**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 Washington,
        D.C. 20549
 
 **FORM
        10-K**
 
 
 Annual
        Report Pursuant to
 Section
        13 or 15(d) of the Securities Exchange Act of 1934
 
 **For
        the Fiscal Year Ended December 29, 2006**   **Commission
        File Number 1-12054**
 
 
 **WASHINGTON
        GROUP INTERNATIONAL, INC.**
 A
        Delaware Corporation
 IRS
        Employer Identification No. 33-0565601
 
 720
        PARK
        BOULEVARD, BOISE, IDAHO 83712
 208-386-5000
 
 
 
 **SECURITIES
        REGISTERED PURSUANT TO SECTION 12(b) and**
 **SECTION
        12(g) OF THE ACT**
 
 Securities
        registered pursuant to Section 12(b) of the Exchange Act: None
 
 Securities
        registered pursuant to Section 12(g) of the Exchange Act:
 
 **Title
        of class**
 Common
        Stock, $.01 par value per share
 
 **COMPLIANCE
        WITH REPORTING REQUIREMENTS**
 
 Indicate
        by check mark if the registrant is a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act.
 X  Yes   No
 
 Indicate
        by check mark if the registrant is not required to file reports pursuant
        to
        Section 13 or Section 15(d) of the Act.
 Yes    X   No
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “Accelerated
        filer and large accelerated filer,” in Rule 12b-2 of the Exchange Act of
        1934.
 X   Large
        accelerated filer   Accelerated Filer   Non-accelerated filer
 
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).
  
  ____Yes    X    No
 
 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.   X   Yes      No
 
 Indicate
        by check mark whether the registrant has filed all documents and reports
        required to be filed by Section 12, 13, or 15(d) of the Exchange Act subsequent
        to the distribution of securities under a plan confirmed by a court.    X   Yes   No
 
 
 **DISCLOSURE
        PURSUANT TO ITEM 405 OF REGULATION S-K**
 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.  X
 
 
 **AGGREGATE
        MARKET VALUE OF COMMON STOCK HELD BY NON-AFFILIATES**
 At
        June
        30, 2006 (the last business day of the registrant’s most recently completed
        second fiscal quarter), the aggregate market value of the registrant’s common
        stock held by nonaffiliates of the registrant, based on the closing price
        on
        June 30, 2006, as reported by the NASDAQ Global Select Market®, was
        approximately $1,527,217,172.
 
 The
        number of shares of common stock outstanding as of February 21, 2007  was
        28,856,499.
 
 
 **DOCUMENTS
        INCORPORATED BY REFERENCE**
 Portions
        of the registrant’s definitive proxy statement for its annual meeting of
        stockholders to be held on May 18, 2007, which is expected to be filed with
        the
        Securities and Exchange Commission not later than April 17, 2007, are
        incorporated by reference into Part III of this report on Form 10-K. In the
        event such proxy statement is not filed by April 17, 2007, the required
        information will be filed as an amendment to this report on Form 10-K no
        later
        than that date.
 
 
 
  **WASHINGTON
        GROUP INTERNATIONAL, INC.**
 
 **Annual
        Report on Form 10-K**
 **For
        the Fiscal Year Ended December 29, 2006**
 
 
 **TABLE
        OF CONTENTS**
 
 **PAGE**Note
                  Regarding Forward-Looking Information
              I-1**PART
                  I**Item
                  1.
              Business
              I-3Item
                  1A
              Risk
                  Factors
              I-16Item
                  1B
              Unresolved
                  Staff Comments
              I-25Item
                  2
              Properties
              I-25Item
                  3
              Legal
                  Proceedings
              I-26Item
                  4
              Submission
                  of Matter to a Vote of Security Holders
              I-26**PART
                  II**Item
                  5
              Market
                  for the Registrant’s Common Equity, Related Stockholder Matter
                  and
                issuer
                  Purchases of Equity Securities
              II-1Item
                  6
              Selected
                  Financial Data
              II-3Item
                  7
              Management’s
                  Discussion and Analysis of Financial Condition and Results
                of
                  Operations
              II-4Item
                  7A
              Quantitative
                  and Qualitative Disclosure About Market Risk
              II-35Item
                  8
              Financial
                  Statements and Supplementary Data
              II-36Item
                  9
              Changes
                  in and disagreements with Accountants on Accounting and Financial
                  Disclosure
              II-79Item
                  9A
              Controls
                  and Procedures
              II-79Item
                  9B
              Other
                  Information
              II-84**PART
                  III**Item
                  10
              Directors,
                  Executive Officers, and Corporate Governance of the
                  Registrant
              III-1Item
                  11
              Executive
                  Compensation
              III-1Item
                  12
              Security
                  Ownership of Certain Beneficial Owners and Management and
                  Related
                stockholder
                  Matters
              III-1Item
                  13
              Certain
                  Relationships and Related Transactions, And Director
                  Independence
              III-1Item
                  14
              Principal
                  Accounting Fees and Services
              III-1**PART
                  IV**Item
                  15
              Exhibits
                  and Financial Statement Schedule
              IV-1**SIGNATURES**
 
 
 
 
  
 **NOTE
        REGARDING FORWARD-LOOKING INFORMATION**
 
 This
        report contains forward-looking statements. You can identify forward-looking
        statements by the use of terminology such as “may,” “will,” “anticipate,”
“believe,” “estimate,” “expect,” “future,” “intend,” “plan,” “could,” “should,”
“potential” or “continue,” or the negative or other variations thereof, as well
        as other statements regarding matters that are not historical fact. These
        forward-looking statements include, among others, statements
        concerning:
 
 ·
            Our
                business strategy and competitive
                advantages; ·
            Our
                expectations as to potential revenue from designated markets or
                customers; ·
            Our
                expectations as to operating results, cash flows, return on invested
                capital and net income; ·
            Our
                expectations as to new work and backlog; ·
            The
                markets for our services and products;
                and ·
            Our
                anticipated contractual obligations, capital expenditures and funding
                requirements. Forward-looking
        statements are only predictions. The forward-looking statements in this report
        are subject to risks and uncertainties, including, among others, the risks
        and
        uncertainties identified in this report and other operational, business,
        industry, market, legal and regulatory developments, which could cause actual
        events or results to differ materially from those expressed or implied by
        the
        forward-looking statements.
 
 Important
        factors that could prevent us from achieving the expectations expressed include,
        but are not limited to, our failure to:
 
 ·
            Manage
                and avoid delays or cost overruns on existing and future
                contracts; ·
            Maintain
                relationships with key customers, partners and
                suppliers; ·
            Successfully
                bid for, and enter into, new contracts on satisfactory
                terms; ·
            Successfully
                manage and negotiate change orders and claims with respect to existing
                and
                future contracts; ·
            Manage
                and maintain our operations and financial performance and the operations
                and financial performance of our current and future operating subsidiaries
                and joint ventures; ·
            Respond
                effectively to regulatory, legislative and judicial developments,
                including any legal or regulatory proceedings, affecting our existing
                contracts, including contracts concerning environmental remediation
                and
                restoration; ·
            Obtain
                and maintain any required governmental authorizations, franchises
                and
                permits, all in a timely manner, at reasonable costs and on satisfactory
                terms and conditions; ·
            Satisfy
                the restrictive covenants imposed by our revolving credit facility
                and
                surety arrangements; ·
            Maintain
                access to sufficient working capital through our existing revolving
                credit
                facility or otherwise; and ·
            Maintain
                access to sufficient bonding capacity. 
 
 
  
  Some
        other factors that may affect our businesses, financial position or results
        of
        operations include:
 
 ·
            Accidents
                and conditions, including industrial accidents, labor disputes, geological
                conditions, environmental hazards, weather and other natural
                phenomena; ·
            Special
                risks of international operations, including uncertain political
                and
                economic environments, acts of terrorism or war, potential
                incompatibilities with foreign joint venture partners, foreign currency
                fluctuations, civil disturbances and labor
                issues; ·
            Special
                risks of contracts with the government, including the failure of
                applicable governing authorities to take necessary actions to secure
                or
                maintain funding for particular projects with us, the unilateral
                termination of contracts by the government and reimbursement obligations
                to the government for funds previously
                received; ·
            The
                outcome of legal proceedings; ·
            Maintenance
                of government-compliant cost systems; and ·
            The
                economic well-being of our private and public customer base and its
                ability and intentions to invest capital in engineering and construction
                activities. In
        addition to the factors mentioned above, see “Risk Factors” under Item 1A for a
        description of other factors affecting forward-looking
        statements.
  
  
 **PART
        I**
 
 **ITEM
        1. BUSINESS**
 
 Unless
        otherwise indicated, the terms “we,” “us” and “our” refer to Washington Group
        International, Inc. (“Washington Group International”) and its consolidated
        subsidiaries; references to 2006 are to our fiscal year ended December 29,
        2006;
        references to 2005 are to our fiscal year ended December 30, 2005; and
        references to 2004 are to our fiscal year ended December 31, 2004 .
 
 We
        file
        annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
        on
        Form 8-K and other information with the Securities and Exchange Commission
        (the
“SEC”). The public can obtain copies of these materials by visiting the SEC’s
        Public Reference Room at 100 F Street, NE, Washington DC 20549, or by calling
        the SEC at 1-800-SEC-0330, or by accessing the SEC’s website at
        http://www.sec.gov. In addition, as soon as reasonably practicable after
        such
        materials are filed with or furnished to the SEC, we make copies available
        to
        the public free of charge on or through our website at http://www.wgint.com.
        The
        information on our website is not incorporated into, and is not part of,
        this
        report.
 
 We
        have
        adopted a Code of Business Conduct and Ethics (the “Code”) which requires all
        employees, officers and directors of Washington Group International to act,
        at
        all times and places, as law-abiding, responsible and responsive citizens.
        The
        Code is published on our website at http://www.wgint.com under Corporate
        Information: Investor Relations, Company Overview, and Corporate Governance.
        A
        copy of the Code is available by contacting us through our website under
        Investor Relations, or by writing to the Investor Relations Department at
        the
        corporate headquarters. We intend to disclose certain amendments to our Code,
        or
        any waivers of our Code granted to Executive Officers and Directors, on our
        website within four business days following the date of such amendment or
        waiver.
 
 Our
          principal executive offices are located at 720 Park Boulevard, Boise, Idaho
          83712. Our telephone number is (208) 386-5000.
 
 **GENERAL**
 
 We
        are an
        international provider of a broad range of design, engineering, construction,
        construction management, facilities and operations management, environmental
        remediation and mining services. We offer our various services separately
        or as
        part of an integrated package throughout the life cycle of a customer’s
        project.
 
 ·
            In
                providing design and engineering services, we participate in the
                conceptualization and planning stages of projects that are part of
                our
                customers’ overall capital programs. We develop the physical designs and
                determine the technical specifications. We also devise project
                configurations to maximize both construction and operating efficiency. 
 ·
            As
                a contractor, we are responsible for the construction and completion
                of
                each contract in accordance with its specifications and contracting
                terms
                (primarily schedule and total cost). In this capacity, we often manage
                the
                procurement of materials, subcontractors and craft labor. Depending
                on the
                project, we may function as the primary contractor or as a subcontractor
                to another firm. 
 ·
            On
                some projects, we function as a construction manager, engaged by
                the
                customer to oversee other contractors’ compliance with design
                specifications and contracting terms. 
 ·
            Under
                operations and maintenance contracts, we provide staffing, technical
                support, repair, renovation, predictive and preventive services to
                customer facilities globally. We also offer other facility services,
                such
                as general building maintenance and asset management. In addition,
                we
                provide inventory and ·
            product
                logistics for manufacturing plants, information technology support,
                equipment servicing and tooling changeover. 
 On
        some
        projects, particularly those of significant size and requiring specialized
        technology, we partner with other firms, both to increase our opportunity
        to win
        the contract and to manage development and execution risk. Partners may include,
        among others, specialized process engineering firms, engineers, constructors,
        operations contractors or equipment manufacturers. These partnerships may
        be
        structured as joint ventures or consortia, with each participating firm having
        an economic interest relative to the scope of its work.
 
 We
        enter
        into four basic types of contracts with our customers:
 
 ·
            Under
                a “fixed-price” contract, we provide the customer a total project for an
                agreed-upon price, subject to project circumstances and changes in
                scope.
                We commonly refer to fixed-price contracts under which the total
                project
                cost is determined up front as “lump-sum” contracts. Large design-build
                infrastructure projects are typically awarded on a lump-sum
                basis. 
 ·
            Under
                a “fixed-unit-price” contract, the customer pays us for materials, labor,
                overhead, equipment rentals or other costs at fixed rates as each
                unit of
                work is performed. Mining projects are typically awarded on a
                fixed-unit-price basis. 
 ·
            Under
                a “target-price” contract, we provide the customer with a total project at
                a target price agreed upon by the customer, subject to project
                circumstances and changes in scope. Should costs exceed the target
                within
                the agreed-upon scope, we will generally absorb a portion of those
                costs
                to the extent of our expected fee or profit; however, the customer
                reimburses us for the costs that we incur if costs continue to escalate
                beyond our expected fee. An additional fee may be earned if costs
                are
                below the target. 
 ·
            Under
                a “cost-type” contract, a customer reimburses us for the costs that we
                incur (primarily materials, labor, overhead and subcontractor services),
                plus a fee. The fee portion of the contract may be a percentage of
                the
                costs incurred and/or may be based on the achievement of specific
                performance incentives or milestones. The fee portion may also be
                subject
                to a maximum limit. Engineering, construction management and environmental
                and hazardous substance remediation contracts, including most of
                our work
                for United States (“US”) government customers, are typically awarded
                pursuant to a cost-type contract. 
 We
        generally refer to the first two contract types described above as “fixed-type
        contracts” and the last two contract types as “cost-reimbursable.”
 
 Some
        fixed-price contracts require the contractor to provide a surety bond to
        its
        customer or a letter of credit. This general industry practice provides
        indemnification to the customer if the contractor fails to perform its
        obligations. Surety companies consider factors such as capitalization, available
        working capital, past performance and management expertise to determine the
        amount of bonds they are willing to issue on behalf of a particular engineering
        and construction company.
 
 We
        participate in construction joint ventures, often as sponsor and manager
        of
        projects, which are formed for the sole purpose of bidding, negotiating and
        completing specific projects. We participate in two incorporated mining
        ventures: MIBRAG mbH (“MIBRAG”), a company that operates lignite coal mines and
        power plants in Germany, and Westmoreland Resources, Inc. (“Westmoreland
        Resources”), a coal mining company in Montana.
 
 **BACKGROUND**
 
 We
        were
        originally incorporated in Delaware on April 28, 1993 under the name Kasler
        Holding Company. In April 1996, we changed our name to Washington Construction
        Group, Inc. On September 11, 1996, we purchased Morrison Knudsen Corporation
        and
        changed our name to Morrison Knudsen Corporation. The purchase
        was
  I-1
  structured
        as a merger and was an integral part of a bankruptcy plan of reorganization.
        We
        have no remaining obligations under that plan of reorganization.
 
 On
        March
        22, 1999, we and BNFL Nuclear Services, Inc. (“BNFL”) acquired the government
        and environmental services businesses of CBS Corporation (now Viacom, Inc.).
        We
        refer to these businesses, together with other government services operations,
        as the “Government Services Business.” On August 25, 2004, we agreed to acquire
        BNFL’s interest in the Government Services Business and effective December 30,
        2005, we settled all remaining acquisition payments resulting in the termination
        of BNFL’s interest in our Government Services Business.
 
 On
        July
        7, 2000, we purchased from Raytheon Company and Raytheon Engineers &
Constructors International, Inc. (“RECI”), the capital stock of the subsidiaries
        of RECI and specified other assets of RECI and assumed specified liabilities
        of
        RECI. The businesses that we purchased, that we refer to as “RE&C,” provide
        engineering, design, procurement, construction, operation, maintenance and
        other
        services on a global basis. Following the RE&C acquisition, we changed our
        name to Washington Group International, Inc.
 
 On
        May
        14, 2001, due to near-term liquidity problems resulting from our acquisition
        of
        RE&C, we filed for protection under Chapter 11 of the US Bankruptcy Code. On
        December 21, 2001, the bankruptcy court entered an order confirming the Second
        Amended Joint Plan of Reorganization of Washington Group International, Inc.,
        et
        al., as modified (the “Plan of Reorganization”). The Plan of Reorganization
        became effective and we emerged from bankruptcy protection on January 25,
        2002.
 
 The
        US
        Bankruptcy Court for the District of Nevada retains jurisdiction to interpret
        the Plan of Reorganization and to resolve outstanding claims and third party
        disputes relating thereto. A reorganization plan committee (the “Plan
        Committee”) was established by the bankruptcy court to evaluate claims of
        unsecured creditors, prosecute any disputed unsecured claims, determine each
        unsecured creditor’s distribution under the Plan of Reorganization and generally
        monitor implementation of the Plan of Reorganization.
 
 **BUSINESS
        UNITS**
 
 We
        operate our business through six business units, each of which comprises
        a
        separate reportable business segment: Power, Infrastructure, Mining,
        Industrial/Process, Defense and Energy & Environment.
 
 ***Power***
 
 Our
        power
        business unit specializes in design, engineering, construction, modification
        and
        maintenance of power generating facilities and the systems that transmit
        and
        distribute electricity. Customers include regulated and deregulated utilities,
        industrial co-generators, independent power producers, original equipment
        manufacturers (“OEMs”) and governments. These customers generate power in a wide
        variety of methods, including coal, oil and gas-fired power plants, combustion
        turbine in both simple cycle and combined cycle configurations, nuclear power,
        hydroelectric power and waste-to-energy. We provide our services to customers
        in
        the US and around the world under both fixed-price and cost-reimbursable,
        and
        the work we have pursued recently has reflected an array of commercial
        arrangements. (See Item 1, “Business - General,” earlier in Part I of this
        report for a description of types of contracts and corresponding risks).
        The
        Power business unit provides a range of services that includes:
 
 *Basic
        Services*
 ·
            General
                planning ·
            Siting
                and licensing ·
            Environmental
                permitting ·
            Engineering,
                procurement and construction, startup ·
            Expansion,
                retrofit and modification ·
            Operations
                and maintenance ·
            Decontamination
                and decommissioning 
 I-2
 *Basic
        Markets*
 ·
            New
                generation §
            Combustion
                turbine (natural gas, oil) §
            Coal §
            Nuclear ·
            Modifications
                and maintenance §
            Fossil:
                clean air retrofits §
            Repowering §
            Nuclear:
                major component replacement §
            Maintenance:
                fossil and nuclear ·
            Engineering
                services §
            Planning
                studies and ongoing operations for fossil and
                nuclear §
            Transmission,
                distribution, and substations 
 The
        power
        industry is in a period of major capital expenditures, led by regulatory-driven
        retrofits of large clean air systems on targeted coal-fired plants and the
        gradual reemergence of demand for new capacity, which has prompted a
        reinvigorated interest in both coal and nuclear technologies. Projects abound
        in
        the US and the key global markets of China, the Middle East, and Eastern
        and
        Central Europe. Reflecting this growth, there is a growing shortage of qualified
        professional and field labor personnel, leading to industry-wide challenges
        to
        meet talent needs.
 
 Stimulating
        much of this growth in the US market are legislative changes enacted by the
        federal government in 2005. The Environmental Protection Agency’s (“EPA”)
        promulgation of the Clean Air Interstate Rule and the Clean Air Mercury rule
        has
        intensified the market for emissions control retrofits, and the Energy Policy
        Act has provided significant economic stimulus to clean coal programs,
        integrated gasification combined cycle facilities, renewable energy
        technologies, and new nuclear facilities.
 
 The
        international power industry is also very active. Among the strongest of
        these
        markets is the development of vast reserves in the Canadian oil sands region,
        which ultimately may give North American generators a dependable and stable
        supply of oil and gas for existing and future operations. We have had a
        substantial presence in the region for several years, supporting a clean
        air
        system retrofit on coking facilities at a production site, and we were recently
        awarded an engineering, procurement and construction (“EPC”) contract for a
        160-megawatt cogeneration station that will supply both electricity and wet
        steam in support of production operations. Economic growth demands in Asia,
        particularly in China, India and Southeast Asia, are spawning new, but highly
        competitive, programs for capacity additions. The nuclear market in China
        is
        forecasted to be particularly strong, and we have been engaged by a local
        utility to enhance their project management program. Environmental concerns
        in
        some regions - China,
        motivated by public image and a growing internal green movement and Central
        and
        Eastern Europe, motivated by standards for admission to the European Union - are
        stimulating clean air system retrofit projects on older coal-fired plants.
 
 The
        Power
        business unit pursues a strategy of providing superior performance in new
        generation projects, major modifications, and long-term technical services
        while
        minimizing its exposure to long-term capital risk. New power generation is
        at
        the core of our business, and we continue to increase our market presence
        in
        each of the technologies at the backbone of the commercial power industry.
        We
        have ongoing combustion turbine, combined cycle projects in Wisconsin and
        Puerto
        Rico, an ongoing coal-fired project in Wisconsin and a new award of a
        400-megawatt coal-fired project in Arizona. We anticipate that the emerging
        nuclear renaissance will not award a grassroots nuclear generation project
        until
        2009; however, we have in place agreements with two prominent nuclear technology
        suppliers to support their efforts to gain Nuclear Regulatory Commission
        design
        certification and to detail their design standards. We are in a consortium
        that
        is studying the restart of a partially constructed unit, and we are managing
        the
        largest grassroots nuclear fuel supply construction project in the
        US
  I-3
  today,
        which also is the first new nuclear facility licensed under the Nuclear
        Regulatory Commission’s new one-step licensing process.
 
 Propelled
        by either the new EPA regulations, previously signed consent decrees,
        independent state legislation, or proactive owners, a substantial number
        of
        large system retrofits to control sulfur oxides and nitrous oxides have been
        announced or are under consideration. We continue to secure new awards in
        this
        market, including the retrofit of flue gas desulphurization systems for clients
        in Maryland, Pennsylvania, West Virginia and Wisconsin. We are also continuing
        work on other emissions control projects in Michigan, Pennsylvania, Wisconsin,
        and Alberta, Canada.
 
 The
        existing fleet of nuclear power plants in North America is being revitalized
        with life-extension strategies that involve significant equipment modifications.
        Among the most common life-extension strategies is the replacement of steam
        generators and reactor vessel heads. Through a 50 percent owned joint venture
        with Framatome-ANP, Inc., we specialize in these replacements and have
        established ourselves as a leading competitor in the US for this market,
        holding
        three world records for short outage durations and winning industry recognition
        for the Best Nuclear Projects of 2005 and 2006, plus the Energy Construction
        Project of the Year for 2005. At present we have ongoing projects in California,
        Florida and New Jersey, plus a consulting assignment in Canada, and in 2006
        we
        were awarded a new assignment in Pennsylvania.
 
 In
        some
        cases, the competitive nature of the power generation industry has led to
        stronger ties between customers seeking engineering solutions to improve
        output
        and contractors assuming the responsibility of in-house specialists. We are
        engaged in several alliance-type relationships at various levels of maturity,
        including a pacesetting program that has established a full services contract
        for a total generation system that exceeds 11,000 megawatts, and outsourcing
        agreements with two utilities in which we are providing engineering services
        as
        needed at a total of more than 90 generating facilities.
 
 Another
        growing market in the US power industry is the full spectrum of power delivery
        systems, i.e., transmission, distribution, substations and systems control.
        The
        Federal Energy Regulatory Commission and the North American Electric Reliability
        Coalition are both focused on improving the reliability of the power grid.
        Having realized a successful campaign of revitalizing and rebuilding the
        electric infrastructure in Iraq, we are refocusing this expertise in this
        US
        market. As a result, we have been awarded services contracts with two major
        power distributors.
 
 ***Infrastructure***
 
 Our
        Infrastructure business unit provides a full range of infrastructure services
        to
        clients globally, including design, engineering, consulting, project management,
        construction management, construction, project development, design-build
        and
        operations and maintenance. The Infrastructure business unit performs as
        a
        general contractor or as a joint venture partner with other contractors on
        domestic and international projects. Typically, design, engineering, consulting,
        project management, construction management, and operations and maintenance
        type
        contracts are performed on a cost-reimbursable basis, while design-build
        and
        construction contracts are performed on a fixed-price, target price or cost
        reimbursable basis.
 
 Infrastructure
        serves both private and public sector customers across three major
        markets:
 
 ·
            *Rail
                and transit*:
                Services include design, project development, construction, and operation
                and maintenance of light rail, subways, commuter/inter-city railroads,
                railroads, freight transport, people movers, bus rapid transit,
                electrification and multimodal facilities. Our current significant
                projects in this market include: 
 §
            Hudson-Bergen
                Light Rail Transit System: We are operating under multiple contracts
                with
                a value exceeding $1.2 billion to design, build, operate and maintain
                the
                Hudson-Bergen Light Rail Transit System in New Jersey. The design-build
                phase was completed in 2006. The term of
                our §
            contract
                to operate and maintain the system extends to 2011, with two five-year
                extension options. 
 §
            Metro
                Gold Line Eastside Extension: A $615 million design-build contract
                for a
                six-mile-long extension to the Metro Gold Line light rail system
                in Los
                Angeles, California. This contract with the Los Angeles Metropolitan
                Transportation Authority (“MTA”) is being performed by a joint venture led
                by us. 
 ·
            *Highways
                and bridges*:
                Services include design, design-build, construction, operation and
                maintenance of interstates/freeways, arterial highways/streets,
                interchanges, bridges, tunnels and intelligent transportation systems.
                The
                Infrastructure business unit has made the strategic decision to no
                longer
                participate in the public agency highway fixed price “construction only”
                market sector. The contract and change order administration practices
                of
                the client agencies, together with an increase in the number of smaller
                local bidders has lowered available margins to unacceptable levels.
                Our
                significant projects in this market
                include: 
 §
            SR-125:
                A joint venture led by us to design and build the 10-mile privately-funded
                toll road section of the public-private State Route 125 South Expressway
                project in San Diego, California, and a 3.5-mile publicly-funded
                segment
                of State Route 125 with a total contract value of approximately $390
                million. 
 §
            I-215/91/60
                Riverside Interchange: A joint venture led by us to perform a design
                sequence contract to upgrade and widen a 7.8 mile section of I-215
                and
                connecting highways for the California Department of Transportation
                in
                Riverside, California with an approximate contract value of $240
                million. 
 Both
        of
        these projects were in a loss position at the end of 2006. See “Management’s
        Discussion and Analysis of Financial Condition and Results of Operations
        -Business Unit Results- Infrastructure,” in Item 7 of this report.
 
 We
        are
        growing our lower risk program management and operations and maintenance
        capabilities in the highway and bridge market. Our current significant projects
        in this area include:
 
 §
            Connecting
                Idaho GARVEE Program Management: Under a $1 billion program with
                the Idaho
                Transportation Department, we lead a team to provide $200 million
                of
                highway design and construction management services for highway work
                throughout the state. 
 §
            Florida
                Toll Services: We are leading an $85 million joint venture operating
                100
                miles of toll road for the Orlando-Orange County Expressway Authority
                including full-service toll collection operations and maintenance
                services. 
 ·
            *Water
                resource and hydropower*:
                Services include design and construction of hydroelectric power,
                water
                supply, flood control, locks and dams, irrigation and drainage, hydraulic
                structures and environmental and safety analysis. A significant project
                in
                this market includes: 
 §
            Olmsted
                Dam: An $855 million cost-reimbursable-plus-base-and-award-fee joint
                venture for the construction of a 2,700-foot concrete dam across
                the lower
                Ohio River. 
 During
        2006, the Infrastructure business unit continued its work for the US Army
        Corps
        of Engineers providing design, engineering, and construction services in
        the
        Middle East. Infrastructure provided procurement, engineering, and construction
        services for water treatment, pump stations, and sewer rehabilitation projects
        in Iraq. Infrastructure also performed repair, installation, and operations
        and
        maintenance services for a hospital in Iraq.
  I-4
  
 We
        anticipate growth in domestic infrastructure markets. Federal highway funding
        is
        subject to authorization from the Safe, Accountable, Flexible, Efficient,
        Transportation Equity Act: A Legacy for Users (“SAFETEA-LU”) which is expected
        to provide long-term funding. State tax revenues are anticipated to increase,
        which will provide for matching funds for capital programs as well. Certain
        markets continue to have viable projects and the design-build method of
        delivery, with its reliance on private capital and potential opportunities
        for
        public-private partnerships, continues to grow in popularity.
 
 ***Mining***
 
 The
        Mining business unit provides a full range of services, concentrating on
        contract mining and mines management, design/build and engineering, procurement,
        and construction or construction management to the precious and base metals,
        energy minerals, and industrial minerals markets globally. These services
        include a broad spectrum of tasks from mine planning and feasibility studies
        through engineering, construction, operations planning and execution, to
        mine
        reclamation and closure.
 
 Currently,
        the Mining business unit is providing services to the phosphate industry
        in
        Canada and the US, coal mines in the US and Germany, silica and ballast quarry
        operations in the US, a silver, zinc and lead mine in Bolivia, a gold mine
        in
        Mexico, a nickel-cobalt project in Cameroon, and bauxite mines in Jamaica.
        Mining contracts are typically one to ten years in length and are normally
        renewed in subsequent bidding cycles throughout the useful life of the mine,
        which can typically range from 5 to 30 years. Mining contracts are generally
        fixed-unit price, cost reimbursable, or target price.
 
 In
        addition to the Mining business unit’s contracted services, we hold ownership
        interests in two mining ventures:
 
 ·
            MIBRAG
                (50 percent) is located in Germany and operates two surface lignite
                coal
                mines that provide lignite to two utility-owned power generation
                plants,
                as well as small commercial plants and three company-owned power
                plants.
                Power generated by the company-owned plants is primarily utilized
                by the
                mining operations and surplus power is sold at wholesale to the utilities.
                The mines have lignite reserves and contracts in place for 20 to
                40 years
                of supply. Because of the significance of MIBRAG to our results of
                operations for the year ended December 29, 2006, the financial statements
                of MIBRAG have been included in this report on Form 10-K as Exhibit
                99.1. 
 ·
            Westmoreland
                Resources (20 percent) is a Montana surface coal mine providing
                sub-bituminous coal to utilities in the upper
                Midwest. 
 See
        Note
        4, “Ventures,” of the Notes to Consolidated Financial Statements in Item 8 of
        this report.
 
 ***Industrial/Process***
 
 Our
        Industrial/Process business unit is a single-source provider of integrated
        engineering, construction, operations, maintenance, logistics and program
        management services. A key component of Industrial/Process’ approach is close
        alignment with our customers to support their business objectives and develop
        long-term, value-added partnerships and to balance the markets we serve in
        order
        to effectively deal with economic cycles that impact industrial and consumer
        spending.
 
 Services
        are provided using a variety of commercial terms, including various forms
        of
        cost-type, target price and lump sum contracting. The unit’s continuing goal is
        to maintain an evenly balanced commercial mix between cost-type and fixed-priced
        contracts in order to optimize the risk/reward profile and improve cash flow.
 
 Organized
        in three divisions, the Industrial/Process business unit is focused on the
        following strategic areas: Oil, Gas and Chemicals, Facility Management, and
        Industrial Services & Life Sciences.
  I-5
  
 ·
            *Oil,
                Gas & Chemicals.*The Oil, Gas & Chemicals division provides services to several
                markets, including oil production, gas treating, gas monetization,
                gas
                storage, refineries and bulk/specialty chemicals producers. Our services
                span a wide range of offerings including engineering, procurement,
                construction and operations and
                maintenance. 
 Customers
        include ExxonMobil, ConocoPhillips, ChevronTexaco, BP, Qatar Petroleum, DuPont,
        Georgia Gulf, El Paso, Dow Corning, PolyOne and Abu Dhabi National Oil Company,
        among others.
 
 ·
            *Facility
                Management.*Our Facility Management division provides life-cycle services allowing
                our
                customers to focus on core business activities. As a facility management
                market leader for industrial customers, we offer management solutions
                that
                include operations, production maintenance and facility management
                across
                a diverse set of industries to customers seeking to outsource non-core
                business functions. 
 Customers
        include many long-term clients such as Caterpillar, DuPont, IBM, Nissan,
        Micron
        and Tektronix.
 
 ·
            *Industrial
                Services & Life Sciences.*Our Industrial Services & Life Sciences divisions provide life-cycle
                services, including design, engineering, construction, quality assurance,
                logistics, quality programs, and validation for the automotive,
                manufacturing, food, consumer product, cement, pulp and paper
                industries. 
 We
        have
        long-term alliance partnerships with Anheuser-Busch, Kraft and General
        Mills/Pillsbury in the foods market. We provide facility and process design
        solutions for breweries and producers of baked goods, cake mix, cereal, prepared
        entrees, snack foods, soups and yogurt. In the automotive markets, customers
        include General Motors, Ford, Daimler/Chrysler and Hyundai.
 
 In
        Life
        Sciences, we provide design, engineering, construction, validation and
        maintenance services to the biotechnology and pharmaceutical industries.
        An
        integrated delivery platform is provided in the areas of biologics, chemical
        synthesis, dosage form and devise manufacturing to create innovative production
        solutions.
 
 Customers
        include Amgen, Sanofi-Pateur, Pfizer, Schering Plough, Merck, Eli Lilly,
        Johnson
& Johnson, Novartis and Wyeth.
 
 ***Defense***
 
 The
        Defense business unit is structured to meet the needs of our major customer,
        the
        US government, and, more specifically, the Departments of Defense and Homeland
        Security. Our Defense business unit manages, integrates and delivers life-cycle
        services for domestic and international programs under three major markets:
        Threat Reduction, Defense Services and Homeland Security.
 
 ·
            *Threat
                Reduction.*In
                the Threat Reduction market, we focus on global proliferation prevention
                and elimination of chemical, biological, radiological, nuclear and
                high
                explosives materials and weapon systems. We are a global leader in
                the
                elimination of chemical weapons and agents. We provide life-cycle
                demilitarization services to federal clients, including chemical
                and
                biological warfare material elimination and nuclear weapons delivery
                systems disarmament. This market includes support for the Department
                of
                Defense in the destruction of the US chemical weapons stockpile.
                We are
                the system contractor for three of the US Army’s four incineration-based
                chemical weapons destruction facilities. We are also responsible
                for the
                start-up, pilot plant testing, operations and maintenance and closure
                of
                two additional neutralization-based plants, dealing with intact chemical
                weapons. All of these facilities are designed to destroy chemical
                weapons
                that have been stored for many years in underground bunkers.
                In ·
            addition,
                we have expanded our global reach through destruction of a chemical
                agent
                stockpile in Albania. 
 We
        provide demilitarization services, funded by the US government, to the former
        Soviet Union, and have been awarded significant participation in the Cooperative
        Threat Reduction Integrated Contract thereunder. This contract is financed
        by
        the US to prevent proliferation of, and safely eliminate, weapons of mass
        destruction located in the former Soviet Union. Work performed includes
        elimination of strategic missiles and related delivery systems, conversion
        of
        the Seversk, Russia plutonium production facility into a peacetime electrical
        power production plant, and construction support for the chemical weapons
        disposal facility in Shchuch’ye, Russia. We are also assisting the Azerbaijan
        and Uzbekistan governments in establishing material detection and interdiction
        capabilities for weapons of mass destruction
 
 A
        major
        objective of Threat Reduction is optimizing the value of existing contracts,
        while our business development efforts are focused on evaluating adjacent
        market
        opportunities and selecting higher probability market sectors for development
        and penetration in the US and abroad.
 
 ·
            *Defense
                Services.*Defense Services, principally, addresses Department of Defense needs,
                offering a wide array of services including engineering, procurement,
                construction, operation, management and technical services with an
                objective of reducing the Department’s risk in mission execution due to
                infrastructure vulnerabilities. We support Department of Defense
                entities
                and agencies that operate or maintain major facilities, providing
                classified and unclassified architectural engineering services,
                engineering, procurement and construction services, as well as support
                services. We provide similar services to the Department of State
                and
                various intelligence agencies of the US government. We lead one of
                six
                teams that provide a wide range of support services under a $10 billion
                indefinite delivery/indefinite quantity, rapid response contract
                to the US
                Air Force under their Contract Augmentation Program
                (“AFCAP”). 
 ·
            *Homeland
                Security.*Homeland Security provides integrated solutions that reduce vulnerability
                to terrorist acts or similar hostile acts and that mitigate the
                consequences of such acts, with emphasis on high-value security systems,
                force protection and emergency preparedness and response services.
                We
                provide threat analysis and mitigation services to a variety of clients,
                domestic and international. We support one of the highest US priorities,
                the security of the nation and the safety of US citizens and assets
                abroad. The market for our services is principally derived from US
                Federal
                requirements and international governments and agencies that have
                similar
                security concerns and strategic assets that require protection. Concerns
                about border security have emerged as an area of global interest.
                We are
                positioning to serve those needs. With the creation of the Department
                of
                Homeland Security, we devote our considerable experience in security
                research and technologies to compete for resulting business. We are
                pursuing multiple opportunities for securing transportation systems
                and
                other critical infrastructure. Washington Group International is
                certified
                by the US Department of Homeland Security to provide anti-terrorism
                services for cargo-container facilities at ports in the
                US. 
 The
        Defense business unit applies our comprehensive skills to create cost-effective
        solutions to operational challenges, drawing resources from all of Washington
        Group International’s business units. Such integration is essential to compete
        successfully in existing and emerging markets. We perform virtually all Defense
        work on a cost-reimbursable basis.
 
 ***Energy
        & Environment***
 
 Our
        Energy & Environment business unit provides services to the US Department of
        Energy, which is responsible for maintaining the nation’s nuclear weapons
        stockpile, performing legacy environmental cleanup and remediation, and leading
        the development of next generation nuclear power. The services provided include
        construction, contract management, supply-chain management, quality assurance,
        waste management, facilities management, decontamination and decommissioning,
        environmental cleanup and restoration services. Energy &
  I-6
  Environment
        provides safety management consulting and waste and environmental technology,
        engineered products, including radioactive waste containers and technical
        support services.
 
 The
        Energy & Environment business unit also provides products and services to
        commercial clients, including the design and manufacture of engineered canisters
        to ship and store spent nuclear fuel, safety planning, integrated safety
        management consulting, facility operation, hazardous material management
        and
        licensing.
 
 The
        Energy & Environment business unit primarily serves the US Department of
        Energy in the environmental management market segment, while also serving
        the
        National Nuclear Security Agency by managing nuclear operations and the
        Department of Defense in selected engineering, design, construction,
        environmental cleanup, and remediation projects. There are currently three
        market units within Energy & Environment: Management Services, Projects and
        Consulting Services. We are positioning a fourth market unit, International,
        to
        provide the services of the existing three market units to international
        customers, primarily in the United Kingdom.
 
 ·
            *Management
                Services.*Management Services focuses on Department of Energy site management
                and
                support contracts, under which key personnel are supplied to effectively
                manage existing site operations, infrastructure and human resources.
                Our
                current emphasis is managing complex, high-hazard facilities and
                operations using our experience in technology, commercial nuclear
                operations, safety and operations in a regulatory
                environment. 
 Management
        Services has long-term management contracts with the Department of Energy.
        We
        serve three major programs within the Department of Energy, Environmental
        Management, Science and the National Nuclear Security Agency. The Environmental
        Management program consists of the environmental cleanup activities (radioactive
        and hazardous waste), resulting from the US government’s nuclear weapons
        program. Our key existing contracts include the Savannah River Site in South
        Carolina, the West Valley Nuclear Services Site in New York, the Idaho Cleanup
        Project in Idaho, the River Corridor Project in Washington  and
        the
        Waste Isolation Pilot Project in New Mexico. The Science program consists
        of
        facility and infrastructure management, such as our contract at the Idaho
        National Laboratory. The National Nuclear Security Agency consists of the
        Department of Energy’s defense programs and weapons production activities, such
        as our contracts at Los Alamos National Laboratory and production facilities
        at
        the Savannah River Site. These contracts range in term from five to ten years
        and may include options to renew for up to five years.
 
 ·
            *Projects.*Projects provides life-cycle services to the Department of Energy
                and its
                prime contractors, as well as to other US government agencies. We
                utilize
                our skills in environmental remediation, design of complex high-hazard
                facilities and construction capability to service this market. We
                provide
                nuclear and high-hazard facility engineering, procurement and
                construction; nuclear and high-hazard facility deactivation,
                decommissioning, decontamination and dismantlement; and environmental
                characterization, design and remediation. Our work includes mid-level
                design, construction and environmental projects for the Department
                of
                Defense. 
 We
        offer
        a broad portfolio of services and technologies to the Department of Energy,
        the
        Department of Defense and the EPA, with five distinct clients within the
        agencies. In the Department of Energy, we serve Environmental Management
        and the
        National Nuclear Security Agency. In the Department of Defense, our customers
        include the US Air Force Center for Environmental Excellence (“AFCEE”), the US
        Army Corps of Engineers and the US Navy Facilities Engineering Command. The
        Defense and Infrastructure business units are executing AFCEE contracts in
        Iraq.
 
 ·
            *Consulting
                Services*.
                Consulting Services provides services to most Department of Energy
                sites.
                These services are also provided to other governmental agencies or
                commercial clients. The core products and services include safety
                analysis, regulatory services, criticality and radiological engineering,
                safeguards and security management and environmental services. We
                self-perform for our sites, support other sites and are equipped
                to
                provide services throughout the life cycle of a project. · Consulting
        Services is primarily concentrated in the Washington Safety Management Solutions
        LLC. Washington Safety Management Solutions LLC takes the expertise developed
        through our experience in the Department of Energy Management Services business
        and develops programs that are utilized at other Department of Energy and
        governmental sites and with commercial clients. The Department of Energy
        facilities are our principal customers.
 
 ·
            *International.*International addresses new markets for our core services internationally,
                primarily in the United Kingdom, which is actively seeking such services
                to address their environmental legacies. We are currently providing
                cleanup support to several sites in the United Kingdom and are supporting
                project work with the Atomic Weapons Establishment. We believe we
                are
                well-positioned to compete for this work given our experience and
                the
                scope of our projects in the hazardous environmental management field
                in
                the US. 
 For
        financial information about each of our business units, geographic areas
        in
        which we operate, and additional disclosures, see “Management’s Discussion and
        Analysis of Financial Condition and Results of Operations - Business
        Unit Results” in Item 7 of this report and Note 10, “Operating Segment,
        Geographic and Customer Information,” of the Notes to Consolidated Financial
        Statements in Item 8 of this report.
 
 **MATERIAL
        CUSTOMERS**
 
 During
        2006, ten percent or more of our total consolidated revenue was derived from
        contracts and subcontracts performed by the Power, Infrastructure,
        Industrial/Process, Defense and Energy & Environment business units for the
        following customers:
 
 Percent
                  of Consolidated RevenueDepartment
                  of Defense
              
              
              27
              %Department
                  of Energy
              
              
              23
              %
 
 Although
        we presently have positive relationships with the Department of Defense and
        the
        Department of Energy, the loss of these customers, or significant reductions
        in
        government funding, could have a material adverse effect primarily on our
        Defense and Energy & Environment business units as well as on our company as
        a whole. See Item 1A, “Risk Factors,” later in this report.
 
 **GOVERNMENT
        CONTRACTS AND BACKLOG**
 
 Government
        funded contracts continue to be a significant part of our business. **** We
        derived 51 percent of our consolidated operating revenue in 2006 from contracts
        with the US government, including 10 percent from work performed in Iraq.
        We
        also have a number of US government contracts that extend beyond one year
        and
        for which government funding has not yet been approved. All US government
        contracts and some foreign contracts are subject to unilateral termination
        at
        the convenience of the customer.
 
 Backlog
        represents the total value of all awarded contracts that have not been completed
        and will be recognized as revenue or as equity in income over the life of
        the
        project. Backlog includes our proportionate share of non-consolidated
        construction joint venture contracts. Backlog for government contracts includes
        only two years’ worth of the portions of such contracts that are currently
        funded or that we are highly confident will be funded. Backlog associated
        with
        mining service contracts and ventures is limited to the revenue and equity
        in
        income to be recognized during the next five years. The reported backlog
        excludes $3.1 billion of government contracts for work to be performed beyond
        December 2008 and $0.8 billion of mining service contracts and equity in
        income
        from mining ventures beyond 2011.
 
 We
        have
        indefinite delivery/indefinite quantity (“ID/IQ”) contracts that are signed
        contracts under which we perform work only when the client issues specific
        task
        orders. The terms of these contracts include a maximum
  I-7
  contract
        value and a specified time period that may include renewal option periods
        at the
        client’s discretion. While we believe that we will continue to receive work over
        the entire term, because of the uncertainty of the renewals and our dependence
        on the issuance of individual task orders for new projects, we cannot be
        assured
        that we will ultimately realize the maximum contract value for any particular
        contract. Only those task orders that are signed and funded are included
        in
        backlog.
 
 Backlog
        at December 29, 2006, totaled $5.6 billion compared with backlog of $4.9
        billion
        at December 30, 2005. Approximately $1.8 billion of the backlog at December
        29,
        2006, was comprised of US government contracts that are subject to termination
        by the government, $0.5 billion of which had not yet been funded. Historically,
        we have not experienced significant reductions in funding of US government
        contracts once they have been awarded. Terminations for the convenience of
        the
        government generally provide for recovery of contract costs and related
        earnings. Approximately $2.9 billion, or 52 percent, of backlog at December
        29,
        2006, is expected to be recognized as contract revenue or as equity in income
        in
        2007, compared to $2.4 billion, or 50 percent, at December 30,
        2005.
 
 Although
        backlog reflects business that we consider to be firm, cancellations or scope
        adjustments may occur.
  **Composition
                    of backlog**
                  *(In
                    millions)*
                **Year
                    Ended**
                  **December
                    29, 2006**
                **Year
                    Ended**
                  **December
                    30, 2005**Cost-type
                    and target-price contracts
                $4,484.7
                80%
                $3,465.8
                71%Fixed-price
                    and fixed-unit-price contracts
                1,120.1
                20%
                1.414.5
                29%Total
                    backlog
                $5,604.8
                100%
                $4,880.3
                100%
 For
        additional
        information about backlog of our business units, see “Managements Discussion and
        Analysis of Financial Condition and Results of Operations - Business Unit
        New
        Work and Backlog” in Item 7 of this report.
 
 **COMPETITION**
 
 We
        are
        engaged in highly competitive businesses in which customer contracts are
        typically awarded through competitive bidding processes. We compete primarily
        based on price, reputation and reliability with other general and specialty
        contractors, both foreign and domestic, including large international
        contractors and small local contractors. Success or failure in our lines
        of
        business is, in large measure, based upon the ability to compete successfully
        for contracts and to provide the engineering, planning, procurement,
        construction, operations and project management and project financing skills
        required to complete them in a timely and cost-efficient manner. Some
        competitors have greater financial and other resources than we do, which,
        in
        some instances, could give them a competitive advantage over us.
 
 **EMPLOYEES**
 
 Our
        global employment varies widely with the volume, type and scope of operations
        at
        any given time. In December 2006, our workforce totaled approximately 25,000
        employees. Approximately 15 percent of our employees are covered either by
        one
        of our regional labor agreements, which expire between June 2007 and June
        2010,
        or by specific project labor agreements, each of which expires upon completion
        of the relevant project.
 
 **RAW
        MATERIALS**
 
 We
        can
        purchase most of the raw materials and components necessary to operate our
        businesses from numerous sources. However, the price and availability of
        raw
        materials and components may vary widely from year to year due to customer
        demand, production capacity, market conditions and material shortages. We
        do not
        anticipate any unavailability of raw materials or components that would have
        a
        material adverse effect on our businesses in the foreseeable future.
  I-8
  **ENVIRONMENTAL
        MATTERS**
 
 Our
        environmental and hazardous substance remediation and contract mining services
        involve risks of liability under federal, state and local environmental laws
        and
        regulations, including the Comprehensive Environmental Response, Compensation
        and Liability Act (“CERCLA”). We perform environmental remediation at Superfund
        sites as a response action contractor for the EPA and, in such capacity,
        are
        exempt from liability under any federal law, including CERCLA, unless our
        conduct is negligent. Moreover, we may be entitled to indemnification from
        agencies of the US government against liability arising out of the negligent
        performance of work in such capacity. We do not own any of the CERCLA
        sites.
 
 We
        are
        subject to risks of liability under federal, state and local environmental
        laws
        and regulations, as well as common law. These laws and regulations and the
        risk
        of attendant litigation can cause significant delays to a project and add
        significantly to its cost. Violations of these laws and regulations could
        subject us to civil and criminal penalties and other liabilities, including
        liabilities for property damage, costs of investigation and cleanup of hazardous
        or toxic substances on property currently or previously owned by us or arising
        out of our current and past remediation, waste management and contract mining
        activities.
 
 For
        additional information regarding environmental matters, see Item 1A, “Risk
        Factors,” later in this report.
  I-9
  
 **ITEM
        1A. RISK FACTORS**
 
 We
        are
        subject to a number of risks, including those enumerated below. Any or all
        of
        these risks could have a material adverse effect on our business, financial
        condition, results of operations and cash flows and on the market price of
        our
        common stock. See also “Note Regarding Forward-Looking Information” preceding
        Part I of this report.
 
 ***The
        documents governing our indebtedness restrict our ability and the ability
        of
        some of our subsidiaries to engage in some business
        transactions.***
 
 We
        have a
        senior secured revolving credit facility (the “Credit Facility”) that provides
        for up to $350 million of loans and other financial accommodations. The credit
        agreement governing the Credit Facility restricts or places certain limits
        on
        our ability and the ability of some of our subsidiaries to, among other
        things:
 
 ·  incur
        or
        guarantee additional indebtedness;
 
 ·  declare
        or pay dividends on, redeem or purchase capital stock;
 
 ·
              make
                  investments;
 
 ·
              incur
                  or permit liens to exist;
 
 ·
              enter
                  into transactions with affiliates;
 
 ·
              make
                  material changes in the nature or conduct of our
                  business;
 
 ·
              merge
                  or consolidate with, or acquire substantially all of the stock
                  or assets
                  of, other companies;
 
 ·
              transfer
                  or sell assets; and
 
 ·
              engage
                  in sale-leaseback transactions.
 
 The
        Credit Facility contains covenants that are typical for credit facilities
        of its
        size, type and tenor, such as requirements that we meet specified financial
        ratios and financial condition tests. Our ability to borrow under the Credit
        Facility depends upon satisfaction of these covenants. Our ability to meet
        these
        covenants and requirements may be affected by events beyond our
        control.
 
 Our
        failure to comply with obligations under the Credit Facility could result
        in an
        event of default under the facility. A default, if not cured or waived, could
        permit acceleration of any outstanding indebtedness. We cannot be certain
        that
        we will be able to remedy any default. If our indebtedness is accelerated,
        we
        cannot be certain that we will have funds available to pay the accelerated
        indebtedness or that we will have the ability to refinance the accelerated
        indebtedness on terms favorable to us or at all.
 
 ***Economic
        downturns and reductions in government funding could have a negative impact
        on
        our businesses.***
 
 Demand
        for the services offered by us has been, and is expected to continue to be,
        subject to significant fluctuations due to a variety of factors beyond our
        control, including economic conditions. During economic downturns, the ability
        of both private and governmental entities to make expenditures may decline
        significantly. We cannot be certain that economic or political conditions
        will
        be generally favorable or that there will not be significant fluctuations
        adversely affecting our industry as a whole or key markets targeted by us.
        In
        addition, our operations are, in part, dependent upon government funding.
        Significant changes in the level of government
  I-10
  funding
        could have an unfavorable impact on our business, financial position, results
        of
        operations and cash flows.
 
 ***Our
        success depends on attracting and retaining qualified personnel in a competitive
        environment.***
 
 We
        are
        dependent upon our ability to attract and retain highly qualified managerial,
        technical and business development personnel. Competition for key personnel
        is
        intense. We cannot be certain that we will retain our key managerial, technical
        and business development personnel or that we will attract or assimilate
        key
        personnel in the future. Failure to retain or attract such personnel could
        adversely affect our businesses, financial position, results of operations
        and
        cash flows.
 
 ***We
        are engaged in highly competitive businesses and must typically bid against
        competitors to obtain engineering, construction and service
        contracts.***
 
 We
        are
        engaged in highly competitive businesses in which customer contracts are
        typically awarded through competitive bidding processes. We compete with
        other
        general and specialty contractors, both foreign and domestic, including large
        international contractors and small local contractors. Some competitors have
        greater financial and other resources than we do, which, in some instances,
        could give them a competitive advantage over us.
 
 ***Our
        fixed-price contracts subject us to the risk of increased project
        costs.***
 
 Our
        fixed-price contracts involve risks relating to our inability to receive
        additional compensation in the event the costs of performing those contracts
        prove to be greater than anticipated. Our cost of performing the contracts
        may
        be greater than anticipated due to uncertainties inherent in estimating contract
        completion costs, contract modifications by customers resulting in claims,
        failure of subcontractors and joint venture partners to perform and other
        unforeseen events and conditions. At December 29, 2006, approximately 20
        percent,  or
        $1.1
        billion, of our backlog represented fixed-price and fixed-unit-price contracts.
        Any one or more of these risks could result in reduced profits or increased
        losses on a particular contract or contracts.
 
 ***We
        have seen an increase in our claims against project owners for payment and
        our
        failure to recover adequately on these and future claims could have a material
        effect on us.***
 
 We
        have
        over the past few years seen an increase in the volume and the amount of
        claims
        brought by us against project owners for additional costs exceeding the contract
        price or for amounts not included in the original contract price. These types
        of
        claims occur due to matters such as owner-caused delays or changes from the
        initial project scope, both of which may result in additional costs, both
        direct
        and indirect. Often, these claims can be the subject of lengthy arbitration
        or
        litigation proceedings, and it is difficult to accurately predict when these
        claims will be fully resolved. When these types of events occur and unresolved
        claims are pending, we have used significant working capital in projects
        to
        cover cost overruns pending the resolution of the relevant claims. A failure
        to
        promptly recover on these types of claims could have a negative impact on
        our
        liquidity and financial condition.
 
 ***The
        US government can audit and disallow costs reimbursed under our government
        contracts and can terminate those contracts without
        cause.***
 
 Government
        contracts, primarily with the US Departments of Energy and Defense, are,
        and are
        expected to continue to be, a significant part of our business. We derived
        approximately 51 percent of our consolidated revenue in 2006 from contracts
        funded by the US government. Allowable costs under government contracts are
        subject to audit by the US government. To the extent that these audits result
        in
        determinations that costs claimed as reimbursable are not allowable costs
        or
        were not allocated in accordance with federal government regulations, we
        could
        be required to reimburse the US government for amounts previously received.
        In
        addition, if we were to lose and not replace our revenue generated by one
        or
        more of the US government contracts, our businesses, financial condition,
        results of operations and cash flows could be adversely
        affected.
  I-11
  
 We
        have a
        number of contracts and subcontracts with agencies of the US government,
        principally for environmental remediation, threat reduction, restoration
        and
        operations work, which extend beyond one year and for which government funding
        has not yet been approved. We cannot be certain that funding will be approved.
        All contracts with agencies of the US government and some commercial and
        foreign
        contracts are subject to unilateral termination at the convenience of the
        customer. In the event of a termination, we would not receive projected revenue
        or profits associated with the terminated portion of those
        contracts.
 
 In
        addition, government contracts are subject to specific procurement regulations,
        contract provisions and a variety of other socioeconomic requirements relating
        to the formation, administration, performance and accounting for these
        contracts. Many of these contracts include express or implied certifications
        of
        compliance with applicable laws and contract provisions. As a result of our
        government contracting, claims for civil or criminal fraud may be brought
        by the
        government for violations of these regulations, requirements or statutes.
        We may
        also be subject to *qui
        tam* litigation brought by private individuals on behalf of the government under
        the
        Federal Civil False Claims Act, which could include claims for up to treble
        damages. Further, if we fail to comply with any of these regulations,
        requirements or statutes, our existing government contracts could be terminated,
        we could be suspended from government contracting or subcontracting, including
        federally funded projects at the state level, and our ability to participate
        in
        foreign projects funded by the US government could be adversely affected.
        If one
        or more of our government contracts are terminated for any reason, or if
        we are
        suspended from government work, we could suffer a significant reduction in
        expected revenue and earnings.
 
 ***Our
        dependence on one or a few customers could adversely affect
        us.***
 
 One
        or a
        few clients have in the past and may in the future contribute a significant
        portion of our consolidated revenue in any one year or over a period of several
        consecutive years. In 2006, approximately 27 percent of our revenue was from
        the
        US Department of Defense and approximately 23 percent of our revenue was
        from
        the US Department of Energy. As our backlog frequently reflects multiple
        projects for individual clients, one major customer may comprise a significant
        percentage of our backlog at any point in time. For example, the US Department
        of Defense, with which we have 78 contracts, represented an aggregate of
        21
        percent of our backlog at December 29, 2006, and the US Department of Energy,
        with which we have 240 contracts, represented an aggregate of 14 percent
        of our
        backlog at December 29, 2006.
 
 Because
        these significant customers generally contract with us for specific projects,
        we
        may lose these customers from year to year as their projects with us are
        completed. If we do not replace them with other customers or other projects,
        our
        business could be materially adversely affected.
 
 Additionally,
        we have long-standing relationships with many of our significant customers.
        Our
        contracts with these customers, however, are on a project-by-project basis,
        and
        the customers may unilaterally reduce or discontinue their purchases at any
        time. The loss of business from any one of such customers could have a material
        adverse effect on our business or results of operations.
 
 ***Changes
        in environmental laws, regulations and programs, could reduce demand for
        our
        environmental services, which could negatively impact our
        revenue.***
 
 Our
        environmental business is driven by federal, state, local and foreign laws,
        regulations and programs related to pollution and environmental protection.
        Accordingly, a relaxation or repeal of these laws and regulations, or changes
        in
        governmental policies regarding the funding, implementation or enforcement
        of
        these programs, could result in a decline in demand for environmental services
        that could negatively impact our revenue.
  I-12
  
 ***Our
        backlog is subject to unexpected adjustments and cancellations and is,
        therefore, an uncertain indicator of our future
        earnings.***
 
 As
        of
        December 29, 2006, our backlog was approximately $5.6 billion. We cannot
        assure
        that the revenue projected in our backlog will be realized or, if realized,
        will
        result in profits. Projects may remain in our backlog for an extended period
        of
        time prior to project execution and, once project execution begins, it may
        occur
        unevenly over the current and multiple future periods. Although we have not
        experienced any significant cancellations, project terminations, suspensions
        or
        reductions in scope, these could occur from time to time with respect to
        contracts reflected in our backlog. Such backlog reductions would adversely
        affect the revenue and profit we actually receive from contracts reflected
        in
        our backlog.
 
 ***Our
        businesses involve many project-related and contract-related
        risks.***
 
 Our
        businesses are subject to a variety of project-related risks, including changes
        in political and other circumstances, particularly since contracts for major
        projects are performed over extended periods of time. These risks include
        the
        failure of applicable governing authorities to take necessary actions,
        opposition by third parties to particular projects and the failure by customers
        to obtain adequate financing for particular projects. Due to these factors,
        losses on a particular contract or contracts could occur, and we could
        experience significant changes in operating results on a quarterly or annual
        basis.
 
 We
        may
        also be adversely affected by various risks and hazards, including industrial
        accidents, labor disputes, geological conditions, environmental hazards,
        acts of
        terrorism or war, weather and other natural phenomena such as earthquakes
        and
        floods.
 
 ***We
        could be subject to liabilities as a result of our
        performance.***
 
 The
        nature of our engineering and construction businesses exposes us to potential
        liability claims and contract disputes that may reduce our profits.
 
 We
        engage
        in engineering and construction activities for large industrial facilities
        where
        design, construction or systems failures can result in substantial injury
        or
        damage to third parties. Any liability in excess of our insurance limits
        at
        locations designed or constructed by us, where our products are installed
        or
        where our services are performed, could result in significant liability claims
        against us, which claims may reduce our earnings. In addition, if a customer
        disputes our performance of project services, the customer may decide to
        delay
        or withhold payment to us. If we were ultimately unable to collect on these
        payments, our profits would be reduced.
 
 ***Our
        dependence on subcontractors and equipment manufacturers could adversely
        affect
        us.***
 
 We
        rely
        on third-party subcontractors as well as third-party equipment manufacturers
        to
        complete our projects. To the extent that we cannot engage subcontractors
        or
        acquire equipment or materials, our ability to complete a project in a timely
        fashion or at a profit may be impaired. If the amount we are required to
        pay for
        these goods and services exceeds the amount we have estimated in bidding
        for
        fixed-price, fixed-unit-price or target-price contracts, we could experience
        reduced profit or losses in the performance of these contracts. In addition,
        if
        a subcontractor or a manufacturer is unable to deliver its services, equipment
        or materials according to the negotiated terms for any reason, including
        the
        deterioration of its financial condition, we may be required to purchase
        the
        services, equipment or materials from another source at a higher price. This
        may
        reduce the profit to be realized or result in a loss on a project for which
        the
        services, equipment or materials were needed.
 
  I-13
  ***Strikes,
        work stoppages and other similar events, as well as resulting increases in
        operating costs, would have a negative impact on our operations and financial
        results.***
 
 We
        are
        party to several regional labor agreements that expire between June 2007
        and
        June 2010, as well as project-specific labor agreements that commit us to
        use
        union building trades on certain projects. If we were unable to negotiate
        with
        any of the unions, it could result in strikes, work stoppages or increased
        operating costs as a result of higher than anticipated wages or benefits.
        If the
        unionized workers engage in a strike or other work stoppage, or other employees
        become unionized, we could experience a disruption of our operations and
        higher
        ongoing labor costs, which could adversely affect portions of our business,
        and
        our financial position, results of operations and cash flows. See Item 1
        “Business - Employees” earlier in Part I of this report.
 `
 ***If
        we guarantee to a customer the timely completion or performance standards
        of a
        project, we could incur additional costs to meet our guarantee
        obligations.***
 
 In
        certain instances, including in some of our fixed-price contracts, we guarantee
        a customer that we will complete a project by a scheduled date. We sometimes
        also provide that the project, when completed, will achieve certain performance
        standards. If we subsequently fail to complete the project as scheduled,
        or if
        the project subsequently fails to meet the guaranteed performance standards,
        we
        may be held responsible for cost impacts to the client resulting from any
        delay
        or the costs incurred by the project to achieve the performance standards.
        In
        most cases where we fail to meet contract-defined performance standards,
        we may
        be subject to agreed-upon liquidated damages. To the extent that these events
        occur, the total costs for the project would exceed our original estimates
        and
        we could experience reduced profits or in some cases a loss for that
        project.
 
 ***The
        success of our joint ventures is dependent on the performance of our joint
        venture partners of their contractual obligations.***
 
 We
        enter
        into various joint ventures as part of our engineering and construction business
        and project specific joint ventures. Success of these joint ventures depends
        largely on the satisfactory performance by our partners of their contractual
        obligations. If our joint venture partners fail to perform their contractual
        obligations as a result of financial or other difficulties, we may be required
        to make additional investments and provide additional services to ensure
        the
        adequate performance and delivery of the contracted services. These additional
        obligations could result in reduced profits or in losses for us.
 
 ***Our
        international operations involve special risks.***
 
 We
        pursue
        project opportunities internationally through foreign and domestic subsidiaries
        as well as through agreements with domestic and foreign joint venture partners.
        Our international operations accounted for approximately 21 percent of our
        revenue in 2006, including 10 percent from work performed in Iraq. Our foreign
        operations are subject to special risks, including:
 
 ·  unstable
        political, economic, financial and market conditions;
 
 ·  potential
        incompatibility with foreign joint venture partners;
 
 ·  foreign
        currency fluctuations;
 
 ·  trade
        restrictions and governmental regulations;
 
 ·  restrictions
        on repatriating foreign profits back to the US;
 
 ·  increases
        in taxes;
 
 ·  civil
        disturbances and acts of terrorism, violence or war in the US or elsewhere;
        and
  I-14
  
 ·
              changes
                  in labor conditions, labor strikes and difficulties in staffing
                  and
                  managing international operations.
 
 Events
        outside of our control may limit or disrupt operations, restrict the movement
        of
        funds, result in the deprivation of contract rights, increase foreign taxes
        or
        limit repatriation of earnings. In addition, in some cases, applicable law
        and
        joint venture or other agreements may provide that each joint venture partner
        is
        jointly and severally liable for all liabilities of the venture.
 
 ***Our
        international operations may require our employees or subcontractors to travel
        to high security risk countries, which may result in employee injury,
        repatriation costs or other unforeseen costs.***
 
 As
        a
        global provider of engineering, construction and management services, we
        dispatch employees and subcontractors to various countries around the world.
        A
        country may represent a high security risk because of its political, social
        or
        economic upheaval such as war, civil unrest or ongoing acts of terrorism.
        Senior
        level employees and other key employees and subcontractors have been, and
        may
        continue to be, deployed to provide services in high security risk countries.
        As
        a result, it is possible that our employees or subcontractors may suffer
        injury
        or death, repatriation problems or other unforeseen costs and risks in the
        course of their international responsibilities, which could negatively impact
        our operations.
 
 ***Actual
        results could differ from the estimates and assumptions used to prepare our
        financial statements.***
 
 In
        order
        to prepare financial statements in conformity with accounting principles
        generally accepted in the United States of America, our management is required
        to make estimates and assumptions as of the date of the financial statements.
        These estimates and assumptions affect the reported values of assets,
        liabilities, revenue and expenses and disclosure of contingent assets and
        liabilities. Areas requiring significant estimates by our management
        include:
 
 ·
            determination
                of new work awards and backlog; 
 ·
            recognition
                of contract revenue, costs, profit or losses in applying the principles
                of
                percentage-of-completion accounting; 
 ·
            recognition
                of recoveries under contract change orders or
                claims; 
 ·
            collectibility
                of billed and unbilled accounts receivable and the need and amount
                of any
                allowance for doubtful accounts; 
 ·
            the
                amount of reserves necessary for self-insured
                risks; 
 ·
            the
                determination of liabilities under pension and other post-retirement
                benefit programs; 
 ·
            estimated
                amounts for expected project losses, reclamation costs, warranty
                costs or
                other contract close-out costs; 
 ·
            recoverability
                of goodwill and other intangible assets; 
 ·
            provisions
                for income taxes and realizability of deferred tax assets; 
 ·
            accruals
                for other estimated liabilities, including litigation
                reserves. 
  I-15
  
 ***Our
        use of percentage-of-completion accounting could result in a reduction or
        elimination of previously reported profits.***
 
 As
        more
        fully discussed in “Management’s Discussion and Analysis of Financial Condition
        and Results of Operations - Overview” in Item 7 of this report and in Note 2, “Significant Accounting
        Policies,” of the Notes to Consolidated Financial Statements in Item 8 of this
        report, a substantial portion of our revenue is recognized using the
        percentage-of-completion method of accounting. Generally, the
        percentage-of-completion accounting practices we utilize result in our
        recognizing contract revenues and earnings ratably, based on the proportion
        of
        costs incurred to total estimated contract costs or on the proportion of
        labor
        hours or labor costs incurred to total estimated labor hours or labor costs.
        For
        certain long-term contracts, completion is measured on estimated physical
        completion or units of production.
 
 The
        cumulative effect of revisions to contract revenue and estimated completion
        costs, including incentive awards, penalties, change orders, claims and
        anticipated losses, is recorded in the accounting period in which the amounts
        become known and can be reasonably estimated. Such revisions could occur
        at any
        time and the effects could be material. A change order is included in total
        estimated contract revenue when it is probable that the change order will
        result
        in a bona fide addition to contract value and can be reliably estimated.
        Estimated contract revenue associated with change orders may include amounts
        in
        excess of costs (profit) when appropriate. Claims are included in total
        estimated contract revenue, only to the extent that contract costs related
        to
        the claim have been incurred, when it is probable that the claim will result
        in
        a bona fide addition to contract value and can be reliably estimated, which
        generally occurs when amounts have been received or awarded.
 
 Although
        we have a history of making reasonably dependable estimates of the extent
        of
        progress towards completion of contract revenue and of contract completion
        costs
        on our long-term engineering and construction contracts, due to uncertainties
        inherent in the estimation process, it is possible that actual completion
        costs
        may vary from estimates, and it is possible that such variances could be
        material to our operating results.
 
 ***If
        we have to write off a significant amount of intangible assets, our earnings
        will be negatively impacted.***
 
 Goodwill
        and other intangible assets totaling $120.6 million are included in our
        consolidated balance sheet at December 29, 2006. We must evaluate our goodwill
        and other intangible assets for impairment at least annually. If our goodwill
        and other intangible assets were to become impaired, we would be required
        to
        write-off the impaired amount. The write-off would negatively impact our
        earnings; however, it would not impact our cash flows. As of December 29,
        2006,
        all of our goodwill and other intangible assets relate to our Defense and
        Energy
& Environment business units, which are almost entirely dependent on
        continued spending by the US government. See Note 2, “Significant Accounting
        Policies,” of the Notes to Consolidated Financial Statements in Item 8 of this
        report.
 
 ***The
        significant demands on our cash resources could affect our ability to achieve
        our business plan.***
 
 We
        have
        substantial demands on our cash resources in addition to operating expenses,
        principally capital expenditures. See “Management’s Discussion and Analysis of
        Financial Condition and Results of Operations - Financial Condition and Liquidity” in Item 7 of this report.
 
 Our
        ability to fund working capital requirements will depend upon our future
        operating performance, which, in turn, will be affected by prevailing economic
        conditions and financial, business and other factors, many of which are beyond
        our control. If we are unable to fund our businesses, we will be forced to
        adopt
        an alternative strategy that may include:
 
 ·  reducing
        or delaying capital expenditures;
 
 ·  limiting
        our growth;
  I-16
  
 ·  seeking
        additional debt financing or equity capital; or
 
 ·  selling
        assets.
 
 We
        cannot
        provide assurance that any of these strategies could be affected on favorable
        terms or at all.
 
 ***If
        we experience delays and/or defaults in customer payments, we could suffer
        liquidity problems or we could be unable to recover all
        expenditures.***
 
 Because
        of the nature of our contracts, at times we commit resources to projects
        prior
        to receiving payments from the customer in amounts sufficient to cover
        expenditures on client projects as they are incurred. Delays in customer
        payments may require us to make a working capital investment. If a customer
        defaults in making its payments on a project in which we have devoted
        significant resources, it could have an adverse effect on our financial
        position, results of operations and cash flows.
 
 ***We
        could be subject to liability under environmental laws and
        regulations.***
 
 We
        are
        subject to a variety of environmental, health and safety laws and regulations
        governing, among other things, discharges to air and water, the handling,
        storage and disposal of hazardous or solid waste materials and the remediation
        of contamination associated with releases of hazardous substances. These
        laws
        and regulations and the risk of attendant litigation can cause significant
        delays to a project and add significantly to its cost. Violations of these
        environmental, health and safety laws and regulations could subject us and
        our
        management to civil and criminal penalties and other liabilities. These laws
        and
        regulations may become more stringent, or be more stringently enforced, in
        the
        future.
 
 Various
        federal, state and local environmental laws and regulations, as well as common
        law, may impose liability for property damage and costs of investigation
        and
        cleanup of hazardous or toxic substances on property currently or previously
        owned by us or arising out of our waste management or environmental remediation
        activities. These laws may impose responsibility and liability without regard
        to
        knowledge of or causation of the presence of contaminants. The liability
        under
        these laws is joint and several. We have potential liabilities associated
        with
        our past waste management and contract mining activities and with our current
        and prior ownership of various properties.
 
 ***Our
        organizational documents, some of our agreements and provisions of Delaware
        law
        could inhibit a change in control.***
 
 We
        are
        subject to various restrictions and other requirements that may have the
        effect
        of delaying, deterring or preventing the ability of others to acquire control
        of
        us, even if such a change in control would provide a premium for shareholders.
        These include the following, among others:
 
 ·
              Our
                  certificate of incorporation and bylaws provide that vacancies
                  on the
                  Board only can be filled by other Directors, restrict the ability
                  of our
                  shareholders to call special meetings and to nominate a Director
                  for
                  election, and require supermajority votes for amendments to our
                  certificate of incorporation or
                  bylaws.
 
 ·
              The
                  disbursing agreement that we entered into in connection with our
                  emergence
                  from bankruptcy requires the disbursing agent to vote the shares
                  held by
                  the disbursing agent as recommended by our Board of Directors,
                  unless the
                  Plan Committee established in connection with our bankruptcy directs
                  it to
                  vote the shares in proportion to the votes cast and abstentions
                  claimed by
                  all other stockholders eligible to vote on the particular matter.
                  As of
                  February 21, 2007, 871,713 shares of our common stock were held
                  by the
                  disbursing agent pending future distribution to unsecured
                  creditors.
  I-17
  ·  Section
        203 of the Delaware General Corporation Law generally limits the ability
        of
        major stockholders to engage in specified transactions with us that may be
        intended to effect a change in control.
 
 ·
              Our
                  Board of Directors has the power to determine the price and terms
                  under
                  which additional capital stock may be issued and to fix the terms
                  of
                  preferred stock. Existing stockholders will not have preemptive
                  rights
                  with respect to any of those
                  shares.
 
 ***Exercise
        of our outstanding stock options may dilute the ownership interests of our
        existing stockholders and could adversely affect the market price of our
        common
        stock.***
 
 We
        have
        issued stock options to our directors and key employees under our long-term
        incentive program. As of December 29, 2006, we had 5,100,852 outstanding
        options
        to purchase common shares at a weighted-average exercise price of $31.95
        per
        share. The
        exercise of these options may dilute the ownership interests of our existing
        stockholders. Furthermore, any sales in the public market of the common stock
        issuable upon exercise of the options could adversely affect the prevailing
        market price of our common stock.
 
 See
        additional information on our outstanding stock options in Note 13, “Capital
        Stock, Stock Purchase Warrants and Stock Compensation Plans,” of the Notes to
        Consolidated Financial Statements in Item 8 of this report.
 
 ***Adequate
        bonding is necessary for us to successfully win new work awards on some types
        of
        contracts.***
 
 In
        line
        with industry practice, we are often required, primarily in our Infrastructure
        business unit, to provide performance and surety bonds to customers under
        fixed-price contracts. These bonds indemnify the customer should we fail
        to
        perform our obligations under the contract. If a bond is required for a
        particular project and we are unable to obtain an appropriate bond, we cannot
        pursue that project. We have bonding capacity but, as is typically the case,
        the
        issuance of a bond is at the surety’s sole discretion. Moreover, due to events
        that affect the insurance and bonding markets generally, bonding may be more
        difficult to obtain in the future or may only be available at significant
        additional cost. There can be no assurance that bonds will continue to be
        available to us on reasonable terms. Our inability to obtain adequate bonding
        and, as a result, to bid on new work could have a material adverse effect
        on our
        businesses, financial condition, results of operations and cash flows. Of
        $4.2
        billion of new work awarded during 2006, 2 percent required
        bonding.
 
 ***Unavailability
        of insurance coverage could have a negative impact on our operations and
        results.***
 
 We
        maintain insurance coverage as part of our overall risk management strategy
        and
        due to requirements to maintain specific coverage in our financing agreements
        and in most of our construction contracts. Although we have been able to
        obtain
        insurance coverage to meet our requirements in the past, there is no assurance
        that such insurance coverage will be available in the future.
 
 
 
  I-18
  **ITEM
        1B. UNRESOLVED STAFF COMMENTS**
 
 We
        do not
        have any unresolved written comments from the staff of the SEC regarding
        our
        periodic or current reports under the Exchange Act.
 
 **ITEM
        2. PROPERTIES**
 
 We
        do not
        own significant real property used in our operations. Our principal office
        facilities located in Boise, Idaho; Princeton, New Jersey; Denver, Colorado;
        Birmingham, Alabama; Aiken, South Carolina; Cleveland, Ohio; and Arlington,
        Virginia are leased under long-term, noncancelable leases expiring at various
        dates through 2015. We consider our construction, administrative and engineering
        facilities to be well maintained and suitable for our current operations.
 
 As
        of
        December 29, 2006, our principal facilities were as follows:
 
 **Property
                  location**
              **Facility
                  Sq. Ft.**
              **Owned/**
                **Leased**
              **Segment/**
                **Business
                  Unit**
              **Usage**Aiken,
                  SC
              96,250
              Leased
              5,6
              Business
                  unit headquarters/engineeringArlington,
                  VA
              31,295
              Leased
              2,5,6,7
              Business
                  unit headquarters/regional officeBirmingham,
                  AL
              140,635
              Leased
              4,8
              Business
                  unit headquarters/regional officeBoise,
                  ID
              50,511
              Leased
              7
              Records/retention
                  centerBoise,
                  ID
              193,461
              Leased
              1,2,4,6,7,8
              Corporate/business
                  unit headquartersBucharest
                  Romania
              48,438
              Leased
              1,2,4,5,8
              EngineeringCarlsbad,
                  NM
              183,800
              Leased
              6
              Office/warehouse/container
                  fabricationCleveland,
                  OH
              88,775
              Leased
              4,5,8
              EngineeringChula
                  Vista, CA
              47,785
              Leased
              2
              Construction
                  office / engineeringDenver,
                  CO
              245,082
              Leased
              1,2,3,4,5,6,7,8
              Business
                  unit headquarters/regional officeHouston,
                  TX
              24,622
              Leased
              1,2,4,8
              Office
                  / engineeringNew
                  York, NY
              35,015
              Leased
              1,2,8
              Area
                  officeOxnard,
                  CA
              43,560
              Leased
              2
              Storage
                  yardsPerris,
                  CA
              413,820
              Leased
              2
              Office/precast
                  concrete fabricationPetaluma,
                  CA
              43,800
              Owned
              2
              Storage
                  yardsPrinceton,
                  NJ
              365,245
              Leased
              1,2,4,5,8
              Business
                  unit headquarters/regional offices/ engineeringRichland,
                  WA
              51,548
              Leased
              6
              OfficeSpring
                  Valley, CA
              53,000
              Leased
              2
              Storage
                  yardsVienna,
                  VA
              51,864
              Leased
              2
              Office
                  / engineeringWarrington,
                  England
              51,836
              Leased
              4,6
              OfficeWhitehall,
                  AR
              129,640
              Leased
              5
              Warehouse
                  / office
 
 *
        Segment/business unit:
 1 - Power
 2 - Infrastructure
 3 - Mining
 4 - Industrial/Process
 5 - Defense
 6 - Energy
& Environment
 7
        -
        Corporate
 8
        -
        Operations centers used by all business units
 
  I-19
  
 **ITEM
        3. LEGAL PROCEEDINGS**
 
 As
        previously reported, we were sued in the Supreme Court of New York, County
        of
        Kings in connection with construction management and inspection services
        performed by Washington Infrastructure, Inc. for a new school facility for
        the
        School Construction Authority of the City of New York by the prime contractor.
        This suit, *Trataros
        Construction, Inc. et al. v. The New York City School Construction Authority
        et
        al.* ,
        Index
        No. 20213/01, has been in the discovery stage for years and there have been
        no
        material developments in the proceedings in some time. To the extent there
        are
        additional material developments in this suit, we will discuss them in future
        reports under the Exchange Act.
 
 We
        incorporate by reference the information regarding legal proceedings set
        forth
        under the caption “Legal Matters” in Note 11, “Contingencies and Commitments,”
of the Notes to Consolidated Financial Statements in Item 8 of this
        report.
 
 Our
        reorganization case is *In
        re
        Washington Group International, Inc. and Related Cases* ,
        Docket
        No. BK-N 01-31627-GWZ, in the US Bankruptcy Court for the District of Nevada.
 
 The
        personal injury and property damage lawsuits discussed under the caption
“Legal
        Matters” and referred to as “New Orleans Levee Failure Class Action Litigation”
in Note 11, “Contingencies and Commitments” of the Notes to Consolidated
        Financial Statements in Item 8 of this report refers to *Berthelot,
        et al. v. Boh Bros. Construction Co., LLC, et al.,* Case No.
        05-4182; *Vodanovich,
        et al. v. Boh Bros. Construction Co., LLC, et al.,* Case No.
        05-5237; *Kirsch,
        et al. v. Boh Bros. Construction Co., LLC, et al.,* Case No.
        05-6073; *Ezell
        v. Boh Bros. Construction Co., LLC, et al.,* Case
        No.
        05-6314; *Brown,
        et al. v. Boh Bros. Construction Co., LLC, et al.,* Case
        No.
        05-6324; *LeBlanc,
        et al. v. Boh Bros. Construction Co., LLC, et al.,* Case No.
        05-6327; *Tauzin
        v. The Board of Commissioners for the Orleans Parish Levee District, et al.,* Case
        No.
        06-0020; *Finney,
        et al. v. Boh Bros. Construction Co., LLC, et al.,* ,
        Case
        No. 06-0886; *Christenberry,
        et al. v. Board of Commissioners of the Orleans Levee District, et
        al.* ,
        Case
        No. 06-2278; *Sanchez,
        et al. v. Boh Bros. Construction Co., LLC, et al* .,
        Case
        No. 06-2287; *C.
        Adams, et al. v. Boh Bros. Construction Co., LLC, et al* .,
        Case
        No. 06-4065; *Brock,
        et al. v. Boh Bros. Construction Co., LLC, et al* .,
        Case
        No. 06-4931; *Fleming,
        et al. v. The United States of America, et al.* ,
        Case
        No. 06-5159; *G.
        Adams, et al. v. Boh Bros. Construction Co., LLC, et al* .,
        Case
        No. 06-4634; *Gisevius
        v. Boh Bros. Construction Co., LLC, et al* .,
        Case
        No. 06-5308; *Holmes,
        et al. v. The United States of America, et al.* ,
        Case
        No. 06-5161; *Joseph,
        et al. v. New Orleans Sewage and Water Board, et al* .,
        Case
        No. 06-5032; *LeDuff,
        et al. v. Boh Bros. Construction Co., LLC* , *et
        al* .,
        Case
        No. 06-5260; *O’Dwyer(1)
        v. Boh Bros Construction Col, LLC, et al* .,
        Case
        No. 05-4182, *O’Dwyer(3)
        v. Dept. of Trans. and Dev., et al.* ,
        Case
        No. 06-4389; and *Bradley,
        et al. v. Boh Bros. Construction Co., LLC, et al* .,
        Case
        No. 06-225, all currently pending in the US District Court for the Eastern
        District of Louisiana and consolidated under the *Berthelot* case. *O’Dwyer(2)
        v. Dept. of Trans. and Dev., et al.* ,
        Case
        No. (not yet assigned); *Richardson
        v. Boh Bros. Construction Co., LLC, et al.* ,
        Case
        No. 06-9246; and *Yacob
        v. Board of Commissioners for Orleans Levee District, et al.* ,
        Case
        No. 06-10372, all currently pending in the Civil District Court for the Parish
        of Orleans, Louisiana; and *Cochran,
        et. al. v. Boh Bros. Construction Co., LLC, et al.* ,
        Case
        No. 107 042, currently pending in the 34 th Judicial
        District Court for St. Bernard Parish, Louisiana.
 
 The
        lawsuit relating to our USAID-financed projects in Egypt discussed under
        the
        caption “Legal Matters” and referred to as “Litigation and Investigation related
        to USAID Egyptian Projects” in Note 11, “Contingencies and Commitments” of the
        Notes to Consolidated Financial Statements in Item 8 of this report refers
        to *United
        States of America v. Washington Group International, Inc., et
        al* .,
        Case
        No. CIV-04545S-EJL, in the US District Court for the District of
        Idaho.
 
 **ITEM
        4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**
 
 We
        submitted no matters to a vote of our stockholders during the fourth quarter
        of
        2006.
 
  
 I-20
  **PART
        II**
 
 **ITEM
        5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
        STOCKHOLDER**
 **MATTERS
        AND ISSUER PURCHASES OF EQUITY SECURITIES**
 
 ***Market
        information***
 
 On
        January 25, 2002, the date we emerged from bankruptcy protection pursuant
        to our
        Plan of Reorganization, all of our then-existing equity securities, including
        our common stock, were canceled and extinguished, and 25,000,000 shares of
        newly
        issued common stock were issued, including 5,000,000 shares allocated to
        the
        unsecured creditor pool.
 
 Our
        common stock began trading on the NASDAQ Global Select Market® under the ticker
        symbol “WGII” on March 6, 2003. At the close of business on February 21, 2007,
        we had 28,856,499 shares of common stock outstanding. Of the 5,000,000 shares
        allocated to the unsecured creditor pool, 4,128,287 shares have been distributed
        to various unsecured creditors and the remaining 871,713 shares will be
        distributed as the claim pool is resolved.
 
 The
        following tables set forth the high and low bid prices per share of our common
        stock as reported by the NASDAQ Global Select Market® for each quarterly period
        in 2006 and 2005.
 
 **2006
                  Quarters Ended**
              
              **March
                  31,**
                **2006**
              
              **June
                  30,**
                **2006**
              
              **September
                  29,**
                **2006**
              
              **December
                  29,**
                **2006**High
              
              $
              60.03
              
              $
              61.32
              
              $
              60.00
              
              $
              62.00Low
              
              $
              51.76
              
              $
              47.28
              
              $
              50.88
              
              $
              53.70**2005
                  Quarters Ended**
              
              
              **April
                  1,**
                **2005**
              
              
              **July
                  1,**
                **2005**
              
              
              **September
                  30,**
                **2005**
              
              
              **December
                  30,**
                **2005**High
              
              $
              47.31
              
              $
              52.79
              
              $
              54.60
              
              $
              54.35Low
              
              $
              38.00
              
              $
              40.78
              
              $
              48.72
              
              $
              47.30
 
 ***Holders***
 
 The
        number of holders of our voting common stock at February 21, 2007 was
        approximately 10,995. This number does not include all beneficial owners
        of our
        common stock held in the name of a nominee.
 
 ***Dividends***
 
 We
        have
        not paid a cash dividend since the first quarter of fiscal 1994 and do not
        intend to pay cash dividends in the near term. Our Credit Facility has specified
        restrictions on dividend payments. For a more detailed discussion, see Note
        6,
“Credit Facility,” of the Notes to Consolidated Financial Statements in Item 8
        of this report.
 
 
  II-1
  ***Issuer
        Purchases of Equity Securities***
 
 As
        part
        of the Plan of Reorganization, 8,520,424 stock purchase warrants were issued
        and
        awarded to the unsecured creditor pool. On August 3, 2005, we announced that
        our
        Board of Directors authorized management to purchase, from time to time,
        up to
        $50,000,000 of outstanding warrants and shares of common stock in open market
        or
        negotiated transactions. Subsequent to the initial authorization, our board
        has
        authorized increases to the amount of common stock and warrants that may
        be
        purchased under the program to a total of $275,000,000 as of December 29,
        2006.
        As of January 25, 2006, all outstanding warrants expired. The shares of common
        stock purchased under the program during the three months ended December
        29,
        2006, are as follows:
 **Period**
              
              **(a)
                  Total Number of Shares Purchased**
              
              **(b)
                  Average Price Paid per Share**
              
              **(c)
                  Total number of Shares Purchased as Part of Publicly Announced
                  Plans or
                  Programs**
              
              **(d)
                  Approximate Dollar Value of Shares that May Yet be Purchased Under
                  the
                  Plans or Programs**September
                  30, 2006 - October 27, 2006
              
              
              214,859
              
              $
              60.37
              
              
              214,859
              
              $
              655,672October
                  28, 2006 - November 24, 2006
              
              
              -
              
              
              -
              
              
              -
              
              $
              100,655,672November
                  25, 2006 - December 29, 2006
              
              
              -
              
              
              -
              
              
              -
              
              $
              100,655,672
  ***Recent
        Sales of Unregistered Equity Securities***
 
 We
        did
        not sell any unregistered equity securities during 2006.
  II-2
  
 **ITEM
        6. SELECTED FINANCIAL DATA**
 *(In
        millions except per share data)*
 
 As
        of
        February 1, 2002, in connection with our emergence from bankruptcy protection,
        we adopted fresh-start reporting pursuant to the guidance provided by the
        American Institute of Certified Public Accountants Statement of Position
        (“SOP”)
        90-7, *Financial
        Reporting by Entities in Reorganization Under the Bankruptcy
        Code* .
        In
        connection with the adoption of fresh-start reporting, we created a new entity
        for financial reporting purposes. The effective date of our emergence from
        bankruptcy is considered to be the close of business on February 1, 2002
        for
        financial reporting purposes. In the tables below, the month ended February
        1,
        2002 has been designated “Predecessor Company.”
 
 Effective
        December 31, 2005, we adopted the fair value method of recording compensation
        expense associated with stock options using the modified retrospective
        application method. As a result, periods prior to the year ended December
        29,
        2006 have been adjusted from amounts previously reported. See Note 13, “Capital
        Stock, Stock Purchase Warrants, and Stock Compensation Plans” of the Notes to
        Consolidated Financial Statements in Item 8 of this report. On August 25,
        2004,
        we agreed to acquire BNFL’s interest in the Government Services Business and
        effective December 30, 2005, we settled all remaining acquisition payments
        resulting in the termination of BNFL’s interest in our Government Services
        Business. See Note 14, “Acquisition of BNFL’s Interest in Government Services
        Business”, of the Notes to Consolidated Financial Statements in Item 8 of this
        report. There were no cash dividends declared during any period
        presented.
 **Year
                    Ended**
                
                **Eleven
                    Months Ended**
                
                **Predecessor
                    Company Month Ended****OPERATIONS
                    SUMMARY**
                
                **December
                    29, 2006**
                
                **December
                    30, 2005**
                
                **December
                    31, 2004**
                
                **January
                    2, 2004**
                
                **January
                    3, 2003**
                
                **February
                    1, 2002**Revenue
                
                $
                3,398.1
                
                $
                3,188.5
                
                $
                2,915.4
                
                $
                2,501.2
                
                $
                3,311.6
                
                $
                349.9Gross
                    profit
                
                
                155.8
                
                
                126.3
                
                
                147.2
                
                
                173.7
                
                
                144.3
                
                
                11.1Equity
                    in income of
                  unconsolidated
                  affiliates
                
                
                35.8
                
                
                29.6
                
                
                26.9
                
                
                25.5
                
                
                27.3
                
                
                3.1Operating
                    income
                
                
                115.9
                
                
                92.1
                
                
                112.1
                
                
                137.6
                
                
                105.8
                
                
                9.4Extraordinary
                    item - gain
                  on
                    debt discharge (a)
                
                
                ─
                
                
                ─
                
                
                ─
                
                
                ─
                
                
                ─
                
                
                567.2Net
                    income
                
                
                80.8
                
                
                53.9
                
                
                47.6
                
                
                34.2
                
                
                21.9
                
                
                522.2Income
                    per share:
                  Basic
                
                
                2.83
                
                
                2.07
                
                
                1.88
                
                
                1.37
                
                
                0.88
                
                
                ─
                    (b
                )Diluted
                
                
                2.64
                
                
                1.77
                
                
                1.71
                
                
                1.35
                
                
                0.88
                
                
                ─
                    (b
                )Shares
                    used to compute
                  income
                    per share:
                  Basic
                
                
                28.6
                
                
                26.0
                
                
                25.3
                
                
                25.0
                
                
                25.0
                
                
                ─
                    (b
                )Diluted
                
                
                30.6
                
                
                30.4
                
                
                27.9
                
                
                25.4
                
                
                25.0
                
                
                ─
                    (b
                )**FINANCIAL
                    POSITION**
                  **AT
                    END OF PERIOD**Cash
                    and cash equivalents
                
                $
                232.1
                
                $
                237.7
                
                $
                224.5
                
                $
                118.2
                
                $
                80.4
                
                $
                40.7Current
                    assets
                
                
                1,125.2
                
                
                1,027.6
                
                
                949.3
                
                
                789.0
                
                
                731.1
                
                
                1,072.4Total
                    assets
                
                
                1,732.3
                
                
                1,665.0
                
                
                1,604.3
                
                
                1,425.5
                
                
                1,425.5
                
                
                1,783.4Current
                    liabilities
                
                
                718.0
                
                
                704.4
                
                
                620.3
                
                
                540.0
                
                
                605.3
                
                
                972.5Long-term
                    debt
                
                
                ─
                
                
                ─
                
                
                ─
                
                
                ─
                
                
                ─
                
                
                40.0Minority
                    interests
                
                
                9.9
                
                
                5.6
                
                
                47.9
                
                
                48.5
                
                
                56.1
                
                
                78.0Stockholders’
                    equity
                
                
                798.2
                
                
                757.1
                
                
                749.0
                
                
                675.9
                
                
                606.9
                
                
                550.0
 
 
 (a)
              Extraordinary
                  item consists of a gain on debt discharge of $1,460.7, less the
                  value of
                  common stock and warrants issued of $550.0, net of income tax of
                  $343.5,
                  upon emergence from bankruptcy.
 (b)
            Income
                per share is not presented for this period, as it is not meaningful
                because of the revised capital structure of the Successor
                Company.  II-3
  
 **ITEM
        7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
        CONDITION**
 **AND
        RESULTS OF OPERATIONS**
 
 *The
        following management’s discussion and analysis of financial condition and
        results of operations should be read in conjunction with the consolidated
        financial statements and notes thereto in Item 8 of this report. The following
        analysis contains forward-looking statements about our expectations related
        to
        future potential revenue and operating results. See “Note Regarding
        Forward-Looking Statements” for a discussion of the risks and uncertainties
        affecting these statements and "Risk Factors” in Item 1A of this
        report.*
 
 References
        in our management’s discussion and analysis to 2006 are for our fiscal year
        ended December 29, 2006. References to 2005 are for our fiscal year ended
        December 30, 2005. References to 2004 are for our fiscal year ended December
        31,
        2004.
 
 **OVERVIEW**
 
 We
        are an
        international provider of a broad range of design, engineering, construction,
        construction management, facilities and operations management, environmental
        remediation and mining services. We offer our various services separately
        or as
        part of an integrated package throughout the life cycle of a customer’s project.
        We serve our clients through six business units: Power, Infrastructure, Mining,
        Industrial/Process, Defense, and Energy & Environment.
 
 We
        are
        subject to numerous factors that have an impact on our ability to obtain
        new
        work. The Power business unit is dependent on the domestic demand for new
        power
        generating facilities and the modification of existing power facilities.
        Infrastructure is affected by the availability of public sector funding for
        transportation projects and the availability of bonding. Mining is affected
        by
        demand for coal, precious metals and other extractive resources. The
        Industrial/Process business unit is affected in general by the growth prospects
        in the US economy and more directly by the capital spending plans of its
        large
        customer base. Industrial/Process also provides services to the oil and gas
        industry. With the increase in the price of oil and natural gas, the business
        unit is actively pursuing opportunities in this market. Finally, the Defense
        and
        Energy & Environment business units are almost entirely dependent on the
        spending levels of the US government, in particular, the Departments of Defense
        and Energy.
 
 **CRITICAL
        ACCOUNTING POLICIES AND RELATED CRITICAL ACCOUNTING
        ESTIMATES**
 
 Our
        accounting and financial reporting policies are in conformity with accounting
        principles generally accepted in the US (“GAAP”). The preparation of our
        consolidated financial statements in conformity with GAAP requires us to
        make
        estimates and judgments that affect the reported amounts of assets and
        liabilities and disclosure of contingent assets and liabilities at the balance
        sheet date, and the reported amounts of revenue and expenses during the
        reporting period. Although our significant accounting policies are described
        in
        Note 2, “Significant Accounting Policies,” of the Notes to Consolidated
        Financial Statements in Item 8 of this report, the following discussion is
        intended to describe those accounting policies most critical to the preparation
        of our consolidated financial statements. The development and selection of
        the
        critical accounting policies, related critical accounting estimates and the
        disclosure below have been reviewed with the Audit Review Committee of our
        Board
        of Directors. Other than adoption of new standards, there were no changes
        in our
        critical accounting policies during 2006.
 
 ***Revenue
        recognition.*** We
        follow the provisions of SOP 81-1, *Accounting
        for Performance of Construction-Type and Certain Production-Type Contracts.* We
        recognize revenue on certain engineering and construction-type contracts
        using
        the percentage-of-completion method of accounting whereby revenue is recognized
        as performance under the contract progresses. For most of our fixed-price
        and
        target-price contracts, we use a cost-to-cost approach to measure progress
        towards completion. Under the cost-to-cost method, we make periodic estimates
        of
        our progress towards completion by comparing costs incurred to date with
        total
        estimated contract costs. Revenue is then calculated on a cumulative basis
        (project-to-date) as the total contract value multiplied by
  II-4
  the
        current percentage complete. Revenue for a reporting period is calculated
        as the
        cumulative project-to-date revenue less project revenue recognized in prior
        periods. However, we defer profit recognition on fixed-price and certain
        target-priced contracts until progress is sufficient to estimate the probable
        outcome, which generally does not occur until the project is at least 20
        percent
        complete . Fixed-price
        contracts accounted for 20 percent of our total revenue during
        2006.
 
 For
        contracts that include significant materials or equipment costs, we use an
        efforts expended method to measure progress towards completion based on labor
        hours, labor dollars or some other measurement of physical completion. For
        certain long-term contracts involving mining and environmental and hazardous
        substance remediation, progress towards completion is measured using the
        units
        of production method. Revenue from reimbursable or cost-plus contracts is
        recognized on the basis of costs incurred during the period plus the fee
        earned.
        Service-related contracts, including operations and maintenance contracts,
        are
        accounted for over the period of performance, in proportion to the costs
        of
        performance, evenly over the period or over units of production. Award fees
        associated with US government contracts are initially estimated and recognized
        based on historical performance until the client has confirmed the final
        award
        fee. Performance-based incentive fees are included in contract value when
        a
        basis exists for the reasonable prediction of performance in relation to
        established targets. When a basis for reasonable prediction does not exist,
        performance-based incentive fees are recognized when actually awarded by
        the
        client.
 
 The
        amount of revenue recognized depends on whether the contract or project is
        determined to be an “at-risk” or an “agency” relationship between the client and
        us. Determination of the relationship is based on characteristics of the
        contract or the relationship with the client. For at-risk relationships, the
        gross revenue and the costs of materials, services, payroll, benefits,
        non-income tax and other costs are recognized in our consolidated statements
        of
        income. For agency relationships, where we act as an agent for our client,
        only
        fee revenue is recognized, meaning that direct project costs and the related
        reimbursement from the client are netted.
 
 The
        use
        of the percentage-of-completion method for revenue recognition requires the
        use
        of various estimates, including among others, the extent of progress towards
        completion, contract completion costs and contract revenue. Profit to be
        recognized is dependent upon the accuracy of estimated engineering progress,
        material quantities, achievement of milestones and other incentives, penalty
        provisions, labor productivity and other cost estimates. Such estimates are
        dependent upon various judgments we make with respect to those factors, and
        some
        are difficult to accurately determine until the project is significantly
        underway. Progress is evaluated each reporting period. We recognize adjustments
        to profitability on contracts utilizing the percentage-of-completion method
        on a
        cumulative basis, when such adjustments are identified. We have a history
        of
        making reasonably dependable estimates of the extent of progress towards
        completion, contract revenue and contract completion costs on our long-term
        engineering and construction-type contracts. However, due to uncertainties
        inherent in the estimation process, it is possible that actual completion
        costs
        may vary from estimates. In limited circumstances, we may use the
        completed-contract method for specific contracts for which reasonably dependable
        estimates cannot be made or for which inherent hazards make the estimates
        doubtful. The completed contract method was not utilized during any of the
        periods presented.
 
 ***Change
        orders and claims.*** Once
        contract performance is underway, we often experience changes in conditions,
        client requirements, specifications, designs, materials and work schedule.
        Generally, a “change order” will be negotiated with our customer to modify the
        original contract to approve both the scope and price of the change.
        Occasionally, however, disagreements arise regarding changes, their nature,
        measurement, timing and other characteristics that impact costs and revenue
        under the contract. When a change becomes a point of dispute between our
        customer and us, we then consider it as a claim.
 
 Costs
        related to change orders and claims are recognized when they are incurred.
        Change orders are included in total estimated contract revenue when it is
        probable that the change order will result in a bona fide addition to contract
        value and can be reliably estimated. Estimated contract revenue associated
        with
        change orders may include amounts in excess of incurred costs (profit) when
        appropriate. Claims are included in total estimated contract revenue, only
        to
        the extent that contract costs related to the claim have been incurred, when
        it
        is probable that the claim will result in a bona fide addition to contract
        value
        and can be reliably estimated which generally
  II-5
  occurs
        when amounts have been received or awarded. This can lead to a situation
        where
        costs are recognized in one period and revenue is recognized when customer
        agreement is obtained or claim resolution occurs, which can be in subsequent
        periods. Historical claim recoveries should not be considered indicative
        of
        future claim recoveries. We recognized revenue and related additional contract
        costs from claims in the following amounts for the periods
        presented:
 
 *(In
                  thousands)*
              
              **Year
                  Ended**
                **December
                  29, 2006**
              
              **Year
                  Ended**
                **December
                  30, 2005**
              
              **Year
                  Ended**
                **December
                  31, 2004**Revenue
                  from claims
              
              $
              ─
              
              $
              22,899
              
              $
              30,439Less
                  additional contract related costs and
                subcontractors’
                  share of claim settlements
              
              
              ─
              
              
              (1,697
              )
              
              (1,901
              )Net
                  impact on gross profit from claims
              
              $
              ─
              
              $
              21,202
              
              $
              28,538
 
 Substantially
        all claims were settled and collected during each respective period for which
        claim revenue was recognized. During 2006, we recognized $16.8 million of
        change
        order recoveries on two projects for which losses were recorded in prior
        periods. As discussed in “Business Unit Results - Infrastructure,” we have
        incurred significant losses on three highway projects and have submitted
        a
        substantial amount of pending change orders and claims to the
        customers.
 
 ***Estimated
        losses on uncompleted contracts and changes in contract
        estimates.*** We
        record provisions for estimated losses on uncompleted contracts in the period
        in
        which such losses are identified. The cumulative effect of revisions to contract
        revenue and estimated completion costs are recorded in the accounting period
        in
        which the amounts become evident and can be reasonably estimated. These
        revisions include such items as the effects of change orders and claims,
        warranty claims, liquidated damages or other contractual penalties, adjustments
        for audit findings on US government contracts and contract closeout settlements.
        It is possible that there will be future and currently unknown significant
        adjustments to our estimated contract revenue, costs and gross margins for
        contracts currently in process, particularly in the later stages of the
        contracts. These adjustments are common in the construction industry and
        inherent in the nature of our contracts. These adjustments could, depending
        on
        the magnitude of the adjustments and/or the number of contracts being completed,
        materially, positively or negatively, affect our operating results in an
        annual
        or quarterly reporting period.
 
 ***Goodwill.*** As of
        December 29, 2006, we had $97.1 million of goodwill. Pursuant to Statement
        of
        Financial Accounting Standards (“SFAS”) No. 142, *Goodwill and Other Intangible Assets,* goodwill
        is not amortized but is tested for impairment at least annually. We regularly
        evaluate whether events and circumstances have occurred which may indicate
        a
        possible impairment of goodwill and perform the annual impairment test for
        all
        of our reporting units each October. In conducting the impairment test, we
        apply
        various techniques to estimate the fair value of our reporting units. These
        techniques are inherently subjective, and the resulting values are not
        necessarily representative of the values we might obtain in a sale of our
        reporting units to a willing third party. Based on our annual review of the
        recoverability of goodwill as of October 31, 2006, we determined that our
        goodwill is not impaired. However, our businesses are cyclical and subject
        to
        competitive pressures. The $97.1 million of goodwill as of December 29, 2006
        relates to our Defense and Energy & Environment business units, which are
        almost entirely dependent on continued spending by the US government. Therefore,
        it is possible that the goodwill values of our business units could be adversely
        impacted in the future by these or other factors and that a significant
        impairment adjustment, which would reduce earnings and potentially affect
        debt
        covenants, could be required in such circumstances.
 
 ***Income
        Taxes.*** Deferred
        income tax assets and liabilities are recognized for the effects of temporary
        differences between the carrying amounts and the tax basis ****** of
        assets
        and liabilities using enacted tax rates. A valuation allowance is established
        when it is more likely than not that net deferred tax assets will not be
        realized. Tax credits are generally recognized in the year they
        arise.
 
 ***Litigation
        claims and contingencies.*** In the
        normal course of business, we are subject to a variety of contractual guarantees
        and litigation. In general, guarantees can relate to project scheduling,
        project
        completion,
  II-6
  plant
        performance or meeting required standards of workmanship. Most of our litigation
        involves us as a defendant in workers’ compensation, personal injury, contract,
        environmental, environmental exposure, professional liability and other similar
        lawsuits. We maintain insurance coverage for some aspects of our business
        and
        operations. In addition, we have elected to retain a portion of the liability
        related to insured losses that may occur through the use of various deductibles,
        limits and retentions under our insurance programs. This situation may subject
        us to some future liability for which we are only partially insured.
        Self-insurance reserves are established and maintained for uninsured business
        risks.
 
 Government
        contracts are, and are expected to continue to be, a significant part of
        our
        business. We derived 51 percent of our consolidated operating revenue in
        2006
        from contracts with the US government. Allowable costs under US government
        contracts are subject to audit by the government. To the extent that these
        audits result in determinations that costs claimed as reimbursable are not
        allowable costs or were not allocated in accordance with federal regulations,
        we
        could be required to reimburse the government for amounts previously received.
        We also have a number of US government contracts which extend beyond one
        year
        and for which government funding has not yet been approved. All US government
        contracts and some foreign contracts are subject to unilateral termination
        at
        the convenience of the customer. However, we have not experienced any unilateral
        termination of US government contracts within the recent past.
 
 Estimating
        liabilities and costs associated with such claims, guarantees, litigation
        and
        audits and investigations requires judgment and assessment based on professional
        knowledge and experience of our management and legal counsel. In accordance
        with
        SFAS No. 5, *Accounting
        for Contingencies* ,
        amounts
        are recorded as charges to earnings when we determine that it is probable
        that a
        liability has been incurred and the amount of loss can be reasonably estimated.
        In estimating the amount of probable loss, we include legal defense costs
        when
        the amounts are both probable and reasonably estimable. The ultimate resolution
        of any such exposure may vary from earlier estimates as further facts and
        circumstances become known. We maintain reserves for both self-insured claims
        that are known as well as for self-insured claims that are believed to have
        been
        incurred based on actuarial analysis, but have not yet been reported to our
        claims administrators. We include any adjustments to such insurance reserves in
        our consolidated results of operations in the period identified.
 
 **OTHER
        SIGNIFICANT ACCOUNTING POLICIES AND TERMS**
 
 The
        following summary of significant accounting policies and terms is presented
        to
        provide a better understanding of our industry, our consolidated financial
        statements and discussion and analysis of our results of operations and
        financial position and liquidity.
 
 **New
        work** represents the monetary value of a contract entered into with a client that
        is
        binding on both parties and reflects the revenue, or equity in income, expected
        to be recognized from that contract.
 
 **Backlog** represents the total accumulation of new work awarded less the amount of
        revenue, or equity in income, recognized to date on contracts at a specific
        point in time. We believe backlog is an indicator of future earnings potential.
        Although backlog reflects business that we consider to be firm, cancellations
        or
        reductions may occur and may reduce backlog and future revenue. We have a
        significant number of clients that consistently extend or add to the scope
        of
        existing contracts. We do not include any estimate of this ongoing work in
        backlog until awarded.
 
 There
        are
        three unique aspects of our approach to recording new work and
        backlog:
 
 ·
              ***Government
                  contracts***-Most of our government contracts extend over several years. However,
                  funding for the contracts is subject to annual appropriations by
                  Congress.
                  To account for the risk that future amounts may not be appropriated,
                  we
                  only include the next two years of forecast revenue in our backlog.
                  Therefore, as time passes and appropriations occur, additional
                  new work is
                  recorded on existing government contracts. At December 29, 2006,
                  US
                  government funded contracts comprised approximately 33 percent
                  of our
                  total backlog.
  II-7
  ·
              ***Mining
                  contracts***-Mining contracts span varying periods of time up to the life of
                  the
                  resource. For new work and backlog purposes, we limit the amount
                  recorded
                  to five years. Similar to our practices with government contracts,
                  as time
                  passes, we recognize additional new work as commitments for that
                  future
                  work are firmed up. At December 29, 2006, mining contracts comprised
                  approximately 13 percent of our total
                  backlog.
 
 ·
              ***At-risk
                  and agency contracts*******-The amount of new work and related backlog recognized depends on
                  whether
                  the contract or project is determined to be an “at-risk” or “agency”
                  relationship between the client and us. For at-risk relationships,
                  the
                  expected gross revenue is included in new work and backlog. For
                  relationships where we act as an agent for our client, only the
                  expected
                  net fee revenue is included in new work and backlog. At December
                  29, 2006,
                  expected net fee revenue for agency relationships comprised approximately
                  3 percent of our total backlog.
 
 **Joint
        ventures and equity investments** are
        utilized when contracts are executed jointly through partnerships and joint
        ventures with unrelated third parties.
 
 ·
              ***Joint
                  ventures***.
                  A
                  significant part of our work on large construction and engineering
                  projects is performed through unincorporated joint ventures with
                  one or
                  more partners. For those in which we control the joint venture
                  by contract
                  terms or other means, the assets, liabilities and results of operations
                  of
                  the joint venture are fully consolidated in our financial statements,
                  and
                  the minority interests of third parties are separately deducted
                  in our
                  financial statements. For those construction joint ventures in
                  which we do
                  not control the joint venture, we report our pro rata portion of
                  revenue
                  and costs, but the balance sheet reflects only our net investment
                  in the
                  project. Joint ventures not involving construction or engineering
                  activities, and which we do not control, are reported using the
                  equity
                  method of accounting in which we record our portion of the joint
                  venture’s
                  net income or loss as equity in income or loss of unconsolidated
                  affiliates and our investment on the balance sheet reflects our
                  original
                  investment, at cost, as adjusted for our equity in the income or
                  loss of
                  the joint venture and dividends
                  received.
 
 ·
              ***Partially
                  owned subsidiary companies.***For incorporated ventures in which we have a controlling interest,
                  the
                  assets, liabilities and results of operations of the subsidiary
                  company
                  are fully consolidated in our financial statements, and the minority
                  interests of third parties are separately deducted in our financial
                  statements. However, for those in which we do not have a controlling
                  interest but do have significant influence, we use the equity method
                  of
                  accounting in which we record our portion of the subsidiary company’s net
                  income or loss as equity in income or loss of unconsolidated affiliates
                  and our investment on the balance sheet reflects our original investment,
                  at cost, as adjusted for our equity in the income or loss of the
                  subsidiary company and dividends
                  received.
 
 **Restricted
        cash** consists
        primarily of cash collateralizing a letter of credit and trust agreement
        associated with our self-insurance program, cash restricted for use in the
        operations of our consolidated joint ventures and projects having contractual
        cash restrictions.
 
 **Accounts
        receivable** represent amounts billed to clients that have not been paid. On large
        fixed-price construction contracts, contract provisions may allow the client
        to
        withhold from 5 percent to 10 percent of invoices until the project is
        completed, which may be several months or years. These amounts withheld,
        referred to as retentions, are recorded as receivables and are separately
        disclosed in the financial statements.
 
 **Unbilled
        receivables** include
        costs incurred on projects, together with any profit recognized on projects
        using the percentage-of-completion method, and represents work performed
        but not
        yet billed pursuant to contract terms or billed after the end of the accounting
        period.
 
 **Billings
        in excess of cost and estimated earnings on uncompleted
        contracts** represent amounts actually billed to clients, and perhaps collected, in excess
        of costs incurred and profit recognized on a project. Also, we occasionally
        negotiate advance payments as a contract condition. These advance payments
        are
        reflected in billings
  II-8
  in
        excess
        of cost and estimated earnings on uncompleted contracts. Provisions for losses
        on contracts, reclamation reserves on mining contracts and reserves for
        punch-list costs, demobilization and warranty costs on contracts that have
        achieved substantial completion and reserves for audit and contract closing
        adjustments on US government contracts are also included in billings in excess
        of cost and estimated earnings on uncompleted contracts.
 
 **Estimate
        at completion** is a
        financial forecast of a project that indicates the best current estimate
        of
        total revenue and profit or loss at the point in time when the project will
        be
        completed. If a project estimate at completion indicates that a project will
        incur a loss, a provision for the entire loss on the contract is recognized
        currently in the period.
 
 **General
        and administrative expenses** include
        executive and corporate functions, such as legal, human resources and finance
        and accounting.
 
 **Self-insurance
        reserves** are
        maintained for uninsured business risks. We carry substantial premium-paid,
        traditional insurance for our various business risks; however, we do self-insure
        the lower level deductibles for workers’ compensation and general, automobile
        and professional liability. As such, we have recorded self-insurance reserves
        on
        our balance sheet. The current portion of the self-insurance reserves is
        included in other accrued liabilities.
 
 **Incentive
        compensation.** Our
        compensation program includes a short-term incentive compensation plan ("STIP")
        and a long-term incentive compensation plan ("LTIP") covering executives
        and key
        employees. The Compensation Committee of the Board of Directors establishes
        the
        performance targets for all awards under both the STIP and the LTIP. Based
        on
        the performance targets, an estimate of the annual incentive compensation
        cost
        is developed at the beginning of each fiscal year in conjunction with our
        budgeting process. Quarterly, the estimate of the annual incentive compensation
        cost is adjusted based on forecasted financial performance against the
        established targets. Each quarter we accrue a portion of the total estimated
        annual incentive cost based on the performance to date as compared to the
        forecasted performance for the year. For example, if 30 percent of the annual
        performance is achieved in the first quarter, 30 percent of the estimated
        annual
        incentive compensation cost is recorded in the first quarter. If estimated
        incentive compensation cost or forecasted financial performance changes in
        subsequent quarters, then we cumulatively catch up or reduce accrued incentive
        compensation.
  **Minority
        interest** reflects
        the equity investment by third parties in certain subsidiary companies and
        joint
        ventures that we have consolidated in our financial statements.
 
 **Accounting
        for stock-based compensation** .
        As
        discussed further in Note 13 of Notes to Consolidated Financial Statements
        in
        Item 8 of this report, we adopted SFAS No. 123(Revised), *Share-Based
        Payment, (“* SFAS
        No.
        123(R)”), effective December 31, 2005, using the modified retrospective
        application method. As a result, financial statement amounts for prior periods
        presented in this report have been adjusted to reflect the expensing of stock
        options based upon fair value as prescribed by SFAS No. 123(R).
 
 We
        estimate the fair value of options granted using the Black-Scholes option
        pricing model. The assumptions used in computing the fair value of share-based
        payments reflect our best estimates, but involve uncertainties relating to
        market and other conditions, many of which are outside of our control. We
        estimate expected volatility based on historical daily price changes of our
        stock for a period that approximates the current expected term of the options.
        The expected option term is the number of years we estimate that options
        will be
        outstanding prior to exercise considering vesting schedules and our historical
        exercise patterns. If other assumptions or estimates had been used, the
        stock-based compensation expense that was recorded for the periods presented
        could have been materially different. Furthermore, if different assumptions
        are
        used in future periods, stock-based compensation expense could be materially
        impacted in the future.
 
 **Government
        contract costs** are
        incurred under some of our contracts, primarily in our Defense, Energy &
Environment, Power, and Infrastructure business units. We have contracts
        with
        the US government that contain provisions requiring compliance with the US
        Federal Acquisition Regulations and the US Cost Accounting Standards. The
        allowable costs we charge to those contracts are subject to adjustment upon
        audit by various
  II-9
  agencies
        of the US government. Audits of indirect costs are complete through 2003.
        Audits
        of 2004 and 2005 indirect costs are in process. In 2006, we completed the
        2005
        Incurred Cost Submission, and we also reached final agreement on settling
        the
        2003 allowable indirect cost audit which, together, resulted in $4.0 million
        of
        charges to earnings. In addition, the US government is in the process of
        auditing insurance related costs reimbursed under government contracts for
        periods ranging from 1998 through 2005. While we have recorded reserves for
        amounts we believe may be owed to the US government under cost reimbursable
        contracts, actual results may differ from our estimates.
 
 **Pension
        and post-retirement benefit obligations** include
        defined benefit pension plans and unfunded supplemental retirement plans
        that
        primarily cover certain groups of current and former employees of our Government
        Services Business. We utilize actuarial estimates of the pension obligations
        for
        financial reporting purposes and make contributions as necessary to meet
        the
        Employee Retirement Income Security Act of 1974 (“ERISA”) funding requirements
        for these plans. We also provide benefits under company-sponsored retiree
        health
        care and life insurance plans for certain groups of employees. The retiree
        health care plans require retiree contributions and contain other cost-sharing
        features. The retiree life insurance plans provide basic coverage on a
        noncontributory basis. Effective December 31, 2005, all benefits provided
        under
        the pension and post-retirement health care and life insurance plans were
        frozen.
 
 **BUSINESS
        UNIT NEW WORK AND BACKLOG**
 
 New
        work
        for each business unit, which represents additions to backlog for the period,
        is
        presented below:
 
 **Three
                  Months Ended**
              
              **Year
                  Ended****New
                  work**
                *(In
                  millions)*
              
              **December
                  29,**
                **2006**
              
              **December
                  30,**
                **2005**
              
              **December
                  29,**
                **2006**
              
              **December
                  30,**
                **2005**Power
              
              $
              194.9
              
              $
              273.1
              
              $
              1,128.5
              
              $
              1,003.8Infrastructure
              
              
              48.5
              
              
              74.5
              
              
              399.5
              
              
              593.6Mining
              
              
              63.1
              
              
              21.5
              
              
              364.9
              
              
              311.7Industrial/Process
              
              
              763.7
              
              
              313.3
              
              
              1,251.6
              
              
              619.5Defense
              
              
              199.1
              
              
              251.1
              
              
              539.1
              
              
              676.5Energy
                  & Environment
              
              
              87.2
              
              
              122.7
              
              
              540.1
              
              
              987.8Other
              
              
              (0.5
              )
              
              0.8
              
              
              1.3
              
              
              2.8Total
                  new work
              
              $
              1,356.0
              
              $
              1,057.0
              
              $
              4,225.0
              
              $
              4,195.7
 
 The
        following table summarizes our changes in backlog for each of the periods
        presented:
 
 **Three
                  Months Ended**
              
              **Year
                  Ended****Changes
                  in backlog**
                *(In
                  millions)*
              
              **December
                  29,**
                **2006**
              
              **December
                  30,**
                **2005**
              
              **December
                  29,**
                **2006**
              
              **December
                  30,**
                **2005**Beginning
                  backlog
              
              $
              5,110.8
              
              $
              4,733.0
              
              $
              4,880.3
              
              $
              4,004.1New
                  work
              
              
              1,356.0
              
              
              1,057.0
              
              
              4,225.0
              
              
              4,195.7Adjustments
                  to backlog
              
              
              ─
              
              
              ─
              
              
              (66.6
              )
              
              (101.4
              )Revenue
                  and equity income
                recognized
              
              
              (862.0
              )
              
              (909.7
              )
              
              (3,433.9
              )
              
              (3,218.1
              )Ending
                  backlog
              
              $
              5,604.8
              
              $
              4,880.3
              
              $
              5,604.8
              
              $
              4,880.3
 
  II-10
  Backlog
        at December 29, 2006, September 29, 2006 and December 30, 2005 consisted
        of the
        following:
 
 **Backlog**
                *(In
                  millions)*
              
              **December
                  29,**
                **2006**
              
              **September
                  29,**
                **2006**
              
              **December
                  30,**
                **2005**Power
              
              $
              1,262.0
              
              $
              1,277.9
              
              $
              924.9Infrastructure
              
              
              799.6
              
              
              892.5
              
              
              1,046.1Mining
              
              
              733.3
              
              
              721.7
              
              
              565.4Industrial/Process
              
              
              1,227.6
              
              
              603.6
              
              
              487.7Defense
              
              
              953.6
              
              
              891.7
              
              
              990.4Energy
                  & Environment
              
              
              628.7
              
              
              723.4
              
              
              865.8Total
                  backlog
              
              $
              5,604.8
              
              $
              5,110.8
              
              $
              4,880.3
 
 ***New
        work and backlog***
 
 At
        December 29, 2006, our backlog was $5,604.8 million, an increase of $494.0
        million and $724.5 million from the third quarter and the beginning of 2006,
        respectively. Backlog on government contracts includes only two years’ worth of
        the portions of such contracts that are currently funded or which management
        is
        highly confident will be funded. Backlog associated with mining service
        contracts and equity in income of mining ventures is limited to the revenue
        and
        equity in income to be recognized during the next five years. In this regard,
        the reported backlog at December 29, 2006 excludes $3.1 billion of government
        contracts for work to be performed beyond December 2008 and $0.8 billion
        of
        mining service contracts and equity in income of mining ventures beyond
        2011.  Approximately
        $2.9 billion, or 52 percent, of backlog at December 29, 2006 is expected
        to be
        recognized as contract  revenue
        or as equity in income in 2007. Our backlog at the end of 2006 consisted
        of
        approximately 80 percent cost-type and 20 percent fixed-price contracts compared
        with 71 percent cost-type and 29 percent fixed-price contracts at the end
        of
        2005.
 
 New
        work
        for the three months and year ended December 29, 2006 includes the following
        significant contracts:
 
 *(In
                  millions)*
              
              **Three
                  Months Ended**
                **December
                  29, 2006**
              
              **Year
                  Ended**
                **December
                  29, 2006*****Power***Plant
                  modification contracts
              
              $
              114.9
              
              $
              742.1Middle
                  East task orders
              
              
              44.3
              
              
              79.1Engineering
                  services
              
              
              31.2
              
              
              271.5***Infrastructure***Construction
                  of dam located in Illinois
              
              
              41.8
              
              
              107.2Engineering
                  services
              
              
              21.1
              
              
              119.7Middle
                  East task orders
              
              
              ─
              
              
              74.9***Mining***International
                  bauxite contract mining project
              
              
              ─
              
              
              151.6Contract
                  mining continuations and miscellaneous
              
              
              63.1
              
              
              213.4***Industrial/Process***Construction
                  of a cement plant in Missouri
              
              
              472.7
              
              
              472.7Facilities
                  management outsourcing contracts
              
              
              113.9
              
              
              295.4Construction
                  of gas processing facility
              
              
              152.0
              
              
              174.0***Defense***Chemical
                  demilitarization contract continuations
              
              
              182.1
              
              
              399.4***Energy
                  & Environment***Nuclear
                  waste processing facility
              
              
              83.4
              
              
              83.4Department
                  of Energy contract continuations
              
              
              0.1
              
              
              150.9Engineering
                  and consulting services
              
              
              4.4
              
              
              106.0Middle
                  East task orders
              
              
              ─
              
              
              82.0
 
  II-11
  **RESULTS
        OF OPERATIONS**
 
 The
        following table summarizes our results of operations and is included to
        facilitate the following analysis and discussion:
 
 **Three
                  Months Ended**
              
              **Year
                  Ended***(In
                  millions)*
              
              **December
                  29,**
                **2006**
              
              **December
                  30,**
                **2005***
              
              **December
                  29,**
                **2006**
              
              **December
                  30,**
                **2005***
              
              **December
                  31,**
                **2004***Revenue
              
              $
              855.3
              
              $
              899.4
              
              $
              3,398.1
              
              $
              3,188.5
              
              $
              2,915.4Gross
                  profit
              
              
              39.9
              
              
              36.1
              
              
              155.8
              
              
              126.3
              
              
              147.2Equity
                  in income of
                unconsolidated
                  affiliates
              
              
              6.7
              
              
              10.3
              
              
              35.8
              
              
              29.6
              
              
              26.9General
                  and administrative
                expenses
              
              
              (20.1
              )
              
              (18.9
              )
              
              (75.7
              )
              
              (63.8
              )
              
              (63.4
              )Other
                  operating
                income,
                  net
              
              
              ─
              
              
              ─
              
              
              ─
              
              
              ─
              
              
              1.4Operating
                  income
              
              
              26.5
              
              
              27.5
              
              
              115.9
              
              
              92.1
              
              
              112.1Interest
                  income
              
              
              2.4
              
              
              2.3
              
              
              10.5
              
              
              8.3
              
              
              2.8Interest
                  expense
              
              
              (1.4
              )
              
              (1.7
              )
              
              (6.2
              )
              
              (9.9
              )
              
              (14.6
              )Write-off
                  of deferred
                financing
                  fees
              
              
              ─
              
              
              ─
              
              
              (5.1
              )
              
              (3.6
              )
              
              ─Other
                  non-operating
                expense,
                  net
              
              
              (0.4
              )
              
              ─
              
              
              (0.5
              )
              
              (0.6
              )
              
              (1.5
              )Income
                  before
                reorganization
                  items,
                income
                  taxes and
                minority
                  interests
              
              
              27.1
              
              
              28.1
              
              
              114.6
              
              
              86.3
              
              
              98.8Reorganization
                  items
              
              
              ─
              
              
              ─
              
              
              ─
              
              
              ─
              
              
              1.2Income
                  tax benefit (expense)
              
              
              4.7
              
              
              (7.0
              )
              
              (30.6
              )
              
              (27.0
              )
              
              (37.2
              )Minority
                  interests in
                income
                  of consolidated
                subsidiaries
              
              
              (2.9
              )
              
              (0.7
              )
              
              (3.2
              )
              
              (5.4
              )
              
              (15.2
              )Net
                  income
              
              $
              28.9
              
              $
              20.4
              
              $
              80.8
              
              $
              53.9
              
              $
              47.6
 
 *
              Adjusted
                  to include the retroactive impact of adopting the fair value method
                  of
                  recording compensation expense associated with stock options, see
                  Note 13
                  of Notes to Consolidated Financial Statements in Item 8 of this
                  report.
 
 **THREE
        MONTHS ENDED DECEMBER 29, 2006 COMPARED TO THE THREE MONTHS**
 **ENDED
        DECEMBER 30, 2005**
 
 ***Revenue
        and operating income***
 
 Revenue
        for the three months ended December 29, 2006 declined $44.1 million, or 5
        percent, from the comparable period of 2005. The decline in revenue is primarily
        due to lower revenue in our Power business unit. During the fourth quarter
        of
        2005, Power completed major component replacements at three nuclear power
        plants
        and there were no replacements performed in 2006. In addition, the volume
        of
        task order work in Iraq decreased in 2006 from the 2005 level. Revenue from
        task
        orders in the Middle East declined to $81.5 million for the three months
        ended
        December 29, 2006 from $101.6 million for the comparable period of 2005.
        These
        declines were partially offset by increases in revenue from both continuing
        and
        new projects. Additional significant reductions in revenue and earnings from
        task orders in the Middle East are anticipated in 2007.
  II-12
  
 Operating
        income for the three months ended December 29, 2006 decreased $1.0 **** million
        from the three months ended December 30, 2005. The following table summarizes
        significant changes in operating income during the three months ended December
        29, 2006 as compared to the three months ended December 30, 2005 (In
        millions):
 
 **Operating
                  income for the three months ended December 30,
                  2005**
              
              **$**
              **27.5***Increases
                  (decreases) in operating income:Increase
                  in earnings from new projects
              
              
              6.9Acquisition
                  of BNFL’s minority interest in Government Services
                  Business
              
              
              6.0Decrease
                  in earnings from completion of projects, including major component
                replacements
                  at three nuclear power plants
              
              
              (15.1
              )Decrease
                  in earnings on Department of Energy Management Services
                  contract
              
              
              (9.0
              )Decrease
                  in earnings from MIBRAG mining venture
              
              
              (4.7
              )Significant
                  highway project losses in 2006, net of change order
                  recoveries
              
              
              (4.0
              )Significant
                  highway project losses in 2005, net of change order
                  recoveries
              
              
              36.5Decrease
                  in earnings from task order work in the Middle East
              
              
              (5.1
              )Pension
                  and post-retirement benefits curtailment gain recognized in
                  2005
              
              
              (9.3
              )Increase
                  in business development and general and administrative
                  costs
              
              
              (4.0
              )Other
              
              
              0.8Net
                  decrease
              
              
              (1.0
              )**Operating
                  income for the three months ended December 29,
                  2006**
              
              **$**
              **26.5**
 
 
 *
              Adjusted
                  to include the retroactive impact of adopting the fair value method
                  of
                  recording compensation expense associated with stock options, see
                  Note 13
                  of Notes to Consolidated Financial Statements in Item 8 of this
                  report.
 
 The
        diversification of our business may cause margins to vary between periods
        due to
        the inherent risks and rewards on fixed-price contracts causing unplanned
        gains
        and losses on contracts. Margins may also vary between periods due to changes
        in
        mix and timing of contracts executed by us, which contain various risk and
        profit profiles and are subject to uncertainties inherent in the estimation
        process. As
        discussed in our summary of critical accounting policies, we provide for
        estimated losses on contracts when such losses are identified and can be
        reasonably estimated. However, we do not recognize revenue for change orders
        or
        claims until it is probable that they will result in additions to the contract
        value. In many cases revenue is not recognized until an actual settlement
        is
        reached. The combination of these accounting policies can result in volatility
        in operating income with a charge recognized in one period and change order
        or
        claim revenue recognized in a subsequent period.
 
 For
        a
        more detailed discussion of our revenue and operating income, see “Business Unit
        Results,” later in this Management’s Discussion and Analysis.
 
 ***Equity
        in income of unconsolidated affiliates***
 
 Equity
        in
        income of unconsolidated affiliates for the three months ended December 29,
        2006
        declined $3.6 million from the comparable period of 2005. The most significant
        component of this decline was a $4.7 million decline in earnings from our
        share
        of the MIBRAG mining venture in Germany. The lower MIBRAG earnings are primarily
        the result of a $3.4 million favorable adjustment in 2005 to the estimated
        cost
        associated with the demolition of an old manufacturing facility. MIBRAG’s
        decrease was partially offset by earnings from our interest in a new affiliate
        that operates a national laboratory for the Department of Energy.
 
 ***General
        and administrative expenses***
 
 General
        and administrative expenses for the three months ended December 29, 2006
        increased $1.2 million from the comparable period of 2005, primarily due
        to
        higher legal and other outside services.
  II-13
  ***Income
        tax benefit (expense)***
 
 The
        effective income tax rates for the three months ended December 29, 2006 and
        December 30, 2005 were (17.4) percent and 24.9 percent, respectively. The
        2006
        effective rate reflects the recognition of $15.9 million of tax benefits
        primarily associated with foreign tax credits and losses of foreign
        subsidiaries. Based on estimated future taxable income, during 2006 we
        determined that i) the utilization of all federal NOL carryovers is more
        likely
        than not and accordingly the related valuation allowance was reduced to zero;
        and ii) foreign taxes previously treated as deductions can now be utilized
        as
        tax credits resulting in additional tax benefits. Approximately $5.1 million
        of
        the recognized tax benefits relate to foreign taxes paid in 2006 and foreign
        subsidiary losses deductible in 2006. The remaining $10.8 million relates
        to
        foreign taxes paid in prior years.
 
 In
        the
        fourth quarter of 2005, we implemented a domestic reinvestment plan for
        dividends received from our interest in MIBRAG. The plan allowed us to take
        advantage of a temporary dividend deduction and generated a $3.8 million
        tax
        benefit.
 
 ***Minority
        interests***
 
 Minority
        interests in income of consolidated subsidiaries for the three months ended
        December 29, 2006 increased $2.2 million from the comparable period of 2005.
        The
        increase is primarily related to a minority partner’s interest in a joint
        venture that received a change order on a highway construction project.
 
 **2006
        COMPARED TO 2005**
 
 **Revenue
        and operating income**
 
 Revenue
        for 2006 increased $209.6 million, or 7 percent, compared to 2005. The increase
        in revenue was primarily due to new projects including an environmental clean
        up
        project in Idaho, construction of an oil and gas facility in Qatar, other
        power
        and engineering projects, and as a result of achieving performance milestones
        on
        a Department of Energy management services contract which allowed us to earn
        a
        portion of the maximum fee. The increase in revenue was partially offset
        by the
        completion of certain significant projects. Revenue from work in the Middle
        East
        decreased $47.0 million to $334.1 million during 2006 as compared to $381.1
        million in 2005. The decline is primarily due to the completion of task orders
        and fewer new task orders being awarded due to the wind-down of US funded
        Iraq
        reconstruction efforts. A significant reduction in Middle East work is
        anticipated in 2007.
  II-14
  
 Operating
        income for 2006 increased $23.8 million from 2005. The following table
        summarizes the significant changes in operating income during 2006 as compared
        to 2005 (In millions):
 
 **Operating
                  income for the year ended December 30, 2005**
              
              **$**
              **92.1***Increases
                  (decreases) in operating income:Increase
                  in earnings from achievement of maximum fee milestones on a Department
                  of
                  Energy
                management
                  services contract
              
              
              17.3Increase
                  in earnings from continuing contracts
              
              
              28.0Increase
                  in earnings from new projects, including sulfur handling
                  facility
              
              
              25.3Acquisition
                  of BNFL’s minority interest in Government Services
                  Business
              
              
              25.5Losses
                  on contract mining projects
              
              
              (10.5
              )Decrease
                  in earnings from task order work in the Middle East
              
              
              (7.3
              )Decrease
                  in earnings from completion of contracts
              
              
              (56.2
              )Significant
                  highway project losses in 2006, net of change order
                  recoveries
              
              
              (42.2
              )Significant
                  highway project losses in 2005, net of change order
                  recoveries
              
              
              99.6Decrease
                  in claim settlements, primarily due to an international power project
                  settlement in 2005
              
              
              (21.2
              )Increase
                  in business development and other overhead costs
              
              
              (14.1
              )Increase
                  in general and administrative expenses
              
              
              (11.9
              )Pension
                  and post-retirement benefits curtailment gain recognized in
                  2005
              
              
              (9.3
              )Other
              
              
              0.8Net
                  increase
              
              
              23.8**Operating
                  income for the year ended December 29, 2006**
              
              **$**
              **115.9**
 
 *
              Adjusted
                  to include the retroactive impact of adopting the fair value method
                  of
                  recording compensation expense associated with stock options, see
                  Note 13
                  of Notes to Consolidated Financial Statements in Item 8 of this
                  report.
 
 For
        a
        more detailed discussion of our revenue and operating income, see “Business Unit
        Results” later in this Management’s Discussion and Analysis.
 
 ***Equity
        in income of unconsolidated affiliates***
 
 Equity
        in
        income of unconsolidated affiliates for 2006 increased by $6.2 million from
        2005. Equity earnings in 2006 from the MIBRAG mining venture in Germany,
        which
        accounts for a significant portion of our unconsolidated affiliates, were
        up
        $2.0 million from 2005. In addition, equity income increased in 2006 from
        our
        interest in a new affiliate that operates a national laboratory for the
        Department of Energy.
  ***General
        and administrative expenses***
 
 General
        and administrative expenses for 2006 increased by $11.9 million from 2005,
        primarily due to increased legal and other outside services, personnel
        development, and higher incentive compensation based on earnings.
 
 ***Interest
        income***
 
 Interest
        income for 2006 increased $2.2 million from 2005 primarily due to an increase
        in
        short-term interest rates.
 
 **Interest
        expense**
 
 Interest
        expense for 2006 decreased $3.7 million from 2005 due to improved terms from
        amendments to our Credit Facility in 2005 and again in 2006.
  II-15
  ***Write-off
        of deferred financing fees***
 
 On
        July
        5, 2006, we restructured our Credit Facility increasing the tranche A facility
        and eliminating the tranche B facility reducing the ongoing costs associated
        with the facility. The scheduled maturity of the agreement and other terms
        did
        not change. As a result of the restructuring, $5.1 million of deferred financing
        fees were written off during 2006.
 
 The
        Credit Facility was previously amended on June 14, 2005, to include more
        favorable provisions and to extend the term to June 2010. The amendment of
        the
        Credit Facility resulted in a $3.6 million write-off of deferred financing
        fees
        in 2005.
 
 ***Income
        tax expense***
 
 The
        components of the effective tax rates for 2006 and 2005 are shown in the
        table
        below:
 
 **Year
                  Ended**
                **December
                  29, 2006**
              
              **Year
                  Ended**
                **December
                  30, 2005**Federal
                  statutory tax rate
              
              
              35.0
              %
              
              35.0
              %State
                  taxes, net of federal benefit
              
              
              1.0
              
              
              (3.1
              )Nondeductible
                  items
              
              
              0.9
              
              
              2.7Domestic
                  reinvestment plan
              
              
              -
              
              
              (4.3
              )Foreign
                  taxes
              
              
              (10.2
              )
              
              1.0Effective
                  tax rate
              
              
              26.7
              %
              
              31.3
              %
 
 Income
        from work performed in the Middle East is generally not subject to state
        income
        tax. As a result of the amount of work in the Middle East during 2006 and
        2005,
        the state tax effective rates are substantially lower. Also, in preparing
        the
        state income tax returns for 2004, we revised our estimate of the impact
        of
        foreign earnings not subject to state income taxes. The result of this change
        in
        estimate was a $2.0 million tax benefit recorded in 2005. Non-deductible
        items
        were principally comprised of non-deductible reorganization expenses, lobbying
        expenses, and the non-deductible portion of meals and entertainment
        expenses.
 
 During
        2005, we implemented a domestic reinvestment plan for dividends received
        from
        our interest in MIBRAG. The plan allowed us to take advantage of a temporary
        dividend deduction and generated a $3.8 million tax benefit.
 
 The
        2006
        foreign tax rate reflects the recognition of $15.9 million of tax benefits
        in
        the fourth quarter primarily associated with foreign tax credits and losses
        of
        foreign subsidiaries. Based on estimated future taxable income, during 2006
        we
        determined that i) the utilization of all federal NOL carryovers is more
        likely
        than not and accordingly the related valuation allowance was reduced to zero;
        and ii) foreign taxes previously treated as deductions can now be utilized
        as
        tax credits resulting in additional tax benefits. Approximately $5.1 million
        of
        the recognized tax benefits relate to foreign taxes paid in 2006 and foreign
        subsidiary losses deductible in 2006. The remaining $10.8 million relates
        to
        foreign taxes paid in prior years.
 
 ***Minority
        interests***
 
 Minority
        interests in income of consolidated subsidiaries for 2006 declined by $2.2
        million from 2005. The decrease is primarily the result of our acquisition
        of
        BNFL’s minority interest in our Government Services Business in
        2005.
  II-16
  
 **2005
        COMPARED TO 2004**
 
 **Revenue
        and operating income**
 
 Revenue
        for 2005 increased $273.1 million, or 9 percent, compared to 2004. Revenue
        increased from a new environmental cleanup project in Idaho, work performed
        on a
        domestic infrastructure dam project, a power modification services contract
        in
        Wisconsin, increased activity and scope on projects in the former Soviet
        Union,
        and revenue from contract mining projects. The winding down and completion
        of a
        new generation power project and lower revenue from Middle East task orders
        reduced revenue as compared to 2004. Revenue from task orders in the Middle
        East
        declined $175.2 million to $381.1 million for 2005 as compared to 2004 revenue
        of $556.3 million. This decline was due to the completion of several large
        infrastructure and power task orders with the US Army Corps of
        Engineers.
 
 Operating
        income for 2005 declined $20.0 million from 2004. The following table summarizes
        the significant changes in operating income during 2005 as compared to 2004
        (In
        millions):
 
 **Operating
                  income for the year ended December 31, 2004**
              
              **$**
              **112.1***Increases
                  (decreases) in operating income:Increase
                  in earnings on Department of Energy management services
                  contract
              
              
              19.6Increased
                  award and incentive fees on chemical demilitarization
                  projects
              
              
              13.3Increase
                  in earnings on projects in the former Soviet Union
              
              
              9.4Pension
                  and post-retirement benefits curtailment gain
              
              
              9.3Increase
                  in earnings from task order work in the Middle East
              
              
              5.1Increase
                  in earnings from other continuing projects
              
              
              52.5Increase
                  in earnings from new projects
              
              
              15.8Decrease
                  in earnings from completion of contracts
              
              
              (33.6
              )Significant
                  highway project losses in 2005
              
              
              (99.6
              )Significant
                  highway
                  project losses in 2004
              
              
              44.3Decrease
                  in claim settlements
              
              
              (7.3
              )BNFL’s
                  share of earnings reported as cost revenue
              
              
              (29.8
              )Legal
                  charge in 2004 related to U.S. government funded international
                  projects
              
              
              8.2Increase
                  in business development, personnel development and other overhead
                  costs
              
              
              (19.3
              )Other
              
              
              (7.9
              )Net
                  decrease
              
              
              (20.0
              )**Operating
                  income for the year ended December 30, 2005**
              
              **$**
              **92.1***
 
 *
              Adjusted
                  to include the retroactive impact of adopting the fair value method
                  of
                  recording compensation expense associated with stock options, see
                  Note 13
                  of Notes to Consolidated Financial Statements in Item 8 of this
                  report.
 
 For
        a
        more detailed discussion of our revenue and operating income, see “Business Unit
        Results” later in this Management’s Discussion and Analysis.
 
 ***Equity
        in income of unconsolidated affiliates***
 
 Equity
        in
        income of unconsolidated affiliates for 2005 increased by $2.7 million from
        2004. Equity earnings in 2005 from the MIBRAG mining venture in Germany,
        which
        accounts for a significant portion of our unconsolidated affiliates, were
        up
        $1.8 million from 2004.
 
 **Other
        operating income, net**
 
 Other
        operating income, net, of $1.4 million in 2004 primarily consisted of a recovery
        related to a legal settlement. No similar transactions occurred in
        2005.
  II-17
  ***Interest
        income***
 
 Interest
        income for 2005 increased $5.5 million from the comparable period of 2004
        due to
        higher average cash balances available for investment and an increase in
        short-term interest rates.
 
 **Interest
        expense**
 
 Interest
        expense for 2005 decreased $4.7 million from 2004 due to improved terms from
        amendments to our credit facility and a reduction in the amount of letters
        of
        credit outstanding under the facility.
 
 ***Write-off
        of deferred financing fees***
 
 On
        June
        14, 2005, we amended our Credit Facility to include more favorable provisions
        and to extend the term to June 2010. The amendment of the Credit Facility
        required a $3.6 million write-off of unamortized deferred financing fees.
 
 ***Income
        tax expense***
 
 The
        components of the effective tax rates for 2005 and 2004 are shown in the
        table
        below:
 
 
 **Year
                  Ended**
                **December
                  30, 2005**
              
              **Year
                  Ended**
                **December
                  31, 2004**Federal
                  statutory tax rate
              
              
              35.0
              %
              
              35.0
              %State
                  taxes
              
              
              (3.1
              )
              
              3.1Nondeductible
                  items
              
              
              2.7
              
              
              2.1Domestic
                  reinvestment plan
              
              
              (4.3
              )
              
              ─Foreign
                  taxes
              
              
              1.0
              
              
              (3.0
              )Effective
                  tax rate
              
              
              31.3
              %
              
              37.2
              %
 
 Income
        from work performed in the Middle East is generally not subject to state
        income
        tax. As a result of an increase in earnings from work in the Middle East
        during
        2005, the 2005 state tax effective rate was substantially lower than in 2004.
        Also, in preparing the 2005 state income tax returns for 2004, we revised
        our
        estimate of the impact of foreign earnings not subject to state income taxes.
        The result of this change in estimate was a $2.0 million tax benefit recorded
        in
        the second quarter of 2005.
 
 In
        the
        fourth quarter of 2005, we implemented a domestic reinvestment plan for
        dividends received from our interest in MIBRAG. The plan allowed us to take
        advantage of a temporary dividend received deduction and generated a $3.8
        million tax benefit.
  The
        foreign tax benefit for 2004 relates to a $3.6 million benefit derived from
        the
        reversal of accrued Dutch withholding taxes following the ratification of
        the
        2004 Protocol to U.S.-Netherlands Income Tax Treaty.
 
 ***Minority
        interests***
 
 Minority
        interests in income of consolidated subsidiaries for 2005 declined by $9.8
        million from 2004. On April 7, 2005, we consummated the acquisition of BNFL’s
        interest in our Government Services Business. See Note 14, “Acquisition of
        BNFL’s Interest in Government Services Business,” of Notes to Consolidated
        Financial Statements in Item 8 of this report. Subsequent to the acquisition,
        BNFL’s share of the earnings on certain contracts was classified as cost of
        revenue rather than minority interest in income of consolidated subsidiaries
        as
        was the case prior to the acquisition. During 2005, BNFL’s share of earnings
        reported as cost of revenue totaled $29.8 million, including $2.9 million
        related to a pension and post-retirement benefits curtailment gain.
 
  II-18
  **BUSINESS
        UNIT RESULTS**
 
 **Three
                  Months Ended**
              
              **Year
                  Ended****Revenue**
                *(In
                  millions)*
              
              **December
                  29,**
                **2006**
              
              **December
                  30,**
                **2005**
              
              **December
                  29,**
                **2006**
              
              **December
                  30,**
                **2005**
              
              **December
                  31,**
                **2004**Power
              
              $
              210.7
              
              $
              244.9
              
              $
              791.3
              
              $
              766.1
              
              $
              634.0Infrastructure
              
              
              141.0
              
              
              150.6
              
              
              577.9
              
              
              665.2
              
              
              891.1Mining
              
              
              46.2
              
              
              40.8
              
              
              166.9
              
              
              171.1
              
              
              109.8Industrial/Process
              
              
              139.6
              
              
              124.8
              
              
              511.0
              
              
              424.6
              
              
              394.7Defense
              
              
              137.1
              
              
              141.3
              
              
              576.0
              
              
              555.8
              
              
              495.3Energy
                  & Environment
              
              
              181.2
              
              
              196.2
              
              
              773.7
              
              
              602.8
              
              
              396.6Intersegment,
                  eliminations and
                other
              
              
              (0.5
              )
              
              0.8
              
              
              1.3
              
              
              2.9
              
              
              (6.1
              )Total
                  revenue
              
              $
              855.3
              
              $
              899.4
              
              $
              3,398.1
              
              $
              3,188.5
              
              $
              2,915.4
 
 **Three
                  Months Ended**
              
              **Year
                  Ended****Operating
                  income (loss)**
                *(In
                  millions)*
              
              **December
                  29,**
                **2006**
              
              **December
                  30,**
                **2005***
              
              **December
                  29,**
                **2006**
              
              **December
                  30,**
                **2005***
              
              **December
                  31,**
                **2004***Power
              
              $
              12.0
              
              $
              20.9
              
              $
              45.9
              
              $
              78.4
              
              $
              34.2Infrastructure
              
              
              (2.3
              )
              
              (30.0
              )
              
              (20.4
              )
              
              (80.2
              )
              
              (16.9
              )Mining
              
              
              2.9
              
              
              7.3
              
              
              18.1
              
              
              28.3
              
              
              33.2Industrial/Process
              
              
              4.0
              
              
              0.4
              
              
              7.8
              
              
              3.0
              
              
              17.4Defense
              
              
              15.0
              
              
              17.3
              
              
              50.3
              
              
              59.7
              
              
              39.7Energy
                  & Environment
              
              
              16.6
              
              
              28.3
              
              
              94.4
              
              
              66.8
              
              
              72.5Intersegment
                  and other
                unallocated
                  operating costs
              
              
              (1.6
              )
              
              2.2
              
              
              (4.5
              )
              
              (0.1
              )
              
              (4.6
              )General
                  and administrative
                costs
              
              
              (20.1
              )
              
              (18.9
              )
              
              (75.7
              )
              
              (63.8
              )
              
              (63.4
              )Total
                  operating income
              
              $
              26.5
              
              $
              27.5
              
              $
              115.9
              
              $
              92.1
              
              $
              112.1
 
 
 *
              Adjusted
                  to include the retroactive impact of adopting the fair value method
                  of
                  recording compensation expense associated with stock options, see
                  Note 13
                  of Notes to Consolidated Financial Statements in Item 8 of this
                  report.
 
 ***Power***
 
 Revenue
        for 2006 increased $25.2 million, or 3 percent, from 2005. The increase was
        primarily due to new modification projects in Michigan, a new generation
        project
        in Puerto Rico, and increased engineering services. The increase in revenue
        was
        partially offset by lower revenue from nuclear power plant component
        replacements, the completion of modification projects and the wind-down of
        an
        air quality control system in Wisconsin.  Revenue
        from work in the Middle East also decreased by $70.9 million to $174.9 million
        in 2006 from $245.8 million in 2005.
 
 Operating
        income for 2006 declined $32.5 million, or 41 percent, from 2005. The reduction
        in operating income in 2006 as compared to the prior year is primarily due
        to
        $18.0 million of claim settlement payments on a completed international power
        project received in 2005, lower earnings associated with nuclear power plant
        component replacements, and the completion and wind-down of modification
        projects. Middle East earnings of $21.6 million in 2006 were $8.5 million
        below
        the $30.1 million of earnings in 2005. The decreases were partially offset
        by
        earnings on new modification projects and engineering services.
  II-19
  
 ***Infrastructure***
 
 Revenue
        for 2006 declined $87.3 million, or 13 percent, from 2005 as a result of
        the
        wind-down of certain construction projects, including a light rail project
        in
        New Jersey, a highway project in Nevada and an airport project in California.
        Revenue from the Middle East operations also decreased by $37.2 million to
        $73.5
        million in 2006 compared to $110.7 million in 2005. The reduction in revenue
        is
        partially offset by increased activity on a California highway project, a
        dam
        project in Illinois and a bridge project in Florida.
  Infrastructure’s
        operations generated a loss of $20.4 million in 2006 as compared to an $80.2
        million loss in 2005. The lower loss by the business unit was primarily due
        to
        lower charges on three fixed-price highway projects. For 2006, $42.2 million
        of
        charges, net of a $10.8 million change order recovery on one of the projects
        in
        the fourth quarter, were recorded as compared to $99.6 million of charges
        on the
        three highway projects in 2005. Partially offsetting the highway losses,
        Infrastructure’s other operations generated $21.8 million of operating income in
        2006 as compared to $19.4 million in 2005. The improved earnings were primarily
        the result of change order recoveries and the successful completion of a
        bridge
        project and a rail project in Florida. In addition, earnings from professional
        services and operations and maintenance contracts increased from 2005 and
        the
        business unit reduced its overhead expenses. Partially offsetting the increases
        was a decline in earnings from the completion in 2005 of an airport project
        in
        California and lower claim recoveries in 2006. In addition, Middle East earnings
        of $16.2 million in 2006 decreased $2.7 million from $18.9 million in
        2005.
 
 The
        largest of the three highway projects is a $390.6 million fixed-price highway
        project in California that is being performed by a construction joint venture
        in
        which we have a 50 percent interest. Through 2006, Infrastructure has recorded
        a
        total of $134.6 million of contract losses on this project. The losses have
        resulted from various developments including final design and other customer
        specifications, state regulatory agency requirements, material quantity and
        cost
        growth, higher subcontract and labor costs and impacts from schedule delays.
        In
        2006, charges of $34.6 million were recorded as compared to $72.5 million
        in
        2005 and $27.5 million in 2004. The project is approximately 71 percent
        complete, measured on a cost-to-cost basis, and is scheduled to be complete
        in
        2007.
 
 Also,
        during 2006 we recognized a $7.1 million estimated contract loss (before
        minority interest of $2.5 million) for cost growth primarily related to customer
        design changes and related impacts on another fixed-price highway project
        in
        California, bringing our share of total losses on this project to $20.9 million.
        During the fourth quarter of 2006, a $10.8 million (before minority interest
        of
        $3.8 million) change order recovery was agreed to by the customer. As discussed
        below, additional change orders have been submitted to the customer and are
        being negotiated. This project is approximately 67 percent complete, measured
        on
        a cost-to-cost basis, and is scheduled to be complete in 2008. The third
        fixed-price highway project is located in Nevada and is substantially
        complete.
 
 To
        date,
        only a portion of the cost increases on the three highway projects have been
        agreed to with the customers and acknowledged with change orders. Our share
        of
        pending change orders and claims submitted to the customers total approximately
        $78.9 million. An additional $17.8 million are in process, and more will
        follow.
        In response to our claims, one of the customers has filed certain counter
        claims
        against us. We believe that we will realize significant recoveries once the
        claim process is completed. Recoveries are recognized only when it is probable
        they will result in additional revenue and the amount can be reliably estimated,
        which generally occurs when amounts have been received or awarded. We have
        not
        recognized any recoveries related to the pending change orders and claims.
        Operating results to date are based on current estimates and actual results
        may
        differ from our estimates.
 
 ***Mining***
 
 Revenue
        for 2006 declined $4.2 million, or 2 percent, from 2005 primarily due to
        the
        termination of a copper mine project in the fourth quarter of 2005 because
        of
        the owner’s decision to self-perform the contract and the completion of a gold
        mine project in Nevada. This decrease was substantially offset by new work
        at a
        phosphate mine in Idaho  and
        at a
        bauxite mine in Jamaica as well as continuing work on a gold mine in Mexico,
        a
        Canadian phosphate project, and a silver mine in Bolivia.
  II-20
  
 Operating
        income for 2006 declined $10.2 million from 2005 primarily due to higher
        operating and maintenance costs at two projects. We have amended, or are
        in the
        process of, amending our contracts at the two projects to cover the cost
        escalation experienced during 2006 and as a result we expect Mining’s operating
        income to improve in 2007.
 
 Equity
        in
        earnings from the MIBRAG mining venture in Germany increased $2.0 million
        in
        2006 as compared to 2005. MIBRAG’s earnings were favorably impacted by an
        increase in tons sold and as a result of the adoption of new accounting
        pronouncements (see Note 3, “Accounting Standards” of Notes to Consolidated
        Financial Statements in Item 8 of this report). MIBRAG’s earnings in 2005
        included a non-recurring $3.4 million favorable adjustment to the estimated
        cost
        associated with the demolition of an old manufacturing facility.
 
 ***Industrial/Process***
 
 Revenue
        for 2006 increased $86.4 million, or 20 percent, from 2005. The increase
        was
        primarily due to a new oil and gas project in Qatar. Also contributing to
        this
        increase was continued growth on a major facility management project and
        increased volume on other oil, gas and chemical projects. The completion
        of a
        food production and packaging project in 2005 partially offset these
        increases.
 
 Operating
        income for 2006 increased $4.8 million from 2005 primarily due to earnings
        on
        new oil, gas and chemical projects including the construction project in
        Qatar.
        The increases were partially offset by higher business development investment
        in
        the oil, gas and chemical segment and the completion of a facility management
        project and a food production and packaging project .
 
 ***Defense***
 
 Revenue
        for 2006 increased $20.2 million, or 4 percent, from 2005. Revenue increased
        due
        to higher volume of operations and maintenance activities on chemical
        demilitarization projects and higher levels of activity on a plutonium reactor
        conversion project and threat reduction projects in the former Soviet Union.
        Completion of homeland security and infrastructure projects partially offset
        these increases.
 
 Operating
        income for 2006 declined $9.4 million as compared to 2005 primarily driven
        by
        unfavorable adjustments during 2006 related to prior period government
        reimbursable indirect costs and non-recurring events in 2005, including a
        favorable construction project close-out, a pension curtailment gain, as
        well as
        additional award fees in the first quarter of 2005 due to a delay of a 2004
        award. The completion of projects also contributed to the lower earnings.
        Operating income for 2006 includes $6.0 million of favorable impact from
        our
        acquisition of BNFL’s minority interest in one of Defense’s chemical
        demilitarization projects.
 
 ***Energy
        & Environment***
  Revenue
        for 2006 increased $170.9 million, or 28 percent, from 2005. The increase
        in
        revenue was primarily due to the achievement of maximum fee milestones on
        a
        Department of Energy management services contract resulting in a year-over-year
        increase of $71.2 million, continuation of an environmental cleanup project
        in
        Idaho resulting in $83.5 million of higher revenue and an increase in Iraq
        task
        orders. Revenue from work in Iraq amounted to $84.1 million in 2006, an increase
        of $59.5 million over 2005. The increase in revenue was partially offset
        by a
        decrease related to the completion of a construction project and lower funding
        for a design project.
 
 The
        contract on the large Department of Energy management services project provided
        for a maximum fee pool contingent on certain performance milestones being
        achieved. During the second quarter of 2006, agreement was reached with the
        Department of Energy resolving certain contingencies with respect to the
        milestones. Based on the agreement and our performance in meeting the
        milestones, a portion of the maximum fee pool was recognized as revenue in
        the
        second quarter and additional amounts continued to be recognized, based on
        percent complete, through the end of 2006 when the contract ended. A portion
        of
        the increased revenue was distributed to our partners on the project.
  II-21
  
 Operating
        income for 2006 increased $27.6 million, or 41 percent, from 2005. Achievement
        of the maximum fee on the Department of Energy management services project
        resulted in $28.9 million of higher earnings in 2006 as compared to 2005.
        In
        addition, the acquisition of BNFL’s minority interest in certain of Energy &
Environment’s operations effective December 30, 2005 contributed $7.9 million to
        the higher operating income along with higher earnings on an environmental
        cleanup project in Idaho and a $3.3 million increase in earnings from work
        in
        Iraq to $5.6 million in 2006 from $2.3 million in 2005. The completion of
        the
        construction project and a $6.9 million pension curtailment gain in 2005
        partially offset the above increases.
 
 The
        Department of Energy management services contract referred to above expired
        on
        December 31, 2006. We have received a twelve to eighteen month extension
        while
        the Department of Energy completes a re-bid of the project. Earnings during
        2007
        under the terms of the contract extension are expected to decrease from the
        maximum performance fees earned during 2006. We have been the prime contractor
        at this site for over 17 years and intend to vigorously re-compete for the
        contract.
 
 Energy
        & Environment participates in a Department of Energy nuclear waste
        processing facility construction project in Washington that has experienced
        significant scope and cost increases. The project is cost reimbursable with
        performance and cost-based incentive fees. Due to the significant scope and
        cost
        increases, changes to the incentive fees are currently being negotiated with
        the
        Department of Energy. If the negotiations are successful, we will recognize
        a
        cumulative adjustment to project to date earnings based on percent complete
        which could occur in 2007 or later.
 
 ***Intersegment
        and other***
 
 Intersegment
        and other operating loss of $4.5 million in 2006 primarily consisted of residual
        costs from our non-union subsidiary of $5.0 million. During 2005, the residual
        costs of $4.4 million were offset by favorable insurance and other adjustments
        not allocated to the business units.
 
 **2005
        COMPARED TO 2004**
 
 ***Power***
 
 Revenue
        for 2005 increased $132.1 million, or 21 percent, from 2004. The increase
        was
        due primarily to $93.8 million higher revenue from work in the Middle East.
        A
        new plant modification project in Wisconsin, a new generation project in
        Puerto
        Rico and modification projects in Michigan combined to also generate increased
        revenue. Offsetting these increases was a decrease in revenue from a Wisconsin
        new generation plant project as the project achieved substantial completion
        in
        the third quarter of 2005 and a combined revenue decrease in nuclear power
        plant
        modification projects and an annually funded project in Tennessee.
 
 Operating
        income for 2005 increased $44.2 million from 2004. Earnings from work in
        the
        Middle East increased $23.1 million from $7.0 million to $30.1 million. A
        portion of this increase was due to favorable performance ratings resulting
        in
        performance-based award fees associated with work performed during 2004.
        Based
        on the actual awards and consistent with our policy, we began to accrue
        performance-based awards for the ongoing work in the Middle East. Work on
        the
        Wisconsin plant modification project provided an increase of $6.6 million
        and a
        new generation project in Puerto Rico generated increased income of $4.9
        million. In addition, a claim settlement on an international project provided
        another $18.0 million of income. The increase was partially offset by a decrease
        in earnings of $10.6 million from completion of a new generation power
        project.
 
 ***Infrastructure***
 
 Revenue
        for 2005 declined $225.9 million, or 25 percent, from 2004 due to the
        substantial completion of several large task orders in the Middle East. Revenue
        from the Middle East decreased $290.9 million to $110.7 million in 2005 as
        compared to $401.6 million in 2004. In addition, revenue declined from the
        winding down of a light rail project in New Jersey and a highway construction
        project in Nevada. Partially offsetting this decline
  II-22
  were
        projects that moved from the start-up phase in 2004 to full operation in
        2005
        including a dam construction project in Illinois, a light rail design/build
        project in California and an airport runway construction project in California.
 
 The
        operating loss increased $63.3 million to a loss of $80.2 million in 2005
        compared to a loss of $16.9 million in 2004. Three highway construction
        contracts located in California and Nevada that recognized $44.3 million
        of
        losses in 2004 continued to experience cost increases resulting in a loss
        of
        $99.6 million in 2005.
 
 Partially
        offsetting these losses was good performance in completion of a runway
        replacement project in California, continuing work on a dam project located
        in
        Illinois and a light rail project in California, increasing our earnings
        $19.3
        million over 2004. Earnings from work in the Middle East were $18.9 million
        and
        $38.9 million during 2005 and 2004, respectively. Claim settlements in 2005
        totaled $3.2 million compared to $14.2 million in 2004.
 
 ***Mining***
 
 Revenue
        for 2005 increased $61.3 million, or 56 percent, from 2004 as a result of
        work
        at a new domestic gold mine project in Nevada, a phosphate mine in Idaho,
        a new
        international silver mining project and higher production at a copper mine
        in
        Nevada. The operating contract for the copper mine in Nevada ended in the
        fourth
        quarter of 2005 due to the owners decision to self-perform the contract.
        As a
        result, our contract was terminated and $59.1 million was removed from
        backlog.
 
 Operating
        income for 2005 decreased $4.9 million from 2004 primarily as a result of
        lower
        earnings on contract mining projects due to higher equipment maintenance,
        project startup and contract renegotiation costs. Earnings from our share
        of the
        MIBRAG mining venture in Germany increased $1.8 million in 2005.
 
 ***Industrial/Process***
 
 Revenue
        for 2005 increased $29.9 million, or 8 percent, from 2004. The increase was
        driven by continued growth on a major international facility management project,
        a major life sciences project in Puerto Rico and from the start up of an
        international sulfur handling facility contract. The increase in revenue
        was
        partially offset by a reduction in revenue from the completion of several
        facilities management contracts in 2005.
 
 Operating
        income for 2005 declined $14.4 million from 2004 primarily due to claim
        settlements and the expiration of the warranty period on a major process
        contract, totaling $15.6 million, all recognized in 2004.
 
 ***Defense***
 
 Revenue
        for 2005 increased $60.5 million, or 12 percent, from 2004. The increase
        was
        primarily due to higher procurement and construction activities on a plutonium
        reactor conversion project and increased activity on four other threat reduction
        projects in the former Soviet Union. In addition, revenue for 2005 also
        increased from 2004 from a higher volume of operations and maintenance
        activities on chemical demilitarization projects. The increase in revenue
        for
        2005 was partially offset by reduced task order activities on a program in
        the
        former Soviet Union.
 
 Operating
        income for 2005 increased $20.0 million, or 50 percent, compared to 2004
        primarily due to a $9.4 million increase in earnings on projects in the former
        Soviet Union and $13.3 million in higher fees and incentives earned on chemical
        demilitarization projects. Operating income for 2005 was reduced by $4.4
        million
        as a result of a change in recording BNFL’s share of certain earnings. See
        additional discussion below under Energy & Environment.
 
 ***Energy
        & Environment***
  Revenue
        for 2005 increased $206.2 million, or 52 percent, from 2004. The increase
        in
        revenue was primarily associated with a new environmental cleanup project
        in
        Idaho, an increase in revenue from new contracts in the
  II-23
  Middle
        East totaling $21.9 million and an increase from the achievement of specific
        milestones on a large Department of Energy management services contract.
        The
        increase in revenue for 2005 was partially offset by a decline related to
        a
        large environmental construction project and the completion of a decontamination
        and demolition contract.
 
 Operating
        income for 2005 declined $5.7 million from 2004; however, operating income
        before BNFL's share of earnings increased $19.8 million in 2005 as compared
        to
        2004. Beginning in the second quarter of 2005, payments to BNFL totaling
        $25.4
        million were charged to operating income rather than being reflected as minority
        interest. See Note 14, “Acquisition of BNFL’s Interest in Government Services
        Business,” of Notes to Consolidated Financial Statements in Item 8 of this
        report. Operating income in 2005 was also impacted by $15.9 million lower
        earnings on a large environmental construction project and losses recognized
        relating to a reduction in work performed in the United Kingdom. Other factors
        contributing to the higher earnings before BNFL's share included a $19.6
        million
        increase primarily related to the achievement of specific milestones on a
        large
        Department of Energy management services contract, $6.9 million related to
        a
        post-retirement benefits curtailment gain, $4.9 million from a new environmental
        cleanup project and a $2.0 million increase in earnings from work in the
        Middle
        East to $2.3 million in 2005 as compared to $0.3 million in 2004.
 
 **FINANCIAL
        CONDITION AND LIQUIDITY**
 
 We
        have
        three principal sources of liquidity: (i) cash generated by operations; (ii)
        existing cash and cash equivalents; and (iii) available capacity under our
        Credit Facility. We had cash and cash equivalents of $232.1 million, and
        an
        additional $65.5 million of restricted cash, at December 29, 2006. At December
        29, 2006, we had no borrowings and $124.5 million in face amount of letters
        of
        credit outstanding under the Credit Facility, leaving a borrowing capacity
        of
        $225.5 million. For more information on our financing activities, see “Credit
        Facility” below.
 
 Our
        cash
        flows are primarily impacted from period to period by fluctuations in working
        capital and purchases of construction and mining equipment required to perform
        our contracts. Working capital is affected by numerous factors
        including:
 
 ·
            ***Business
                unit mix.***Our working capital requirements are unique by business unit, and
                changes
                in the type, size and stage of completion of contracts performed
                by our
                business units can impact our working capital requirements. Also,
                growth
                in the business requires working capital investment and the purchase
                of
                construction and mining equipment. 
 ·
            ***Commercial
                terms.***The commercial terms of our contracts with customers and subcontractors
                may vary by business unit, contract type and customer type and utilize
                a
                variety of billing and payment terms. These could include client
                advances,
                milestone payment schedules, monthly or bi-monthly billing cycles
                and
                performance based incentives. Additionally, some customers have
                requirements on billing documentation including documentation from
                subcontractors, which may increase the level of billing complexity
                and
                cause delays in the billing cycle and collection cycle from period
                to
                period. 
 ·
            ***Contract
                life cycle.***Our contracts typically involve initial cash for working capital
                during
                the start-up phase, reach a cash neutral position and eventually
                experience a reduction of working capital during the wind-down and
                completion of the project. 
 ·
            ***Delays
                in execution.***At
                times, we may experience delays in scheduling and performance of
                our
                contracts and encounter unforeseen events or issues that may negatively
                affect our cash flow.  II-24
  
 ***Liquidity
        position and cash flows***
 
 **Liquidity**
                *(In
                  millions)*
              
              **December
                  29, 2006**
              
              **December
                  30, 2005**Cash
                  and cash equivalents
              
              $
              232.1
              
              $
              237.7Restricted
                  cash
              
              
              65.5
              
              
              52.5Total
              
              $
              297.6
              
              $
              290.2
 
 **Cash
                  flow activities**
                *(In
                  millions)*
              
              **Year
                  Ended**
                **December
                  29, 2006**
              
              **Year
                  Ended**
                **December
                  30, 2005***
              
              **Year
                  Ended**
                **December
                  31, 2004***Net
                  cash provided (used) by:Operating
                  activities
              
              $
              78.2
              
              $
              100.2
              
              $
              110.0Investing
                  activities
              
              
              (74.7
              )
              
              (40.1
              )
              
              15.0Financing
                  activities
              
              
              (9.1
              )
              
              (46.9
              )
              
              (18.6
              )Increase
                  (decrease) in cash
              
              $
              (5.6
              )
              $
              13.2
              
              $
              106.4
 
 
 *
              Adjusted
                  to include the retroactive impact of adopting the fair value method
                  of
                  recording compensation expense associated with stock options, see
                  Note 13
                  of Notes to Consolidated Financial Statements in Item 8 of this
                  report.
 
 The
        discussion below highlights significant aspects of our cash flows.
 
 ·
            ***Operating
                activities:*** 
 In
        2006,
        our operating activities provided $78.2 million of cash compared to $100.2
        million provided in 2005. Cash from operating activities in 2006 included
        net
        income of $80.8 million and significant non-cash expenses including non-cash
        income tax expense of $25.9 million, depreciation of $31.1 million, amortization
        of intangible assets of $13.9 million, stock-based compensation of $11.3
        million
        and amortization and write-off of financing fees of $6.6 million. During
        2006
        and 2005, we recognized contract losses of $42.2 million and $99.6 million,
        respectively, on three highway construction projects. During 2006, the three
        highway projects required $79.7 million of cash and we expect an additional
        $50.0 million of cash requirements in 2007. Working capital requirements
        for the
        US Army Corps of Engineers task orders in the Middle East decreased by $37.5
        million to $20.5 million at December 29, 2006 from $58.0 million at December
        30,
        2005. Additionally, in connection with the achievement of the maximum fee
        milestones on a Department of Energy management services contract, we had
        $101.7
        million of receivables at December 29, 2006, partially offset by $56.1 million
        of payables to our partners on the project. The $101.7 million has been received
        subsequent to year end.
 
 In
        2005,
        our operating activities provided $100.2 million of cash compared to $110.0
        million provided in 2004. Cash from operating activities in 2005 included
        net
        income of $53.9 million and non-cash expenses including non-cash income tax
        expense of $23.8 million, depreciation of $21.9 million, amortization and
        write-off of financing fees of $6.3 million, and stock-based compensation
        of
        $9.7 million. During 2005, the three highway construction projects referred
        to
        above, required $54.8 million in cash. In addition, we funded a $45.1 million
        increase in working capital requirements associated with new projects and
        a $6.4
        million increase in working capital requirements for the work with the Middle
        East.
  ·
            ***Investing
                activities:*** 
 During
        2006, investing activities required $74.7 million of cash including $55.7
        million of capital expenditures, net of $8.7 million of proceeds from equipment
        sales, principally for mining equipment to support new contracts. In connection
        with new mining projects in Jamaica, we acquired an existing operating company
        for cash consideration of $6.1 million and the assumption of a $1.7 million
        note
  II-25
  payable.
        The assets acquired consisted primarily of trade receivables, spare parts
        inventory and mining equipment.
 
 During
        2005, investing activities required $40.1 million of cash including $50.2
        million of capital expenditures, net of $13.0 million of proceeds from equipment
        sales, principally for new contracts in the Mining and Infrastructure business
        units. Also, in the fourth quarter of 2005, we completed the acquisition
        of
        BNFL’s interest in our Government Services Business resulting in a $36.2 million
        lump sum cash payment. Cash flow from investing activities was positively
        impacted by the net sales of $30.2 million of short-term investments and
        a $9.0
        million decrease in restricted cash.
 
 ·
            ***Financing
                activities:*** 
 During
        2006, financing activities used $9.1 million in cash, consisting of $65.8
        million to purchase shares of our common stock and $35.7 million to purchase
        outstanding warrants. The cash used to purchase common shares of our common
        stock and warrants was partially offset by $71.2 million received from warrant
        exercises and $17.1 million of proceeds from the exercise of stock options.
 
 During
        2005, financing activities used $46.9 million in cash, consisting of $4.6
        million in financing fees in amending our Credit Facility, $4.4 million in
        distributions to our partners in consolidated joint ventures, primarily BNFL,
        and $72.9 million for the purchase of outstanding warrants. Proceeds from
        the
        exercise of stock options totaled $29.9 million.
  ***Income
        taxes***
 
 We
        anticipate that cash payments for income taxes for 2007 and later years will
        be
        substantially less than income tax expense recognized in our consolidated
        financial statements. This difference results from expected tax deductions
        for
        tax goodwill amortization and from the use of net operating loss (“NOL”)
        carryovers and foreign tax credit carryforwards. As of December 29, 2006,
        we
        have remaining tax goodwill of $47.1 million resulting from the original
        acquisition of the Government Services Business in 1999 and $471.9 million
        resulting from the acquisition of RE&C. The amortization of this tax
        goodwill is deductible over remaining periods of 7.2 and 8.5 years,
        respectively, resulting in annual tax deductions of $62.1 million. The federal
        NOL carryovers as of December 29, 2006 were approximately $151.9 million,
        most
        of which are subject to an annual limitation of $26.5 million and expire
        in
        years 2020 through 2026. Unused available NOL carryovers from previous years
        plus the 2007 annual limitation of $26.5 million would allow us to use up
        to
        approximately $75.5 million of the NOL carryovers in 2007. Until the tax
        goodwill deductions and the NOL carryovers are exhausted, we will not pay
        cash
        taxes (other than a minimal impact for alternative minimum tax) on the first
        $88.6 million of federal taxable income before tax goodwill amortization
        and
        application of NOL carryovers each year with $137.6 million available in
        2007.
        In addition, as of December 29, 2006 we have $41.8 million of foreign tax
        credits available to offset future federal taxes payable.
 
 During
        2005, we settled with the IRS on disputes involving tax years 1994 through
        1997
        and paid $6.4 million of additional taxes. During 2006, we paid $7.0 million
        of
        interest related to the settlement.
  II-26
  
 ***Cash
        flows for 2007***
 
 In
        2007,
        we expect to generate positive cash flows from operations. Specific issues
        which
        are relevant to understanding 2007 cash flows include:
 
 ·
            ***Income
                taxes:***Because of anticipated utilization of tax goodwill amortization of
                $62.1
                million, and the availability of approximately $75.5 million of NOL
                carryovers and foreign tax credits, we will likely not pay federal
                taxes,
                other than a minimal amount for alternative minimum tax. We will
                pay state
                and foreign income taxes, which are not expected to be
                significant. 
 ·
            ***Property
                and equipment:***Capital expenditures for construction and mining projects, along
                with
                normal capital expenditures to upgrade our information systems hardware
                and software, are expected to be approximately $65 to $75 million.
                Additional capital may be required for new projects obtained during
                the
                year. Additionally, in the normal course of business, we sell a portion
                of
                our construction and mining equipment fleet each year, depending
                on
                estimated future requirements. We expect depreciation expense to
                amount to
                approximately $33.7 million in 2007. 
 ·
            ***Pension
                and post-retirement benefit obligations:***We
                expect to fund $8.5 million of our pension and post-retirement benefit
                obligations during 2007 as compared to $14.0 million funded in 2006.
                We
                estimate financial statement expense under these plans to be approximately
                $4.8 million in 2007 as compared to $6.7 million in
                2006. 
 ·
            ***Financing
                activities:***We
                have issued stock options that are currently exercisable and at December
                29, 2006, the market price of our common stock exceeded the exercise
                price
                of the options. If the options are exercised, we will receive proceeds
                based on the exercise price of the options. For additional information
                related to the stock options, see Note 13, “Capital Stock, Stock Purchase
                Warrants and Stock Compensation Plans,” of the Notes to Consolidated
                Financial Statements in Item 8 of this report. As discussed above,
                during
                2006 and 2005 we have purchased shares of our common stock and warrants
                under a stock buy back program. As of December 29, 2006, we have
                $100.7
                million of authorization under a stock buy back program approved
                by our
                Board of Directors. Based on our projected cash flows for 2007, we
                believe
                we can continue to purchase shares of common stock without adversely
                impacting our overall liquidity position. 
 ·
            ***Operating
                Activities:***We
                expect to fund approximately $50.0 million of the highway project
                losses
                during 2007. Future change orders and claim recoveries on these projects
                which, if received, could reduce the amount of required
                funding. 
 ***Financial
        condition and liquidity***
 
 We
        expect
        to use cash to, among other things, satisfy contractual obligations, fund
        working capital requirements and make capital expenditures. For additional
        information on contractual obligations and capital expenditures, see
“Contractual Obligations” below and “Property and Equipment” above.
 
 We
        believe that our cash flows from operations, existing cash and cash equivalents
        and available capacity under our Credit Facility will be sufficient to meet
        our
        reasonably foreseeable liquidity needs.
 
 In
        line
        with industry practice, we are often required to provide performance and
        surety
        bonds to customers under fixed-price contracts. These bonds indemnify the
        customer should we fail to perform our obligations under the contract. If
        a bond
        is required for a particular project and we are unable to obtain an appropriate
        bond, we cannot pursue that project. We have existing bonding capacity but,
        as
        is customary, the issuance of a bond is at the sureties’ discretion. Moreover,
        due to events that affect the insurance and bonding markets generally, bonding
        may be more difficult to obtain in the future or may only be available at
        significant additional cost. Although
  II-27
  there
        can
        be no assurance that bonds will continue to be available on reasonable terms,
        we
        believe that we have access to the bonding necessary to achieve our operating
        goals.
 
 We
        continually evaluate alternative capital structures and the terms of our
        Credit
        Facility. We may also, from time to time, pursue opportunities to complement
        existing operations through business combinations and participation in ventures,
        which may require additional financing and utilization of our capital
        resources.
 
 ***Contractual
        obligations***
 
 As
        of
        December 29, 2006, we had the following contractual obligations:
 
 **Payments
                  due by period****Contractual
                  obligations**
                *(In
                  millions)*
              
              **Less
                  than**
                **1
                  year**
              
              **1-3**
                **years**
              
              **3-5**
                **years**
              
              **More
                  than**
                **5
                  years**
              
              **Total**Operating
                  lease obligations
              
              $
              29.2
              
              $
              44.8
              
              $
              36.1
              
              $
              34.2
              
              $
              144.3Purchase
                  obligations (a)
              
              
              12.3
              
              
              24.6
              
              
              6.2
              
              
              ─
              
              
              43.1Credit
                  Facility (b)
              
              
              3.8
              
              
              7.3
              
              
              1.7
              
              
              ─
              
              
              12.8Pension
                  and post-retirement benefitobligations
                  (c)
              
              
              8.5
              
              
              18.2
              
              
              17.4
              
              
              37.6
              
              
              81.7Total
              
              $
              53.8
              
              $
              94.9
              
              $
              61.4
              
              $
              71.8
              
              $
              281.9
 
 
 (a)
              Purchase
                  obligations include future cash payments pursuant to an outsourcing
                  agreement for certain information technology services. Commitments
                  pursuant to subcontracts and other purchase orders related to engineering
                  and construction contracts are not included since such amounts
                  are
                  expected to be funded under contract
                  billings.
 (b)
              Represents
                  payments for letter of credit, commitment and administrative fees
                  for our
                  Credit Facility.
 (c)
              Pension
                  and post-retirement benefit obligations noted under the heading
“More than
                  5 years” are presented for the years 2012-2016.
 
 We
        have
        no long-term debt, capital leases or other material long-term liabilities
        reflected on our consolidated balance sheets, except for a performance guarantee
        of a joint venture as discussed in “Guarantees” below.
 
 In
        the
        normal course of business, we cause letters of credit and surety bonds to
        be
        issued generally in connection with contract performance obligations that
        are
        not required to be recorded in our consolidated balance sheets. We are obligated
        to reimburse the issuer of our letters of credit or surety bonds for any
        payments made thereunder. The table below presents the expiration of our
        outstanding commitments on letters of credit and surety bonds outstanding
        as of
        December 29, 2006 for each of the next five years and thereafter. Although
        letters of credit under the Credit Facility may not extend beyond termination
        of
        the Credit Facility, the presentation is prepared based on the expiration
        period
        of our contractual obligations with the customer or beneficiary. At December
        29,
        2006, $124.5 million of the outstanding letters of credit were issued under
        the
        Credit Facility. We have pledged cash and cash equivalents as collateral
        for our
        reimbursement obligations with respect to $21.0 million in face amount of
        letters of credit not issued under our Credit Facility that were outstanding
        at
        December 29, 2006. Our commitments under performance bonds generally end
        concurrent with the expiration of our contractual obligation. The face amount
        of
        the surety bonds expiring by period is presented below. Our actual exposure
        is
        limited to estimated costs to complete our bonded contracts, which was
        approximately $442.6 million at December 29, 2006.
  II-28
  
 **Other
                  commercial commitments***(In
                  millions)*
              
              **Letters
                  of credit**
              
              **Surety
                  bonds**
              
              **Total**Commitments
                  expiring by period2007
              
              $
              22.2
              
              $
              552.0
              
              $
              574.22008
              
              
              0.3
              
              
              290.7
              
              
              291.02009
              
              
              2.5
              
              
              17.0
              
              
              19.52010
              
              
              12.7
              
              
              607.8
              
              
              620.52011
              
              
              19.4
              
              
              ─
              
              
              19.4Thereafter
              
              
              88.4
              
              
              36.0
              
              
              124.4Total
                  other commercial commitments
              
              $
              145.5
              
              $
              1,503.5
              
              $
              1,649.0
 
 ***Indemnities***
 
 In
        connection with a prior sale of a business, we have guaranteed certain indemnity
        provisions relating to environmental conditions that obligate us to pay the
        buyer up to a maximum of $3.5 million for environmental losses they incur
        over
        $5.0 million until October 2007. We are also responsible, through 2012, for
        environmental losses that exceed $1.3 million related to a specified parcel
        of
        property we sold. We believe that the indemnification provisions will not
        have a
        material adverse effect on our financial position, results of operations
        or cash
        flows.
 
 ***Guarantees***
 
 In
        the
        ordinary course of business, we enter into various agreements providing
        financial or performance assurances to clients on behalf of certain
        unconsolidated subsidiaries, joint ventures and other jointly executed
        contracts. These agreements are entered into primarily to support the project
        execution commitments of these entities. The maximum potential payment amount
        of
        an outstanding performance guarantee is the remaining cost of work to be
        performed by or on behalf of third parties under engineering and construction
        contracts. At December 29, 2006, approximately $1.1 billion of work representing
        either our partners’ proportionate share, or work that our partners are directly
        responsible for, had yet to be completed. Amounts that may be required to
        be
        paid in excess of estimated costs to complete contracts in progress are not
        estimable. For cost reimbursable contracts, amounts that may become payable
        pursuant to guarantee provisions are normally recoverable from the client
        for
        work performed under the contract. For lump sum or fixed price contracts,
        this
        amount is the cost to complete the contracted work less amounts remaining
        to be
        billed to the client under the contract. Remaining billable amounts could
        be
        greater or less than the cost to complete. In those cases where costs exceed
        the
        remaining amounts payable under the contract we may have recourse to third
        parties, such as owners, co-venturers, subcontractors or vendors, for
        claims.
 
 We
        also
        participate, from time to time, in consortiums or “line item” joint venture
        agreements under which each partner is responsible for performing certain
        discrete items of the total scope of contracted work. The revenue for these
        discrete items is defined in the contract with the project owner and each
        venture partner bears the profitability risk associated with its own work.
        Generally, partners in these types of arrangements are jointly and severally
        liable for completion of the total project under the terms of the contact
        with
        the project owner. There is not a single set of books and records for this
        type
        of arrangement. Each partner accounts for its items of work individually
        as it
        would for any self-performed contract. We account for our portion of these
        contracts as a project in our accounting system and include receivables and
        payables associated with our work on our consolidated balance sheets.
 
 During
        the fourth quarter of 2005, we entered into a line item joint venture
        arrangement pursuant to which we have jointly and severally guaranteed the
        performance of the joint venture. Under the arrangements, we would be required
        to perform on the guarantee in the event our partner was not able to complete
        their portion of the construction contract through its expected completion
        in
        2008. Our maximum exposure under this performance guarantee at the time we
        entered into the arrangement was estimated to be approximately $170 million,
        the
        exposure is being reduced over the contract term upon execution of the contract
        scope. We have recorded the
  II-29
  estimated
        fair value of this guarantee in the amount of $2.4 million as a liability
        with a
        corresponding asset as of December 29, 2006.
 
 ***Off-balance
        sheet arrangements***
 
 We
        do not
        have any off-balance sheet arrangements that have or are reasonably likely
        to
        have a current or future effect on financial condition, revenue or expenses,
        results of operations, liquidity, capital expenditures or capital resources
        that
        are material to investors.
 
 ***Credit
        Facility***
 
 Our
        Credit Facility provides for up to $350.0 million in the aggregate of loans
        and
        other financial accommodations. Previously, the Credit Facility consisted
        of a
        tranche A facility of $247.5 million and a tranche B facility of $102.5 million.
        On July 5, 2006, we restructured the Credit Facility resulting in an increase
        in
        the size of the tranche A facility to $350.0 million and the elimination
        of the
        tranche B facility. The maturity date of June 14, 2010 did not change and
        the
        terms of tranche A remained the same. The tranche A borrowing rate is LIBOR
        plus
        an additional margin of 2.00 percent or, at our option, prime plus an additional
        margin of 1.00 percent, subject in each case to a 0.25 percent reduction
        upon
        our obtaining a specified long-term debt rating. As of December 29, 2006,
        the
        effective one month LIBOR borrowing rate was 7.33 percent. As a result of
        the
        restructuring, $5.1 million of deferred financing fees were written off in
        2006.
 
 The
        Credit Facility also provides for other fees, including commitment and letter
        of
        credit fees, normal and customary for such credit agreements. Letter of credit
        fees are calculated using the applicable LIBOR margins stated above plus
        an
        issuance fee that is negotiated with the issuing bank. Commitment fees are
        calculated on the remaining borrowing capacity after subtracting any outstanding
        borrowings and letters of credit. The tranche A commitment fee is 0.50 percent
        (subject to a 0.25 percent reduction upon our obtaining a specified long-term
        debt rating). As of December 29, 2006, $124.5 million in face amount of letters
        of credit were issued and outstanding and no borrowings were outstanding
        leaving
        a borrowing capacity of $225.5 million under the Credit Facility.
 
 The
        Credit Facility contains financial covenants requiring the maintenance of
        specified financial and operating ratios, and specified events of default
        that
        are typical for a credit facility of this size, type and tenor. The Credit
        Facility also contains covenants that limit our ability and the ability of
        some
        of our subsidiaries to incur debt, grant liens, provide guarantees, make
        investments, merge with or acquire other companies and pay dividends. As
        of
        December 29, 2006, we were in compliance with all of the financial covenants
        under the Credit Facility. The Credit Facility is secured by substantially
        all
        of the assets of Washington Group International and our wholly owned domestic
        subsidiaries.
 
 As
        a
        result of an amendment to the Credit Facility in June 2005, $3.6 million
        of
        deferred financing fees were written off during 2005.
 
 ***Earnings
        Before Interest, Taxes, Depreciation and Amortization
        (“EBITDA”)***
 
 We
        view
        EBITDA as a performance measure of operating liquidity, and as such we believe
        that the GAAP financial measure most directly comparable to it is net cash
        provided by operating activities (see “Reconciliation of EBITDA to Net Cash
        Provided by Operating Activities” below). EBITDA is not an alternative to and
        should not be considered instead of, or as a substitute for, earnings from
        operations, net income or loss, cash flows from operating activities or other
        statements of operations or cash flow data prepared in conformity with GAAP,
        or
        as a GAAP measure of profitability or liquidity. In addition, our calculation
        of
        EBITDA may or may not be comparable to similarly titled measures of other
        companies.
 
 EBITDA
        is
        used by our management as a supplemental financial measure to evaluate the
        performance of our business that, when viewed with our GAAP results and the
        accompanying reconciliations, we believe provides a more complete understanding
        of factors and trends affecting our business than the GAAP results alone.
        We
        also regularly communicate our EBITDA to the public through our earnings
        releases because it is a financial measure
  II-30
  commonly
        used by analysts that cover our industry to evaluate our performance as compared
        to the performance of other companies that have different financing and capital
        structures or effective tax rates. In addition, EBITDA is a financial measure
        used in the financial covenants of our Credit Facility and therefore is a
        financial measure to evaluate our compliance with our financial covenants.
        Management compensates for the above-described limitations of using a non-GAAP
        financial measure by using this non-GAAP financial measure only to supplement
        our GAAP results to provide a more complete understanding of the factors
        and
        trends affecting our business.
 
 Components
        of EBITDA are presented below:
 
 **Year
                  Ended***(In
                  millions)*
              
              **December
                  29, 2006**
              
              **December
                  30, 2005***
              
              **December
                  31, 2004***Net
                  income
              
              $
              80.8
              
              $
              53.9
              
              $
              47.6Taxes
              
              
              30.6
              
              
              27.0
              
              
              37.2Interest
                  expense (a)
              
              
              11.3
              
              
              13.5
              
              
              14.6Depreciation
                  and amortization (c)
              
              
              45.0
              
              
              21.9
              
              
              18.7Total
                  (b)
              
              $
              167.7
              
              $
              116.3
              
              $
              118.1
 
 
 *
              Adjusted
                  to include the retroactive impact of adopting the fair value method
                  of
                  recording compensation expense associated with stock options, see
                  Note 13
                  of Notes to Consolidated Financial Statements in Item 8 of this
                  report.
 (a)
              Includes
                  write-off of deferred financing fees of $5.1 million in 2006 and
                  $3.6
                  million in 2005.
 (b)
              EBITDA
                  for the year ended December 31, 2004 includes reorganization income
                  of
                  $1.2 million which had minimal tax expense.
 (c)
              Includes
                  $13.9 million of amortization of intangible assets in 2006 which
                  will
                  decline to approximately $4.4 million in
                  2007.
 
 **RECONCILIATION
        OF EBITDA TO NET CASH PROVIDED BY OPERATING ACTIVITIES**
 
 We
        believe that net cash provided by operating activities is the financial measure
        calculated and presented in accordance with GAAP that is most directly
        comparable to EBITDA. The following table reconciles EBITDA to net cash provided
        by operating activities for each of the periods for which EBITDA is
        presented.
 
 **Year
                  Ended***(In
                  millions)*
              
              **December
                  29,**
                **2006**
              
              **December
                  30,**
                **2005***
              
              **December
                  31,**
                **2004***EBITDA
              
              $
              167.7
              
              $
              116.3
              
              $
              118.1Interest
                  expense (a)
              
              
              (11.3
              )
              
              (13.5
              )
              
              (14.6
              )Tax
                  expense
              
              
              (30.6
              )
              
              (27.0
              )
              
              (37.2
              )Reorganization
                  items
              
              
              ─
              
              
              ─
              
              
              (1.2
              )Cash
                  paid for reorganization items
              
              
              (2.9
              )
              
              (2.7
              )
              
              (2.5
              )Amortization
                  and write off of financing fees
              
              
              6.6
              
              
              6.3
              
              
              3.2Non-cash
                  income tax expense
              
              
              25.9
              
              
              23.8
              
              
              32.3Minority
                  interest in net income of consolidated
                subsidiaries,
                  net of tax
              
              
              3.2
              
              
              5.4
              
              
              15.2Equity
                  in income of unconsolidated affiliates, less
                dividends
                  received
              
              
              (16.1
              )
              
              (14.0
              )
              
              (17.3
              )Excess
                  tax benefits from exercise of stock options
              
              
              (6.7
              )
              
              (5.0
              )
              
              (0.6
              )Stock-based
                  compensation
              
              
              11.3
              
              
              9.6
              
              
              7.0Changes
                  in net operating assets and liabilities and other
              
              
              (68.9
              )
              
              1.0
              
              
              7.6Net
                  cash provided by operating activities
              
              $
              78.2
              
              $
              100.2
              
              $
              110.0
 
 
  II-31
  *  Adjusted
        to include the retroactive impact of adopting the fair value method of recording
        compensation expense associated with stock options, see Note 13 of Notes
        to
        Consolidated Financial Statements in Item 8 of this report.
 (a)
              Includes
                  write-off of deferred financing fees of $5.1 million in 2006 and
                  $3.6
                  million in 2005.
  II-32
  
 **ACCOUNTING
        STANDARDS**
 
 ***Recently
        issued accounting standards***
 
 In
        July
        2006, the Financial Accounting Standards Board (“FASB”) issued FASB
        Interpretation No. 48 (“FIN 48”), *Accounting
        for Uncertainty in Income Taxes* ,
        an
        interpretation of FASB Statement No. 109, *Accounting
        for Income Taxes.* FIN 48
        prescribes a more likely than not recognition threshold for financial statement
        recognition and measurement of a tax position taken or expected to be taken
        in a
        tax return and also provides guidance on various related matters such as
        derecognition, interest and penalties, and disclosure. FIN 48 is effective
        for
        our fiscal year 2007 and interim periods within fiscal 2007. The cumulative
        effect of applying FIN 48 will be recorded as an adjustment to retained earnings
        as of December 30, 2006. We are currently evaluating the impact of adopting
        FIN
        48 in the first quarter of 2007.
 
 In
        September 2006, the FASB issued SFAS No.157, *Fair
        Value Measurements* .
        SFAS
        No. 157 clarifies the principle that fair value should be based on the
        assumptions market participants would use when pricing an asset or liability
        and
        establishes a fair value hierarchy that prioritizes the information used
        to
        develop those assumptions. Under the standard, fair value measurements would
        be
        separately disclosed by level within the fair value hierarchy. SFAS No. 157
        is effective for our fiscal year 2008 and interim periods within fiscal 2008,
        with early adoption permitted. We are currently evaluating the impact, if
        any,
        that SFAS No. 157 will have on our financial statements.
 
 ***Adoption
        of accounting standards***
 
 In
        September 2006, the FASB issued SFAS No. 158, *Employers’
        Accounting for Defined Benefit Pension and Other Postretirement
        Plans* .
        SFAS
        No. 158 requires employers to recognize the overfunded or underfunded status
        of
        a defined benefit pension or postretirement plan as an asset or liability
        in its
        statement of financial position, recognize changes in that funded status
        in the
        year in which the changes occur through comprehensive income and measure
        a
        plan’s assets and its obligations that determine its funded status as of the end
        of the employer’s fiscal year. The provisions of SFAS No. 158 are generally
        effective for the year ended December 29, 2006 with certain provisions not
        being
        required until 2008. See Note 8, “Benefit Plans,” of the Notes to Consolidated
        Financial Statements in Item 8 of this report for disclosure of the impact
        of
        adopting SFAS No. 158.
 
 In
        September 2006, the Securities and Exchange Commission issued Staff Accounting
        Bulletin (“SAB”) No. 108 which provides interpretive guidance on how the effects
        of the carryover or reversal of prior year misstatements should be considered
        in
        quantifying a current year misstatement. SAB No. 108 is effective for the
        year
        ended December 29, 2006. The adoption of SAB No. 108 did not have an impact
        on
        our financial statements.
  In
        the
        mining industry, companies may be required to remove overburden and waste
        materials to access mineral deposits. The costs of removing overburden and
        waste
        materials are referred to as “stripping costs.” MIBRAG incurs significant
        stripping costs in its lignite coal mining operations. MIBRAG’s mines are open
        pit mines, which cover several square miles and have an estimated remaining
        life
        of 40 or more years. Because of the mining procedures used, MIBRAG generally
        does not maintain any significant inventory of mined coal. In March 2005,
        the
        Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 04-6, *Accounting
        for Stripping Costs Incurred during Production in the Mining
        Industry* .
        The
        EITF concluded that stripping costs incurred during the production phase
        of a
        mine are variable production costs that should be included in the cost of
        inventory produced during the period that stripping costs are incurred. We
        were
        required to adopt EITF No. 04-6 in the first quarter of 2006. EITF No. 04-6
        provides that any adjustment from adoption be recognized as a cumulative
        effect
        adjustment to beginning retained earnings in the period of adoption. Based
        upon
        MIBRAG’s deferred stripping costs recorded as of December 30, 2005, the adoption
        of EITF No. 04-6 resulted in a reduction of our investments in unconsolidated
        affiliates and a reduction of total stockholders’ equity of $83.2 million and
        $54.1 million, respectively. We also recorded a cumulative effect adjustment
        of
        $0.5 million related to another mining venture.
   II-33
  Under
        EITF No. 04-6, costs of removing overburden are now expensed in the period
        incurred. The execution of MIBRAG’s mine plans may result in fiscal periods
        during which costs incurred for the removal of overburden will not bear a
        direct
        relationship to the revenue derived from the sale of coal. This may result
        in a
        degree of variability in the future reported earnings of MIBRAG. During the
        year
        ended December 29, 2006, equity in income of unconsolidated affiliates increased
        $2.0 million due to the change in accounting for stripping costs as compared
        to
        the prior method of deferring stripping costs and expensing as the associated
        coal deposit was extracted and sold.
 
 In
        June
        2005, the FASB ratified the consensus reached in EITF Issue No. 05-5, *Accounting
        for Early Retirement or Post-employment Programs with Specific Features (Such
        as
        Terms Specified in Altersteilzeit Early -Retirement
        Arrangements)* .
        EITF
        No. 05-5 addresses the timing of recognition of salaries, bonuses and additional
        pension contributions associated with certain early retirement arrangements
        typical in Germany (as well as similar programs). The EITF also specified
        the
        accounting for government subsidies related to these arrangements. The effect
        of
        applying EITF No. 05-5 was to be recognized prospectively as a change in
        accounting estimate effected by a change in accounting principle under SFAS
        No.
        154, *Accounting
        Changes and Error Corrections - a Replacement of APB Opinion No. 20 and FASB
        Statement No. 3.* MIBRAG
        provides early retirement arrangements to its employees pursuant to a program
        designed by the German government. Prior to EITF No. 05-5, the additional
        compensation related to the early retirement program had been accrued and
        expensed at the time an employee elected to participate. However, EITF No.
        05-5
        requires that the additional compensation be recognized ratably over the
        employee’s remaining service period. Accordingly, the adoption of EITF No. 05-5
        in the first quarter of 2006 increased MIBRAG’s earnings as the prior accruals
        were reversed, resulting in a $2.1 million increase in our equity in earnings
        of
        MIBRAG.
 
 In
        December 2004, the FASB issued SFAS No. 123 (R), replacing SFAS No. 123 and
        superseding Accounting Principles Board (“APB”) Opinion No. 25, *Accounting
        for Stock Issued to Employees* .
        We were
        required to adopt the fair value method prescribed by SFAS No. 123(R) in
        the
        first quarter of 2006. See Note 13, “Capital Stock, Stock Purchase Warrants and
        Stock Compensation Plans,” of the Notes to Consolidated Financial Statements in
        Item 8 of this report for disclosure of the impact of adopting SFAS No.
        123(R).
  II-34
  
 **ITEM
        7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
        RISK**
 
 ***Interest
        rate risk***
 
 Our
        exposure to market risk for changes in interest rates relates primarily to
        our
        Credit Facility. Substantially all cash and cash equivalents at December
        29,
        2006 were held in highly liquid instruments.
 
 From
        time
        to time, we may effect borrowings under bank credit facilities or otherwise
        for
        general corporate purposes, including working capital requirements and capital
        expenditures. Borrowings under our Credit Facility, of which there currently
        are
        none, bear interest at the applicable LIBOR or prime rate, plus an additional
        margin and, therefore, are subject to fluctuations in interest
        rates.
 
 ***Foreign
        currency risk***
 
 We
        conduct our business in various regions of the world. Our operations are,
        therefore, subject to volatility because of currency fluctuations, inflation
        changes and changes in political and economic conditions in these countries.
        We
        are subject to foreign currency translation and exchange issues, primarily
        with
        regard to our mining venture, MIBRAG, in Germany. At December 29, 2006 and
        December 30, 2005, the cumulative adjustments for translation gains (losses),
        net of related income tax benefits, were $25.8 million and $19.3 million,
        respectively. While we endeavor to enter into contracts with foreign customers
        with repayment terms in US dollars in order to mitigate foreign exchange
        risk,
        our revenue and expenses are sometimes denominated in local currencies, and
        our
        results of operations may be affected adversely as currency fluctuations
        affect
        our pricing and operating costs or those of our competitors. We may engage
        from
        time to time in hedging operations, including forward foreign exchange
        contracts, to reduce the exposure of our cash flows to fluctuations in foreign
        currency rates. We do not engage in hedging for speculative investment reasons.
        We can give no assurances that our hedging operations will eliminate or
        substantially reduce risks associated with fluctuating currencies.
 
 During
        2005 and 2006, we entered into forward foreign currency contracts to hedge
        contracts to acquire equipment denominated in Canadian dollars and South
        African
        Rand. At December 29, 2006, we had forward foreign exchange contracts to
        sell US
        dollars and buy South African Rand. The notional value of the South African
        Rand
        contracts was $2.5 million and the duration was less than 1 month. At December
        30, 2005, we had forward foreign exchange contracts to sell US dollars and
        buy
        Canadian dollars and to sell US dollars and buy South African Rand. The notional
        value of the Canadian dollar contracts was $24.1 million and the duration
        was
        less than 11 months. The notional value of the South African Rand contracts
        was
        $8.8 million and the duration was 6 months. The estimated fair value of the
        contracts was not significant as of either December 29, 2006 or December
        30,
        2005.
 
  II-35
  **ITEM
        8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**
 
 **INDEX
        TO FINANCIAL STATEMENTS**
 
 **WASHINGTON
        GROUP INTERNATIONAL, INC. AND SUBSIDIARIES**
 
 Consolidated
        Financial Statements and Financial Statement Schedule as of
 December
        29, 2006 and December 30, 2005, and for the years ended December 29, 2006,
 December
        30, 2005, and December 31, 2004
 
 
 **PAGE**Report
                  of Independent Registered Public Accounting Firm
              II-37Consolidated
                  Statements of Income
              II-38Consolidated
                  Statements of Comprehensive Income
              II-39Consolidated
                  Balance Sheets
              II-40Consolidated
                  Statements of Cash Flows
              II-42Consolidated
                  Statements of Stockholders’ Equity
              II-43Notes
                  to Consolidated Financial Statements
              II-44Quarterly
                  Financial Data (Unaudited)
              II-78Schedule
                  IIK - Valuation, qualifying and Reserve Accounts
              S-1Management’s
                  Annual Report on Internal Control over Financial Reporting
              II-80Attestation
                  Report of Independent Registered Public Accounting Firm on
                  Internal
                Control
                  Over Financial Reporting
              II-82Financial
                  Statements of Mitteldeutsche Braunkohlengesellschaft mbH
              Exhibit
                  99.1
 
 
  II-36
  **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 To
        the
        Board of Directors and Stockholders of
 Washington
        Group International, Inc.
 We
        have
        audited the accompanying consolidated balance sheets of Washington Group
        International, Inc. and subsidiaries (the “Company”) as of December 29, 2006 and
        December 30, 2005, and the related consolidated statements of income,
        comprehensive income, cash flows, and stockholders' equity for each of the
        three
        years in the period ended December 29, 2006.  Our audits also included the
        financial statement schedule listed in the Index at Item 8.  These
        financial statements and financial statement schedule are the responsibility
        of
        the Company's management.  Our responsibility is to express an opinion on
        the financial statements and financial statement schedule based on our
        audits.
 We
        conducted our audit in accordance with the standards of the Public Company
        Accounting Oversight Board (United States).  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, such consolidated financial statements present fairly, in all material
        respects, the financial position of Washington Group International, Inc.
        and
        subsidiaries as of December 29, 2006 and December 30, 2005, and the results
        of
        their operations and their cash flows for each of the three years in the
        period
        ended December 29, 2006, in conformity with accounting principles generally
        accepted in the United States of America.  Also, in our opinion, such
        financial statement schedule, when considered in relation to the basic
        consolidated financial statements taken as a whole, presents fairly, in all
        material respects, the information set forth therein.
 As
        discussed in Note 3 to the consolidated financial statements, in 2006 the
        Company adopted Emerging Issues Task Force Issue No. 04-6, *Accounting
        for Stripping Costs Incurred during Production in the Mining
        Industry* ,
        which
        changed its method of accounting for mining stripping costs. In addition,
        the
        Company adopted Statement of Financial Accounting Standards No. 158, *Employers’
        Accounting for Defined Benefit Pension and Other Postretirement Plans - an
        Amendment of FASB Statements No. 87, 88, 106 and 132(R)* ,
        which
        changed its method of accounting for pension and postretirement benefits
        as of
        December 29, 2006.
 We
        have
        also audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), the effectiveness of the Company's internal
        control over financial reporting as of December 29, 2006, based on the criteria
        established in *Internal
        Control—Integrated Framework* issued
        by the Committee of Sponsoring Organizations of the Treadway Commission and
        our
        report dated February 25, 2007 expressed an unqualified opinion on management's
        assessment of the effectiveness of the Company's internal control over financial
        reporting and an unqualified opinion on the effectiveness of the Company's
        internal control over financial reporting.
 
 /s/
        Deloitte & Touche LLP
 Deloitte
        & Touche LLP
 Boise,
        Idaho
 February
        25, 2007
  II-37
  **CONSOLIDATED
        STATEMENTS OF INCOME**
 
 
 (*In
                  thousands except per share data*)
              
              **Year
                  Ended**
                **December
                  29, 2006**
              
              **Year
                  Ended**
                **December
                  30, 2005***
              
              **Year
                  Ended**
                **December
                  31, 2004***Revenue
              
              $
              3,398,082
              
              $
              3,188,454
              
              $
              2,915,382Cost
                  of revenue
              
              
              (3,242,290
              )
              
              (3,062,100
              )
              
              (2,768,227
              )Gross
                  profit
              
              
              155,792
              
              
              126,354
              
              
              147,155Equity
                  in income of unconsolidated affiliates
              
              
              35,816
              
              
              29,596
              
              
              26,917General
                  and administrative expenses
              
              
              (75,728
              )
              
              (63,823
              )
              
              (63,374
              )Other
                  operating income, net
              
              
              16
              
              
              ─
              
              
              1,443Operating
                  income
              
              
              115,896
              
              
              92,127
              
              
              112,141Interest
                  income
              
              
              10,533
              
              
              8,257
              
              
              2,778Interest
                  expense
              
              
              (6,216
              )
              
              (9,955
              )
              
              (14,625
              )Write-off
                  of deferred financing fees
              
              
              (5,063
              )
              
              (3,588
              )
              
              ─Other
                  non-operating expense, net
              
              
              (522
              )
              
              (551
              )
              
              (1,509
              )Income
                  before reorganization items, income taxes
                and
                  minority interests
              
              
              114,628
              
              
              86,290
              
              
              98,785Reorganization
                  items
              
              
              ─
              
              
              ─
              
              
              1,245Income
                  tax expense
              
              
              (30,590
              )
              
              (27,021
              )
              
              (37,243
              )Minority
                  interests in income of consolidated
                subsidiaries
              
              
              (3,192
              )
              
              (5,409
              )
              
              (15,214
              )Net
                  income
              
              $
              80,846
              
              $
              53,860
              
              $
              47,573Income
                  per share:Basic
              
              $
              2.83
              
              $
              2.07
              
              $
              1.88Diluted
              
              
              2.64
              
              
              1.77
              
              
              1.71Shares
                  used to compute income per share:Basic
              
              
              28,605
              
              
              26,037
              
              
              25,281Diluted
              
              
              30,608
              
              
              30,408
              
              
              27,890
 
 *The
        accompanying notes are an integral part of the consolidated financial
        statements.*
 
 *
              Adjusted
                  to include the retroactive impact of adopting the fair value method
                  of
                  recording compensation expense associated with stock options, see
                  Note
                  13.
  II-38
  **CONSOLIDATED
        STATEMENTS OF COMPREHENSIVE INCOME**
 
 
 (*In
                  thousands*)
              
              **Year
                  Ended**
                **December
                  29, 2006**
              
              **Year
                  Ended**
                **December
                  30, 2005***
              
              **Year
                  Ended**
                **December
                  31, 2004***Net
                  income
              
              $
              80,846
              
              $
              53,860
              
              $
              47,573Other
                  comprehensive income (loss), net of tax:Foreign
                  currency translation adjustments
              
              
              6,569
              
              
              (15,568
              )
              
              9,348Minimum
                  pension liability adjustment and other
              
              
              (423
              )
              
              (603
              )
              
              (991
              )Other
                  comprehensive income (loss), net of tax
              
              
              6,146
              
              
              (16,171
              )
              
              8,357Comprehensive
                  income
              
              $
              86,992
              
              $
              37,689
              
              $
              55,930
 *The
        accompanying notes are an integral part of the consolidated financial
        statements.*
 
 *
              Adjusted
                  to include the retroactive impact of adopting the fair value method
                  of
                  recording compensation expense associated with stock options, see
                  Note
                  13.
  II-39
  
 **CONSOLIDATED
        BALANCE SHEETS**
 
 *(In
                  thousands)*
              
              **December
                  29, 2006**
              
              **December
                  30, 2005*****ASSETS****Current
                  assets**Cash
                  and cash equivalents
              
              $
              232,096
              
              $
              237,706Restricted
                  cash
              
              
              65,475
              
              
              52,533Accounts
                  receivable, including retentions of $16,443 and
                $22,849,
                  respectively
              
              
              358,957
              
              
              275,623Unbilled
                  receivables
              
              
              268,829
              
              
              256,090Investments
                  in and advances to construction joint ventures
              
              
              44,333
              
              
              56,668Deferred
                  income taxes
              
              
              106,681
              
              
              107,798Other
              
              
              48,789
              
              
              41,202Total
                  current assets
              
              
              1,125,160
              
              
              1,027,620**Investments
                  and other assets**Investments
                  in unconsolidated affiliates
              
              
              113,953
              
              
              172,448Goodwill
              
              
              97,076
              
              
              162,270Deferred
                  income taxes
              
              
              227,901
              
              
              142,525Other
                  assets
              
              
              38,005
              
              
              59,362Total
                  investments and other assets
              
              
              476,935
              
              
              536,605**Property
                  and equipment**Construction
                  and mining equipment
              
              
              162,776
              
              
              121,109Other
                  equipment and fixtures
              
              
              50,642
              
              
              40,415Buildings
                  and improvements
              
              
              12,781
              
              
              12,575Land
                  and improvements
              
              
              584
              
              
              2,403Total
                  property and equipment
              
              
              226,783
              
              
              176,502Less
                  accumulated depreciation
              
              
              (96,554
              )
              
              (75,748
              )Property
                  and equipment, net
              
              
              130,229
              
              
              100,754Total
                  assets
              
              $
              1,732,324
              
              $
              1,664,979
 
 *The
        accompanying notes are an integral part of the consolidated financial
        statements.*
 
 *
              Adjusted
                  to include the retroactive impact of adopting the fair value method
                  of
                  recording compensation expense associated with stock options, see
                  Note
                  13.
 
  II-40
  
 **CONSOLIDATED
        BALANCE SHEETS (** ***continued)***
 
 *(In
                  thousands except per share data)*
              
              **December
                  29, 2006**
              
              **December
                  30, 2005*****LIABILITIES
                  AND STOCKHOLDERS’ EQUITY****Current
                  liabilities**Accounts
                  payable and subcontracts payable, including
                retentions
                  of $26,423 and $32,127, respectively
              
              $
              335,045
              
              $
              253,559Billings
                  in excess of cost and estimated earnings on
                uncompleted
                  contracts
              
              
              152,109
              
              
              239,106Accrued
                  salaries, wages and benefits, including compensated
                absences
                  of $53,695 and $49,578, respectively
              
              
              192,307
              
              
              165,062Other
                  accrued liabilities
              
              
              38,563
              
              
              46,639Total
                  current liabilities
              
              
              718,024
              
              
              704,366**Non-current
                  liabilities**Self-insurance
                  reserves
              
              
              68,392
              
              
              66,933Pension
                  and post-retirement benefit obligations
              
              
              87,449
              
              
              92,210Other
                  non-current liabilities
              
              
              50,263
              
              
              38,801Total
                  non-current liabilities
              
              
              206,104
              
              
              197,944**Contingencies
                  and commitments (Notes 4 and 11)****Minority
                  interests**
              
              
              9,947
              
              
              5,578**Stockholders’
                  equity**Preferred
                  stock, par value $.01 per share, 10,000 shares authorized
              
              
              ─
              
              
              ─Common
                  stock, par value $.01 per share, 100,000 shares
                authorized;
                  30,001 and 26,870 shares issued, respectively
              
              
              300
              
              
              269Capital
                  in excess of par value
              
              
              669,663
              
              
              574,094Stock
                  purchase warrants
              
              
              ─
              
              
              15,104Retained
                  earnings
              
              
              183,492
              
              
              157,239Treasury
                  stock, 1,159 and 32 shares, respectively, at cost
              
              
              (67,251
              )
              
              (1,307
              )Unearned
                  compensation - restricted stock
              
              
              (8,385
              )
              
              (4,233
              )Accumulated
                  other comprehensive income
              
              
              20,430
              
              
              15,925Total
                  stockholders’ equity
              
              
              798,249
              
              
              757,091Total
                  liabilities and stockholders’ equity
              
              $
              1,732,324
              
              $
              1,664,979
 
 *The
        accompanying notes are an integral part of the consolidated financial
        statements* *.*
 
 *
              Adjusted
                  to include the retroactive impact of adopting the fair value method
                  of
                  recording compensation expense associated with stock options, see
                  Note
                  13.
 
  II-41
  **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 *(In
                  thousands)*
              
              **Year
                  Ended**
                **December
                  29, 2006**
              
              **Year
                  Ended**
                **December
                  30, 2005***
              
              **Year
                  Ended**
                **December
                  31, 2004*****Operating
                  activities**Net
                  income
              
              $
              80,846
              
              $
              53,860
              
              $
              47,573Reorganization
                  items
              
              
              ─
              
              
              ─
              
              
              (1,245
              )Adjustments
                  to reconcile net income to net cash provided by
                operating
                  activities:Cash
                  paid for reorganization items
              
              
              (2,872
              )
              
              (2,740
              )
              
              (2,493
              )Depreciation
                  of property and equipment
              
              
              31,105
              
              
              21,880
              
              
              18,714Amortization
                  and write-off of deferred financing fees
              
              
              6,623
              
              
              6,300
              
              
              3,225Amortization
                  of intangible assets
              
              
              13,862
              
              
              ─
              
              
              ─Non-cash
                  income tax expense
              
              
              25,903
              
              
              23,766
              
              
              32,321Stock-based
                  compensation
              
              
              11,319
              
              
              9,651
              
              
              7,010Minority
                  interests in income of consolidated subsidiaries, net of
                  tax
              
              
              3,192
              
              
              5,409
              
              
              15,214Equity
                  in income of unconsolidated affiliates, less dividends
                  received
              
              
              (16,113
              )
              
              (14,038
              )
              
              (17,296
              )Self-insurance
                  reserves
              
              
              1,459
              
              
              (1,013
              )
              
              7,772Excess
                  tax benefits from exercise of stock options
              
              
              (6,710
              )
              
              (5,033
              )
              
              (634
              )Other
              
              
              (7,922
              )
              
              (7,850
              )
              
              4,832Changes
                  in other assets and liabilities, net of acquisitions:Accounts
                  receivable and unbilled receivables
              
              
              (94,164
              )
              
              (69,481
              )
              
              (73,980
              )Investments
                  in and advances to construction joint ventures
              
              
              (11,249
              )
              
              12,312
              
              
              2,040Other
                  current assets
              
              
              (4,527
              )
              
              15,747
              
              
              (5,841
              )Accounts
                  payable and subcontracts payable, accrued salaries,
                wages
                  and benefits and other accrued liabilities
              
              
              110,855
              
              
              61,209
              
              
              40,779Billings
                  in excess of cost and estimated earnings
              
              
              (63,413
              )
              
              (9,822
              )
              
              32,009Net
                  cash provided by operating activities
              
              
              78,194
              
              
              100,157
              
              
              110,000**Investing
                  activities**Property
                  and equipment additions
              
              
              (64,392
              )
              
              (63,192
              )
              
              (35,217
              )Property
                  and equipment disposals
              
              
              8,735
              
              
              12,965
              
              
              21,270Business
                  acquisition, net of cash acquired of $563
              
              
              (6,103
              )
              
              ─
              
              
              ─Purchase
                  of short-term investments
              
              
              ─
              
              
              (74,900
              )
              
              (617,200
              )Sales
                  of short-term investments
              
              
              ─
              
              
              105,100
              
              
              637,000Acquisition
                  of minority interest
              
              
              ─
              
              
              (29,057
              )
              
              ─Decrease
                  (increase) in restricted cash
              
              
              (12,942
              )
              
              9,016
              
              
              9,118Net
                  cash provided (used) by investing activities
              
              
              (74,702
              )
              
              (40,068
              )
              
              14,971**Financing
                  activities**Payment
                  of financing fees
              
              
              ─
              
              
              (4,577
              )
              
              (3,914
              )Payoff
                  of loan assumed in business acquisition
              
              
              (1,668
              )
              
              ─
              
              
              ─Distributions
                  to minority interests, net
              
              
              (866
              )
              
              (4,379
              )
              
              (25,501
              )Proceeds
                  from exercise of stock options and warrants
              
              
              88,266
              
              
              29,927
              
              
              10,171Purchase
                  of warrants and treasury stock
              
              
              (101,544
              )
              
              (72,916
              )
              
              ─Excess
                  tax benefits from exercise of stock options
              
              
              6,710
              
              
              5,033
              
              
              634Net
                  cash used by financing activities
              
              
              (9,102
              )
              
              (46,912
              )
              
              (18,610
              )Increase
                  (decrease) in cash and cash equivalents
              
              
              (5,610
              )
              
              13,177
              
              
              106,361Cash
                  and cash equivalents at beginning of year
              
              
              237,706
              
              
              224,529
              
              
              118,168Cash
                  and cash equivalents at end of year
              
              $
              232,096
              
              $
              237,706
              
              $
              224,529
 
 *The
        accompanying notes are an integral part of the consolidated financial
        statements.*
 
 *
              Adjusted
                  to include the retroactive impact of adopting the fair value method
                  of
                  recording compensation expense associated with stock options, see
                  Note
                  13.
  II-42
  **CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS’ EQUITY**
 
 *(In
                  thousands)*
              
              **Shares
                  of**
                **Common
                  stock**
                **Issued
                  Treasury**
              
              **Common**
                **stock**
              
              **Capital
                  in excess of par value**
              
              **Stock
                  purchase warrants**
              
              **Retained
                  earnings**
              
              **Treasury
                  stock**
              
              **Unearned
                  compensation-restricted stock**
              
              **Accumulated
                  other comprehensive income (loss)****January
                  2, 2004***
              
              
              25,046
              
              
              ─
              
              $
              250
              
              $
              567,140
              
              $
              28,647
              
              $
              56,074
              
              $
              ─
              
              $
              ─
              
              $
              23,739Net
                  income*
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              47,573Stock-based
                  compensation *
              
              
              
              
              
              
              
              
              
              
              
              7,010Exercise
                  of stock options
                and
                  warrants
              
              
              428
              
              
              
              
              
              5
              
              
              11,131
              
              
              (331
              )Foreign
                  currency translation
                adjustments,
                  net
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              9,348Minimum
                  pension liability
                adjustments
                  and other
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (991
              )Other
              
              
              
              
              
              (26
              )
              
              
              
              
              586
              
              
              (149
              )
              
              
              
              
              (1,012
              )**December
                  31, 2004***
              
              
              25,474
              
              
              (26
              )
              
              255
              
              
              585,867
              
              
              28,167
              
              
              103,647
              
              
              (1,012
              )
              
              ─
              
              
              32,096Net
                  income*
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              53,860Issuance
                  of restricted
                stock,
                  net of forfeitures
              
              
              134
              
              
              
              
              
              1
              
              
              5,844
              
              
              
              
              
              
              
              
              (4
              )
              
              (5,841
              )Stock-based
                  compensation *
              
              
              4
              
              
              
              
              
              
              
              
              8,043
              
              
              
              
              
              
              
              
              
              
              
              1,608Exercise
                  of stock options
                and
                  warrants
              
              
              1,258
              
              
              
              
              
              13
              
              
              36,361
              
              
              (1,415
              )Purchase
                  of warrants
              
              
              
              
              
              
              
              
              
              
              
              (62,113
              )
              
              (11,616
              )Foreign
                  currency translation
                adjustments,
                  net
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (15,568
              )Minimum
                  pension liability
                adjustments
                  and other
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (603
              )Other
              
              
              
              
              
              (6
              )
              
              
              
              
              92
              
              
              (32
              )
              
              (268
              )
              
              (291
              )**December
                  30, 2005***
              
              
              26,870
              
              
              (32
              )
              
              269
              
              
              574,094
              
              
              15,104
              
              
              157,239
              
              
              (1,307
              )
              
              (4,233
              )
              
              15,925Cumulative
                  effect adjustments
                related
                  to stripping costs
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (54,593
              )**Adjusted
                  December 31, 2005**
              
              
              26,870
              
              
              (32
              )
              
              269
              
              
              574,094
              
              
              15,104
              
              
              102,646
              
              
              (1,307
              )
              
              (4,233
              )
              
              15,925Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              80,846Issuance
                  of restricted
                stock,
                  net of forfeitures
              
              
              128
              
              
              
              
              
              1
              
              
              8,046
              
              
              
              
              
              
              
              
              
              
              
              (8,047
              )Stock-based
                  compensation
              
              
              
              
              
              
              
              
              
              
              
              7,424
              
              
              
              
              
              
              
              
              
              
              
              3,895Exercise
                  of stock options
                and
                  warrants
              
              
              3,003
              
              
              
              
              
              30
              
              
              102,553
              
              
              (7,607
              )Purchase
                  of warrants and
                common
                  stock
              
              
              
              
              
              (1,125
              )
              
              
              
              
              (28,073
              )
              
              (6,851
              )
              
              
              
              
              (65,807
              )Recognition
                  of pre-
                reorganization
                  tax benefits
              
              
              
              
              
              
              
              
              
              
              
              3,771Foreign
                  currency translation
                adjustments,
                  net
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              6,569Minimum
                  pension liability
                adjustments
                  and other
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (423
              )Adoption
                  of SFAS No. 158
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,641
              )Other
              
              
              
              
              
              (2
              )
              
              
              
              
              1,848
              
              
              (646
              )
              
              
              
              
              (137
              )**December
                  29, 2006**
              
              
              30,001
              
              
              (1,159
              )
              $
              300
              
              $
              669,663
              
              $
              ─
              
              $
              183,492
              
              $
              (67,251
              )
              $
              (8,385
              )
              $
              20,430
 
 *The
        accompanying notes are an integral part of the consolidated financial
        statements.*
 
 *
              Adjusted
                  to include the retroactive impact of adopting the fair value method
                  of
                  recording compensation expense associated with stock options, see
                  Note
                  13.
  II-43
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 The
        terms
“we,” “us” and “our” as used in this annual report refer to Washington Group
        International, Inc. (“Washington Group International”) and its consolidated
        subsidiaries unless otherwise indicated.
 
 **1.**  **DESCRIPTION
        OF BUSINESS**
 
 ***Business***
 
 We
        are an
        international provider of a broad range of design, engineering, construction,
        construction management, facilities and operations management, environmental
        remediation and mining services to diverse public and private sector clients,
        including (i) engineering, construction and operations and maintenance services
        in nuclear and fossil power markets; (ii) engineering, construction,
        construction management and operations and maintenance services for the highway
        and bridge, airport and seaport, dam, tunnel, water resource and railway
        markets; (iii) contract mining, technical and engineering services for the
        metals, precious metals, coal, minerals and minerals processes markets; (iv)
        design, engineering, procurement, construction and construction management
        and
        operations and maintenance services for industrial companies; (v) design,
        engineering, construction, management and operations and closure services
        for
        weapons and chemical demilitarization programs for governmental clients;
        and
        (vi) comprehensive nuclear and other environmental and hazardous substance
        remediation as well as management and operations services for governmental
        and
        private-sector clients. In providing these services, we enter into four basic
        types of contracts: fixed-price or lump-sum contracts providing for a fixed
        price for all work to be performed; fixed-unit-price contracts providing
        for a
        fixed price for each unit of work to be performed; target-price contracts
        providing for an agreed upon price whereby we absorb all or a portion of
        cost
        escalations to the extent of our expected fee or profit and are reimbursed
        for
        costs which continue to escalate beyond our expected fee and share in the
        cost
        savings based on a negotiated formula; and cost-type contracts providing
        for
        reimbursement of costs plus a fee. Engineering, construction management,
        maintenance and environmental and hazardous substance remediation contracts
        are
        typically awarded pursuant to a cost-type contract.
 
 We
        participate in construction joint ventures, often as sponsor and manager
        of
        projects, which are formed for the sole purpose of bidding, negotiating and
        completing specific projects. We participate in two incorporated mining
        ventures: MIBRAG mbH (“MIBRAG”), a company that operates lignite coal mines and
        power plants in Germany, and Westmoreland Resources, Inc. (“Westmoreland
        Resources”), a coal mining company in Montana.
 
 ***Basis
        of presentation***
 
 The
        consolidated financial statements include the accounts of Washington Group
        International and all of its majority-owned subsidiaries and certain
        majority-owned construction joint ventures. Investments in non-consolidated
        construction joint ventures are accounted for by the equity method on the
        balance sheet with our proportionate share of revenue, cost of revenue and
        gross
        profit included in the consolidated statements of income. Investments in
        unconsolidated affiliates are accounted for using the equity method.
        Intercompany transactions and accounts have been eliminated in
        consolidation.
 
 On
        March
        22, 1999, we and BNFL Nuclear Services, Inc. (“BNFL”) acquired the government
        and environmental services businesses of CBS Corporation (now Viacom, Inc.).
        We
        refer to these businesses, together with other government services operations,
        as the “Government Services Business.” The Government Services Business manages
        highly complex facilities and programs for the United States (“US”) Departments
        of Energy and Defense and provides engineering, construction, management,
        and
        risk-analysis services for a variety of governmental markets. The Government
        Services Business currently makes up our Energy & Environment and Defense
        business units. On August 25, 2004, we agreed to acquire BNFL’s interest in the
        Government Services Business and effective December 30, 2005 we settled all
        remaining acquisition payments resulting in the termination of BNFL’s interest
        in our Government Services Business. See Note 14 for additional discussion
        of
        our acquisition of BNFL’s minority interest in the Government Services
        Business.
  II-44
  On
        July
        7, 2000, we purchased from Raytheon Company and Raytheon Engineers &
Constructors International, Inc. (“RECI”) the capital stock of the subsidiaries
        of RECI and specified other assets of RECI and assumed specified liabilities
        of
        RECI. The businesses that we purchased, that we refer to as “RE&C,” provide
        engineering, design, procurement, construction, operation, maintenance, and
        other services on a global basis.
 
 On
        May
        14, 2001, due to near-term liquidity problems resulting from our acquisition
        of
        RE&C, we filed for protection under Chapter 11 of the US Bankruptcy Code. On
        December 21, 2001, the bankruptcy court entered an order confirming the Second
        Amended Joint Plan of Reorganization of Washington Group International, Inc.,
        et
        al., as modified (the “Plan of Reorganization”). The Plan of Reorganization
        became effective and we emerged from bankruptcy protection on January 25,
        2002.
 
 As
        of
        February 1, 2002, we adopted fresh-start reporting pursuant to the guidance
        provided by the American Institute of Certified Public Accountants Statement
        of
        Position (“SOP”) 90-7, *Financial
        Reporting by Entities in Reorganization under the Bankruptcy
        Code* .
        In
        connection with the adoption of fresh-start reporting, we created a new entity
        for financial reporting purposes. The effective date of our emergence from
        bankruptcy protection is considered to be the close of business on February
        1,
        2002 for financial reporting purposes.
 
 Our
        fiscal year is the 52/53 weeks ending on the Friday closest to December
        31.
 
 **2.**  **SIGNIFICANT
        ACCOUNTING POLICIES**
 
 ***Revenue
        recognition***
 
 We
        follow
        the provisions of SOP 81-1, *Accounting
        for Performance of Construction-Type and Certain Production-Type Contracts.* We
        recognize revenue on engineering and construction-type contracts using the
        percentage-of-completion method of accounting whereby revenue is recognized
        as
        performance under the contract progresses. For most of our fixed-price and
        target-price contracts, we use a cost-to-cost approach to measure progress
        towards completion. Under the cost-to-cost method, we make periodic estimates
        of
        our progress towards completion by comparing costs incurred to date with
        total
        estimated contract costs. Revenue is then calculated on a cumulative basis
        (project-to-date) as the total contract value multiplied by the current
        percentage complete. Revenue for a reporting period is calculated as the
        cumulative project-to-date revenue less project revenue recognized in prior
        periods. However, we defer profit recognition on fixed-price and target-priced
        contracts until progress is sufficient to estimate the probable outcome,
        which
        generally does not occur until the project is at least 20 percent complete.
 
 For
        contracts that include significant materials or equipment costs, we use an
        efforts expended method to measure progress towards completion based on labor
        hours, labor dollars or some other measurement of physical completion. For
        certain long-term contracts involving mining and environmental and hazardous
        substance remediation, progress towards completion is measured using the
        units
        of production method. Revenue from reimbursable or cost-plus contracts is
        recognized on the basis of costs incurred during the period plus the fee
        earned.
        Service-related contracts, including operations and maintenance contracts,
        are
        accounted for over the period of performance, in proportion to the costs
        of
        performance, evenly over the period or over units of production. Award fees
        associated with US government contracts are initially estimated and recognized
        based on historical performance until the client has confirmed the final
        award
        fee. Performance-based incentive fees are included in contract value when
        a
        basis exists for the reasonable prediction of performance in relation to
        established targets. When a basis for reasonable prediction does not exist,
        performance-based incentive fees are recognized when actually awarded by
        the
        client.
 
 The
        amount of revenue recognized also depends on whether the contract or project
        is
        determined to be an “at-risk” or an “agency” relationship between the client and
        us. Determination of the relationship is based on characteristics of the
        contract or the relationship with the client. For at-risk relationships,
        the
        gross revenue and the costs of materials, services, payroll, benefits,
        non-income tax and other costs are recognized in our statements of income.
        For
        agency relationships, where we act as an agent for our client, only fee revenue
        is recognized, meaning that direct project costs and the related reimbursement
        from the client are netted.
  II-45
  
 The
        use
        of the percentage-of-completion method for revenue recognition requires the
        use
        of various estimates, including among others, the extent of progress towards
        completion, contract completion costs and contract revenue. Profit margins
        to be
        recognized are dependent upon the accuracy of estimated engineering progress,
        materials quantities, achievement of milestones and other incentives, penalty
        provisions, labor productivity and other cost estimates. Such estimates are
        dependent upon various judgments we make with respect to those factors, and
        some
        are difficult to accurately determine until the project is significantly
        underway. Progress is evaluated each reporting period. We recognize adjustments
        to profitability on contracts utilizing the percentage-of-completion method
        on a
        cumulative basis, when such adjustments are identified. We have a history
        of
        making reasonably dependable estimates of the extent of progress towards
        completion, contract revenue and contract completion costs on our long-term
        engineering and construction-type contracts. However, due to uncertainties
        inherent in the estimation process, it is possible that actual completion
        costs
        may vary from estimates. In limited circumstances, we may use the
        completed-contract method for specific contracts for which reasonably dependable
        estimates cannot be made or for which inherent hazards make the estimates
        doubtful. The completed contract method was not utilized during any of the
        periods presented.
 
 ***Change
        orders and claims***
 
 Once
        contract performance is underway, we often experience changes in conditions,
        client requirements, specifications, designs, materials and work schedule.
        Generally, a “change order” will be negotiated with our customer to modify the
        original contract to approve both the scope and price of the change.
        Occasionally, however, disagreements arise regarding changes, their nature,
        measurement, timing, and other characteristics that impact costs and revenue
        under the contract. When a change becomes a point of dispute between our
        customer and us, we then consider it as a claim.
 
 Costs
        related to change orders and claims are recognized when they are incurred.
        Change orders are included in total estimated contract revenue when it is
        probable that the change order will result in a bona fide addition to contract
        value and can be reliably estimated. Estimated contract revenue associated
        with
        change orders may include amounts in excess of incurred costs (profit) when
        appropriate. Claims are included in total estimated contract revenue, only
        to
        the extent that contract costs related to the claim have been incurred, when
        it
        is probable that the claim will result in a bona fide addition to contract
        value
        and can be reliably estimated which generally occurs when amounts have been
        received or awarded. This can lead to a situation where costs are recognized
        in
        one period and revenue is recognized when customer agreement is obtained
        or
        claim resolution occurs, which can be in subsequent periods. Historical claim
        recoveries should not be considered indicative of future claim recoveries.
        We
        recognized revenue and related additional contract costs from claims in the
        following amounts for the periods presented:
 
 *(In
                  thousands)*
              
              **Year
                  Ended**
                **December
                  29, 2006**
              
              **Year
                  Ended**
                **December
                  30, 2005**
              
              **Year
                  Ended**
                **December
                  31, 2004**Revenue
                  from claims
              
              $
              ─
              
              $
              22,899
              
              $
              30,439Less
                  additional contract related costs and
                subcontractors’
                  share of claim settlements
              
              $
              ─
              
              
              (1,697
              )
              
              (1,901
              )Net
                  impact on gross profit from claims
              
              $
              ─
              
              $
              21,202
              
              $
              28,538
 
 Substantially
        all claims were settled and collected during each respective period for which
        claim revenue was recognized. During the year ended December 29, 2006, we
        recognized $16.8 million of change order recoveries on two projects for which
        contract losses were recorded in prior periods.
 
  II-46
  ***Estimated
        losses on uncompleted contracts and changes in contract
        estimates***
 
 We
        record
        provisions for estimated losses on uncompleted contracts in the period in
        which
        such losses are identified. The cumulative effects of revisions to contract
        revenue and estimated completion costs are recorded in the accounting period
        in
        which the amounts become evident and can be reasonably estimated. These
        revisions can include such items as the effects of change orders and claims,
        warranty claims, liquidated damages or other contractual penalties, adjustments
        for audit findings on US government contracts and contract closeout settlements.
 
 ***Segmenting
        contracts***
 
 Occasionally
        a contract may include several elements or phases, each of which was negotiated
        separately with the customer and agreed to be performed without regard to
        the
        performance of others. We follow the criteria set forth in SOP 81-1 when
        segmenting contracts. In these situations, we segment the contract and assign
        revenue and cost to the different elements or phases to achieve different
        rates
        of profitability based on the relative value of each element or phase to
        the
        estimated contract revenue. Values assigned to the segments are based on
        our
        normal historical prices and terms of such services to other
        customers.
 
 **Use
        of estimates**
 
 The
        preparation of our consolidated financial statements in conformity with
        accounting principles generally accepted in the United States of America
        (“GAAP”) necessarily requires us to make estimates and assumptions that affect
        the reported amounts of assets and liabilities, the disclosure of contingent
        assets and liabilities at the balance sheet dates and the reported amounts
        of
        revenue and costs during the reporting periods. Actual results could differ
        from
        those estimates. On an ongoing basis, we review our estimates based on
        information that is currently available. Changes in facts and circumstances
        may
        result in revised estimates.
 
 ***Classification
        of current assets and liabilities***
 
 Because
        we participate in long-term contracts, we include in current assets and
        liabilities amounts realizable and payable under contracts that extend beyond
        one year. Accounts receivable at December 29, 2006 and December 30, 2005
        included $11.9 million and $9.4 million, respectively, of contract retentions,
        which are not expected to be collected within one year. Subcontracts payable
        at
        December 29, 2006 and December 30, 2005, included $6.8 million and $3.9 million,
        respectively, of retentions payable which are not expected to be paid within
        one
        year. Billings in excess of cost and estimated earnings on uncompleted contracts
        contain amounts that, depending on contract performance, resolution of US
        government contract audits, negotiations, change orders, claims or changes
        in
        facts and circumstances, may not require payment within one year.
 
 ***Cash
        and cash equivalents***
 
 Cash
        and
        cash equivalents consist of liquid securities with remaining maturities of
        three
        months or less at the date of acquisition that are readily convertible into
        known amounts of cash.
 
 ***Restricted
        cash***
 
 As
        of
        December 29, 2006 and December 30, 2005, we had $65.5 million and $52.5 million,
        respectively, of restricted cash. Restricted cash consists primarily of cash
        restricted for use in the normal operations of our consolidated joint ventures,
        by projects having contractual cash restrictions and by our self-insurance
        program.
  II-47
  
 ***Accounts
        and unbilled receivables***
 
 Accounts
        receivable at December 29, 2006 and December 30, 2005 include allowances
        for
        doubtful accounts of $6.7 million and $5.8 million, respectively. Unbilled
        receivables represent costs incurred under contracts in process that have
        not
        yet been invoiced to customers and arise from the use of the
        percentage-of-completion method of accounting, cost reimbursement-type contracts
        and the timing of billings. Substantially all unbilled receivables at December
        29, 2006 are expected to be billed and collected within one year.
 
 ***Credit
        risk concentration***
 
 By
        policy, we limit the amount of credit exposure to any one financial institution
        and place investments with financial institutions evaluated as highly
        creditworthy. At December 29, 2006, billed and unbilled receivables from
        the
        Department of Energy and the Department of Defense totaled $272.6 million.
        Concentrations of credit risk with respect to other accounts receivable and
        unbilled receivables are believed to be limited due to the number,
        diversification and character of the obligors and our credit evaluation process.
        Typically, we have not required collateral for such obligations, but we may
        place liens against property, plant or equipment constructed if a default
        occurs.
 
 ***Goodwill
        and other intangible assets***
 
 Goodwill
        and other intangible assets are subject to annual impairment tests pursuant
        to
        Statement of Financial Accounting Standards (“SFAS”) No. 142, *Goodwill and Other Intangible Assets* .
        Effective February 1, 2002, in conjunction with fresh-start reporting, we
        used
        the purchase method of accounting to allocate our reorganization value to
        our
        net assets, with the excess recorded as goodwill on the basis of estimates
        of
        fair value. For income tax purposes, we had tax deductible goodwill in excess
        of
        financial statement goodwill and net operating loss (“NOL”) carryovers for which
        a valuation allowance was established in fresh-start reporting. As realization
        of the income tax benefits related to the tax goodwill amortization and NOL
        carryovers has become probable, the valuation allowance has been reduced
        and the
        resulting tax benefit has been recorded as a reduction to financial statement
        goodwill. During 2006, the reorganization goodwill has been reduced to zero.
        The
        remaining goodwill as of December 29, 2006 of $97.1 million was recorded
        in
        connection with the acquisition of the Government Services Business and relates
        to our Defense and Energy & Environmental business units. Intangible assets
        of $23.5 million are included in other assets as of December 29, 2006 and
        consist of minority interest in certain contracts and customer related
        intangibles acquired from BNFL (see Note 14). These intangible assets are
        being
        amortized over estimated useful lives ranging from seven to eight years.
 
 ***Property
        and equipment***
 
 Property
        and equipment was stated at estimated fair value as of February 1, 2002.
        Subsequent major renewals and improvements are capitalized at cost, while
        maintenance and repairs are expensed when incurred. Depreciation of construction
        and mining equipment is provided based on the straight-line and accelerated
        methods, after an allowance for estimated salvage value, over estimated lives
        of
        2 to 10 years. Depreciation of buildings is provided based on the straight-line
        method over estimated lives of 10 to 15 years, and improvements are amortized
        over the shorter of the asset life or lease term. Depreciation of equipment
        is
        provided based on the straight-line method over estimated lives of 3 to 12
        years. Upon disposition, cost and related accumulated depreciation of property
        and equipment are removed from the accounts, and the gain or loss is reflected
        in results of operations.
 
 ***Billings
        in excess of cost and estimated earnings on uncompleted
        contracts***
 
 Billings
        in excess of cost and estimated earnings on uncompleted contracts represent
        amounts actually billed to clients, and perhaps collected, in excess of costs
        incurred and profits recognized on a project. Also, we occasionally negotiate
        advance payments as a contract condition. These advance payments are reflected
        in billings in excess of cost and estimated earnings on uncompleted contracts.
        Provisions for losses on contracts, reclamation
  II-48
  reserves
        on mining contracts and reserves for punch-list costs, demobilization and
        warranty costs on contracts that have achieved substantial completion and
        reserves for audit and contract closing adjustments on US government contracts
        are also included in billings in excess of cost and estimated earnings on
        uncompleted contracts. The following table summarizes the components of billings
        in excess of cost and estimated earnings on uncompleted contracts.
 
 *(In
                  thousands)*
              
              **December
                  29, 2006**
              
              **December
                  30, 2005**Billings
                  in excess of cost and estimated earnings on uncompleted
                  contracts
              
              $
              47,556
              
              $
              92,298Estimated
                  costs to complete long-term contracts
              
              
              12,751
              
              
              21,192Net
                  liabilities of construction joint ventures
              
              
              48,782
              
              
              72,366Other
                  reserves
              
              
              43,020
              
              
              53,250$
              152,109
              
              $
              239,106
 
 The
        caption “Net liabilities of construction joint ventures” above represents our
        share of unconsolidated construction joint ventures that had an excess of
        liabilities over assets primarily due to accrued contract losses.(see Note
        4).
 
 ***Self-insurance
        reserves***
 
 Self-insurance
        reserves represent reserves established through a program under which we
        self-insure certain business risks. We carry substantial premium-paid,
        traditional insurance for our various business risks; however, we self-insure
        the lower level deductibles for workers’ compensation and general, automobile
        and professional liability. Our total self-insurance reserves at December
        29,
        2006 and December 30, 2005 were $81.4 million and $79.2 million, respectively.
        The current portion of the self-insurance reserves of $13.0 million and $12.3
        million at December 29, 2006 and December 30, 2005, respectively, is included
        in
        other accrued liabilities.
 
 ***Foreign
        currency translation***
 
 The
        functional currency for foreign operations is generally the local currency.
        Translation of assets and liabilities to US dollars is based on exchange
        rates
        at the balance sheet date. Translation of revenue and expenses to US dollars
        is
        based on the average rate during the period. Translation gains or losses,
        net of
        income tax effects, are reported as a component of other comprehensive income
        (loss), except for translation gains or losses related to short-term duration
        construction and engineering projects which are recognized currently. Gains
        or
        losses from foreign currency transactions are included in results of operations.
 
 ***Income
        taxes***
 
 Deferred
        income tax assets and liabilities are recognized for the effects of temporary
        differences between the carrying amounts and the income tax basis of assets
        and
        liabilities using enacted tax rates. A valuation allowance is established
        when
        it is more likely than not that net deferred tax assets will not be realized.
        Tax credits are generally recognized in the year they arise.
 
 ***Income
        per share***
 
 Basic
        income per share is computed by dividing net income by the weighted-average
        number of common shares outstanding during the period. Diluted income per
        share
        is computed similar to basic income per share except that it reflects the
        potential dilution from dilutive common stock equivalents using the treasury
        stock method. Outstanding common stock equivalents primarily consist of options
        and warrants to purchase common stock and restricted stock (see Note 13).
        During
        the years ended December 29, 2006, December 30, 2005 and December 31, 2004,
        the
        weighted average number of anti-dilutive outstanding options and restricted
        stock excluded from the computation of diluted earnings per share was 240,000,
        109,000 and 588,000, respectively.
  II-49
  A
        reconciliation between weighted average shares outstanding used in calculating
        basic and diluted income per share is as follows:
 
 *(In
                  thousands)*
              
              **Year
                  Ended**
                **December
                  29, 2006**
              
              **Year
                  Ended**
                **December
                  30, 2005**
              
              **Year
                  Ended**
                **December
                  31, 2004**Basic
                  weighted average shares outstanding
              
              
              28,605
              
              
              26,037
              
              
              25,281Effect
                  of dilutive securities:Stock
                  options
              
              
              1,718
              
              
              1,642
              
              
              1,391Stock
                  warrants
              
              
              120
              
              
              2,677
              
              
              1,210Restricted
                  shares and other
              
              
              165
              
              
              52
              
              
              8Diluted
                  weighted average shares outstanding
              
              
              30,608
              
              
              30,408
              
              
              27,890
 
 ***Stock-based
        compensation***
 
 As
        discussed further in Note 13, we adopted SFAS No. 123 (Revised), *Share-Based
        Payment* (“SFAS
        No. 123(R)”), effective December 31, 2005 using the modified retrospective
        application method. As a result, the accompanying consolidated financial
        statements and notes as of December 30, 2005 and for the years ended December
        30, 2005 and December 31, 2004 have been adjusted to reflect the expensing
        of
        stock options based upon fair value as prescribed by SFAS No.
        123(R).
 
 We
        estimate the fair value of options granted using the Black-Scholes option
        pricing model. The assumptions used in computing the fair value of share-based
        payments reflect our best estimates, but involve uncertainties relating to
        market and other conditions, many of which are outside of our control. We
        estimate expected volatility based on historical daily price changes of our
        stock for a period that approximates the current expected term of the options.
        The expected option term is the number of years we estimate that options
        will be
        outstanding prior to exercise considering vesting schedules and our historical
        exercise patterns. If other assumptions or estimates had been used, the
        stock-based compensation expense that was recorded for the periods presented
        could have been materially different. Furthermore, if different assumptions
        are
        used in future periods, stock-based compensation expense could be materially
        impacted in the future.
 
 ***Supplemental
        cash flows***
 
 The
        following table provides supplemental cash flow information to the accompanying
        consolidated statements of cash flows:
 
 *(In
                  thousands)*
              
              **Year
                  Ended**
                **December
                  29,**
                **2006**
              
              **Year
                  Ended**
                **December
                  30,**
                **2005**
              
              **Year
                  Ended**
                **December
                  31,**
                **2004****Supplemental
                  cash flow information**Interest
                  paid
              
              $
              3,858
              
              $
              7,255
              
              $
              12,121Income
                  taxes paid, net
              
              
              4,043
              
              
              4,641
              
              
              7,411Settlement
                  payments related to tax audits of prior
                periods
              
              
              7,232
              
              
              6,406
              
              
              ─**Supplemental
                  non-cash investing activities**Adjustments
                  to investment in foreign subsidiaries for
                cumulative
                  translation adjustments, net of income
                taxes
              
              $
              6,569
              
              $
              (15,568
              )
              $
              9,348
 
 ***Reclassifications***
 
 The
        accompanying consolidated financial statements reflect the reclassification
        of
        the current portion of pension and post-retirement benefit obligations of
        $7.0
        million and $7.3 million as of December 30, 2005 and December 31, 2004,
        respectively, to accrued salaries, wages and benefits to conform to the 2006
        presentation. The reclassification did not impact previously reported revenue,
        net income, total assets, total liabilities, stockholders’ equity or cash
        flows.
  II-50
  **3.**  **ACCOUNTING
        STANDARDS**
 
 ***Recently
        issued accounting standards***
 
 In
        July
        2006, the Financial Accounting Standards Board (“FASB”) issued FASB
        Interpretation No. 48 (“FIN 48”), *Accounting
        for Uncertainty in Income Taxes* ,
        an
        interpretation of FASB Statement No. 109, A *ccounting
        for Income Taxes.* FIN 48
        prescribes a more likely than not recognition threshold for financial statement
        recognition and measurement of a tax position taken or expected to be taken
        in a
        tax return and also provides guidance on various related matters such as
        derecognition, interest and penalties, and disclosure. FIN 48 is effective
        for
        our fiscal year 2007 and interim periods within fiscal 2007. The cumulative
        effect of applying FIN 48 will be recorded as an adjustment to retained earnings
        as of December 30, 2006. We are currently evaluating the impact of adopting
        FIN
        48 in the first quarter of 2007.
 
 In
        September 2006, the FASB issued SFAS No. 157 ,*Fair
        Value Measurements*.
        SFAS
        No. 157 clarifies the principle that fair value should be based on the
        assumptions market participants would use when pricing an asset or liability
        and
        establishes a fair value hierarchy that prioritizes the information used
        to
        develop those assumptions. Under the standard, fair value measurements would
        be
        separately disclosed by level within the fair value hierarchy. SFAS No. 157
        is effective for our fiscal year 2008 and interim periods within fiscal 2008,
        with early adoption permitted. We are currently evaluating the impact, if
        any,
        that SFAS No.157
        will
        have on our financial statements.
 
 ***Adoption
        of accounting standards***
 
 In
        September 2006, the FASB issued SFAS No. 158, *Employers’
        Accounting for Defined Benefit Pension and Other Postretirement
        Plans* .
        SFAS
        No. 158 requires employers to recognize the overfunded or underfunded status
        of
        a defined benefit pension or postretirement plan as an asset or liability
        in its
        statement of financial position, recognize changes in that funded status
        in the
        year in which the changes occur through comprehensive income and measure
        a
        plan’s assets and its obligations that determine its funded status as of the end
        of the employer’s fiscal year. The provisions of SFAS No. 158 are generally
        effective for the year ended December 29, 2006 with certain provisions not
        being
        required until 2008. See Note 8 for disclosure of the impact of adopting
        SFAS
        No. 158.
 
 In
        September 2006, the Securities and Exchange Commission issued Staff Accounting
        Bulletin (“SAB”) No. 108 which provides interpretive guidance on how the effects
        of the carryover or reversal of prior year misstatements should be considered
        in
        quantifying a current year misstatement. SAB No. 108 is effective for the
        year
        ended December 29, 2006. The adoption of SAB No. 108 did not have an impact
        on
        our financial statements.
  In
        the
        mining industry, companies may be required to remove overburden and waste
        materials to access mineral deposits. The costs of removing overburden and
        waste
        materials are referred to as “stripping costs.” MIBRAG incurs significant
        stripping costs in its lignite coal mining operations. MIBRAG’s mines are open
        pit mines, which cover several square miles and have an estimated remaining
        life
        of 40 or more years. Because of the mining procedures used, MIBRAG generally
        does not maintain any significant inventory of mined coal. In March 2005,
        the
        Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 04-6, *Accounting
        for Stripping Costs Incurred during Production in the Mining
        Industry* .
        The
        EITF concluded that stripping costs incurred during the production phase
        of a
        mine are variable production costs that should be included in the cost of
        inventory produced during the period that stripping costs are incurred. We
        were
        required to adopt EITF No. 04-6 in the first quarter of 2006. EITF No. 04-6
        provides that any adjustment from adoption be recognized as a cumulative
        effect
        adjustment to beginning retained earnings in the period of adoption. Based
        upon
        MIBRAG’s deferred stripping costs recorded as of December 30, 2005, the adoption
        of EITF No. 04-6 resulted in a reduction of our investments in unconsolidated
        affiliates and a reduction of total stockholders’ equity of $83.2 million and
        $54.1 million, respectively. We also recorded a cumulative effect adjustment
        of
        $0.5 million related to another mining venture.
   II-51
  Under
        EITF No. 04-6, costs of removing overburden are now expensed in the period
        incurred. The execution of MIBRAG’s mine plans may result in fiscal periods
        during which costs incurred for the removal of overburden will not bear a
        direct
        relationship to the revenue derived from the sale of coal. This may result
        in a
        degree of variability in the future reported earnings of MIBRAG. During the
        year
        ended December 29, 2006, equity in income of unconsolidated affiliates increased
        $2.0 million due to the change in accounting for stripping costs as compared
        to
        the prior method of deferring stripping costs and expensing as the associated
        coal deposit was extracted and sold.
 
 In
        June
        2005, the FASB ratified the consensus reached in EITF Issue No. 05-5, *Accounting
        for Early Retirement or Post-employment Programs with Specific Features (Such
        as
        Terms Specified in Altersteilzeit Early Retirement
        Arrangements)* .
        EITF
        No. 05-5 addresses the timing of recognition of salaries, bonuses and additional
        pension contributions associated with certain early retirement arrangements
        typical in Germany (as well as similar programs). The EITF also specified
        the
        accounting for government subsidies related to these arrangements. The effect
        of
        applying EITF No. 05-5 was to be recognized prospectively as a change in
        accounting estimate effected by a change in accounting principle under SFAS
        No.
        154, *Accounting
        Changes and Error Corrections - a Replacement of APB Opinion No. 20 and FASB
        Statement No. 3.* MIBRAG
        provides early retirement arrangements to its employees pursuant to a program
        designed by the German government. Prior to EITF No. 05-5, the additional
        compensation related to the early retirement program had been accrued and
        expensed at the time an employee elected to participate. However, EITF No.
        05-5
        requires that the additional compensation be recognized ratably over the
        employee’s remaining service period. Accordingly, the adoption of EITF No. 05-5
        in the first quarter of 2006 increased MIBRAG’s earnings as the prior accruals
        were reversed, resulting in a $2.1 million increase in our equity in earnings
        of
        MIBRAG.
 
 In
        December 2004, the FASB issued SFAS No. 123(R), replacing SFAS No. 123 and
        superseding Accounting Principles Board (“APB”) Opinion No. 25, *Accounting
        for Stock Issued to Employees* .
        We were
        required to adopt the fair value method prescribed by SFAS No. 123(R) in
        the
        first quarter of 2006. See Note 13 for disclosure of the impact of adopting
        SFAS
        No. 123(R).
 
 **4.**
            **VENTURES** 
 ***Construction
        joint ventures***
 
 We
        participate in unconsolidated construction joint ventures that are formed
        to
        bid, negotiate and complete specific projects. The unconsolidated construction
        joint ventures are reflected in our consolidated balance sheets as investments
        in and advances to construction joint ventures accounted for under the equity
        method, and our proportionate share of revenue, cost of revenue and gross
        profit
        is included in our consolidated statements of income. The size, scope and
        duration of construction joint venture projects vary among periods. The tables
        below present the financial information of our unconsolidated construction
        joint
        ventures in which we do not hold a controlling interest but do exercise
        significant influence. At December 29, 2006 and December 30, 2005, $48.8
        million
        and $72.4 million, respectively, was included in our consolidated balance
        sheet
        under the caption “Billings in excess of cost and estimated earnings on
        uncompleted contracts,” representing our share of the excess of liabilities over
        assets primarily due to accrued contract losses of unconsolidated construction
        joint ventures.
 
 **Combined
                  financial position of**
                **unconsolidated
                  construction joint ventures**
                *(In
                  thousands)*
              
              **December
                  29, 2006**
              
              **December
                  30, 2005**Current
                  assets
              
              $
              299,722
              
              $
              298,935Property
                  and equipment, net
              
              
              7,734
              
              
              9,582Current
                  liabilities
              
              
              (322,414
              )
              
              (353,728
              )Net
                  liabilities
              
              $
              (14,958
              )
              $
              (45,211
              )
 
  II-52
  
 **Combined
                  results of operations of**
                **unconsolidated
                  construction joint ventures**
                *(In
                  thousands)*
              
              **Year
                  Ended**
                **December
                  29, 2006**
              
              **Year
                  Ended**
                **December
                  30, 2005**
              
              **Year
                  Ended**
                **December
                  31, 2004**Revenue
              
              $
              1,056,658
              
              $
              1,060,782
              
              $
              704,729Cost
                  of revenue
              
              
              (1,061,321
              )
              
              (1,153,194
              )
              
              (716,755
              )Gross
                  profit (loss)
              
              $
              (4,663
              )
              $
              (92,412
              )
              $
              (12,026
              )
 
 **Washington
                  Group International’s share of**
                **results
                  of operations of unconsolidated**
                **construction
                  joint ventures**
                *(In
                  thousands)*
              
              **Year
                  Ended**
                **December
                  29, 2006**
              
              **Year
                  Ended**
                **December
                  30, 2005**
              
              **Year
                  Ended**
                **December
                  31, 2004**Revenue
              
              $
              485,812
              
              $
              477,138
              
              $
              281,890Cost
                  of revenue
              
              
              (497,529
              )
              
              (522,233
              )
              
              (294,367
              )Gross
                  profit (loss)
              
              $
              (11,717
              )
              $
              (45,095
              )
              $
              (12,477
              )
 
 Beginning
        in 2004, contract losses have been recognized by a construction joint venture
        in
        which we have a 50 percent interest on a $390.6 million fixed-price roadway
        interchange and bridge project. Through December 29, 2006, we have recorded
        a
        total of $134.6 million of contract losses on this project. The losses have
        resulted from various developments including final design and other customer
        specifications, state regulatory agency requirements, material quantity and
        cost
        growth, higher subcontractor and labor costs, and impacts from schedule delays.
        During the year ended December 29, 2006, charges of $34.6 million were recorded
        as compared to $72.5 million during the year ended December 30, 2005 and
        $27.5
        million during the year ended December 31, 2004. The contract is approximately
        71 percent complete, measured on a cost-to-cost basis, and is scheduled to
        be
        complete in 2007.
 
 To
        date,
        only a small portion of the cost increases have been agreed to with the
        customers and acknowledged with change orders.  Pending
        change orders and claims submitted to the customers total approximately $99.7
        million (of which our share is $49.9 million), an additional $35.6 million
        are
        in process (of which our share is $17.8 million) and we believe more are
        to
        follow. In response to our claims, one of the customers has filed certain
        counter claims against us. We believe that we will realize significant
        recoveries once the claim process is completed. Because we have not been
        able to
        reach agreement on the change orders and claims, recoveries will be recognized
        only when it is probable they will result in additional revenue and the amounts
        can be reliably estimated. While the entire amount of the current estimated
        loss
        has been recognized, actual results may differ from our estimates.
 
 Pursuant
        to the fixed-price agreement, the joint venture is liable for specified
        liquidated damages to the customers if certain project schedule milestones
        are
        not met. Based on schedule delays to date, the liquidated damages could amount
        to approximately $28.0 million, of which our share would be $14.0 million.
        No
        potential liquidated damages have been included in the current estimated
        contract loss because we believe it is unlikely any liquidated damages will
        be
        owed once schedule relief for customer directed changes has been
        determined.
 
 ***Unconsolidated
        affiliates***
 
 At
        December 29, 2006 and December 30, 2005, we held ownership interests in
        unconsolidated affiliates that are accounted for under the equity method,
        the
        most significant of which are two incorporated mining ventures: MIBRAG (50
        percent) and Westmoreland Resources (20 percent). We provide consulting services
        to MIBRAG and contract mining services to Westmoreland Resources. The tables
        below present the financial information of our unconsolidated affiliates
        in
        which we do not hold a controlling interest but do exercise significant
        influence.
  II-53
  
 **Combined
                  financial position of unconsolidated affiliates**
                *(In
                  thousands)*
              
              **December
                  29, 2006**
              
              **December
                  30, 2005**Current
                  assets
              $
              153,581
              
              $
              156,537Property
                  and equipment, net
              
              608,454
              
              
              530,140Other
                  non-current assets
              
              433,418
              
              
              622,217Current
                  liabilities
              
              (92,507
              )
              
              (88,710
              )Long-term
                  debt, non-recourse to parents
              
              (201,684
              )
              
              (225,512
              )Other
                  non-current liabilities
              
              (653,750
              )
              
              (648,085
              )Net
                  assets
              $
              247,512
              
              $
              346,587**Combined
                  results of operations of**
                **unconsolidated
                  affiliates**
                *(In
                  thousands)*
              
              
              **Year
                  Ended**
                **December
                  29, 2006**
              
              
              **Year
                  Ended**
                **December
                  30, 2005**
              
              
              **Year
                  Ended**
                **December
                  31, 2004**Revenue
              
              $
              592,352
              
              $
              481,632
              
              $
              457,219Costs
                  and expenses
              
              
              (498,181
              )
              
              (420,843
              )
              
              (401,182
              )Gross
                  profit
              
              $
              94,171
              
              $
              60,789
              
              $
              56,037
  As
        disclosed in Note 3, effective December 31, 2005, MIBRAG adopted EITF No.
        04-6
        and $166.3 million of deferred stripping costs which were classified as other
        non-current assets as of December 30, 2005 in the above table were written
        off.
 
 **5.**  **GOODWILL**
 
 The
        following table reflects the changes in the carrying value of goodwill from
        December 31, 2004 to December 29, 2006. We have reduced goodwill as a result
        of
        amortization of the excess of tax deductible goodwill over financial statement
        goodwill, and for actual and forecast usage of pre-reorganization NOL
        carryovers. In 2006, our goodwill recorded in connection with our reorganization
        was reduced to zero as a result of a decrease in the deferred income tax
        valuation allowance. In addition, as disclosed in Note 10, certain operations
        were transferred among business units during 2004. Goodwill was also impacted
        by
        the transactions completed with BNFL in 2005 as discussed in Note
        14.
 
 **Goodwill
                  activity by**
                **reporting
                  segment**
              
              **Power**
              
              **Industrial/**
                **Process**
              
              **Infrastructure**
              
              **Mining**
              
              **Defense**
              
              **Energy
                  &**
                **Environment**
              
              **Total**Balance
                  at December 31, 2004
              
              $
              12,659
              
              $
              57,932
              
              $
              36,131
              
              $
              ─
              
              $
              31,866
              
              $
              169,229
              
              $
              307,817Reorganization
                  of reporting
                structure
              
              
              1,908
              
              
              794
              
              
              (2,613
              )
              
              ─
              
              
              (89
              )
              
              ─
              
              
              ─Adjustment
                  for amortization of
                tax
                  goodwill and utilization
                of
                  NOL’s and reduction of
                tax
                  contingency liability
              
              
              (2,490
              )
              
              (33,719
              )
              
              (20,247
              )
              
              ─
              
              
              (11,494
              )
              
              (13,765
              )
              
              (81,715
              )Impact
                  of BNFL acquisition
              
              
              ─
              
              
              ─
              
              
              ─
              
              
              ─
              
              
              (1,152
              )
              
              (62,680
              )
              
              (63,832
              )Balance
                  at December 30, 2005
              
              
              12,077
              
              
              25,007
              
              
              13,271
              
              
              ─
              
              
              19,131
              
              
              92,784
              
              
              162,270Adjustment
                  for amortization of
                tax
                  goodwill and utilization
                of
                  NOL’s
              
              
              (12,077
              )
              
              (25,007
              )
              
              (13,271
              )
              
              ─
              
              
              (7,437
              )
              
              (7,402
              )
              
              (65,194
              )Balance
                  at December 29, 2006
              
              $
              ─
              
              $
              ─
              
              $
              ─
              
              $
              ─
              
              $
              11,694
              
              $
              85,382
              
              $
              97,076
 
 We
        perform our annual goodwill impairment test as of the end of October in
        conjunction with our annual budgeting and forecasting process. There has
        been no
        goodwill impairment during the years ended December 29, 2006, December 30,
        2005
        and December 31, 2004.
  II-54
  **6.**  **CREDIT
        FACILITY**
 
 We
        have a
        Senior Secured Revolving Credit Facility (the "Credit Facility") that provides
        for up to $350.0 million in the aggregate of loans and other financial
        accommodations. Previously, the Credit Facility consisted of a tranche A
        facility of $247.5 million and a tranche B facility of $102.5 million.
        Borrowings and letters of credit were allocated, pro rata, between tranche
        A and
        tranche B. On July 5, 2006, we restructured the Credit Facility resulting
        in an
        increase in the size of the tranche A facility to $350.0 million and the
        elimination of the tranche B facility. The maturity date of June 14, 2010
        did
        not change and the terms of tranche A remained the same. The tranche A borrowing
        rate is LIBOR plus an additional margin of 2.00 percent or, at our option,
        prime
        plus an additional margin of 1.00 percent, subject in each case to a 0.25
        percent reduction upon our obtaining a specified long-term debt rating. The
        borrowing rate for tranche B was LIBOR plus an additional margin of 1.75
        percent
        or, at our option, prime plus an additional margin of 0.75 percent. As of
        December 29, 2006, the effective one month LIBOR borrowing rate was 7.33
        percent
        and as of December 30, 2005, the effective borrowing rate was 6.39 percent
        for
        tranche A and 6.14 percent for tranche B. As a result of the restructuring,
        $5.1
        million of deferred financing fees were written off in 2006.
 
 The
        Credit Facility also provides for other fees, including commitment and letter
        of
        credit fees, normal and customary for such credit agreements. Letter of credit
        fees are calculated using the applicable LIBOR margins stated above plus
        an
        issuance fee that is negotiated with the issuing bank. Commitment fees are
        calculated on the remaining borrowing capacity after subtracting any outstanding
        borrowings and letters of credit. The tranche A commitment fee is 0.50 percent
        (subject to a 0.25 percent reduction upon our obtaining a specified long-term
        debt rating) and the commitment fee for tranche B was 1.75 percent. As of
        December 29, 2006, $124.5 million in face amount of letters of credit were
        issued and outstanding and no borrowings were outstanding leaving a borrowing
        capacity of $225.5 million under the Credit Facility.
 
 The
        Credit Facility contains financial covenants requiring the maintenance of
        specified financial and operating ratios, and specified events of default
        that
        are typical for a credit facility of this size, type and tenor. The Credit
        Facility also contains covenants that limit our ability and the ability of
        some
        of our subsidiaries to incur debt, grant liens, provide guarantees, make
        investments, merge with or acquire other companies and pay dividends. As
        of
        December 29, 2006, we were in compliance with all of the financial covenants
        under the Credit Facility. The Credit Facility is secured by substantially
        all
        of the assets of Washington Group International and our wholly owned domestic
        subsidiaries.
 
 As
        a
        result of an amendment to the Credit Facility in June 2005, $3.6 million
        of
        deferred financing fees were written off during 2005.
 
 **7.**  **TAXES
        ON INCOME**
 
 The
        components of the US federal, state and foreign income tax expense (benefit)
        were as follows:
 
 **Year
                  Ended**
                **December
                  29, 2006**
              
              **Year
                  Ended**
                **December
                  30, 2005**
              
              **Year
                  Ended**
                **December
                  31, 2004**Currently
                  payable:US
                  federal
              
              $
              ─
              
              $
              661
              
              $
              611State
              
              
              1,024
              
              
              (216
              )
              
              548Foreign
              
              
              5,103
              
              
              4,575
              
              
              3,629Total
                  current expense
              
              
              6,127
              
              
              5,020
              
              
              4,788Deferred:US
                  federal
              
              
              23,734
              
              
              25,469
              
              
              35,607State
              
              
              732
              
              
              (3,636
              )
              
              4,154Foreign
              
              
              (3
              )
              
              168
              
              
              (7,306
              )Total
                  deferred expense
              
              
              24,463
              
              
              22,001
              
              
              32,455Income
                  tax expense
              
              $
              30,590
              
              $
              27,021
              
              $
              37,243
 
  II-55
  
 The
        components of the deferred tax assets and liabilities and the related valuation
        allowances were as follows:
 
 **Deferred
                  tax assets and liabilities**
              
              **December
                  29, 2006**
              
              **December
                  30, 2005**Deferred
                  tax assets:Goodwill
              
              $
              42,411
              
              $
              21,075Compensation
                  and benefits
              
              
              114,502
              
              
              95,167Depreciation
              
              
              3,559
              
              
              3,127Provision
                  for losses
              
              
              19,301
              
              
              34,493Joint
                  ventures
              
              
              27,272
              
              
              29,514Revenue
                  recognition
              
              
              2,327
              
              
              1,652Self-insurance
                  reserves
              
              
              36,361
              
              
              36,147Alternative
                  minimum tax
              
              
              16,601
              
              
              16,817Foreign
                  tax credits
              
              
              41,811
              
              
              22,557Net
                  operating loss carryovers
              
              
              133,460
              
              
              135,981Valuation
                  allowances
              
              
              (76,654
              )
              
              (107,949
              )Other,
                  net
              
              
              12,316
              
              
              9,811Total
                  deferred tax assets
              
              
              373,267
              
              
              298,392Deferred
                  tax liability:
                Investment
                  in affiliates
              
              
              (38,685
              )
              
              (48,069
              )Total
                  deferred tax assets, net
              
              $
              334,582
              
              $
              250,323
 
 As
        of
        December 29, 2006, we have remaining tax goodwill of $519.0 million resulting
        from prior acquisitions. The amortization of this goodwill is deductible
        over
        remaining periods ranging from 7.2 to 8.5 years. The annual tax amortization
        will be $62.1 million for the next 7 years and decrease thereafter. At December
        29, 2006, we had federal NOL carryovers of $151.9 million, most of which
        is
        subject to an annual limitation of $26.5 million. The federal NOL carryovers
        expire in years 2020 through 2026. We also have foreign NOL carryovers of
        $192.5
        million, most of which are not subject to expiration. The foreign NOL carryovers
        primarily consist of losses incurred on two construction projects in the
        United
        Kingdom which were acquired as part of the RE&C acquisition. We also have
        $10.4 million of foreign tax credits that expire in years 2009 through 2016
        and
        $31.4 million of foreign tax credits which currently have no expiration date.
 
 The
        $76.7
        million of valuation allowances reduce the deferred tax assets associated
        with
        NOL carryovers to a level which will, more likely than not, be realized based
        on
        estimated future taxable income. As the NOL is used against taxable income
        or
        the valuation allowance is no longer considered necessary, the valuation
        allowance will be reduced, substantially all of which will result in a
        corresponding increase to equity. During 2005 and 2006, based on actual and
        forecasted utilization of NOL carryovers the valuation allowance was decreased
        by $27.9 million and $30.0 million, respectively. The tax effect of the change
        resulted in an additional $17.8 million deferred tax asset in 2005 and $16.0
        million in 2006. The combined amounts of $45.7 million and $46.0 million
        were
        recorded as reductions to goodwill in 2005 and 2006 until reorganization
        goodwill was reduced to zero then the remaining $3.8 million was recorded
        as an
        increase to equity in 2006 in accordance with SOP 90-7 *,
        Financial Reporting by Entities in Reorganization Under the Bankruptcy
        Code* .
        During
        these years, the valuation allowance also had minor adjustments due to foreign
        currency translation and changes in utilization estimates.
 
 Years
        prior to 2002 are closed to examination for federal tax purposes. We have
        evaluated the available evidence about both asserted and unasserted income
        tax
        contingencies in our income tax returns filed with the Internal Revenue Service,
        state, local and foreign tax authorities. We have recorded $1.0 million for
        income tax contingencies that represents our estimate of the amount that
        is
        probable and estimable of being payable, if successfully challenged by such
        tax
        authorities, under the provisions of SFAS No. 5, *Accounting
        for Contingencies* .
        During
        2005, we paid $6.4 million in settlement with the Internal Revenue Service
        on
        disputes involving tax years 1994 through 1997. During 2006, we made an interest
        payment of $7.0 million to the Internal Revenue Service on disputes involving
        these same tax years. We have not received either written or oral tax opinions
        that are contrary to our assessment of the recorded income tax provision
        and
        income tax contingency accrual. In January 2007, we received notice from
        the
        Internal Revenue Service of a proposed adjustment to a deduction claimed
        in
        2002. We believe the deduction was
  II-56
  proper
        and have disputed the Internal Revenue Service's position. However, upon
        adotion
        of FIN 48 in the first quarter of 2007, we may have a cumulative effect
        adjustment related to this matter that would be recorded as an adjustment
        to
        retained earnings.
  Income
        tax expense
        (benefit) differed from income taxes at the US federal statutory tax rate
        of
        35.0 percent as follows:
 
 **Year
                  Ended**
                **December
                  29, 2006**
              
              **Year
                  Ended**
                **December
                  30, 2005**
              
              **Year
                  Ended**
                **December
                  31, 2004**Federal
                  statutory tax rate
              
              
              35.0
              %
              
              35.0
              %
              
              35.0
              %State
                  taxes, net of federal benefit
              
              
              1.0
              
              
              (3.1
              )
              
              3.1Nondeductible
                  items
              
              
              0.9
              
              
              2.7
              
              
              2.1Domestic
                  reinvestment plan
              
              
              ─
              
              
              (4.3
              )
              
              ─Foreign
                  taxes
              
              
              (10.2
              )
              
              1.0
              
              
              (3.0
              )Effective
                  tax rate
              
              
              26.7
              %
              
              31.3
              %
              
              37.2
              %
 
 Income
        from work performed in the Middle East is generally not subject to state
        income
        tax. As a result of the amount of work in the Middle East during 2006 and
        2005,
        the state tax effective rates were substantially lower. Also, in preparing
        the
        state income tax returns for 2004, we revised our estimate of the impact
        of
        foreign earnings not subject to state income taxes. The result of this change
        in
        estimate was a $2.0 million tax benefit recorded in the year ended December
        30,
        2005. Non-deductible items were principally comprised of non-deductible
        reorganization expenses, lobbying expenses, and the non-deductible portion
        of
        meals and entertainment expenses.
 
 During
        the year ended December 30, 2005, we implemented a domestic reinvestment
        plan
        for dividends received from our interest in MIBRAG. The plan allowed us to
        take
        advantage of a temporary dividend received deduction and generated a $3.8
        million tax benefit.
 
 The
        2006
        foreign tax rate reflects the recognition of $15.9 million of tax benefits
        primarily associated with foreign tax credits and losses of foreign
        subsidiaries. Based on estimated future taxable income, during 2006 we
        determined that i) the utilization of all federal NOL carryovers is more
        likely
        than not and accordingly the related valuation allowance was reduced to zero;
        and ii) foreign taxes previously treated as deductions can now be utilized
        as
        tax credits resulting in additional tax benefits. Approximately $5.1 million
        of
        the recognized tax benefits relate to foreign taxes paid in 2006 and foreign
        subsidiary losses deductible in 2006. The remaining $10.8 million relates
        to
        foreign taxes paid in prior years.
 
 The
        US
        government ratified the protocol modifying the income tax treaty between
        the US
        and the Netherlands in December 2004. The protocol eliminates the 5 percent
        Netherlands withholding tax on dividends from Netherlands subsidiaries received
        after February 1, 2005. The net impact of the elimination of the Netherlands
        withholding tax on future dividends was a reduction in our deferred tax
        liability of $3.6 million, which decreased income tax expense for the year
        ended
        December 31, 2004.
 
 Income
        before reorganization items, income taxes and minority interests is comprised
        of
        the following:
 
 **Year
                  Ended**
                **December
                  29, 2006**
              
              **Year
                  Ended**
                **December
                  30, 2005**
              
              **Year
                  Ended**
                **December
                  31, 2004**US
                  source
              
              $
              9,308
              
              $
              (16,395
              )
              $
              8,104Foreign
                  source
              
              
              105,320
              
              
              102,685
              
              
              90,681Income
                  before reorganization items, income
                taxes
                  and minority interests
              
              $
              114,628
              
              $
              86,290
              
              $
              98,785
 
 
 
 
  II-57
  
 
 **8.**  **BENEFIT
        PLANS**
 
 ***Pension
        plans and supplemental retirement plans***
 
 We
        sponsor defined benefit pension plans and unfunded supplemental retirement
        plans, which primarily cover certain groups of current and former employees
        of
        the Government Services Business. We utilize actuarial estimates of the pension
        obligations for financial reporting purposes and make contributions as necessary
        to meet ERISA funding requirements for these plans. Qualified plan assets
        are
        invested in master pension trusts that invest primarily in publicly traded
        common stocks, bonds, government securities and cash equivalents.
 
 Effective
        January 1, 2006, all of the Government Services Business’ employees, excluding
        those employed at US government-owned/contractor-operated sites, were converted
        to the Washington Group International benefits programs. Accordingly, benefits
        provided under the pension plans were frozen effective December 31, 2005.
        Accrued pension benefits are based on pay and service through December 31,
        2005.
        The freezing of benefits under the pension plans resulted in a curtailment
        gain
        of $2.2 million during the year ended December 30, 2005.
 
 We
        use an
        October 31 measurement date for our pension and post-retirement benefit
        plans.
 
 Reconciliation
        of beginning and ending balances of benefit obligations and fair value of
        plan
        assets and the funded status of the pension plans are as follows:
 
 **Change
                  in benefit obligations**
                *(In
                  thousands)*
              
              **Year
                  Ended**
                **December
                  29, 2006**
              
              **Year
                  Ended**
                **December
                  30, 2005**Benefit
                  obligations at beginning of period
              
              $
              86,087
              
              $
              83,128Service
                  cost
              
              
              976
              
              
              5,466Actuarial
                  loss
              
              
              570
              
              
              3,007Interest
                  cost
              
              
              5,156
              
              
              4,782Participant
                  contributions
              
              
              83
              
              
              518Recognition
                  of initial obligation
              
              
              804
              
              
              ─Impact
                  of benefit freeze
              
              
              ─
              
              
              (6,682
              )Benefit
                  payments
              
              
              (4,159
              )
              
              (4,132
              )Benefit
                  obligations at end of period
              
              $
              89,517
              
              $
              86,087
 
 **Change
                  in plan assets**
                *(In
                  thousands)*
              
              **Year
                  Ended**
                **December
                  29, 2006**
              
              **Year
                  Ended**
                **December
                  30, 2005**Fair
                  value of plan assets at beginning of period
              
              $
              26,610
              
              $
              21,073Actual
                  return on plan assets
              
              
              3,456
              
              
              1,462Company
                  contributions
              
              
              10,184
              
              
              7,689Participant
                  contributions
              
              
              83
              
              
              518Benefit
                  payments
              
              
              (4,159
              )
              
              (4,132
              )Fair
                  value of plan assets at end of period
              
              $
              36,174
              
              $
              26,610
 
 **Accrued
                  benefit cost**
                *(In
                  thousands)*
              
              **Year
                  Ended**
                **December
                  29, 2006**
              
              **Year
                  Ended**
                **December
                  30, 2005**Benefit
                  obligations
              
              $
              (89,517
              )
              $
              (86,087
              )Fair
                  value of plan assets
              
              
              36,174
              
              
              26,610Funded
                  status
              
              
              (53,343
              )
              
              (59,477
              )Unrecognized
                  net actuarial loss
              
              
              ─
              
              
              5,492Accrued
                  benefit cost
              
              
              (53,343
              )
              
              (53,985
              )Contributions
                  made after the measurement date
              
              
              692
              
              
              621Accrued
                  benefit cost
              
              $
              (52,651
              )
              $
              (53,364
              )
 
  II-58
  We
        expect
        to contribute $4.6 million to the pension plans in 2007. Pension benefits
        expected to be paid in each of the next five years and in the aggregate for
        the
        next succeeding five years are $4.5 million, $4.7 million, $4.9 million,
        $5.1
        million, $5.3 million and $31.0 million, respectively, at December 29,
        2006.
 The
        components of net pension costs for the plans are as follows:
 
 **Components
                  of net pension costs**
                *(In
                  thousands)*
              
              **Year
                  Ended**
                **December
                  29, 2006**
              
              **Year
                  Ended**
                **December
                  30, 2005**
              
              **Year
                  Ended**
                **December
                  31, 2004**Service
                  cost
              
              $
              976
              
              $
              5,466
              
              $
              4,769Interest
                  cost
              
              
              5,156
              
              
              4,782
              
              
              4,453Expected
                  return on assets
              
              
              (2,309
              )
              
              (1,823
              )
              
              (1,336
              )Recognized
                  net actuarial loss
              
              
              182
              
              
              386
              
              
              175Recognized
                  net initial obligation
              
              
              43
              
              
              ─
              
              
              ─Prior
                  service costs
              
              
              ─
              
              
              (133
              )
              
              ─Net
                  pension costs before curtailment gain
              
              
              4,048
              
              
              8,678
              
              
              8,061Curtailment
                  gain
              
              
              ─
              
              
              (2,224
              )
              
              ─Net
                  pension costs
              
              $
              4,048
              
              $
              6,454
              
              $
              8,061
 
 The
        actuarial assumptions used to determine pension benefit obligations for the
        plans are as follows:
 
 **Year
                  Ended**
                **December
                  29, 2006**
              
              **Year
                  Ended**
                **December
                  30, 2005**Discount
                  rates
              
              
              5.9%
                  to 6.1
              %
              
              5.8%
                  to 5.9
              %Expected
                  return on assets
              
              
              8.0
              %
              
              8.0
              %
 
 Experience
        gains and losses, as well as the effects of changes in actuarial assumptions
        and
        plan provisions, are amortized over the average future service period of
        employees.
 
 To
        determine the overall expected long-term rate of return on assets, we evaluate
        the following: (i) expectations of investment performance based on the specific
        investment policies and strategy for each class of plan assets, (ii) historical
        rates of return for each significant category of plan assets and (iii) other
        relevant market and company specific factors we believe have historically
        impacted long-term rates of return.
 
 Separate
        investment committees manage the assets of the two master trusts, which hold
        the
        plan assets. In accordance with the investment guidelines, the assets of
        the
        funds are invested in a manner consistent with the fiduciary standards of
        the
        Employee Retirement Income Security Act of 1974 (“ERISA”). The investments are
        made solely in the interest of the participants and beneficiaries and for
        the
        exclusive purpose of providing benefits to the participants and their
        beneficiaries. The asset allocation targets for these two master trusts are
        approximately 60 percent in equities and 40 percent in fixed income securities.
        Actual allocation percentages will vary from the target percentages based
        on
        short-term fluctuations in cash flows and market fluctuations.
 
 The
        pension plans weighted-average asset allocations by asset category
        are:
 
 **Asset
                  category**
              
              **Year
                  Ended**
                **December
                  29, 2006**
              
              **Year
                  Ended**
                **December
                  30, 2005**US
                  equity securities
              
              
              57
              %
              
              55
              %Fixed
                  income debt securities
              
              
              32
              %
              
              33
              %Non-US
                  equity securities
              
              
              6
              %
              
              6
              %Cash
                  and cash equivalents
              
              
              5
              %
              
              6
              %
 
 ***Post-retirement
        benefit plans***
 
 We
        provide benefits under company-sponsored retiree health care and life insurance
        plans for certain groups of employees, some of which require retiree
        contributions and contain other cost sharing features. The retiree life
        insurance plans provide basic coverage on a noncontributory basis. In connection
        with the transition of certain groups of the Government Services Business’
employees to Washington Group International’s benefit programs,
  II-59
  retiree
        health care and life insurance benefits were terminated for anyone retiring
        after December 31, 2005. Accordingly, all benefits provided under
        company-sponsored health care and life insurance plans are frozen. The
        termination of retiree medical and life insurance benefits for anyone retiring
        after December 31, 2005 resulted in a curtailment gain of $7.1 million during
        the year ended December 30, 2005. We reserve the right to amend or terminate
        the
        post-retirement benefits currently provided under the plans and may increase
        retirees’ cash contributions at any time. Reconciliation of beginning and ending
        balances of post-retirement benefit obligations and fair value of plan assets
        and the funded status are as follows:
 
 **Change
                  in post-retirement benefit obligations**
                *(In
                  thousands)*
              
              **Year
                  Ended**
                **December
                  29, 2006**
              
              **Year
                  Ended**
                **December
                  30, 2005**Benefit
                  obligations at beginning of period
              
              $
              46,743
              
              $
              59,221Service
                  cost
              
              
              ─
              
              
              613Interest
                  cost
              
              
              2,571
              
              
              2,889Recognition
                  of initial obligation
              
              
              ─
              
              
              575Curtailment
                  gain
              
              
              ─
              
              
              (7,065
              )Participant
                  contributions
              
              
              1,209
              
              
              1,235Benefit
                  payments
              
              
              (5,004
              )
              
              (5,824
              )Actuarial
                  gain
              
              
              (2,560
              )
              
              (4,901
              )Benefit
                  obligations at end of period
              
              $
              42,959
              
              $
              46,743
 
 **Change
                  in plan assets**
                *(In
                  thousands)*
              
              **Year
                  Ended**
                **December
                  29, 2006**
              
              **Year
                  Ended**
                **December
                  30, 2005**Fair
                  value of plan assets at beginning of period
              
              $
              ─
              
              $
              ─Company
                  contributions
              
              
              3,795
              
              
              4,589Participant
                  contributions
              
              
              1,209
              
              
              1,235Benefit
                  payments
              
              
              (5,004
              )
              
              (5,824
              )Fair
                  value of plan assets at end of period
              
              $
              ─
              
              $
              ─
 
 **Accrued
                  benefit cost**
                *(In
                  thousands)*
              
              **Year
                  Ended**
                **December
                  29, 2006**
              
              **Year
                  Ended**
                **December
                  30, 2005**Benefit
                  obligations
              
              $
              (42,959
              )
              $
              (46,743
              )Fair
                  value of assets
              
              
              ─
              
              
              ─Funded
                  status
              
              
              (42,959
              )
              
              (46,743
              )Unrecognized
                  net actuarial loss
              
              
              ─
              
              
              6,345Accrued
                  benefit cost
              
              
              (42,959
              )
              
              (40,398
              )Contributions
                  made after the measurement date
              
              
              704
              
              
              643Accrued
                  benefit cost
              
              $
              (42,255
              )
              $
              (39,755
              )
 
 We
        expect
        to contribute $3.9 million to our post-retirement plans in 2007. Post-retirement
        benefits expected to be paid in each of the next five years and in the aggregate
        for the next succeeding five years are $3.9 million, $3.9 million, $3.9 million,
        $3.9 million, $3.8 million, and $17.9 million, respectively, at December
        29,
        2006.
 
 The
        components of net post-retirement benefit costs are as follows:
 
 **Components
                  of net**
                **post-retirement
                  benefits cost (income)**
                *(In
                  thousands)*
              
              **Year
                  Ended**
                **December
                  29, 2006**
              
              **Year
                  Ended**
                **December
                  30, 2005**
              
              **Year
                  Ended**
                **December
                  31, 2004**Service
                  cost
              
              $
              ─
              
              $
              640
              
              $
              1,456Interest
                  cost
              
              
              2,571
              
              
              2,889
              
              
              3,397Recognized
                  net actuarial loss
              
              
              51
              
              
              280
              
              
              306Recognition
                  of initial obligation
              
              
              28
              
              
              ─
              
              
              287Net
                  post-retirement benefits cost before
                curtailment
                  gain
              
              
              2,650
              
              
              3,809
              
              
              5,446Curtailment
                  gain
              
              
              ─
              
              
              (7,065
              )
              
              ─Net
                  post-retirement benefits cost (income)
              
              $
              2,650
              
              $
              (3,256
              )
              $
              5,446
 
  II-60
  The
        actuarial assumptions used to determine post-retirement benefit obligations
        are
        as follows:
 
 **Year
                  Ended**
                **December
                  29, 2006**
              
              **Year
                  Ended**
                **December
                  30, 2005**Discount
                  rates
              
              
              5.9%
                  to 6.1
              %
              
              5.7%
                  to 5.9
              %Health
                  care cost trend rate assumed for next year
              
              
              10.0
              %
              
              10.0
              %Rate
                  to which the cost trend rate is assumed to decline (the
                ultimate
                  trend rate)
              
              
              5.0
              %
              
              5.0
              %Year
                  that the rate reaches the ultimate trend rate
              
              
              2012
              
              
              2011
 
 Experience
        gains and losses, as well as the effects of changes in actuarial assumptions
        and
        plan provisions, are amortized over the average future service period of
        employees.
 
 The
        health care cost trend rate assumption has a significant effect on the amounts
        reported for health care plans. The effect of a 1 percent change in this
        assumption would be as follows:
 
 **Post-retirement
                  benefits**
                *(In
                  thousands)*
              
              **December
                  29, 2006**
              
              **December
                  30, 2005**Effect
                  on total of service and interest cost1%
                  point increase
              
              $
              137
              
              $
              3051%
                  point decrease
              
              
              (120
              )
              
              (251
              )Effect
                  on accumulated projected benefit obligation1%
                  point increase
              
              
              2,146
              
              
              2,7871%
                  point decrease
              
              
              (1,895
              )
              
              (2,432
              )
 
 ***Adoption
        of SFAS No. 158***
 
 SFAS
        No.
        158 requires employers to recognize the overfunded or underfunded status
        of a
        defined benefit pension or post-retirement plan as an asset or liability
        in its
        statement of financial position, recognize changes in that funded status
        in the
        year in which the changes occur through comprehensive income and measure
        a
        plan’s assets and its obligations that determine its funded status as of the end
        of the employer’s fiscal year. We adopted certain provisions of SFAS No. 158 as
        of December 29, 2006. The amounts recognized in the accompanying consolidated
        balance sheet as of December 29, 2006 and the impact from adoption are as
        follows:
 
 **Impact
                  of adopting**
                **SFAS
                  No. 158**
                *(In
                  thousands)*
              
              **December
                  29, 2006**
                **amounts
                  before**
                **adoption
                  adjustments**
              
              **SFAS
                  No. 158**
                **adoption
                  adjustments**
              
              **December
                  29, 2006 adjusted amounts**Other
                  assets - (intangible assets)
              
              $
              38,251
              
              $
              (246
              )
              $
              38,005Deferred
                  income taxes - current
              
              
              105,632
              
              
              1,049
              
              
              106,681Pension
                  and post retirement benefit
                obligations
                  - noncurrent
              
              
              (85,005
              )
              
              (2,444
              )
              
              (87,449
              )Accumulated
                  other comprehensive
                income
                  (loss), net of tax
              
              
              ($22,071
              )
              $
              1,641
              
              
              ($20,430
              )
 
 The
        requirement to measure our plan’s assets and its obligations that determine the
        funded status as of the end of our fiscal year is effective for the year
        ending
        January 2, 2009. Our current measurement date is October 31.
 
 The
        2006
        amounts recognized in accumulated other comprehensive income (loss) shown
        in the
        table above (net of tax) consist of net actuarial losses of $2.9 million
        and
        $2.2 million for the pension and post-retirement benefit plans, respectively,
        and net transitional obligations of $0.2 million and $0.1 million,
        respectively.
  II-61
  
 ***Deferred
        compensation plans***
 
 We
        provide nonqualified plans for executives. We have a deferred compensation
        plan
        which allows for deferral of salary and incentive compensation beyond amounts
        allowed under our 401(k) plan and a restoration plan that provides matching
        contributions on compensation not eligible for matching contributions under
        our
        401(k) plan. As of December 29, 2006 and December 30, 2005, the accrued benefit
        amounts are $17.1 million and $13.9 million, respectively, and are included
        in
        other non-current liabilities in the accompanying consolidated balance
        sheets.
 
 ***Other
        retirement plans***
 
 We
        sponsor a number of defined contribution retirement plans. Participation
        in
        these plans is available to substantially all salaried employees and to certain
        groups of hourly employees. Our cash contributions to these plans are based
        on
        either a percentage of employee contributions or on a specified amount per
        hour
        depending on the provisions of each plan. The net cost of these plans was
        $33.9
        million, $24.7 million and $26.6 million for the years ended December 29,
        2006,
        December 30, 2005 and December 31, 2004, respectively. The increase in 2006
        is
        primarily due to an increase in the amount of employee contributions matched
        by
        the company.
 
 ***Multiemployer
        pension plans***
 
 We
        participate in and make contributions to numerous construction-industry
        multiemployer pension plans. Generally, the plans provide defined benefits
        to
        substantially all employees covered by collective bargaining agreements.
        Under
        ERISA, a contributor to a multiemployer plan is liable, upon termination
        or
        withdrawal from a plan, for its proportionate share of a plan’s unfunded vested
        liability. We currently have no intention of withdrawing from any of the
        multiemployer pension plans in which we participate. The net cost of these
        plans
        was $33.0 million, $27.7 million and $31.3 million in the years ended December
        29, 2006, December 30, 2005 and December 31, 2004, respectively.
 
 **9.**  **TRANSACTIONS
        WITH AFFILIATES**
 
 We
        purchased goods and services from companies owned by the Chairman of our
        Board
        of Directors as follows:
 
 *(In
                  thousands)*
              
              **Year
                  Ended**
                **December
                  29, 2006**
              
              **Year
                  Ended**
                **December
                  30, 2005**
              
              **Year
                  Ended**
                **December
                  31, 2004**Capital
                  expenditures
              
              $
              715
              
              $
              2,259
              
              $
              160Lease
                  and maintenance of corporate aircraft
              
              
              2,214
              
              
              2,223
              
              
              1,904Parts,
                  rentals, overhauls and repairs of
                construction
                  equipment
              
              
              3,105
              
              
              856
              
              
              1,055Construction
                  materials and services
              
              
              1,170
              
              
              1,487
              
              
              952Other
              
              
              56
              
              
              59
              
              
              272
 
 During
        the years ended December 29, 2006, December 30, 2005 and December 31, 2004,
        we
        mined and sold ballast used in railroad beds to an affiliate of the Chairman
        of
        our Board of Directors of $0.5 million, $0.5 million, and $0.7 million,
        respectively. We also purchased construction materials and services from
        firms
        owned by or affiliated with persons who were members of our Board of Directors
        at the time of purchase of $0.3 million and $0.4 million during the years
        ended
        December 30, 2005 and December 31, 2004, respectively.
  II-62
  
 **10.**  **OPERATING
        SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION**
 
 We
        operate through six business units, each of which comprises a separate
        reportable business segment: Power, Infrastructure, Mining, Industrial/Process,
        Defense and Energy & Environment. The reportable segments are separately
        managed, serve different markets and customers and differ in their expertise,
        technology and resources necessary to perform their services.
 
 Power
        provides engineering, construction and operations and maintenance services
        in
        both nuclear and fossil power markets for turnkey new power plant construction,
        plant expansion, retrofit and modification, decontamination and decommissioning,
        general planning, siting and licensing and environmental
        permitting.
 
 Infrastructure
        provides diverse engineering and construction, construction management, and
        operations and management services for highways and bridges, airports and
        seaports, tunnels and tube tunnels, railroad and transit lines, water storage
        and transport, water treatment, site development and hydroelectric facilities.
        The business unit generally performs as a general contractor or as a joint
        venture partner with other contractors on domestic and international
        projects.
 
 Mining
        provides contract-mining, engineering, resource evaluation, geologic modeling,
        mine planning, simulation modeling, equipment selection, production scheduling
        and operations management to coal, industrial minerals and metals
        markets.
 
 Industrial/Process
        provides engineering, design, procurement, construction services and total
        facilities management for oil, gas and chemicals, general manufacturing,
        pharmaceutical and biotechnology, metals processing, industrial buildings,
        food
        and consumer products, automotive, aerospace, cement and pulp and paper
        industries.
 
 Defense
        provides a complete range of technical services to the US Department of Defense,
        including operations and management services, environmental and chemical
        demilitarization services, waste handling and storage, architectural engineering
        services and engineering, procurement and construction services for the armed
        forces.
 
 Energy
        & Environment provides services to the US Department of Energy, which is
        responsible for maintaining the nation’s nuclear weapons stockpile and
        performing environmental cleanup and remediation. The business unit also
        provides the US government with construction, contract management, supply
        chain
        management, quality assurance, administration and environmental cleanup and
        restoration services. Energy & Environment also provides safety management
        consulting and waste and environmental technology and engineered products,
        including radioactive waste containers and technical support services.
 
 The
        accounting policies of the segments are the same as those described in the
        summary of significant accounting policies. We evaluate performance and allocate
        resources based on segment assets, gross profit and equity in income of
        unconsolidated affiliates. Effective
        January 3, 2004, certain divisions of the Industrial/Process business unit
        were
        transferred to the Infrastructure and Energy & Environment business units to
        more closely align the divisions to the markets of the respective business
        unit.
 
  II-63
  
 *(In
                  thousands)*
              
              **Year
                  Ended**
                **December
                  29, 2006**
              
              **Year
                  Ended**
                **December
                  30, 2005**
              
              **Year
                  Ended**
                **December
                  31, 2004****Revenue**Power
              
              $
              791,337
              
              $
              766,131
              
              $
              633,981Infrastructure
              
              
              577,916
              
              
              665,215
              
              
              891,081Mining
              
              
              166,880
              
              
              171,071
              
              
              109,780Industrial/Process
              
              
              510,983
              
              
              424,646
              
              
              394,739Defense
              
              
              575,969
              
              
              555,754
              
              
              495,295Energy
                  & Environment
              
              
              773,686
              
              
              602,784
              
              
              396,570Intersegment,
                  eliminations and other
              
              
              1,311
              
              
              2,853
              
              
              (6,064
              )Total
                  revenue
              
              $
              3,398,082
              
              $
              3,188,454
              
              $
              2,915,382**Gross
                  profit (loss)**Power
              
              $
              45,915
              
              $
              78,177
              
              $
              33,966Infrastructure
              
              
              (21,865
              )
              
              (81,253
              )
              
              (17,786
              )Mining
              
              
              (12,112
              )
              
              1,084
              
              
              7,647Industrial/Process
              
              
              7,085
              
              
              2,382
              
              
              16,674Defense
              
              
              50,273
              
              
              59,705
              
              
              39,702Energy
                  & Environment
              
              
              91,007
              
              
              66,316
              
              
              73,043Intersegment
                  and other unallocated operating costs
              
              
              (4,511
              )
              
              (57
              )
              
              (6,091
              )Total
                  gross profit
              
              $
              155,792
              
              $
              126,354
              
              $
              147,155**Equity
                  in income (loss) of unconsolidated affiliates**Power
              
              $
              28
              
              $
              197
              
              $
              260Infrastructure
              
              
              1,491
              
              
              1,084
              
              
              892Mining
              
              
              30,170
              
              
              27,205
              
              
              25,551Industrial/Process
              
              
              711
              
              
              588
              
              
              696Defense
              
              
              ─
              
              
              ─
              
              
              ─Energy
                  & Environment
              
              
              3,416
              
              
              522
              
              
              (482
              )Intersegment
                  other
              
              
              ─
              
              
              ─
              
              
              ─Total
                  equity in income of unconsolidated affiliates
              
              $
              35,816
              
              $
              29,596
              
              $
              26,917**Operating
                  income (loss)**Power
              
              $
              45,943
              
              $
              78,374
              
              $
              34,225Infrastructure
              
              
              (20,374
              )
              
              (80,169
              )
              
              (16,894
              )Mining
              
              
              18,058
              
              
              28,289
              
              
              33,198Industrial/Process
              
              
              7,796
              
              
              2,970
              
              
              17,371Defense
              
              
              50,273
              
              
              59,705
              
              
              39,702Energy
                  & Environment
              
              
              94,423
              
              
              66,836
              
              
              72,561Intersegment
                  and other unallocated operating costs
              
              
              (4,495
              )
              
              (55
              )
              
              (4,648
              )General
                  and administrative expenses, corporate
              
              
              (75,728
              )
              
              (63,823
              )
              
              (63,374
              )Total
                  operating income
              
              $
              115,896
              
              $
              92,127
              
              $
              112,141**Capital
                  expenditures**Power
              
              $
              920
              
              $
              1,279
              
              $
              ─Infrastructure
              
              
              1,915
              
              
              9,757
              
              
              20,022Mining
              
              
              41,194
              
              
              38,698
              
              
              9,947Industrial/Process
              
              
              841
              
              
              447
              
              
              206Defense
              
              
              124
              
              
              (8
              )
              
              8Energy
                  & Environment
              
              
              4,538
              
              
              5,616
              
              
              1,507Corporate
                  and other
              
              
              13,501
              
              
              9,638
              
              
              3,527Total
                  capital expenditures
              
              $
              63,033
              
              $
              65,427
              
              $
              35,217**Depreciation**Power
              
              $
              415
              
              $
              288
              
              $
              108Infrastructure
              
              
              6,366
              
              
              5,652
              
              
              5,906Mining
              
              
              14,906
              
              
              8,500
              
              
              5,913Industrial/Process
              
              
              496
              
              
              688
              
              
              743Defense
              
              
              ─
              
              
              39
              
              
              59Energy
                  & Environment
              
              
              2,947
              
              
              1,334
              
              
              1,258Corporate
                  and other
              
              
              5,975
              
              
              5,379
              
              
              4,727Total
                  depreciation
              
              $
              31,105
              
              $
              21,880
              
              $
              18,714
 
  II-64
  
 **Assets
                  as of**
                *(In
                  thousands)*
              
              **December
                  29, 2006**
              
              **December
                  30, 2005**Power
              
              $
              126,266
              
              $
              179,147Infrastructure
              
              
              165,390
              
              
              197,613Mining
              
              
              270,362
              
              
              247,633Industrial/Process
              
              
              128,567
              
              
              141,543Defense
              
              
              107,917
              
              
              104,463Energy
                  & Environment
              
              
              347,875
              
              
              246,624Corporate
                  and other (a)
              
              
              585,947
              
              
              547,956Total
                  assets
              
              $
              1,732,324
              
              $
              1,664,979
 
 
 (a)  Corporate
        and other assets principally consist of cash and cash equivalents and deferred
        tax assets.
 
 ***Investments
        in unconsolidated affiliates***
 
 At
        December 29, 2006 and December 30, 2005, we had $114.0 million and $172.4
        million, respectively, in investments accounted for by the equity method,
        primarily consisting of MIBRAG. These investments were held and reported
        primarily as part of the Mining business unit.
 
 ***Geographic
        areas***
 
 Geographic
        data regarding our revenue is shown below. Revenues are attributed to geographic
        locations based upon the primary location of work performed. Geographical
        disclosures of long-lived assets are impracticable to prepare.
 
 **Geographic
                  data**
                *(In
                  thousands)*
              
              **Year
                  Ended**
                **December
                  29, 2006**
              
              **Year
                  Ended**
                **December
                  30, 2005**
              
              **Year
                  Ended**
                **December
                  31, 2004**Revenue:United
                  States
              
              $
              2,667,616
              
              $
              2,498,613
              
              $
              2,145,175Iraq
              
              
              332,524
              
              
              380,628
              
              
              492,430Other
                  international
              
              
              397,942
              
              
              309,213
              
              
              277,777Total
                  revenue
              
              $
              3,398,082
              
              $
              3,188,454
              
              $
              2,915,382
 
 Revenue
        from other international operations in all periods presented was in numerous
        geographic areas without significant concentration.
 
 ***Major
        customers***
 
 Ten
        percent or more of our total revenue was derived from contracts and subcontracts
        performed by the Power, Infrastructure, Industrial/Process, Defense, and
        Energy
& Environment business units to the following customers for the periods
        presented:
 
 *(In
                  thousands)*
              
              **Year
                  Ended**
                **December
                  29, 2006**
              
              **Year
                  Ended**
                **December
                  30, 2005**
              
              **Year
                  Ended**
                **December
                  31, 2004**US
                  Department of Energy
              
              $
              778,973
              
              $
              617,988
              
              $
              409,700US
                  Department of Defense
              
              
              907,333
              
              
              927,372
              
              
              1,086,034
 
  II-65
  
 **11.**  **CONTINGENCIES
        AND COMMITMENTS**
 
 ***Contract
        related matters***
 
 We
        have
        cost-type contracts with the US government that require the use of estimated
        annual rates for indirect costs. The estimated rates are analyzed periodically
        and adjusted based on changes in the level of indirect costs we expect to
        incur
        and the volume of work we expect to perform. The cumulative effect of changes
        to
        estimated rates is recorded in the period of the change. Additionally, the
        allowable indirect costs for US government cost-type contracts are subject
        to
        adjustment upon audit by the US government. To the extent that these audits
        result in determinations that costs claimed as reimbursable are not allowable
        costs, or were not allocated in accordance with federal regulations, we could
        be
        required to reimburse the government for amounts previously received. Audits
        by
        the US government of indirect costs are complete through 2003. Audits of
        2004
        and 2005 indirect costs are in process. During 2006, we completed the 2005
        Incurred Cost Submission and reached final agreement on settling the 2003
        allowable indirect cost audit which, together, resulted in $4.0 million of
        charges to earnings. The US government is also in the process of auditing
        insurance related costs reimbursed under government contracts for periods
        ranging from 1998 through 2005.
 
 US
        government Cost Accounting Standards and other regulations also require that
        accounting changes, as defined, be evaluated for potential impact to the
        amount
        of indirect costs allocated to government contracts and that cost impact
        statements be submitted to the US government for audit. Cost impact statements
        through 1998 have been audited by the US government and settled. We are in
        the
        process of preparing cost impact statements for 1999 through
        2006.
 
 While
        we
        have recorded reserves for amounts we believe are owed to the US government
        under cost-type contracts, actual results may differ from our estimates.
 
 ***Letters
        of credit***
 
 In
        the
        normal course of business, we cause letters of credit to be issued in connection
        with contract performance obligations that are not required to be reflected
        in
        the accompanying consolidated balance sheets. We are obligated to reimburse
        the
        issuer of such letters of credit for any payments made thereunder. At December
        29, 2006 and December 30, 2005, $148.1 million and $119.0 million, respectively,
        in face amount of letters of credit were outstanding. As of December 29,
        2006,
        $124.5 million of the outstanding letters of credit were issued and outstanding
        under the Credit Facility. We have pledged $21.0 million of cash and cash
        equivalents in connection with the letters of credit that were outstanding
        at
        December 29, 2006 not related to the Credit Facility.
 
 ***Long-term
        leases***
  Total
        rental and long-term lease payments for real estate and equipment charged
        to
        operations were $80.6 million for the year ended December 29, 2006, $76.8
        million for the year ended December 30, 2005, and $55.1 million for the year
        ended December 31, 2004. Future minimum rental payments under operating leases,
        some of which contain renewal or escalation clauses, with remaining
        noncancelable terms in excess of one year at December 29, 2006 were as follows:
 
 **Year
                  ending**
                *(In
                  thousands)*
              
              **Real
                  estate**
              
              **Equipment**
              
              **Total**December
                  28, 2007
              
              $
              24,980
              
              $
              4,175
              
              $
              29,155January
                  2, 2009
              
              
              21,278
              
              
              2,616
              
              
              23,894January
                  1, 2010
              
              
              18,793
              
              
              2,113
              
              
              20,906December
                  31, 2010
              
              
              17,318
              
              
              1,520
              
              
              18,838December
                  30, 2011
              
              
              16,569
              
              
              698
              
              
              17,267Thereafter
              
              
              34,091
              
              
              170
              
              
              34,261Total
              
              $
              133,029
              
              $
              11,292
              
              $
              144,321
 
  II-66
  Future
        minimum lease payments as of December 29, 2006 have not been reduced by minimum
        non-cancelable sublease rentals aggregating $2.9 million.
 
 ***Indemnities***
 
 In
        connection with a prior sale of a business, we guaranteed certain indemnity
        provisions relating to environmental conditions that obligate us to pay the
        buyer up to a maximum of $3.5 million for environmental losses they incur
        over
        $5.0 million until October 2007. We are also responsible for environmental
        losses that exceed $1.3 million related to a specified parcel of the sold
        property through October 2012. We believe that the indemnification provisions
        will not have a material adverse effect on our financial position, results
        of
        operations or cash flows.
 
 ***Guarantees***
 
 In
        the
        ordinary course of business, the company enters into various agreements
        providing financial or performance assurances to clients on behalf of certain
        unconsolidated subsidiaries, joint ventures, and other jointly executed
        contracts. These agreements are entered into primarily to support the project
        execution commitments of these entities. The maximum potential payment amount
        of
        an outstanding performance guarantee is the remaining cost of work to be
        performed by or on behalf of third parties under engineering and construction
        contracts. At December 29, 2006, approximately $1.1 billion of work representing
        either our partners’ proportionate share, or work that our partners are directly
        responsible for, had yet to be completed. Amounts that may be required to
        be
        paid in excess of estimated costs to complete contracts in progress are not
        estimable. For cost reimbursable contracts, amounts that may become payable
        pursuant to guarantee provisions are normally recoverable from the client
        for
        work performed under the contract. For lump sum or fixed price contracts,
        this
        amount is the cost to complete the contracted work less amounts remaining
        to be
        billed to the client under the contract. Remaining billable amounts could
        be
        greater or less than the cost to complete. In those cases where costs exceed
        the
        remaining amounts payable under the contract the company may have recourse
        to
        third parties, such as owners, co-venturers, subcontractors or vendors, for
        claims.
 
 We
        also
        participate, from time to time, in consortiums or “line item” joint venture
        agreements under which each partner is responsible for performing certain
        discrete items of the total scope of contracted work. The revenue for these
        discrete items is defined in the contract with the project owner and each
        venture partner bearing the profitability risk associated with its own work.
        Generally, partners in these types of arrangements are jointly and severally
        liable for completion of the total project under the terms of the contact
        with
        the project owner. There is not a single set of books and records for this
        type
        of arrangement. Each partner accounts for its items of work individually
        as it
        would for any self-performed contract. We account for our portion of these
        contracts as a project in our accounting system and include receivables and
        payables associated with our work on our consolidated balance sheet.
 
 During
        the fourth quarter of 2005, we entered into a line item joint venture
        arrangement pursuant to which we have jointly and severally guaranteed the
        performance of the joint venture. Under the arrangements, we would be required
        to perform on the guarantee in the event our partner was not able to complete
        their portion of the construction contract through its expected completion
        in
        2008. Our maximum exposure under this performance guarantee at the time we
        entered into the arrangement was estimated to be approximately $170.0 million
        but will be reduced over the contract term upon execution of the contract
        scope.
        We have recorded the estimated fair value of this guarantee in the amount
        of
        $2.4 million as a liability with a corresponding asset as of December 29,
        2006.
 
 ***Off-balance
        sheet arrangements***
 
 We
        do not
        have any off-balance sheet arrangements that have or are reasonably likely
        to
        have a current or future effect on financial condition, revenue or expenses,
        results of operations, liquidity, capital expenditures or capital resources
        that
        are material to investors.
  II-67
  
 ***Legal
        matters***
 
 ***Litigation
        and Investigation related to USAID Egyptian
        Projects.*** In 2002,
        the Inspector General for the US Agency for International Development (“USAID”)
        requested documentation about and made inquiries into the contractual
        relationships between one of our US joint ventures and a local construction
        company in Egypt. The focus of the inquiry was whether the structure of our
        business relationship with the Egyptian company violated USAID contract
        regulations with respect to source, origin, and nationality requirements.
        In
        January 2004, we entered into an agreement with USAID whereby we agreed to
        undertake certain compliance and training measures and USAID agreed that
        we are
        presently eligible for USAID contracts, including host-country projects,
        and are
        not under threat of suspension or debarment arising out of matters covered
        by
        the USAID inquiry. We satisfactorily completed that training effective November
        22, 2004, and, as a result, are currently in good standing to bid on all
        USAID
        projects.
 
 In
        March
        2003, we were notified by the Department of Justice that the US government
        was
        considering civil litigation against us for potential violations of the USAID
        source, origin, and nationality regulations in connection with five of our
        USAID-financed host-country projects located in Egypt beginning in the early
        1990s. Following that notification, we responded to inquiries from the
        Department of Justice and otherwise cooperated with the government’s
        investigation. In November 2004, the government filed an action in the US
        District Court for the District of Idaho against us and the companies referred
        to above with respect to the Egyptian projects (the “Idaho Action”). The Idaho
        Action was brought under the Federal False Claims Act, the Federal Foreign
        Assistance Act of 1961, and common law theories of payment by mistake and
        unjust
        enrichment. The complaint seeks damages and civil penalties for violations
        of
        the statutes and asserts that the government is entitled to a refund of all
        amounts paid to us and the other defendants under the specified contracts.
        The
        government alleges that approximately $373.0 million was paid under those
        contracts. We deny any liability in the action and contest the government’s
        damage allegations and its entitlement to any recovery. All projects were
        completed and turned over for operation.
 
 Further,
        on March 23, 2005, we filed a Motion to Enforce the Confirmation Order in
        the
        Bankruptcy Court in Nevada, and a Motion to Dismiss or Stay the Action in
        the
        Idaho Court pending resolution of the proceedings in the Bankruptcy Court.
        In
        the filings in the Bankruptcy Court, we sought dismissal of the government’s
        claims pursuant to the Confirmation Order (and other relevant orders of the
        Bankruptcy Court) because of the government’s failure to give appropriate notice
        or otherwise preserve those claims. On August 30, 2005, the Bankruptcy Court
        granted our Motion to Enforce the Confirmation Order, in total, ruling that
        all
        of the government’s claims (as set forth in the Complaint in the Idaho Action)
        are barred. On November 9, 2005, the Bankruptcy Court confirmed its decision
        with a written order and detailed findings of fact. The government appealed
        the
        Bankruptcy Court's order to the US District Court for the District of Nevada.
        On
        March 22, 2006, the judge in the Idaho Action stayed that action during the
        pendency of the government's appeal of the Bankruptcy Court's ruling.
 
 On
        December 29, 2006, the District Court in Nevada disagreed with the specific
        grounds on which the Bankruptcy Court had determined that the Government’s
        statutory claims were barred, and on that basis reversed the Bankruptcy Court’s
        order and remanded the matter back to the Bankruptcy Court for further
        proceedings. In his Order, the District Court judge specifically noted that
        on
        remand, “[t]he Bankruptcy Court may choose among other things, to address
        whether the Idaho claims are barred for any other reasons, or are otherwise
        affected by Washington Group International’s Bankruptcy proceedings.” The
        Company intends to renew its motion that the Government’s claim in the
        Bankruptcy Court is nonetheless barred under different theories than those
        initially addressed by the Bankruptcy Court.
 
 Our
        joint
        venture for one of the five projects referred to above brought arbitration
        proceedings before an arbitration tribunal in Egypt in which it asserted
        an
        affirmative claim for additional compensation for the construction of water
        and
        wastewater treatment facilities in Egypt. The project owner, National
        Organization for Potable Water and Sanitary Drainage (“NOPWASD”), an Egyptian
        government agency, asserted in a counterclaim that by reason of alleged
        violations of the USAID source, origin and nationality regulations,
        and
  II-68
  alleged
        violations of Egyptian law, our joint venture should forfeit its claim, pay
        damages of approximately $6.0 million and the owner’s costs of defending
        against the joint venture’s claims in arbitration. We denied liability on the
        project owner’s counterclaim. On April 17, 2006, the arbitration tribunal issued
        its award providing that the joint venture prevailed on its affirmative claims
        in the net amount of $8.2 million, and that NOPWASD's counterclaims are
        rejected. Our portion of any final award received by the joint venture would
        be
        approximately 45 percent. Because of potential issues related to appeals
        or
        collectibility of amounts awarded, no amounts related to this potential recovery
        have been recognized in the accompanying consolidated financial
        statements.
 
 Based
        on
        our assessment of the above-described matters, we recorded a charge of
        $8.2 million in the year ended December 31, 2004. Potential recovery on the
        arbitration award, or additional loss, if any, is not estimable.
 
 ***New
        Orleans Levee Failure Class Action Litigation*** **.** From
        July 1999 through May 2005, we performed demolition, site preparation, and
        environmental remediation services for the US Army Corps of Engineers on
        the
        east bank of the Inner Harbor Navigation Canal (the “Industrial Canal”) in New
        Orleans, Louisiana. All the work performed by us and our subcontractors was
        directed, supervised and approved by the US Army Corps of Engineers.
 
 On
        August
        29, 2005, Hurricane Katrina devastated New Orleans. The storm surge created
        by
        the hurricane flooded the east bank of the Industrial Canal and overtopped
        the
        Industrial Canal levee floodwall, flooding the Lower Ninth Ward and other
        parts
        of the city.
 
 Multiple
        personal injury and property damage class action lawsuits have been filed
        in
        Louisiana state and federal court naming us as one of numerous defendants
        including The City of New Orleans, the Board of Commissioners for the Orleans
        Parish Levee District, and its insurer St. Paul Fire and Marine Insurance
        Company and other contractors. Plaintiffs claim that defendants were negligent
        in their design, construction and maintenance of the New Orleans levees and
        assert their claims under the Federal Class Action Fairness Act of 2005,
        28 USC.
        12(d)(2). The alleged class of plaintiffs are all residents and property
        owners
        of the Parishes of Orleans and Jefferson in the State of Louisiana “who incurred
        damages arising out of the breach and failure of the hurricane protection
        levees
        and floodwalls along the 17 th Street
        Canal, the London Avenue Canal, and the Industrial Canal in the wake of
        Hurricane Katrina.”
 
 In
        all of
        the lawsuits to-date, the only specific allegation against us is that we
        “contracted to level and clear abandoned industrial sites along the Industrial
        Canal between the floodwall and the canal” and plaintiffs believe “the use of
        heavy vehicles and/or other heavy construction equipment along the Industrial
        Canal between the floodwall and the canal damaged the levee and/or floodwall
        and
        caused and/or contributed to the breach in the levee and/or floodwall.”
Plaintiffs allege damages as high as $200 billion and demand attorneys’
fees and costs. We have substantial liability insurance coverage in the event
        we
        are found to have any liability in this matter. While we cannot predict the
        adequacy of the coverage with certainty, we believe it to be adequate to
        cover
        any potential liability that could be imposed on us as a result of these
        class
        actions.
 
 We
        deny
        any liability for the hurricane and flood damage, or for construction, repair
        or
        maintenance of any of the New Orleans levees or floodwalls that failed during
        or
        after Hurricane Katrina. None of the activities performed by us damaged the
        Industrial Canal or floodwall. We will pursue all contractual and equitable
        rights of indemnity and contribution and leverage all available challenges
        against class certification.
 
 We
        believe our insurance program covers these matters. Consistent with our
        accounting policy of accruing legal fees when probable and estimable, we
        accrued
        $4.2 million for estimated legal defense costs associated with these
        matters. We believe a portion of these costs will be reimbursable under our
        insurance program and have recorded a corresponding insurance
        receivable.
 
 Based
        on
        the status and nature of this matter at this time, we cannot make an estimate
        of
        additional potential loss, if any.
  II-69
  ***General
        Litigation.*** In
        addition to the foregoing, there are other claims, lawsuits, disputes with
        third
        parties, investigations, and administrative proceedings against us relating
        to
        matters in the ordinary course of our business activities that we do not
        expect
        to have a material adverse effect on our financial position, results of
        operations or cash flows. Government contracts are subject to specific
        procurement regulations, contract provisions and a variety of other requirements
        relating to the formation, administration, performance and accounting for
        these
        contracts. As a result of our government contracting, claims for civil or
        criminal fraud may be brought by the Government for violations of those
        regulations, requirements and statutes.
 
 **12.**  **OTHER
        COMPREHENSIVE INCOME (LOSS)**
 
 Other
        comprehensive income (loss) for the years ended December 31, 2004, December
        30,
        2005, and December 29, 2006 was as follows:
 
 *(In
                  thousands)*
              
              **Before-tax**
                **Amount**
              
              **Tax
                  (expense)**
                **or
                  benefit**
              
              **Net-of-tax**
                **amount****Year
                  ended December 31, 2004**Foreign
                  currency translation adjustments
              
              $
              14,381
              
              $
              (5,033
              )
              $
              9,348Minimum
                  pension liability adjustment and other
              
              
              (1,645
              )
              
              654
              
              
              (991
              )Other
                  comprehensive income
              
              $
              12,736
              
              $
              (4,379
              )
              $
              8,357**Year
                  ended December 30, 2005**Foreign
                  currency translation adjustments
              
              $
              (23,951
              )
              $
              8,383
              
              $
              (15,568
              )Minimum
                  pension liability adjustment and other
              
              
              (1,009
              )
              
              406
              
              
              (603
              )Other
                  comprehensive loss
              
              $
              (24,960
              )
              $
              8,789
              
              $
              (16,171
              )**Year
                  ended December 29, 2006**Foreign
                  currency translation adjustments
              
              $
              10,106
              
              $
              (3,537
              )
              $
              6,569Minimum
                  pension liability adjustment and other
              
              
              (654
              )
              
              231
              
              
              (423
              )Other
                  comprehensive income
              
              $
              9,452
              
              $
              (3,306
              )
              $
              6,146
 
 The
        accumulated balances related to each component of other comprehensive income
        (loss) were as follows:
 
 *(In
                  thousands)*
              
              **Currency**
                **items**
              
              **Minimum
                  pension liability adjustment**
              
              **Other
                  (a)**
              
              **Accumulated
                  other comprehensive income (loss)**Balance
                  at January 2, 2004
              
              $
              25,496
              
              $
              (1,757
              )
              
              ─
              
              $
              23,739Other
                  comprehensive income
              
              
              9,348
              
              
              (1,198
              )
              $
              207
              
              
              8,357Balance
                  at December 31, 2004
              
              
              34,844
              
              
              (2,955
              )
              
              207
              
              
              32,096Other
                  comprehensive income (loss)
              
              
              (15,568
              )
              
              (777
              )
              
              174
              
              
              (16,171
              )Balance
                  at December 30, 2005
              
              
              19,276
              
              
              (3,732
              )
              
              381
              
              
              15,925Other
                  comprehensive income
              
              
              6,569
              
              
              61
              
              
              (484
              )
              
              6,146Adoption
                  of SFAS No. 158
              
              
              ─
              
              
              (1,641
              )
              
              ─
              
              
              (1,641
              )Balance
                  at December 29, 2006
              
              $
              25,845
              
              $
              (5,312
              )
              $
              (103
              )
              $
              20,430
 
 
 (a)  Other
        includes unrealized net gains on securities and the change in fair value
        of
        forward foreign currency contracts.
 
 **13.**  **CAPITAL
        STOCK, STOCK PURCHASE WARRANTS AND STOCK COMPENSATION
        PLANS**
 -
 ***Capital
        stock***
 
 Pursuant
        to our certificate of incorporation, we have the authority to issue 100,000,000
        shares of common stock and 10,000,000 shares of preferred stock. Preferred
        stock
        can be issued at any time or from time to time in
  II-70
  one
        or
        more series with such designations, powers, preferences and rights,
        qualifications, limitations and restrictions thereon as determined by our
        Board
        of Directors.
 
 ***Stock
        purchase warrants and stock buy-back program***
 
 In
        connection with our Plan of Reorganization, warrants to purchase shares of
        common stock were issued to unsecured creditors in three tranches. The following
        table summarizes the warrant activity during the years ended December 31,
        2004,
        December 30, 2005 and December 29, 2006:
 
 (In
                  thousands except per share data)
              
              **Tranche
                  A**
              
              **Tranche
                  B**
              
              **Tranche
                  C**
              
              **Total**Issued
                  in January 25, 2002 reorganization
              
              
              3,086
              
              
              3,527
              
              
              1,907
              
              
              8,520Exercise
                  price per share
              
              $
              28.50
              
              $
              31.74
              
              $
              33.51**Year
                  ended December 31, 2004**Exercised
              
              
              (35
              )
              
              (41
              )
              
              (22
              )
              
              (98
              )Returned
                  as part of legal settlement
              
              
              (16
              )
              
              (18
              )
              
              (10
              )
              
              (44
              )Outstanding
                  at December 31, 2004
              
              
              3,035
              
              
              3,468
              
              
              1,875
              
              
              8,378**Year
                  ended December 30, 2005**Exercised
              
              
              (217
              )
              
              (159
              )
              
              (45
              )
              
              (421
              )Purchased
              
              
              (1,217
              )
              
              (1,529
              )
              
              (709
              )
              
              (3,455
              )Returned
                  as part of legal settlement
              
              
              (4
              )
              
              (4
              )
              
              (2
              )
              
              (10
              )Outstanding
                  at December 30, 2005
              
              
              1,597
              
              
              1,776
              
              
              1,119
              
              
              4,492**Year
                  ended December 29, 2006**Exercised
              
              
              (872
              )
              
              (805
              )
              
              (585
              )
              
              (2,262
              )Purchased
              
              
              (656
              )
              
              (890
              )
              
              (492
              )
              
              (2,038
              )Expired
              
              
              (69
              )
              
              (81
              )
              
              (42
              )
              
              (192
              )Outstanding
                  at December 29, 2006
              
              
              ─
              
              
              ─
              
              
              ─
              
              
              ─
 
 During
        2005, our Board of Directors authorized a stock/warrant buy-back program
        up to
        $125.0 million, under which we purchased 3,455,000 warrants at a cost of
        $73.6
        million. During 2006, we purchased an additional 2,038,000 warrants at a
        cost of
        $35.0 million. In addition, 2,262,000 warrants were exercised generating
        proceeds of $71.2 million and the remaining 192,000 outstanding warrants
        expired
        on January 25, 2006. In connection with the stock/warrant buy-back program,
        we
        incurred $0.7 million of direct costs. Also, during 2006, the authorization
        limit under the stock/warrant buy back program was increased to $175.0 million
        and we purchased 1,125,000 shares of common stock for $65.8 million, under
        the
        program. On November 21, 2006, our Board of Directors increased the total
        authorized amount under the stock buy back program by $100.0 million to $275.0
        million. As of December 29, 2006, a total of $174.4 million had been expended
        under the program.
 
 ***Stock
        compensation plans and long-term incentive program***
 
 Washington
        Group International, Inc.’s Equity and Performance Incentive Plan (the “2002
        Plan”) became effective January 25, 2002 in connection with our reorganization.
        On May 9, 2003, our stockholders approved an amended and restated version
        of the
        2002 Plan. The 2002 Plan allows our Board of Directors to award various types
        of
        rights related to our stock, including options to purchase stock, appreciation
        rights, performance units, performance shares, restricted stock, deferred
        stock
        or other awards to directors, officers and key employees. The 2002 Plan has
        a
        fixed limit of 6,002,000 shares. Awards are subject to terms and conditions
        determined by our Board of Directors. As of December 29, 2006, only option
        rights, performance units and deferred stock have been awarded under the
        2002
        Plan.
 
 On
        May 7,
        2004, our stockholders approved the Washington Group International Inc. 2004
        Equity Incentive Plan (the “2004 Plan”), which provides for additional shares
        under the long-term incentive program (“LTIP”). The 2004 Plan allows our Board
        of Directors to award various types of rights related to our stock, including
        options to purchase stock, appreciation rights, restricted stock and deferred
        stock. Persons eligible to receive
  II-71
  awards
        under the 2004 Plan include officers, key employees and directors of the
        company. The 2004 Plan provides a fixed limit of 2,400,000 shares of which
        no
        more than 400,000 may be issued in connection with awards other than stock
        options and appreciation rights. As of December 29, 2006, only option rights,
        restricted stock and deferred stock have been awarded under the 2004
        Plan.
 
 All
        stock
        options issued under the 2002 Plan and the 2004 Plan must have an exercise
        price
        equal to or greater than the fair value of our common stock on the date the
        stock option is granted. Re-pricing of stock options is prohibited without
        stockholder approval. As of December 29, 2006, 1,034,000 shares are available
        for future issuance under the plans. Our policy is to issue new shares of
        common
        stock to satisfy stock option exercises. We recognize compensation cost for
        these options on a straight-line basis over the service period for the entire
        award.
 
 From
        January 25, 2002 through December 29, 2006, officers, key employees and our
        Board of Directors (other than the chairman) were granted nonqualified stock
        options to purchase 4,121,000 shares of common stock, with terms of ten years
        and exercise prices based on the market prices on the dates of grant, ranging
        from $13.40 to $58.86 per share. Stock options to purchase 292,000 shares
        of
        common stock have been forfeited due to employment terminations. Options
        granted
        in 2002 vested one-third on the date of grant, one-third on the first
        anniversary of the date of grant and the final third on the second anniversary
        of the date of grant. Options granted after 2002 vest one-third on the first
        anniversary of the date of grant, one-third on the second anniversary of
        the
        date of grant and the final third on the third anniversary of the date of
        grant.
        The vesting period for future grants will be determined by the Compensation
        Committee of our Board of Directors.
 
 On
        January 25, 2002, the Chairman of our Board of Directors, Mr. Dennis R.
        Washington, was granted stock options to purchase shares of common stock
        in
        three tranches which expire ten years from the date of grant, or January
        25,
        2012. The number of options and respective exercise prices for each tranche
        are
        as follows:
 
 **Number
                  of options**
                (In
                  thousands)
              
              **Exercise
                  price per option**Tranche
                  A
              
              
              1,389
              
              $
              24.00Tranche
                  B
              
              
              882
              
              $
              31.74Tranche
                  C
              
              
              953
              
              $
              33.51
 
 Beginning
        in 2005, officers and key employees received annual grants of restricted
        stock
        under the 2004 Plan. During 2005 and 2006, 141,000 and 138,000 shares of
        restricted stock were granted, respectively. The restricted stock is not
        transferable until the third anniversary of the date of grant, when the
        restrictions will lapse and the stock will be freely tradable. The restricted
        period for future grants, generally, will be at least three years, but may
        be
        longer as determined by the Compensation Committee of our Board of
        Directors.
 
 Effective
        December 31, 2005, we adopted the provisions of SFAS No. 123(R). Under the
        provisions of SFAS No. 123(R), stock-based compensation is measured at the
        grant
        date, based on the calculated fair value of the award, and is recognized
        as an
        expense over the employee service period (generally the vesting period of
        the
        grant). We adopted SFAS No. 123(R) using the modified retrospective application
        method and, as a result, the accompanying consolidated financial statements
        and
        notes as of December 30, 2005 and for each of the two years in the period
        then
        ended have been adjusted to reflect the fair value method of expensing
        prescribed by SFAS No. 123(R) as follows:
  II-72
  
 (*In
                  thousands except per share data*)
              
              **Year
                  Ended**
                **December
                  30, 2005**
              
              **Year
                  Ended**
                **December
                  31, 2004****As
                  Previously Reported**
              
              **As
                  Adjusted**
              
              **As
                  Previously Reported**
              
              **As
                  Adjusted****Income
                  statement items**Income
                  before reorganization items, income taxes and
                minority
                  interest
              
              $
              93,681
              
              $
              86,290
              
              $
              104,631
              
              $
              98,785Net
                  income
              
              
              58,366
              
              
              53,860
              
              
              51,137
              
              
              47,573Net
                  income per share - basic
              
              
              2.24
              
              
              2.07
              
              
              2.02
              
              
              1.88Net
                  income per share - diluted
              
              
              1.93
              
              
              1.77
              
              
              1.86
              
              
              1.71Shares
                  used to compute basic income per share
              
              
              26,037
              
              
              26,037
              
              
              25,281
              
              
              25,281Shares
                  used to compute diluted income per share
              
              
              30,251
              
              
              30,408
              
              
              27,444
              
              
              27,890**Cash
                  flow items**Net
                  cash used by operating activities
              
              $
              105,190
              
              $
              100,157
              
              $
              110,634
              
              $
              110,000Net
                  cash used by financing activities
              
              
              (51,945
              )
              
              (46,912
              )
              
              (19,244
              )
              
              (18,610
              )**December
                  30, 2005****As
                  Previously Reported**
              
              
              **As
                  Adjusted****Balance
                  sheet items**Deferred
                  income taxes, non-current
              
              
              
              
              
              
              
              $
              126,651
              
              $
              142,525Capital
                  in excess of par value
              
              
              
              
              
              
              
              
              526,460
              
              
              574,094Retained
                  earnings
              
              
              
              
              
              
              
              
              188,999
              
              
              157,239Total
                  stockholders’ equity
              
              
              
              
              
              
              
              
              741,217
              
              
              757,091Total
                  liabilities and stockholders’ equity
              
              
              
              
              
              
              
              
              1,649,105
              
              
              1,664,979
 
 In
        connection with the adoption of SFAS No. 123(R), we were required to change
        our
        method of accounting for forfeitures from only recognizing forfeitures as
        they
        occurred to estimating the number of stock options and restricted stock grants
        for which the requisite service is not expected to be rendered. Upon adoption,
        the effect of this change was an increase in other operating income of $1.3
        million.
 
 We
        measure the compensation cost associated with share-based payments by estimating
        the fair value of stock options as of the grant date using the Black-Scholes
        option pricing model. We believe that the valuation technique and the approach
        utilized to develop the underlying assumptions are appropriate in calculating
        the fair values of the stock options granted. Estimates of fair value are
        not
        intended to predict actual future events or the value ultimately realized
        by the
        employees who receive equity awards.
 
 The
        weighted average fair values of stock-based arrangements on the date of grant
        and the assumptions used to estimate the fair value of the stock-based
        arrangements were as follows:
 
 **Year
                  Ended**
                **December
                  29, 2006**
              
              **Year
                  Ended**
                **December
                  30, 2005**
              
              **Year
                  Ended**
                **December
                  31, 2004**Weighted
                  average fair value of:Stock
                  options granted
              
              $
              22.30
              
              $
              16.23
              
              $
              15.93Restricted
                  stock awards
              
              
              58.22
              
              
              43.21
              
              
              ─Average
                  expected volatility
              
              
              34.6
              %
              
              36.6
              %
              
              39.9
              %Expected
                  term (years)
              
              
              5
              
              
              5
              
              
              6Average
                  risk-free interest rate
              
              
              4.6
              %
              
              3.7
              %
              
              4.0
              %Expected
                  dividend yield
              
              
              ─
              
              
              ─
              
              
              ─
  We
        estimate expected volatility based on historical daily price changes of our
        common stock for a period that approximates the current expected term of
        the
        options. The risk-free interest rate is based on the US Treasury yields in
        effect at the time of grant corresponding with the expected term of the options.
        The expected option term is the number of years we estimate that options
        will be
        outstanding on average prior to exercise considering vesting schedules and
        historical exercise experience.
  II-73
   A
        summary
        of stock option and restricted stock award activity under our share-based
        compensation plans is presented in the following tables:
 
 *(In
                  thousands except per share data)*
              
              **Outstanding
                  at beginning of period**
              
              **Granted**
              
              **Exercised**
              
              **Forfeited**
              
              **Outstanding
                  at end of period****Number
                  of options**Year
                  ended December 31, 2004
              
              
              5,563
              
              
              837
              
              
              (329
              )
              
              (66
              )
              
              6,005Year
                  ended December 30, 2005
              
              
              6,005
              
              
              405
              
              
              (836
              )
              
              (84
              )
              
              5,490Year
                  ended December 29, 2006
              
              
              5,490
              
              
              408
              
              
              (740
              )
              
              (57
              )
              
              5,101**Weighted-average
                  exercise prices**Year
                  ended December 31, 2004
              
              $
              25.52
              
              $
              34.82
              
              $
              21.62
              
              $
              21.30
              
              $
              27.17Year
                  ended December 30, 2005
              
              
              27.17
              
              
              42.61
              
              
              21.96
              
              
              33.99
              
              
              29.00Year
                  ended December 29, 2006
              
              
              29.00
              
              
              58.25
              
              
              24.00
              
              
              39.17
              
              
              31.95
 
 The
        weighted-average remaining contractual life of the 5,101,000 outstanding
        options
        at December 29, 2006 was 5.88 years, and the aggregate intrinsic value of
        those
        options was $142.0 million at December 29, 2006. Intrinsic value represents
        the
        amount by which the fair market value of the underlying stock exceeds the
        exercise price of the options. There were 4,227,000 exercisable options at
        December 29, 2006 with a weighted average exercise price of $28.67 per share,
        a
        weighted-average remaining contractual life of 5.37 years and an aggregate
        intrinsic value of $131.5 million. During the year ended December 29, 2006,
        options to purchase 740,000 shares of common stock were exercised for proceeds
        of $17.8 million, of which $0.7 million was received after
        year-end.
 A
        summary
        of restricted stock activity is as follows:
 *(In
                  thousands)*
              
              **Outstanding
                  at beginning of period**
              
              **Granted**
              
              **Restrictions
                  Lapsed**
              
              **Forfeited**
              
              **Outstanding
                  at end of period**Year
                  ended December 30, 2005
              
              
              ─
              
              
              141
              
              
              ─
              
              
              (7
              )
              
              134Year
                  ended December 29, 2006
              
              
              134
              
              
              138
              
              
              (3
              )
              
              (10
              )
              
              259
 
 All
        restricted stock grants vest on the third anniversary of the date of grant.
        The
        weighted-average remaining vesting period of the 259,000 outstanding shares
        of
        restricted stock at December 29, 2006 was 1.69 years, and the aggregate
        intrinsic value of those shares was $2.3 million at December 29, 2006. Intrinsic
        value represents the amount by which the fair market value of the underlying
        stock exceeds the fair market value at the time of award of restricted shares.
        The total intrinsic value of stock-based arrangements exercised or on which
        the
        restrictions lapsed during the years ended December 29, 2006, December 30,
        2005
        and December 31, 2004 was $24.8 million, $20.9 million and $4.6 million,
        respectively.
 As
        of
        December 29, 2006, total remaining unrecognized compensation cost related
        to
        unvested stock-based arrangements was $16.6 million and is expected to be
        recognized over a weighted average period of 1.79 years. The total grant
        date
        fair value of stock options that vested during the years ended December 29,
        2006, December 30, 2005 and December 31, 2004 was $7.3 million, $6.7 million
        and
        $16.1 million, respectively.
 SFAS
        No.
        123(R) requires the cash flows resulting from the tax benefits for tax
        deductions in excess of the compensation expense recorded for those options
        (excess tax benefits) be classified as financing cash flows. These excess
        tax
        benefits were $6.6 million, $5.0 million and $6.3 million, respectively,
        for the
        years ended December 29, 2006, December 30, 2005 and December 31, 2004,
        respectively.
  II-74
  
 A
        summary
        of our non-vested options as of and changes during the years ended December
        29,
        2006, is presented below:
 
 **Outstanding
                  non-vested options**
                (*In
                  thousands except per share data)*
              
              **Number
                  of**
                **Options**
              
              **Weighted**
                **Average**
                **Grant
                  Date**
                **Fair
                  Value**Outstanding
                  as of December 30, 2005
              
              
              1,072
              
              $
              14.59Granted
              
              
              408
              
              
              22.30Vested
              
              
              (549
              )
              
              13.28Forfeited
              
              
              (57
              )
              
              16.07Outstanding
                  as of December 29, 2006
              
              
              874
              
              $
              18.92
  Beginning
        in 2003, performance units are awarded annually and mature at the end of
        their
        three-year performance period. The value of each performance unit will be
        calculated at the end of the three-year performance period to which it relates,
        based on performance results relative to predetermined corporate financial
        goals. At the end of each three-year period, the value of mature performance
        units generally will be paid in cash provided the threshold performance metrics
        have been achieved. Certain executives who are subject to stock ownership
        guidelines may elect to have the value of mature performance units paid in
        stock
        to the extent necessary to satisfy those guidelines. During the years ended
        December 29, 2006, December 30, 2005 and December 31, 2004, $19.2 million,
        $12.7
        million and $6.3 million, respectively, was recorded as compensation expense
        related to the performance units.
 
 **14.**  **ACQUISITION
        OF BNFL’S INTEREST IN GOVERNMENT SERVICES BUSINESS**
 
 On
        August
        25, 2004, we entered into an agreement to acquire BNFL’s 40 percent economic
        interest in a portion of the Government Services Business (the “Initial
        Acquisition”). The Initial Acquisition was conditioned upon compliance with
        certain regulatory approvals, of which the final condition was satisfied
        on
        April 7, 2005 (the “Effective Date”). Under the terms of the Initial
        Acquisition, we controlled the Government Services Business and agreed to
        pay
        BNFL 40 percent of net future profits from certain existing contracts and
        on
        future contracts, if any, at certain Department of Energy sites and one
        Department of Defense site (the “40% Legacy Contracts”) and 10 percent of
        profits from all other existing operations and future contracts with the
        Department of Energy through September 30, 2012 (the “10% Contracts”). BNFL
        would not share in any losses related to 10% Contracts if they occurred in
        the
        future, but retained its portion of liabilities incurred prior to July 31,
        2004.
 
 For
        accounting purposes, the Initial Acquisition was bifurcated between the 40%
        Legacy Contracts and the 10% Contracts. Prior to the acquisition, BNFL had
        a 40
        percent economic interest in the 40% Legacy Contracts and continued to receive
        40 percent of the net profits from such contracts. In substance there was
        no
        change in the economic relationship of the parties and therefore payments
        to
        BNFL for their share of earnings from the 40% Legacy Contracts were not deemed
        to be consideration for the acquisition of a minority interest. Payments
        to BNFL
        for the 10% Contracts were deemed to be consideration for the acquisition
        of a
        minority interest and were recorded using the purchase method of accounting.
        Pursuant to purchase method accounting, the acquired assets and assumed
        liabilities were recorded at estimated fair value. The fair value of assets
        acquired exceeded liabilities assumed resulting in $7.1 million of contingent
        consideration. Other significant adjustments related to the Initial Acquisition
        included: (i) elimination of BNFL’s minority interest of $46.1 million; (ii)
        elimination of $64.1 million of goodwill; (iii) recording a receivable of
        $24.6
        million from BNFL for its portion of pension liabilities retained.
 
 Prior
        to
        the Effective Date, all payments made to BNFL related to their interest in
        the
        Government Services Business were classified on our consolidated statement
        of
        income as minority interest in income of consolidated subsidiaries and were
        reflected as a financing activity on our consolidated statement of cash flows
        as
        distributions to minority interests. BNFL’s minority interest in the Government
        Services Business during the year ended December 31, 2004 and the first quarter
        of 2005 amounted to $28.2 million and $5.6 million,
        respectively.
  II-75
  
 Subsequent
        to the Effective Date, BNFL’s share of the earnings related to the 40% Legacy
        Contracts were classified as cost of revenue on our consolidated statement
        of
        income and as an operating activity on our consolidated statement of cash
        flows.
        From the Effective Date through December 30, 2005, $29.8 million was recorded
        as
        cost of revenue related to the 40% Legacy Contracts. BNFL’s share of profits
        related to the 10% Contracts from the Effective Date through December 30,
        2005
        was recorded as consideration for the acquisition of a minority interest
        and
        recorded as a $1.5 million reduction to the contingent
        consideration.
 
 Effective
        December 30, 2005, BNFL and Washington Group International entered into a
        Termination Agreement to accelerate, in the form of a $36.2 million lump
        sum
        payment, the payment of all amounts due or to become due under the Initial
        Acquisition, to terminate all rights and responsibilities under the Initial
        Acquisition, and to mutually release each other from any and all claims.
        The
        $36.2 million payment was made prior to December 30, 2005. Pursuant to the
        Termination Agreement, the risks and rewards associated with the 40% Legacy
        Contracts transferred to Washington Group International resulting in the
        acquisition of BNFL’s interest in such contracts. The Termination Agreement also
        fixed the amount of consideration to be paid related to the 10% Contracts.
        Based
        on these factors, the Termination Agreement was accounted for as an acquisition
        of a minority interest using the purchase method. The consideration, including
        cash paid and liabilities assumed, was allocated to the acquired assets based
        on
        estimated fair values. To assist in determining the value of separately
        identifiable intangible assets, we obtained an independent valuation. The
        table
        below summarizes the purchase consideration and assets acquired.
 
 **Purchase
                  Consideration:***(In
                  thousands)*Lump
                  sum cash payment
              
              $
              36,200Liabilities
                  assumed
              
              
              14,969Liabilities
                  settled, including contingent consideration
              
              
              (13,534
              )Total
                  purchase consideration
              
              $
              37,635Assets
                  acquired:Contract
                  amortizable intangible asset (backlog)
              
              $
              28,800Customer
                  relationship amortizable intangible asset
              
              
              8,600Goodwill
              
              
              235Total
                  assets acquired
              
              $
              37,635
 
 The
        contract intangible asset is being amortized over an estimated life of eight
        years proportionately to the estimated contract earnings as of the acquisition
        date to be generated from the contract backlog acquired. The customer
        relationship intangible is being amortized over an estimated life of seven
        years
        using the straight-line method. As of December 29, 2006 and December 30,
        2005,
        $23.5 million and $37.4 million, respectively, have been classified as “other
        assets” in the accompanying consolidated balance sheets.
 
 The
        following table presents the unaudited, pro forma consolidated results of
        operations for the years ended December 30, 2005 and December 31, 2004, as
        if
        the Termination Agreement had occurred at the beginning of fiscal year 2004.
        The
        pro forma results are not necessarily indicative of results of operations
        that
        would have occurred had the Termination Agreement occurred at the beginning
        of
        fiscal year 2004 or of future results of operations.
 
 **Pro
                  Forma**
                *(In
                  thousand except per share amounts)*
              
              **Year
                  Ended**
                **December
                  30, 2005**
              
              **Year
                  Ended**
                **December
                  31, 2004**Revenue
              
              $
              3,188,454
              
              $
              2,915,382Net
                  income
              
              
              66,815
              
              
              57,147Income
                  per share:Basic
              
              
              2.57
              
              
              2.26Diluted
              
              
              2.20
              
              
              2.05
 
  II-76
  **15.**  **FINANCIAL INSTRUMENTS**
 
 The
        estimated fair values of financial instruments at December 29, 2006 and December
        30, 2005 were determined, using available market information and valuation
        methodologies believed to be appropriate. However, judgment is necessary
        in
        interpreting market data to develop the estimates of fair values. Accordingly,
        the estimates presented herein are not necessarily indicative of the amounts
        that we could realize in a current market exchange. The use of different
        market
        assumptions and/or estimation methodologies could have a material effect
        on the
        estimated fair value amounts.
 
 The
        carrying amounts and estimated fair values of certain financial instruments
        at
        December 29, 2006 and December 30, 2005 were as follows:
 
 **December
                  29, 2006**
              
              **December
                  30, 2005***(In
                  thousands)*
              
              **Carrying**
                **Amount**
              
              **Fair**
                **Value**
              
              **Carrying**
                **Amount**
              
              **Fair**
                **Value****Financial
                  assets**Customer
                  retentions
              
              $
              16,443
              
              $
              15,853
              
              $
              22,849
              
              $
              22,140**Financial
                  liabilities**Subcontract
                  retentions
              
              $
              26,423
              
              $
              25,475
              
              $
              32,127
              
              $
              31,130
 
 The
        fair
        value of customer retentions and subcontract retentions was estimated by
        discounting expected cash flows at rates currently available to us for
        instruments with similar risks and maturities. The fair value of other financial
        instruments including cash and cash equivalents, short-term investments,
        accounts receivable excluding customer retentions, unbilled receivables and
        accounts and subcontracts payable excluding retentions approximate cost because
        of the immediate or short-term maturity. The estimated fair value of the
        forward
        foreign currency contracts was not significant as of December 29, 2006 and
        December 30, 2005.
  II-77
  
 **QUARTERLY
        FINANCIAL DATA**
 *(In
        millions except per share data)*
 
 **UNAUDITED**
 
 Selected
        quarterly financial data for the years ended December 29, 2006 and December
        30,
        2005 is presented below.
 
 **2006
                  Quarters Ended**
              
              **March
                  31,**
                **2006**
              
              **June
                  30,**
                **2006**
              
              **September
                  29,**
                **2006**
              
              **December
                  29,**
                **2006**Revenue
              
              $
              828.3
              
              $
              890.1
              
              $
              824.4
              
              $
              855.3Gross
                  profit
              
              
              35.0
              
              
              65.4
              
              
              15.5
              
              
              39.9Net
                  income
              
              
              19.0
              
              
              28.7
              
              
              4.3
              
              
              28.9Net
                  income per share:Basic
              
              
              0.67
              
              
              1.00
              
              
              0.15
              
              
              1.01Diluted
              
              
              0.62
              
              
              0.94
              
              
              0.14
              
              
              0.95Market
                  price:High
              
              
              60.03
              
              
              61.32
              
              
              60.00
              
              
              62.00Low
              
              
              51.76
              
              
              47.28
              
              
              50.88
              
              
              53.70
 
 **2005
                  Quarters Ended**
              
              **April
                  1,**
                **2005***
              
              **July
                  1,**
                **2005***
              
              **September
                  30,**
                **2005***
              
              **December
                  30,**
                **2005***Revenue
              
              $
              700.9
              
              $
              773.2
              
              $
              815.0
              
              $
              899.5Gross
                  profit
              
              
              45.1
              
              
              2.5
              
              
              42.7
              
              
              36.1Net
                  income (loss)
              
              
              16.1
              
              
              (1.8
              )
              
              19.1
              
              
              20.4Net
                  income (loss) per share:Basic
              
              $
              0.63
              
              $
              (0.07
              )
              $
              0.73
              
              $
              0.78Diluted
              
              
              0.55
              
              
              (0.06
              )
              
              0.61
              
              
              0.67Market
                  price:High
              
              $
              47.31
              
              $
              52.79
              
              $
              54.60
              
              $
              54.35Low
              
              
              38.00
              
              
              40.78
              
              
              48.72
              
              
              47.30
 
 
 *
              Adjusted
                  to include the retroactive impact of adopting the fair value method
                  of
                  recording compensation expense associated with stock options, see
                  Note 13
                  of Notes to Consolidated Financial Statements. Additionally, on
                  August 25,
                  2004, we agreed to acquire BNFL’s interest in the Government Services
                  Business and effective December 30, 2005, we settled all remaining
                  acquisition payments resulting in the termination of BNFL’s interest in
                  our Government Services Business, see Note 14 of Notes to Financial
                  Consolidated Financial
                  Statements.
  II-78
  **ITEM
        9.**  **CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
        ACCOUNTING**
 **AND
        FINANCIAL DISCLOSURE**
 
 During
        the years ended December 29, 2006, December 30, 2005 and December 31, 2004,
        there were no changes in, or disagreements with, accountants on accounting
        and
        financial disclosure matters.
 
 **ITEM
        9A.**  **CONTROLS
        AND PROCEDURES**
 
 ***Evaluation
        of our Disclosure Controls and disclosure of changes to Internal Control
        over
        Financial Reporting.***
 We
        maintain a set of disclosure controls and procedures designed to ensure that
        information required to be disclosed by us in reports that we file or submit
        under the Securities Exchange Act of 1934 is recorded, processed, summarized
        and
        reported within the time periods specified in SEC rules and forms. As of
        the
        date of the financial statements, an evaluation was carried out under the
        supervision and with the participation of our management, including the Chief
        Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the
        effectiveness of our disclosure controls and procedures. Based on that
        evaluation, the CEO and CFO have concluded that our disclosure controls and
        procedures are effective.
 
 ·
            ***CEO
                and CFO certificates*** 
 Attached
        as Exhibits 31.1 and 31.2 to this report on Form 10-K are two certifications,
        one each by the CEO and the CFO. They are required in accordance with Rule
        13a-14 of the Exchange Act. This Item 9A, *Controls
        and Procedures,* includes
        the information concerning the controls evaluation referred to in the
        certifications and should be read in conjunction with the
        certifications.
 
 ·
            ***Disclosure
                controls*** 
 “Disclosure
        Controls” are controls and procedures that are designed to reasonably ensure
        that information required to be disclosed in our reports filed under the
        Securities Exchange Act of 1934, such as this report on Form 10-K, is recorded,
        processed, summarized and reported within the time periods specified in the
        SEC
        rules and forms. Disclosure Controls are also designed to ensure that
        information required to be disclosed is accumulated and communicated to our
        management, including our CEO and CFO, as appropriate too allow timely decisions
        regarding required disclosures.
 
 ·
            ***Internal
                control over financial
                reporting*** 
 Our
        Disclosure Controls include components of our “Internal Control over Financial
        Reporting.” Internal Control over Financial Reporting is a process designed by,
        or under the supervision of our principal executive and principal financial
        officers, and effected by our Board of Directors, management and other
        personnel, to provide reasonable assurance regarding the reliability of
        financial reporting and the preparation of financial statements for external
        purposes in accordance with generally accepted accounting principles and
        includes those policies and procedures that:
 
 §
            Pertain
                to the maintenance of records that in reasonable detail accurately
                and
                fairly reflect the transactions and dispositions of our
                assets; §
            Provide
                reasonable assurance that transactions are recorded as necessary
                to permit
                preparation of financial statements in accordance with generally
                accepted
                accounting principles, and that our receipts and expenditures are
                being
                made only in accordance with authorizations of our management and
                directors; and §
            Provide
                reasonable assurance regarding prevention or timely detection of
                unauthorized acquisition, use or disposition of our assets that could
                have
                a material effect on the financial
                statements.  II-79
  
 ·
            ***Limitations
                on the effectiveness of
                controls*** 
 Our
        management, including the CEO and CFO, does not expect that our Disclosure
        Controls and/or our Internal Control over Financial Reporting will prevent
        or
        detect all error or fraud. A system of controls is able to provide only
        reasonable, not complete, assurance that the control objectives are being
        met,
        no matter how extensive those control systems may be. Also, control systems
        must
        be established considering the benefits of a control system relative to its
        costs. Because of these inherent limitations that exist in all control systems,
        no evaluation of controls can provide absolute assurance that all errors
        or
        fraud, if any, have been detected. The inherent limitations in control systems
        include various human and system factors that may include errors in judgment
        or
        interpretation regarding events or circumstances or inadvertent error.
        Additionally, controls can be circumvented by the acts of a single person,
        by
        collusion on the part of two or more people or by management override of
        the
        control. Over time, controls can also become ineffective as conditions,
        circumstances, policies, technologies, level of compliance and people change.
        Because of such inherent limitations, in any cost-effective control system
        over
        financial information, misstatements may occur due to error or fraud and
        may not
        be detected.
 
 ·
            ***Scope
                of evaluation of Disclosure
                Controls*** 
 The
        evaluation of our Disclosure Controls performed by our CEO and CFO included
        obtaining an understanding of the design and objectives of the controls,
        the
        implementation of those controls and the results of the controls on this
        report
        on Form 10-K. We have established a Disclosure Committee whose duty is to
        perform procedures to evaluate the Disclosure Controls and provide the CEO
        and
        CFO with the results of their evaluation as part of the information considered
        by the CEO and CFO in their evaluation of Disclosure Controls. In the course
        of
        the evaluation of Disclosure Controls, we reviewed the controls that are
        in
        place to record, process, summarize and report, on a timely basis, matters
        that
        require disclosure in our reports filed under the Securities Exchange Act
        of
        1934. We also considered the adequacy of the items disclosed in this report
        on
        Form 10-K.
 
 ·
            ***Conclusions*** 
 Based
        upon the evaluation of our Disclosure Controls described above, our CEO and
        CFO
        have concluded that, subject to the limitations described above, our Disclosure
        Controls are effective to provide reasonable assurance that material information
        relating to Washington Group International and its consolidated subsidiaries
        is
        made known to management, including the CEO and CFO, so that required
        disclosures have been included in this report on Form 10-K.
 
 We
        have
        also reviewed our Internal Control Over Financial Reporting during the most
        recent fiscal quarter, and our CEO and CFO have concluded that there have
        been
        no changes that have materially affected, or are reasonably likely to materially
        affect, our internal control over financial reporting.
 
 ***Management’s
        Annual Report on Internal Control Over Financial
        Reporting***
 
 Our
        management is responsible for establishing and maintaining adequate internal
        control over financial reporting. Under the supervision and with the
        participation of our management, including our CEO and our CFO, we conducted
        an
        evaluation of the effectiveness of our internal control over financial reporting
        based on the framework in *Internal
        Control - Integrated Framework* ,
        issued
        by the Committee of Sponsoring Organizations of the Treadway Commission.
        Based
        on our evaluation under the framework in *Internal
        Control - Integrated Framework* ,
        our
        management concluded that our Internal Control Over Financial Reporting was
        effective as of December 29, 2006.
  II-80
  Our
        independent registered public accountants, Deloitte & Touche LLP, have
        audited our management’s assessment of internal control over financial reporting
        as of December 29, 2006, as stated in their attestation report which is included
        herein.
 
  II-81
  **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 To
        the
        Board of Directors and Stockholders of
 Washington
        Group International, Inc.
 We
        have
        audited management's assessment, included in the accompanying Management’s
        Annual Report on Internal Control Over Financial Reporting, that Washington
        Group International, Inc. and subsidiaries (the “Company”) maintained effective
        internal control over financial reporting as of December 29, 2006, based
        on
        criteria established in *Internal
        Control—Integrated Framework* issued
        by
        the Committee of Sponsoring Organizations of the Treadway Commission.  The
        Company's management is responsible for maintaining effective internal control
        over financial reporting and for its assessment of the effectiveness of internal
        control over financial reporting.  Our responsibility is to express an
        opinion on management's assessment and an opinion on the effectiveness of
        the
        Company's internal control over financial reporting based on our
        audit.
 We
        conducted our audit in accordance with the standards of the Public Company
        Accounting Oversight Board (United States).  Those standards require that
        we plan and perform the audit to obtain reasonable assurance about whether
        effective internal control over financial reporting was maintained in all
        material respects.  Our audit included obtaining an understanding of
        internal control over financial reporting, evaluating management's assessment,
        testing and evaluating the design and operating effectiveness of internal
        control, and performing such other procedures as we considered necessary
        in the
        circumstances.  We believe that our audit provides a reasonable basis for
        our opinions.
 A
        company's internal control over financial reporting is a process designed
        by, or
        under the supervision of, the company's principal executive and principal
        financial officers, or persons performing similar functions, and effected
        by the
        company's board of directors, management, and other personnel to provide
        reasonable assurance regarding the reliability of financial reporting and
        the
        preparation of financial statements for external purposes in accordance with
        generally accepted accounting principles.  A company's internal control
        over financial reporting includes those policies and procedures that (1)
        pertain
        to the maintenance of records that, in reasonable detail, accurately and
        fairly
        reflect the transactions and dispositions of the assets of the company; (2)
        provide reasonable assurance that transactions are recorded as necessary
        to
        permit preparation of financial statements in accordance with generally accepted
        accounting principles, and that receipts and expenditures of the company
        are
        being made only in accordance with authorizations of management and directors
        of
        the company; and (3) provide reasonable assurance regarding prevention or
        timely
        detection of unauthorized acquisition, use, or disposition of the company's
        assets that could have a material effect on the financial
        statements.
 Because
        of the inherent limitations of internal control over financial reporting,
        including the possibility of collusion or improper management override of
        controls, material misstatements due to error or fraud may not be prevented
        or
        detected on a timely basis.  Also, projections of any evaluation of the
        effectiveness of the internal control over financial reporting to future
        periods
        are subject to the risk that the controls may become inadequate because of
        changes in conditions, or that the degree of compliance with the policies
        or
        procedures may deteriorate.
 In
        our
        opinion, management's assessment that the Company maintained effective internal
        control over financial reporting as of December 29, 2006, is fairly stated,
        in
        all material respects, based on the criteria established in *Internal
        Control—Integrated Framework* issued
        by
        the Committee of Sponsoring Organizations of the Treadway Commission.  Also
        in our opinion, the Company maintained, in all material respects, effective
        internal control over financial reporting as of December 29, 2006, based
        on the
        criteria established in *Internal
        Control—Integrated Framework* issued
        by
        the Committee of Sponsoring Organizations of the Treadway
        Commission.
  II-82
  We
        have
        also audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), the consolidated financial statements and
        financial statement schedule **** as
        of and
        for the year ended December 29, 2006, of the Company and our report dated
        February 25, 2007 expressed an unqualified opinion on those financial statements
        and financial statement schedule and included an explanatory paragraph regarding
        the adoption of Emerging Issues Task Force Issue No. 04-6, *Accounting
        for Stripping Costs Incurred during Production in the Mining
        Industry* and
        Financial Accounting Standards No. 158, *Employers’
        Accounting for Defined Benefit Pension and Other Postretirement Plans - an
        Amendment of FASB Statements No. 87, 88, 106 and 132(R)* .
 
 /s/
        Deloitte & Touche LLP
 Deloitte
        & Touche LLP
 Boise,
        Idaho
 February
        25, 2007
 
  II-83
  
 II-84
 
 **ITEM
        9B. OTHER INFORMATION**
 
 None.
 
 II-85
  **PART
        III**
 
 **ITEM
        10.**  **DIRECTORS,
        EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**
 
 The
        information called for by this Item will be set forth under the captions
        “Directors” and **** “Executive
        Officers” in our definitive proxy statement for our annual meeting of
        stockholders, to be filed not later than April 17, 2007, and is incorporated
        herein by this reference.
 
 **ITEM
        11.**  **EXECUTIVE
        COMPENSATION**
 
 The
        information called for by this Item will be set forth under the caption “Report
        of the Compensation Committee on Executive Compensation for 2006” in our
        definitive proxy statement for our annual meeting of stockholders, to be
        filed
        not later than April 17, 2007, and is incorporated herein by this
        reference.
 
 **ITEM
        12.**  **SECURITY
        OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
        MATTERS**
 
 ***Securities
        authorized for issuance under equity compensation plans***
 
 **(a)**
              
              **(b)**
              
              **(c)**Plan
                  Category
              
              Number
                  of securities to be issued upon exercise of outstanding
                  options
              
              Weighted-average
                  exercise price of outstanding options
              
              Number
                  of securities remaining available for future issuance under equity
                  compensation plans (excluding securities reflected in column
                  (a)Equity
                  compensation
                plans
                  approved by
                security
                  holders
              
              
              5,100,852
              
              $
              31.95
              
              
              1,033,619Equity
                  compensation
                plans
                  not approved
                by
                  security holders
              
              
              ─
              
              
              ─
              
              
              ─Total
              
              
              5,100,852
              
              $
              31.95
              
              
              1,033,619
 
 Additional
        information called for by this Item will be set forth under the caption
“Security Ownership of Certain Beneficial Owners and Management” in our
        definitive proxy statement for our annual meeting of stockholders, to be
        filed
        not later than April 17, 2007, and is incorporated herein by this
        reference.
 
 **ITEM
        13.**  **CERTAIN
        RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
        INDEPENDENCE**
 
 The
        information called for by this Item will be set forth under the caption “Certain
        Relationships and Related Transactions” in our definitive proxy statement for
        our annual meeting of stockholders, to be filed not later than April 17,
        2007,
        and is incorporated herein by this reference.
 
 **ITEM
        14.**  **PRINCIPAL
        ACCOUNTING FEES AND SERVICES**
 
 The
        information called for by this Item will be set forth under the caption
“Principal Accountant Fees and Services” in our definitive proxy statement for
        our annual meeting of stockholders, to be filed not later than April 17,
        2007,
        and is incorporated herein by this reference.
 
  III-1
   **PART
        IV**
 
 **ITEM
        15.**  **EXHIBITS
        AND FINANCIAL STATEMENT SCHEDULE**
 
 (a)  *Documents
        filed as a part of this Form 10-K.*
 
 **PAGE**1.
              The
                  Consolidated Financial Statements, together with the report thereon
                  of
                Deloitte
                  & Touche LLP, are included in part II, Item 8 of this
                  reportReport
                  of Independent Registered Public Accounting Firm
              II-34Consolidated
                  Statements of Income for the years ended December 29, 2006,
                December
                  30, 2005 and December 31, 2004
              II-35Consolidated
                  Statements of Comprehensive Income for the years ended
                December
                  29, 2006, December 30, 3005 and December 31, 2004
              II-36Consolidated
                  Balance Sheets as of December 29, 2006 and December 30,
                  2005
              II-37Consolidated
                  statements of Cash Flows for the years ended December 29, 2006,
                December
                  30, 2005 and December 31, 2004
              II-39Consolidated
                  Statements of Stockholders’ Equity for the years ended December 29,
                  2006,
                December
                  30, 2005 and December 31, 2004
              II-40Notes
                  to Consolidated Financial Statements
              II-412.
              Schedule
                  II Valuation, Qualifying and Reserve Accounts
              S-1Financial
                  statement schedules not listed above are omitted because they are
                  not
                  required or are not applicable, or the required information is
                  presented
                  in the financial statements including the notes thereto. Captions
                  and
                  column headings have been omitted where not applicable3.
              ExhibitsThe
                  exhibits to this report are listed in the Exhibit Index set forth
                  below82
 
 
 
 
  **SIGNATURES**
 
 Pursuant
        to the requirements of Section 13 or 15(d) of the Securities Exchange Act
        of
        1934, we have duly caused this Form 10-K to be signed on our behalf by the
        undersigned, thereunto duly authorized on February XX, 2007.
 
 Washington
        Group International, Inc.
 
 By  /s/
        George H. Juetten
 George
        H.
        Juetten, Executive Vice President and Chief Financial Officer
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, this Form 10-K
        has
        been signed below on February XX, 2007 by the following persons on our behalf
        in
        the capacities indicated.
 
 
 Chief
        Executive Officer and President and Director
 /s/
        Stephen G. Hanks  (Principal
        Executive Officer)
 
 Executive
        Vice President and Chief Financial Officer
 /s/
        George H. Juetten  (Principal
        Financial Officer)
 
 Vice
        President and Controller
 /s/
        Jerry
        K. Lemon  (Principal
        Accounting Officer)
 
 
 /s/
        Dennis R. Washington*  Chairman
        and Director
 
 /s/
        David
        H. Batchelder*  Director
 
 /s/
        Michael R. D’Appolonia *  Director
 
 /s/
        C.
        Scott Greer*  Director
 
 /s/
        William H. Mallender*  Director
 
 /s/
        Michael P. Monaco*  Director
 
 /s/
        Cordell Reed*  Director
 
 /s/
        Gail
        E. Hamilton*  Director
 
 /s/
        Dennis K. Williams*  Director
 
 /s/
        John
        R. Alm*  Director
 
 *Craig
        G.
        Taylor, by signing his name hereto, does hereby sign this Form 10-K on behalf
        of
        each of the above-named directors of Washington Group International, Inc.,
        pursuant to powers of attorney executed on behalf of each such officer and
        director.
 
 By
        /s/
        Craig G. Taylor
 Craig
        G.
        Taylor, Attorney-in-fact
 
  
 
 
  
 **WASHINGTON
        GROUP INTERNATIONAL, INC.**
 **SCHEDULE
        II. VALUATION, QUALIFYING AND RESERVE ACCOUNTS**
 ***(In
        thousands)***
 
 **Allowance
        for Doubtful Accounts Receivable Deducted in the Balance Sheet from Accounts
        Receivable**
 
 
 
 
 Period
                  Ended
              
              Balance
                  at
                Beginning
                  of Period
              
              Provisions
                Charged
                  to
                Operations
              
              Other
              
              Deductions
              
              Balance
                  at
                End
                  of PeriodYear
                  ended December 31, 2004
              
              $
              (13,519
              )
              $
              (3,707
              )
              
              -
              
              $
              7,807
              
              $
              (9,419
              )Year
                  ended December 30, 2005
              
              
              (9,419
              )
              
              (1,188
              )
              
              -
              
              
              4,796
              
              
              (5,811
              )Year
                  ended December 29, 2006
              
              
              (5,811
              )
              
              (2,146
              )
              
              -
              
              
              1,210
              
              
              (6,747
              )
 
 
 **Deferred
        Income Tax Asset Valuation Allowance Deducted in the Balance
        Sheet**
 **from
        Deferred Income Tax Assets**
 
 
 Period
                  Ended
              
              Balance
                  at
                Beginning
                  of Period
              
              Provisions
                Charged
                  to
                Operations
              
              Other
              
              Deductions
              
              Balance
                  at
                End
                  of PeriodYear
                  ended December 31, 2004
              
              $
              (149,975
              )
              $
              ─
              
              $
              18,731
              
              
              ─
              
              $
              (131,244
              )Year
                  ended December 30, 2005
              
              
              (131,244
              )
              
              (1,098
              )
              
              24,393
              
              
              ─
              
              
              (107,949
              )Year
                  ended December 29, 2006
              
              
              (107,949
              )
              
              1,098
              
              
              30,197
              
              
              ─
              
              
              (76,654
              )
 
 _____________________
 
 (a)
              Other
                  adjustments to the deferred income tax valuation allowance during
                  the
                  years ended December 31, 2004, December 30, 2005 and December 29,
                  2006
                  primarily relate to actual and forecasted utilization of NOL
                  carryovers.
 
 
 S-1
  
 **WASHINGTON
        GROUP INTERNATIONAL, INC.**
 **EXHIBIT
        INDEX**
 
 
 **Exhibit**
 **Number**  **Exhibit
        Description**
 
 2.1
              Stock
                  Purchase Agreement dated as of April 14, 2000, among Raytheon Company,
                  Raytheon Engineers & Constructors International, Inc. and Washington
                  Group International, Inc. (“Washington Group International”) (filed as
                  Exhibit 2 to Washington Group International’s Form 10-Q Quarterly Report
                  for the quarter ended March 3, 2000, and incorporated herein by
                  reference).
 
 2.2.1
              Second
                  Amended Joint Plan of Reorganization of Washington Group International,
                  et. al. (filed as Exhibit 99.1 to Washington Group International’s Form
                  8-K Current Report filed on August 2, 2001, and incorporated herein
                  by
                  reference).
 
 2.2.2
              Modification
                  to Second Amended Joint Plan of Reorganization of Washington Group
                  International, et. al. (filed as Exhibit 99.1 to Washington Group
                  International’s Form 8-K Current Report filed on August 31, 2001, and
                  incorporated herein by reference).
 
 2.2.3
              Second
                  Modification to Second Amended Joint Plan of Reorganization of
                  Washington
                  Group International, et. al. (filed as Exhibit 2.3 to Washington
                  Group
                  International’s Form 8-K Current Report filed on January 4, 2002, and
                  incorporated herein by reference).
 
 2.2.4
              Third
                  Modification to Second Amended Joint Plan of Reorganization of
                  Washington
                  Group International, et. al. (filed as Exhibit 2.4 to Washington
                  Group
                  International’s Form 8-K Current Report filed on January 4, 2002 and
                  incorporated herein by reference).
 
 3.1
              Amended
                  and Restated Certificate of Incorporation of Washington Group
                  International (filed as Appendix B to Washington Group International’s
                  Form 14A Definitive Proxy Statement filed on March 20, 2004, and
                  incorporated herein by reference).
 
 3.2
              Amended
                  and Restated Bylaws of Washington Group International as of January
                  25,
                  2007.*
 
 4.1
              Specimen
                  certificate of Washington Group International’s common stock (filed as
                  Exhibit 4.1 to Washington Group International’s Form 10-Q Quarterly Report
                  for quarter ended June 28, 2002, and incorporated herein by
                  reference).
 
 10.1
              Pledge
                  and Security Agreement dated as of January 24, 2002, among Washington
                  Group International, certain subsidiaries of Washington Group
                  International identified therein and Credit Suisse First Boston,
                  as
                  administrative agent (filed as Exhibit 10.2 to Washington Group
                  International’s Form 8-K Current Report filed on February 8, 2002, and
                  incorporated herein by reference).
 
 10.2
              Shareholders
                  Agreement dated December 18, 1993, among Morrison Knudsen BV, a
                  wholly-owned subsidiary of Washington Group International, Lambique
                  Beheer
                  BV and Ergon Overseas Holdings Limited (filed as Exhibit 10.6 to
                  Washington Group International’s Form 10-K Annual Report for fiscal year
                  ended November 30, 1997, and incorporated herein by
                  reference).
 
 10.3
              Asset
                  Purchase Agreement dated as of June 25, 1998, between CBS Corporation
                  and
                  WGNH Acquisition, LLC related to the acquisition of the Westinghouse
                  Energy Systems Business Unit from CBS Corporation (filed as Exhibit
                  10.10
                  to Washington Group International’s Form 10-K Annual Report for fiscal
                  year ended November 30, 1998, and incorporated herein by
                  reference).
  E-1
  10.4
              Asset
                  Purchase Agreement dated as of June 25, 1998, between CBS Corporation
                  and
                  WGNH Acquisition, LLC related to the acquisition of the Westinghouse
                  Government and Environmental Services Company business from CBS
                  Corporation (filed as Exhibit 10.11 to Washington Group International’s
                  Form 10-K Annual Report for fiscal year ended November30,
                  1998, and incorporated herein by
                  reference).
 
 10.5
              Second
                  Amended and Restated Consortium Agreement between Washington Group
                  International’s wholly-owned subsidiary, Washington Group International,
                  Inc., an Ohio corporation, and BNFL-USA Group, Inc., effective
                  as of July
                  31, 2004 (filed as Exhibit 10.1 to Washington Group International’s Form
                  10-Q Quarterly Report for quarter ended October 1, 2004, and incorporated
                  herein by reference).
 
 10.6
              Termination
                  Agreement of December 31, 2005, among Washington Group International,
                  Inc., British Nuclear Fuels plc, and BNFL USA Group Inc. (filed
                  as Exhibit
                  10.6 to Washington Group International’s Form 10-K Annual Report for year
                  ended December 30, 2005, and incorporated herein by
                  reference).
 
 10.7
              Asset
                  Purchase Agreement dated as of October 25, 2002, between Westinghouse
                  Government Services Company LLC and Curtiss-Wright Electro-Mechanical
                  Corporation (filed as Exhibit 99.2 to Washington Group International’s
                  Form 8-K/A Amended Current Report filed on November 1, 2002, and
                  incorporated herein by reference).
 
 10.8
              Trust
                  and Disbursing Agreement dated as of January 25, 2002, among Washington
                  Group International, the Official Unsecured Creditors’ Committee and Wells
                  Fargo Bank Minnesota, National Association, as disbursing agent
                  (filed as
                  Exhibit 10.4 to Washington Group International’s Form 8-K Current Report
                  filed on February 8, 2002, and incorporated herein by
                  reference).
 
 10.9
              Settlement
                  Agreement dated as of January 23, 2002, among Washington Group
                  International, Raytheon Company and Raytheon Engineers & Constructors
                  International, Inc. (filed as Exhibit 10.5 to Washington Group
                  International’s Form 8-K Current Report filed on February 8, 2002, and
                  incorporated herein by reference).
 
 10.10
              Asset
                  Purchase Agreement dated as of April 17, 2003, between The Shaw
                  Group Inc.
                  and Washington Group International related to the sale of Washington
                  Group
                  International’s Petrochemical Technology Center in Cambridge,
                  Massachusetts, to Stone & Webster, Inc., a subsidiary of The Shaw
                  Group Inc. of Baton Rouge, Louisiana (filed as Exhibit 10.1 to
                  Washington
                  Group International’s Form 10-Q Quarterly Report for quarter ended July 4,
                  2003, and incorporated herein by
                  reference).
 
 10.11.1
              Amended
                  and Restated Credit Agreement dated as of October 9, 2003, among
                  Washington Group International, Inc., the lenders and issuers party
                  thereto, Credit Suisse First Boston, as administrative agent, sole
                  lead
                  arranger and book manager, LaSalle Bank National Association, as
                  documentation agent, and ABLECO Finance LLC, as syndication agent
                  (filed
                  as Exhibit 10.1 to Washington Group International’s Form 8-K Current
                  Report filed on October 13, 2003, and incorporated herein by
                  reference).
 
 10.11.2
              Amendment
                  No. 1, dated as of March 19, 2004, to the Amended and Restated
                  Credit
                  Agreement dated as of October 9, 2003, among Washington Group
                  International, Inc., the lenders and issuers party thereto, Credit
                  Suisse
                  First Boston, as administrative agent, sole lead arranger and book
                  manager, and LaSalle Bank National Association, as documentation
                  agent
                  (filed as Exhibit 10.3 to Washington Group International’s Form 10-Q
                  Quarterly Report for the quarter ended April 2, 2004, and incorporated
                  herein by reference).
 
 10.11.3
              Amendment
                  No. 2, dated as of July 22, 2004, to the Amended and Restated Credit
                  Agreement of October 9, 2003, as amended by Amendment No. 1 dated
                  as of
                  March 19, 2004, among Washington Group international, Inc., the
                  lenders
                  and issuers party thereto, and Credit Suisse First Boston,
                  as
  E-2
  administrative
        agent for the Lenders and Issuers thereunder (filed as Exhibit 10.2 to
        Washington Group International’s Form 10-Q Quarterly Report for the quarter
        ended July 2, 2004, and incorporated herein by reference).
 
 10.11.4  Amendment
        Agreement among Washington Group International, Inc., the lenders and issuers
        party thereto, Credit Suisse, as administrative agent, and the other parties
        thereto, including the Second Amended and Restated Credit Agreement, dated
        as of
        June 14, 2005, among Washington Group International, Inc., the lenders and
        issuers party thereto, and Credit Suisse, as administrative agent (filed
        as
        Exhibit 10.1 to Washington Group International’s Form 8-K Current Report filed
        on June 17, 2005, and incorporated herein by reference).
 
 10.12
              Joinder
                  Agreement dated as of October 9, 2003, delivered by subsidiaries
                  of
                  Washington Group International, Inc. and acknowledged and agreed
                  by Credit
                  Suisse First Boston (filed as Exhibit 10.2 to Washington Group
                  International’s Form 8-K Current report filed on October 13, 2003, and
                  incorporated herein by reference).
 
 10.13
              Intercreditor
                  Agreement as of July 31, 2004, among Credit Suisse First Boston,
                  BNFL USA
                  Group, Inc., Washington Group International, Inc. (an Ohio corporation)
                  (“Washington Group (Ohio)”) and various affiliates of Washington (Ohio)
                  (filed as Exhibit 10.2 to Washington Group International’s Form 10-Q
                  Quarterly Report for quarter ended October 1, 2004, and incorporated
                  herein by reference).
 
 10.14
              Security
                  Agreement as of July 31, 2004, among Washington Group (Ohio), various
                  affiliates of Washington Group (Ohio) listed therein as Debtors,
                  and BNFL
                  USA Group, Inc. (filed as Exhibit 10.3 to Washington Group International’s
                  Form 10-Q Quarterly Report for quarter ended October 1, 2004, and
                  incorporated herein by reference).
 
 10.15
              Warrant
                  Cash Substitution Agreement dated as of January 10, 2006, by and
                  among
                  Washington Group International, Inc., the Plan Committee, formerly
                  the
                  Unsecured Creditors’ Committee, and Wells Fargo Bank Minnesota, National
                  Association, as trust and disbursing agent (filed as Exhibit 10.15
                  to
                  Washington Group International’s Form 10-K Annual Report for year ended
                  December 20, 2005, an incorporated herein by
                  reference).
 
 10.16.1  Washington
        Group International, Inc. Equity and Performance Incentive Plan, Amended
        and
        Restated as of November 9, 2002 (filed as Appendix E to Washington Group
        International’s Form Def 14A Definitive Proxy Statement filed on April 8, 2003,
        and incorporated herein by reference).#
 
 10.16.2
              Washington
                  Group International, Inc. Equity and Performance Incentive Plan,
                  Amended
                  and Restated as of August 14, 2003 (filed as Exhibit 10.13.2 to
                  Washington
                  Group International’s Form 10-K Annual Report for the year ended January
                  2, 2004, and incorporated herein by reference).
                  #
 
 10.16.3
              Amendment
                  No. 1, effective as of February 13, 2004, to the Washington Group
                  International, Inc. Equity and Performance Incentive Plan as Amended
                  and
                  Restated as of August 14, 2003 (filed as Exhibit 10.2 to Washington
                  Group
                  International’s Form 10-Q Quarterly Report for the quarter ended April 2,
                  2004, and incorporated herein by
                  reference).#
 
 10.16.4
              Amendment
                  No. 2, effective as of May 20, 2005, to the Washington Group
                  International, Inc. Equity and Performance Incentive Plan as Amended
                  and
                  Restated as of August 14, 2003 (filed as Exhibit 10.2 to Washington
                  Group
                  International’s Form 8-K Current Report filed on May 25, 2005, and
                  incorporated herein by reference).
 
 10.17
              Form
                  of Washington Group International, Inc. Equity and Performance
                  Incentive
                  Plan Performance Unit Participation Agreement (filed as Exhibit
                  10.17 to
                  Washington Group International’s Form 10-K Annual Report for year ended
                  December 30, 2005, and incorporated herein by
                  reference).#
  E-3
  10.18
              Washington
                  Group International, Inc. Equity and Performance Incentive Plan-California (filed as Exhibit 10.8 to Washington Group International’s Form
                  8-K Current Report filed on February 8, 2002, and incorporated
                  herein by
                  reference). #
 
 10.19
              Letter
                  Agreement dated as of November 15, 2001, between Washington Group
                  International and Dennis R. Washington (filed as Exhibit 10.9 to
                  Washington Group International’s Form 8-K Current Report filed on February
                  8, 2002, and incorporated herein by reference).
                  #
 
 10.20
              Letter
                  Agreement of January 21, 2004, effective as of November 14, 2003,
                  between
                  Washington Group International and Dennis R. Washington (filed
                  as Exhibit
                  10.17 to Form 10-K Annual Report for the year ended January 2,
                  2004, and
                  incorporated herein by reference).
 
 10.21
              Form
                  of Indemnification Agreement (filed as Exhibit 10.10 to Washington
                  Group
                  International’s Form 8-K Current Report filed on February 8, 2002, and
                  incorporated herein by reference). # A schedule listing the directors
                  and
                  officers with whom Washington Group International has entered into
                  such
                  agreements is filed herewith. *
 
 10.22
              Washington
                  Group International Key Executive Disability Insurance Plan (filed
                  as
                  Exhibit 10.12 to Old MK’s Form 10-K Annual Report for year ended December
                  31, 1992, and incorporated herein by reference).
                  #
 
 10.23.1
              Form
                  of Washington Group International’s Retention Agreement (filed as Exhibit
                  10.21 to Washington Group International’s Form 10-K Annual Report for
                  fiscal year ended November 30, 2001, and incorporated herein by
                  reference). # A schedule listing the Executive Officers with whom
                  Washington Group International has entered into such agreements
                  is filed
                  herewith.*
 
 10.23.2
              Form
                  of Amendment to Washington Group International’s Retention Agreement
                  (filed as Exhibit 10.18.2 to Washington Group International’s Form 10-K
                  Annual Report for fiscal year ended January 3, 2003, and incorporated
                  herein by reference). # A schedule listing Executive Officers with
                  whom
                  Washington Group International has entered into such amendments
                  is filed
                  herewith.*
 
 10.24.1
              Washington
                  Group International, Inc. Short-Term Incentive Plan (filed as Appendix
                  D
                  to Washington Group International’s Form Def 14A Proxy Statement filed on
                  April 8, 2003, and incorporated herein by reference).
                  #
 
 10.24.2
              Amendment
                  1 to Washington Group International, Inc. Short-Term Incentive
                  Plan (filed
                  as Exhibit 10.3 to Washington Group International’s Form 8-K Current
                  Report filed on February 15, 2005, and incorporated herein by
                  reference).#
 
 10.25
              Washington
                  Group International, Inc. Restoration Plan effective as of January
                  1,
                  2003, amended and restated as of August 14, 2003 (filed as Exhibit
                  10.3 to
                  Washington Group International’s Form 10-Q Quarterly Report for quarter
                  ended October 3, 2003, and incorporated herein by reference).
                  #
 
 10.26
              Washington
                  Group International, Inc. Voluntary Deferred Compensation Plan
                  effective
                  as of January 1, 2003, amended and restated as of August 14, 2003
                  (filed
                  as Exhibit 10.4 to Washington Group International’s Form 10-Q Quarterly
                  Report for quarter ended October 3, 2003, and incorporated herein
                  by
                  reference). #
 
 10.27
              Description
                  of Washington Group International Executive Financial Counseling
                  Program
                  adopted on February 14, 2003 (filed as Exhibit 10.23 to Washington
                  Group
                  International’s Form 10-K Annual Report for fiscal year ended January 3,
                  2003, and incorporated herein by reference).
                  #
  E-4
  10.28.1
              Washington
                  Group International, Inc. 2004 Equity Incentive Plan effective
                  as of May
                  7, 2004 (filed as Exhibit 10.1 to Washington Group International’s Form
                  10-Q Quarterly Report for quarter ended July 2, 2004, and incorporated
                  herein by reference).#
 
 10.28.2
              Amendment
                  No. 1, effective as of May 20, 2005, to the Washington Group
                  International, Inc. 2004 Equity Incentive Plan effective as of
                  May 7, 2004
                  (filed as Exhibit 10.1 to Washington Group International’s Form 8-K
                  Current Report filed on May 25, 2005, and incorporated herein by
                  reference).#
 
 10.29
              Form
                  of Washington Group International, Inc. 2004 Equity Incentive Plan
                  Option
                  Rights Agreement (filed as Exhibit 10.1 to Washington Group
                  International’s Form 8-K Current Report filed on February 15, 2005, and
                  incorporated herein by reference).#
 
 10.30
              Form
                  of Washington Group International, Inc. 2004 Equity Incentive Plan
                  Restricted Share Agreement (filed as Exhibit 10.2 to Washington
                  Group
                  International’s Form 8-K Current Report filed on February 15, 2005, and
                  incorporated herein by reference).#
 
 10.31
              Executive
                  Life Insurance Agreement effective as of January 1, 2005, between
                  Washington Group International, Inc., and Stephen G. Hanks (filed
                  as
                  Exhibit 10.31 to Washington Group International’s Form 10-K Annual Report
                  for year ended December 20, 2005, and incorporated herein by reference).
                  #
 
 10.32
              Executive
                  Life Insurance Agreement effective as of January 1, 2005, between
                  Washington Group International, Inc., and Thomas H. Zarges (filed
                  as
                  Exhibit 10.32 to Washington Group International’s Form 10-K Annual Report
                  for year ended December 20, 2005, and incorporated herein by reference).
                  #
 
 10.33
              Incremental
                  Tranche A Facility Commitment Assumption Agreement dated as of
                  July 5,
                  2006, among Washington Group International, Inc., the lenders and
                  issuers
                  party thereto and Credit Suisse, as Administrative Agent (filed
                  as Exhibit
                  10.1 to Washington Group International’s Form 10-Q Quarterly Report for
                  the quarter ended June 30, 2006, and incorporated herein by
                  reference).
 
 10.34
              Severance
                  Agreement dated as of September 8, 2006, between Washington Group
                  International, Inc., and Stephen G. Hanks, as described in the
                  heading*Change
                  in Control Agreements*in
                  Washington Group International’s Form 14A Definitive Proxy Statement filed
                  on April 14, 2006 (filed as Exhibit 10.1 to Washington Group
                  International’s Form 10-Q Quarterly Report for the quarter ended September
                  29, 2006, and incorporated herein by reference).
                  #
 
 10.35
              Form
                  of Severance Agreement dated as of September 8, 2006, between Washington
                  Group International, Inc., and certain of its officers, as described
                  under
                  the heading*Change
                  in Control Agreements*in
                  Washington Group International’s Form 14A Definitive Proxy Statement filed
                  on April 14, 2006 (filed as Exhibit 10.2 to Washington Group
                  International’s Form 10-Q Quarterly Report for the quarter ended September
                  29, 2006, and incorporated herein by reference). # A schedule listing
                  the
                  officers with whom Washington Group International has entered into
                  such
                  agreements is filed herewith. *
 
 21.*
              Subsidiaries
                  of Washington Group International.
 
 23.1*
              Consent
                  of Deloitte & Touche LLP.
 
 23.2*
              Consent
                  of Deloitte & Touche GmbH.
 
 24.
              Powers
                  of Attorney (filed as Exhibit 24 to Washington Group International’s Form
                  10-K Annual Report for year ended December 30, 2005, and incorporated
                  herein by reference).
  E-5
  31.1*
              Certification
                  of the Principal Executive Officer of Washington Group International
                  pursuant to Section 302 of the Sarbanes-Oxley Act of
                  2002.
 
 31.2*
              Certification
                  of the Principal Financial Officer of Washington Group International,
                  pursuant to Section 302 of the Sarbanes-Oxley Act of
                  2002.
 
 32.1†
              Certification
                  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002.
 
 99.1*
              Financial
                  Statements of Mitteldeutsche Braunkohlengesellschaft mbH (MIBRAG)
                  for the
                  year ended December 31, 2006.
 
 ________________
 
 #  Management
        contract or compensatory plan
 *  Filed
        herewith
 †  Furnished
        herewith
 
 
 
 
 
 
 
 
 
 
  E-6
  Exhibit
        23.1
 **CONSENT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 We
        consent to the incorporation by reference in Registration Statement Nos.
        333-108941 and 333-123881 on Form S-8 of our reports dated February 25, 2007,
        relating to the financial statements and financial statement schedule of
        Washington Group International Inc. and subsidiaries (which report
        expresses an unqualified opinion and includes an explanatory paragraph regarding
        the adoption of Emerging Issues Task Force Issue No. 04-6, *Accounting
        for Stripping Costs Incurred during Production in the Mining
        Industry* and
        Financial Accounting Standard No. 158, *Employers’
        Accounting for Defined Benefit Pension and Other Postretirement Plans - an
        Amendment of FASB Statements No. 87, 88, 106 and 132(R)* ) and
        management's report on the effectiveness of internal control over financial
        reporting, appearing in this Annual Report on Form 10-K of Washington Group
        International Inc. for the year ended December 29, 2006.
 
 
 /s/
        Deloitte & Touche LLP
 Deloitte
        & Touche LLP
 Boise,
        Idaho
 February
        25, 2007
 
 
  E-7
  Exhibit
        23.2
 
 **INDEPENDENT
        AUDITORS’ CONSENT**
 
 We
        consent to the incorporation by reference in Registration Statement Nos.
        333-108941 and 333-123881 of Washington Group International, Inc. on Form
        S-8 of
        our report dated February 7, 2007 relating to the audit of the consolidated
        balance sheets of Mitteldeutsche Braunkohlengesellschaft mbH, Theissen (Germany)
        and its subsidiaries as of December 31, 2006 and 2005, 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, 2006 appearing in
        this
        Annual Report on Form 10-K of Washington Group International, Inc. for the
        year
        ended December 29, 2006. In the report, we express the opinion that the
        consolidated financial statements referred to above present fairly, in all
        material respects, the consolidated financial position of Mitteldeutsche
        Braunkohlengesellschaft mbH, Theissen (Germany), and the consolidated results
        of
        its operations and cash flows in conformity with accounting principles generally
        accepted in Germany. The effect of applying accounting principles generally
        accepted in the United States of America on the results of operations for
        each
        of the years in the three-year period ended December 31, 2006 and on
        shareholders’ equity as of December 31, 2006 and 2005, audited by us, is fairly
        presented in Note C to the consolidated financial statements.
 
 
 
 /s/
        DELOITTE & TOUCHE GMBH
 Deloitte
        & Touche GmbH
 Leipzig,
        Germany
 February
        25, 2007
  E-8
  Exhibit
        31.1
 
 **PRINCIPAL
        EXECUTIVE OFFICER’S CERTIFICATIONS**
 **PURSUANT
        TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002**
 
 I,
        Stephen G. Hanks, certify that:
 
 1.
        I have
        reviewed this annual report on Form 10-K of Washington Group International,
        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 officer and I are responsible for establishing and
        maintaining disclosure controls and procedures (as defined in Exchange Act
        Rules
        13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
        defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
        and we
        have:
 
 a)
        designed such disclosure controls and procedures, or caused such disclosure
        controls and procedures to be designed under our supervision, 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)
        designed such internal control over financial reporting, or caused such internal
        control over financial reporting to be designed under our supervision, to
        provide reasonable assurance regarding the reliability of financial reporting
        and the preparation of financial statements for external purposes in accordance
        with generally accepted accounting principles;
 
 c)
        evaluated the effectiveness of the registrant’s disclosure controls and
        procedures and presented in this report our conclusions about the effectiveness
        of the disclosure controls and procedures, as of the end of the period covered
        by this report based on such evaluation; and
 
 d)
        disclosed in this report any change in the registrant’s internal control over
        financial reporting that occurred during the registrant’s most recent fiscal
        quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
        that has materially affected, or is reasonably likely to materially affect,
        the
        registrant’s internal control over financial reporting.
 
 5.
        The
        registrant’s other certifying officer and I have disclosed, based on our most
        recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation
        of
        internal control over financial reporting which are reasonably likely to
        adversely affect the registrant’s ability to record, process, summarize and
        report financial data; and
 
 b)
            any
                fraud, whether or not material, that involves management or other
                employees who have a significant role in the registrant’s internal control
                over financial reporting. 
 February
        26, 2007
 
 
 /s/
        Stephen G. Hanks
 
 Stephen
        G. Hanks
 President
        and Chief Executive Officer
   E-9
  Exhibit
        31.2
 
 **PRINCIPAL
        FINANCIAL OFFICER’S CERTIFICATIONS**
 **PURSUANT
        TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002**
 
 
 I,
        George
        H. Juetten certify that:
 
 1.
        I have
        reviewed this annual report on Form 10-K of Washington Group International,
        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 officer and I are responsible for establishing and
        maintaining disclosure controls and procedures (as defined in Exchange Act
        Rules
        13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
        defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
        and we
        have:
 
 a)
        designed such disclosure controls and procedures, or caused such disclosure
        controls and procedures to be designed under our supervision, 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)
        designed such internal control over financial reporting, or caused such internal
        control over financial reporting to be designed under our supervision, to
        provide reasonable assurance regarding the reliability of financial reporting
        and the preparation of financial statements for external purposes in accordance
        with generally accepted accounting principles;
 
 c)
        evaluated the effectiveness of the registrant’s disclosure controls and
        procedures and presented in this report our conclusions about the effectiveness
        of the disclosure controls and procedures, as of the end of the period covered
        by this report based on such evaluation; and
 
 d)
        disclosed in this report any change in the registrant’s internal control over
        financial reporting that occurred during the registrant’s most recent fiscal
        quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
        that has materially affected, or is reasonably likely to materially affect,
        the
        registrant’s internal control over financial reporting.
 
 5.
        The
        registrant’s other certifying officer and I have disclosed, based on our most
        recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation
        of
        internal control over financial reporting which are reasonably likely to
        adversely affect the registrant’s ability to record, process, summarize and
        report financial data; and
 
 b)
            any
                fraud, whether or not material, that involves management or other
                employees who have a significant role in the registrant’s internal control
                over financial reporting. 
 February
        26, 2007
 
 
 /s/
        George H. Juetten
 
 George
        H.
        Juetten
 Executive
        Vice President and Chief Financial Officer
  E-10
  Exhibit
        32.1
 
 **CERTIFICATION
        PURSUANT TO**
 **18
        U.S.C. SECTION 1350,**
 **AS
        ADOPTED PURSUANT TO**
 **SECTION
        906 OF THE SARBANES-OXLEY ACT OF 2002**
 
 In
        connection with the annual report of Washington Group International, Inc.
        (the
“Company”) on Form 10-K for the year ended December 29, 2006, as filed with the
        Securities and Exchange Commission on the date hereof (the “Report”), each of
        the undersigned officers of the Company certifies, pursuant to 18 U.S.C.
        Section
        1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
        that, to such officer’s knowledge:
 
 (1)
              The
                  Report fully complies with the requirements of Section 13(a) or
                  15(d) of
                  the Securities Exchange Act of 1934;
                  and
 
 (2)
              The
                  information contained in the Report fairly presents, in all material
                  respects, the financial condition and results of operations of
                  the Company
                  as of the dates and for the periods presented in the
                  Report.
 
 
 February
        26, 2007
 
 /s/
        Stephen G. Hanks
  Stephen
        G. Hanks
 President
        and Chief Executive Officer
 
 
 /s/
        George H. Juetten
  George
        H.
        Juetten
 Executive
        Vice President and Chief Financial Officer
 
 
 The
        foregoing certification is being furnished solely pursuant to 18 U.S.C. Section
        1350, and is not being filed as part of the Report or as a separate disclosure
        document.