Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources

Operating activities provided $5.1 million of cash during the first nine months of fiscal year 2009. This increase was mainly attributable to the reported $4.2 million in net income and a $1.2 million increase in accounts payable due to the increased work levels throughout the Company during the first nine months of fiscal year 2009. Offsetting these was an increase in other contracts receivables and other current assets. Contracts receivable increased $1.7 million during the first nine months of fiscal year 2009 due to overall growth in revenue throughout the Company. Other current assets increased $1.1 million during the first nine months of fiscal year 2009 due to an increase in prepaid project costs associated with the increased work levels throughout the Company.

Financing activities consumed $4.4 million of cash during the first nine months of fiscal year 2009. The Company paid dividends in the amount of $777,000 or $.19 per share and repurchased 207,941 shares of the Class A common stock for $1.8 million. Net cash outflow on long-term debt and capital lease obligations was $1.2 million due mainly to the repayment of a $1.0 million loan by E&E do Brasil. Distributions to minority partners during the first nine months of fiscal year 2009 were approximately $615,000.

The Company maintains unsecured lines of credit available for working capital and letters of credit of $19.0 million with various banks at one-half percent below the prevailing prime rate. Other lines are available solely for letters of credit in the amount of $19.2 million. The Brazilian subsidiary in July 2008 borrowed $1 million under a four month term note at 5.19% annualized interest rate. The Brazilian loan was repaid in full in December 2008. The Company guarantees the Walsh Environmental line of credit. The banks have reaffirmed the Company's lines of credit within the past twelve months. At May 2, 2009 and July 31, 2008 the Company had letters of credit outstanding totaling approximately $.6 million. Borrowings by the Brazilian subsidiary for working capital were $0 and $1.0 million at May 2, 2009 and July 31, 2008, respectively. After letters of credit and loans, there was $37.6 million of line still available at May 2, 2009. The Company believes that cash flows from operations and borrowings against the line of credit will be sufficient to cover all working capital requirements for at least the next twelve months and the foreseeable future.

Results of Operations

Revenue

Fiscal Year 2009 vs 2008

Revenues for the third quarter of fiscal year 2009 were $38.0 million, an increase of $10.6 million from the $27.4 million reported for the third quarter of fiscal year 2008. The increase in revenue was attributable to increased work in the Company's environmental remediation, energy and federal government sectors. Revenues from the Company's majority owned subsidiary Walsh Environmental were $14.8 million for the third quarter of fiscal year 2009, an increase of $8.5 million from the $6.3 million reported in the third quarter of fiscal year 2008. The increase in Walsh Environmental revenues was mainly attributable to increased activity in the environmental remediation market. Revenues of the parent company E&E, Inc increased $2.3 million during the third quarter of fiscal year 2009. The increase in revenue was attributable to increased work on contracts in the Company's commercial and federal government sectors. Revenues from commercial clients of E&E were $6.9 million for the third quarter of fiscal year 2009, an increase of $1.4 million from the $5.5 million reported during the third quarter of the prior year. The increase in commercial revenue was mainly attributable to an increase in work levels on contracts in the energy sector. Revenue from federal government clients of E&E, were $9.2 million during the third quarter of fiscal year 2009, an increase of $4.2 million from the $5.0 million reported in the third quarter of fiscal year 2008. The increase in federal government revenue was mainly attributable to an increase in work levels on various contracts with the United States Department of Defense (DOD) and United States Environmental Protection Agency (EPA). Offsetting these increases was a decrease in work at the parent company in the state sector. Revenue from state clients was $5.2 million during the third quarter of fiscal year 2009, a decrease of $1.8 million from the $7.0 million reported in the prior year.

Revenues for the first nine months of fiscal year 2009 were $105.8 million, an increase of $28.6 million from the $77.1 million reported for the prior year. Revenues from the Company's majority owned subsidiary Walsh Environmental were $32.4 million for the first nine months of fiscal year 2009, an increase of $13.0 million from the $19.4 million reported in the prior year. The increase in Walsh Environmental revenues was mainly attributable to increased activity in the environmental remediation, asbestos and energy markets. Revenues of the parent company E&E, Inc were $64.2 million, an increased of $15.4 million from the $48.8 million reported for the first nine months of fiscal year 2008. The increase in revenue was attributable to increased work on contracts in the Company's commercial and federal government sectors. Revenues from commercial clients of E&E were $21.5 million for the first nine months of fiscal year 2009, an increase of $8.2 million from the $13.3 million reported during the prior year. The increase in commercial revenue was mainly attributable to an increase in work levels on contracts in the energy sector. Revenue from federal government clients of E&E were $25.3 million during the first nine months of fiscal year 2009, an increase of $10.3 million from the $15.0 million reported in the prior year. The increase in federal government revenue was mainly attributable to an increase in work levels on various contracts with DOD and EPA.

Fiscal Year 2008 vs 2007

Revenues for the third quarter of fiscal year 2008 were $27.4 million, an increase of $1.1 million from the $26.3 million reported for the prior year. Revenues from the Company's majority owned subsidiary E&E do Brasil were $1.7 million for the third quarter of fiscal year 2008, an increase of $500,000 from the $1.2 million reported in the third quarter of fiscal year 2007. The increase in E&E do Brasil revenues was mainly attributable to increased work in the public and private power industries. Revenues of the parent company E&E, Inc increased $700,000 during the third quarter of fiscal year 2008 due to increases in work from commercial and state clients. Revenues from state clients increased $.7 million from the $6.3 million reported during the third quarter of the prior year. The increase in state revenue was mainly attributable to an increase in work levels on contracts in Florida. Revenues from commercial clients were $5.5 million for the third quarter of fiscal year 2008, an increase of $1.4 million from the $4.1 million reported during the prior year. The increase in commercial revenue was mainly attributable to an increase in work levels on contracts in the energy sector. Offsetting these increases were decreases in work at the parent company in the federal government sectors. Revenue from federal government clients were $3.8 million during the third quarter of fiscal year 2008, a decrease $1.4 from the $5.2 million reported in the prior year.

Revenue for the nine months of fiscal year 2008 was $77.1 million, an increase of $3.0 million from the $74.1 million reported in the first nine months of the prior year. The increase was mainly attributable to increases in work performed for state clients at the parent company and by EEI's majority owned subsidiaries Walsh Environmental and E&E do Brasil. Revenues from state clients of the parent company were $19.7 million, up $2.8 million from the $16.9 million reported in the prior year. The increase in state revenue was mainly attributable to an increase in work levels on contracts in New York and California. Revenues from Walsh Environmental were $19.4 million for the first nine months of fiscal year 2008, an increase of 10% from the $17.6 million reported in the first nine months of fiscal year 2007. The increase in Walsh Environmental revenues was mainly attributable to increased activity in the environmental remediation and asbestos markets. Revenues from E&E do Brasil were $5.0 million for the first nine months of fiscal year 2008, an increase of $1.6 million or 47% over the prior year due mainly to increased work in the public and private power industries. Offsetting these increases for the first nine months of fiscal year 2008 were reduced revenues in the parent company from work performed on contracts with various commercial and federal government clients. Revenue from commercial clients of the parent company were $13.3 million during the first nine months of fiscal year 2008, a decrease $.8 million from the $14.1 million reported in the prior year. Revenue from federal government clients of the parent company were $11.2 million during the first nine months of fiscal year 2008, a decrease $2.6 million from the $13.8 million reported in the first nine month of fiscal year 2007.

Income From Continuing Operations Before Income Taxes and Minority Interest

Fiscal Year 2009 vs 2008

The Company's income from continuing operations before income taxes and minority interest was $1.8 million for the third quarter of fiscal year 2009, an increase of $1.2 million or 200% from the $.6 million reported in the third quarter of fiscal year 2008. Gross profits increased $1.6 million during the third quarter of fiscal year 2009 as a result of the increased revenue reported at the parent company E&E, Inc. and Walsh Environmental, offset by an increase in corporate wide subcontractor costs. The increase in subcontractor costs was primarily related to the increase in environmental remediation work at Walsh Environmental. The increased gross profits were offset by higher indirect costs at the parent company E&E, Inc. and Walsh Environmental. The increase in indirect costs was mainly attributable to an increase in staffing levels due to their overall business growth. The Company the released the remaining accrual for Kuwait taxes and FASB Interpretation No. 48 "Uncertainty in Income Taxes" ("FIN 48") charges of approximately $1.4 million (net of deferred) by reducing the current quarter's income tax provision by $850,000 and reducing interest expense and general and administrative costs each by $275,000. In addition the Company has recorded a charge against revenue during the quarter in the amount of $925,000 to reserve the balance of accounts receivable from the work performed in the Middle East. The Company's reversal of the FIN 48 accrual and charges for reserving the Middle East receivables reduced the income from continuing operations before income taxes and minority interest by $.4 million.

The Company's income from continuing operations before income taxes and minority interest was $6.9 million for the first nine months of fiscal year 2009, an increase of $4.1 million or 146% from the $2.8 million reported in the first nine months of fiscal year 2008. Gross profits increased 19% as a result of the increased revenues reported at E&E and Walsh Environmental, offset by an increase in corporate wide subcontractor costs. The increased gross profits were offset by higher indirect costs attributable to increased staffing levels and increased business development costs worldwide. E&E do Brasil recorded an exchange loss of $385,000 ($0.05 per share after tax) during the second quarter of fiscal year 2009 due to the repayment of a $1.0 million loan denominated in US dollars.

Fiscal Year 2008 vs 2007

The Company's income from continuing operations before income taxes and minority interest was $609,000 for the third quarter of fiscal year 2008, down 59% from the $1.5 million reported in the third quarter of fiscal year 2007. Gross profits increased slightly during the third quarter of fiscal year 2008 as a result of the increased revenue reported at E&E do Brasil and the parent company. The slight increase in gross profits were offset by increased costs associated with the Company's FIN 48 Kuwait tax accrual as well as higher indirect costs at the Company's subsidiary E&E do Brasil. For the three months ended April 26, 2008, E&E recorded an additional FIN 48 accrual of $420,000 or $.08 per share after tax. The FIN 48 accrual included additional interest and penalties of approximately $201,000 ($.04 per share after tax) as well as a foreign exchange loss of $219,000 ($.04 per share after tax) to adjust the FIN48 Kuwait tax reserve to current exchange rates. This expense is related to the contested Kuwait taxes. The Company has continued its assertion of a contractual obligation for reimbursement from the Public Authority for Assessment of Compensation for Damages Resulting from Iraqi Aggression (PAAC) should any tax liability be agreed to with the Kuwait Ministry of Finance, however the assessment of this reimbursement in not permitted under FIN 48. E&E do Brasil reported an increase of $244,000 in indirect costs during the third quarter of fiscal year 2008 due to increase in staffing and additional office space needed to accommodate the increased work load. The parent company has experienced significant increases in labor utilization since the end of the third quarter and expects this upsurge in direct hours to continue throughout the balance of the fourth quarter.

The Company's income from continuing operations before income taxes and minority interest was $2.8 million for the first nine months of fiscal year 2008, down 42% from the $4.8 million reported in the first nine months of fiscal year 2007. Gross profits increased as a result of the increased revenues reported at Walsh Environmental and E & E do Brasil and a decrease in corporate wide subcontractor costs. The increased gross profits were offset by higher indirect costs during the first nine months of fiscal year 2008. Consolidated indirect costs increased $2.2 million during the first nine months of fiscal year 2008 as a result of an increase in marketing and bid and proposal costs and costs associated with increased staffing levels at Walsh Environmental, E&E do Brasil and the parent company. Marketing and bid and proposal costs were $8.7 million for the first nine months of fiscal year 2008, an increase of $.9 million from the $7.8 million reported in the prior year. The Company continues to increase business development costs worldwide to capitalize on the global demands for energy and environmental infrastructure improvements. These expenditures should result in increased contract bookings and revenues in future periods. For the nine months ended April 26, 2008, E&E accrued additional interest and penalties of approximately $451,000 ($.09 per share after tax) related to the FIN 48 tax accrual as well as a foreign exchange loss of $219,000 ($.04 per share after tax) to adjust the FIN48 Kuwait tax reserve to current exchange rates.

Income Taxes

In March of 2009, the Company received a tax assessment from the Kuwait Ministry of Finance in the amount of $2.6 million related to the contested taxes resulting from the work performed for the Public Authority for Assessment of Compensation for Damages Resulting from Iraqi Aggression (PAAC). A liability had been previously accrued for this tax including interest and penalties of approximately $4.3 million. The Company reached a favorable settlement with the Ministry of Finance in April 2009. Accordingly, the Company has derecognized the remaining accrual of approximately $1.4 million (net of deferred tax) by reducing the current quarter's income tax provision by $850,000 and reducing interest expense and general and administrative costs each by $275,000. The Company continues its assertion of a contractual obligation for reimbursement of this payment of taxes and penalties from its client PAAC and is pursuing reimbursement.

The estimated effective tax rate for fiscal year 2009 is 23.0%, down from the 38.0% reported for fiscal year 2008. Excluding the favorable settlement in Kuwait, the estimated effective tax rate for fiscal year 2009 is 35.6%.

Critical Accounting Policies and Use of Estimates

Management's discussion and analysis of financial condition and results of operations discuss the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, allowance for doubtful accounts, income taxes, impairment of long-lived assets and contingencies. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Revenue recognition

The Company's revenues are derived primarily from the professional and technical services performed by its employees or, in certain cases, by subcontractors engaged to perform on under contracts we enter into with our clients. The revenues recognized, therefore, are derived from our ability to charge clients for those services under the contracts.

The Company employs three major types of contracts: "cost-plus contracts," "fixed-price contracts" and "time-and-materials contracts." Within each of the major contract types are variations on the basic contract mechanism. Fixed-price contracts generally present the highest level of financial and performance risk, but often also provide the highest potential financial returns. Cost-plus contracts present a lower risk, but generally provide lower returns and often include more onerous terms and conditions. Time-and-materials contracts generally represent the time spent by our professional staff at stated or negotiated billing rates.

Fixed price contracts are accounted for on the "percentage-of-completion" method, wherein revenue is recognized as project progress occurs. Time and material contracts are accounted for over the period of performance, in proportion to the costs of performance, predominately based on labor hours incurred. If an estimate of costs at completion on any contract indicates that a loss will be incurred, the entire estimated loss is charged to operations in the period the loss becomes evident.

The use of the percentage of completion revenue recognition method requires the use of estimates and judgment regarding the project's expected revenues, costs and the extent of progress towards completion. The Company has a history of making reasonably dependable estimates of the extent of progress towards completion, contract revenue and contract completion costs. However, due to uncertainties inherent in the estimation process, it is possible that completion costs may vary from estimates.

Most of our percentage-of-completion projects follow a method which approximates the "cost-to-cost" method of determining the percentage of completion. Under the cost-to-cost method, we make periodic estimates of our progress towards project completion by analyzing costs incurred to date, plus an estimate of the amount of costs that we expect to incur until the completion of the project. Revenue is then calculated on a cumulative basis (project-to-date) as the total contract value multiplied by the current percentage-of-completion. The revenue for the current period is calculated as cumulative revenues less project revenues already recognized. The recognition of revenues and profit is dependent upon the accuracy of a variety of estimates. Such estimates are based on various judgments we make with respect to those factors and are difficult to accurately determine until the project is significantly underway.

For some contracts, using the cost-to-cost method in estimating percentage-of-completion may overstate the progress on the project. For projects where the cost-to-cost method does not appropriately reflect the progress on the projects, we use alternative methods such as actual labor hours, for measuring progress on the project and recognize revenue accordingly. For instance, in a project where a large amount of equipment is purchased or an extensive amount of mobilization is involved, including these costs in calculating the percentage-of-completion may overstate the actual progress on the project. For these types of projects, actual labor hours spent on the project may be a more appropriate measure of the progress on the project.

The Company's contracts with the U.S. government contain provisions requiring compliance with the Federal Acquisition Regulation (FAR), and the Cost Accounting Standards (CAS). These regulations are generally applicable to all of the Company's federal government contracts and are partially or fully incorporated in many local and state agency contracts. They limit the recovery of certain specified indirect costs on contracts subject to the FAR. Cost-plus contracts covered by the FAR provide for upward or downward adjustments if actual recoverable costs differ from the estimate billed. Most of our federal government contracts are subject to termination at the convenience of the client. Contracts typically provide for reimbursement of costs incurred and payment of fees earned through the date of such termination.

Federal government contracts are subject to the FAR and some state and local governmental agencies require audits, which are performed for the most part by the Defense Contract Audit Agency (DCAA). The DCAA audits overhead rates, cost proposals, incurred government contract costs, and internal control systems. During the course of its audits, the DCAA may question incurred costs if it believes we have accounted for such costs in a manner inconsistent with the requirements of the FAR or CAS and recommend that our U.S. government financial administrative contracting officer disallow such costs. Historically, we have not experienced significant disallowed costs as a result of such audits. However, we can provide no assurance that such audits will not result in material disallowances of incurred costs in the future.

The Company maintains reserves for cost disallowances on its cost based contracts as a result of government audits. Government audits have been completed and final rates have been negotiated through fiscal year 2001. The Company has estimated its exposure based on completed audits, historical experience and discussions with the government auditors. If these estimates or their related assumptions change, the Company may be required to record additional charges for disallowed costs on its government contracts.

Allowance for Doubtful Accounts and Contract Adjustments

We reduce our accounts receivable and costs and accrued earnings in excess of billings on contracts in process by establishing an allowance for amounts that, in the future, may become uncollectible or unrealizable, respectively. We determine our estimated allowance for uncollectible amounts based on management's judgments regarding our operating performance related to the adequacy of the services performed, the status of change orders and claims, our experience settling change orders and claims and the financial condition of our clients, which may be dependent on the type of client and current economic conditions that the client may be subject to.

Deferred Income Taxes

We use the asset and liability approach for financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances based on our judgments and estimates are established when necessary to reduce deferred tax assets to the amount expected to be realized in future operating results. Management believes that realization of deferred tax assets in excess of the valuation allowance is more likely than not. Our estimates are based on facts and circumstances in existence as well as interpretations of existing tax regulations and laws applied to the facts and circumstances, with the help of professional tax advisors. Therefore, we estimate and provide for amounts of additional income taxes that may be assessed by the various taxing authorities.

Changes in Corporate Entities

On September 1, 2007 Gustavson Associates LLC purchased from minority unit holder, Prospect Resources, their remaining 50 ownership units. Prospect was paid $466,708 for its units with 25% of the amount paid in cash, and the assumption of a three year note with a six percent annualized interest rate. The purchase price that was paid was at a premium over the capital value of the units. This excess created additional goodwill of $255,578 which was recorded in the first quarter of fiscal year 2008.

Inflation

Inflation has not had a material impact on the Company's business because a significant amount of the Company's contracts are either cost based or contain commercial rates for services that are adjusted annually.