**MANAGEMENT’S DISCUSSION AND ANALYSIS**This discussion and analysis of Stantec Inc.’s operations and financial position, datedFebruary 21, 2007, should be read in conjunction with the Company’s 2006 audited consolidatedfinancial statements and related notes. Our 2006 audited consolidated financial statements areprepared in accordance with generally accepted accounting principles (GAAP) in Canada, which differin certain respects from GAAP in the United States. Note 21 of the audited consolidated financialstatements summarizes the principal differences between Canadian and US GAAP that affect ourfinancial statements. Unless otherwise indicated, all amounts shown below are in Canadian dollars.Additional information regarding the Company, including our Annual Information Form, is availableon SEDAR at www.sedar.com. Such additional information is not incorporated by reference and shouldnot be deemed to be made part of this Management’s Discussion and Analysis.During the second quarter of 2006, our shareholders approved the subdivision of our common shareson a two-for-one basis. All references to common shares, per share amounts, and stock-basedcompensation plans in this Management’s Discussion and Analysis have been restated to reflect thestock split on a retroactive basis.**CAUTION REGARDING FORWARD-LOOKING STATEMENTS**Our public communications often include written or verbal forward-looking statements withinthe meaning of the U.S. Private Securities Litigation Reform Act and Canadian securities law.Forward-looking statements are disclosures regarding possible events, conditions, or results ofoperations that are based on assumptions about future economic conditions and courses of action andinclude future-oriented financial information.Statements of this type are contained in this report, including the discussion of our goal in theVisions, Core Business, and Strategy section and of our annual targets and expectations for ourpractice areas in the Results and Outlook sections, and may be contained in filings with securitiesregulators or in other communications. Forward-looking statements may involve, but are not limitedto, comments with respect to our objectives for 2007 and beyond, our strategies or future actions,our targets, our expectations for our financial condition or share price, or the results of oroutlook for our operations or for the Canadian or US economies.By their nature, forward-looking statements require us to make assumptions and are subject toinherent risks and uncertainties. There is a significant risk that predictions and otherforward-looking statements will not prove to be accurate. We caution readers of this report to notplace undue reliance on our forward-looking statements since a number of factors could cause actualfuture results, conditions, actions, or events to differ materially from the targets, expectations,estimates, or intentions expressed in these forward-looking statements.Future outcomes relating to forward-looking statements may be influenced by many factors,including, but not limited to, global capital market activities; fluctuations in interest rates orcurrency values; our ability to execute our strategic plans or to complete or integrateacquisitions; critical accounting estimates; the effects of war or terrorist activities; theeffects of disease or illness on local, national, or international
M-3

 
economies; the effects ofdisruptions to public infrastructure such as transportation or communications; disruptions in poweror water supply; industry or worldwide economic or political conditions; regulatory or statutorydevelopments; the effects of competition in the geographic or business areas in which we operate;the actions of management; or technological changes.We caution that the foregoing list is not exhaustive of all possible factors and that other factorscould adversely affect our results. The Risk Factors section below provides additional informationconcerning key factors that could cause actual results to differ materially from those projected inour forward-looking statements. Investors and the public should carefully consider these factors,other uncertainties, and potential events as well as the inherent uncertainty of forward-lookingstatements when relying on these statements to make decisions with respect to our Company. Theforward-looking statements contained herein represent our expectations as of February 21, 2007,and, accordingly, are subject to change after such date. Except as may be required by law, we donot undertake to update any forward-looking statement, whether written or verbal, that may be madefrom time to time.**VISION, CORE BUSINESS, AND STRATEGY**Our Company provides professional consulting services in planning, engineering, architecture,interior design, landscape architecture, surveying and geomatics, environmental sciences, projectmanagement, and project economics for infrastructure and facilities projects. Throughmultidiscipline service delivery, we support clients throughout the project life cycle—from theinitial conceptual planning to project completion and beyond.Our goal is to become a top 10 global design and consulting services firm, and our focus isproviding professional services in the infrastructure and facilities market principally on afee-for-service basis. To achieve our objective, we must expand the depth and breadth of ourservices, which will result in growth. We intend to continue to pursue a prudent growth plan inexpectation of achieving or exceeding $1 billion in annual revenue in the year 2008.Our business strategy is based on managing risk by **•** Diversifying our operations through a focused, three-dimensional business model  **•** Serving many clients on many projects  **•** Taking on little or no construction risk  **•** Positioning ourselves among the top-three service providers in our geographic regionsand practice areasOur focused, three-dimensional business model allows us to manage risk while continuing to increaseour revenue and earnings. The model is based on **•** Diversifying our operations across several geographic regions  **•** Specializing in distinct but complementary practice areas  **•** Providing services in all five phases of the infrastructure and facilities projectlife cycle (planning, design, construction, maintenance, and decommissioning)
M-4

 
Through our “One Team. Infinite Solutions.” approach to our business and service delivery, we haveone reportable GAAP segment—Consulting Services—which is an aggregate of our operating segments.Our operating segments are based on our regional geographic areas, and our chief operating decisionmaker (Chief Executive Officer) assesses our Company’s performance based on financial informationavailable from these geographic areas. In addition, we have practice areas that provide strategicdirection, mentoring, and technical support across all of our geographic regions.The following discussion outlines the three main components of our business model.**Geographic Diversification**Currently, we operate in three main regions in North America—Canada, the US East, and the US West.We also have a small presence in the Caribbean and a project presence in several internationallocations. Our target is to position our Company among the top three service providers in each ofour regions. Based on our services mix, this generally means achieving a market penetration of $10million in revenue per one million population. We realize this objective in our existing areasprimarily by adding services through organic growth and strategic hiring supplemented byacquisitions. We achieve our target in new areas principally by acquiring and integrating firmsthat complement our organization supplemented by organic growth and strategic hiring.**Practice Area Specialization**Currently, we provide services in five specialized and distinct practice area groupings—Buildings,Environment, Industrial & Project Management, Transportation, and Urban Land.**Buildings.**We provide comprehensive solutions for the development of commercial, industrial, andinstitutional facilities through two specialist practice areas: 1) Architecture, Interior Design &Facilities Planning & Operations and 2) Buildings Engineering. Our core services in these areasinclude project/program management, facilities management, strategic planning, architecturaldesign, interior design, and structural, mechanical, electrical, and acoustical engineering forboth new construction and existing buildings and facilities. For existing buildings, we offerexpertise in performance engineering, building operating systems (including analysis of exteriorenvelope, air quality, lighting, and energy efficiency), and ongoing tenant improvements.**Environment.**We provide solutions for sustaining air, water, and soil quality as well as the healthof natural ecosystems through two specialist practice areas: 1) Environmental Infrastructure and2) Environmental Management. Our core services in these areas include water supply, distribution,pumping, storage, and treatment; wastewater collection, pumping, management, and treatment; odorand corrosion control; water resources management; water reclamation and reuse; environmental sitemanagement; environmental assessment; heritage and natural resource assessment; risk assessment;health and safety assessment; air quality assessment; infiltration and inflow design/management ofcombined and sanitary sewer overflows; ecotoxicology and good laboratory practice testing; andmicrobiological testing.**Industrial & Project Management**. We provide industrial solutions to clients in the automotive,chemical, consumer products, forestry, food and beverage, bio/pharmaceutical, power generation,pulp and paper, utilities, mining, and general manufacturing sectors. Our core services includeplanning, engineering, and project management, which we deliver through four specialist practiceareas: 1) Manufacturing/Industrial, 2) Energy & Resources, 3) Bio/Pharmaceuticals, and 4) Program &Project Management. We also provide
M-5

 
specialty services in occupational health and safety, systemintegration, instrumentation and control, electrical energy and power management, facility planningand design, industrial engineering, logistics, materials handling, and commissioning.**Transportation.**We offer transportation solutions for the safe and efficient movement of people,vehicles, aircraft, and goods through two specialist practice areas: 1) Transportation and 2)Infrastructure Management & Pavement Engineering. Our core services include project management,planning, and engineering. We prepare transportation master plans for communities and airports;conduct transportation investment studies; and design new and upgraded airport facilities, transitfacilities, bridges, urban roadways, freeways, interchanges, rural highways, and rail systems. Inaddition, we offer expertise in simulation modeling, a comprehensive understanding oftransportation demand and supply management principles, extensive use of a range of life cycle costand statistical analysis techniques, and skills in public consultation and environmental assessmentfor developing infrastructure facility plans with broad public support. A key feature of ourtransportation services is our expertise in designing, developing, and implementing integratedinfrastructure/asset management systems and work management applications for pavement, bridges,right-of-way features, water, wastewater, stormwater, utilities, and other assets.**Urban Land.**We provide planning, engineering, surveying, project management, and landscapearchitecture solutions, principally for the land development and real estate industries, throughthree specialist practice areas: 1) Planning & Landscape Architecture, 2) Urban Land Engineering,and 3) Surveys/Geomatics. Our core services include, or relate to, the development of conceptualplans, zoningapproval of design infrastructure, transportation planning, traffic engineering, landscapearchitecture, urban planning, design construction review, and surveying.Focusing on this combination of project services helps differentiate us from our competitors,allowing us to enhance our presence in new geographic regions and markets and to establish andmaintain long-term client relationships. Our strategy for strengthening this element of ourbusiness model is to expand the depth of our expertise in our current practice areas and toselectively add complementary new practice areas to our operations.**Life Cycle Solutions**The third element of our business model is the provision of professional services in all fivephases of the project life cycle—planning, design, construction, maintenance, and decommissioning.This inclusive approach enables us to deliver services during periods of strong new capital projectactivity (i.e., design and construction) as well as periods of lower new capital projectexpenditures (i.e., maintenance and rehabilitation). Beginning with the planning and design stages,we provide conceptual and detailed design services, conduct feasibility studies, and prepare plansand specifications. During the construction phase, we generally act as the owners’ representative,providing project management, surveying, and resident engineering services. We focus principally onfee-for-service type work and generally do not act as the contractor or take on construction risk.Following project completion, during the maintenance phase, we provide ongoing professionalservices for maintenance and rehabilitation projects in areas such as facilities and infrastructuremanagement, facilities operations, and performance engineering. Finally, in the decommissioningphase, we provide solutions and recommendations for taking facilities out of active service.
M-6

 
Our three-dimensional business model approach allows us to provide services to many clients and formany projects, ensuring that we do not rely on a few large projects for our revenue and that nosingle client or project accounts for more than 5% of our business.**KEY PERFORMANCE DRIVERS AND CAPABILITIES**Our performance depends on our ability to attract and retain qualified people; make the mostof market opportunities; finance our growth; find, acquire, and integrate firms and/or newemployees into our operations; and achieve top-three market penetration in the geographic areas weserve. Based on our success with these drivers, we believe that we are well positioned to continueto be one of the principal providers of professional design and consulting services in ourgeographic regions.**People**Because we are a professional services firm, the most important driver of our performance is ourpeople.Our employees create the project solutions we deliver to clients. Consequently, to achieve our goalof becoming a top 10 global design firm, we must grow our workforce through a combination ofinternal hiring and acquisitions. We measure our success in this area by total staff numbers. In2006 our employee numbers increased to approximately 6,000 from 5,500 in 2005. Currently, ourworkforce is made up of about 3,000 professionals, 2,100 technical staff, and 900 supportpersonnel. We expect our employee numbers to continue to increase in 2007 and beyond.To attract and retain qualified staff, we offer opportunities to be part of “One Team” working onchallenging multidiscipline projects with some of the most talented people in our industry. We arecontinually strengthening and supporting our people-oriented, “One Team. Infinite Solutions.”culture. In 2006 we completed a number of activities, including the expansion of our LearningResource Center with updated content and new in-house programs and training. Launched in 2005, thecenter is the on-line source for all our learning resources, providing access to programs andmaterial on topics such as employee orientation, people skills and leadership, project management,risk mitigation, business development, and financial management, among others. Going forward, wewill continue to update and improve our learning programs and other career development initiativesin response to the needs of our staff.Our “diversified portfolio” approach to business, operating in different regions and practiceareas, and our “One Team” philosophy, using and sharing the best available staff resources acrossthe Company, generally enable us to redeploy a portion of our workforce when faced with changes inlocal, regional, or national economies or practice area demand. Although there will always be someareas where it will be difficult to find appropriate staff during certain periods, as we increasein size we become better able to address these issues by mobilizing staff from other parts of theCompany either through temporary relocation or work sharing. We are continually improving ourability to work on projects from multiple locations through standardized practices and systems,project collaboration, and Web-based technology.**Market Opportunities/Acquisition and Integration**We believe that growth is necessary in order to enhance the depth and breadth of our expertise,broaden our services, increase our shareholder value, provide more opportunities for our employees,and lever our information technology systems. Our strategy is to combine internal growth with theacquisition of firms
M-7

 
that believe in our vision and want to be part of our dynamic Company. Sincewe became publicly traded on the Toronto Stock Exchange (TSX) in 1994, we have integrated a totalof over 4,300 employees into the Stantec family from throughout Canada, the United States, and theCaribbean. In 2006 we completed three acquisitions, including two in the United States, whichestablished a new geographic subregion in New England and platforms for growth in Florida andTexas, and one in Ontario, Canada. In total, these acquisitions added over 315 employees to ouroperations. We are confident that we can continue to take advantage of acquisition opportunitiesbecause we operate in an industry sector that includes more than 100,000 firms and is estimated togenerate over US$60 billion in revenue in North America every year, of which we currently haveapproximately a 1% market share. (According to the Engineering News Record, the largest 500engineering and architecture companies in the United States alone generated nearly US$60 billion infees in 2005.)The integration of acquired firms begins immediately following the acquisition closing date andgenerally takes between six months and three years. It involves the implementation of ourCompany-wide information technology and financial management systems as well as provision of “backoffice” supportservices from our corporate and regional offices. This approach allows our new staff to focus ontheir primary responsibility of continuing to serve clients with minimal interruption.Our acquisition and integration program is managed by a dedicated acquisition team that supports,or is responsible for, the tasks of identifying and valuing acquisition candidates, undertaking andcoordinating due diligence, negotiating and closing transactions, and integrating employees andsystems following an acquisition.**Financing**Our success also depends on our continuing ability to finance our growth plan. Adequate financinggives us the flexibility to acquire firms that are appropriate to our vision and complement ourbusiness model. Since we became publicly traded on the TSX in 1994, we have grown our gross revenueat a compound annual rate of 20.3%. To fund such growth, we require cash generated from bothinternal and external sources. Historically, we have completed acquisitions using mostly cash andnotes while at opportune times raising additional equity to replenish our cash reserves, pay downdebt, or strengthen our balance sheet. To date, we have issued additional shares for these purposeson four occasions—in 1997, 2000, 2002, and 2005. Currently, we have a revolving credit facility,expiring on August 31, 2009, that provides us with a line of credit of $160 million. Such financingwill help us continue to pursue our growth plan.**Market Penetration**Also key to our success is achieving a certain level of market penetration in the geographic areaswe serve. Our goal is to be among the top three service providers in each of our geographic regionsand practice areas. With this level of market presence, we are less likely to be affected bydownturns in regional economies. Top-three positioning also gives us increased opportunities towork for the best clients, obtain the best projects, and attract the best employees in a region,and is important for building or maintaining the critical mass of staff needed to generateconsistent performance and to support regional infrastructure.
M-8

 
**RESULTS****Overall Performance****Highlights for 2006**By executing our business strategy in 2006, we generated strong results for the fiscal year as wellas growth in gross revenue, net income, and earnings per share as follows:                   **2006**  **2005**  **$ Change**  **% Change**   *(In millions of Canadian dollars,*       *except per share amounts)*      Gross revenue  816.1   618.0   198.1   32.1%Net income  60.2   40.6   19.6   48.2%Earnings per share – basic  1.34   1.02   0.32   31.4%Earnings per share – diluted  1.31   0.99   0.32   32.3%Cash flows from operating activities  93.4   57.3   36.1   n/mCash flows used in investing activities  (15.6)  (114.6)  99.0   n/mCash flows from (used in) financing activities  (77.4)  47.9   (125.3)  n/mn/m = not meaningfulIn our 2005 Management’s Discussion and Analysis, we established various ranges of expectedperformance for 2006. The following table presents the results we achieved in 2006 as we met orexceeded all our established targets:       **Measure** **Expected Range** **Result Achieved** Debt to equity ratio *[note 1]* At or below 0.5 to 1  (0.03)üReturn on equity*[note 2]* At or above 14%  16.1%üNet income as % of net revenue At or above 5%  8.5%üGross margin as % of net revenue Between 54 and 56%  57.0%üüAdministrative and marketing expenses      as % of net revenue Between 40 and 42%  41.3%üEffective income tax rate Between 32 and 34%  32.7%ü*note 1: Debt to equity ratio is calculated as the sum of (1) long-term debt, including currentportion, plus bank indebtedness, minus cash divided by (2) shareholders’ equity.**note 2: Return onequity is calculated as net income for the year divided by average shareholders’ equity over eachof the last four quarters.***üü** *Better than target* **ü** *Met target* **û** *Did not meet target*The following highlights the major financial achievements and strategic activities thatoccurred in 2006, as well as other factors that contributed to our successful financial performanceand strong overall financial condition: **•** **A year of record results and continued growth.**In 2006 we posted record grossrevenue, net income, and basic and diluted earnings per share. **•** Gross revenue for 2006 was $816.1 million compared to $618.0 millionin 2005 and $520.9 million in 2004.  **•** Net income for 2006 was $60.2 million compared to $40.6 million in2005 and $30.2 million in 2004.  **•** Diluted earnings per share for 2006 were $1.31 compared to $0.99 in2005 and $0.79 in 2004.
M-9

 
 **•** **Strong balance sheet.**Our consolidated balance sheet position at December 31, 2006,remained solid, with cash and cash equivalents of $28.4 million and long-term debt of$16.2 million compared to cash and cash equivalents of $28.1 million and long-term debt of$86.7 million at December 31, 2005. As at December 31, 2006, $149.9 million of our $160million revolving credit facility was available for future acquisitions, working capitalneeds, capital expenditures, and general corporate purposes. Also during the year, wenegotiated an extension of the due date of our credit facility to August 2009 and renewedour Normal Course Issuer Bid with the TSX.  **•** **Increased backlog.**Consolidated revenue backlog at the end of 2006 was $685 millioncompared to $588 million at the end of 2005 and $380 million at the end of 2004. Theoutlook for 2007 remains positive.  **•** **Growth through acquisitions.**The 32.1% growth in gross revenue from 2005 to 2006 andthe 48.2% growth in net income from 2005 to 2006 were partially fueled by the integrationof acquisitions completed in the second half of 2005 and by the acquisition of CarinciBurt Rogers Engineering, Inc., Dufresne-Henry, Inc., and ACEx Technologies, Inc. in 2006.The acquisitions completed in 2006 added over 315 employees to our Company and increasedour growing presence in the United States.  **•** **Internal growth.**In addition to acquisition activities, internal growth contributed$46.7 million to the $198.1 million increase in gross revenue in 2006. Of note is a $19.9million increase in our Industrial & Project Management practice area due to internalgrowth aided by a strong energy sector in western Canada.  **•** **Continued growth.**On January 12, 2007, we signed a non-binding letter of intent toacquire Vollmer Associates. The successful acquisition of this firm, with headquarters inNew York and 24 offices throughout the northeastern United States, will add 650 employeesto our Company and complement our Transportation practice area with services inengineering, architecture, planning, landscape architecture, and surveying.  **•** **Stock split and the issuance of stock options.**In 2006 our shareholders approved thesubdivision of our issued common shares on a two-for-one basis, effective for registeredcommon shares at the close of business on May 19, 2006. Under our Company’s share optionplan and as part of our incentive program, our Board of Directors granted 471,000 stockoptions to various officers and employees in the Company. These options vest equally overa three-year period and have a contractual life of seven years from the grant date.  **•** **Addition to the S&P/TSX Composite Index.**During the second quarter of 2006, ourCompany was added to the S&P/TSX Composite Index.  **•** **Award-winning projects.**We continue to receive awards for our project work. Inparticular, in 2006 we received various awards for our sustainable design solutions. Forexample, the Kamloops Centre for Water quality, the first water treatment plant in Canadato achieve LEED® Gold certification, received numerous awards, including the2006 Canadian Consulting Engineers Award of Excellence. As well, the Frito-LayDistribution Center in Rochester, New York, one of only two LEED®Gold-certified buildings in New York State, received the 2006 American Council ofEngineering Companies, Engineering Excellence Diamond Award.
M-10

 
**Acquisitions**Total consideration for acquisition activity was $18.5 million in 2006 and $228.7 million in 2005.In March 2006, we acquired Carinci Burt Rogers Engineering, Inc., which added over 20 employees inthe Greater Toronto Area and strengthened our electrical engineering practice. In April 2006, weacquired Dufresne-Henry, Inc., adding over 270 employees and 12 office locations to our Company.The acquisition of this multidiscipline design firm, which offers services in engineering,planning, environmental sciences, and landscape architecture, complemented our New York operations,expanded our services into four new states in New England, and established an initial presence inFlorida. In May 2006, we acquired the communications systems engineering firm ACEx Technologies,Inc., which added over 25 staff and new locations in Oakland, California, and Irving, Texas, andcomplemented our services in transit, rail and power communications, and control systemsengineering. As a result of our investment in our enterprise management system in 2003 as well assubsequent enhancements, we were able to quickly integrate these acquisitions during 2006.**Selected Annual Information**We have demonstrated strong, sustainable financial growth in the last three years as highlighted inthe trending of the annual information below:               **Selected Annual Information**   **2006**  **2005**  **2004**   *(In millions of Canadian dollars,*   *except per share and share amounts)*  Gross revenue *[note]*  816.1   618.0   520.9 Net income  60.2   40.6   30.2 Earnings per share – basic  1.34   1.02   0.82 Earnings per share – diluted  1.31   0.99   0.79 Cash dividends declared per common share nil  nil  nil              Total assets  630.5   628.8   362.1 Total long-term debt  16.2   86.7   34.0 Outstanding common shares – as at December 31  45,201,785   44,626,262   37,742,170 Outstanding common shares – as at February 21, 2007  45,515,412         Outstanding share options – as at December 31  1,702,784   1,876,528   2,142,666 Outstanding share options – as at February 21, 2007  1,399,054         *note: The term gross revenue is defined in the Critical Accounting Estimates, Developments, andMeasures section of this Management’s Discussion and Analysis.*The three acquisitions completed in 2006, the three completed in 2005, and the four completedin 2004 contributed to our year-over-year growth in gross revenue, net income, and basic anddiluted earnings per share. As well, internal growth contributed $46.7 million to the $198.1million increase in gross revenue in 2006 compared to 2005.Our total assets increased by $1.7 million from 2005 to 2006. A $17.6 million decrease in currentassets was offset by a $19.3 million increase in non-current assets. The decrease in current assetswas mainly due to a reduction in restricted cash used to fund acquisitions in 2006, repay acquireddebt, and pay promissory notes for acquisitions completed in prior years as further described inthe Working Capital section below.
M-11

 
The increase in non-current assets was mainly due to a $8.8 million increase in goodwill and a $6.5million increase in property and equipment resulting from internal growth and growth throughacquisitions in the year.Total assets increased $266.7 million from 2004 to 2005 mainly due to a $158.0 million increase ingoodwill and a $21.0 million increase in intangible assets primarily arising from the threeacquisitions completed in 2005.During the third quarter of 2006, we conducted our annual goodwill impairment review. Anindependent third-party valuator was contracted to assist in assessing the goodwill of ouroperations in the US East. The review concluded that there was no impairment of goodwill.Our total liabilities decreased $61.1 million from 2005 to 2006 mainly due to the reduction of ourrevolving credit facility from $79.0 million at December 31, 2005, to $8.2 million at December 31,2006. We were able to repay our credit facility from cash generated from operations in the year.From 2004 to 2005, our credit facility increased $55.0 million mainly to finance the acquisitionsin 2005.**Results of Operations**Our Company operates in one reportable segment—Consulting Services. We provide knowledge-basedsolutions for infrastructure and facilities projects through value-added professional servicesprincipally under fee-for-service agreements with clients.The following table summarizes our key operating results on a percentage of net revenue basis andthe percentage increase in the dollar amount of these results from year to year:                       **Percentage of Net Revenue** **Percentage Increase ***  **2006** **2005** **2004** **2006 vs. 2005** **2005 vs. 2004** **Gross revenue**  115.3%  117.8%  116.0%  32.1%  18.6%**Net revenue**  100.0%  100.0%  100.0%  35.0%  16.8%Direct payroll costs  43.0%  44.7%  45.8%  29.9%  14.1%**Gross margin**  57.0%  55.3%  54.2%  39.1%  19.0%Administrative and marketingexpenses  41.3%  40.6%  40.9%  37.1%  15.8%Depreciation of property andequipment  2.2%  2.4%  2.7%  26.0%  3.4%Amortization of intangible assets  0.9%  0.5%  0.2%  141.2%  174.2%Net interest expense  0.3%  0.1%  0.6%  231.3%  (79.6%)Share of income fromassociated companies  (0.1%)  0.0%  (0.1%)  52.4%  (51.4%)Foreign exchange (gains) losses  0.0%  (0.1%)  0.0%  (83.5%)  377.7%Other income  (0.2%)  (0.1%)  0.0%  319.8%  131.6%**Income before income taxes**  12.6%  11.9%  9.9%  43.1%  39.9%Income taxes  4.1%  4.2%  3.2%  33.7%  51.2%**Net income**  8.5%  7.7%  6.7%  48.2%  34.6%** % Increase calculated based on the dollar change from the comparable period.*Our gross and net revenue grew at a faster rate during 2006 than during 2005 mainly due to thesize of acquisitions that occurred in the second half of 2005 and in the first two quarters of2006. Administrative and marketing expenses, amortization of intangible assets, and net interestexpense grew at greater rates than the rate of growth in revenue as further explained in theAdministrative and Marketing Expenses, Amortization of Intangible Assets, and Net Interest sectionsbelow.
M-12

 
**Gross and Net Revenue**The following table summarizes the impact of acquisitions, internal growth, and foreign exchange onour gross and net revenue for 2006 compared to 2005 and for 2005 compared to 2004. For definitionsof gross and net revenue, refer to the Definition of Non-GAAP Measures in the Critical AccountingEstimates, Developments, and Measures section of this discussion and analysis.         **Gross Revenue** **2006 vs. 2005**  **2005 vs. 2004**   *(In millions of Canadian dollars)* Increase (decrease) due to:        Acquisitions growth  165.4   88.1 Net internal growth  46.7   22.8 Impact of foreign exchange rates onrevenue earned by foreign subsidiaries  (14.0)  (13.8)                Total increase over prior year  198.1   97.1         **Net Revenue** **2006 vs. 2005**  **2005 vs. 2004**   *(In millions of Canadian dollars)* Increase (decrease) due to:        Acquisitions growth  148.7   65.2 Net internal growth  46.8   22.1 Impact of foreign exchange rates onrevenue earned by foreign subsidiaries  (12.2)  (11.9)                Total increase over prior year  183.3   75.4        Gross revenue earned in Canada during 2006 increased to $461.3 million from $380.5 million in 2005and $325.8 million in 2004. Gross revenue generated in the United States in 2006 increased to$348.0 million compared to $233.4 million in 2005 and $190.4 million in 2004. Gross revenue earnedoutside Canada and the United States in 2006 was $6.8 million, compared to $4.1 million in 2005 and$4.7 million in 2004. The increase in revenues in both our US- and Canadian-based operations waspositively impacted by the acquisitions completed in 2006 and 2005.The following table summarizes our gross revenue by practice area for 2006, 2005, and 2004:                                        **% of**           **% of**           **% of**       **Consulting**           **Consulting**           **Consulting**       **Services**   **%Change**      **Services**   **%Change**      **Services****Practice Area**      **Gross**   **2006 vs.**      **Gross**   **2005 vs.**      **Gross****Gross Revenue** **2006**   **Revenue**   **2005**  **2005**   **Revenue**   **2004**  **2004**   **Revenue**  *(millions of C$)*           *(millions of C$)*           *(millions of C$)*      Buildings  184.2   22.6%   25.0%  147.4   23.9%   50.3%  98.1   18.9%Environment  149.4   18.3%   44.5%  103.4   16.7%   (1.1%)  104.6   20.1%Industrial & ProjectManagement  94.8   11.6%   39.8%  67.8   11.0%   18.9%  57.0   11.0%Transportation  106.0   13.0%   17.0%  90.6   14.6%   (0.9%)  91.4   17.6%Urban Land  281.7   34.5%   34.9%  208.8   33.8%   23.7%  168.8   32.4%                                                         Total Consulting Services  816.1   100.0%   32.1%  618.0   100.0%   18.9%  519.9   100.0%                        *note: Comparative figures are restated due to a realignment of practice areas in 2006.*
M-13

 
As indicated above, our gross revenue was impacted by acquisitions, net internal growth, andthe effect of foreign exchange rates on revenue earned by our foreign subsidiaries. The impact ofthese factors on gross revenue earned by practice area is summarized below:                           **2006 Compared to 2005** **2005 Compared to 2004**           **Change Due to**          **Change Due to**           **Net Internal**          **Net Internal**       **Change**  **Growth**      **Change**  **Growth and****Practice Area**  **Total**  **Due to**  **and Foreign**  **Total**  **Due to**  **Foreign****Gross Revenue**  **Change**  **Acquisitions**  **Exchange**  **Change**  **Acquisitions**  **Exchange**  *(In millions of Canadian dollars)*  *(In millions of Canadian dollars)*  Buildings  36.8   38.7   (1.9)  49.3   43.6   5.7 Environment  46.0   32.6   13.4   (1.2)  8.1   (9.3)Industrial & ProjectManagement  27.0   8.9   18.1   10.8   7.5   3.3 Transportation  15.4   11.7   3.7   (0.8)  (0.3)  (0.5)Urban Land  72.9   73.5   (0.6)  40.0   29.2   10.8                                             Total Consulting Services  198.1   165.4   32.7   98.1   88.1   10.0                    *note: Comparative figures are restated due to a realignment of practice areas in 2006.*The following summarizes the acquisitions completed from 2005 to 2006 that affected theacquisition growth of each of our practice areas: **•** Buildings: Dufresne-Henry, Inc. (May 2006); Carinci Burt Rogers Engineering, Inc.(March 2006); Keen Engineering Co. Ltd. (October 2005); The Keith Companies, Inc.(September 2005); and CPV Group Architects & Engineers Ltd. (August 2005)  **•** Environment: Dufresne-Henry, Inc. (May 2006) and The Keith Companies, Inc. (September2005)  **•** Industrial & Project Management: The Keith Companies, Inc. (September 2005) andDufresne-Henry, Inc. (May 2006)  **•** Transportation: ACEx Technologies, Inc. (May 2006) and Dufresne-Henry, Inc. (May2006)  **•** Urban Land: The Keith Companies, Inc. (September 2005) and Dufresne-Henry, Inc. (May2006)All of our practice areas generate a portion of their gross revenue in the United States. Thestrengthening of the Canadian dollar against the US dollar in 2006 compared to 2005 and in 2005compared to 2004 had a negative impact on the change in gross revenue by practice area year overyear. The average exchange rate for the Canadian dollar relative to the US dollar increased byapproximately 6.0% from 2005 to 2006 (US$0.83 to US$0.88) and by 9.2% from 2004 to 2005 (US$0.76 toUS$0.83).**Buildings**Gross revenue for the Buildings practice area grew by 25.0% from 2005 to 2006. Of the $36.8 millionincrease in gross revenue in 2006, $25.1 million, $6.3 million, $4.6 million, $1.4 million, and$1.3 million were due to revenue earned from the acquisition of Keen Engineering Co. Ltd., CPVGroup Architects & Engineers Ltd., Carinci Burt Rogers Engineering, Inc., The Keith Companies, Inc.(Keith), and Dufresne-Henry, Inc., respectively. Foreign exchange negatively affected the change ingross revenue from 2005
M-14

 
to 2006 by $1.6 million. In 2006 the Buildings practice area continued tosecure larger projects and to experience higher project volumes. In particular, it continued to bevery active in western Canada, resulting in a strong backlog. For example, in Q3 06 we secured amultimillion-dollar contract to provide mechanical, electrical, and civil engineering services forthe development of an acute care hospital facility—the Legacy project—in Vancouver, BritishColumbia. In addition, we were recently awarded a multimillion-dollar contract to design athree-module “campus” style facility for a banking institution in Calgary, Alberta. To assist inmeeting increased demand, the practice area made use of work-sharing initiatives across the Companyin 2006. We believe the Buildings practice area is well positioned to provide sustainable designexpertise and solutions to clients into 2007.Gross revenue for the Buildings practice area grew by 50.3% from 2004 to 2005. Of the $49.3 millionincrease in gross revenue in 2005, $43.6 million was due to acquisition growth, and $5.7 millionwas due to internal growth and foreign exchange. In 2005 the presence of strong economies inregions in which we operate contributed to growth in this practice area, as well as our transitionfrom a group of local and regional offices into a national practice able to provide sought-afterexpertise in markets such as health care, research, education, and aviation.**Environment**Gross revenue for the Environment practice area grew by 44.5% from 2005 to 2006. Of the $46.0million increase in gross revenue in 2006, $20.9 million and $11.7 million were due to revenueearned from the acquisition of Keith and Dufresne-Henry, Inc., respectively. In addition, internalgrowth accounted for $15.7 million of the increase in gross revenue in 2006, offset by a $2.3million negative impact from foreign exchange. The Environment practice area remained strong due tolarger projects, higher labor utilization rates, and the strong economy in western Canada. Theincreased awareness of governments and the public of environmental issues may present opportunitiesfor this practice area. As well, the Environment practice area is positioning itself to exploreopportunities in odor and corrosion control and hazardous waste remediation.Gross revenue for the Environment practice area decreased by 1.1% from 2004 to 2005. In 2005 theEnvironment practice area focused on improving the operational effectiveness of underperformingoperations. During the last half of 2004, certain of our operations in the Environment practicearea were curtailed through staff reductions, resulting in a decrease in the level of revenuegenerated in 2005. This strategic realignment enhanced the Environment practice area’s ability toimprove its gross revenue and gross margin.**Industrial & Project Management**Gross revenue for the Industrial & Project Management practice area grew by 39.8% from 2005 to2006. Of the $27.0 million increase in gross revenue in 2006, $8.9 million was due to acquisitions.The revenue earned from the industrial and project management practice acquired from the Keithacquisition accounted for $8.1 million of the acquisition growth. In addition, internal growthaccounted for $20.1 million of the increase in gross revenue in 2006, offset by a $2.0 millionnegative impact from foreign exchange. The internal growth in 2006 was primarily due to securingprojects in the oil sands sector in western Canada. For example, during the year, the practice areacompleted a multimillion-dollar contract to provide services for the development of facilities andinfrastructure for the Fort Hills Oil Sands project in northern Alberta. We believe the oil sandssector in western Canada will remain strong into 2007.
M-15

 
The Industrial & Project Management practice area continues to position itself to capture more ofthe support facilities and infrastructure segment of the energy and resources sector, projects inthe power telecommunications sector, and opportunities that may arise from an expected increase inconstruction activity for ethanol and biomass facilities in Canada as a result of recent federalgovernment initiatives. Since this practice area continues to work on projects requiring wind andsolar energy expertise, it is also well positioned to capture opportunities in the renewableelectrical energy sector resulting from the 2005 Energy Act in the United States. Due tocompetition for qualified staff, especially in western Canada, this practice area is exploring newstrategies for attracting additional people.Gross revenue for the Industrial & Project Management practice area grew by 18.9% from 2004 to2005. Of the $10.8 million increase in gross revenue in 2005, $5.8 million was due to revenueearned from the industrial and project management practice acquired from the Sear-Brownacquisition.**Transportation**Gross revenue for the Transportation practice area grew by 17.0% from 2005 to 2006. Of the $15.4million increase in gross revenue in 2006, $9.2 million and $2.5 million were due to revenue earnedfrom the acquisition of Dufresne-Henry, Inc. and ACEx Technologies, Inc., respectively. Inaddition, internal growth accounted for $6.6 million of the increase in gross revenue in 2006,offset by a $2.9 million negative impact from foreign exchange. The implementation of the newsix-year, US$286.4 billion Safe, Accountable, Flexible, Efficient Transportation Equity Act: ALegacy for Users (SAFETEA-LU) signed on August 10, 2005, increased the funds available fortransportation projects, which started to translate into contracts for our Company in 2006. Forexample, during the year, we renewed a five-year, $11 million contract with the U.S. Department ofTransportation to conduct long-term pavement performance studies. The outlook for theTransportation practice area in Canada remains strong, in particular with recent announcements ofgovernment funding such as the $2.4 billion Canadian Highways and Border Infrastructure Fund.Gross revenue for the Transportation practice area decreased by 0.9% from 2004 to 2005. The $0.8million decrease was mainly due to delays in US federal transportation funding in 2005.**Urban Land**Gross revenue for the Urban Land practice area grew by 34.9% from 2005 to 2006. Of the $72.9million increase in gross revenue in 2006, $70.2 million and $3.3 million were the result ofrevenue earned from the acquisition of Keith and Dufresne-Henry, Inc., respectively. In addition,internal growth accounted for $4.7 million of the increase in gross revenue in 2006, offset by a$5.3 million negative impact from foreign exchange. The Keith and Dufresne-Henry Inc. acquisitionsincreased our presence in the urban land market in the United States. We offer urban land servicesprimarily in Alberta, southern Ontario, and California and have a more modest presence in Arizona,Nevada, Utah, Colorado, North Carolina, and Florida and a small presence in other Canadian andeastern US markets. Our three core regions, which account for approximately 75% of our business,are stable or experiencing moderate declines in housing starts. Due to our strong market positionin these regions, our overall performance in urban land was strong in 2006, and we anticipate acontinuing stable market in 2007.Gross revenue for the Urban Land practice area grew by 23.7% from 2004 to 2005. The practice areagrew both internally and through acquisitions in 2005. Of the $40.0 million increase in grossrevenue in 2005, $29.2 million was the result of acquisitions, of which $28.4 million was earnedfrom the urban land practice acquired from the Keith acquisition.
M-16

 
**Gross Margin**For a definition of gross margin, refer to the Definition of Non-GAAP Measures in the CriticalAccounting Estimates, Developments, and Measures section below. Gross margin increased to 57.0% in2006 from 55.3% in 2005 and 54.2% in 2004. Our 2006 gross margin exceeded the anticipated range of54 to 56% set out in our 2005 Annual Report. Factors that have contributed to our improved grossmargins over the last three years include the following: **•** Improved markets for our services with corresponding increases in fee rates.  **•** Improved project management through enhanced staff training and support systems. This improvement has been achieved through the expansion of our on-line LearningResource Center with updated content and in-house programs and training in project andfinancial management and through the use of improved information available from theenterprise management systems we implemented in 2003 as well as subsequent upgrades.  **•** The implementation of an improved system for invoicing project-related administrativecosts in 2005. Following this implementation, we continued to reflect these recoveries aspart of revenue, but we now report the costs in administrative and marketing expenses.This has contributed to both the increased gross margin and the increased administrativeand marketing expenses in 2006.The following table summarizes our gross margin percentages by practice area for 2006, 2005, and2004:             **Practice Area Gross Margin**  **2006**  **2005**  **2004** Buildings  56.5%  55.9%  52.6%Environment  58.4%  56.6%  55.2%Industrial & Project Management  51.0%  49.2%  48.7%Transportation  55.7%  56.1%  55.9%Urban Land  58.7%  56.1%  55.6%*note: Comparative figures are restated due to a realignment of practice areas in 2006*.Gross margins in all practice areas improved from 2004 to 2006, with the exception of a modestdecline of 0.4% in the Transportation practice area from 2005 to 2006. The increases in grossmargins can be attributed to the same factors discussed above. Because of the nature of ourbusiness model, which is based on diversifying our operations across geographic regions, practiceareas, and all phases of the infrastructure and facilities project life cycle, there will continueto be fluctuations in the margins reported from year to year depending on the mix of projects inprogress during any year.**Administrative and Marketing Expenses**Administrative and marketing expenses as a percentage of net revenue were 41.3% in 2006 compared to40.6% in 2005. The increase was mainly due to an additional $3.2 million of performance andretention bonuses arising from acquisitions completed in the current and prior years. As well, whenwe implemented an improved system for invoicing project-related administrative costs in 2005, wecontinued to reflect these recoveries as part of revenue, but we now report the costs inadministrative and marketing expenses. This has contributed to both the increased gross margin andthe increased administrative and marketing expenses in 2006. The 41.3% in 2006 was within theexpected range of 40 to 42% set out in our 2005 Annual Report.
M-17

 
Administrative and marketing expenses as a percentage of net revenue were 40.6% in 2005 compared to40.9% in 2004. This percentage was lower in 2005 due to a $4.0 million reduction of our allowancefor doubtful accounts. This adjustment was based on improved information available on ourhistorical loss experience. As well, our enhanced processes for identifying projects that qualifyfor Scientific Research and Experimental Development tax credits in Canada reduced ouradministrative and marketing expenses by $1.2 million in 2005. The above reductions were offset bya $4.6 million increase in our professional liability claims cost, which was based on the resultsof an independent actuarial review completed in 2005.Our administrative and marketing expenses may fluctuate from year to year as a result of the amountof non-billable staff time allocated to administration and marketing, which is influenced by theratio of work carried out on proposals and other non-billable administrative and marketingactivities during the year.**Depreciation of Property and Equipment**Depreciation of property and equipment as a percentage of net revenue was 2.2% in 2006, 2.4% in2005, and 2.7% in 2004. Depreciation expense in 2006 increased at a lower rate than that of netrevenue. The $3.2 million increase in depreciation from 2005 to 2006 was primarily due to theaddition of property and equipment from acquisitions made in the fourth quarter of 2005 and in2006. The reduction in depreciation expense as a percentage of net revenue in 2005 related to thesale of our office building in Edmonton, Alberta, during the fourth quarter of 2004.**Amortization of Intangible Assets**The timing of completed acquisitions, the size of acquisitions, and the type of intangible assetsacquired affect the amount of amortization of intangible assets in each year. Client relationshipsand other intangible assets are amortized over estimated useful lives ranging from 10 to 15 years,whereas contract backlog is amortized over an estimated useful life of generally less than one anda half years. As a result, the impact of amortization of contract backlog can be significant in thetwo to six quarters following an acquisition. The following table summarizes the amortization ofidentifiable intangible assets:               **2006**  **2005**  **2004**   *(In thousands of Canadian dollars)*  Amortization of client relationships  2,401   1,050   579 Amortization of backlog  3,508   1,349   239 Other  223   143   109                        Total amortization of intangible assets  6,132   2,542   927           The increase of $3.6 million between 2005 and 2006 was primarily due to the intangible assetsacquired from the Keith and Keen Engineering Co. Ltd. acquisitions in September and October of2005. Of the $6.1 million amortized in 2006, $4.1 million was related to the Keith acquisition.**Net Interest Expense**The increase of $1.3 million in net interest expense in 2006 compared to 2005 was a result of ourlong-term debt balance throughout the first two quarters of 2006 being higher than in the sameperiod in 2005 and the prevailing interest rates in 2006 being higher than in 2005. Near the end ofthe third quarter of 2005, we accessed our revolving credit facility to finance the Keithacquisition. At December 31, 2005, $79.0 million was used on our credit facility. At December 31,2006, $8.2 million was used on our credit facility. In 2006 we repaid our credit facility usingcash generated from operations. Depending on the form
M-18

 
under which the credit facility is accessedand certain financial covenant calculations, rates of interest may vary among Canadian prime, USbase rate, or LIBOR or bankers acceptance rates plus 65 or 85 basis points. Our average interestrate was 6.0% at December 31, 2006, compared to 4.34% at December 31, 2005. We estimate that, basedon our loan balance at December 31, 2006, a 1% change in interest rates would impact our annualearnings per share by less than $0.01.The reduction of $2.2 million in net interest expense in 2005 compared to 2004 was a result ofmaintaininga positive net cash position during the first three quarters of 2005 compared to a position of bankindebtedness during the same period in 2004. In addition, our total long-term debt position duringthe first three quarters of 2005 was less than it was during the same period in 2004, whichcontributed to the reduction in overall interest expense.**Foreign Exchange Gains**We reported a foreign exchange gain of $0.1 million in 2006, compared to $0.4 million in 2005 and$0.1 million in 2004. These foreign exchange gains arose on the translation of theforeign-denominated assets and liabilities held in our Canadian companies and in our non-US-basedforeign subsidiaries. We minimize our exposure to foreign exchange fluctuations by matchingUS-dollar assets with US-dollar liabilities and, when appropriate, by entering into forwardcontracts to buy or sell US dollars in exchange for Canadian dollars.Throughout most of 2004, we used US-dollar-denominated debt to minimize our exposure to foreigncurrency fluctuations. Late in 2004, due to an improvement in our cash position, we were able toreduce the amount of this debt. Therefore, in order to minimize our exposure to foreign exchangefluctuations, we matched US-dollar assets with US-dollar liabilities and entered into forwardcontracts to buy or sell US dollars in exchange for Canadian dollars. Near the end of the thirdquarter of 2005, we borrowed US dollars to complete the Keith acquisition. This US-dollar debtoffset our investment in US-dollar net assets and eliminated the need to enter into forwardcontracts. In 2006 we began repaying the US-dollar debt using cash generated from operations, whichcreated the need to enter into forward contracts again in the last quarter of 2006. As at December31, 2006, we had entered into a foreign currency forward contract that provided for the sale ofUS$4.5 million on January 12, 2007, at the rate of 1.1608 per US dollar. The fair value of thiscontract, estimated using market rates at December 31, 2006, was a loss of $19,167.In 2004 the Canadian dollar rose from US$0.77 at the beginning of the year to US$0.83 at the end ofthe year. We recorded a $0.1 million foreign exchange gain because our matching of US-dollar assetsand liabilities limited our exposure. During 2005, the Canadian dollar continued to strengthen toUS$0.86, and we recorded a gain of $0.4 million since there was a period at the closing of theKeith transaction when our US-dollar-denominated liabilities exceeded our US-dollar-denominatedassets. Approximately $0.4 million of this gain was reflected in Q3 05. The exchange rate at theend of December 31, 2006, was US$0.86, the same rate as at December 31, 2005, and we recorded a$0.1 million gain in 2006 due to our limited exposure throughout the year.**Income Taxes**Our effective income tax rate for 2006 was 32.7% compared to 35.0% for 2005 and 32.4% for 2004. Inour 2005 Management’s Discussion and Analysis, we anticipated that our effective tax rate would bein the range of 32.0 to 34.0% depending on our estimated earnings in each of our taxingjurisdictions. We review our estimated income tax rate quarterly and adjust it based on changes instatutory rates in the jurisdictions
M-19

 
in which we operate as well as on our estimated earnings ineach of these jurisdictions. In 2006 the Quebec government enacted Bill 15 to amend the QuebecTaxation Act, legislation that retroactively eliminated the benefit of certain financing trustarrangements. As a result of this legislative change, we recorded anadditional $1.0 million of income tax expense in Q2 06 related to 2005. The impact of this increasewas offset by the relative amount of income earned in our low tax rate jurisdictions, resulting inan effective income tax rate below the middle of our expected range.Throughout 2005 we maintained our estimated rate consistently at 35.0%. The 32.4% rate for 2004 wasfavorably impacted by the additional income reflected in our regulated insurance subsidiary in Q404; a portion of that income was subject to tax at lower rates, resulting in a 1.2% reduction ofour consolidated tax rate.**Quarterly Trends and Fourth Quarter Results**The following is a summary of our quarterly operating results for the last two fiscal years.                                   **Quarterly Operating Results**   *(In millions of Canadian dollars, except per share amounts)*   **2006**  **2005**    **Dec 31**  **Sep 30**  **Jun 30**  **Mar 31**  **Dec 31**  **Sep 30**  **Jun 30**  **Mar 31** Gross revenue  211.8   210.2   208.8   185.3   180.6   146.1   150.2   141.1 Net revenue  180.6   182.0   182.2   163.1   151.9   125.9   127.7   119.1 Net income  15.6   16.5   16.7   11.4   8.0   12.8   13.1   6.7 EPS – basic  0.35   0.36   0.37   0.25   0.18   0.33   0.34   0.18 EPS – diluted  0.34   0.36   0.36   0.25   0.17   0.32   0.34   0.17 *The quarterly earnings per share on a basic and diluted basis are not additive and may notequal the annual earnings per share reported. This is due to the effect of shares issued orrepurchased during the year on the weighted average number of shares. Diluted earnings per share ona quarterly and annual basis are also affected by the change in the market price of our shares,since we do not include in dilution options whose exercise price is not in the money.*The following items impact the comparability of our quarterly results:                   **Q4 06 vs.**  **Q3 06 vs.**  **Q2 06 vs.**  **Q1 06 vs.**   **Q4 05**  **Q3 05**  **Q2 05**  **Q1 05**   *(In millions of Canadian dollars)*  Increase (decrease) in gross revenue due to:                                 Acquisitions growth  12.0   51.3   55.3   46.8 Net internal growth  21.4   16.3   8.5   0.5 Impact of foreign exchange rates onrevenue earned by foreign subsidiaries  (2.2)  (3.5)  (5.2)  (3.1)                              Total increase in gross revenue  31.2   64.1   58.6   44.2              
M-20

 
**Fourth Quarter Results**During Q4 06, our gross revenue increased by $31.2 million, or 17.3%, to $211.8 million compared to$180.6 million for the same period in 2005. Approximately $12.0 million of this increase resultedfrom acquisitions completed in 2005 and 2006 and internal growth of $21.4 million, offset by $2.2million in foreign exchange due to the strengthening of the Canadian dollar during 2005 and 2006.Net income during Q4 06 was strong, increasing by $7.6 million, or 95.7%, from the same period in2005. Basic earnings per share in Q4 06 increased by $0.17, or 94.4%, compared to the same periodin Q4 05. These increases in net income and earnings per share were mainly due to the growth ingross revenue mentioned above as well as a quarterly gross margin of 58.3% compared to 53.5% forthe same period last year. Due to the nature of our business model, which is based on diversifyingour operations across geographic regions, practice areas, and all phases of the infrastructure andfacilities project life cycle, there will continue to be fluctuations in our gross margin fromperiod to period depending on the mix of projects during any quarter. In addition, our 2005 grossmargin was low since we integrated approximately 1,000 staff into our Company in Q4 05 from theKeith and Keen Engineering Co. Ltd. acquisitions, who were then required to learn new practices andprocesses and understand new systems. Such a learning curve results in decreased productivity untilthe learning is complete.**Quarterly Trends**During Q1 06, our gross revenue grew $44.2 million, or 31.3%, compared to Q1 05. Approximately$46.8 million of this increase was a result of the CPV Group Architects & Engineers Ltd., Keith,and Keen Engineering Co. Ltd. acquisitions, which occurred in the last half of 2005. With theintegration of project work for over 1,000 employees into our operations from these acquisitions,net income increased by $4.7 million in Q1 06, and basic earnings per share increased by $0.07compared to the same period in 2005.During Q2 06, our gross revenue grew by $58.6 million, or 39.1%, compared to Q2 05. Approximately$55.3 million of this increase was a result of the three acquisitions completed in the last half of2005 and of the Carinci Burt Rogers Engineering, Inc., Dufresne-Henry, Inc., and ACEx Technologies,Inc. acquisitions completed in the first half of 2006. Net income increased by $3.6 million in Q206 compared to the same period in 2005, and basic earnings per share increased by $0.03 compared tothe same period last year. Net income and earnings per share would have increased $7.6 million and$0.10, respectively, had it not been for a $4.0 million positive adjustment made in Q2 05 relatedto management’s revised estimate of provision for doubtful accounts receivable. That revisedestimate was based on improved information on historical loss experience that became available tous through the use of our enterprise management system.During Q3 06, our gross revenue grew by $64.1, or 43.9%, compared to Q3 05. Approximately $51.3million of this increase was a result of the three acquisitions completed in the last half of 2005and of the Carinci Burt Rogers Engineering, Inc., Dufresne-Henry, Inc., and ACEx Technologies Inc.acquisitions completed in the first half of 2006. As we integrated the staff and project work fromthese acquisitions, net income increased by $3.7 million, or 27.9%, in Q3 06 compared to the sameperiod in 2005, and basic earnings per share increased by $0.03 compared to the same period lastyear.
M-21

 
**Liquidity and Capital Resources**The following table represents summarized working capital information as at December 31, 2006,compared to December 31, 2005:               **Dec 31, 2006**  **Dec 31, 2005**  **% Change**  *(In millions of Canadian dollars,*       *except ratios)*      Current assets  262.8   280.4   (6.3%)Current liabilities  (155.7)  (157.8)  (1.3%)Working capital  107.1   122.6   (12.6%)Current ratio  1.69   1.78   n/a*note: Working capital is calculated by subtracting current liabilities from current assets.Current ratio is calculated by dividing current assets by current liabilities.*Our cash flows from operating, investing, and financing activities, as reflected in theConsolidated Statement of Cash Flows, are summarized in the following table:                                   **$ Change**  **$ Change**               **2006 vs.**  **2005 vs.**   **2006**  **2005**  **2004**  **2005**  **2004**       *(In millions of Canadian dollars)*      Cash flows from operating activities  93.4   57.3   77.4   36.1   (20.1)Cash flows used in investingactivities  (15.6)  (114.6)  (10.2)  99.0   (104.4)Cash flows from (used in)financing activities  (77.4)  47.9   (36.0)  (125.3)  83.9 Our liquidity needs can be met through a variety of sources, including cash generated fromoperations, long- and short-term borrowings from our $160 million credit facility, and the issuanceof common shares. Our primary use of funds is for operational expenses, acquisitions, andsustaining capital spending on property and equipment. We continue to generate cash flows fromoperations to assist our acquisition growth. In addition, we continue to manage according to theestablished management guideline of maintaining a debt to equity ratio of less than 0.5 to 1.**Working Capital**Our working capital at the end of 2006 was $107.1 million, compared to $122.6 million in 2005.Current assets decreased by $17.6 million, and current liabilities decreased by $2.1 million. Thedecrease in current assets was partly due to a decrease in restricted cash. A portion of the cashacquired as part of the Keith acquisition (US$26.1 million) was subject to restrictions outlined inthe merger agreement to allow the transaction to qualify as a reorganization under US taxregulations. This cash could not be used, directly or indirectly, to pay debt incurred with respectto financing the acquisition of Keith. Generally, the restrictedcash was to be used to finance future acquisitions as well as future capital expenditures. During2006, the restricted cash decreased by $19.8 million to an outstanding balance of $1.5 million(US$1.3 million) at December 31, 2006. The $19.8 million was used to fund acquisitions completed in2006, repay debt acquired in 2006, and pay promissory notes for acquisitions completed in prioryears.
M-22

 
**Cash Flows From Operating Activities**Our cash flows from operating activities were up by $36.1 million in 2006 from 2005 and down by$20.1 million from 2004 to 2005. Cash flows for 2006 were positively affected by a net increase of$46.7 million in cash receipts from clients less cash paid to suppliers and employees. Thisincrease was mainly due to additional revenue generated by the acquisitions completed in the secondhalf of 2005 and in the first three quarters of 2006. As we successfully integrated theacquisitions made in the second half of 2005, there was a reduction in our combined investment incosts and estimated earnings in excess of billings (work in progress) and in accounts receivablefrom 101 days of revenue at the end of 2005 to 92 days of revenue at the end of 2006.Offsetting the above increase in operating cash flows in 2006 was a $9.2 million increase in netincome taxes paid in 2006 and a $1.4 million increase in interest paid. Our income tax paymentsincreased in 2006 to cover the higher income tax liability outstanding at the end of 2005 as wellas the increased income tax installments required for 2006.The decrease in operating cash flows in 2005 was reflective of a significant increase in operatingcash flows in 2004. The implementation of our enterprise management system in the fourth quarter of2003 contributed to the significant reduction in cash flows from operations for 2003 since ourinvestment in costs and estimated earnings in excess of billings and in accounts receivable climbedto 119 days of revenue. The subsequent reduction to 101 days as at December 31, 2004, led to thespike in operating cash flows in 2004.**Cash Flows Used In Investing Activities**Cash flows used in investing activities decreased by $99.0 million from 2005 to 2006 and increasedby $104.4 million from 2004 to 2005. In 2006 we used $12.2 million to finance acquisitionscompleted during the year versus $100.4 million used in 2005 and $18.8 million used in 2004. Theuse of cash and cash equivalents for acquisitions in 2006 was offset by a drawdown of restrictedcash that we acquired in connection with the Keith acquisition.Offsetting the reduction of cash used in investing in 2006 compared to 2005 was a $1.9 millionincrease in purchases of property and equipment. One factor that contributed to this increase was a$2.9 million expenditure on improvements to our offices in Vancouver, British Columbia, andEdmonton, Alberta, during the year. Our 2005 investment activities increased compared to 2004 dueto the use of $1.7 million for the expansion and improvement of our office in Winnipeg, Manitoba.In 2004 we recorded a cash inflow from the sale of our Edmonton office building as well as ourinterest in Goodfellow EFSOPTM technology.As a professional services organization, we are not capital intensive. Our capital expenditureshave historically been made primarily for property and equipment including such items as leaseholdimprovements, computer equipment and business information systems software, furniture, and otheroffice and field equipment. Our cash outflows for property and equipment were $18.9 million, $17.0million, and $17.5 million in each of 2006, 2005, and 2004, respectively. Approximately 42.0% ofthese cash flows in 2006 related to buildings and leasehold improvements and computer equipment andbusiness information systems software. Our capital expenditures during 2006 were financed by cashflows from operations. We expect our total capital expenditures in 2007 to be in the range of $27to $30 million.
M-23

 
**Cash Flows Used In Financing Activities**Cash flows used in financing activities increased by $125.3 million from 2005 to 2006 and decreasedby $83.9 million from 2004 to 2005. In 2006 we generated sufficient cash from our operations toreduce the amount outstanding on our credit facility by $85.6 million and repay $1.8 million of ouracquired debt. At December 31, 2006, we had $149.9 million of our $160 million credit facilityavailable for future use. As well, we used $1.0 million to repurchase shares under our NormalCourse Issuer Bid in 2006. The above use of cash was offset by $1.9 million generated from optionsexercised during the year.In 2005 we had cash flows from financing since we accessed $95.9 million of our new credit facilityfor acquisition purposes, in particular, the Keith acquisition. During 2005, we replaced our creditfacility by repaying $24.0 million outstanding on long-term debt and entering into a $160 millionrevolving credit facility that expires on August 31, 2009. This facility is available foracquisitions, working capital needs, capital expenditures, and general corporate purposes.Depending on the form under which the credit facility is accessed and certain financial covenantcalculations, rates of interest will vary between Canadian prime, US base rate, or LIBOR rate or bankers acceptances rates plus 65 or 85 basis points. The averageinterest rate on the amounts outstanding at December 31, 2006, was 6.0%. The new credit facilitycontains financial tests and other covenants with which we must comply at each quarter-end. Inparticular, we must satisfy the following specified ratios: 1) the senior debt to EBITDA ratio mustnot exceed 2.5 to 1 at any time and 2) the EBITDAR to debt service ratio must not be less than 1.25to 1 at any time. EBITDA, EBITDAR, and EBITDAR to debt service ratio are defined in the Definitionof Non-GAAP Measures in the Critical Accounting Estimates, Developments, and Measures section ofthis analysis. We were in compliance with these covenants as at and throughout the year endedDecember 31, 2006. During 2005, we also used $2.0 million for share issue costs related to theshares issued in conjunction with the acquisition of Keith. Options exercised for cash in 2005generated cash of $1.0 million.**Shareholders’ Equity**Our shareholders’ equity increased by $62.8 million in 2006 and by $159.0 million in 2005. Thefollowingtable summarizes the reasons for these increases:           **2006**  **2005**   *(In millions of Canadian dollars)*  **Beginning shareholders’ equity**  348.1   189.1                 Net income for the year  60.2   40.6 Change in cumulative translation account  0.7   (6.6)Share options exercised for cash  1.9   1.0 Recognition of fair value of share-based compensation  1.0   1.3 Shares repurchased under Normal Course Issuer Bid  (1.0)  (0.2)Shares issued on the Keith acquisition  –   123.4 Restricted shares issued on the Keith acquisition  –   2.2 Share issue costs  –   (1.5)Deferred stock compensation arising on the Keith acquisition  –   (1.2)                Total change  62.8   159.0                 **Ending shareholders’ equity**  410.9   348.1        The change arising on the translation of our US-based subsidiaries in 2006 was only $0.7 milliondue to the Canadian dollar remaining at US$0.86 at the end and beginning of the year in relation tothe US dollar. The $6.6 million change in 2005 was due to the continued strengthening of theCanadian dollar—from US$0.83 to US$0.86—in relation to the US dollar during the year.
M-24

 
In 2006, under our Company’s share option plan and as part of our incentive program, our Board ofDirectors granted 471,000 stock options to various officers and employees of the Company. Theseoptions vest equally over a three-year period and have a contractual life of seven years from thegrant date.Our Normal Course Issuer Bid on the TSX was renewed in 2006 and allows us to repurchase up to2,258,754 shares. We continue to believe that, from time to time, the market price of our commonshares does not fully reflect the value of our business or future business prospects and that, atsuch times, outstanding common shares are an attractive, appropriate, and desirable use ofavailable Company funds. In 2006 we purchased 51,600 common shares at an average price of $19.69per share for an aggregate price of $1.0 million. In 2005 we purchased 13,600 common shares at anaverage price of $14.34 per share for an aggregate price of $195,000.**Other****Outstanding Share Data**As at December 31, 2006, there were 45,201,785 common shares and 1,702,784 share optionsoutstanding. During the period of December 31, 2006, to February 21, 2007, no shares wererepurchased under our Normal Course Issuer Bid; 298,066 share options were exercised; 5,664 shareoptions were canceled; and 15,561 common shares were issued upon the vesting of restricted sharesissued on the Keith acquisition. As at February 21, 2007, there were 45,515,412 common shares and 1,399,054 share options outstanding.**Contractual Obligations**As part of our continuing operations, we enter into long-term contractual arrangements from time totime. The following table summarizes the contractual obligations due on our long-term debt, otherliabilities, and operating lease commitments as of December 31, 2006:                       **Payments Due by Period**       **Less than**      **4–5**  **After 5** **Contractual Obligations** **Total**  **1 year**  **1–3 years**  **years**  **years**   *(In millions of Canadian dollars)*  Long-term debt  16.2   4.2   11.9   –   0.1 Interest on debt  1.7   0.8   0.9   –   – Other liabilities  36.8   5.2   13.3   8.2   10.1 Operating lease commitments  211.0   35.8   57.5   43.0   74.7                                      Total contractual obligations  265.7   46.0   83.6   51.2   84.9                 For further information regarding the nature and repayment terms of our long-term debt, refer tothe Cash Flows Used In Financing Activities section. Our operating lease commitments includeobligations under office space rental agreements, and our other liabilities primarily includeleasehold inducement benefits and provision for self-insurance.**Off-Balance Sheet Arrangements**As of December 31, 2006, we had off-balance sheet financial arrangements relating to letters ofcredit in the amount of $1.9 million that expire at various dates before January 2008. Theseletters of credit were issued in the normal course of operations, including the guarantee ofcertain office rental obligations.
M-25

 
In the normal course of business, we also provide indemnifications and, in very limitedcircumstances, bonds, which are often standard contractual terms, to counterparties in transactionssuch as purchase and sale contracts for assets or shares, service agreements, and leasingtransactions. In addition, we indemnify our directors and officers against any and all claims orlosses reasonably incurred in the performance of their service to the Company to the extentpermitted by law. These indemnifications may require us to compensate the counterparty for costsincurred as a result of various events. The terms of these indemnification agreements will varybased upon the contract, the nature of which prevents us from making a reasonable estimate of themaximum potential amount that could be required to pay counterparties. Historically, we have notmade any significant payments under such indemnifications, and no amounts have been accrued in ourconsolidated financial statements with respect to these guarantees.**Market Risk**We are exposed to various market factors that can affect our performance primarily with respect tocurrency and interest rates.**Currency.**Because a significant portion of our revenue and expenses is generated or incurred in USdollars, we face the challenge of dealing with fluctuations in exchange rates. To the extent thatUS-dollar revenues are greater than US-dollar expenses in a strengthening US-dollar environment, weexpect to see a positive impact on our income from operations. Conversely, to the extent thatUS-dollar revenues are greater than US-dollar expenses in a weakening US-dollar environment, weexpect to see a negative impact. This exchange rate risk primarily reflects, on an annual basis,the impact of fluctuating exchange rates on the net difference between total US-dollar professionalrevenue and US-dollar expenses. Other exchange rate risk arises from the revenue and expensesgenerated or incurred by subsidiaries located outside Canada and the United States. Our income fromoperations will be impacted by exchange rate fluctuations used in translating these revenue andexpenses. In addition, the impact of exchange rates on the balance sheet accounts of subsidiarieslocated outside Canada and the United States will affect our operating results. We also continue tobe exposed to exchange rate risk for the US-dollar and other foreign currency-denominated balancesheet items carried by our Canadian, US, and international operations.**Interest Rate.**Changes in interest rates also present a risk to our performance. Our creditfacility carries a floating rate of interest. We estimate that, based on our balance at December31, 2006, a 1% change in interest rates would impact our earnings per share by less than $0.01.**Related Party Transactions**We have not entered into any related party transactions as defined in Section 3840 of the CanadianInstitute of Chartered Accountants (CICA) Handbook.
M-26

 
**OUTLOOK**The following table summarizes our expectations for the coming year:   **Measure** **Expected Range** Debt to equity ratio *[note 1]* At or below 0.5 to 1Return on equity *[note 2]* At or above 14%Net income as % of net revenue At or above 6%Gross margin as % of net revenue Between 55 and 57%Administrative and marketing expensesas % of net revenue Between 40 and 42%Effective income tax rate Between 32 and 34%*note 1: Debt to equity ratio is calculated as the sum of (1) long-term debt, including currentportion, plus bank indebtedness, less cash divided by (2) shareholders’ equity.*