UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC  20549

______________

FORM 10-Q

_____________

                    (Mark one)

ý Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

          For the Quarterly Period Ended June 29, 2007

OR

 o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 

        For the transition period from _____________ to _____________

Commission File Number 1-12054

_____________

WASHINGTON GROUP INTERNATIONAL, INC.

 (Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		33-0565601 (IRS Employer Identification No.)
720 Park Boulevard, Boise, Idaho (Address of principal executive offices)		83712 (zip code)
	(208) 386-5000 (Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

ý Yes   o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Securities Exchange Act. (Check one):

ý  Large accelerated filer                           o  Accelerated filer                           o  Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

o Yes   ý No

Number of shares of common stock outstanding at July 27, 2007:  29,297,592

TABLE OF CONTENTS

		PAGE
	Note Regarding Forward-Looking Information	i
	PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Statements of Income for the Three and Six Months Ended June 29, 2007 and June 30, 2006	I-1
	Condensed Consolidated Balance Sheets at June 29, 2007 and December 29, 2006	I-2
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 29, 2007 and June 30, 2006	I-4
	Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 29, 2007 and June 30, 2006	I-5
	Notes to Condensed Consolidated Financial Statements	I-6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	I-20
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	I-38
Item 4.	Controls and Procedures	I-38
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	II-1
Item 1A.	Risk Factors	II-2
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	II-3
Item 3.	Defaults upon Senior Securities	II-3
Item 4.	Submission of Matters to a Vote of Security Holders	II-3
Item 5.	Other Information	II-4
Item 6.	Exhibits	II-4
	SIGNATURES

NOTE REGARDING FORWARD-LOOKING INFORMATION

This report contains forward-looking statements. You can identify forward-looking statements by the use of terminology such as “may,” “will,” “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “plan,” “could,” “should,” “potential” or “continue,” or the negative or other variations thereof, as well as other statements regarding matters that are not historical fact. These forward-looking statements include, among others, statements concerning:

·   Our business strategy and competitive advantages;

·   Our expectations as to potential revenue from designated markets or customers;

·   Our expectations as to operating results, cash flows, return on invested capital and net income;

·   Our expectations as to new work and backlog;

·   The markets for our services and products; and

·   Our anticipated contractual obligations, capital expenditures and funding requirements.

Forward-looking statements are only predictions. The forward-looking statements in this report are subject to risks and uncertainties, including, among others, the risks and uncertainties identified in this report and other operational, business, industry, market, legal and regulatory developments, which could cause actual events or results to differ materially from those expressed or implied by the forward-looking statements.

Important factors that could prevent us from achieving the expectations expressed include, but are not limited to, our failure to:

·   Manage and avoid delays or cost overruns on existing and future contracts;

·   Maintain relationships with key customers, partners and suppliers;

·   Successfully bid for, and enter into, new contracts on satisfactory terms;

·   Successfully manage and negotiate change orders and claims with respect to existing and future contracts;

·   Manage and maintain our operations and financial performance and the operations and financial performance of our current and future operating subsidiaries and joint ventures;

·   Respond effectively to regulatory, legislative and judicial developments, including any legal or regulatory proceedings, affecting our existing contracts, including contracts concerning environmental remediation and restoration;

·   Obtain and maintain any required governmental authorizations, franchises and permits, all in a timely manner, at reasonable costs and on satisfactory terms and conditions;

·   Satisfy the restrictive covenants imposed by our revolving credit facility and surety arrangements;

·   Maintain access to sufficient working capital through our existing revolving credit facility or otherwise; and

·   Maintain access to sufficient bonding capacity.

i

Some other factors that may affect our businesses, financial position or results of operations include:

·   Accidents and conditions, including industrial accidents, labor disputes, geological conditions, environmental hazards, weather and other natural phenomena;

·   Special risks of international operations, including uncertain political and economic environments, acts of terrorism or war, potential incompatibilities with foreign joint venture partners, foreign currency fluctuations, civil disturbances and labor issues;

·   Special risks of contracts with the government, including the failure of applicable governing authorities to take necessary actions to secure or maintain funding for particular projects with us, the unilateral termination of contracts by the government and reimbursement obligations to the government for funds previously received;

·   The outcome of legal proceedings;

·   Maintenance of government-compliant cost systems; and

·   The economic well-being of our private and public customer base and its ability and intentions to invest capital in engineering and construction activities.

For a description of additional risk factors that may affect our businesses, financial position or results of operations, see “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and “Business – Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 29, 2006 (“2006 Annual Report”).

ii

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

	Three Months Ended						Six Months Ended
(In thousands, except per share data)	June 29,  2007			June 30, 2006			June 29, 2007			June 30, 2006
Revenue	$	951,877		$	890,057		$	1,789,253		$	1,718,399
Cost of revenue		(906,551	)		(824,704	)		(1,711,220	)		(1,618,003	)
Gross profit		45,326			65,353			78,033			100,396
Equity in income of unconsolidated affiliates		3,506			3,625			12,934			16,816
General and administrative expenses		(18,303	)		(20,246	)		(37,698	)		(35,007	)
Operating income		30,529			48,732			53,269			82,205
Interest income		1,800			2,465			4,767			5,138
Interest expense		(1,447	)		(1,752	)		(2,981	)		(3,684	)
URS merger related costs		(6,650	)	─				(6,650	)	─
Other income (expense), net		(47	)		485			(410	)		103
Income before income taxes and minority interests		24,185			49,930			47,995			83,762
Income tax expense		(12,400	)		(20,196	)		(21,462	)		(33,696	)
Minority interests in income of consolidated entities, net of tax		(1,103	)		(1,034	)		(2,802	)		(2,406	)
Net income	$	10,682		$	28,700		$	23,731		$	47,660
Net income per share:
Basic	$	0.37		$	1.00		$	0.83		$	1.67
Diluted		0.35			0.94			0.77			1.55
Shares used to compute net income per share:
Basic		28,859			28,773			28,742			28,575
Diluted		30,930			30,563			30,740			30,667

The accompanying notes are an integral part of the condensed consolidated financial statements.

 I-1

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In thousands)	June 29, 2007			December 29, 2006
ASSETS
Current assets
Cash and cash equivalents	$	136,490		$	232,096
Restricted cash		63,792			65,475
Accounts receivable, including retentions of $16,168 and $16,443, respectively		287,436			358,957
Unbilled receivables		345,244			268,829
Investments in and advances to construction joint ventures		59,876			44,333
Deferred income taxes		93,189			106,681
Other		46,941			48,789
Total current assets		1,032,968			1,125,160
Investments and other assets
Investments in unconsolidated affiliates		117,875			113,953
Goodwill		97,076			97,076
Deferred income taxes		237,328			227,901
Other assets		36,302			38,005
Total investments and other assets		488,581			476,935
Property and equipment
Construction and mining equipment		234,373			162,776
Other equipment and fixtures		57,810			50,642
Buildings and improvements		10,892			12,781
Land and improvements		584			584
Total property and equipment		303,659			226,783
Less accumulated depreciation		(100,030	)		(96,554	)
Property and equipment, net		203,629			130,229
Total assets	$	1,725,178		$	1,732,324

The accompanying notes are an integral part of the condensed consolidated financial statements.

I-2

CONDENSED CONSOLIDATED BALANCE SHEETS (continued)

(UNAUDITED)

(In thousands, except per share data)	June 29,  2007			December 29, 2006
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and subcontracts payable, including retentions of $26,453 and $26,423, respectively	$	299,778		$	335,045
Billings in excess of cost and estimated earnings on uncompleted contracts		132,520			152,109
Accrued salaries, wages and benefits, including compensated absences of $61,642 and $53,695, respectively		183,922			192,307
Other accrued liabilities		38,068			38,563
Total current liabilities		654,288			718,024
Non-current liabilities
Self-insurance reserves		74,249			68,392
Pension and post-retirement benefit obligations		86,259			87,449
Other non-current liabilities		51,825			50,263
Total non-current liabilities		212,333			206,104
Contingencies and commitments (Note 8)
Minority interests		11,629			9,947
Stockholders’ equity
Preferred stock, par value $.01 per share, 10,000 shares authorized	─			─
Common stock, par value $.01 per share, 100,000 shares authorized; 30,442 and 30,001 shares issued, respectively		304			300
Capital in excess of par value		685,024			661,278
Retained earnings		207,223			183,492
Treasury stock, 1,163 and 1,159 shares, respectively, at cost		(67,474	)		(67,251	)
Accumulated other comprehensive income		21,851			20,430
Total stockholders’ equity		846,928			798,249
Total liabilities and stockholders’ equity	$	1,725,178		$	1,732,324

The accompanying notes are an integral part of the condensed consolidated financial statements.

I-3

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six Months Ended
(In thousands)	June 29, 2007			June 30, 2006
Operating activities
Net income	$	23,731		$	47,660
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Cash paid for reorganization items		(1,253	)		(995	)
Depreciation of property and equipment		18,862			14,205
Amortization of intangible assets		2,185			8,830
Amortization of deferred financing fees		457			1,103
Non-cash income tax expense		19,197			30,168
Minority interests in income of consolidated subsidiaries, net of tax		2,803			2,406
Equity in income of unconsolidated affiliates, less dividends received		(530	)		(8,729	)
Gain on sale of assets, net		(5,350	)		(800	)
Stock-based compensation expense		8,225			5,966
Excess tax benefits from exercise of stock options		(2,965	)		(4,140	)
Changes in operating assets, liabilities and other		(84,678	)		(70,690	)
Net cash provided (used) by operating activities		(19,316	)		24,984
Investing activities
Property and equipment additions		(101,992	)		(25,373	)
Property and equipment disposals		14,270			2,541
Change in restricted cash		1,683			4,242
Business acquisition, net of cash acquired of $563	─				(6,103	)
Contributions and advances to unconsolidated affiliates		(245	)		(648	)
Net cash used by investing activities		(86,284	)		(25,341	)
Financing activities
Proceeds from exercise of stock options and warrants		9,944			83,047
Excess tax benefit from exercise of stock options		2,965			4,140
Purchase of warrants and treasury stock	─				(76,480	)
Distributions to minority interests, net		(2,915	)		(2,543	)
Payoff of loan assumed in business acquisition	─				(1,668	)
Net cash provided by financing activities		9,994			6,496
Increase (decrease) in cash and cash equivalents		(95,606	)		6,139
Cash and cash equivalents at beginning of period		232,096			237,706
Cash and cash equivalents at end of period	$	136,490		$	243,845

The accompanying notes are an integral part of the condensed consolidated financial statements.

I-4

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

	Three Months Ended					Six Months Ended
(In thousands)	June 29, 2007		June 30, 2006			June 29, 2007		June 30, 2006
Net income	$	10,682	$	28,700		$	23,731	$	47,660
Other comprehensive income (loss), net of  tax:
Foreign currency translation adjustments		435		2,461			1,345		4,064
Other		61		(101	)		76		59
Other comprehensive income, net of tax		496		2,360			1,421		4,123
Comprehensive income	$	11,178	$	31,060		$	25,152	$	51,783

 The accompanying notes are an integral part of the condensed consolidated financial statements.

I-5

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The terms “we,” “us” and “our” as used in this quarterly report refer to Washington Group International, Inc. (“Washington Group International”) and its consolidated subsidiaries unless otherwise indicated.

1.            DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Business

We are an international provider of a broad range of design, engineering, construction, construction management, facilities and operations management, environmental remediation and mining services to diverse public and private sector customers, including (i) engineering, construction and operations and maintenance services in nuclear and fossil power markets; (ii) engineering, construction, construction management and operations and maintenance services for the highway and bridge, airport and seaport, dam, tunnel, water resource and railway markets; (iii) contract mining, technical and engineering services for the metals, precious metals, coal, minerals and minerals processes markets; (iv) design, engineering, procurement, construction and construction management and operations and maintenance services for industrial companies; (v) design, engineering, construction, management and operations and closure services for weapons and chemical demilitarization programs for governmental customers; and (vi) comprehensive nuclear and other environmental and hazardous substance remediation as well as management and operations services for governmental and private-sector customers. In providing these services, we enter into two basic types of contracts: fixed-price and cost-type contracts. Fixed price contracts include lump-sum contracts providing for a fixed price for all work to be performed and fixed-unit-price contracts providing for a fixed price for each unit of work to be performed. Cost-type contracts include target-price contracts providing for an agreed upon price whereby we absorb all or a portion of cost escalations to the extent of our expected fee or profit and are reimbursed for costs which continue to escalate beyond our expected fee and share in the cost savings based on a negotiated formula and cost-type contracts providing for reimbursement of costs plus a fee. Engineering, construction management, maintenance and environmental and hazardous substance remediation contracts are typically awarded pursuant to a cost-type contract.

We participate in construction joint ventures, often as sponsor and manager of projects, which are formed for the sole purpose of bidding, negotiating and completing specific projects. We participate in two incorporated mining ventures: MIBRAG mbH (“MIBRAG”), a company that operates lignite coal mines and power plants in Germany, and Westmoreland Resources, Inc. (“Westmoreland Resources”), a coal mining company in Montana.

Basis of presentation

The accompanying condensed consolidated financial statements and related notes are unaudited. They have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The financial statements include the accounts of Washington Group International and all of its majority-owned subsidiaries and certain majority-owned construction joint ventures. Investments in unconsolidated construction joint ventures are accounted for using the equity method in the consolidated balance sheets, with our proportionate share of revenue, cost of revenue and gross profit included in the consolidated statements of income. Investments in unconsolidated affiliates are accounted for under the equity method. Intercompany transactions and accounts have been eliminated in consolidation.

The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in our 2006 Annual Report. The accompanying condensed consolidated balance sheet at December 29, 2006 and related footnote disclosures included herein have been derived from the audited consolidated balance sheet and related footnotes included in the 2006 Annual Report.

I-6

In our opinion, the accompanying condensed consolidated financial statements reflect all adjustments of a recurring nature that are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations and cash flows for the interim periods presented are not necessarily indicative of results of operations and cash flows to be expected for the full year.

Our fiscal year is the 52/53 weeks ending on the Friday closest to December 31.

The preparation of our condensed consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet dates, and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. On an ongoing basis, we review our estimates based on information that is currently available. Changes in facts and circumstances may cause us to revise estimates.

Reclassification

            The accompanying condensed consolidated balance sheet as of December 29, 2006 reflects the reclassification of unearned compensation – restricted stock of $8.4 million to capital in excess of par to conform to the 2007 presentation.  The reclassification did not impact previously reported revenue, net income, total assets, total liabilities, stockholders’ equity or cash flows.

2.           PROPOSED MERGER OF WASHINGTON GROUP INTERNATIONAL WITH URS CORPORATION

On May 27, 2007, Washington Group International entered into a definitive Agreement and Plan of Merger (the “Agreement”) with URS Corporation (“URS”). The Agreement provides that, upon the terms and subject to the conditions set forth in the Agreement, Washington Group International will become a wholly owned subsidiary of URS, and each outstanding share of our common stock will be converted into the right to receive 0.772 of a share of URS common stock and cash consideration of $43.80 per share. Consummation of the merger is subject to customary closing conditions and regulatory approvals, and approval by the stockholders of URS and Washington Group International. The waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 expired July 10, 2007. The merger is expected to close in the fourth quarter of fiscal year 2007 and may not be completed if any of the conditions are not satisfied or waived. Unless otherwise indicated, the discussions in this document relate to Washington Group International as a standalone entity and do not reflect the impact of the proposed merger with URS. We expect to hold a special meeting in the fourth quarter of 2007 to enable our stockholders to vote to adopt the merger agreement.

Either party may terminate the Agreement if the merger is not consummated by December 27, 2007, unless the merger is extended to May 27, 2008; if the Washington Group International stockholders fail to approve the merger; if the URS stockholders fail to approve the issuance of URS common stock required to consummate the merger; if any governmental entity prohibits the merger; if the other party breaches any representation, warranty, covenant or agreement of the merger agreement; if the other party’s board of directors withdraws its approval of the merger agreement; or if the party receives an unsolicited bona fide written acquisition proposal for 50 percent or more of its consolidated assets or 50 percent or more of its voting or economic interest and is more favorable to the party and its stockholders than the aforementioned merger.

If the Agreement is terminated, Washington Group International may be required in specified circumstances to pay a termination fee of $70.0 million to URS, and URS may be required in specified circumstances to pay a termination fee of $70.0 million to Washington Group International. For additional information regarding the merger, please refer to the Schedule 14A, amended, which contains the joint proxy statement/prospectus and Agreement filed by Washington Group International and URS on July 17, 2007 in connection with the merger.

As of June 29, 2007, we had incurred $6.7 million of merger related expenses associated with the proposed merger with URS principally comprised of investment banking, legal and accounting fees.

I-7

3.           NET INCOME PER SHARE

Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed similar to basic net income per share except that it reflects the potential dilution from dilutive common stock equivalents using the treasury stock method. Outstanding common stock equivalents primarily consist of options and warrants to purchase common stock and restricted shares. During the three months ended June 29, 2007 and June 30, 2006, the number of anti-dilutive outstanding options and deferred shares excluded from the computation of diluted net income per share was 359,000 and 396,000, respectively. During the six months ended June 29, 2007 and June 30, 2006, the weighted average number of anti-dilutive outstanding options and deferred shares excluded from the computation of diluted net income per share was 552,000 and 399,000, respectively.

A reconciliation between weighted average shares outstanding used in calculating basic and diluted net income per share is as follows:

	Three Months Ended				Six Months Ended
(In thousands)	June 29, 2007		June 30, 2006		June 29,  2007		June 30, 2006
Basic weighted average shares outstanding		28,859		28,773		28,742		28,575
Effect of dilutive securities:
Stock options		1,846		1,654		1,768		1,722
Stock warrants	─		─		─			241
Restricted shares and other		225		136		230		129
Diluted weighted average shares outstanding		30,930		30,563		30,740		30,667

4.           VENTURES

Construction joint ventures

We participate in unconsolidated construction joint ventures that are formed to bid, negotiate and complete specific projects. The unconsolidated construction joint ventures are reflected in our condensed consolidated balance sheets as “Investments in and advances to construction joint ventures” using the equity method with our proportionate share of revenue, cost of revenue and gross profit included in our condensed consolidated statements of income. The size, scope and duration of joint-venture projects vary among periods. The tables below present the financial information of our unconsolidated construction joint ventures in which we do not hold a controlling interest but do exercise significant influence. At June 29, 2007 and December 29, 2006, certain construction joint ventures had liabilities in excess of assets due to accrued contract losses resulting in $47.9 million and $48.8 million, respectively, being included in our condensed consolidated balance sheets under the caption “Billings in excess of cost and estimated earnings on uncompleted contracts.”

Combined financial position of unconsolidated construction joint ventures (In thousands)	June 29, 2007			December 29, 2006
Current assets	$	265,945		$	299,722
Property and equipment, net		1,737			7,734
Current liabilities		(289,299	)		(322,414	)
Net liabilities	$	(21,617	)	$	(14,958	)

I-8

	Three Months Ended						Six Months Ended
Combined results of operations of unconsolidated construction joint ventures (In thousands)	June 29, 2007			June 30, 2006			June 29, 2007			June 30, 2006
Revenue	$	196,451		$	260,839		$	427,706		$	551,422
Cost of revenue		(231,903	)		(243,470	)		(452,022	)		(536,078	)
Gross profit (loss)	$	(35,452	)	$	17,369		$	(24,316	)	$	15,344

	Three Months Ended						Six Months Ended
Washington Group International’s share of results of  operations of unconsolidated construction joint ventures (In thousands)	June 29, 2007			June 30, 2006			June 29,  2007			June 30,  2006
Revenue	$	92,397		$	117,118		$	203,187		$	251,837
Cost of revenue		(111,149	)		(111,689	)		(217,008	)		(246,576	)
Gross profit (loss)	$	(18,752	)	$	5,429		$	(13,821	)	$	5,261

Beginning in 2004, contract losses have been recognized by a construction joint venture in which we have a 50 percent interest on a $395.7 million fixed-price roadway interchange and bridge project. Through June 29, 2007, we have recorded a total of $160.5 million of contract losses on this project. The losses have resulted from various developments including final design and other customer specifications, state regulatory agency requirements, material quantity and cost growth, higher subcontractor and labor costs, and impacts from schedule delays. During the three and six months ended June 29, 2007, we recorded $25.5 million of additional losses due to our customer’s decision to assert and withhold liquidated damages from payments due to the joint venture, as compared to no losses recorded during the three months ended June 30, 2006 and $6.9 million during the six months ended June 30, 2006.

Pursuant to the fixed price agreement, the joint venture is liable for specified liquidated damages to the customers if certain project schedule milestones are not met.  Although the joint venture has been operating pursuant to an understanding that the client would not withhold payment for liquidated damages, in June 2007 the client began to withhold payment from amounts otherwise due to the joint venture.  Based on the current project completion schedule, we currently believe the client will assert and withhold liquidated damages totaling approximately $51.0 million (of which our share is $25.5 million). Claims for schedule extension have been submitted to the customers that the joint venture believes will eliminate or significantly reduce liabilities for liquidated damages. As of June 29, 2007, the contract is approximately 84 percent complete, measured on a cost-to-cost basis, and is scheduled to be substantially complete in late 2007.

To date, only a portion of the overall cost increases have been agreed to with the customers and acknowledged with change orders. Pending change orders and claims submitted to the customers total approximately $202.7 million (of which our share is $101.4 million) and an additional $34.4 million are in process (of which our share is $17.2 million). In response to our claims, certain counterclaims have been filed against us.  We believe that we will realize significant recoveries once the claim process is completed. Because we have not been able to reach agreement on the change orders and claims, recoveries will be recognized only when it is probable they will result in additional revenue and the amounts can be reliably estimated. While the entire amount of the current estimated loss has been recognized, actual results may differ from our estimates.

I-9

Unconsolidated affiliates

      At June 29, 2007 and December 29, 2006, we held ownership interests in unconsolidated affiliates that are accounted for under the equity method, the most significant of which are two incorporated mining ventures: MIBRAG (50 percent) and Westmoreland Resources (20 percent). We provide consulting services to MIBRAG and, through March 30, 2007, we provided contract mining services to Westmoreland Resources.

 Effective March 30, 2007, we agreed with Westmoreland Resources to conclude our contract mining services agreement, which provided for compensation to us in lieu of future services and the transfer of certain mining equipment, inventory, and reclamation liabilities to Westmoreland Resources. The transaction generated $14.0 million of cash and a net gain of $6.1 million, of which $1.0 million has been deferred because we continue to own a 20 percent interest in Westmoreland Resources. This gain more than offset the operating loss incurred on the project in the three months ended March 30, 2007 of $4.3 million. The tables below present the financial information of our unconsolidated affiliates in which we do not hold a controlling interest but do exercise significant influence.

Combined financial position of unconsolidated affiliates (In thousands)	June 29, 2007			December 29, 2006
Current assets	$	152,564		$	153,581
Property and equipment, net		630,923			608,454
Other non-current assets		421,848			433,418
Current liabilities		(86,542	)		(92,507	)
Long-term debt, non-recourse to parents		(190,443	)		(201,684	)
Other non-current liabilities		(660,678	)		(653,750	)
Net assets	$	267,672		$	247,512

	Three Months Ended						Six Months Ended
Combined results of operations of unconsolidated affiliates (In thousands)	June 29, 2007			June 30, 2006			June 29,  2007			June 30,  2006
Revenue	$	150,236		$	243,649		$	297,490		$	381,821
Cost of revenue		(135,016	)		(231,313	)		(256,336	)		(342,244	)
Gross profit	$	15,220		$	12,336		$	41,154		$	39,577

5.           CREDIT FACILITY

 We have a Senior Secured Revolving Credit Facility (the "Credit Facility") that provides for up to $350.0 million in the aggregate of loans and other financial accommodations. The maturity date of the Credit Facility is June 14, 2010. The borrowing rate is LIBOR plus an additional margin of 2.00 percent or, at our option, prime plus an additional margin of 1.00 percent, subject in each case to a 0.25 percent reduction upon our obtaining a specified long-term debt rating. As of June 29, 2007 and December 29, 2006, the effective borrowing rate was 7.32 percent and 7.33 percent, respectively.

 The Credit Facility also provides for other fees, including commitment and letter of credit fees, normal and customary for such credit agreements. Letter of credit fees are calculated using the applicable LIBOR margins stated above plus an issuance fee that is negotiated with the issuing bank. Commitment fees are calculated on the remaining borrowing capacity after subtracting any outstanding borrowings and letters of credit. The commitment fee is 0.50 percent (subject to a 0.25 percent reduction upon our obtaining a specified long-term debt rating). As of June 29, 2007, $121.3 million in face amount of letters of credit were issued and outstanding and no borrowings were outstanding leaving a borrowing capacity of $228.7 million under the Credit Facility.

I-10

The Credit Facility contains financial covenants requiring the maintenance of specified financial and operating ratios, and specified events of default that are typical for a credit facility of this size, type and tenor. The Credit Facility also contains covenants that limit our ability and the ability of some of our subsidiaries to incur debt, grant liens, provide guarantees, make investments, merge with or acquire other companies and pay dividends. As of June 29, 2007, we were in compliance with all of the financial covenants under the Credit Facility except the fixed charge coverage ratio and the annual capital expenditures limit.  Over the past year, new contracts to perform mining services for major international natural-resource companies have required significant capital expenditures for mining equipment. As a consequence of the capital expenditures and lower earnings due to the charge of the fixed-price highway project discussed in Note 4, we have obtained waivers on the fixed charge coverage ratio and the annual capital expenditures limit through September 27, 2007. We are currently in the process of selling and leasing back under operating leases approximately $40 million of the mining equipment acquired through June 29, 2007 and expect to be in compliance with all of the financial covenants under the Credit Facility by September 27, 2007. The Credit Facility is secured by substantially all of the assets of Washington Group International and our wholly owned domestic subsidiaries.

6.           OPERATING SEGMENT INFORMATION

We operate through six business units, each of which comprises a separate reportable business segment: Power, Infrastructure, Mining, Industrial/Process, Defense and Energy & Environment. The reportable segments are separately managed, serve different markets and customers, and differ in their expertise, technology and resources necessary to perform their services.

Power provides engineering, construction and maintenance services in nuclear and fossil power markets for turnkey new power plant construction, plant expansion, retrofit and modification, decontamination and decommissioning, general planning, siting and licensing and environmental permitting.

Infrastructure provides engineering, construction, construction management, and operations and maintenance services for highways and bridges, airports and seaports, tunnels and tube tunnels, railroad and transit lines, water storage and transport, water treatment, site development and hydroelectric facilities. The business unit generally performs as a general contractor or as a joint venture partner with other contractors on domestic and international projects.

Mining provides contract mining, resource evaluation, mine planning, production scheduling, simulation modeling, equipment selection, engineering, mine reclamation and operations management to coal, oil sands, industrial minerals and metals markets.

Industrial/Process provides design, engineering, procurement, construction services and total facilities management for general manufacturing, pharmaceutical and biotechnology, oil production, gas treating, gas monetization, institutional buildings, food and consumer products, automotive, aerospace and pulp and paper industries.

Defense provides a complete range of technical services to the Department of Defense, including operations and management services, environmental and chemical demilitarization services, waste handling and storage, architectural engineering services and engineering, procurement and construction services for the armed forces.

Energy & Environment provides services to the Department of Energy, which is responsible for maintaining the nation’s nuclear weapons stockpile and performing environmental cleanup and remediation. The business unit also provides the United States (“US”) government with construction, contract management, supply-chain management, quality assurance, administrative and environmental cleanup and restoration services. Energy & Environment provides safety management consulting and waste and environmental technology and engineered products, including radioactive waste containers and technical support services.

I-11

The accounting policies of the segments are the same as those described in Note 2, “Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Part II, Item 8 of our 2006 Annual Report. We evaluate performance and allocate resources based on segment operating income. Segment operating income is total segment revenue reduced by segment cost of revenue and includes equity in income of unconsolidated affiliates. Intersegment and other unallocated operating costs principally consist of unallocated costs of our self-insurance program and company-wide development initiatives.

I-12

SEGMENT OPERATING INFORMATION

	Three Months Ended						Six Months Ended
(In thousands)	June 29, 2007			June 30, 2006			June 29, 2007			June 30, 2006
Revenue
Power	$	276,359		$	205,218		$	490,972		$	409,918
Infrastructure		124,250			151,865			257,955			294,243
Mining		58,347			34,701			114,765			66,410
Industrial/Process		170,665			124,775			312,292			250,224
Defense		147,597			140,536			289,060			293,134
Energy & Environment		174,903			234,219			323,593			405,218
Intersegment, eliminations and other		(244	)		(1,257	)		616			(748		)
Total revenue	$	951,877		$	890,057		$	1,789,253		$	1,718,399
Gross profit (loss)
Power	$	17,811		$	11,226		$	29,426		$	22,337
Infrastructure		(17,456	)		1,780			(13,224	)		(976		)
Mining		5,870			(5,183	)		5,967			(9,898		)
Industrial/Process		5,825			1,705			6,150			6,314
Defense		16,663			10,944			25,972			24,548
Energy & Environment		16,125			46,743			23,416			60,812
Intersegment and other unallocated operating costs		488			(1,862	)		326			(2,741		)
Total gross profit	$	45,326		$	65,353		$	78,033		$	100,396
Equity in income (loss) of unconsolidated affiliates
Power	$	33		$	(43	)	$	32		$	(24		)
Infrastructure		292			294			681			644
Mining		1,956			2,738			9,833			15,311
Industrial/Process		170			127			518			319
Defense	─			─				─		─
Energy & Environment	1,055				509			1,870				566
Total equity in income of unconsolidated affiliates	$	3,506		$	3,625		$	12,934		$		16,816
Operating income (loss)
Power	$	17,844		$	11,183		$	29,458		$		22,313
Infrastructure		(17,164	)		2,074			(12,543	)			(332	)
Mining	7,826				(2,445	)		15,800				5,413
Industrial/Process	5,995				1,832			6,668				6,633
Defense	16,663				10,944			25,972				24,548
Energy & Environment	17,180				47,252			25,286				61,378
Intersegment and other unallocated operating costs	488				(1,862	)		326				(2,741	)
Corporate general and administrative expenses	(18,303		)		(20,246	)		(37,698	)			(35,007	)
Total operating income	$	30,529		$	48,732		$	53,269		$		82,205

Assets as of (In thousands)	June 29, 2007		December 29, 2006
Power	$	197,503	$	126,266
Infrastructure		187,250		165,390
Mining		351,574		270,362
Industrial/Process		157,318		128,567
Defense		94,737		107,917
Energy & Environment		245,052		347,875
Corporate and other		491,744		585,947
Total assets	$	1,725,178	$	1,732,324

I-13

7.           INCOME TAXES AND ADOPTION OF FIN 48

The effective tax rates for the three and six months ended June 29, 2007 were 51.3 percent and 44.7 percent, respectively.  The effective tax rates for the three and six months ended June 30, 2006, were 40.4 percent and 40.2 percent, respectively. The increase in the tax rates for the three and six months ended June 29, 2007 is primarily due to the impact of merger related costs that are not deductible for income tax purposes.

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes (“FIN 48”). FIN 48 prescribes a more-likely-than-not recognition threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and also provides guidance on various related matters such as derecognition, interest and penalties and disclosure. An uncertain income tax position is not recognized if it has less than a 50 percent likelihood of being sustained.

We adopted the provisions of FIN 48 effective December 30, 2006. As of December 29, 2006, we had recognized tax benefits for $22.3 million of tax deductions that we have concluded do not meet the more-likely-than-not threshold for financial statement recognition. As a result, the adoption of FIN 48 resulted in recording an increase to other non-current liabilities and a charge to capital in excess of par value of $5.8 million. In addition, changes in the unrecognized tax benefit would have no impact on the effective tax rate in future periods.

We recognize interest and penalties accrued related to unrecognized tax liabilities in income tax expense. We had $1.0 million accrued for the payment of interest at December 29, 2006. Upon adoption of FIN 48 on December 30, 2006, no change in our accrual for interest and penalties was required.

 We are subject to taxation in the US and various states and foreign jurisdictions. Our returns for 2002 and 2003 are currently under examination by the Internal Revenue Service (“IRS”). During the three months ended June 29, 2007, we received notices of proposed adjustments from the IRS related to the 2002 and 2003 examination. One of the proposed adjustments, which we had anticipated, relates to our treatment of cancellation of indebtedness income (“CODI”) associated with our reorganization in 2002 which treatment preserved approximately $259 million of net operating loss carryforwards and approximately $17 million of alternative minimum tax credit carryforwards. These tax attributes have resulted in a reduction of income taxes paid of approximately $37 million through June 29, 2007. In addition, approximately $70 million of deferred tax assets remain related to future utilization of net operating loss and tax credit carryforwards. We believe our interpretation of the law, which is supported by an independent tax opinion, and our treatment of CODI on our tax returns was and remains correct and that the IRS’ interpretation is not appropriate based on the law and our facts and circumstances. We believe the resolution of the proposed adjustments will not result in a material change to our results of operations and financial condition and liquidity. With few exceptions, we are no longer subject to US federal, state, local or foreign examinations by tax authorities for years before 2002.

I-14

8.           CONTINGENCIES AND COMMITMENTS

Contract related matters

We have cost-type contracts with the US government that require the use of estimated annual rates for indirect costs. The estimated rates are analyzed periodically and adjusted based on changes in the level of indirect costs we expect to incur and the volume of work we expect to perform. The cumulative effect of changes to estimated rates is recorded in the period of the change. Additionally, the allowable indirect costs for US government cost-type contracts are subject to adjustment upon audit by the US government. To the extent that these audits result in determinations that costs claimed as reimbursable are not allowable costs, or were not allocated in accordance with federal regulations, we could be required to reimburse the government for amounts previously received. Audits by the US government of indirect costs are complete through 2003. Audits of 2004 and 2005 indirect costs are in process. The US government is also in the process of auditing insurance related costs reimbursed under government contracts for periods ranging from 1998 through 2005.

US Government Cost Accounting Standards and other regulations also require that accounting changes, as defined, be evaluated for potential impact to the amount of indirect costs allocated to government contracts and that cost impact statements be submitted to the US government for audit. Cost impact statements through 1998 have been audited by the US government and settled. We are in the process of preparing cost impact statements for 1999 through 2005.

While we have recorded reserves for amounts we believe are owed to the US government under cost-type contracts, actual results may differ from our estimates.

Letters of credit

In the normal course of business, we cause letters of credit to be issued in connection with contract performance obligations that are not required to be reflected in the accompanying condensed consolidated balance sheets. We are obligated to reimburse the issuer of such letters of credit for any payments made thereunder. At June 29, 2007 and December 29, 2006, $145.3 million and $148.1 million, respectively, in face amount of letters of credit were outstanding. As of June 29, 2007, $121.3 million of the outstanding letters of credit were issued under the Credit Facility and $20.0 million of letters of credit were secured by restricted cash.

Legal Matters

Litigation and Investigation related to USAID Egyptian Projects.  In 2002, the Inspector General for the US Agency for International Development (“USAID”) requested documentation about and made inquiries into the contractual relationships between one of our US joint ventures and a local construction company in Egypt.  The focus of the inquiry was whether the structure of our business relationship with the Egyptian company violated USAID contract regulations with respect to source, origin, and nationality requirements.  In January 2004, we entered into an agreement with USAID whereby we agreed to undertake certain compliance and training measures and USAID agreed that we were presently eligible for USAID contracts, including host-country projects, and were not under threat of suspension or debarment arising out of matters covered by the USAID inquiry.  We satisfactorily completed that training effective November 22, 2004, and, as a result, are currently in good standing to bid on all USAID projects.

In March 2003, we were notified by the Department of Justice that the US government was considering civil litigation against us for potential violations of the USAID source, origin, and nationality regulations in connection with five of our USAID-financed host-country projects located in Egypt beginning in the early 1990s.  Following that notification, we responded to inquiries from the Department of Justice and otherwise cooperated with the government’s investigation.  In November 2004, the government filed an action in the US District Court for the District of Idaho against us and the companies referred to above with respect to the Egyptian projects (the “Idaho Action”).  The Idaho Action was brought under the Federal False Claims Act, the Federal Foreign Assistance Act of 1961, and common law theories of payment by mistake and unjust enrichment. The complaint seeks damages and civil penalties for violations of the statutes and asserts that the government is entitled to a refund of all amounts paid to us and the other defendants under the specified contracts. The government alleges that approximately $373.0 million was paid under those contracts. We deny any liability in the action and contest the government’s damage allegations and its entitlement to any recovery. All projects were completed and turned over for operation.

I-15

Further, on March 23, 2005, we filed a Motion to Enforce the Confirmation Order in the Bankruptcy Court in Nevada, and a Motion to Dismiss or Stay the Action in the Idaho Court pending resolution of the proceedings in the Bankruptcy Court. In the filings in the Bankruptcy Court, we sought dismissal of the government’s claims pursuant to the Confirmation Order (and other relevant orders of the Bankruptcy Court) because of the government’s failure to give appropriate notice or otherwise preserve those claims. On August 30, 2005, the Bankruptcy Court granted our Motion to Enforce the Confirmation Order, in total, ruling that all of the government’s claims (as set forth in the complaint in the Idaho Action) are barred. On November 9, 2005, the Bankruptcy Court confirmed its decision with a written order and detailed findings of fact. The government appealed the Bankruptcy Court's order to the US District Court for the District of Nevada. On March 22, 2006, the judge in the Idaho Action stayed that action during the pendency of the government's appeal of the Bankruptcy Court's ruling.

On December 29, 2006, the District Court in Nevada disagreed with the specific grounds on which the Bankruptcy Court had determined that the Government’s statutory claims were barred, and on that basis reversed the Bankruptcy Court’s order and remanded the matter back to the Bankruptcy Court for further proceedings. In his order, the District Court judge specifically noted that on remand, “[t]he Bankruptcy Court may choose among other things, to address whether the Idaho claims are barred for any other reasons, or are otherwise affected by WGI’s Bankruptcy proceedings.” We intend to renew our motion that the Government’s claim in the Bankruptcy Court is nonetheless barred under different theories than those initially addressed by the Bankruptcy Court. On February 23, 2007, the US District Judge reaffirmed that the Idaho Action will remain stayed until the Bankruptcy Court determines whether the government’s claims in the Idaho Action are barred. The Bankruptcy Court has set a conference for August 29, 2007, at which time we expect the procedures and schedule to be established for the handling of the motions we expect to file.

Our joint venture for one of the five projects referred to above brought arbitration proceedings before an arbitration tribunal in Egypt in which it asserted an affirmative claim for additional compensation for the construction of water and wastewater treatment facilities in Egypt. The project owner, National Organization for Potable Water and Sanitary Drainage (“NOPWASD”), an Egyptian government agency, asserted in a counterclaim that by reason of alleged violations of the USAID source, origin and nationality regulations, and alleged violations of Egyptian law, our joint venture should forfeit its claim, pay damages of approximately $6.0 million and the owner’s costs of defending against the joint venture’s claims in arbitration. We denied liability on the project owner’s counterclaim. On April 17, 2006, the arbitration tribunal issued its award providing that the joint venture prevailed on its affirmative claims in the net amount of $8.2 million, and that NOPWASD's counterclaims are rejected. Our portion of any final award received by the joint venture would be approximately 45 percent. Because of potential issues related to appeals or collectibility of amounts awarded, no amounts related to this potential recovery have been recognized in the accompanying condensed consolidated financial statements.

Based on our assessment of the above-described matters, we recorded a charge of $8.2 million in the year ended December 31, 2004. Potential recovery on the arbitration award, or additional loss, if any, is not estimable.

New Orleans Levee Failure Class Action Litigation. From July 1999 through May 2005, we performed demolition, site preparation, and environmental remediation services for the US Army Corps of Engineers on the east bank of the Inner Harbor Navigation Canal (the “Industrial Canal”) in New Orleans, Louisiana. All the work performed by us and our subcontractors was directed, supervised and approved by the US Army Corps of Engineers.

I-16

On August 29, 2005, Hurricane Katrina devastated New Orleans. The storm surge created by the hurricane overtopped the Industrial Canal levee and floodwall, flooding the Lower Ninth Ward and other parts of the city.

Between September 19, 2005 and June 29, 2007, 30 personal injury and property damage class action lawsuits have been filed in Louisiana State and Federal court naming us, of which 29 are currently pending. Other defendants include the US Army Corps of Engineers, the Board for the Orleans Parish Levee District, and its insurer, St. Paul Fire and Marine Insurance Company. Over 170 hurricane-related cases, including Washington Group International cases, have been consolidated in the Federal District Court for the Eastern District of Louisiana.  The plaintiffs claim that defendants were negligent in their design, construction and/or maintenance of the New Orleans levees. The alleged class of plaintiffs are all residents and property owners who incurred damages arising out of the breach and failure of the hurricane protection levees and floodwalls in the wake of Hurricane Katrina. The allegation against us is that the work we performed adjacent to the Industrial Canal damaged the levee and floodwall and caused and/or contributed to breaches and flooding. The plaintiffs allege damages of $200 billion and demand attorneys’ fees and costs. In the event we are found to have any liability in this matter, we have substantial general liability and professional liability insurance coverage. While the adequacy of the coverage cannot be predicted with certainty, we believe it is adequate to cover any potential liability which could be imposed on us as a result of this litigation.

We deny any liability and are vigorously defending these lawsuits. We did not design, construct, repair or maintain any of the levees or floodwalls that failed during or after Hurricane Katrina. There is no evidence that activities performed by us damaged the Industrial Canal levee or floodwall. We will pursue all contractual and equitable rights of indemnity and contribution and leverage all available challenges against class certification.

Based on the status and nature of this matter at this time, we cannot make an estimate of probable liability, if any. We performed the work adjacent to the Industrial Canal as a contractor for the US government and are pursuing dismissal from the lawsuits either as a result of a motion to dismiss for failure to state a claim or on a motion for summary judgment on the basis that government contractors are immune from liability. Until our motions are decided, class certification decisions are issued, and we know who our co-defendants will be, there is no reasonable basis for accurately predicting the outcome of these actions. Consistent with our accounting policy of accruing legal fees when probable and estimable, as of June 29, 2007, we have accrued $7.8 million for estimated legal defense costs associated with these matters. We believe a portion of these costs are reimbursable under our insurance program and have recorded a corresponding insurance receivable.

General Litigation. In addition to the foregoing, there are other claims, lawsuits, disputes with third parties, investigations, and administrative proceedings against us relating to matters in the ordinary course of our business activities that we do not expect to have a material adverse effect on our financial position, results of operations or cash flows. Government contracts, including work performed for US Government Agencies in Iraq, are subject to specific procurement regulations, contract provisions and a variety of other requirements relating to the formation, administration, performance and accounting for these contracts. As a result of our government contracting, claims for civil or criminal fraud may be brought by the government for violations of those regulations, requirements and statutes.

9.           STOCK PURCHASE WARRANTS AND STOCK/WARRANT BUYBACK PROGRAM

During the six months ended June 30, 2006, under a stock/warrant buy back program, we purchased 2,038,000 warrants at a cost of $35.0 million. In addition, 2,262,000 warrants were exercised generating proceeds of $71.2 million and the remaining 192,000 outstanding warrants expired on January 25, 2006. In connection with the stock/warrant buy-back program, we incurred $0.7 million of direct costs.  Also during the three and six months ended June 30, 2006 we purchased 461,000 and 706,000 shares of common stock for $26.5 million and $40.8 million, respectively.

I-17

As of June 29, 2007, our Board of Directors has authorized $275.0 million for purchases of stock and warrants under the program, of which $174.4 million has been expended. No purchases were made under the program during the three and six months ended June 29, 2007.

10.           STOCK COMPENSATION PLANS

     We have two share-based compensation plans for officers, key employees and directors (See Note 13 of the Notes to Consolidated Financial Statements in Part II, Item 8 of our 2006 Annual Report). The number of shares authorized for issuance under the plans as of June 29, 2007, totaled 8,402,000, 571,000 of which were available for future issuance. Our policy is to issue new shares of common stock to satisfy stock option exercises. All stock options granted must have an exercise price equal to or greater than the fair value of our common stock on the date the option is granted. Stock options granted have a contractual term of ten years and vest over three years. Restricted stock grants vest on the third anniversary of the date of grant. We recognize compensation cost for these options and restricted shares on a straight-line basis over the service period for the entire award.

We measure the compensation cost associated with share-based payments by estimating the fair value of stock options as of the grant date using the Black-Scholes option pricing model. We believe that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the stock options granted. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by the employees who receive equity awards.

The weighted average fair values of stock-based arrangements on the date of grant and the assumptions used to estimate the fair value of the stock options were as follows:

	Three Months Ended						Six Months Ended
	June 29, 2007			June 30, 2006			June 29,  2007			June 30, 2006
Weighted average fair value of:
Stock options granted	$	27.95		$	21.53		$	24.23		$	22.32
Restricted stock awards	$	68.57		$	55.97		$	59.64		$	58.27
Average expected volatility		32.5	%		34.3	%		32.9	%		34.7	%
Expected term (years)		6			5			6			5
Average risk-free interest rate		4.6	%		5.0	%		4.5	%		4.6	%
Expected dividend yield	─			─			─			─

We estimate expected volatility based on historical daily price changes of our common stock for a period that approximates the current expected term of the options. The risk-free interest rate is based on the US Treasury yields in effect at the time of grant corresponding with the expected term of the options. The expected option term is the number of years we estimate that options will be outstanding prior to exercise considering vesting schedules and historical exercise experience. Beginning in 2007, we have elected to use the simplified method of estimating the expected option term pursuant to Securities and Exchange Commission Staff Accounting Bulletin 107, Share-Based Payment.

A summary of stock option and restricted stock award activity under our share-based compensation plans for the three and six months ended June 29, 2007 is presented in the following tables:

Stock Options Three Months Ended (In thousands, except per share data)	Number of Stock Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Yrs)		Aggregate Intrinsic Value
Outstanding as of March 30, 2007		5,238		$	33.89
Granted		9			68.76
Exercised		(119	)		27.70
Forfeited		(26	)		52.41
Outstanding as of June 29, 2007		5,102		$	34.00		5.64	$	234,755

I-18

Stock Options Six Months Ended (In thousands, except per share data)	Number of Stock Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Yrs)		Aggregate Intrinsic Value
Outstanding as of December 29, 2006		5,101		$	31.95
Granted		354			59.62
Exercised		(326	)		28.33
Forfeited		(27	)		52.41
Outstanding as of June 29, 2007		5,102		$	34.00		5.64	$	234,755
Exercisable as of  June 29, 2007		4,376		$	30.29		5.09	$	217,589

Restricted Stock Awards Three Months Ended (In thousands, except per share data)	Number of Restricted Shares			Remaining Contractual Life (Yrs)	Weighted Average Aggregate Intrinsic Value
Outstanding as of March 30, 2007		384
Granted		3
Restrictions lapsed		(4	)
Forfeited		(13	)
Outstanding as of June 29, 2007		370		1.73	$9,641

Restricted Stock Awards Six Months Ended (In thousands, except per share data)	Number of Restricted Shares			Remaining Contractual Life (Yrs)	Weighted Average Aggregate Intrinsic Value
Outstanding as of December 29, 2006		259
Granted		128
Restrictions lapsed		(4	)
Forfeited		(13	)
Outstanding as of June 29, 2007		370		1.73	$9,641

Intrinsic value represents the amount by which the fair market value of the underlying stock exceeds the exercise price of the options or the fair market value at the time of award of restricted shares. The total intrinsic value of stock-based arrangements exercised or on which the restrictions lapsed during the three months ended June 29, 2007 and June 30, 2006, was $4.9 million and $2.8 million, respectively. The total intrinsic value of stock-based arrangements exercised or on which the restrictions lapsed during the six months ended June 29, 2007 and June 30, 2006, was $11.7 million and $15.7 million, respectively. As of June 29, 2007, total remaining unrecognized compensation cost related to unvested stock-based arrangements was $23.2 million and is expected to be recognized over a weighted average period of 2.12 years. During the three and six months ended June 29, 2007, options to purchase 119,000 and 326,000 shares of common stock were exercised for proceeds of $3.3 million and $9.2 million, respectively. The total grant date fair value of stock options that vested during the three and six months ended June 29, 2007 was $0.2 million and $8.5 million, respectively. The total grant date fair value of stock options that vested during the three and six months ended June 30, 2006 was $0.3 million and $7.0 million, respectively.

        I-19  

ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

                 AND RESULTS OF OPERATIONS

The following management's discussion and analysis of financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and notes thereto in Item 1 of this report. The following analysis contains forward-looking statements about our future revenues, operating results and expectations. See "Note Regarding Forward-Looking Information" for a discussion of the risks and uncertainties affecting these statements preceding Item 1 of this report.

OVERVIEW

We are an international provider of a broad range of design, engineering, construction, construction management, facilities and operations management, environmental remediation and mining services. We offer our various services separately or as part of an integrated package throughout the life cycle of a customer's project. We serve our customers through six business units: Power, Infrastructure, Mining, Industrial/Process, Defense and Energy & Environment.

We are subject to numerous factors that have an impact on our ability to obtain new work. The Power business unit is dependent on the domestic demand for new power generating facilities and the modification of existing power facilities. Infrastructure is affected by the availability of public sector funding for transportation projects and the availability of bonding. Mining is affected by demand for coal, precious metals and other extractive resources. The Industrial/Process business unit is affected, in general, by the growth prospects in the US economy and more directly by the capital spending plans of its large customer base. Industrial/Process also provides services to the natural gas processing industry. Finally, the Defense and Energy & Environment business units are almost entirely dependent on the spending levels of the US government, in particular, the Departments of Defense and Energy.

On May 27, 2007, Washington Group International entered into a definitive Agreement and Plan of Merger with URS. The Agreement provides that, upon the terms and subject to the conditions set forth in the Agreement, Washington Group International will become a wholly owned subsidiary of URS, and each outstanding share of our common stock will be converted into the right to receive 0.772 of a share of URS common stock and cash consideration of $43.80 per share. Consummation of the merger is subject to customary closing conditions and regulatory approvals, and approval by the stockholders of URS and Washington Group International. The waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 expired July 10, 2007. The merger is expected to close in the fourth quarter of fiscal year 2007 and may not be completed if any of the conditions are not satisfied or waived. Unless otherwise indicated, the discussions in this document relate to Washington Group International as a standalone entity and do not reflect the impact of the proposed merger with URS.

Either party may terminate the Agreement if the merger is not consummated by December 27, 2007, unless the merger is extended to May 27, 2008; if the Washington Group International stockholders fail to approve the merger; if the URS stockholders fail to approve the issuance of URS common stock required to consummate the merger; if any governmental entity prohibits the merger; if the other party breaches any representation, warranty, covenant or agreement of the merger agreement; if the other party’s board of directors withdraws its approval of the merger agreement; or if either party receives an unsolicited bona fide written acquisition proposal for 50 percent or more of its consolidated assets or 50 percent or more of its voting or economic interest and is more favorable to the party and its stockholders than the aforementioned merger.

If the Agreement is terminated, Washington Group International may be required in specified circumstances to pay a termination fee of $70.0 million to URS, and URS may be required in specified circumstances to pay a termination fee of $70.0 million to Washington Group International.

I-20

For additional information regarding the proposed merger, please refer to the Schedule 14A, as amended, which contains the joint proxy statement/prospectus and Agreement filed by Washington Group International and URS on July 17, 2007 in connection with the proposed merger. We expect to hold a special meeting in the fourth quarter to enable our stockholders to vote to adopt the merger agreement.

CRITICAL ACCOUNTING POLICIES AND RELATED CRITICAL ACCOUNTING ESTIMATES

Our accounting and financial reporting policies are in conformity with GAAP. The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet dates, and the reported amounts of revenue and expenses during the reporting periods. Our significant accounting policies are described in Note 2, "Significant Accounting Policies," of the Notes to Consolidated Financial Statements in Item 8 of our 2006 Annual Report, and our critical accounting policies and related critical accounting estimates are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 7 of our 2006 Annual Report. There were no changes in our critical accounting policies during the three and six months ended June 29, 2007.  As discussed in Note 7, “Income Taxes and Adoption of FIN 48” in Part I, Item 1 of this report, we adopted FIN 48 effective December 30, 2006.  The following discussion of our significant revenue recognition policies has been included to enhance the discussion of financial results for the interim periods presented.

Revenue recognition. We follow the provisions of the American Institute of Certified Public Accountants Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts.  We recognize revenue on certain engineering and construction-type contracts using the percentage-of-completion method of accounting whereby revenue is recognized as performance under the contract progresses. For most of our fixed-price and target-price contracts, we use a cost-to-cost approach to measure progress towards completion. Under the cost-to-cost method, we make periodic estimates of our progress towards completion by comparing costs incurred to date with total estimated contract costs. Revenue is then calculated on a cumulative basis (project-to-date) as the total contract value multiplied by the current percentage complete. Revenue for a reporting period is calculated as the cumulative project-to-date revenue less project revenue recognized in prior periods. However, we defer profit recognition on fixed-price and certain target-priced contracts until progress is sufficient to estimate the probable outcome, which generally does not occur until the project is at least 20 percent complete.  Fixed-price contracts accounted for 18 and 20 percent of our total revenue for the six months ended June 29, 2007 and June 30, 2006, respectively.

For contracts that include significant material or equipment costs, we use an efforts expended method to measure progress towards completion based on labor hours, labor dollars or some other measurement of physical completion. For certain long-term contracts involving mining and environmental and hazardous substance remediation, progress towards completion is measured using the units of production method. Revenue from reimbursable or cost-plus contracts is recognized on the basis of costs incurred during the period plus the fee earned. Service-related contracts, including operations and maintenance and mining services contracts, are accounted for as services are performed.  Revenue earned for each contract is based on an input or output measurement such as units of production, work hours, milestones achieved, or in some cases the passage of time, in proportion to the costs of performance.  Award fees associated with US government contracts are initially estimated and recognized based on historical performance until the customer has confirmed the final award fee. Performance-based incentive fees are included in contract value when a basis exists for the reasonable prediction of performance in relation to established targets. When a basis for reasonable prediction does not exist, performance-based incentive fees are recognized when actually awarded by the customer.

The amount of revenue recognized depends on whether the contract or project is determined to be an "at-risk" or an "agency" relationship between the customer and us. Determination of the relationship is based on characteristics of the contract or the relationship with the customer. For at-risk relationships, the gross revenue and the costs of materials, services, payroll, benefits, non-income tax and other costs are recognized in our statement of income. For agency relationships, where we act as an agent for our customer, only fee revenue is recognized, meaning that direct project costs and the related reimbursement from the customer are netted.

I-21

The use of the percentage-of-completion method for revenue recognition requires the use of various estimates, including among others, the extent of progress towards completion, contract completion costs and contract revenue. Profit to be recognized is dependent upon the accuracy of estimated engineering progress, materials quantities, achievement of milestones and other incentives, penalty provisions, labor productivity and other cost estimates. Such estimates are dependent upon various judgments we make with respect to those factors, and some are difficult to accurately determine until the project is significantly underway. We recognize adjustments to profitability on contracts utilizing the percentage-of-completion method on a cumulative basis, when such adjustments are identified. We have a history of making reasonably dependable estimates of the extent of progress towards completion, contract revenue and contract completion costs on our long-term engineering and construction-type contracts. However, due to uncertainties inherent in the estimation process, it is possible that actual completion costs may vary from estimates. In limited circumstances, we may use the completed-contract method for specific contracts for which reasonably dependable estimates cannot be made or for which inherent hazards make the estimates doubtful. The completed contract method was not utilized during any of the periods presented.

Change orders and claims. Once contract performance is underway, we often experience changes in conditions, customer requirements, specifications, designs, materials and work schedule. Generally, a "change order" will be negotiated with our customer to modify the original contract to approve both the scope and price of the change. Occasionally, however, disagreements arise regarding changes, their nature, measurement, timing and other characteristics that impact costs and revenue under the contract. When a change becomes a point of dispute between our customer and us, we then consider it as a claim.

Costs related to change orders and claims are recognized when they are incurred. Change orders are included in total estimated contract revenue when it is probable that the change order will result in a bona fide addition to contract value and can be reliably estimated. Estimated contract revenue associated with change orders may include amounts in excess of incurred costs (profit) when agreement with the customer has been reached. Claims are included in total estimated contract revenue, only to the extent that contract costs related to the claim have been incurred, when it is probable that the claim will result in a bona fide addition to contract value and can be reliably estimated, which generally occurs when amounts have been received or awarded. This can lead to a situation where costs are recognized in one period and revenue is recognized when customer agreement is obtained or claim resolution occurs, which can be in subsequent periods. Historical claim recoveries should not be considered indicative of future claim recoveries. We recognized $5.4 million of claim revenue on a completed highway project in Nevada during the three and six months ended June 29, 2007.  No claim revenue was recognized during the three and six months ended June 30, 2006.

Estimated losses on uncompleted contracts and changes in contract estimates. We record provisions for estimated losses on uncompleted contracts in the period in which such losses are identified. The cumulative effect of revisions to contract revenue and estimated completion costs are recorded in the accounting period in which the amounts become evident and can be reasonably estimated. These revisions include such items as the effects of change orders and claims, warranty claims, liquidated damages or other contractual penalties, adjustments for audit findings on US government contracts and contract closeout settlements. It is possible that there will be future and currently unknown significant adjustments to our estimated contract revenue, costs and gross margins for contracts currently in process. These adjustments are common in the construction industry and inherent in the nature of our contracts. These adjustments could, depending on the magnitude of the adjustments and/or the number of contracts being completed, materially, positively or negatively, affect our operating results in an annual or quarterly reporting period.

I-22

BUSINESS UNIT NEW WORK AND BACKLOG

New work represents the monetary value of a contract entered into with a customer that is binding on both parties and reflects the revenue, or equity in income, expected to be recognized from that contract.

Backlog represents the total accumulation of new work awarded less the amount of revenue, or equity in income, recognized to date on contracts at a specific point in time. We believe backlog is an indicator of future earnings potential. Although backlog reflects business that we consider to be firm, cancellations or reductions may occur and may reduce backlog and future revenue. We have a significant number of customers that consistently extend or add to the scope of existing contracts. We do not include any estimate of this ongoing work in backlog until awarded.

There are three unique aspects of our approach to recording new work and backlog:

·   Government contracts - Most of our government contracts cover several years. However, funding for the contracts is subject to annual appropriations by Congress. To account for the risk that future amounts may not be appropriated, we only include the next two years of forecast revenue in our new work and backlog. Therefore, as time passes and appropriations occur, additional new work is recorded on existing government contracts.

·   Mining contracts - Mining contracts span varying periods of time up to the life of the resource. For new work and backlog purposes, we limit the amount recorded to five years. Similar to our practices with government contracts, as time passes, we recognize additional new work as commitments for that future work are firmed up.

·   At-risk and agency contracts - The amount of new work and related backlog recognized depends on whether the contract or project is determined to be an "at-risk" or "agency" relationship between the customer and us. For at-risk relationships, the expected gross revenue is included in new work and backlog. For relationships where we act as an agent for our customer, only the expected net fee revenue is included in new work and backlog.

New work, which represents additions to backlog for the period, is presented below for each business unit:

	Three Months Ended						Six Months Ended
NEW WORK (In millions)	June 29, 2007			June 30, 2006			June 29,  2007		June 30, 2006
Power	$	214.0		$	111.3		$	633.9	$	272.3
Infrastructure		166.7			66.1			276.8		161.4
Mining		339.6			189.8			420.1		263.3
Industrial/Process		308.4			211.6			413.4		413.0
Defense		128.2			119.3			303.2		228.0
Energy & Environment		203.1			137.5			499.3		295.6
Other		(0.1	)		(1.0	)		0.7		(0.7	)
Total new work	$	1,359.9		$	834.6		$	2,547.4	$	1,632.9

Based on the nature of our new work and the bidding and awarding process, our new work can fluctuate significantly period-to-period. The increase in new work to $1.4 billion for the three months ended June 29, 2007 from $834.6 million in the prior year comparable period is primarily related to a new mining contract, new generation projects in our Power business unit and an increase on a contract for construction of a cement plant in our Industrial/Process business unit.  In addition to these factors, new work for the six months ended June 29, 2007 also increased due to clean air modification projects in Power, higher funding authorization for Defense’s chemical demilitarization projects, and Department of Energy contract extensions and continuations in our Energy & Environment business unit.

I-23

New work for the three and six months ended June 29, 2007 includes the following significant contracts:

	Three Months Ended		Six Months Ended
(In millions)	June 29,2007		June 29, 2007
Power
Clean air modification projects	$	12.4	$	245.9
New generation		125.1		240.3
New nuclear programs		48.9		55.3
Infrastructure
Engineering services		25.3		49.3
Light rail preliminary engineering services project		65.2		65.2
Mining
Contract mining services projects		310.7		359.0
Industrial/Process
Construction of a cement plant in Missouri		139.3		139.3
Facilities management outsourcing contracts		85.1		85.1
Oil and gas projects		34.3		89.7
Defense
Chemical demilitarization contract continuations		121.2		285.7
Energy & Environment
Department of Energy contract extensions and continuations		77.2		250.0
Consulting services		22.4		47.5

The following table summarizes our changes in backlog for each of the periods presented:

	Three Months Ended						Six Months Ended
CHANGES IN BACKLOG (In millions)	June 29, 2007			June 30, 2006			June 29,  2007			June 30, 2006
Beginning backlog	$	5,894.0		$	4,770.5		$	5,604.8		$	4,880.3
New work		1,359.9			834.6			2,547.4			1,632.9
Adjustments to backlog		(127.9	)	─				(179.4	)		(66.6	)
Revenue and equity income recognized		(955.4	)		(893.7	)		(1,802.2	)		(1,735.2	)
Ending backlog	$	6,170.6		$	4,711.4		$	6,170.6		$	4,711.4

The backlog adjustments during the three and six months ended June 29, 2007 primarily resulted from agreements to terminate contract mining projects.  The adjustment during the six months ended June 30, 2006 primarily resulted from a negotiated change order on a contract that reduced the remaining contract term from ten years to five years with two five-year renewal options.

I-24

Backlog at June 29, 2007, March 30, 2007 and December 29, 2006 consisted of the following for each business unit:

BACKLOG (In millions)	June 29, 2007		March 30, 2007		December 29, 2006
Power	$	1,404.9	$	1,467.3	$	1,262.0
Infrastructure		765.2		760.5		799.6
Mining		907.5		714.3		733.3
Industrial/Process		1,328.1		1,190.6		1,227.6
Defense		964.7		986.9		953.6
Energy & Environment		800.2		774.4		628.7
Total backlog	$	6,170.6	$	5,894.0	$	5,604.8

At June 29, 2007, our backlog was $6.2 billion, an increase of $566.1 million from December 29, 2006. Based on our backlog recognition policies by contract type, reported backlog at June 29, 2007 excludes $5.3 billion of government contracts to be performed beyond two years and $0.7 billion of mining contracts to be performed beyond the next five years. Our backlog at June 29, 2007 consisted of approximately 84 percent cost-type and 16 percent fixed-price contracts compared with 80 percent cost-type and 20 percent fixed-price contracts at the end of 2006.

RESULTS OF OPERATIONS

The following table summarizes our results of operations for the three and six months ended June 29, 2007 and June 30, 2006, and is included to facilitate our analysis and discussion of results of operations.

	Three Months Ended						Six Months Ended
(In millions)	June 29, 2007			June 30, 2006			June 29,  2007			June 30, 2006
Revenue	$	951.9		$	890.1		$	1,789.3		$	1,718.4
Gross profit		45.3			65.4			78.0			100.4
Equity in income of unconsolidated affiliates		3.5			3.6			12.9			16.8
General and administrative expenses		(18.3	)		(20.3	)		(37.6	)		(35.0	)
Operating income		30.5			48.7			53.3			82.2
Interest income		1.8			2.5			4.8			5.1
Interest expense		(1.4	)		(1.8	)		(3.0	)		(3.6	)
URS merger related costs		(6.7	)	─				(6.7	)	─
Other income (expense), net	─				0.5			(0.4	)		0.1
Income before income taxes and minority interests		24.2			49.9			48.0			83.8
Income tax expense		(12.4	)		(20.2	)		(21.5	)		(33.7	)
Minority interests in income of consolidated subsidiaries, net of tax		(1.1	)		(1.0	)		(2.8	)		(2.4	)
Net income	$	10.7		$	28.7		$	23.7		$	47.7

I-25

THREE AND SIX MONTHS ENDED JUNE 29, 2007 COMPARED TO

THREE AND SIX MONTHS ENDED JUNE 30, 2006

Revenue and operating income

Revenue for the three and six months ended June 29, 2007 increased $61.8 million and $70.9 million, respectively, from the comparable periods in 2006. The net increase consists of higher revenue from new projects including power clean air modification projects, a new bauxite mine in Jamaica and a new cement plant in Missouri. These increases were partially offset by a decrease on a Department of Energy management services contract that achieved certain milestones resulting in the recognition of a portion of the maximum fee pool in the prior year. We also recorded a $25.5 million decrease in contract value on a fixed-price highway project in California related to the client’s decision to assert and withhold liquidated damages from payments otherwise due under the contract. The completion of certain projects and decreasing volume of work in Iraq also reduced revenue. Revenue from work in the Middle East was $46.7 million and $108.0 million for the three and six months ended June 29, 2007, respectively, compared to $85.1 million and $174.7 million for the comparable 2006 periods, respectively. We expect revenue from work in Iraq to continue to decline as current task orders are completed and funding for new task orders is limited.

A summary of the significant changes in operating income is included in the following table:

(In millions)	Three Months			Six Months
Operating income for the periods ended June 30, 2006	$	48.7		$	82.2
Increase in earnings from continuing contracts		17.4			21.2
Increase in earnings from new contracts		16.5			20.4
Improved performance on contract mining projects		9.4			14.1
Increase due to claim settlement		5.4			5.4
Decrease in earnings on Department of Energy management services contract		(36.7	)		(38.6	)
Decrease in earnings from task order work in the Middle East		(10.6	)		(20.0	)
Significant highway project loss in 2006	─				6.8
Significant highway project loss in 2007		(25.5	)		(25.5	)
Decrease in earnings from MIBRAG mining venture		(0.3	)		(5.3	)
Decrease (increase) in overhead and general and administrative expenses		4.7			(5.3	)
Other		1.5			(2.1)
Net decrease		(18.2	)		(28.9	)
Operating income for the periods ended June 29, 2007	$	30.5		$	53.3

The diversification of our business may cause margins to vary between periods due to the inherent risks and rewards on fixed-price contracts causing unplanned gains and losses on contracts. Margins may also vary between periods due to changes in mix and timing of contracts executed by us, which contain various risk and profit profiles and are subject to uncertainties inherent in the estimation process. As discussed in our summary of critical accounting policies, we provide for estimated losses on contracts when such losses are identified and can be reasonably estimated. However, we do not recognize revenue for change orders or claims until it is probable that they will result in additions to the contract value. In many cases, revenue is not recognized until an actual settlement is reached. The combination of these accounting policies can result in volatility in operating income with a charge recognized in one period and change order or claim revenue recognized in a subsequent period.

For a more detailed discussion of our revenue and operating income, see “Business Unit Results,” later in this Management’s Discussion and Analysis.

I-26

Equity in income of unconsolidated affiliates

Equity in income of unconsolidated affiliates for the three and six months ended June 29, 2007 declined $0.1 million and $3.9 million, respectively, from the comparable periods of 2006. The most significant component of the year to date decline was a $5.3 million decline in earnings from our share of the MIBRAG mining venture in Germany. MIBRAG’s decrease was partially offset by earnings from our interest in an affiliate that operates a national laboratory for the Department of Energy.

The $5.3 million decline in MIBRAG’s year-to-date 2007 earnings as compared to 2006 is due to a $2.1 million favorable impact in the first quarter of 2006 from the adoption of a new accounting pronouncement.  MIBRAG also experienced lower coal sales to its power plant customers as a result of lower power demand in the first quarter of 2007 as compared to the first quarter of 2006.

General and administrative expenses

General and administrative expenses decreased $2.0 million for the three months ended June 29, 2007, and increased $2.6 million for the six months ended June 29, 2007 from the comparable periods of 2006. The decrease in the quarter is mainly due to lower incentive compensation accruals based on earnings. The increase for the six months is primarily due to higher costs associated with information systems, employee development, legal and other outside consulting services associated with operational efficiencies and cost reduction initiatives.

URS merger related costs

Through June 29, 2007, we have incurred $6.7 million of costs associated with our proposed merger with URS. Merger related expenses were principally comprised of investment banking, legal and accounting fees. If the merger is consummated, we expect to incur a total of approximately $30 million of merger related costs.

Income tax expense

The effective income tax rates for the three and six months ended June 29, 2007 were 51.3 percent and 44.7 percent, respectively. The effective income tax rates for the three and six months ended June 30, 2006 were 40.4 percent and 40.2 percent, respectively. The increase in the tax rates for the three and six months ended June 29, 2007 is primarily due to the impact of merger related costs that are not deductible for income tax purposes.

I-27

BUSINESS UNIT RESULTS

	Three Months Ended						Six Months Ended
(In millions)	June 29, 2007			June 30, 2006			June 29,  2007			June 30, 2006
Revenue
Power	$	276.3		$	205.2		$	491.0		$	409.9
Infrastructure		124.3			151.9			258.0			294.2
Mining		58.3			34.7			114.7			66.4
Industrial/Process		170.7			124.8			312.3			250.2
Defense		147.6			140.5			289.1			293.1
Energy & Environment		174.9			234.2			323.6			405.2
Intersegment and other		(0.2	)		(1.2	)		0.6			(0.6	)
Total revenue	$	951.9		$	890.1		$	1,789.3		$	1,718.4
Operating income (loss)
Power	$	17.8		$	11.2		$	29.5		$	22.3
Infrastructure		(17.2	)		2.1			(12.5	)		(0.3	)
Mining		7.8			(2.4	)		15.8			5.4
Industrial/Process		6.0			1.8			6.6			6.6
Defense		16.7			10.9			26.0			24.5
Energy & Environment		17.2			47.3			25.3			61.4
Intersegment and other unallocated operating costs		0.5			(1.9	)		0.3			(2.7	)
Total segment operating income		48.8			69.0			91.0			117.2
General and administrative expenses, corporate		(18.3	)		(20.3	)		(37.7	)		(35.0	)
Total operating income	$	30.5		$	48.7		$	53.3		$	82.2

Power

Revenue for the three and six months ended June 29, 2007 increased $71.1 million and $81.1 million, from the comparable periods in 2006. The increase is primarily due to continuing projects, including a uranium enrichment facility in New Mexico and new generation projects in Arizona, Puerto Rico and Wisconsin. Higher revenue was also driven by new clean air modification projects. The higher revenue from new and continuing projects was partially offset by decreases of $26.5 million and $62.1 million in revenue from work in the Middle East to $21.0 million and $46.9 million for the three and six months ended June 29, 2007, respectively. The decline in Middle East revenue is a result of the completion of task orders and a decrease in funding for new task orders.

Operating income for the three and six months ended June 29, 2007 increased $6.6 million and $7.2 million, respectively, from the comparable periods in 2006. Continuing projects contributed to higher earnings in 2007 as the projects progressed towards completion. New clean air modification projects also contributed to higher earnings.  Offsetting these increases were declines of $7.3 million and $12.7 million, respectively, in earnings from work in the Middle East due to decreased task orders. Earnings from the Middle East were $0.9 million and $2.7 million for the three and six months ended June 29, 2007, respectively, as compared to $8.2 million and $15.4 million in the comparable periods in 2006.

Infrastructure

Revenue for the three and six months ended June 29, 2007 declined $27.6 million and $36.2 million, respectively, from the comparable periods in 2006, primarily as a result of a client’s decision to assert and withhold liquidated damages from payments otherwise due on a fixed-price highway project in California. The wind-down of a light rail project in New Jersey, completion of a bridge project in Florida and decreases in certain continuing projects further reduced revenue. The decreases in revenue were partially offset by increased activity on another fixed-price highway project in California, including change order activity, an increased share in a joint venture to build a light rail project in California, a new light rail project in Texas and a negotiated claim settlement on a completed highway job in Nevada. Middle East revenue totaled $8.3 million and $27.3 million for the three and six months ended June 29, 2007, respectively, compared to $19.1 million and $36.5 million in the comparable periods in 2006.

I-28

Infrastructure generated operating losses for the three and six months ended June 29, 2007 of $17.2 million and $12.5 million as compared to $2.1 million of operating income and a $0.3 million operating loss for the comparable periods in 2006. The decrease in earnings for the three and six months ended June 29, 2007, was primarily related to a $25.5 million charge for liquidated damages on a fixed-price highway project in California. The winding down of certain projects also decreased operating income. Improved performance on another fixed-price highway project in California and a $5.4 million claim settlement on a highway job in Nevada partially offset the declines.  Middle East earnings also decreased to $0.9 million and $2.9 million for the three and six months ended June 29, 2007, respectively, from $4.2 million and $10.7 million in the comparable periods of 2006.  The decrease in Middle East earnings is primarily due to a decrease in the volume of work being performed based on reduced funding.

The largest fixed-price highway project is a $395.7 million fixed-price highway project in California that is being performed by a construction joint venture in which we have a 50 percent interest. Through June 29, 2007, we have recorded a total of $160.5 million of contract losses on this project, including a $25.5 million charge in the three months ended June 29, 2007.  The losses have resulted from various developments including final design and other customer specifications, state regulatory agency requirements, material quantity and cost growth, higher subcontractor and labor costs, and impacts from schedule delays.  In addition, the joint venture had been operating pursuant to an understanding that the customer would not withhold payment for liquidated damages.  However, in June 2007 the customer began to withhold payment from amounts otherwise due the joint venture. Based on the current schedule, we currently believe the customer will assert and withhold liquidated damages totaling approximately $51.0 million (of which our share is $25.5 million).  Claims for schedule extension have been submitted to the client that the joint venture believes will eliminate or significantly reduce liabilities for liquidated damages.  As of June 29, 2007, the contract is approximately 84 percent complete, measured on a cost-to-cost basis, and is scheduled to be substantially complete in 2007.

The second project is a $269.4 million fixed-price highway project in California that is being performed by a joint venture in which we have a 65 percent interest. The cost growth on this contract is primarily related to customer design changes and related impacts. During the fourth quarter of 2006, a $10.8 million (before minority interest of $3.8 million) change order recovery was agreed to by the customer. During the first quarter of 2007, $2.5 million (before minority interest of $0.9 million) of additional change orders were agreed to and negotiations are continuing. As of June 29, 2007, the project is approximately 77 percent complete, measured on a cost-to-cost basis, and is scheduled to be complete in 2008.

To date, only a portion of the cost increases on the two highway projects have been agreed to with the customers and acknowledged with change orders. Our share of pending change orders and claims submitted to the customers total approximately $121.6 million. An additional $17.2 million are in process, including recovery of liquidated damages. In response to our claims, one of the customers has filed certain counterclaims against us. We believe that we will realize significant recoveries once the claim process is completed. Recoveries are recognized only when it is probable they will result in additional revenue and the amount can be reliably estimated, which generally occurs when amounts have been received or awarded. We have not recognized any recoveries related to the pending change orders and claims. Operating results to date are based on current estimates and actual results may differ from our estimates.

I-29

Mining

Revenue for the three and six months ended June 29, 2007 increased $23.6 million and $48.3 million, respectively, compared to 2006. The increase is primarily attributable to new work at a bauxite mine in Jamaica and an increase in continuing work on a silver mine in Bolivia. These increases were partially offset by the completion of a gold mine project in Nevada and the conclusion of our contract mining services agreement at a coal mine in Montana.

Operating income for the three and six months ended June 29, 2007 increased $10.2 million and $10.4 million, respectively, compared to the same periods in 2006. Equity in earnings of MIBRAG for the three and six months ended June 29, 2007 decreased $0.3 million and $5.3 million, respectively, from the comparable periods of 2006. The decrease for the six months ended June 29, 2007 is due to a $2.1 million favorable impact in the first quarter of 2006 from the adoption of a new accounting pronouncement and to lower coal sales to MIBRAG’s power plant customers as a result of lower power demand. The decrease in equity in earnings of MIBRAG was offset by higher earnings from improved performance on contract mining projects, including the impact of amending two contracts to cover cost escalation experienced in 2006 and a net gain on the termination of a mining services contract. Effective March 30, 2007, we agreed with Westmoreland Resources to conclude our contract mining services agreement at a coal mine in Montana, which provided for compensation to us in lieu of future services and the transfer of certain mining equipment, inventory, and reclamation liabilities to Westmoreland Resources.  The transaction resulted in a net gain of $6.1 million, of which $1.0 million has been deferred due to our continuing 20 percent interest in Westmoreland Resources.  This gain more than offset the operating loss incurred on the project during the three months ended March 30, 2007 of $4.3 million.

Industrial/Process

Revenue for the three and six months ended June 29, 2007 increased $45.9 million and $62.1 million, respectively, from the comparable periods of 2006. The increase in revenue was primarily due to a new cement plant contract in Missouri, growth on an industrial maintenance chemical plant project in Louisiana and increases on continuing facility management projects. The increase was partially offset by lower revenue on an oil and gas project in Qatar and lower volume within the Life Sciences division.

Operating income for the three months ended June 29, 2007 increased $4.2 million from the comparable period of 2006, and was unchanged for the six month period. The increase for the quarter is primarily related to earnings on the new cement plant in Missouri and the chemical plant in Ohio. The year to date results include an increase from the cement plant offset by a decline on the oil and gas project in Qatar.  During the first quarter of 2006, we recognized earnings of $4.8 million on the Qatar project as it reached the stage of completion at which earnings recognition commences pursuant to our accounting policies.

Defense

Revenue increased $7.1 million for the three months ended June 29, 2007, and decreased $4.0 million for the six months ended June 29, 2007 from the comparable periods of 2006. Revenue for the quarter increased due to higher volume of operations and maintenance activities at two domestic and an international chemical demilitarization project in Albania. The decrease in revenue for the six month period is due to scope reductions on another domestic chemical demilitarization project and due to lower funding for a threat reduction project in the former Soviet Union.

Operating income for the three and six months ended June 29, 2007 increased $5.8 million and $1.5 million, respectively, from the comparable periods of 2006. The increases are primarily due to higher award fees and performance incentives earned at domestic chemical demilitarization projects.

I-30

Energy & Environment

Revenue for the three and six months ended June 29, 2007 decreased $59.3 million and $81.6 million, respectively, from the comparable periods of 2006. The decreases were primarily due to $81.5 million and $81.9 million, respectively, of performance based incentive fees recognized on a Department of Energy management services contract.  During the second quarter of 2006 we achieved certain milestones resulting in the recognition of a portion of the maximum fee pool.  The quarterly decrease was partially offset by increased work at an environmental cleanup project in Idaho.  The year to date decrease in revenue was also partially offset by revenue from continuing projects in the Middle East. Revenue from the Middle East increased $4.6 million from $29.2 million for the six months ended June 30, 2006 to $33.8 million for the six months ended June 29, 2007.  Middle East revenue decreased $1.1 million for the three months ended June 29, 2007 to $17.4 million compared to $18.5 million in 2006.

Operating income for the three and six months ended June 29, 2007 decreased $30.1 million and $36.1 million, respectively, primarily due to the recognition of $38.5 million and $38.4 million, respectively, of additional earnings on the Department of Energy management services contract referred to above.  The decrease for the quarter was partially offset by an increase in earnings due to a contract closure settlement on an environmental cleanup project. The year to date results also include a $10.8 million increase in business development related costs associated with various Department of Energy bids and new work opportunities in the United Kingdom. Middle East earnings were $1.2 million and $2.3 million for the three and six months ended June 29, 2007 compared to $1.2 million and $1.8 million in 2006.

Energy & Environment has a 50 percent participation in a Department of Energy nuclear waste processing facility construction project in Washington that has experienced significant scope and cost increases. The project is cost reimbursable with performance and cost-based incentive fees. Changes to the fee structure are currently being negotiated with the Department of Energy to address the impact of the scope and cost increases on both the original contract scope and new scope added. If the negotiations are successful, we will recognize a cumulative adjustment to project to date earnings based on percent complete, which could occur in 2007 or later. 

Additionally, we have submitted a Request for Equitable Adjustment (“REA”) to the Department of Energy with respect to a large Department of Energy management services contract that expired on December 31, 2006. Although the contract has been extended for a period of eighteen to twenty four months, the REA requests compensation for negative impacts from funding shortfalls and other factors on performance fees earned under the contract. If the REA is successful, we would receive additional fees for work performed under the contract, which could occur in 2007 or later.

FINANCIAL CONDITION AND LIQUIDITY

We have three principal sources of liquidity: (1) cash generated by operations (2) existing cash and cash equivalents and (3) available capacity under our Credit Facility. We had cash and cash equivalents of $200.3 million at June 29, 2007, of which $63.8 million was restricted for use in the normal operations of our consolidated joint venture projects or was restricted under our self-insurance programs. As of June 29, 2007, we had no borrowings and $121.3 million in face amount of letters of credit outstanding under the Credit Facility, leaving a borrowing capacity of $228.7 million under the facility. For more information on our financing activities, see Note 5 “Credit Facility,” of the Notes to Condensed Consolidated Financial Statements in Item 1.

I-31

Our cash flows are primarily impacted from period to period by fluctuations in working capital and purchases of construction and mining equipment required to perform our contracts. Working capital is affected by numerous factors including:

·   Business unit mix. Our working capital requirements are unique by business unit, and changes in the type, size and stage of completion of contracts performed by our business units can impact our working capital requirements. Also, growth in the business requires working capital investment and the purchase of construction and mining equipment.

·   Commercial terms. The commercial terms of our contracts with customers and subcontractors may vary by business unit, contract type and customer type and utilize a variety of billing and payment terms. These could include customer advances, milestone payment schedules, monthly or bi-monthly billing cycles, and performance based incentives. Additionally, some customers have requirements on billing documentation including documentation from subcontractors, which may increase the level of billing complexity and cause delays in the billing cycle and collection cycle from period to period.

·   Contract life cycle. Our contracts typically involve initial cash for working capital during the start-up phase, reach a cash neutral position and eventually experience a reduction of working capital during the wind-down and completion of the project.

·   Delays in execution. At times, we may experience delays in scheduling and performance of our contracts and encounter unforeseen events or issues that may negatively affect our cash flow.

The following tables summarize our liquidity position and cash flow activities.

Liquidity (In millions)	June 29, 2007			December 29, 2006
Cash and cash equivalents		$	136.5		$	232.1
Restricted cash			63.8			65.5
Total		$	200.3		$	297.6

Cash flow activities (In millions)	Six Months Ended
	June 29, 2007				June 30, 2006
Net cash provided (used) by:
Operating activities		$	(19.3	)		$	25.0
Investing activities			(86.3	)			(25.4	)
Financing activities			10.0				6.5
Increase (decrease) in cash and cash equivalents		$	(95.6	)		$	6.1

The discussion below highlights significant aspects of our cash flows.

·   Operating activities:  For the six months ended June 29, 2007, operating activities used $19.3 million of cash. During the period, operating activities included net income of $23.7 million and several significant non-cash expenses including non-cash income taxes of $19.2 million, depreciation and amortization of $21.5 million and stock-based compensation of $8.2 million. Cash flow was impacted by an increase in working capital of $84.7 million principally due to working capital requirements for new and expanding projects, payments made for incentive compensation, and includes $28.4 million of cash to fund losses on a highway project. Working capital requirements for the US Army Corps of Engineers task orders in the Middle East increased $13.2 million to $33.7 million at June 29, 2007 from $20.5 million at December 29, 2006.

I-32

  For the six months ended June 30, 2006, operating activities generated $25.0 million of cash. During the period, operating activities included net 

  income of $47.7 million and several significant non-cash expenses including non-cash income taxes of $30.2 million, depreciation and amortization of
  $24.1 million, and stock-based compensation of $6.0 million.  Cash flow was impacted by an increase in working captial requirements of $70.7 million
  principally due to the recogniction of significant performance based incentive fees on a Department of Energy management services contract, payment
  of which was received in the first quarter of 2007, funding the losses on highway projects, other project working captial requirements and payments
  made for incentive compensation. At June 30, 2006, working capital requirements related to work in the Middle East declined to $21.1 million from
  $58.0 million at December 30, 2005.

·   Investing activities:  During the six months ended June 29, 2007, investing activities used $86.3 million of cash, primarily for mining equipment.  Over the past year, new contracts to perform mining services for major international natural-resource companies have required significant capital expenditures for mining equipment.  We are currently in the process of selling and leasing back under operating leases approximately $38.7 million of mining equipment acquired through June 29, 2007.

During the six months ended June 30, 2006, investing activities used $25.4 million of cash, primarily for property and equipment acquisitions for our Infrastructure and Mining business units. In connection with new contract mining projects in Jamaica, we acquired an existing operating company for cash consideration of $6.1 million and the assumption of a $1.7 million note payable. The assets acquired consisted primarily of trade receivables, spare parts inventory and mining equipment.

·   Financing activities:  During the six months ended June 29, 2007, financing activities generated $10.0 million of cash. Options to purchase 326,000 shares of common stock were exercised generating $9.2 million of cash. An additional $0.7 million of cash was received in January 2007 for options exercised at the end of December 2006.

During the six months ended June 30, 2006, financing activities generated $6.5 million of cash. During the period, we purchased and cancelled 2.0 million warrants at a cost of $35.7 million; 2.3 million warrants were exercised providing proceeds of $71.2 million and the remaining 192,000 warrants expired. Options to purchase 486,000 shares of common stock were exercised generating $11.9 million in cash and we purchased 706,000 shares of our common stock for $40.8 million. In addition, as described above under Investing activities, during the three months ended June 30, 2006 we assumed a $1.7 million note payable which was immediately paid in full.

Income taxes

We anticipate that cash payments for income taxes for 2007 and later years will be substantially less than income tax expense recognized in our consolidated financial statements. This difference results from expected tax deductions for tax goodwill amortization and from the use of net operating loss (“NOL”) carryovers and foreign tax credit carryforwards. As of June 29, 2007, we have remaining tax goodwill of $43.8 million resulting from the original acquisition of the Government Services Business in 1999 and $444.2 million resulting from the acquisition of Raytheon Company and Raytheon Engineers & Constructors International, Inc. The amortization of this tax goodwill is deductible over remaining periods of 6.7 and 8.0 years, respectively, resulting in annual tax deductions of $62.1 million. The federal NOL carryovers as of June 29, 2007 were approximately $168.1 million, most of which are subject to an annual limitation of $26.5 million and expire in years 2020 through 2026. Unused available NOL carryovers from previous years plus the 2007 annual limitation of $26.5 million would allow us to use up to approximately $75.5 million of the NOL carryovers in 2007. Until the tax goodwill deductions and the NOL carryovers are exhausted, we will not pay cash taxes (other than a minimal impact for alternative minimum tax) on the first $88.6 million of federal taxable income before tax goodwill amortization and application of NOL carryovers each year. We have $137.6 million of tax goodwill deductions and NOL carryovers available for 2007. In addition, as of June 29, 2007, we had $47.7 million of foreign tax credits available to offset future federal taxes payable.

I-33

Cash flows for 2007

During the remainder of 2007, we expect cash and cash equivalents to increase. Specific issues, which are relevant to understanding 2007 cash flows, include:

·   Operating Activities:  During the six months ended June 29, 2007, we have used $28.4 million of cash to fund a highway project loss and expect to fund an additional $45 million to $50 million during the remainder of 2007.  Funding requirements during the remainder of 2007 have increased from prior estimates due to one of the customer’s decisions to withhold liquidated damages from amounts otherwise due under the contract.  Other than the highway loss, other working capital requirements have used $81.8 million of cash year-to-date through June 29, 2007.  We do not expect working capital to continue to increase in the last half of 2007.

·   Property and equipment: Capital expenditures, net of dispositions, for mining and construction projects, along with normal capital expenditures to upgrade our information systems hardware and software, have amounted to $87.7 million through June 29, 2007. We are currently in the process of selling and leasing back under operating lease arrangements approximately $40 million of mining equipment acquired through June 29, 2007. We expect to acquire approximately $20 million of additional mining equipment during the remainder of 2007 which will also be sold and leased back under operating lease arrangements. We expect an additional $10 million to $15 million of capital expenditures through the remainder of 2007. We expect depreciation expense to amount to approximately $34 million in 2007.

·   Income taxes: Because of anticipated utilization of tax goodwill amortization of $62.1 million, and the availability of approximately $75.5 million of NOL carryovers and foreign tax credits, we will likely not pay federal taxes, other than a minimal amount for alternative minimum tax. We will pay state and foreign income taxes.

·   Pension and post-retirement benefit obligations: We expect to fund $8.5 million of our pension and post-retirement benefit obligations during 2007 as compared to $14.0 million in 2006. We estimate financial statement expense under these plans to be approximately $4.8 million in 2007 as compared to $6.7 million in 2006. As of June 29, 2007, $3.7 million of contributions have been made to the pension and post-retirement plans.

Financial condition and liquidity

We expect to use cash to, among other things, satisfy contractual obligations, fund working capital requirements and make capital expenditures. We believe that our cash flows from operations, existing cash and cash equivalents and available capacity under our revolving Credit Facility will be sufficient to meet our reasonably foreseeable liquidity needs.

In line with industry practice, we are often required to provide surety bonds to customers under fixed-price contracts. These bonds indemnify the customer should we fail to perform our obligations under the contract. If a bond is required for a particular project and we are unable to obtain an appropriate bond, we cannot pursue that project. We have existing bonding capacity but, as is customary, the issuance of a bond is at the sureties’ discretion. Moreover, due to events that affect the insurance and bonding markets generally, bonding may be more difficult to obtain in the future or may only be available at significant additional cost. Although there can be no assurance that bonds will continue to be available on reasonable terms, we believe that we have access to the bonding necessary to achieve our operating goals.

We continually evaluate alternative capital structures and the terms of our credit facilities. We may also, from time to time, pursue opportunities to complement existing operations through business combinations and participation in ventures, which may require additional financing and utilization of our capital resources.

I-34

Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”)

We view EBITDA as a performance measure of operating liquidity, and as such we believe that the GAAP financial measure most directly comparable to it is net cash provided by operating activities (see reconciliation of EBITDA to net cash used by operating activities below). EBITDA is not an alternative to and should not be considered instead of, or as a substitute for, earnings from operations, net income or loss, cash flows from operating activities or other statements of operations or cash flow data prepared in conformity with GAAP, or as a GAAP measure of profitability or liquidity. In addition, our calculation of EBITDA may or may not be comparable to similarly titled measures of other companies.

EBITDA is used by our management as a supplemental financial measure to evaluate the performance of our business that, when viewed with our GAAP results and the accompanying reconciliations, we believe provides a more complete understanding of factors and trends affecting our business than the GAAP results alone. We also regularly communicate our EBITDA to the public through our earnings releases because it is a financial measure commonly used by analysts that cover our industry to evaluate our performance as compared to the performance of other companies that have different financing and capital structures or effective tax rates. In addition, EBITDA is a financial measure used in the financial covenants of our Credit Facility and therefore is a financial measure to evaluate our compliance with our financial covenants. Management compensates for the above-described limitations of using a non-GAAP financial measure by using this non-GAAP financial measure only to supplement our GAAP results to provide a more complete understanding of the factors and trends affecting our business.

Components of EBITDA are presented below:

	Three Months Ended				Six Months Ended
(In millions)	June 29, 2007		June 30, 2006		June 29,  2007		June 30, 2006
Net income	$	10.7	$	28.7	$	23.7	$	47.7
Interest expense		1.4		1.8		3.0		3.7
Income tax expense		12.4		20.2		21.5		33.7
Depreciation and amortization		10.7		13.8		21.0		23.0
EBITDA	$	35.2	$	64.5	$	69.2	$	108.1

I-35

Reconciliation of EBITDA to net cash provided (used) by operating activities

We believe that net cash provided (used) by operating activities is the financial measure calculated and presented in accordance with GAAP that is most directly comparable to EBITDA. The following table reconciles EBITDA to net cash provided (used) by operating activities for each of the periods for which EBITDA is presented.

	Three Months Ended							Six Months Ended
(In millions)	June 29, 2007				June 30, 2006			June 29,  2007			June 30, 2006
EBITDA	$	35.2		$	64.5		$	69.2		$	108.1
Interest expense		(1.4	)		(1.8	)		(3.0	)		(3.7	)
Income tax expense		(12.4	)		(20.2	)		(21.5	)		(33.7	)
Cash paid for reorganization items		(0.1	)		(0.5	)		(1.2	)		(1.0	)
Amortization of deferred financing fees		0.3			0.5			0.5			1.1
Non-cash income tax expense		11.2			17.5			19.2			30.1
Minority interests in income of consolidated subsidiaries, net of tax		1.1			1.0			2.8			2.4
Equity in income of unconsolidated affiliates, less dividends received		1.0			1.8			(0.5	)		(8.7	)
Gain on sale of assets, net		(2.8	)		(0.6	)		(5.3	)		(0.8	)
Stock-based compensation expense		4.2			3.9			8.2			6.0
Excess tax benefit from exercise of stock options		(1.4	)		(0.8	)		(3.0	)		(4.1	)
Changes in operating assets, liabilities and other		(33.7	)		(14.9	)		(84.7	)		(70.7	)
Net cash provided (used) by operating activities	$	1.2		$	50.4		$	(19.3	)	$	25.0
Net cash used by operating activities for the six months ended June 29, 2007	$	(19.3	)
Less: Net cash used by operating activities for the three months ended  March 30, 2007		(20.5	)
Net cash provided by operating activities for the three months ended June 29, 2007	$	1.2
Net cash provided by operating activities for the six months ended June 30, 2006				$	25.0
Less: Net cash used by operating activities for the three months ended  March 31, 2006					(25.4	)
Net cash provided by operating activities for the three months ended June 30, 2006				$	50.4

ACCOUNTING STANDARDS

Recently issued accounting standards

In September 2006, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 157, Fair Value Measurements. SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS No. 157 is effective for our fiscal year 2008 and interim periods within fiscal 2008, with early adoption permitted. We are currently evaluating the impact, if any, that SFAS No. 157 will have on our financial statements.

I-36

In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value.  Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 is effective for our fiscal year 2008 and interim periods within fiscal 2008, with early adoption permitted. We are currently evaluating the impact, if any, that SFAS No. 159 will have on our financial statements.

Adoption of accounting standards

  In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. SFAS No. 158 requires employers to recognize the overfunded or underfunded status of a defined benefit pension or postretirement plan as an asset or liability in its statement of financial position, recognize changes in that funded status in the year in which the changes occur through comprehensive income and measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year. We adopted certain recognition provisions of SFAS No. 158 as of December 29, 2006, and will be required to adopt the remaining measurement provisions of SFAS No. 158 in 2008.  Those provisions require that we measure our plan’s assets and its obligations that determine its funded status as of the end of our fiscal year.  Our current measurement date is October 31.

In July 2006, the FASB issued FIN 48, which prescribes a more-likely-than-not recognition threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and also provides guidance on various related matters such as derecognition, interest and penalties, and disclosure. An uncertain income tax position will not be recognized if it has less than a 50 percent likelihood of being sustained. We adopted the provisions of FIN 48 on December 30, 2006.  See Note 7, “Income Taxes and Adoption of FIN 48,” of the Notes to Condensed Consolidated Financial Statements in Item 1 of this report for disclosure of the impact of adopting FIN 48.

I-37

 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate risk

Our exposure to market risk for changes in interest rates relates primarily to our Credit Facility. Substantially all cash and cash equivalents at June 29, 2007 were held in highly liquid instruments.

From time to time, we may effect borrowings under bank credit facilities or otherwise for general corporate purposes, including working capital requirements and capital expenditures. Borrowings under our Credit Facility, of which there currently are none, bear interest at the applicable LIBOR or prime rate, plus an additional margin and, therefore, are subject to fluctuations in interest rates.

Foreign currency risk

We conduct our business in various regions of the world. Our operations are, therefore, subject to volatility because of currency fluctuations, inflation changes and changes in political and economic conditions in these countries. We are subject to foreign currency translation and exchange issues, primarily with regard to our mining venture, MIBRAG, in Germany. At June 29, 2007 and December 29, 2006, the cumulative adjustments for translation gains, net of related income tax benefits, were $27.2 million and $25.8 million, respectively. While we endeavor to enter into contracts with foreign customers with repayment terms in US dollars in order to mitigate foreign exchange risk, our revenues and expenses are sometimes denominated in local currencies, and our results of operations may be affected adversely as currency fluctuations affect our pricing and operating costs or those of our competitors. We may engage from time to time in hedging operations, including forward foreign exchange contracts, to reduce the exposure of our cash flows to fluctuations in foreign currency rates. We do not engage in hedging for speculative investment reasons. We can give no assurances that our hedging operations will eliminate or substantially reduce risks associated with fluctuating currencies.

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on financial condition, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

ITEM 4. CONTROLS AND PROCEDURES

We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. As of the date of the financial statements, an evaluation was carried out under the supervision and with the participation of our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that our disclosure controls and procedures are effective.

·   CEO and CFO certificates

Attached as Exhibits 31.1 and 31.2 to this report on Form 10-Q are two certifications, one each by the CEO and the CFO. They are required in accordance with Rule 13a-14 of the Exchange Act. This Item 4, Controls and Procedures, includes the information concerning the controls evaluation referred to in the certifications and should be read in conjunction with the certifications.

I-38

·   Disclosure controls

“Disclosure Controls” are controls and procedures that are designed to reasonably ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, such as this report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. Disclosure Controls are also designed to ensure that information required to be disclosed is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosures.

·   Internal control over financial reporting

Our Disclosure Controls include components of our “Internal Control over Financial Reporting.” Internal Control over Financial Reporting is a process designed by, or under the supervision of our principal executive and principal financial officers, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

§   Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

§   Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

§   Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

·   Limitations on the effectiveness of controls

Our management, including the CEO and CFO, does not expect that our Disclosure Controls and/or our Internal Control over Financial Reporting will prevent or detect all error or fraud. A system of controls is able to provide only reasonable, not complete, assurance that the control objectives are being met, no matter how extensive those control systems may be. Also, control systems must be established considering the benefits of a control system relative to its costs. Because of these inherent limitations that exist in all control systems, no evaluation of controls can provide absolute assurance that all errors or fraud, if any, have been detected. The inherent limitations in control systems include various human and system factors that may include errors in judgment or interpretation regarding events or circumstances or inadvertent error. Additionally, controls can be circumvented by the acts of a single person, by collusion on the part of two or more people or by management override of the control. Over time, controls can also become ineffective as conditions, circumstances, policies, technologies, level of compliance and people change. Because of such inherent limitations, in any cost-effective control system over financial information, misstatements may occur due to error or fraud and may not be detected.

·   Scope of evaluation of Disclosure Controls

The evaluation of our Disclosure Controls performed by our CEO and CFO included obtaining an understanding of the design and objectives of the controls, the implementation of those controls and the results of the controls on this report on Form 10-Q. We have established a Disclosure Committee whose duty is to perform procedures to evaluate the Disclosure Controls and provide the CEO and CFO with the results of their evaluation as part of the information considered by the CEO and CFO in their evaluation of Disclosure Controls. In the course of the evaluation of Disclosure Controls, we reviewed the controls that are in place to record, process, summarize and report, on a timely basis, matters that require disclosure in our reports filed under the Securities Exchange Act of 1934. We also considered the adequacy of the items disclosed in this report on Form 10-Q.

I-39

·   Conclusions

Based upon the evaluation of our Disclosure Controls described above, our CEO and CFO have concluded that, subject to the limitations described above, our Disclosure Controls are effective to provide reasonable assurance that material information relating to Washington Group International and its consolidated subsidiaries is made known to management, including the CEO and CFO, so that required disclosures have been included in this report on Form 10-Q.

We have also reviewed our Internal Control Over Financial Reporting during the most recent fiscal quarter, and our CEO and CFO have concluded that there have been no changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

I-40

PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

As previously reported, we were sued in the Supreme Court of New York, County of Kings in connection with construction management and inspection services performed by Washington Infrastructure, Inc. for a new school facility for the School Construction Authority of the City of New York by the prime contractor. This suit, Trataros Construction, Inc. et al., v. The New York City School Construction Authority et al., Index No. 20213/01, has been in the discovery stage for years and there have been no material developments in the proceedings in some time. To the extent there are additional material developments in this suit, we will discuss them in future reports under the Exchange Act.

We incorporate by reference the information regarding legal proceedings set forth under the caption “Legal Matters” in Note 8, “Contingencies and Commitments,” of the Notes to Condensed Consolidated Financial Statements in Item 1 of this report. Our legal proceedings are also described in Part I, Item 3 “Legal Proceedings” and Note 11, “Contingencies and Commitments,” of the Notes to the Consolidated Financial Statements in Item 8 of our 2006 Annual Report.

Our reorganization case is In re Washington Group International, Inc. and Related Cases, Docket No. BK-N 01-31627-GWZ, in the US Bankruptcy Court for the District of Nevada.

The personal injury and property damage lawsuits discussed under the caption “Legal Matters” and referred to as “New Orleans Levee Failure Class Action Litigation” in Note 8, “Contingencies and Commitments” of the Notes to Condensed Consolidated Financial Statements in Item 1 of this report refers to Berthelot, et al. v. Boh Bros. Construction Co., LLC, et al., Case No. 05-4182; Vodanovich, et al. v. Boh Bros. Construction Co., LLC, et al., Case No. 05-5237; Kirsch, et al. v. Boh Bros. Construction Co., LLC, et al., Case No. 05-6073; Ezell v. Boh Bros. Construction Co., LLC, et al., Case No. 05-6314; Brown, et al. v. Boh Bros. Construction Co., LLC, et al., Case No. 05-6324; LeBlanc, et al. v. Boh Bros. Construction Co., LLC, et al., Case No. 05-6327; Finney, et al. v. Boh Bros. Construction Co., LLC, et al., Case No. 06-0886; Christenberry, et al. v. Board of Commissioners of the Orleans Levee District, et al., Case No. 06-2278; Sanchez, et al. v. Boh Bros. Construction Co., LLC, et al., Case No. 06-2287; C. Adams, et al. v. Boh Bros. Construction Co., LLC, et al., Case No. 06-4065; Brock, et al. v. Boh Bros. Construction Co., LLC, et al., Case No. 06-4931; Fleming, et al. v. The United States of America, et al., Case No. 06-5159; G. Adams, et al. v. Boh Bros. Construction Co., LLC, et al., Case No. 06-4634; Gisevius v. Boh Bros. Construction Co., LLC, et al., Case No. 06-5308; Holmes, et al. v. The United States of America, et al., Case No. 06-5161; Joseph, et al. v. New Orleans Sewage and Water Board, et al., Case No. 06-5032; LeDuff, et al. v. Boh Bros. Construction Co., LLC, et al., Case No. 06-5260; O’Dwyer(1) v. United States of America, et al., Case No. 05-4181, O’Dwyer(3) v. Dept. of Trans. and Dev., et al., Case No. 06-4389; Bradley, et al. v. Boh Bros. Construction Co., LLC, et al., Case No. 06-225; O’Dwyer(2) v. Dept. of Trans. and Dev., et al., Case No. 06-5786; Richardson v. Boh Bros. Construction Co., LLC, et al., Case No. 06-8708; Yacob v. Board of Commissioners for Orleans Levee District, et al., Case No. 06-5937; Cochran, et. al. v. Boh Bros. Construction Co., LLC, et al., Case No. 06-5785; Ciuffi v. United States of America, et al., Case No. 07-1271; Carney v. Boh Bros. Construction Co., LLC, Case No. 07-1349; The Parfait Family, et al. v. United States of America, et al., Case No. 07-3500; Lundy v. The United States of America, et al., Case No. 07-3173; Dear Mother’s Taste of New Orleans, LLC, et al., v. M.A. Hayes Co., et al., Case No. 06-5890; and Douville, et al., v. Boh Bros. Construction Co., LLC, et al., Case No. 07-1113; all currently pending in the US District Court for the Eastern District of Louisiana and consolidated under the Berthelot case.

The lawsuit relating to our USAID-financed projects in Egypt discussed under the caption “Legal Matters” and referred to as “Litigation and Investigation related to USAID Egyptian Projects” in Note 8, “Contingencies and Commitments” of the Notes to Condensed Consolidated Financial Statements in Item 1 of this report refers to United States of America v. Washington Group International, Inc., et al., Case No. CIV-04545S-EJL, in the US District Court for the District of Idaho.

II-1

ITEM 1A.  RISK FACTORS

There have been no material changes in our risk factors from those disclosed in our 2006 Annual Report, except as follows:

Failure to complete the merger with URS could materially and adversely affect our results of operations and our stock price.

On May 27, 2007, we entered into a definitive merger agreement with URS. Consummation of the merger is subject to customary closing conditions, regulatory approvals, including antitrust approvals, and approval by the stockholders of URS and Washington Group International, respectively. We cannot assure you that these conditions will be met or waived, that the necessary approvals will be obtained, or that we will be able to successfully consummate the merger as currently contemplated under the merger agreement or at all. If the merger is not consummated:

·   We may not realize any or all of the potential benefits of the merger, including any synergies that could result from combining the financial and proprietary resources of Washington Group International and URS;

·   We will remain liable for significant transaction costs, including legal, accounting, financial advisory and other costs relating to the merger;

·   Under some circumstances, we may have to pay a termination fee to URS in the amount of $70 million;

·   The attention of our management and our employees may be diverted from day-to-day operations;

·   Our customers may seek to modify or terminate existing agreements, or prospective customers may delay entering into new agreements or purchasing our products as a result of the announcement of the merger; and

·   Our ability to attract new employees and retain our existing employees may be harmed by uncertainties associated with the merger.

 The occurrence of any of these events individually or in combination could have a material adverse affect on our results of operations and our stock price.

Since the merger agreement contemplates a fixed exchange ratio, changes in the market price of URS common stock could adversely affect the value of URS common stock to be received by our stockholders in the merger.

Under the merger agreement, each outstanding share of our common stock will be converted into the right to receive 0.772 of a share of URS common stock and cash consideration of $43.80. Because the merger agreement contemplates a fixed exchange ratio, changes in the stock price of URS common stock in the period leading up to the time the merger is consummated could adversely affect the value of the URS common stock to be received by our stockholders upon consummation of the merger.

In connection with the merger, we have filed a joint proxy statement/prospectus with the Securities and Exchange Commission announcing a special meeting of stockholders that we will hold during the fourth quarter of 2007 to enable our stockholders to vote to adopt the merger agreement. The joint proxy statement/prospectus will be sent to all our stockholders and will contain important information about Washington Group International, URS, the proposed merger, risks relating to the proposed merger and the combined company, and related matters. We strongly encourage our stockholders to read this joint proxy statement/prospectus.

II-2

ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

Issue Repurchases of Equity Securities

We did not repurchase any shares of our common stock during the three months ended June 29, 2007.  We are authorized to repurchase up to approximately $100.0 million of outstanding shares of common stock in open market or negotiated transactions.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a) The annual meeting of Washington Group International’s stockholders was held on May 18, 2007.

(b) At the annual meeting, stockholders of record on March 21, 2007, were entitled to vote 29,056,806 shares of common stock. A total of 26,561,752 shares were represented at the meeting. The results of voting at the annual meeting are summarized below:

(1) Nominees for terms of office to continue until the annual meeting of stockholders in 2008:

	For	Withheld
John R. Alm	26,018,796	542,956
David H. Batchelder	26,018,746	543,006
Michael R. D’Appolonia	25,443,181	1,118,571
C. Scott Greer	24,518,886	2,042,866
Gail E. Hamilton	25,443,681	1,118,071
Stephen G. Hanks	26,223,176	338,576
William H. Mallender	25,101,064	1,460,688
Michael P. Monaco	26,223,696	338,056
Cordell Reed	24,518,127	2,043,625
Dennis R. Washington	25,743,473	818,279
Dennis K. Williams	26,018,874	542,878

(2) Ratification of the appointment of Deloitte & Touche LLP as independent auditor of Washington Group International:

For	Against	Abstain	Broker Non-Vote
26,543,207	16,579	1,966	0

(3) Amendment of Washington Group International’s Certificate of Incorporation to allow for election of directors by majority vote:

For	Against	Abstain	Broker Non-Vote
25,180,919	1,373,475	7,358	0

(4) Shareholder proposal to take steps to provide for cumulative voting in the election of directors:

For	Against	Abstain	Broker Non-Vote
7,840,609	14,907,458	31,376	3,782,309

II-3

ITEM 5. OTHER INFORMATION

None. 

ITEM 6. EXHIBITS

(a)         Exhibits

The Exhibits to this quarterly report on Form 10-Q are listed in the Exhibit Index contained elsewhere in this quarterly report

II-4

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	WASHINGTON GROUP INTERNATIONAL, INC.
	/s/ George H. Juetten
	George H. Juetten
	Executive Vice President and Chief Financial Officer,
	in his respective capacities as such
August 6, 2007

WASHINGTON GROUP INTERNATIONAL, INC.

EXHIBIT INDEX

Exhibit

Number                   Exhibit Description

2.1 Agreement and Plan of Merger, dated as of May 27, 2007, among URS Corporation, Elk Merger Corporation, Bear Merger Sub, Inc. and Washington Group International, Inc. (filed as Exhibit 2.01 to Washington Group International’s Form 8-K Current Report filed on May 29, 2007, and as Appendix A to URS Corporation’s and Washington Group International, Inc.’s Form PREM14A Preliminary Proxy Statement filed on July 17, 2007, and incorporated herein by reference).

3.1 Amended and Restated Certificate of Incorporation of Washington Group International (filed as Appendix F to Washington Group International’s Form DEFR 14A Definitive Proxy Statement filed on April 18, 2007, and incorporated herein by reference).

3.2* Amended and Restated Bylaws of Washington Group International as of May 18, 2007.

10.1 Waiver and Agreement dated as of July 13, 2007, among the Company, Credit Suisse (individually and as administrative agent), and certain lenders under that certain Second Amended and Restated Credit Agreement dated as of June 14, 2005 (as amended) (filed as Exhibit 10.1 to Washington Group International’s Form 8-K Current Report filed on July 16, 2007, and incorporated herein by reference).

10.2* Amendment No. 3, dated as of May 25, 2007, and effective as of November 16, 2006, to the Washington Group International, Inc. Equity and Performance Incentive Plan as Amended and Restated as of August 14, 2003.

10.3* Amendment No. 2, dated as of May 25, 2007, and effective as of November 16, 2006, to the Washington Group International, Inc. 2004 Equity Incentive Plan.

10.4* Washington Group International, Inc. Executive Severance Pay Plan, effective as of May 26, 2007.

31.1* Certification of the Principal Executive Officer of Washington Group International, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2* Certification of the Principal Financial Officer of Washington Group International, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 32.1† Amended and Restated Certificate of Incorporation of Washington Group International (filed as Appendix F to Washington Group International’s Form DEFR 14A Definitive Proxy Statement filed on April 18, 2007, and incorporated herein by reference).

*       Filed herewith

 †       Furnished herewith

E-1