                        |  |                             |            |         |  |              |            |             |  |   |            |  |  |   |            | 
|------------------------------------------------------- |  | --------------------------- | ---------- | ------- |  | ------------ | ---------- | ----------- |  | - | ---------- |  |  | - | ---------- | 
|                                                        |  |                            
|                                                        |  | 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 earnings per share from continuing
    operations |  | $                           | 0.21       |         |  | $            | 0.28       |             |  | $ | 0.41       |  |  | $ | 0.24       | 

52



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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.




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 Controls
and Procedures in our Proxy Statement for our 2003 Annual
Meeting of Shareholders. Such information is incorporated in
this report and made a part hereof by reference.




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 32
    through 52 hereof:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Independent Auditors Report. 
     Consolidated Balance Sheets as of December 31, 2001 and
    2002 
     Consolidated Statements of Income for the years ended
    December 31, 2000, 2001 and 2002 
     Consolidated Statements of Shareholders Equity for the
    years ended December 31, 2000, 2001 and 2002 
     Consolidated Statements of Cash Flows for the years ended
    December 31, 2000, 2001 and 2002 
     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.

53



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| |              
| | -------------
| | (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).   
|        | 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).                                      
|        | 21.0  |             |  | List of Subsidiaries*                                                                                                                                                                                                                                                                                                         
|        | 23.1  |             |  | Consent of Independent Auditors*                                                                                                                                                                                                                                                                                              
|        | 99.1  |             |  | Certification of Chief Executive Officer pursuant
    of Section 906 of Sarbanes/ Oxley Act of 2002*                                                                                                                                                                                                                          
|        | 99.2  |             |  | Certification of Chief Financial Officer pursuant
    of Section 906 of Sarbanes/ Oxley Act of 2002*                                                                                                                                                                                                                          



---



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




(b) Reports on Form 8-K.



| |                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On December 10, 2002, we filed a Current
    Report on Form 8-K relating to the established written
    trading plans under Rule 10b5-1, which certain members of
    our executive management team entered into on December 6,
    2002.
|
| | On February 14, 2003, we filed a Current
    Report on Form 8-K relating to a press release announcing
    2002 Year End results dated February 13, 2003.                                                                                

54



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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 21, 2003

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 21, 2003
|                                              
|/s/ ERIC C. NIELSENEric C. Nielsen             |  | President, Chief Operating Officer, and Director                                                    |  | March 21, 2003
|                                              
|/s/ GARY C. CAMPANAROGary C. Campanaro         |  | Chief Financial Officer,
    Secretary and Director(Principal Financial and
    Accounting Officer) |  | March 21, 2003
|                                              
|/s/ GEORGE DEUKMEJIANGeorge Deukmejian         |  | Director                                                                                            |  | March 21, 2003
|                                              
|/s/ CHRISTINE DIEMER IGERChristine Diemer Iger |  | Director                                                                                            |  | March 21, 2003
|                                              
|/s/ EDWARD R. MULLEREdward R. Muller           |  | Director                                                                                            |  | March 21, 2003

55



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##### Table of Contents



Certification of

Chief Executive Officer


Of The Keith Companies, Inc.


I, Aram H. Keith, certify that:



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this annual report on Form 10-K of The Keith Companies,
    Inc.;                                                                                                                                                                                                                                                           
|
| | 2.     Based on my
    knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report;                       
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and we have:                                                                                                       



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) Designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) Evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) Presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officers and I have indicated
    in this annual report whether or not there were significant
    changes in internal controls or in other factors that could
    significantly affect internal controls subsequent to the date of
    our most recent evaluation, including any corrective actions
    with regard to significant deficiencies and material weaknesses.

Date: March 21, 2003



| |                               
| | ------------------------------
| | /s/ ARAM H. KEITH             
| |                               
| | By: Aram H. Keith             
| | Title: Chief Executive Officer



---



##### Table of Contents



Certification of

Chief Financial Officer


Of The Keith Companies, Inc.


I, Gary C. Campanaro, certify that:



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this annual report on Form 10-K of The Keith Companies,
    Inc.;                                                                                                                                                                                                                                                           
|
| | 2.     Based on my
    knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report;                       
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and we have:                                                                                                       



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) Designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) Evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) Presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officers and I have indicated
    in this annual report whether or not there were significant
    changes in internal controls or in other factors that could
    significantly affect internal controls subsequent to the date of
    our most recent evaluation, including any corrective actions
    with regard to significant deficiencies and material weaknesses.

Date: March 21, 2003



| |                               
| | ------------------------------
| | /s/ GARY C. CAMPANARO         
| |                               
| | By: Gary C. Campanaro         
| | Title: Chief Financial Officer



---



##### 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).                                      
|        | 21.0  |             |  | List of Subsidiaries*                                                                                                                                                                                                                                                                                                         
|        | 23.1  |             |  | Consent of Independent Auditors*                                                                                                                                                                                                                                                                                              
|        | 99.1  |             |  | Certification of Chief Executive Officer pursuant
    of Section 906 of Sarbanes/ Oxley Act of 2002*                                                                                                                                                                                                                          
|        | 99.2  |             |  | Certification of Chief Financial Officer pursuant
    of Section 906 of Sarbanes/ Oxley Act of 2002*                                                                                                                                                                                                                          



---



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