**EXHIBIT 13.1****SELECTED FINANCIAL DATA**                     *(In thousands, except per*               *share information)* **2006***  2005  2004  2003  2002  **Results of Operations**                    Total contract revenues **$****651,012**  $579,278  $552,046  $426,761  $405,264 Income from operations  **18,513**   16,882   18,868   5,720   16,354 Net income/(loss)  **11,831**   5,051   8,394   (800)  9,039 Diluted earnings/(loss) pershare **$****1.36**  $0.58  $0.98  $(0.10) $1.06 Return/(loss) on averageequity  **13.5****%**  6.5%  12.1%  (1.2)%  14.8%                      **Financial Condition**                    Total assets **$****266,123**  $225,461  $215,013  $181,099  $145,495 Working capital **$****68,726**  $49,264  $43,624  $42,768  $35,512 Current ratio  **1.45**   1.35   1.32   1.42   1.47 Long-term debt **$****11,038**  $—  $—  $13,481  $— Shareholders’ investment  **95,120**   79,824   74,781   64,343   65,977 Book value per outstandingshare  **10.94**   9.40   8.78   7.73   7.87 Year-end closing share price **$****22.65**  $25.55  $19.60  $10.35  $10.95                       **Cash Flow**                    Net cash (used in)/providedbyoperating activities **$****(9,343****)** $12,440  $28,477  $(14,675) $(9,139)Net cash (used in)/providedby investing activities  **(14,933****)**  (7,078)  (4,055)  (4,787)  121 Net cash provided by/(usedin) financing activities  **18,417**   (1,792)  (18,077)  18,703   421  (Decrease)/increase in cash **$****(5,859****)** $3,570  $6,345  $(759) $(8,597)                      **Backlog** **$****1,292,500**  $1,321,800  $1,399,500  $720,700  $545,200                       **Share Information**                    Year-end shares outstanding  **8,698**   8,490   8,519   8,320   8,384 Diluted weighted averageshares outstanding  **8,718**   8,715   8,554   8,403   8,543  * For further discussion, see the “Fourth Quarter Adjustments” note to our accompanyingconsolidated financial statements.
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**MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**     The following discussion should be read in conjunction with our “Selected Financial Data” andour consolidated financial statements and related notes. The discussion in this section containsforward-looking statements that involve risks and uncertainties. For a discussion of importantrisk factors that could cause actual results to differ materially from those described or impliedby the forward-looking statements contained herein, see the “Note with Respect to Forward-LookingStatements” and “Risk Factors” sections included in our Annual Report on Form 10-K.**Business Overview and Environment**     We provide engineering and energy expertise for public and private sector clients worldwide.Our primary services include engineering design for the transportation and civil infrastructuremarkets, architectural and environmental services, construction management services for buildingsand transportation projects, and maintenance of oil and gas production facilities. We view ourshort and long-term liquidity as being dependent upon our results of operations, changes in workingcapital and our borrowing capacity. Our financial results are affected by appropriations of publicfunds for infrastructure and other government-funded projects, capital spending levels in theprivate sector, and the demand for our services in the engineering and energy markets. We could beaffected by additional external factors such as price fluctuations and capital expenditures in theenergy industry.*Engineering*     For the past several years, we have observed increased federal spending activity by theDepartment of Defense (“DoD”) and the Department of Homeland Security (“DHS”), including theFederal Emergency Management Agency (“FEMA”). In turn, we have focused more marketing and salesactivity on these agencies of the United States of America (“U.S.”) federal government. As aresult of pursuing this strategy, we have significantly increased our revenues from U.S. federalgovernment contracting activity over the last several years. Additional government spending inthese areas or on transportation infrastructure could result in profitability and liquidityimprovements for us. Significant contractions in any of these areas could unfavorably impact ourprofitability and liquidity. In 2005, the U.S. Congress approved a six-year $286.5 billiontransportation infrastructure bill entitled SAFETEA-LU, the Safe, Accountable, Flexible, EfficientTransportation Equity Act—A Legacy for Users. This funding reflects an increase of approximately46% over its predecessor, TEA-21. With this bill enacted, we saw an increase in state spending ontransportation infrastructure projects for the year ended December 31, 2006, and we expect thisactivity to grow at a more accelerated rate in 2007. Our second quarter acquisition of BuckEngineering, P.C. (“Buck”) added stream and wetlands restoration capabilities which we expect toleverage with departments of transportation in various states. Significant Engineering contractsawarded during 2006 and early 2007 are as follows:     2006 Contracts **•** Indefinite Delivery/Indefinite Quantity (“IDIQ”) contract with a one-year baseperiod and four, one-year option periods with the DHS to provide program and projectmanagement services for facilities and engineering projects within the US-VISITprogram. The maximum ordering limitation is $10 million for the base year and thefour option years for a total of $50 million.  **•** Contract to be the lead designer for a $183 million design/build highwayreconstruction project on Interstate 15 in Ogden, Utah. We will be providing thedesign services for the project, which are valued at $16.4 million.
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     2007 Contracts **•** A five-year, $45 million IDIQ contract with the U.S. Army Corps of Engineers, Ft.Worth District, to provide architectural and engineering design services nationwide insupport of the Department of Homeland Security’s efforts to secure U.S. borders.  **•** A four-year, $24 million Environmental Services Cooperative Agreement with the U.S.Department of the Army to perform a conservation conveyance. Services to be providedby us and our team members are valued at $15 million under this contract.  **•** A $9.8 million contract with the Pennsylvania Department of Transportation toprovide construction management support and construction inspection services foradministering an estimated $130 million reconstruction or replacement of portions ofU.S. Route 15 and Interstate 81 in Cumberland County, Pennsylvania.     In March 2004, we announced that we had been awarded a five-year contract with FEMA for up to$750 million to serve as the program manager to develop, plan, manage, implement, and monitor theMulti-Hazard Flood Map Modernization Program for flood hazard mitigation across the U.S. and itsterritories. Approximately $467 million of this contract value was included in our backlog as ofDecember 31, 2006.     During the second quarter of 2006, we were initially awarded a separate five-year, up-to-$750million, performance-based contract from FEMA to provide program management and individual housinginspection services to assess damage caused by natural disasters. A protest was filed by anotherbidder and later dismissed relative to this award, and FEMA is currently conducting a re-selectionprocess. While we believe that we have provided an acceptable proposal with respect toqualification and pricing, we can give no assurance that we will be re-selected or when suchre-selection process will be completed. As such, no related amounts have been included in ourbacklog as of December 31, 2006.*Energy*     During 2006, we continued to increase our presence into the deepwater Gulf of Mexico andinternational markets, where oil and gas producers are currently investing significant amounts ofcapital for new projects. An important contributor to our success in these areas is our compliancewith applicable health, safety and environmental regulations for our clients. As evidence of ourimprovements in this regard, we were awarded the 2005 National Safety Award for Excellence (“SAFE”)by the U.S. Department of the Interior’s Minerals Management Service during the second quarter of2006. We were also the recipient of three district SAFE awards and named a finalist for the 2006National SAFE award during the first quarter of 2007. Significant Energy contracts awarded during2006 are as follows: **•** A five-year, multi-million dollar contract with Escambia Operating Company, LLC(“Escambia”) to operate and maintain its gas producing properties and facilities at the BigEscambia Field in Alabama.  **•** A five-year, multi-million dollar managed services contract with Brooks Range PetroleumCorporation to provide exploration, development and operations services for their prospectfields on the North Slope of Alaska.  **•** A maintenance technician contract with Cabinda Gulf Oil Company Ltd. for its Angolanproduction regions. This contract for five years plus one option year has a value ofapproximately $10 million.  **•** A two-year, multi-million dollar contract with Stone Energy to provide offshoreoperations and maintenance labor services in the Gulf of Mexico.     During 2005, our Energy segment received an onshore managed services contract in the PowderRiver Basin of Wyoming from Storm Cat Energy to operate and maintain its coal bed methaneproduction facilities, which are adjacent to the Huber properties (another Energy client).
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**Executive Overview**     Our total contract revenues were $651 million for 2006, a 12% increase over the $579 millionreported for 2005. This increase was driven by 30% year-over-year growth in our Energy segment,which benefited from two large contract awards in mid-year 2006. Revenue growth in our Engineeringsegment was modest at 2%. Our Engineering growth was primarily related to transportation-relatedservices and included a minor increase from a 2006 acquisition, offset by a 14% decline inFEMA-related revenue.     Our 2006 results of operations benefited from a number of adjustments related to taxliabilities and associated penalties and interest expense accrued primarily in prior years, with aportion relating to 2006, which favorably impacted our pre-tax income by approximately $8.0 millionduring the fourth quarter. Offsetting these adjustments were legal costs totaling $2.2 millionwhich were incurred during 2006 in connection with litigation related to our bid on a new housinginspection services contract for FEMA. Professional fees totaling $1.8 million were also incurredduring 2006 in connection with the restatement of our consolidated financial statements from 2001through the first quarter of 2005. These favorable tax liability adjustments, unfavorablebid-related legal costs, and unfavorable restatement-related professional fees are not expected torecur in future periods.     Our earnings per diluted common share were $1.36 for 2006, a 134% increase over the $0.58 perdiluted common share reported for 2005. Income from operations in our Energy segment improved froma 2005 operating loss of $6.0 million to a 2006 operating profit of $6.3 million, although the 2006operating profit includes $5.2 million of favorable effects from tax-related settlements. Our 2006net income and earnings per share also benefited from a much lower effective income tax rate, whichdeclined from 67% in 2005 to 43% in 2006 due to higher levels of foreign income associated with thefavorable tax settlements.**Developments Regarding Foreign and Domestic Tax Liabilities**     During the fourth quarter of 2006, we resolved a number of outstanding foreign and domestictax and tax-related liabilities related to our Energy segment. In November 2006, a domestic salesand use tax matter was settled for $0.1 million (including related interest), for which we hadaccrued $4.8 million through September 30, 2006. This resulted in a favorable reversal of tax andinterest liabilities totaling $4.7 million during the fourth quarter. We also settled certainother foreign payroll tax exposures, which resulted in the reversal of approximately $2.1 millionin tax, penalty and interest liabilities during the fourth quarter. In addition, a foreign payrolltax exposure accrued at December 31, 2005 was resolved. This resulted in the reversal of a relatedtax liability totaling $1.2 million during the fourth quarter of 2006. We expect that additionaltax exposures will be settled in our Energy segment during 2007; however, we are currently unableto estimate what impact, if any, those settlements may have on our 2007 earnings. The impact ofthese 2006 reversals, as well as 2006 payments, on our liability balances recorded at December 31,2005 was as follows:                               **Balances**  **Balances at**         **at****Tax-related liabilities arising from** **December** **2006** **2006** **December****2005 restatement** **31, 2005** **Payments** **Reversals** **31, 2006**  (in millions)Penalties and interest on taxes $6.4  $(0.5) $(2.1) $3.8 Domestic sales and use taxes  3.2   (0.1)  (3.1)  — International payroll taxes  5.7   (1.7)  (1.6)  2.4 International value added taxes  1.4   (0.2)  —   1.2 International income taxes  4.7   (2.9)  —   1.8  Total $21.4  $(5.4) $(6.8) $9.2  
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     The above table does not include additional tax liabilities related to our 2006 operations.During the first nine months of 2006, we recorded additional tax and interest totaling $1.2 millionassociated with the domestic sales and use tax issue, which was reversed in the fourth quarter. Inaddition to the amounts included in the preceding table, penalties and interest totaling $1.0million were incurred during 2006 related to our outstanding exposures as of December 31, 2005.**Results of Operations**     The following table reflects a summary of our operating results (excluding intercompanytransactions) for the years ended December 31, 2006, 2005 and 2004. We evaluate the performance ofour segments primarily based on income from operations before Corporate overhead allocations.Corporate overhead is allocated between our Engineering and Energy segments based on a three-partformula comprising revenues, assets and payroll.             **Total Contract Revenues/Income from Operations** (dollars in millions) **2006**  2005  2004  **Engineering**            Total contract revenues **$****380.1**  $371.1  $343.3              Income from operations pre-Corporate overhead  **30.1**   40.2   33.2 *Percentage of Engineering revenues*  ***7.9******%***  *10.8**%*  *9.7**%*Less: Corporate overhead  **(16.5****)**  (13.6)  (11.3)*Percentage of Engineering revenues*  ***4.3******%***  *3.7**%*  *3.3**%* Income from operations  **13.6**   26.6   21.9 *Percentage of Engineering revenues*  ***3.6******%***  *7.2**%*  *6.4**%*              **Energy**            Total contract revenues  **270.9**   208.2   208.7              Income/(loss) from operations pre-Corporate overhead  **12.5**   (0.9)  2.7 *Percentage of Energy revenues*  ***4.6******%***  *(0.4**)%*  *1.3**%*Less: Corporate overhead  **(6.2****)**  (5.1)  (4.7)*Percentage of Energy revenues*  ***2.3******%***  *2.4**%*  *2.3**%* Income/(loss) from operations  **6.3**   (6.0)  (2.0)*Percentage of Energy revenues*  ***2.3******%***  *(2.9**)%*  *(1.0**)%*              **Total Business Segments**            Total contract revenues  **651.0**   579.3   552.0              Income from operations pre-Corporate overhead  **42.6**   39.3   35.9 *Percentage of total business segment revenues*  ***6.5******%***  *6.8**%*  *6.5**%*Less: Corporate overhead  **(22.7****)**  (18.7)  (16.0)*Percentage of total business segment revenues*  ***3.5******%***  *3.2**%*  *2.9**%* Income from operations — segments  **19.9**   20.6   19.9 *Percentage of total business segment revenues*  ***3.1******%***  *3.6**%*  *3.6**%*              Other Corporate/Insurance expense  **(1.4****)**  (3.7)  (1.0)              **Total Company – Income from operations** **$****18.5**  $16.9  $18.9 *Percentage of total Company revenues*  ***2.8******%***  *2.9**%*  *3.4**%* 
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***Comparisons for the Years Ended December 31, 2006 and 2005*****Total Contract Revenues**     Our total contract revenues were $651.0 million in 2006 compared to $579.3 million in 2005,reflecting an increase of $71.7 million or 12%. The main driver of this increase relates to 30%year-over-year growth in our Energy segment.     ***Engineering*****.**Revenues were $380.1 million for 2006 compared to $371.1 million for 2005,reflecting an increase of $9.0 million or 2%. The majority of our 2006 revenues in the Engineeringsegment was generated by our transportation practice (37% of total) and our projects with FEMA (26%of total).     The following table presents Engineering revenues by client type for 2006 and 2005:                 Revenues by client type **2006** 2005  *(dollars in millions)*Federal government clients **$****175.6**   **46****%** $179.8   48%State and local government clients  **150.9**   **40****%**  152.2   41%Domestic private industry clients  **53.6**   **14****%**  39.1   11% *Total Engineering revenues* **$****380.1**   **100****%** $371.1   100%      The increase in our Engineering segment’s revenue was generated primarily by a 13% increase intransportation-related revenues and the acquisition of Buck which added revenue of $6.3 million in2006. This increase was partially offset by a decrease in FEMA-related revenues. Total revenuesfrom FEMA were $100 million and $114 million for 2006 and 2005, respectively. The 2006 decrease inFEMA revenue was primarily associated with higher subcontractor costs in 2005 associated withcompleting the initial scope of the information infrastructure required for the map modernizationproject during 2005. In addition, as a result of achieving certain performance levels on the mapmodernization project, we recognized revenues associated with incentive awards totaling $2.1million and $6.4 million for 2006 and 2005, respectively. The higher awards for 2005 represent acombination of the availability of a larger incentive award pool in 2005 as compared to 2006 andlower performance levels being achieved on the project in 2006, which resulted in our recognitionof a lower percentage of the available 2006 incentive award pool.     ***Energy*****.**Revenues were $270.9 million for 2006 compared to $208.2 million for 2005, reflectingan increase of $62.7 million or 30%. The Energy segment serves both major and smaller independentoil and gas producing companies in both the U.S and foreign markets.     The following table presents Energy revenues by market for 2006 and 2005:                 Revenues by market **2006** 2005  *(dollars in millions)*Domestic **$****200.6**   **74****%** $143.7   69%Foreign  **70.3**   **26****%**  64.5   31% *Total Energy revenues* **$****270.9**   **100****%** $208.2   100%      The 30% increase in Energy’s revenues in 2006 was the direct result of the previouslymentioned contracts awarded during 2006. These contracts included offshore operations andmaintenance work in the Gulf of Mexico with Stone Energy and onshore managed services contractswith Escambia and Brooks Range Petroleum Corporation. Internationally, Energy’s revenues alsobenefited from the scheduled shut downs of a liquefied natural gas facility in Nigeria, for whichwe provided operations and maintenance services on two separate occasions during 2006 versus onlyonce in 2005. During the shut-
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down period, high levels of effort are expended to complete preventative and other maintenanceand then place the facility back into service quickly. These activities generate revenues over ashort period of time and do not recur until the next scheduled shut-down period. In addition, wereceived new contracts in Western Africa during 2006, which were offset by the loss of a majorcontract in Venezuela.**Gross Profit**     Our gross profit was $88.3 million in 2006 compared to $83.4 million in 2005, reflecting anincrease of $4.9 million or 6%. Gross profit expressed as a percentage of contract revenuesdecreased to 13.6% in 2006 from 14.4% in 2005. Direct labor and subcontractor costs are majorcomponents of our cost of work performed due to the project-related nature of our servicebusinesses. Direct labor costs expressed as a percentage of contract revenues were 30.1% for 2006compared to 30.8% for 2005, while subcontractor costs expressed as a percentage of revenues were24.4% and 22.7% in 2006 and 2005, respectively. Incremental employee medical costs in both theEngineering and Energy segments for 2006 also contributed to the increase in our cost of workperformed over 2005.     ***Engineering*****.**Gross profit was $64.6 million in 2006 compared to $72.2 million in 2005,reflecting a decrease of $7.6 million or 10%. Engineering’s gross profit expressed as a percentageof revenues decreased to 17.0% in 2006 from 19.5% in 2005. In 2006, gross profit expressed as apercentage of revenues was negatively impacted by a decrease of $4.3 million in the aforementionedincentive awards on the FEMA map modernization project, coupled with legal costs totaling $2.2million incurred during 2006 in connection with litigation related to our bid on a new housinginspection services contract for FEMA. In addition, Engineering’s labor utilization rates for 2006were lower by 1.5% when compared to 2005 and negatively impacted Engineering’s gross profitexpressed as a percentage of revenues. These lower labor utilization rates in 2006 areattributable to a higher level of Baker labor hours worked in 2005 in connection with the FEMA mapmodernization project, combined with a higher level of proposal activity in the first half of 2006and multiple delays of anticipated projects during 2006. The 2006 proposal activity includes oureffort to acquire the housing inspection services contract for FEMA, which was initially awarded tous but subsequently protested.     ***Energy.***Gross profit was $25.1 million in 2006 compared to $14.9 million in 2005, reflectingan increase of $10.2 million or 69%. Gross profit expressed as a percentage of contract revenuesincreased to 9.3% in 2006 from 7.1% in 2005. This increase in gross profit expressed as apercentage of revenues relates to the previously mentioned 30% increase in revenues coupled withlower project overhead costs expressed as a percentage of contractrevenues for 2006 as compared to 2005. Gross profit increased by $8.7million in our managed services business as a result of higher profitability on the aforementionednew contracts which commenced in 2006. Also favorably impacting gross profit expressed as apercentage of revenues was the improved performance of our computerized maintenance management andoperations assurance services (“CMMS”) contracts, which contributed $1.4 million of gross profit in2006 versus a gross loss of approximately $0.1 million in 2005, and a performance-based incentivebonus totaling $0.7 million that was earned on a project in our managed services business duringthe first quarter of 2006. In 2006, the Energy segment recorded tax liability adjustments whichreduced its cost of work performed by approximately $1.6 million. These adjustments related toseveral foreign payroll tax exposures that were settled or resolved in the fourth quarter. Inaddition, the Energy segment’s gross profit expressed as a percentage of revenues was favorablyimpacted by lower workers’ compensation claims expense in 2006 versus 2005.
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**Selling, General and Administrative Expenses**     Our selling, general and administrative (“SG&A”) expenses were $69.8 million in 2006 comparedto $66.5 million in 2005, reflecting an increase of $3.3 million or 5%. This overall increase inSG&A expenses is the direct result of higher corporate overhead costs in 2006. Corporate overheadincreased primarily due to professional fees of $1.8 million incurred during the first nine monthsof 2006 that were associated with the previously mentioned restatement of our consolidatedfinancial statements, and higher costs associated with headcount additions. SG&A expensesexpressed as a percentage of contract revenues decreased to 10.7% in 2006 from 11.5% in 2005. Thisoverall decrease in SG&A expenses expressed as a percentage of contract revenues is related to our12% increase in total contract revenues for 2006.     ***Engineering*****.**SG&A expenses were $51.0 million in 2006 compared to $45.5 million in 2005,reflecting an increase of $5.5 million or 12%. SG&A expenses expressed as a percentage of revenuesincreased to 13.4% in 2006 from 12.3% in 2005. In addition to an increase of $2.8 million inallocated corporate overhead expenses, the Engineering segment’s SG&A expenses increased by $2.1million in 2006 due primarily to increases in bid and proposal costs, as well as other increases inlegal and other professional fees, project management training costs, and personnel-related costscompared to 2005.     ***Energy*****.**SG&A expenses were $18.8 million in 2006 compared to $20.9 million in 2005,reflecting a decrease of $2.1 million or 10%. SG&A expenses expressed as a percentage of revenuesdecreased to 6.9% in 2006 from 10.0% in 2005. This decrease in SG&A expenses expressed as apercentage of revenues is primarily attributable to the aforementioned 30% increase in revenuescoupled with the favorable effect of the aforementioned tax liability adjustments recorded in 2006.In 2006, the Energy segment recorded tax liability adjustments which reduced its SG&A expenses byapproximately $3.6 million. These adjustments related to a favorable settlement of sales and usetax liabilities and reductions in penalties related to various foreign taxes. Partially offsettingthese favorable adjustments was an increase of $1.2 million in allocated corporate overheadexpenses and professional fees of $1.0 million for audit and tax services related to oursettlements of past due taxes in 2006.**Other Income/(Expense)**     All other income and expense categories totaled $2.1 million of income for 2006 compared to$1.8 million of expense for 2005. A portion of this favorable impact was the result of ourunconsolidated joint ventures producing equity income of $1.3 million in 2006 compared to $0.5million in 2005. This increase in equity income as compared to 2005 primarily related toadditional costs recognized in 2005 related to a goodwill impairment charge and other costsincurred as a result of Hurricanes Katrina and Rita.     Interest income increased to $0.5 million in 2006 compared to $0.3 million in 2005. Thisincrease resulted primarily from interest income collected in connection with a favorable claimsettlement and a tax refund received during 2006. Our recurring interest expense increased to $1.0million in 2006 compared to $0.1 million in 2005 primarily due to our being in a net borrowedposition under our Unsecured Credit Agreement (“Credit Agreement”) during the majority of 2006. Wewere in a net invested position under our Credit Agreement for the majority of 2005.     As a result of our underpayment of certain income, payroll, value added, and sales and usetaxes in our Energy segment during 2005 and prior years, we accrued $1.4 million in interestexpense in 2005. During 2006, favorable settlements and resolutions of these tax liabilitiesresulted in the reversal of previously accrued interest expense totaling $1.6 million. Inaddition, interest expense related to unresolved and unsettled taxexposures totaling $0.6 millionwas accrued during 2006.
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     Our “other, net” income/(expense) was $0.4 million of income for 2006 compared to $1.1 millionof expense for 2005. The 2006 income amount included currency-relatedgains totaling $0.4 million. The2005 expense amount included currency-related losses of $0.5 million, a writedown on an equityinvestment totaling $0.2 million, and other miscellaneous expense.**Income Taxes**     Our provisions for income taxes resulted in effective tax rates of 43% and 67% in 2006 and2005, respectively. The variance between the U.S. federal statutory rate and our effective ratefor these periods is primarily due to taxes on foreign revenue and income, which we are not able tooffset with U.S. foreign tax credits, and to foreign losses with no U.S. tax benefit. The foreignpre-tax book income was approximately $5.7 million for 2006 compared to a loss of $3.4 million for2005. The change in foreign pre-tax book income from a loss in 2005 to a profit in 2006 created asignificant fluctuation in the effective rate relative to foreign taxes. The effective raterelated to foreign taxes was 6% and 26% in 2006 and 2005, respectively, reflecting a 20% ratereduction from the previous year. The foreign tax expense from 2005 to 2006 did not fluctuatesignificantly; however, when applied to the amount of pre-tax book income, a significant rateimpact resulted because a significant portion of our foreign tax expense is typically computedbased on deemed profits and would not be impacted by the amount of pre-tax book income from year toyear. Our effective rate was also lower because of state incometaxes, a favorable mix of permanentitems as compared to the prior year and an income tax benefit realized from a U.S. income tax refund received in 2006 related toan amended return.***Comparisons for the Years Ended December 31, 2005 and 2004*****Total Contract Revenues**     Our total contract revenues were $579.3 million in 2005 compared to $552.0 million in 2004,reflecting an increase of $27.3 million or 5%.     ***Engineering*****.**Revenues were $371.1 million in 2005 compared to $343.4 million in 2004,reflecting an increase of $27.7 million or 8%. This increase in revenues reflects the addition ofthe previously mentioned FEMA map modernization project. Total revenue from FEMA was $114 millionin 2005 versus $80 million in 2004. Much of the FEMA revenue growth was associated with the costof expanding the information infrastructure required for the project in 2005. In addition, as aresult of achieving certain performance levels from the second quarter of 2004 through the thirdquarter of 2005 on this project, the Engineering segment recognized revenue associated withincentive awards totaling $6.4 million during 2005. FEMA incentive award revenues totaled $0.4million in 2004. Revenues for 2005 from Engineering’s private and public sector clients increased9% and 8%, respectively.     The following table presents Engineering revenues by client type for 2005 and 2004:                 Revenue by client type **2005** 2004  *(dollars in millions)*Federal government clients **$****179.8**   **48****%** $142.9   42%State and local government clients  **152.2**   **41****%**  166.6   48%Domestic private industry clients  **39.1**   **11****%**  33.9   10% *Total Engineering revenues* **$****371.1**   **100****%** $343.4   100% 
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     ***Energy*****.**Revenues were $208.2 million in 2005 compared to $208.7 million in 2004, reflecting aslight decrease of $0.5 million. This minor decrease reflects lower revenues on certain contractsin Energy’s CMMS business, partially offset by revenue increases associated with the additions of amulti-million dollar contract with Anglo-Suisse Offshore Partners, LLC (“ASOP”) to operate,maintain and optimize the performance of ASOP’s offshore oil and gas producing properties in theGulf of Mexico, an onshore contract with Storm Cat Energy to operate and maintain its coal bedmethane production facilities, and a multi-million dollar contract to provide operations assuranceservices for the Agbami Floating Production Storage and Offloading Project in deepwater offshoreNigeria. The lower 2005 revenues associated with CMMS contracts were due to the wind down ofseveral projects during late 2004 and early 2005. Also negatively impacting Energy revenues in2005 was the loss of certain offshore projects in the Gulf of Mexico, where properties were soldand we were not able to retain the contracts with the new owners.     The following table presents Energy revenues by market for 2005 and 2004:                 Revenue by market **2005** 2004  *(dollars in millions)*Domestic **$****143.7**   **69****%** $147.5   71%International  **64.5**   **31****%**  61.2   29% *Total Energy revenues* **$****208.2**   **100****%** $208.7   100% **Gross Profit**     Our gross profit was $83.4 million in 2005 compared to $86.4 million in 2004, reflecting adecrease of $3.0 million or 4%. Gross profit expressed as a percentage of contract revenuesdecreased to 14.4% in 2005 from 15.7% in 2004. Direct labor costs expressed as a percentage ofcontract revenues were 30.8% for 2005 compared to 30.5% for 2004, while subcontractor costsexpressed as a percentage of revenues were 22.7% and 21.5% in 2005 and 2004, respectively. Grossprofit for 2005 was also unfavorably impacted by $1.3 million related to adverse development on aprofessional liability insurance claim. We also increased our reserve for medical insurance claimsby $0.7 million during 2005 and the majority of this expense was allocated to cost of workperformed, thereby reducing gross profit for both the Engineering and Energy segments.     ***Engineering*****.**Gross profit was $72.2 million in 2005 compared to $66.7 million in 2004,reflecting an increase of $5.5 million or 8%. Gross profit expressed as a percentage of revenuesincreased slightly to 19.5% in 2005 from 19.4% in 2004. With respect to FEMA, the positive effectof the aforementioned incentive awards was partially offset by a higher use of subcontractors tobuild the information infrastructure in 2005.     ***Energy.***Gross profit was $14.9 million in 2005 compared to $20.7 million in 2004, reflectinga decrease of $5.8 million or 28%. Gross profit expressed as a percentage of revenues decreased to7.1% in 2005 from 9.9% in 2004. In 2005, gross profit expressed as a percentage of revenues wasadversely affected by the previously mentioned loss of certain projects in the Gulf of Mexico andthe resulting change in our contract mix toward lower-margin labor-based contracts, and the delaysand cancellations of certain CMMS contracts that occurred during 2005. Additionally, higher costsrelated to workers’ compensation and general liability claims had a negative impact on gross profitfor 2005.
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**Selling, General and Administrative Expenses**     Our SG&A expenses were $66.5 million in 2005 compared to $67.6 million in 2004, reflecting adecrease of $1.1 million or 2%. SG&A expenses expressed as a percentage of total contractrevenues decreased to 11.5% in 2005 from 12.2% in 2004. This decrease in SG&A expenses expressedas a percentage of revenues primarily reflects the combination of significantly lower incentivecompensation expense in both Engineering and Energy for 2005 and the 5% increase in revenues. Inaddition to significantly lower incentive compensation expense recorded in 2005 due to our lower2005 financial performance, amounts previously accrued at December 31, 2004 under our long-termincentive compensation plan totaling $0.3 million were reversed in the second quarter of 2005 whensuch amounts were no longer considered to be payable under the plan. Offsetting these decreases inSG&A expenses expressed as a percentage of revenues was the unfavorable 2005 effect of our settlingcertain litigation. This settlement had the effect of increasing our SG&A expenses (specificallyCorporate overhead expense) by $0.9 million in the second quarter of 2005. Aside from the effectof this litigation settlement, Corporate overhead expense increased by $1.8 million for 2005,primarily due to higher salary and salary-related costs and professional fees. Professional feesrelated to the restatement totaled $0.5 million in 2005.     ***Engineering.***SG&A expenses were $45.5 million in 2005 compared to $44.8 million in 2004,reflecting an increase of $0.7 million or 2%. SG&A expenses expressed as a percentage of revenuesdecreased to 12.3% in 2005 from 13.1% in 2004. This decrease in SG&A expenses expressed as apercentage of revenues is primarily related to the aforementioned lower incentive compensationexpense in conjunction with increased revenues partially offset by higher corporate overhead andlitigation expenses.     ***Energy.***SG&A expenses were $20.9 million in 2005 compared to $22.7 million in 2004, adecrease of $1.8 million or 8%. SG&A expenses expressed as a percentage of revenues decreased to10.0% in 2005 from 10.9% in 2004. This decrease in SG&A expenses expressed as a percentage ofrevenues was primarily related to the aforementioned lower incentive compensation expense inconjunction with increased revenues partially offset by higher corporate overhead and litigationexpenses.**Other Income/(Expense)**     All other income and expense categories totaled $1.8 million of expense for 2005 compared to$0.1 million of expense for 2004. A portion of this unfavorable impact was the result of ourunconsolidated joint ventures producing equity income of $0.5 million in 2005 compared to $0.6million in 2004.     Interest income increased to $0.3 million in 2005 compared to $0.1 million in 2004. Ourrecurring interest expense decreased to $0.1 million in 2005 compared to $0.3 million in 2004.Both of these variances were attributable to our being in a net invested position under our CreditAgreement during the majority of 2005 as compared to a net borrowed position for the majority of2004.     As a result of our underpayment of certain income, payroll, value added, and sales and usetaxes in our Energy segment during 2005 and prior years, we accrued $1.4 million in interestexpense in 2005 compared to $1.2 million for 2004.     Our “other, net” income/(expense) was $1.1 million of expense for 2005 compared to $0.6 million ofincome for 2005. The 2005 expense amount included currency-related losses of $0.5 million, awritedown on an equity investment totaling $0.2 million, and other miscellaneous expenses. The2004 income amount included a gain on the sale of an investment totaling $0.2 million andcurrency-related gains totaling $0.1 million.
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**Income Taxes**     Our provisions for income taxes resulted in effective tax rates of 67% in 2005 and 55% in2004. The variance between the U.S. federal statutory rate and the effective rate for theseperiods is due primarily to taxes on foreign income, which we are not able to offset with U.S.foreign tax credits. Our effective rate is also impacted by state income taxes, permanent itemsthat are not deductible for U.S. tax purposes and Nigerian income taxes that are levied on a deemedprofit basis.**Contract Backlog**         *(In millions)* **December 31, 2006**  December 31, 2005  Engineering **$****1,057.1**  $1,109.2 Energy  **235.4**   212.6  *Total* **$****1,292.5**  $1,321.8       Backlog consists of that portion of uncompleted work that is represented by signed or executedcontracts. Most of our contracts with the federal government and other clients may be terminatedat will, or option years may not be exercised; therefore, no assurance can be given that allbacklog will be realized.     As of December 31, 2006 and 2005, $467 million and $566 million of our backlog, respectively,related to a $750 million contract in the Engineering segment to assist FEMA in conducting alarge-scale overhaul of the nation’s flood hazard maps, which commenced late in the first quarterof 2004. This contract includes data collection and analysis, map production, product delivery,and effective program management; and seeks to produce digital flood hazard data, provide access toflood hazard data and maps via the Internet, and implement a nationwide state-of-the-artinfrastructure that enables all-hazard mapping. Due to the task order structure of the contract,realization of the timing and the amount we will realize of the original contract value of $750million remains difficult to predict. FEMA has identified specific program objectives andpriorities which it intends to accomplish under this program. As the initial task orders arecompleted and progress against objectives is measured, we will become better able to predictrealization of this contract award. In the future, we may be required to reduce the backlogaccordingly.     In our Energy segment, we also consider our clients’ purchase orders for labor services asbacklog. These purchase orders typically have a twelve-month term and cancellation clauses withthirty-day notice provisions. On a periodic basis, backlog is reduced as related revenue isrecognized. Oil and gas industry merger, acquisition and divestiture transactions affecting ourclients can result in increases and decreases in our Energy segment’s backlog.**Liquidity and Capital Resources**     We have three principal sources of liquidity to fund our operations, our existing cash andcash equivalents, cash generated by operations, and our available capacity under our CreditAgreement. In addition, certain customers have provided us with cash advances for use as workingcapital amounts under contracts related to those customers’ contracts. At December 31, 2006 and2005, we had $13.2 million and $19.0 million in cash and cash equivalents and $68.7 million and$49.3 million in working capital, respectively. Our available capacity under our Credit Agreement,after consideration of current borrowings and outstanding letters of credit, was approximately$38.8 million (65%) and $53.0 million (88%) at December 31, 2006 and 2005, respectively. Ourcurrent ratios were 1.45 to 1 and 1.35 to 1 at the end of 2006 and 2005, respectively. The $19.4million increase in working capital at December 31, 2006 was primarily driven by increases inaccounts receivable and unbilled revenues, partially offset by a decrease in cash and increases inaccounts payable and billings in excess of revenues. The increases in
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receivables and unbilled revenues as of December 31, 2006 were primarily related tosignificant growth in our Energy segment revenues during the fourth quarter of 2006. Our cashflows are primarily impacted from period to period by fluctuations in working capital. Factorssuch as our contract mix, commercial terms, and delays in the start of projects may impact ourworking capital. In line with industry practice, for many of our contracts we accumulate costsduring a given month and then bill those costs in the following month. While salary costsassociated with the contracts are paid on a bi-weekly basis, certain subcontractor costs aregenerally not paid until we receive payment from our customers. As of December 31, 2006 and 2005,$16.2 million and $16.0 million, respectively, of our accounts payable balance comprised invoiceswith “pay-when-paid” terms.*Cash Used in/Provided by Operating Activities*     Cash used in operating activities was $9.3 million for 2006, and cash provided by operatingactivities was $12.4 million and $28.5 million for 2005 and 2004, respectively.     The decrease in cash provided by operating activities for 2006 resulted in part from incometax payments totaling $12.2 million in 2006 compared to $0.9 million in payments made during 2005.The increase in payments for 2006 primarily resulted from the utilization of U.S. federal netoperating loss carryforwards in 2005 which reduced our tax payments for 2005. Our higher 2006forecasted taxable income resulted in higher quarterly estimated tax payments to the U.S. federalgovernment during the year. In addition, approximately $2.9 million of the 2006 tax paymentsrelated to international income taxes for the settlement of prior period income tax liabilities.Furthermore, we paid an incremental $1.9 million in foreign payroll and value added taxes to settleseveral prior tax periods. Increases in both of our segments’ accounts receivable balances and anincrease in our Energy segment’s net unbilled revenues, offset partially by a decrease in ourEngineering segment’s net unbilled revenues, were the primary factors in our 2006 decrease in cashprovided from operating activities. While our revenues increased during the year by $71.7 millionor 12%, the aggregate of accounts receivables and unbilled revenues, net of billings in excess,increased by $24.2 million or 16%. One of the key drivers in the increase in receivables ascompared to the increase in revenues is the significant growth in our Energy segment’s revenues inthe fourth quarter, during which the Energy segment earned 30% of its 2006 revenues. This, inturn, increased our receivables and net unbilled revenue balances as of December 31, 2006.     The decrease in cash provided by operating activities for 2005 resulted primarily from lowernet income, higher days sales outstanding associated with our net unbilled revenues, and loweraccrued compensation (related to the 2004 incentive compensation bonuses that were paid in 2005).     The cash provided by operating activities for 2004 was the direct result of significantlyhigher net income, higher payables at year-end 2004 associated with Engineering’s FEMA project, theaccrued Engineering and Energy 2004 incentive compensation bonuses, and the accrued 2004discretionary contribution to our 401(k) retirement plan totaling $1.5 million.*Cash Used in Investing Activities*     Cash used in investing activities was $14.9 million, $7.1 million, and $4.1 million in 2006,2005 and 2004, respectively. The increase in cash used in investing activities for 2006 reflectsthe net cash paid for the acquisition of Buck totaling $11.2 million and capital expenditures of$3.8 million. Except for the acquisition of Buck in 2006, our cash used in investing activitiesrelated entirely to capital expenditures, with the majority relating to office and field equipment,computer and software equipment and leasehold improvements. We also acquire various assets throughoperating leases, which reduce the level of capital expenditures that would otherwise be necessaryto operate both segments of our business.
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*Cash Provided by/Used in Financing Activities*     Cash provided by financing activities was $18.4 million for 2006, and cash used in financingactivities was $1.8 million and $18.1 million for 2005 and 2004, respectively.     Cash provided by financing activities for 2006 primarily related to net borrowings under ourCredit Agreement totaling $11.0 million, which were used for short-term working capital needs andto finance the Buck acquisition. In addition, our book overdrafts increased in the amount of $6.0million, and we received proceeds from the exercise of stock options totaling $2.0 million. Thiswas offset by payments on capital lease obligations totaling $0.6 million.     Cash used in financing activities for 2005 primarily related to the repurchase of 104,300shares of our common stock totaling $1.8 million. In addition, we received proceeds from theexercise of stock options totaling $0.6 million. This was offset by payments on capital leaseobligations totaling $0.6 million.     The cash used in financing activities during 2004 resulted from repayments of long-term debttotaling $13.5 million, the elimination of a book overdraft balance from year-end 2003 and paymentsfor capital lease obligations of $0.3 million, partially offset by proceeds from the exercise ofstock options totaling $1.7 million.     As of December 31, 2006, 520,319 of the total 1,000,000 Board authorized treasury shares hadbeen repurchased. We made no treasury share repurchases during 2006. Under our Credit Agreementwhich became effective in September 2004, our treasury share repurchases are subject to certainlimitations during the four-year term of the Credit Agreement.*Credit Agreement*     Our Credit Agreement is with a consortium of financial institutions. The Credit Agreementprovides for a revolving commitment of $60 million through September 17, 2008. The commitmentincludes the sum of the principal amount of revolving credit loans outstanding and the aggregateface value of outstanding standby letters of credit (“LOCs”) not to exceed $15.0 million. As ofDecember 31, 2006, borrowings outstanding under the Credit Agreement were $11.0 million and theoutstanding LOCs were $10.2 million. As of December 31, 2005, there were no borrowings outstandingunder the Credit Agreement; however, outstanding LOCs totaled $7.0 million as of that date. TheCredit Agreement provides for us to borrow at the bank’s prime interest rate or at LIBOR plus anapplicable margin determined by our leverage ratio (based on a measure of EBITDA to indebtedness).The Credit Agreement requires us to meet minimum equity, leverage, interest and rent coverage, andcurrent ratio covenants. If any of these financial covenants or certain other conditions ofborrowing are not achieved, under certain circumstances, after a cure period, the banks may demandthe repayment of all borrowings outstanding and/or require deposits to cover the outstandingletters of credit. We were in compliance with these financial covenants at December 31, 2006 andwe expect to be in compliance with these financial covenants for at least the next year.     In connection with the restatement of our consolidated financial statements through March 31,2005, we did not timely file various Securities and Exchange Commission (“SEC”) filings during2006. As a result, several covenant violations related to the timing of our financial reportingoccurred under the Credit Agreement. The lenders waived these violations as a result ofus becoming current on those SEC filings as of September 30, 2006.
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*Financial Condition & Liquidity*     We plan to utilize our cash and borrowing capacity under the Credit Agreement for, among otherthings, short-term working capital needs, to satisfy contractual obligations, to support strategicopportunities that management identifies, to fund capital expenditures, and to make our remainingforeign tax payments. One of our strategies is to pursue growth in our core business. We consideracquisitions, investments and geographic expansion as components of our growth strategy and intendto use both existing cash and the Credit Agreement to fund such endeavors. As part of ourstrategy, we also periodically review our segments, and our service offerings within thosesegments, for financial performance and growth potential. As such, we may also considerstreamlining our current organizational structure if we conclude that such actions would furtherincrease our operating efficiency and strengthen our competitive position over the long term. Ifwe commit to funding future acquisitions, we may need to adjust our Credit Agreement to reflect alonger repayment period on borrowings used for acquisitions. After giving effect to the foregoing,we believe that the combination of cash and cash equivalents, cash generated from operations andour existing Credit Agreement will be sufficient to meet our operating and capital expenditurerequirements for the foreseeable future.**Contractual Obligations and Off-Balance Sheet Arrangements**     A summary of our contractual obligations and off-balance sheet arrangements as of December 31,2006 are as follows:                     *(in millions)*     Payments due by period       Within 1  2 – 3  4 – 5  After 5 **Contractual obligations** Total  year  years  years  years  Operating lease obligations (1) $62.0  $17.8  $25.6  $12.9  $5.7 Long-term debt and interest (2)  11.0   —   11.0   —   — Purchase obligations (3)  4.2   1.8   2.3   0.1   — Other long-term liabilities (4)  0.9   —   —   —   0.9 Capital lease obligations (5)  1.6   0.9   0.7   —   —  *Total contractual obligations* $79.7  $20.5  $39.6  $13.0  $6.6  (1) We utilize operating leases to provide for use of certain assets in our daily businessactivities. This balance includes office space of $52.0 million, with the remainingbalance relating to computers, computer-related equipment, and motor vehicles. The leasepayments for use of these assets are recorded as expenses, but do not appear as liabilitieson our consolidated balance sheets. (2) The long-term debt and interest related to borrowings under our Credit Agreementtotaling $11.0 million, which were used for short-term working capital needs and forfinancing the Buck acquisition. (3) Our purchase obligations relate to legally binding agreements to purchase goods orservices at agreed prices. These obligations include maintenance agreements related to ourinformation and telecommunication systems of $3.6 million and other obligations of $0.6million. (4) The majority of this $0.9 million balance represents deferred compensation for ourBoard of Directors. (5) Capital leases include computers, computer-related equipment and motor vehicles.
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                     *(in millions)*     Amount of commitment expiration per period       Within 1  2 – 3  4 – 5  Over 5 **Off-Balance Sheet Arrangements** Total  year  years  years  years  Standby letters of credit $10.2  $—  $10.2  $—  $— Performance and payment bonds  5.3   0.2   —   4.4   0.7  *Total commercial commitments* $15.5  $0.2  $10.2  $4.4  $0.7       Our banks issue standby letters of credit on our behalf under the Credit Agreement discussedabove. As of December 31, 2006, the majority of our outstanding LOCs were issued to insurancecompanies to serve as collateral for payments the insurers are required to make under certain ofour self-insurance programs. These LOCs may be drawn upon in the event that we do not reimbursethe insurance companies for claims payments made on our behalf. Such LOCs renew automatically onan annual basis unless either the LOC is returned to the bank by the beneficiaries or our bankselect not to renew them.     Bonds are provided on our behalf by certain insurance carriers. The beneficiaries under theseperformance and payment bonds may request payment from our insurance carriers in the event that wedo not perform under the project or if subcontractors are not paid. We do not expect any amountsto be paid under our outstanding bonds at December 31, 2006. In addition, we believe that ourbonding lines will be sufficient to meet our bid and performance bonding needs for at least thenext year.**Critical Accounting Estimates**     We have identified the following critical accounting estimates as those that are mostimportant to the portrayal of our results of operations and financial condition, and which requiremanagement’s most difficult, subjective or complex judgments and estimates.     ***Project Cost Estimates to Complete*****.**We utilize the percentage-of-completion method ofaccounting for the majority of our contracts in our Engineering segment. Revenues for the currentperiod on these contracts are determined by multiplying the estimated margin at completion for eachcontract by the project’s percentage of completion to date, adding labor costs, subcontractor costsand other direct costs incurred to date, and subtracting revenues recognized in prior periods. Inapplying the percentage-of-completion method, a project’s percent complete as of any balance sheetdate is computed as the ratio of labor costs incurred to date divided by the total estimated laborcosts at completion. Estimated labor costs at completion reflect labor costs incurred to date plusan estimate of the labor costs to complete the project. As changes in estimates of total laborcosts at completion and/or estimated total losses on projects are identified, appropriate earningsadjustments are recorded during the period that the change or loss is identified. Due to thevolume and varying degrees of complexity of our active Engineering projects, as well as the manyfactors that can affect estimated costs at completion, the computations of these estimates requirethe use of complex and subjective judgments. Accordingly, labor cost estimates to complete requireregular review and revision to ensure that project earnings are not misstated. Thepercentage-of-completion method is also used to account for certain construction-type contracts inour Energy segment. We have a history of making reasonably dependable estimates of costs atcompletion on our contracts that follow the percentage-of-completion method; however, due touncertainties inherent in the estimation process, it is possible that estimated project costs atcompletion could vary from our estimates. As of December 31, 2006, we do not believe that materialchanges to project cost estimates at completion for any of our open projects are reasonably likelyto occur.     ***Revenue Recognition*****.**As referenced above, we recognize revenue under thepercentage-of-completion method for the majority of our Engineering segment contracts in accordancewith AICPA Statement of Position (“SOP”) 81-1, “Accounting for Performance of Construction-Type andCertain Production-Type Contracts.” Under certain circumstances, we may agree to provide new oradditional engineering services to a client without a fully executed contract or change order. Inthese instances,
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although the costs of providing these services are expensed as incurred, the recognition ofrelated contract revenues are delayed until the contracts and/or change orders have been fullyexecuted by the clients, other suitable written project approvals are received from the clients, oruntil management determines that revenue recognition is appropriate based on the probability ofclient acceptance. The probability of client acceptance is assessed based on such factors as ourhistorical relationship with the client, the nature and scope of the services to be provided, andmanagement’s ability to accurately estimate the realizable value of the services to be provided.Under this policy, we had not recognized potential future revenues estimated at $1.4 million as ofboth December 31, 2006 and 2005, for which the related costs had already been expensed as of thesedates. The consistent application of this policy may result in revenues being recognized in aperiod subsequent to the period in which the related costs were incurred and expensed.     Our Energy segment recognizes revenue for the majority of its contracts in accordance with SECStaff Accounting Bulletin No. (“SAB”) 104, “Revenue Recognition.” SAB 104 requires that revenueshould generally be recognized only after (1) persuasive evidence of an arrangement exists, (2) therelated services have been rendered, (3) our selling price is fixed or determinable, and (4)collectibility is reasonably assured.     ***Income and Other Taxes*****.**We account for income taxes in accordance with Statement of FinancialAccounting Standards No. (“SFAS”) 109. We record our annual current tax provision based upon ourbook income plus or minus any permanent and temporary differences multiplied by the statutory ratein the appropriate jurisdictions where we operate. In certain foreign jurisdictions where weoperate, income tax is based on a deemed profit methodology. The calculation of our annual taxprovision may require interpreting tax laws and regulations and could result in the use ofjudgments or estimates which could cause our recorded tax liability to differ from the actualamount due.     We recognize current tax assets and liabilities for estimated taxes refundable or payable ontax returns for the current year. We also recognize deferred tax assets or liabilities for theestimated future tax effects attributable to temporary differences, net operating losses,undistributed foreign earnings, and various other credits and carryforwards. Our current anddeferred tax assets and liabilities are measured based on provisions in enacted tax laws in eachjurisdiction where we operate. We do not consider the effects of future changes in tax laws orrates in the current period. We analyze our deferred tax assets and place a valuation allowance onthose assets if we do not expect the realization of these assets to be more likely than not.     As a result of the restatements of our consolidated financial statements through the firstquarter of 2005, we have recorded significant liabilities for foreign income tax and other taxes aswell as related penalties and interest. These amounts were estimated and recorded based onapplicable statutory tax rates, and will be reduced in future periods based on tax payments,settlements and other resolutions. The amounts of these payments, settlements and otherresolutions may differ from the amounts estimated and recorded.     ***Goodwill*****.**During the second quarter of each year, we perform a valuation of the goodwillassociated with our operating segments. To the extent that the fair value of the business,including the goodwill, is less than the recorded value, we would write down the value of thegoodwill. The valuation of the goodwill is affected by, among other things, our business plan forthe future and estimated results of future operations. Changes in the business plan and/or infuture operating results may have an impact on the valuation of the assets and therefore couldresult in our recording a related impairment charge.     ***Contingencies*****.**The preparation of financial statements in conformity with accountingprinciples generally accepted in the U.S. requires us to make estimates and assumptions that affectthe reported amounts of assets and liabilities and the disclosure of contingent assets andliabilities as of the date of the financial statements, and also affect the amounts of revenues andexpenses reported for each period. Specifically, management estimates are inherent in theassessment of our exposure to insurance claims that fall below policy deductibles and to litigationand other legal claims and contingencies, as well as in
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determining our liabilities for incurred but not reported insurance claims. Significantjudgments by us and reliance on third-party experts are utilized in determining probable and/orreasonably estimable amounts to be recorded or disclosed in our financial statements. The resultsof any changes in accounting estimates are reflected in the financial statements of the period inwhich the changes are determined. We do not believe that material changes to these estimates arereasonably likely to occur.**Recent Accounting Pronouncements**     In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS 123(R), whichreplaces SFAS 123 and supersedes Accounting Principles Board Opinion No. (“APB”) 25, “Accountingfor Stock Issued to Employees.” SFAS 123(R) requires that the expense resulting from all share-basedpayment transactions be recognized in the financial statements. This statement applies to allawards granted after the required effective date, and does not apply to awards granted in periodsbefore the required effective date, except if prior awards are modified, repurchased or cancelledafter the effective date. We adopted the provisions of SFAS 123(R) on January 1, 2006 and used themodified prospective application method in our adoption. SFAS 123(R) did not have a material impacton our financial statements since we have been recording our stock-based compensation expense underthe fair value method in accordance with SFAS 123 since January 1, 2003.     In May 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections, areplacement of APB No. 20 and FASB Statement No. 3.” SFAS 154 requires, among other things,retrospective application, unless impracticable, to prior period financial statements for voluntarychanges in accounting principles and changes required by an accounting pronouncement in the unusualcircumstances in which the pronouncement does not include specific transition provisions. SFAS 154also requires that a change in depreciation, amortization, or depletion method for long-lived,nonfinancial assets should be accounted for as a change in accounting estimate affected by a changein accounting principle. The guidance for reporting the correction of an error in previouslyissued financial statements and the change of an accounting estimate will not change from APB 20.SFAS 154 was effective for us beginning January 1, 2006. The adoption of this standard did nothave a material impact on our consolidated financial statements.     In June 2006, the FASB issued FASB Interpretation (“FIN”) 48, “Accounting for Uncertainty inIncome Taxes-an Interpretation of FASB Statement No. 109.” FIN 48 prescribes recognition andmeasurement standards for a tax position taken or expected to be taken in a tax return. Theevaluation of a tax position in accordance with FIN 48 is a two step process. The first step isthe determination of whether a tax position should be recognized in the financial statements.Under FIN 48, a tax position taken or expected to be taken in a tax return is to be recognized onlyif we determine that it is more likely than not that the tax position will be sustained uponexamination by the tax authorities based upon the technical merits of the position. In step two,for those tax positions which should be recognized, the measurement of a tax position is determinedas being the largest amount of benefit that is greater than 50% likely of being realized uponultimate settlement. FIN 48 is effective for fiscal years beginning after December 15, 2006. Wewill adopt FIN 48 in the first quarter of 2007, with the adoption to be treated as acumulative-effect reduction to retained earnings in the range of $0.6to $0.9 million as of January1, 2007.     In June 2006, the FASB issued Emerging Issues Task Force (“EITF”) Issue No. 06-3, “How SalesTaxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in theIncome Statement (That Is, Gross Versus Net Presentation).” EITF 06-3 provides guidance ondisclosing the accounting policy for the income statement presentation of any tax assessed by agovernmental authority that is directly imposed on a revenue-producing transaction between a sellerand a customer on either a gross (included in revenues and costs) or a net (excluded from revenues)basis. In addition, EITF 06-3 requires disclosure of any such taxes that are reported on a grossbasis as well as the amounts of those taxes in interim and annual financial statements for eachperiod for which an income statement is presented. EITF 06-3 will be effective for us as ofJanuary 1, 2007. As EITF 06-3 provides only
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disclosure requirements, the adoption of this standard is not expected to have a materialimpact on our consolidated financial statements.     In September 2006, the SEC issued SAB 108, “Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB 108provides interpretive guidance on how the effects of prior-year uncorrected misstatements should beconsidered when quantifying misstatements in the current year financial statements. SAB 108requires registrants to quantify misstatements using both an income statement and balance sheetapproach and then evaluate whether either approach results in a misstatement that, when allrelevant quantitative and qualitative factors are considered, is material. If prior year errorsthat had been previously considered immaterial now are considered material based on eitherapproach, no restatement is required as long as management properly applies its previous approachand all relevant facts and circumstances were considered. If prior years’ financial statements arenot restated, the cumulative effect adjustment is recorded in opening retained earnings as of thebeginning of the fiscal year of adoption. SAB 108 was effective for us for the year ended December31, 2006. The adoption of SAB 108 did not have an impact on our consolidated financial statements.     In September 2006, the FASB issued SFAS 157, “Fair Value Measurements,” which defines fairvalue, establishes guidelines for measuring fair value and expands disclosures regarding fair valuemeasurements. SFAS 157 does not require any new fair value measurements but rather eliminatesinconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 iseffective for fiscal years beginning after November 15, 2007 and interim periods within thosefiscal years. Earlier adoption is permitted, provided that financial statements have not yet beenissued for that fiscal year, including financial statements for an interim period within thatfiscal year. We will adopt the provisions of SFAS 157 on January 1, 2008 and do not expect anyimpact on our consolidated financial statements.     In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets andLiabilities, Including an Amendment of FASB Statement No. 115,” which permits entities tochoose, at specific election dates, to measure eligible financial assets and liabilities at fairvalue (referred to as the “fair value option”) and report associated unrealized gains and losses inearnings. SFAS 159 also requires entities to display the fair value of the selected assets andliabilities on the face of the balance sheet. SFAS 159 does not eliminate disclosure requirementsof other accounting standards, including fair value measurement disclosures in SFAS 157. SFAS 159is effective for fiscal years beginning after November 15, 2007.We may adopt the provisions ofSFAS 159 on January 1, 2008 and we do not expect the adoption of this standard to have a materialimpact on our consolidated financial statements.
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**MICHAEL BAKER CORPORATION**