Three months Ended September 25, 2009 and September 26, 2008

Beginning with the quarter ended September 28, 2007, we established our quarter end as the last Friday of the quarter. We believe the last Friday of the quarter period reporting is more consistent with our operating cycle, as well as the reporting periods of our industry peers. The quarter ended September 25, 2009 contains one less calendar day than the same period in the prior year.

You should read the following discussion of our results of operations and financial condition in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q and with our Annual Report on Form 10-K for the fiscal year ended June 30, 2009. This discussion contains forward-looking statements that are based upon current expectations and assumptions, and, by their nature, such forward-looking statements are subject to risks and uncertainties. We have attempted to identify such statements using words such as "may", "expects", "plans", "anticipates", "believes", "estimates", or other words of similar import. We caution the reader that there may be events in the future that management is not able to accurately predict or control which may cause actual results to differ materially from the expectations described in the forward-looking statements. The factors in the sections captioned "Critical Accounting Policies" and "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended June 30, 2009 and below in this Form 10-Q provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations described in the forward-looking statements.

OVERVIEW

We are a firm that provides engineering, consulting, and construction management services. Our project teams provide services to assist our commercial, industrial, and government clients implement environmental, energy and infrastructure projects from initial concept to delivery and operation. We provide our services to commercial organizations and governmental agencies almost entirely in the United States of America.

We derive our revenue from fees for professional and technical services. As a service company, we are more labor-intensive than capital-intensive. Our revenue is driven by our ability to attract and retain qualified and productive employees, identify business opportunities, secure new and renew existing client contracts, provide outstanding service to our clients and execute projects successfully. Our income or loss from operations is derived from our ability to generate revenue and collect cash under our contracts in excess of our direct costs, subcontractor costs, other contract costs, and general and administrative ("G&A") expenses.

In the course of providing our services, we routinely subcontract services. Generally, these subcontractor costs are passed through to our clients and, in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") and consistent with industry practice, are included in 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 service revenue ("NSR"), which is gross revenue less the cost of subcontractor services and other direct reimbursable costs, and our discussion and analysis of financial condition and results of operations uses NSR as a point of reference.

Our cost of services ("COS") includes professional compensation and related benefits together with certain direct and indirect overhead costs such as rents, utilities and travel. Professional compensation represents the majority of these costs. Our G&A expenses are comprised primarily of our corporate headquarters costs related to corporate executive management, finance, accounting, administration and legal. These costs are generally unrelated to specific client projects and can vary as expenses are incurred to support corporate activities and initiatives.

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

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

† Seasonality of the spending cycle, notably for state and local government entities, and the spending patterns of our commercial sector clients;

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

† Divestitures or discontinuance of operating units;

† Employee hiring, utilization and turnover rates;

† The number and significance of client contracts commenced and completed during the period;

† Creditworthiness and solvency of clients;

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

† Delays incurred in connection with contracts;

† The size, scope and payment terms of contracts;

† Contract negotiations on change orders and collection of related accounts receivable;

† The timing of expenses incurred for corporate initiatives;

† Competition;

† Litigation;

† Changes in accounting rules;

† The credit markets and their effects on our customers; and

† General economic or political conditions.

Management of Operating Segments

During fiscal 2009, our accounting system was configured to provide revenue and earnings by segment, and we initiated reporting to our chief operating decision maker ("CODM") under three operating segments. Management established these operating segments based upon the type of project, the client and market to which those projects are delivered, the different marketing strategies associated with the services provided and the specialized needs of the respective clients. Effective in the first quarter of fiscal 2010, we made certain changes to our operating segments in our continuing efforts to align businesses around markets and customers. Segment information for all periods presented has been reclassified to reflect the new segment structure. The operating segments are as follows:

Energy: The Energy segment provides engineering and construction services to energy companies including support in the design of new sources of power generation, electrical transmission and distribution system upgrades, and natural gas and liquid products pipelines and terminals.

Environmental: The Environmental segment provides services to a wide range of clients, including industrial and natural resource companies, railroads, energy companies, and federal and state agencies, and is organized to focus on key areas of demand including: building sciences, air quality measurements and modeling, environmental assessment and remediation including Exit Strategy, licensing and permitting, and natural and cultural resource management.

Infrastructure: The Infrastructure segment provides services related to the expansion of infrastructure capacity, the rehabilitation of overburdened and deteriorating infrastructure systems, and the management of risks related to security of public and private facilities.

Our CODM is our Chief Executive Officer. Our CEO manages the business by evaluating the financial results of the three operating segments, focusing primarily on segment revenue and segment operating income (loss). We utilize segment revenue and segment operating income (loss) because we believe they provide useful information for effectively allocating resources among operating segments; evaluating the health of our operating segments based on metrics that management can actively influence; and gauging our investments and our ability to service, incur or pay down debt. Specifically, our CEO evaluates segment revenue and segment operating income (loss) and assesses the performance of each operating segment based on these measures, as well as, among other things, the prospects of each of the operating segments and how they fit into our overall strategy. Our CEO then decides how resources should be allocated among our operating segments. We do not track our assets by operating segment. Consequently, it is not practical to show assets by operating segment. Depreciation expense is primarily allocated to operating segments based upon their respective use of

total operating segment office space. Inter-segment balances and transactions are not material. The accounting policies of the operating segments are the same as those for us as a whole. See Note 13 in the Condensed Consolidated Financial Statements for additional information regarding operating segments.

The following table presents the approximate percentage of our NSR by operating segment for the three months ended September 25, 2009 and September 26, 2008:

                         Three Months Ended
                    September 25,   September 26,
Operating Segment       2009            2008
Energy                       26.6 %          25.0 %
Environmental                51.0 %          52.4 %
Infrastructure               22.4 %          22.6 %
                            100.0 %         100.0 %

Business Trend Analysis

Energy: The utilities in the United States are in the process of a multi-year upgrade of the electric transmission grid to improve capacity and reliability. Years of underinvestment coupled with an increasingly favorable regulatory environment have provided a good business opportunity for those serving this market. According to a Department of Energy study, $50 billion to $100 billion of investment is needed to modernize the grid. These needs and increased returns on large investments in energy assets provide opportunities to sell services including engineering and construction for the electric transmission system and development of renewable energy projects. We are well established in the Northeast and are actively growing our presence in other geographic regions where demand for services is the highest.

Environmental: Market demand for environmental services remains active driven by a combination of regulatory requirements, economic factors and renewed focus on sustainability and climate change. Regulatory focus on emissions of concern (e.g. mercury, small particulates) is supporting demand for air quality consulting and air measurement services. Climate change initiatives should also sustain market growth for these services. Remediation services remain constant in spite of much lower demand in the real estate market, but regulatory requirements and previously funded multi-year capital projects will sustain the market in the next several years. Real estate developers and owners are using building science services (e.g. mold, indoor air quality) to maintain real estate asset values, however new development projects will likely not resume in fiscal 2010.

Infrastructure: Demand for services is expected to be flat in fiscal 2010 due to general economic conditions and the lack of increased public funding, although the federal stimulus bill has provided substitute funding for some existing projects. The long-term outlook remains strong due to alternative funding mechanisms (e.g., private/public partnerships), potential additional economic stimulus initiatives and the continued need to upgrade, replace or repair aging transportation infrastructure.

Critical Accounting Policies

Our financial statements have been prepared in accordance with U.S. GAAP. These principles require the use of estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes. Actual results could differ from these estimates and assumptions. We use our best judgment in the assumptions used to value these estimates which are based on current facts and circumstances, prior experience and other assumptions that are believed to be reasonable. Our accounting policies are described in Note 2 to the consolidated financial statements contained in Item 8 of the Annual Report on Form 10-K as of and for the year ended June 30, 2009.

Results of Operations

We incurred a net loss applicable to our common shareholders of $0.9 million for the first quarter of fiscal 2010 as well as significant net losses applicable to our common shareholders for the fiscal years ended June 30, 2009, 2008 and 2007. The net loss applicable to our common shareholders for the three months ended September 25, 2009 included the impact of accretion charges on preferred stock of $0.8 million. The preferred stock accretion charges will continue to accrete until the preferred stock converts to common stock in December 2010. During the three months ended September 25, 2009, cash used in operations was $5.4 million, primarily as a result of increased accounts receivable and insurance recoverable combined with reductions in accounts payable.

In fiscal 2010, we will continue to focus on improving operating profitability and cash flows from operations, including continuing to enhance controls over cost estimating and project performance to improve overall project execution and reduce contract losses. We raised $15.5 million in additional capital through a preferred stock offering in June 2009.

Consolidated Results



The following table presents the dollar and percentage changes in certain items
in the condensed consolidated statements of operations for the three months
ended September 25, 2009 and September 26, 2008:



                                                  Three Months Ended
                                           September 25,       September 26            Change
(Dollars in thousands)                          2009               2008             $           %
Gross revenue                             $         82,357    $      114,993    $ (32,636 )     (28.4 )%
Less subcontractor costs and other
direct reimbursable charges                         25,397            49,069      (23,672 )     (48.2 )
Net service revenue                                 56,960            65,924       (8,964 )     (13.6 )
Interest income from contractual
arrangements                                           180               778         (598 )     (76.9 )
Insurance recoverables and other
income                                               3,283               289        2,994     1,036.0
Cost of services                                    50,880            53,537       (2,657 )      (5.0 )
General and administrative expenses                  6,678             8,621       (1,943 )     (22.5 )
Provision for doubtful accounts                        686               800         (114 )     (14.3 )
Depreciation and amortization                        1,950             1,909           41         2.1
Operating income                                       229             2,124       (1,895 )     (89.2 )
Interest expense                                       264               887         (623 )     (70.2 )
Federal and state income tax provision                  56               182         (126 )     (69.2 )
Equity in losses from unconsolidated
affiliates                                             (15 )               -          (15 )    (100.0 )
Net (loss) income                                     (106 )           1,055       (1,161 )    (110.0 )
Net loss applicable to noncontrolling
interest                                               (27 )               -          (27 )    (100.0 )
Net (loss) income applicable to TRC
Companies, Inc.                                        (79 )           1,055       (1,134 )    (107.5 )
Accretion charges on preferred stock                   834                 -          834       100.0
Net (loss) income applicable to
TRC Companies, Inc.'s common
shareholders                              $           (913 )  $        1,055    $  (1,968 )    (186.5 )%

The following table presents the percentage relationships of items in the condensed consolidated statements of operations to NSR:

                                                                 Three Months Ended
                                                            September 25    September 26
                                                                2009            2008
Net service revenue                                                100.0 %         100.0 %

Interest income from contractual arrangements                        0.3             1.2
Insurance recoverables and other income                              5.8             0.4

Operating costs and expenses:
Cost of services                                                    89.3            81.2
General and administrative expenses                                 11.7            13.1
Provision for doubtful accounts                                      1.2             1.2
Depreciation and amortization                                        3.5             2.9
                                                                   105.7            98.4
Operating income                                                     0.4             3.2
Interest expense                                                     0.5             1.3
(Loss) income from operations before equity in losses               (0.1 )           1.9
Federal and state income tax provision                               0.1             0.3
(Loss) income from operations before equity in losses               (0.2 )           1.6
Equity in losses from unconsolidated affiliates                        -               -
Net (loss) income                                                   (0.2 )           1.6
Net loss applicable to noncontrolling interest                      (0.1 )             -
Net (loss) income applicable to TRC Companies, Inc.                 (0.1 )           1.6
Accretion charges on preferred stock                                 1.5               -
Net (loss) income applicable to TRC Companies, Inc.'s
common shareholders                                                 (1.6 )%          1.6 %

Gross revenue decreased $32.6 million, or 28.4%, to $82.4 million for the three months ended September 25, 2009 from $115.0 million for the same period in the prior year. The wind-down of a large commercial development Exit Strategy project in our environmental business reduced current quarter gross revenue by approximately $14.7 million compared to the same period in the prior year. In addition, the wind-down of certain large environmental compliance projects reduced current quarter gross revenue by approximately $2.3 million. Current quarter revenue in our energy segment declined as work associated with three engineer, procure and construct ("EPC") contracts was lower than the same period last year by approximately $15.3 million. The performance associated with the EPC projects was partially replaced by traditional energy service projects which had lower levels of subcontracting requirements and, therefore, generated less gross revenue.

NSR decreased $8.9 million, or 13.6%, to $57.0 million for the three months ended September 25, 2009 from $65.9 million for the same period in the prior year. The decrease was due primarily to a $5.6 million reduction in our environmental segment related to: (1) current quarter adjustments to the estimates at completion on certain Exit Strategy contracts which reduced NSR by approximately $1.9 million; (2) the wind-down of a large commercial development Exit Strategy project which reduced NSR by approximately $0.8 million; and
(3) the wind-down of certain large environmental compliance projects which reduced NSR by approximately $1.2 million. In addition, current quarter NSR for our infrastructure segment decreased by $2.2 million primarily due to personnel departures resulting from certain actions taken to eliminate low margin work in the second half of fiscal 2009. Further, the current quarter had one less business day, resulting in a decrease in NSR of approximately $0.9 million.

Interest income from contractual arrangements decreased $0.6 million, or 76.9%, to $0.2 million for the three months ended September 25, 2009 from $0.8 million for the same period in the prior year primarily due to lower one-year constant maturity T-Bill rates and a lower average balance of restricted investments in fiscal 2010 compared to fiscal 2009.

Insurance recoverables and other income increased $3.0 million to $3.3 million for the three months ended September 25, 2009 from $0.3 million for the same period in the prior year. The increase was due to a higher rate of Exit Strategy contracts where costs were incurred that were covered by insurance.

COS decreased $2.7 million, or 5.0%, to $50.8 million for the three months ended September 25, 2009 from $53.5 million for the same period in the prior year. The current quarter decrease in COS, to a large extent, corresponded to the reduction in NSR. Specifically, the decrease was related to: (1) a $2.8 million decrease in labor costs; (2) a $0.4 million decrease in bonus costs; and (3) a $0.3 million decrease in other discretionary employee costs (e.g. travel costs). The reduction of current quarter COS also showed the effect of a $0.3 million increase in the recovery of certain project-related equipment costs. These decreases were partially offset by a $1.4 million increase in contract loss reserves primarily related to certain Exit Strategy projects that had estimated costs increases during the current quarter. As a percentage of NSR, COS was 89.3% and 81.2% for the three months ended September 25, 2009 and September 26, 2008, respectively.

G&A expenses decreased $1.9 million, or 22.5%, to $6.7 million for the three months ended September 25, 2009 from $8.6 million for the same period in the prior year. The decrease was primarily attributable to a $0.7 million decrease in professional fees. In addition, corporate labor and fringe benefit costs decreased $0.9 million due primarily to headcount reductions and one less payroll day compared to the same period in the prior year.

The provision for doubtful accounts decreased $0.1 million, or 14.3% to $0.7 million for the three months ended September 25, 2009 from $0.8 million for the same period in the prior year. The decrease was primarily due to the corresponding decrease in revenue.

Depreciation and amortization expense decreased $0.04 million, or 2.1%, to $1.95 million for the three months ended September 25, 2009 from $1.91 million for the same period in the prior year.

Interest expense decreased $0.6 million, or 70.2%, to $0.3 million for the three months ended September 25, 2009 from $0.9 million for the same period in the prior year. The decrease was primarily due to the fact that we did not have an outstanding balance on our credit facility in the first quarter of fiscal 2010 compared to an average outstanding balance of $25.5 million for the same period in the prior year. In June 2009, we raised $15.5 million in additional capital through a preferred stock offering, and the proceeds were used to repay outstanding amounts on our credit facility.

Federal and state income tax provision decreased $0.1 million to $0.1 million for the three months ended September 25, 2009 from a tax provision of $0.2 million for the same period in the prior year.

Additional Information by Reportable Segment



Energy Segment Results



                                       Three Months Ended
                       September 25,     September 26,         Change
                           2009              2008            $         %
Net service revenue   $        14,880   $        16,304   $ (1,424 )  (8.7 )%
Operating income      $         1,820   $         3,283   $ (1,463 ) (44.6 )%

NSR decreased $1.4 million, or 8.7%, to $14.9 million for the three months ended September 25, 2009 from $16.3 million for the same period of the prior year. The energy segment experienced a decline in NSR due to a slowdown in electric transmission and distribution spending. In particular, many of our clients have delayed previously scheduled investments in large, multi-year capital projects. Consequently, as several of our major EPC contracts wind down, we are experiencing a delay before our clients move forward with new or previously scheduled projects. This decrease in revenue was partially mitigated by a significant increase in demand for our energy efficiency program management services.

Operating income decreased $1.5 million, or 44.6%, to $1.8 million for the three months ended September 25, 2009 from $3.3 million for the same period of the prior year. The decline in operating income is primarily related to the decline in NSR. As described above, our clients are delaying large scale capital investments and, alternatively, are focusing on smaller, competitively bid maintenance projects. Increased competition for these smaller, maintenance projects resulted in lower operating margins and less available work. This decrease was partially offset by an increase in current quarter operating margin for our energy efficiency related projects. For the three months ended September 25, 2009, as a percentage of NSR, operating margin decreased to 12.2% from 20.1% for the same period of the prior year.

Environmental Segment Results



                                       Three Months Ended
                       September 25,     September 26,         Change
                           2009              2008            $         %
Net service revenue   $        28,509   $        34,094   $ (5,585 ) (16.4 )%
Operating income      $         5,939   $         7,489   $ (1,550 ) (20.7 )%

NSR decreased $5.6 million, or 16.4%, to $28.5 million for the three months ended September 25, 2009 from $34.1 million for the same period of the prior year. The decrease was primarily related to (1) current quarter adjustments to the estimates at completion on certain Exit Strategy contracts which reduced NSR by approximately $1.9 million; and (2) the wind-down of a large commercial development Exit Strategy project which reduced NSR by approximately $0.8 million. In addition, we experienced lower activity in our environmental sector due to the completion of several major compliance projects that experienced high levels of activity in the comparable period in fiscal 2009.

Operating income decreased $1.6 million, or 20.7%, to $5.9 million for the three months ended September 25, 2009 from $7.5 million for the same period of the prior year. The decrease in operating income is primarily attributable to the adjustments to the estimates at completion on certain Exit Strategy contracts and the wind-down of a large Exit Strategy project, which reduced operating income by approximately $2.5 million in the current quarter. This decrease was partially mitigated by the receipt of change orders of approximately $0.9 million in the current quarter for which costs were expended in a prior period. . . .