WASHINGTON GROUP INTERNATIONAL INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
ANNUAL REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended

NOVEMBER 30, 2001

Commission File Number 1-12054

WASHINGTON GROUP INTERNATIONAL, INC.

A Delaware Corporation
IRS Employer Identification No. 33-0565601

720 PARK BOULEVARD, BOISE, IDAHO 83712
208 / 386-5000

SECURITIES REGISTERED AND NUMBER OF SHARES OF
REGISTRANT'S COMMON STOCK OUTSTANDING

At November 30, 2001, 52,468,900 shares of the registrant's $.01 par value
common stock were outstanding, and such common stock was traded in the
over-the-counter market and registered under Section 12(g) of the Securities
Exchange Act of 1934 (the "Exchange Act"). Such common stock was formerly listed
on the New York Stock Exchange and registered under Section 12(b) of the
Exchange Act. On May 14, 2001, the New York Stock Exchange suspended trading of
such common stock, and on July 6, 2001 such common stock was delisted by the New
York Stock Exchange. Upon such delisting, the common stock was traded in the
over-the-counter market and was registered under section 12(g) of the Exchange
Act. Pursuant to the Second Amended Joint Plan of Reorganization of Washington
Group International, Inc., et al., as modified and confirmed, on January 25,
2002, all of the registrant's existing equity securities, including such common
stock, were deemed canceled and extinguished, and new common stock was issued.
At May 31, 2002, 25,000,000 shares of the registrant's $.01 par value common
stock were outstanding; such common stock is traded in the over-the-counter
market and is registered under 12(g) of the Exchange Act.

COMPLIANCE WITH REPORTING REQUIREMENTS
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act 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. / / Yes /X/ No

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Exchange Act
subsequent to the distribution of securities under a plan confirmed by a court.
/X/ Yes / / No

DISCLOSURE PURSUANT TO ITEM 405 OF REGULATION S-K
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this annual report on Form 10-K or any
amendment to this annual report on Form 10-K. / /

AGGREGATE MARKET VALUE OF COMMON STOCK HELD BY NONAFFILIATES
At November 30, 2001, the aggregate market value of the registrant's common
stock held by nonaffiliates of the registrant, based on the over-the-counter
market closing bid price on November 30, 2001, as reported by the Pink Sheets
quotation service, was approximately $1,836,000. The aggregate market value of
the registrant's common stock held by nonaffiliates of the registrant, based on
the over-the-counter closing bid price on May 31, 2002, as reported by the Pink
Sheets(R) quotation service, was approximately $576,250,000. No shares are
assumed to be held by affiliates of the registrant on such dates for purposes of
these calculations.

DOCUMENTS INCORPORATED BY REFERENCE
None.

WASHINGTON GROUP INTERNATIONAL, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED NOVEMBER 30, 2001

TABLE OF CONTENTS

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:

o OUR BUSINESS STRATEGY AND COMPETITIVE ADVANTAGES

o OUR EXPECTATIONS AS TO POTENTIAL REVENUES FROM DESIGNATED MARKETS OR
CUSTOMERS

o OUR EXPECTATIONS AS TO PROFITS, CASH FLOWS, RETURN ON INVESTED CAPITAL
AND NET INCOME

o OUR EXPECTATIONS AS TO NEW WORK AND BACKLOG

o THE MARKETS FOR OUR SERVICES AND PRODUCTS

o OUR ANTICIPATED CAPITAL EXPENDITURES AND FUNDING REQUIREMENTS

FORWARD-LOOKING STATEMENTS ARE ONLY PREDICTIONS. THESE FORWARD-LOOKING
STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES, INCLUDING, AMONG OTHERS,
THE RISKS AND UNCERTAINTIES IDENTIFIED IN THIS REPORT OR 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 STATEMENTS. THE MOST IMPORTANT FACTORS THAT COULD PREVENT US
FROM ACHIEVING THE EXPECTATIONS EXPRESSED INCLUDE, BUT ARE NOT LIMITED TO,
OUR FAILURE TO:

o SATISFY THE RESTRICTIVE COVENANTS IMPOSED BY OUR INDEBTEDNESS

o RAISE SUFFICIENT WORKING CAPITAL ON ACCEPTABLE TERMS AND ON A TIMELY
BASIS

o MAINTAIN RELATIONSHIPS WITH KEY CUSTOMERS, PARTNERS, SURETIES AND
SUPPLIERS

o MANAGE AND AVOID DELAYS OR COST OVERRUNS IN EXISTING CONTRACTS

o SUCCESSFULLY BID FOR, AND ENTER INTO, NEW CONTRACTS ON SATISFACTORY
TERMS

o SUCCESSFULLY NEGOTIATE CLAIMS AND CHANGE ORDERS

o MANAGE AND MAINTAIN OUR OPERATIONS AND FINANCIAL PERFORMANCE AND THE
OPERATIONS AND FINANCIAL PERFORMANCE OF OUR CURRENT AND FUTURE
OPERATING SUBSIDIARIES AND JOINT VENTURES

o NEGOTIATE ACCEPTABLE COLLECTIVE BARGAINING AGREEMENTS WITH ANY
APPLICABLE UNIONS

o RESPOND TO COMPETITORS IN OUR EXISTING AND PLANNED MARKETS

o 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

o OBTAIN AND MAINTAIN ANY REQUIRED GOVERNMENTAL AUTHORIZATIONS,
FRANCHISES AND PERMITS, ALL IN A TIMELY MANNER, AT REASONABLE COSTS AND
ON SATISFACTORY TERMS AND CONDITIONS

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o REALIZE ANTICIPATED REDUCTIONS IN OVERHEAD AND OTHER COSTS

o SUCCESSFULLY IMPLEMENT OUR PLAN OF REORGANIZATION, AS MODIFIED AND
CONFIRMED

SOME OTHER FACTORS THAT MAY AFFECT OUR BUSINESSES, FINANCIAL POSITION OR
RESULTS OF OPERATIONS INCLUDE:

o ACCIDENTS AND CONDITIONS, INCLUDING INDUSTRIAL ACCIDENTS, LABOR
DISPUTES, GEOLOGICAL CONDITIONS, ENVIRONMENTAL HAZARDS, WEATHER AND
OTHER NATURAL PHENOMENA

o SPECIAL RISKS OF INTERNATIONAL OPERATIONS, INCLUDING UNCERTAIN
POLITICAL AND ECONOMIC ENVIRONMENTS, POTENTIAL INCOMPATIBILITIES WITH
FOREIGN JOINT VENTURE PARTNERS, FOREIGN CURRENCY FLUCTUATIONS AND
CONTROLS, CIVIL DISTURBANCES AND LABOR ISSUES

o 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 BEING REQUIRED TO
REIMBURSE THE GOVERNMENT FOR FUNDS PREVIOUSLY RECEIVED

o MAINTENANCE OF GOVERNMENT-COMPLIANT COST SYSTEMS.

SUBSEQUENT EVENTS

The deadline to timely file this report was February 28, 2002. On March 7,
2002, we filed a current report on Form 8-K announcing that we did not file this
report by the prescribed due date because we needed additional time to prepare
the consolidated financial statements and related disclosures required to be
included herein.

On March 16, 2001, we announced that, if we were unable to obtain
additional sources of cash, we may seek protection from our creditors under the
U.S. Bankruptcy Code. On March 8, 2001, we announced that, as a result of a
rigorous review of projects acquired in connection with our acquisition of the
capital stock of certain subsidiaries of Raytheon Engineers & Constructors
International, Inc. ("RECI") from RECI and Raytheon Company ("Raytheon" and,
together with RECI, the "Sellers"), we believed that certain historical
financial statements and unaudited pro forma condensed combined financial
statements, which were previously filed as exhibits to a current report on Form
8-K filed July 13, 2000, should not be relied upon. For a more detailed
discussion, see our current report on Form 8-K filed March 8, 2001, and for
additional discussion of the transactions with the Sellers and their
consequences, see "The Raytheon Transaction" in Item 1 of this report. The
businesses that we purchased, hereinafter called "RE&C", provide engineering,
design, procurement, construction, operation, maintenance and other services on
a worldwide basis.

On May 14, 2001, Washington Group International, Inc. and several but not
all of its direct and indirect subsidiaries filed voluntary petitions to
reorganize under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy
Court for the District of Nevada (Case No. BK-N-01-31627). The various legal
entities that filed for bankruptcy are collectively referred to hereafter as the
"Debtors." The individual bankruptcy cases were administered jointly. Each of
the Debtors continued to operate its business and manage its property as a
debtor-in-possession pursuant to sections 1107 and 1108 of the U.S. Bankruptcy
Code during the pendency of the cases. For a more detailed discussion, see our
current report on Form 8-K filed May 29, 2001.

Prior to May 14, 2001, our common stock was listed on the New York Stock
Exchange and traded under the ticker symbol "WNG." On May 14, 2001, the exchange
suspended trading of our common stock and on July 6, 2001 our common stock was
delisted by the exchange.

Shortly after the commencement of the bankruptcy cases, the committee
representing our secured lenders and Dennis R. Washington began negotiations
regarding Mr. Washington's continued involvement with us during the bankruptcy
cases and after our emergence from bankruptcy protection. The result of these
negotiations was an

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agreement, embodied in our Plan of Reorganization (as defined below),
providing that in exchange for Mr. Washington's agreement to render ongoing
services to us and to remain as chairman of our board of directors, Mr.
Washington would be granted options to purchase shares of our common stock to
be issued in connection with our emergence from bankruptcy protection. For a
more detailed discussion, see our current report on Form 8-K filed January 4,
2002.

Following the commencement of the bankruptcy cases,
PricewaterhouseCoopers LLP informed us that it had concluded that it was not
a "disinterested person" with respect to the Debtors, and could not file an
affidavit of disinterestedness before the bankruptcy court in order to
continue to serve as independent public accountants of the Debtors during the
pendency of the bankruptcy cases. In addition, PricewaterhouseCoopers LLP
notified us that it could give no assurance that it would be able to act as
our independent public accountants following the Debtors' emergence from
bankruptcy protection. As a result, on October 3, 2001, we dismissed
PricewaterhouseCoopers LLP and selected Deloitte & Touche LLP as our
independent public accountants. For a more detailed discussion, see our
current report on Form 8-K filed October 3, 2001.

On December 21, 2001, the U.S. Bankruptcy Court for the District of
Nevada entered an order confirming the Second Amended Joint Plan of
Reorganization of Washington Group International, Inc., et al., as modified
(the "Plan of Reorganization"). For a more detailed discussion, see our
current report on Form 8-K filed January 4, 2002.

On January 25, 2002 (the "Effective Date"), the Debtors emerged from
bankruptcy protection pursuant to our Plan of Reorganization. We also entered
into a $350 million, 30-month revolving credit facility to fund our working
capital requirements and obtained bonding capacity to take on new projects.
Under our Plan of Reorganization, on the Effective Date, all our equity
securities existing prior to the Effective Date were canceled and
extinguished; we issued an aggregate 25,000,000 shares of our $.01 par value
common stock; we issued warrants to purchase an additional aggregate
8,520,424 shares of common stock; we filed an amended and restated
certificate of incorporation and adopted amended and restated bylaws; we
adopted new stock option plans and granted options under those plans for an
aggregate 4,613,000 shares of common stock, including options granted to
Dennis R. Washington to purchase an aggregate 3,224,100 shares of common
stock; and we entered into various other agreements. For a more detailed
discussion, see our current reports on Form 8-K filed February 8, 2002.

Also on the Effective Date, our board of directors was replaced by an
interim board of directors pursuant to our Plan of Reorganization. This
interim board of directors consisted of David H. Batchelder, H. Peter Boger,
Robert A. Del Genio, Joel A. Glodowski, Stephen G. Hanks, Samuel "Skip"
Victor, Dennis R. Washington and four vacancies. Pursuant to the Plan of
Reorganization, the interim board of directors was replaced upon designation
of the members of the initial board of directors on March 14, 2002 and April
9, 2002; these designations became effective on March 25, 2002 and April 19,
2002, respectively. The board of directors currently consists of: Dennis R.
Washington, David H. Batchelder, Michael R. D'Appolonia, William J. "Bud"
Flanagan, C. Scott Greer, Stephen G. Hanks, William H. Mallender, Michael P.
Monaco, Cordell Reed, Bettina M. Whyte and Dennis K. Williams. For a more
detailed discussion, see our current reports on Form 8-K filed April 3, 2002
and April 26, 2002.

During the pendency of the bankruptcy cases, we continued negotiations
with the Sellers in respect of certain disputes related to the purchase price
of RE&C. As a result of these negotiations, we reached a settlement regarding
the issues and disputes between the parties, which settlement was
incorporated into our Plan of Reorganization (the "Raytheon Settlement").

Under the Raytheon Settlement, the Sellers waived any rights to
distributions under the Plan of Reorganization arising from the claims they
had asserted against the Debtors, and the Debtors agreed to dismiss the
fraudulent conveyance adversary proceeding they filed with the bankruptcy
court and the pending state court litigation against the Sellers related to
our purchase of certain of the businesses of RECI, including a purchase price
adjustment process and a pending arbitration. We released all claims based on
any act occurring prior to the

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Effective Date of the Plan of Reorganization, including all claims against
the Sellers, their affiliates and their directors, officers, employees,
agents and specified professionals. The Sellers released all claims based on
any act occurring prior to the Effective Date, including any claims related
to any contracts or projects not assumed by the Debtors during the bankruptcy
cases, against us and our directors, officers, employees, agents and
professionals.

Under a services agreement entered into as a part of the Raytheon
Settlement, the Sellers will direct the process for resolving pre-petition
claims asserted against the Debtors in the bankruptcy cases relating to any
contract or project that was rejected by the Debtors and that involved some form
of support arrangement from the Sellers. We agreed to assist the Sellers in
settling or litigating various claims related to those rejected projects. We
will also complete work as requested by the Sellers on those rejected projects,
and the Sellers will reimburse us on a cost-plus basis. The Sellers have the
right to pursue or settle any claims of the Debtors against project owners,
contractors or other third parties with respect to those rejected projects and
will retain any resulting proceeds, except that for some projects, recoveries in
excess of amounts paid by the Sellers will be returned to us.

Our new common stock currently trades in the over-the-counter market and is
quoted on the Pink Sheets(R) quotation service under the ticker symbol "WGII."

We have changed our fiscal year from a 52/53 week year ending on the Friday
closest to November 30 to the Friday ending closest to December 31. This change
became effective on December 29, 2001.

Beginning on December 29, 2001, we changed the operating units of our
business. The process technology development portion of our petroleum and
chemicals business is being held for sale; the remainder of the Petroleum &
Chemicals operating unit has been combined with the Industrial/Process operating
unit. Infrastructure & Mining has been split into two operating units:
"Infrastructure" and "Mining." The Government operating unit has been split into
two operating units: "Defense" and "Energy & Environment."

On January 25, 2002, we completed our reorganization and emerged from
bankruptcy. We accounted for the reorganization using fresh-start reporting
effective February 1, 2002. Accordingly, all assets and liabilities at the
Effective Date were restated to reflect their reorganization value, which
approximates fair value at the date of reorganization.

These events are discussed in greater detail in Note 3, "Acquisitions" and
Note 4, "Reorganization Case and Fresh-start Reporting" of the Notes to
Consolidated Financial Statements in Item 8 of this report and in our annual
report on Form 10-K for the fiscal year ended December 1, 2000, which is being
filed contemporaneously with this report.

PART I

ITEM 1. BUSINESS

Unless otherwise indicated, the terms "we," "us" and "our" refer to
Washington Group International, Inc. ("WGI") and its consolidated subsidiaries,
and references to 2001 are references to our fiscal year ended November 30,
2001. References to 2000 are references to our fiscal year ended December 1,
2000; references to 1999 are references to our fiscal year ended December 3,
1999.

Except as otherwise indicated, the information in this report is
presented as of and for the periods ended November 30, 2001 and does not
reflect our reorganization, which occurred after our fiscal year ended
November 30, 2001, or the impact of our reorganization. Thus, although much
of the information in this report is stated in the present tense, unless
otherwise indicated, that information is not or may not be representative of
our current business, properties, legal proceedings or financial position.
Because of the material impact of the reorganization on our business and
financial statements, the information in this report is of limited relevance
and does not include, except by reference to our subsequent filings with the
Securities and Exchange Commission under the Securities Exchange Act of 1934
that are identified in this report, the information that is required for an

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understanding of our current business, financial condition, prospects and
outlook. Accordingly, this report should be read in conjunction with the
various reports we have filed with the Securities and Exchange Commission
under the Securities Exchange Act of 1934 since November 30, 2001 and, in
particular, our quarterly report on Form 10-Q for the quarter ended March 29,
2002, which is being filed contemporaneously with this report.

Our principal executive offices are located at 720 Park Boulevard,
Boise, Idaho 83712. Our telephone number is (208) 386-5000. Our website
address is http://www.wgint.com. The information on our website is not
incorporated into, and is not part of, this report.

GENERAL

We are an international provider of a broad range of design, engineering,
construction, construction management, facilities and operations management,
environmental remediation and mining services. We offer our various services
separately or as part of an integrated package throughout the life cycle of a
customer's project:

o In providing engineering and design services, we are involved in the
conceptualization and planning stages of projects that are part of our
customers' overall capital programs. We develop the physical designs
and determine the technical specifications. We also devise project
configurations to maximize both construction and operating efficiency.

o As a contractor, we are responsible for the construction and completion
of each contract in accordance with its specifications and contracting
terms (primarily schedule and total cost). In this capacity, we often
manage the procurement of materials, subcontractors and craft labor.
Depending on the project, we may function as the primary contractor or
as a subcontractor to another firm.

o On some projects, we function as a construction manager, engaged by the
customer to oversee another contractor's compliance with design
specifications and contracting terms.

o Under operations and maintenance contracts, we provide repair,
renovation, predictive and preventive services to customer facilities
worldwide. We also offer other "light" facility services, such as
cleaning and groundskeeping. In addition, we provide inventory and
product logistics for manufacturing plants, information technology
support, equipment servicing and tooling changeover support.

On some projects, particularly those of significant size and requiring
specialized technology or know-how, we partner with other firms, both to
increase our opportunity to win the contract and to manage development and
execution risk. Partners may include specialized process engineering firms,
other contractors or equipment manufacturers. These partnerships may be
structured as joint ventures or consortia, with each participating firm having
an economic interest relative to the scope of its work.

We enter into three basic types of contracts with our customers:

o Under a "fixed-price" contract, we provide the customer a total project
or per-unit cost, subject to project circumstances and changes in
scope. We commonly refer to contracts under which the total project
cost is determined up front as "lump-sum" contracts. Plant and facility
construction projects are typically awarded on a lump-sum basis. We
follow strict guidelines in bidding for and entering into fixed-price
contracts.

o Under a "fixed-unit-price" contract, the customer pays us for labor,
overhead, equipment rentals or other costs at fixed rates as each unit
of work is performed. Large infrastructure projects are typically
awarded on a fixed-price per-unit basis.

o Under a "cost-type" contract, a customer reimburses us for the costs
that we incur (primarily materials, labor, overhead and subcontractor
services), plus a predetermined fee. The fee portion of the contract
may

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equal a percentage of the costs incurred or may be based on the
achievement of specific performance incentives. The fee portion may
also be subject to a maximum. Engineering, construction management and
environmental and hazardous substance remediation contracts, including
most of our work for U.S. government customers, are typically awarded
pursuant to a cost-type contract.

Many fixed-price contracts require the contractor to provide a surety
bond to its customer. This general industry practice provides indemnification
to the customer if the contractor fails to perform its obligations. Surety
companies consider factors such as capitalization, available working capital,
past performance and management expertise to determine the amount of bonds
they are willing to issue to a particular engineering and construction firm.

BACKGROUND

We were originally incorporated in Delaware on April 28, 1993 under the
name Kasler Holding Company. In April 1996, we changed our name to Washington
Construction Group, Inc. On September 11, 1996, we purchased Morrison Knudsen
Corporation, which we refer to as "Old MK," and changed our name to Morrison
Knudsen Corporation. On September 15, 2000, we changed our name to Washington
Group International, Inc.

Our purchase of Old MK was structured as a merger with and into us and
was an integral part of the reorganization of Old MK under a plan of
reorganization that Old MK filed in the U.S. Bankruptcy Court for the
District of Delaware. We have no remaining obligations under that plan of
reorganization.

On March 22, 1999, we and BNFL Nuclear Services, Inc. ("BNFL") acquired
the government and environmental services businesses of CBS Corporation (now
Viacom, Inc.). We refer to these businesses as the "Westinghouse Businesses."
The Westinghouse Businesses currently constitute our Westinghouse Government
Services Group ("WGSG"), which is a part of our Government operating unit.

THE RAYTHEON TRANSACTION

On July 7, 2000, pursuant to a stock purchase agreement dated April 14,
2000 (the "Stock Purchase Agreement"), we purchased from the Sellers the
capital stock of the subsidiaries of RECI and specified other assets of RECI,
and we assumed specified liabilities of RECI. The businesses that we
purchased provide engineering, design, procurement, construction, operation,
maintenance and other services on a worldwide basis. We financed the
acquisition by obtaining new senior secured credit facilities (the "RE&C
Financing Facilities") and issuing senior unsecured notes due July 1, 2010
(the "Senior Unsecured Notes"). See Note 8, "Credit Facilities - RE&C
Financing Facilities" and "Credit Facilities -Senior Unsecured Notes" of the
Notes to Consolidated Financial Statements in Item 8 of this report for a
more detailed description of the RE&C Financing Facilities and the Senior
Unsecured Notes.

The purchase price paid at the closing of the acquisition on July 7,
2000 was $53 million in cash and the assumption of net liabilities originally
estimated at $450 million. We also incurred acquisition costs of $7.7
million. The cash portion of the purchase price paid at closing was
determined based upon a formula contained in the Stock Purchase Agreement and
represented the estimated amount of the Adjusted Non-Current Net Assets and
Adjusted Net Working Capital (as the terms are defined in the Stock Purchase
Agreement) that we acquired, valued as of April 30, 2000. The amounts of
Adjusted Non-Current Net Assets and Adjusted Net Working Capital were subject
to post-closing finalization, including an audit by independent accountants,
and other adjustments to the price paid at closing. In addition, the Stock
Purchase Agreement contained a provision requiring us to either pay the
Sellers or to be paid by the Sellers, the net amount of cash the Sellers
either advanced to or withdrew from RE&C between April 30, 2000 and July 7,
2000. After closing, we paid the Sellers $84.4 million representing the net
amount of cash advanced or paid by the Sellers for the use or benefit of RE&C
between April 30, 2000 and July 7, 2000.

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The Stock Purchase Agreement provided that the Sellers would retain all
non-restricted cash and cash equivalents held by RE&C at the close of business
on April 30, 2000 ("Cut-Off Date Cash Balances"). At closing, for purposes of
administrative convenience, RE&C kept all cash held by it ($15.8 million), and
we paid the Sellers an additional $30.8 million for the cash balances on April
30, 2000. That amount was subject to post-closing verification by us and
adjustment in the event it was not equal to the Cut-Off Date Cash Balances held
by RE&C. We subsequently verified the amount and no adjustment was required.

RECI retained, among other assets, all of its interest in and rights with
respect to some of the existing contracts. In addition, the Stock Purchase
Agreement provided that the contracts related to four specified construction
projects would be transferred to RECI, and RE&C would enter into subcontracts to
perform, on a cost-reimbursed basis, all of RECI's obligations under the
contracts. Because the customer consents required to transfer the four contracts
to RECI could not be obtained as of closing, we agreed to remain the contract
party and continued to be directly obligated to the customers and other third
parties under the contracts relating to the four projects. Accordingly, we and
the Sellers agreed that the Sellers would provide us with full indemnification
with respect to any risks associated with those contracts, which arrangement
accomplished the original intent of the Stock Purchase Agreement. Under the
Stock Purchase Agreement, we agreed that we would complete the four specified
projects for the Sellers' account and the Sellers agreed to reimburse our costs
to do so and to share equally with us any positive variance between actual costs
and estimated costs. The Sellers also agreed to indemnify us against any losses,
claims or liabilities under the contracts relating to such projects, except
losses, claims or liabilities resulting from our gross negligence or willful
misconduct, against which we would indemnify the Sellers.

The Stock Purchase Agreement did not contain a fixed purchase price at
closing for the transaction, but rather, as noted above, provided that the
purchase price would be adjusted upward or downward post-closing, based on the
effect on a formula that would be applied to an audited RE&C April 30, 2000
balance sheet to be prepared by the Sellers and audited by the Sellers'
independent accountants. After closing, we extended the delivery date for the
final audited RE&C balance sheet for April 30, 2000 to January 14, 2001.

As part of the acquisition of RE&C, we undertook a comprehensive review of
existing contracts that were acquired for the purpose of making a preliminary
allocation of the acquisition price to the net assets acquired. As part of this
review, we evaluated, among other matters, RECI's estimates of the cost at
completion of the long-term contracts that were underway as of July 7, 2000
("Acquisition Date EAC's"). During this process information came to our
attention that raised questions as to whether the Acquisition Date EAC's needed
to be adjusted significantly. Our review process involved the analysis of an
extensive amount of supporting data, including analysis of numerous, large
construction projects in various stages of completion. Based on the information
available at the time of the review, the preliminary results of this review
indicated that the Acquisition Date EAC's of numerous long-term contracts
required substantial adjustment. The adjustments resulted in contract losses or
lower than market rate margins. As a result, in our report on Form 10-Q for the
quarter ended September 1, 2000, we significantly decreased the carrying value
of the net assets acquired and increased the goodwill associated with the
transaction. Because many of the contracts we acquired contained either
unrecorded losses or lower than market rate margins, these contracts were
adjusted to their estimated fair value at the July 7, 2000 acquisition date in
order to allow for a reasonable profit margin for completing the contracts, and
a gross margin or normal profit reserve of $233.1 million was established and
recorded in billings in excess of cost and estimated earnings on uncompleted
contracts.

Our review of the RE&C contracts and the purchase price allocation process
continued thereafter, and, based on the results of that review, we expected
that, as a result of the purchase price adjustment process, the purchase price
of RE&C would be adjusted downward by a significant amount. Subsequent to the
quarter ended September 1, 2000, we completed the review and made additional
adjustments to the contracts we had acquired, resulting from a more accurate
determination of the actual contract status at the acquisition date.

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The normal profit reserve has been reduced as work has been performed on
the affected projects. The reduction results in reductions to cost of revenue
and corresponding increases in gross profit, but has no effect on cash. The
establishment of and decreases in cost of revenue for the periods indicated are
as follows:

An audited RE&C April 30, 2000 balance sheet was not delivered by Sellers,
and therefore, on February 27, 2001, we filed a lawsuit against the Sellers
seeking specific performance of the purchase price adjustment provisions of the
Stock Purchase Agreement. On March 8, 2001, we amended our complaint to also
seek money damages for misstatements and omissions allegedly made by the
Sellers. Our lawsuit seeking specific performance was successful, and we and the
Sellers thereafter commenced arbitration proceedings before an independent
accountant approved by the court to determine the purchase price adjustment. A
significant arbitration claim was ultimately filed against the Sellers, as
discussed below.

During the spring of 2000, in connection with the acquisition of RE&C, we
received from the Sellers audited RECI financial statements at December 31, 1999
and 1998 and for each of the three years in the period ended December 31, 1999
and unaudited RECI financial statements as of and for the three months ended
April 2, 2000 and April 4, 1999. In accordance with federal securities law
disclosure requirements, we filed on July 13, 2000 those audited and unaudited
financial statements and our related unaudited pro forma condensed combined
financial statements as of and for the year ended December 3, 1999 and for the
quarter ended March 3, 2000 in a current report on Form 8-K. In our current
report on Form 8-K filed March 8, 2001, we advised that, for the reasons stated
in such report, the foregoing audited and unaudited financial statements of
RECI, and our related unaudited pro forma condensed combined financial
statements, which were derived therefrom, no longer should be relied upon.

On March 2, 2001 we announced that we faced severe near-term liquidity
problems as a result of our acquisition of RE&C. On March 9, 2001, because of
those liquidity problems, we suspended work on two large construction projects
located in Massachusetts that were part of the acquisition. The Sellers had
provided the customer with parent performance guarantees on those two contracts,
and the guarantees remained in effect after closing. Those performance
guarantees required the Sellers to complete the work on the contracts in the
event RE&C (owned by us as of July 7, 2000) did not complete them. The contracts
were fixed-price in nature and our review of cost estimates indicated that there
were substantial unrecognized future costs in excess of future contract revenues
that were not reflected in RECI's Acquisition Date EAC's.

Upon our suspension of work, the Sellers undertook performance of those
contracts pursuant to the outstanding performance guarantees. We, however, were
obligated under the Stock Purchase Agreement to indemnify the Sellers for losses
they incurred under those guarantees. The Sellers also assumed obligations under
other contracts, primarily in the RE&C power generation construction business
unit, which resulted in significant additional indemnification obligations by us
to the Sellers. As a result of costs they incurred to perform under the parent
guarantees, the Sellers filed a claim against us in the bankruptcy process for
approximately $940 million. As further discussed below, this claim was
ultimately settled without payment to the Sellers in connection with the
completion of our Plan of Reorganization. See Note 4, "Reorganization Case and
Fresh-start Reporting" of the Notes to Consolidated Financial Statements in Item
8 of this report. Until such settlement, we retained all

I-8

liabilities related to these contracts, including normal profit reserves, on
our balance sheet as accrued liabilities included in liabilities subject to
compromise.

On May 14, 2001, because of the severe near-term liquidity problems
resulting from our acquisition of RE&C, we filed for protection under Chapter
11 of the U.S. Bankruptcy Code. At various times between May 14, 2001 and
November 20, 2001, we "rejected" numerous contracts (construction contracts,
leases and others), as that term is used in the legal sense in bankruptcy
law. Included in these rejections were numerous contracts that we acquired
from the Sellers. Effective August 27, 2001, we also rejected the Stock
Purchase Agreement.

During the pendency of the bankruptcy, we continued to negotiate with the
Sellers a settlement of our outstanding litigation with respect to the RE&C
acquisition. As a result of those negotiations, we entered into the Raytheon
Settlement.

Under the Raytheon Settlement, the Sellers agreed that, with respect to
their bankruptcy claim, the Sellers would be considered unpaid, unsecured
creditors having rights in the unsecured creditor class, but that, upon
completion of our Plan of Reorganization, they would waive any rights to receive
any distributions to be given to unsecured creditors with allowed claims. In
exchange, we agreed to dismiss all litigation against the Sellers related to the
acquisition and to discontinue the purchase price adjustment and binding
arbitration process. We released all claims based on any act occurring prior to
the Effective Date of the Plan of Reorganization, including all claims against
the Sellers, their affiliates and their directors, officers, employees, agents
and specified professionals. The Sellers released all claims based on any act
occurring prior to the Effective Date of our Plan of Reorganization, including
any claims related to any contracts or projects not assumed by us during the
bankruptcy cases, against us and our directors, officers, employees, agents and
professionals. No cash was exchanged as a result of this settlement.

In addition, under a services agreement that is a part of the Raytheon
Settlement, the Sellers will direct the process for resolving pre-petition
claims asserted against us in the bankruptcy case relating to any contract or
project that was rejected by us and that involved some form of support
arrangement from the Sellers. We will assist the Sellers in settling or
litigating various claims related to those rejected projects. We will also
complete work as requested by the Sellers on those rejected projects, and will
be reimbursed on a cost-reimbursable contracting basis. The Sellers may, with
respect to the rejected projects described above, pursue or settle any of our
claims against project owners, contractors or other third parties and will
retain any resulting proceeds, except that for specified projects, recoveries in
excess of amounts paid by the Sellers will be returned to us.

While this settlement eliminated our ability to continue to seek to collect
our arbitration claim, it was necessary because the Sellers' large unsecured
claims in the bankruptcy were substantially impeding our Plan of Reorganization
process. Without this settlement, a successful emergence from Chapter 11 would
have been delayed or impossible.

We have made adjustments to the preliminary purchase price allocation of
the RE&C acquisition price to the net assets acquired that was included in the
unaudited quarterly information at September 1, 2000, including the following,
as a result of completing our review:

o We have made adjustments for amounts that were recorded as part of and
subsequent to the initial preliminary purchase price allocation, as
a result of additional information we obtained that supported that
some of the July 7, 2000 balances were materially misstated based on
generally accepted accounting principles and were, therefore,
included in our purchase price adjustment arbitration claim against
the Sellers. In the lawsuits and purchase price adjustment
arbitration claim referred to above, we asserted that the Sellers
should have recorded these as adjustments in the RE&C financial
statements prior to the acquisition. The adjustments primarily
relate to provisions for anticipated losses on fixed-price contracts
that were not recorded in the RE&C financial statements prior to the
acquisition. We recorded these amounts as a $444.1 million
arbitration claim receivable from the Sellers. However, as noted
above, under the terms of the Raytheon Settlement we subsequently
agreed to dismiss all litigation against the

I-9

Sellers related to the acquisition and to discontinue the purchase
price adjustment and binding arbitration process. Therefore, we
wrote off the receivable from the Sellers as an asset impairment
during the fourth quarter of 2000.

o Also, we have made adjustments for items that were identified
subsequent to the initial purchase price allocation that we believed
were additional misstatements, based on additional information that we
obtained, but that were not included in the arbitration claim. Cost of
revenue included adjustments to estimates at completion on contracts
and increases in self-insurance reserves. The impairment of assets was
primarily unrecoverable accounts receivable. These amounts totaled
$144.5 million and were charged to operations in the fourth quarter of
2000 as follows:

OPERATING UNITS

During the fiscal quarter ended September 1, 2000, we reorganized our
business to operate through five operating units, each of which comprises a
separate reportable business segment: Power, Infrastructure & Mining,
Industrial/Process, Government and Petroleum & Chemicals.

POWER

Our Power operating unit provides engineering, construction, and operations
and maintenance services in both the fossil and nuclear power markets. Its
customers include utilities, industrial co-generators, independent power
producers, and governments that generate power in a wide variety of ways,
including coal-, oil- and gas-fired power plants, combustion turbine and
combined cycle generation, nuclear power generation, hydroelectric generation
and waste-to-energy generation. The operating unit provides a range of services
that include:

o general engineering and design;
o power generation planning;
o siting and licensing;
o environmental permitting and engineering;
o plant construction, expansion, refurbishment, retrofit and
modification, including the construction of new power plants,
distribution and transmission systems and energy storage
facilities, the installation of flue-gas cleaning systems in
coal-fired power plants and the replacement of steam generators in
nuclear power plants;
o decontamination and decommissioning of nuclear power plants; and
o operations and maintenance, including renewal and repair, supply and
logistics management and maintenance and modification services at
several nuclear power plants.

INFRASTRUCTURE & MINING

Our Infrastructure & Mining operating unit provides diverse engineering and
construction and construction management services for highways and bridges,
airports and seaports, tunnels and tube tunnels, railroad and transit lines,
water storage and transport, water treatment, site development, mine operations
and hydroelectric facilities. It also provides contract mining, engineering and
other technical services to the international fossil fuel and mineral markets.
The operating unit generally performs as a general contractor or as a joint
venture partner with other contractors on domestic and international projects.

Infrastructure & Mining serves both private and public sector customers
through four major divisions:

o HEAVY CIVIL: This division provides services both as a general
contractor and in a design-build capacity. Heavy Civil primarily
targets domestic heavy infrastructure projects in the transportation,
marine and water resources markets, including highways, bridges,
tunnels, railroad and commuter rail systems, airport and seaport
facilities, dams, wastewater treatment facilities and pipelines. It
also provides site development at mine, industrial, various commercial
and recreational sites.

I-11

o INTERNATIONAL CONSTRUCTION: This division constructs heavy
infrastructure projects, with a current focus on water resource,
wastewater management and telecommunications projects in the Middle
East and various other regions of the world.

o INFRASTRUCTURE PROGRAMS: This division provides civil design and
project-management services throughout the United States.
Infrastructure Programs specializes in the engineering, design and
construction/program management of highway, bridge, railroad, airport
and water resource infrastructure projects.

o MINING: This division provides contract mining services
internationally to the fossil fuel and industrial mineral markets.
Mining also offers a full range of technical and engineering services,
including resource evaluation, geologic modeling, mine planning and
development, environmental permitting, equipment selection, and
remediation. Mining holds ownership interests in two mining ventures:
MIBRAG mbH (33% at December 1, 2000 and increased to 50% effective
March 28, 2001) and Westmoreland Resources, Inc. (20%). See Note 6,
"Ventures" of the Notes to Consolidated Financial Statements in Item 8
of this report.

INDUSTRIAL/PROCESS

The Industrial/Process operating unit provides services in each stage of a
project's life cycle, including engineering, design, procurement, construction
and total facilities management. Industrial/Process' total facilities management
services include inventory and supply chain management, shutdown and turnaround
management and other maintenance, operations and logistics management services.
Industrial/Process serves companies in the following markets:

o general manufacturing;
o pharmaceutical and biotechnology;
o institutional buildings;
o food and consumer products;
o automotive;
o aerospace;
o telecommunications;
o pulp and paper markets;
o process; and
o metals processing.

GOVERNMENT

Our Government operating unit provides products and services primarily to
U.S. government customers in the national defense, nonproliferation,
environmental cleanup, nuclear waste management and hazardous material
stabilization markets. Its services span the entire life cycle of its customers'
needs - from design, construction and operation of facilities through their
eventual decontamination, decommissioning and final environmental remediation.
Through its Electro-Mechanical Division, the operating unit designs and
manufactures pumps, valves, generators and propulsion units for the U.S. Navy's
nuclear-powered fleet. Almost all of this operating unit's revenues are from
contracts with the federal government, with the Department of Defense and the
Department of Energy accounting for about 71% of its revenues.

The Government operating unit also provides products and services to
commercial clients, including:

o the design and manufacture of components for nuclear power facilities;
o the design and manufacture of engineered canisters to ship and store
spent nuclear fuel; and

I-12

o safety planning, integrated safety management consulting, facility
operation, hazardous material management and licensing.

PETROLEUM & CHEMICALS

The Petroleum & Chemicals operating unit provides a wide range of services
to petroleum and chemical markets worldwide, including the commodity-organic
chemicals, polymers, Fischer-Tropsch chemistry, fertilizers, oleochemicals,
petroleum processing, lube oil processing and natural gas processing markets.
The operating unit offers engineering, procurement, construction and operations
and maintenance services for diverse projects, including upstream petroleum
processing and refining plants, natural gas processing plants, plants that
convert coal to synthetic fuels, underground gas storage facilities and plants
that produce a wide array of products ranging from industrial commodities to
specialty chemicals. Petroleum & Chemicals also develops and licenses technology
used in the production of petrochemicals. The operating unit provides technology
for the ethylbenzene, styrene, cumene, phosphoric acid, paraxylene and purified
terephthalic acid markets, among others.

For financial information about our operating units and additional
disclosures, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Operating Segment Results" in Item 7 of this report
and Note 12, "Operating Segment, Geographic and Customer Information" of the
Notes to Consolidated Financial Statements in Item 8 of this report.

GOVERNMENT CONTRACTS AND BACKLOG

Government contracts are a significant part of our business. For example,
the U.S. government accounted for 24% of our consolidated operating revenues in
2001. Allowable costs under U.S. government contracts are subject to audit by
the government. To the extent that these audits result in determinations that
costs claimed as reimbursable are not allowable costs or were not allocated in
accordance with federal regulations, we could be required to reimburse the
government for amounts previously received. We also have a number of U.S.
government contracts which extend beyond one year and for which government
funding has not yet been approved. All U.S. government contracts and some
foreign contracts are subject to unilateral termination at the option of the
customer.

Backlog represents the total value of all awarded contracts that have not
been completed and will be recognized as revenues over the life of the project
or over the construction period. Backlog includes our proportionate share of
construction joint venture contracts and the uncompleted portions of mining
service contracts and ventures for the next five years. Backlog for government
contracts includes only two years' worth of the portions of such contracts that
are currently funded or which we are highly confident will be funded.

Backlog at November 30, 2001 totaled $3.5 billion compared with December 1,
2000 backlog of $5.7 billion. Approximately $1.1 billion of the backlog at
November 30, 2001 was comprised of U.S. government contracts that are subject to
termination by the government, $463 million of which had not been funded.
Terminations for the convenience of the government generally provide for
recovery of contract costs and related earnings.

Although backlog reflects business that we consider to be firm,
cancellations or scope adjustments may occur. We have adjusted backlog to
reflect project cancellations, deferrals and revisions in scope and cost, both
upward and downward known at the reporting date; however, future contract
cancellations or modifications may reduce backlog and future revenues.

I-13

During 2001, we reversed previously recorded backlog of $1,020.6 million.
This reversal was principally due to the suspension of work on two large
construction projects located in Massachusetts that were part of the RE&C
acquisition. See Note 3, "Acquisitions - Acquisition of Raytheon Engineers &
Constructors" of the Notes to Consolidated Financial Statements in Item 8 of
this report.

COMPETITION

We are engaged in highly competitive businesses in which customer contracts
are typically awarded through competitive bidding processes. We compete based
primarily on price, reputation and reliability with other general and specialty
contractors, both foreign and domestic. Success or failure in our lines of
business is, in large measure, based upon the ability to compete successfully
for contracts and to provide the engineering, planning, procurement, management
and project financing skills required to complete them in a timely and
cost-efficient manner. We compete with other general and specialty contractors,
both foreign and domestic, including large international contractors and small
local contractors. Some competitors have greater financial and other resources
than we do, which in some instances, could give them a competitive advantage
over us.

EMPLOYEES

Our total worldwide employment varies widely with the volume, type and
scope of operations under way at any given time. At November 30, 2001, we
employed over 34,000 employees. Approximately 22% of the employees are covered
either by one of our regional collective bargaining agreements, which expire
between June 2001 and September 2006, or by a project specific collective
bargaining agreement, each of which expires upon completion of the relevant
project.

RAW MATERIALS

We can purchase much of the raw materials and components necessary to
operate our businesses from numerous sources. We do not foresee any
unavailability of raw materials or components that would have a material adverse
effect on our businesses in the foreseeable future.

ENVIRONMENTAL MATTERS

Our environmental and hazardous substance remediation and contract mining
services involve risks of liability under federal, state and local environmental
laws and regulations, including the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"). We perform environmental remediation
at Superfund sites as a response action contractor for the Environmental
Protection Agency and, in such capacity, are exempt from liability under any
federal law, including CERCLA, unless our conduct is negligent. Moreover, we may
be entitled to indemnification from agencies of the United States against
liability arising out of the negligent performance of work in such capacity.

We are subject to risks of liability under federal, state and local
environmental laws and regulations, as well as common law. These laws and
regulations and the risk of attendant litigation can cause significant delays to
a project and add significantly to its cost. Violations of these laws and
regulations could subject us to civil and criminal penalties and other
liabilities, including liabilities for property damage, costs of investigation
and cleanup of hazardous or toxic substances on property currently or previously
owned by us or arising out of our current and past remediation, waste management
and contract mining activities.

For additional information regarding environmental matters, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Environmental Contingency" in Item 7 of this report and Note 13,
"Contingencies and Commitments - Summitville environmental matters" and
"Contingencies and Commitments - Other environmental matters" of the Notes to
Consolidated Financial Statements in Item 8 of this report.

I-14

RISK FACTORS

We are subject to a number of risks, including those enumerated below. Any
or all of these risks could have a material adverse effect on our business,
financial condition, results of operations and cash flows and on the market
price of our securities. See also "Note Regarding Forward-looking Information."

THE DOCUMENTS GOVERNING OUR INDEBTEDNESS RESTRICT OUR ABILITY AND THE ABILITY OF
SOME OF OUR SUBSIDIARIES TO ENGAGE IN SOME BUSINESS TRANSACTIONS.

In connection with our emergence from bankruptcy protection, we entered
into exit financing facilities (the "Senior Secured Revolving Credit Facility")
providing for an aggregate of $350 million of revolving borrowing and letter of
credit capacity. The credit agreement governing the Senior Secured Revolving
Credit Facility restricts our ability and the ability of some of our
subsidiaries to, among other things:

o incur or guarantee additional indebtedness;

o declare or pay dividends on, redeem or repurchase capital stock;

o restrict the payment of dividends or other distributions or the ability
to transfer assets or make loans between us and some of our
subsidiaries;

o make investments;

o incur or permit to exist liens;

o enter into transactions with affiliates;

o make material changes in the nature or conduct of our business;

o merge or consolidate with, acquire substantially all of the stock or
assets of other companies;

o transfer, sell assets; and

o engage in sale-leaseback transactions.

The Senior Secured Revolving Credit Facility also contains other covenants
that are typical for credit facilities of this size, type and tenor, such as
requirements that we meet specified financial ratios and financial condition
tests. Our ability to make additional borrowings under the Senior Secured
Revolving Credit Facility otherwise depends upon satisfaction of these
covenants. Our ability to meet these covenants and requirements may be affected
by events beyond our control.

Our failure to comply with obligations under the Senior Secured Revolving
Credit Facility could result in an event of default under the facility. A
default, if not cured or waived, could permit acceleration of our indebtedness.
We cannot be certain that we will be able to remedy any default. If our
indebtedness is accelerated, we cannot be certain that we will have funds
available to pay the accelerated indebtedness or that we will have the ability
to refinance the accelerated indebtedness on terms favorable to us or at all.

WE ARE ENGAGED IN HIGHLY COMPETITIVE BUSINESSES AND MUST TYPICALLY BID AGAINST
COMPETITORS TO OBTAIN ENGINEERING, CONSTRUCTION AND SERVICE CONTRACTS.

We are engaged in highly competitive businesses in which customer contracts
are typically awarded through competitive bidding processes. We compete with
other general and specialty contractors, both foreign and

I-15

domestic, including large international contractors and small local contractors.
Some competitors have greater financial and other resources than we do that, in
some instances, could give them a competitive advantage over us.

STRIKES, WORK STOPPAGES AND THE LIKE, AS WELL AS RESULTING INCREASES IN
OPERATING COSTS WOULD HAVE A NEGATIVE IMPACT ON OUR OPERATIONS AND RESULTS.

We are party to several regional collective bargaining agreements which
expire between June 2001 and September 2006, and several project-specific
collective bargaining agreements, each of which expires upon completion of the
relevant project. Our inability to negotiate acceptable collective bargaining
agreements with any of the unions could result in strikes, work stoppages or
increased operating costs as a result of higher union wages or benefits. If the
unionized workers engage in a strike or other work stoppage, or other employees
become unionized, we could experience a significant disruption of our operations
and ongoing higher labor costs, which could adversely affect our businesses,
financial position or results of operations. See "Employees" in Part I of this
report.

OUR SUCCESS DEPENDS ON ATTRACTING AND RETAINING QUALIFIED PERSONNEL IN A
COMPETITIVE ENVIRONMENT.

We are dependent upon our ability to attract and retain highly qualified
managerial, technical and business development personnel. Competition for key
personnel is intense. We cannot be certain that we will retain our key
managerial, technical and business development personnel or that we will attract
or assimilate key personnel in the future.

ECONOMIC DOWNTURNS AND REDUCTIONS IN GOVERNMENT FUNDING COULD HAVE A NEGATIVE
IMPACT ON OUR BUSINESSES.

Demand for the services offered by us has been, and is expected to continue
to be, subject to significant fluctuations due to a variety of factors beyond
our control, including economic conditions. During economic downturns, the
ability of both private and governmental entities to make expenditures may
decline significantly. We cannot be certain that economic or political
conditions generally will be favorable or that there will not be significant
fluctuations adversely affecting the industry as a whole or key markets targeted
by us. In addition, our operations are in part dependent upon government
funding. Significant changes in the level of government funding of these
projects could have an unfavorable impact on our operating results.

OUR FIXED-PRICE CONTRACTS SUBJECT US TO THE RISK OF INCREASED PROJECT COST.

Our fixed-price contracts involve risks relating to our inability to
receive additional compensation in the event the costs of performing those
contracts proves to be greater than anticipated. Our cost of performing the
contracts may be greater than anticipated due to uncertainties inherent in
estimating contract completion costs, contract modifications by customers
resulting in claims, failure of subcontractors and joint venture partners to
perform and other unforeseen events and conditions. Approximately 58% or
$2,046.6 million of our backlog is fixed-price or fixed-unit-price contracts.
Any one or more of these risks could result in reduced profits or increased
losses on a particular contract or contracts.

THE U.S. GOVERNMENT CAN AUDIT AND DISALLOW CLAIMS FOR COMPENSATION UNDER OUR
GOVERNMENT CONTRACTS, AND CAN TERMINATE THOSE CONTRACTS WITHOUT CAUSE.

Government contracts, primarily with the U.S. Departments of Energy and
Defense, are, and are expected to be, a significant part of our business. The
U.S. government accounted for approximately 24% of our consolidated revenues in
2001. Allowable costs under government contracts are subject to audit by the
U.S. government. To the extent that these audits result in determinations that
costs claimed as reimbursable are not allowable costs or were not allocated in
accordance with federal government regulations, we could be required to
reimburse the U.S. government for amounts previously received. If we were to
lose and not replace our revenues generated by one or more of the U.S.
government contracts, our businesses, financial condition, results of operations
and cash flows could be adversely affected.

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We have a number of contracts and subcontracts with agencies of the U.S.
government, principally for environmental remediation and restoration work,
which extend beyond one year and for which government funding has not yet been
approved. We cannot be certain that funding will be approved. All contracts with
agencies of the U.S. government and some commercial and foreign contracts are
subject to unilateral termination at the option of the customer. In the event of
a termination, we would not receive projected revenues or profits associated
with the terminated portion of those contracts.

OUR BUSINESSES INVOLVE MANY PROJECT-RELATED AND CONTRACT-RELATED RISKS.

Our businesses are subject to a variety of project-related risks, including
changes in political and other circumstances, particularly since contracts for
major projects are performed over extended periods of time. These risks include
the failure of applicable governing authorities to take necessary actions,
opposition by third parties to particular projects and the failure to obtain
adequate financing for particular projects. Due to these factors, losses on a
particular contract or contracts could occur, and we could experience
significant changes in operating results on a quarterly or annual basis.

We also may be adversely affected by various risks and hazards, including
industrial accidents, labor disputes, geological conditions, environmental
hazards, weather and other natural phenomena such as earthquakes and floods.

OUR INTERNATIONAL OPERATIONS INVOLVE SPECIAL RISKS.

We pursue project opportunities internationally through foreign and
domestic subsidiaries as well as through agreements with foreign joint venture
partners. Our international operations accounted for 15.8% of our revenues in
2001. Our foreign operations are subject to special risks, including:

o unstable political, economic, financial and market conditions;

o potential incompatibility with foreign joint venture partners;

o foreign currency controls and fluctuations;

o trade restrictions;

o restrictions on repatriating foreign profits back to the United States;

o increases in taxes;

o civil disturbances; and

o changes in labor conditions, labor strikes and difficulties in staffing
and managing international operations.

Events outside of our control may limit or disrupt operations, restrict the
movement of funds, result in the deprivation of contract rights, increase
foreign taxation or limit repatriation of earnings. In addition, in some cases,
applicable law and joint venture or other agreements may provide that each joint
venture partner is jointly and severally liable for all liabilities of the
venture.

WE COULD BE SUBJECT TO LIABILITY UNDER ENVIRONMENTAL LAWS.

We are subject to a variety of environmental laws and regulations
governing, among other things, discharges to air and water, the handling,
storage and disposal of hazardous or solid waste materials and the
remediation of

I-17

contamination associated with releases of hazardous substances. These laws
and regulations and the risk of attendant litigation can cause significant
delays to a project and add significantly to its cost. Violations of these
environmental laws and regulations could subject us and our management to
civil and criminal penalties and other liabilities. These laws and
regulations may become more stringent, or be more stringently enforced, in
the future.

Various federal, state and local environmental laws and regulations, as
well as common law, may impose liability for property damage and costs of
investigation and cleanup of hazardous or toxic substances on property
currently or previously owned by us or arising out of our waste management
activities. These laws may impose responsibility and liability without regard
to knowledge of or causation of the presence of the contaminants. The
liability under these laws is joint and several. We have potential
liabilities associated with our past waste management and contract mining
activities and with our current and prior ownership of various properties.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Contingencies and Commitments."

OUR STOCKHOLDER RIGHTS PLAN, OUR ORGANIZATIONAL DOCUMENTS, SOME OF OUR
AGREEMENTS AND PROVISIONS OF DELAWARE LAW COULD INHIBIT A CHANGE IN CONTROL.

We are subject to various restrictions and other requirements that may
have the effect of delaying, deterring or preventing a change in control of
us, such as:

o our stockholder rights plan;

o provisions in our certificate of incorporation and bylaws;

o some of our agreements, including the disbursing agreement that we
entered into in connection with our emergence from bankruptcy; and

o once it applies to us, Section 203 of the Delaware General Corporation
law.

On June 21, 2002, our board of directors approved a stockholder rights
plan. Under this plan, each share of our common stock is accompanied by a
right that entitles the holder of that share, upon the occurrence of
specified events that may be intended to effect a change in control, to
purchase either additional shares of our common stock or shares of an
acquiring company's common stock at a price equal to one-half of the current
market price of the relevant shares.

A number of provisions in our certificate of incorporation and bylaws
also may make a change in control more difficult, including, among others,
provisions relating to a classified board of directors, removal of directors
only for cause, the elimination of our stockholders' ability to fill
vacancies on the board of directors and to call special meetings and
supermajority stockholder amendments. In addition, our certificate of
incorporation authorizes the issuance of up to 100 million shares of our
common stock and 10 million shares of our preferred stock. Our board of
directors has the power to determine the price and terms under which
additional capital stock may be issued and to fix the terms of preferred
stock. Existing shareholders will not have preemptive rights with respect to
any of those shares.

On the Effective Date, we issued 5,000,000 shares of our common stock to
a disbursing agent for the benefit of unsecured creditors in our bankruptcy.
As of June 19, 2002, an initial distribution of 461,505 shares of our common
stock was made to various unsecured creditors. Pending the distribution of
the remaining shares to the unsecured creditors, the disbursing agreement
requires the disbursing agent to vote the shares held by the disbursing agent
as recommended by our board of directors, unless the reorganization plan
committee established in connection with our bankruptcy directs it to vote
the shares in proportion to the votes cast and abstentions claimed by all
other stockholders eligible to vote on the particular matter.

I-18

Section 203 of the Delaware General Corporation Law, which generally
limits the ability of major stockholders to engage in specified transactions
with us that may be intended to effect a change in control, is not currently
applicable to us. It will become applicable to us as soon as our common stock
is listed on a national securities exchange or authorized for quotation on
Nasdaq or we have more than 2,000 stockholders.

THE SIGNIFICANT DEMANDS ON OUR CASH RESOURCES COULD AFFECT OUR ABILITY TO
ACHIEVE OUR BUSINESS PLAN.

We have substantial demands on our cash resources in addition to
operating expenses and interest expense, principally capital expenditures.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Financial Condition and Liquidity."

Our ability to fund working capital requirements will depend upon our
future operating performance which, in turn, will be affected by prevailing
economic conditions and financial, business and other factors, many of which
are beyond our control. If we are unable to fund our businesses, we will be
forced to adopt an alternative strategy that may include:

o reducing or delaying capital expenditures;

o limiting our growth;

o seeking additional debt financing or equity capital;

o selling assets; or

o restructuring or refinancing our indebtedness.

We cannot assure you that any of these strategies could be effected on
favorable terms or at all. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Financial Condition and
Liquidity."

THERE IS NO ORGANIZED TRADING MARKET FOR OUR COMMON STOCK.

At present, our common stock is not eligible to be listed on a national
stock exchange or quoted on a national quotation system. As a result, there
is no organized trading market for our common stock. We intend to apply for
the listing or quotation of our common stock on a national stock exchange or
national quotation system as soon as possible after all of the relevant
listing requirements are met. However, we can give no assurance that we will
be successful in having our common stock listed on an exchange or quoted on a
quotation system. In the event that we are unable to cause any of our common
stock to be so listed or quoted, the liquidity of our common stock would be
materially impaired and holders of our common stock may be forced to bear the
economic risk of their investment for an indefinite period of time.

WE MAY BE SUBJECT TO ADDITIONAL RISKS ASSOCIATED WITH OUR RECENT EMERGENCE
FROM BANKRUPTCY.

Our recent emergence from bankruptcy does not assure our continued
success, and the effect, if any, which the bankruptcy may have on our future
operations cannot be accurately predicted or quantified. We are engaged in
highly competitive businesses in which customer contracts are typically
awarded through competitive bidding processes, and winning new work and new
customers is vital to our success. In addition, on some projects,
particularly those of significant size and requiring specialized technology
or know-how, we partner with other companies, both to increase our
opportunity to win the contract and to manage development and execution risk.
For some projects, if we cannot find a suitable partner on satisfactory
terms, we will not be able to pursue the project on our own. The adverse
publicity of our recent bankruptcy could impair our ability to attract new
customers, win new work from existing customers and establish partnerships
and joint ventures with other

I-19

companies on favorable terms. Any of these circumstances would adversely
affect our ability to compete and could have a material adverse effect on our
businesses, financial condition, results of operations and cash flows.

WE MAY BE UNABLE TO OBTAIN ADEQUATE BONDING TO BID ON NEW WORK.

In line with industry practice, we are often required to provide
performance and surety bonds to customers under fixed-price contracts. These
bonds indemnify the customer should we fail to perform our obligations under
the contract. If a bond is required for a particular project and we are
unable to obtain an appropriate bond, we cannot pursue that project. We have
an existing bonding facility with an aggregate capacity of $500 million, but
the issuance of bonds under that facility is at the surety's sole discretion.
Moreover, due to events that affect the insurance and bonding markets
generally, bonding may be more difficult to obtain in the future or may only
be available at significant additional cost. There can be no assurance that
bonds will continue to be available on reasonable terms. Our inability to
obtain adequate bonding and, as a result, to bid on new work could have a
material adverse effect on our businesses, financial condition, results of
operations and cash flows.

ITEM 2. PROPERTIES

We do not own significant real property for operations other than
certain land and improvements in Highland and Petaluma, California and
Cheswick, Pennsylvania. Our principal administrative office facilities
located in Boise, Idaho, Cleveland, Ohio, Aiken, South Carolina, Denver,
Colorado and Princeton, New Jersey, are leased under long-term, noncancelable
leases expiring in 2003, 2010, 2011, 2005 and 2013, respectively. At November
30, 2001, we owned more than 7,300 units of heavy and light mobile
construction, environmental remediation and contract mining equipment. We
consider our construction, environmental remediation and mining equipment and
leased administrative and engineering facilities to be well maintained and
suitable for our current operations.

As of November 30, 2001, our principal facilities were as follows:

* Operating unit: 1 - Industrial Process
2 - Government Services
3 - Infrastructure & Mining
4 - Power
5 - Petroleum & Chemicals
6 - Corporate

ITEM 3. LEGAL PROCEEDINGS

We are a defendant in various lawsuits resulting from allegations that
third parties sustained injuries and damage from the inhalation of asbestos
fibers contained in materials used in construction projects. In addition,
based on proofs of claims filed with the court during the pendency of our
bankruptcy proceedings, we are aware of other potential asbestos claims
against us. We believe that we have substantial third party insurance
coverage for a significant portion of these existing and potential claims and
remaining amounts will not have an adverse material impact on our financial
position, results of operations or cash flows.

While we expect that additional asbestos claims will be filed against us
in the future, we have no basis for estimating the number of claims or
individual or cumulative settlement amounts and, accordingly, no provision
has been made for future claims. We believe, however, that the outcome of
these actions, individually and collectively, will not have a material
adverse impact on our financial position, results of operations or cash flows.

We also incorporate by reference the information regarding legal
proceedings set forth under the caption "Other" in Note 13, "Contingencies
and Commitments" of the Notes to Consolidated Financial Statements in Item 8
of this report.

I-21

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

We submitted no matters to a vote of our stockholders during the fourth
quarter of 2001.

I-22

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS

MARKET INFORMATION

Prior to May 14, 2001, our common stock traded on the New York Stock
Exchange under the ticker symbol "WNG." On May 14, 2001, the New York Stock
Exchange suspended trading of our common stock and on July 6, 2001, our
common stock was delisted by the New York Stock Exchange. Upon such
delisting, our common stock traded in the over-the-counter market, as
reported by the Pink Sheets(R) quotation service, under the ticker symbol
"WNGXQ." At the close of business on November 30, 2001, we had 52,468,900
shares of common stock issued and outstanding.

The following table sets forth the high and low prices per share of our
common stock for each quarterly period within 2000 and 2001:

- ----------------------
(1) Unless otherwise indicated, all prices are the New York Stock Exchange
composite high and low sales prices per share of our common stock.
(2) The high price is the New York Stock Exchange composite high sales price
per share of our common stock, and the low price is the low
over-the-counter closing bid price per share of our common stock, as
reported buy the Pink Sheets(R) quotation service.
(3) The high and low prices are the high and low over-the-counter closing bid
prices per share of our common stock, as reported by the Pink Sheets(R)
quotation service. The over-the-counter quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.

HOLDERS

The number of record holders of our voting common stock at November 30,
2001 was approximately 1,321. This number does not include beneficial owners
of our common stock held in the name of a nominee.

DIVIDENDS

We have not paid a cash dividend since the first quarter of fiscal 1994.
Our credit facilities place restrictions on dividend payments. For a more
detailed discussion, see Note 8, "Credit Facilities" of the Notes to
Consolidated Financial Statements in Item 8 of this report.

RECENT SALES OF UNREGISTERED EQUITY SECURITIES

We did not sell any unregistered equity securities during 2001.

II-1

ITEM 6. SELECTED FINANCIAL DATA
(IN MILLIONS, EXCEPT PER SHARE DATA)

(a) On July 7, 2000, we acquired RE&C from the Sellers in a transaction
accounted for as a purchase. See Items 1 and 7 of this report and Note 3,
"Acquisitions - Acquisition of Raytheon Engineers & Constructors" of the
Notes to Consolidated Financial Statements in Item 8 of this report.

(b) On March 22, 1999, we acquired a majority economic interest in the
government and environmental services businesses of CBS Corporation (now
Viacom, Inc.) in a transaction accounted for as a purchase. See Item 1 of
this report and Note 3, "Acquisitions - Acquisition of Westinghouse
Businesses" of the Notes to Consolidated Financial Statements in Item 8 of
this report.

(c) Gross profit (loss) during the year ended December 1, 2000 includes the
impact of adjustments of $141.0 million to the preliminary allocation of
the RE&C purchase price to the net assets acquired for items that we
believe were additional misstatements, based on additional information we
obtained, but that were not included in the arbitration claim, including
adjustments to estimates at completion on contracts and increases in
self-insurance reserves. See Note 3, "Acquisitions - Acquisition of
Raytheon Engineers & Constructors" of the Notes to Consolidated Financial
Statements in Item 8 of this report.

II-2

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

CONSOLIDATED OPERATIONS

OVERVIEW

The acquisition of RE&C on July 7, 2000 significantly increased our size
in terms of revenues and backlog. As a result, the historical information
presented in this Form 10-K does not purport to represent what our results of
operations, financial position or cash flows would have been for the
historical periods presented had we in fact owned RE&C for those periods, and
is not indicative of the results of operations, financial position or cash
flows we may report in the future.

WGI is a global engineering and construction company serving clients
through five operating units: Power, Infrastructure & Mining,
Industrial/Process, Government and Petroleum & Chemicals. See "Business
- --Operating Units" in Item 1 of this report for a thorough description of the
segments.

We are subject to numerous factors that impact our ability to win new
work. The Power segment is dependent on the domestic demand for new power
generating facilities and the modification of existing power facilities.
Infrastructure & Mining is impacted by the availability of public sector
funding for transportation projects and availability of bonding. The
Industrial/Process segment is impacted in general by the growth prospects in
the U.S. economy and more directly by the capital spending plans of its large
customer base. The Government unit is almost entirely dependent on the
spending levels of the U.S. government, in particular, the Departments of
Energy and Defense. Petroleum & Chemicals is affected by the capital spending
of oil and gas companies and chemical producers.

II-3

During 2001, numerous factors impacted our results of operations, but
the largest factor was our dispute with the Sellers surrounding the RE&C
acquisition that led to our bankruptcy filing on May 14, 2001. See Note 4,
"Reorganization Case and Fresh-start Reporting" of the Notes to Consolidated
Financial Statements in Item 8 of this report. The bankruptcy adversely
impacted our ability to win new contracts. However, it also enabled us to
relieve ourselves of significant liabilities in the form of debt, warranty
obligations, lease obligations, and obligations on contracts acquired from
the Sellers.

The following are our most significant accounting terms and policies:

NEW WORK BOOKINGS represent the monetary value of a contract entered
into with clients that are binding on both parties and reflect the revenue
expected to be recognized from that contract.

BACKLOG represents the total accumulation of new work bookings less the
amount of revenue recognized to-date on contracts at a specific point in
time; therefore, it comprises the total value of awarded contracts that are
not complete and the revenue that is expected to be reflected over the
remaining life of the projects in process. Backlog is the key predictor of
future earnings potential. Although backlog reflects business that is
considered to be firm, cancellations or scope adjustments may occur. We have
adjusted backlog to reflect project cancellations, deferrals and revisions in
scope and cost, both upward and downward known at the reporting date;
however, future contract cancellations or modifications may reduce backlog
and future revenues. We have a significant number of clients that
consistently extend or add to the scope of existing contracts. We do not
include any estimate of this ongoing work in backlog.

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

o GOVERNMENT CONTRACTS--Most of our government contracts cover several
years. However, they are subject to annual appropriations by
Congress. To account for the risk that future amounts may not be
appropriated, we only include the most immediate two years of
forecast revenue in our backlog. Therefore, as time passes and
appropriations occur, additional new work bookings are recorded on
existing government contracts.

o MINING CONTRACTS--Mining contracts are entered into for varying
periods of time up to the life of the resource. For new work
bookings and backlog purposes, we limit the amount recorded to five
years. Similarly to government contracts, as time passes, we
recognize additional new work bookings as commitments for that
future work are firmed up.

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

REVENUE RECOGNITION is generally measured on the
"percentage-of-completion" method for construction-type contracts, on the
"units performed" method for fixed-unit-price contracts, and as work is
performed and award and other fees are earned for cost-type and operation and
maintenance type contracts. There are various means of determining revenue
under the percentage-of-completion method. Most of our fixed-price contracts
use a cost-to-cost approach, where revenue is earned in proportion to costs
incurred divided by total expected costs to be incurred. However, if a
project includes significant materials or equipment costs, we require that
the percentage-of-completion method be based on labor hours, labor dollars or
some other appropriate approximation of physical completion rather than on a
strict percentage of costs incurred. Also, we generally do not recognize any
profit on fixed-price contracts until the project is at least 20% complete.

With respect to award fees associated with U.S. government contracts, we
recognize an estimated award fee based on historical performance until the
client has confirmed the final award fee at year-end. This approach can

II-4

result in significant amounts of profit recognition in the fourth quarter on
projects in our Government operating unit. Performance-based incentive fees
are recognized when actually awarded by the client.

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

JOINT VENTURES AND EQUITY INVESTMENTS are utilized when certain
contracts are executed jointly through partnerships and joint ventures with
unrelated third parties.

o JOINT VENTURES--Much of our work on large construction projects is
performed through joint ventures with one or more partners. The
accounting treatment depends on our ownership percentage of the
joint venture. For those where our ownership exceeds 50% or we
control the joint venture by contract terms or other means, the
assets, liabilities and results of operations of the joint venture
are fully consolidated in our financial statements and the minority
interests of third parties are separately deducted in our financial
statements. For those where the ownership is 50% or less, we report
our pro rata portion of revenue and costs but the balance sheet
reflects only our net percentage investment in the project.

o PARTIALLY-OWNED SUBSIDIARY COMPANIES--Again, the accounting
treatment depends on our ownership percentage of the subsidiary
company. For those where the ownership exceeds 50%, the assets,
liabilities and results of operations of the subsidiary company are
fully consolidated in our financial statements and the minority
interests of third parties are separately deducted in our financial
statements. However, where the ownership is 50% or less, we reflect
our proportion of the net income in the results of operations as
equity in earnings of mining ventures and our investment on the
balance sheet as our net percentage investment in the subsidiary
company.

NORMAL PROFIT is an accounting concept that results from the requirement
that an acquiring company record at fair value all contracts, including
construction contracts, of an acquiree in process at the date of the
acquisition. As such, an asset for favorable contracts or a liability for
unfavorable contracts is recorded in purchase accounting. These assets or
liabilities are then reduced based on revenues recorded over the remaining
contract lives effectively resulting in the recognition of a reasonable or
normal profit margin on contract activity performed by us subsequent to the
acquisition. Because of the acquisition of RE&C and the below market profit
status of many of the significant acquired contracts, we recorded significant
liabilities in purchase accounting. The reduction of these liabilities has a
significant impact on our recorded net income but has no impact on our cash
flows.

CHANGE ORDERS AND CLAIMS are common on construction contracts when
changes occur once contract performance is underway. These changes are to be
documented and terms agreed with the client before the work is performed.
Also, costs may be incurred in addition to amounts originally estimated under
the assumption that the customer will agree to pay for such additional costs.
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. If it is probable that the
change order will result in the contract price exceeding the related costs
incurred, that the excess over cost can be reliably estimated and if
realization is assured beyond a reasonable doubt, the original contract price
is adjusted to the probable revised contract amount as the costs are
recognized. 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. No profit is recognized on claims until
final settlement occurs. This can lead to a situation where losses are
recognized when costs are incurred before client agreement is obtained and
subsequent income recognized when signed agreements are negotiated.

II-5

ACCOUNTS RECEIVABLE generally carry the same meaning as in any other
business and represent amounts billed to clients that have not been paid. One
unusual item is client retention. On large fixed-price construction contracts,
contract provisions may allow the client to withhold from 5% to 10% of invoices
until the project is completed, which may be several months or years. Retention
is recorded as a receivable and is separately disclosed in the financial
statements.

UNBILLED RECEIVABLES is comprised of costs incurred on projects, together
with any profit recognized on projects using the percentage-of-completion
method, and represents work performed but pursuant to contract terms we are
either not yet able to bill the client, or the invoice was not recorded before
the accounting period cut-off occurred.

BILLINGS IN EXCESS OF COST AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
represents amounts actually billed to clients, and perhaps collected, in excess
of costs and profits incurred on the project and as such, is reflected as a
liability. Also, in specified business segments, we are able to negotiate
substantial advance payments as a contract condition. Those advance payments are
reflected in billings in excess of cost and estimated earnings on uncompleted
contracts.

ESTIMATE AT COMPLETION is a financial forecast of a project that indicates
the best current estimate of total revenues and profits at the point in time
when the project is completed. If a project estimate at completion indicates
that a project will incur a loss, a provision for the entire loss on the
contract is recognized at that time.

ESTIMATED COSTS TO COMPLETE LONG-TERM CONTRACTS is comprised of provisions
for losses on contracts, reclamation reserves on mining contracts and reserves
for punch-list costs, demobilization and warranty costs on contracts that have
achieved substantial completion and reserves for audit and contract closing
adjustments on U.S. government contracts.

GENERAL AND ADMINISTRATIVE EXPENSES include executive salaries and
corporate headquarters functions such as legal services, human resources, and
finance and accounting.

SELF-INSURANCE RESERVES represent reserves established through a program
under which we determine the extent to which we self-insure certain business
risks. We carry substantial premium-paid, traditional insurance for our various
business risks, however, we do self-insure the lower level deductibles for
workers' compensation and general and auto liability. Most of this is handled
through Broadway Insurance Company, a wholly-owned captive Bermuda insurance
subsidiary. As such, we carry self-insurance reserves on our balance sheet that
are reviewed annually by an independent actuary. The current portion of the
self-insurance reserves is included in other accrued liabilities.

MINORITY INTEREST reflects the equity investment by third parties in
certain subsidiary companies and joint ventures that we have consolidated in our
financial statements.

GOVERNMENT CONTRACT COSTS are incurred under certain of our contracts,
primarily in the Government operating unit. We have contracts with the U.S.
government that contain provisions requiring compliance with the U.S. Federal
Acquisition Regulation and U.S. Cost Accounting Standards. The allowable costs
we charge to those contracts are subject to adjustments upon audit and
negotiation by various agencies of the U.S. government. Audits and negotiations
of indirect costs are substantially complete through 1999. Audits of 2000
indirect costs are in progress. We are also in the process of preparing cost
impact statements as required under the U.S. Cost Accounting Standards for 1999
through 2001, which are subject to audit and negotiation. We have also prepared
and submitted to the U.S. government cost impact statements for 1989 through
1995 for which we believe no adjustments are necessary. We believe that the
results of the indirect cost audits and negotiations and the cost impact
statements will not result in a material change to our financial position,
results of operations or cash flows.

PENSION AND POST-RETIREMENT BENEFIT PLANS include certain plans for which
we assumed sponsorship through the Westinghouse Businesses acquisition,
including contributory defined benefit pension plans that cover

II-6

employees of WGSG. We make actuarially computed contributions as necessary to
adequately fund benefits for these plans. We are also the sponsors of an
unfunded plan to provide health care benefits for employees of WGSG who
retired before July 1, 1993, including their surviving spouses and dependent
children. We also provide benefits under company-sponsored retiree health
care and life insurance plans for substantially all employees of WGSG. We
also provide benefits under company-sponsored retiree health care to
approximately 260 retired employees and provide a life insurance plan for
substantially all retirees of RE&C. The retiree health care plans require
retiree contributions and contain other cost sharing features. The retiree
life insurance plan provides basic coverage on a noncontributory basis.

2001 COMPARED TO 2000

REVENUE AND GROSS PROFIT

Revenue for the year ended November 30, 2001 increased 31% from the year
ended December 1, 2000 to $4,059.5. The increase was due to the inclusion of a
full year's revenue of RE&C operations compared to five months in 2000.

Cost of revenue for the year ended December 1, 2000 includes $141 million
in charges for items related to the acquisition of RE&C that were identified
subsequent to the initial purchase price allocation based on additional
information we obtained, but that were not included in the arbitration claim.
See Note 3, "Acquisitions - Acquisition of Raytheon Engineers & Constructors,"
of the Notes to Consolidated Financial Statements in Item 8 of this report.
These amounts are comprised of the following:

Exclusive of the $141.0 million in charges discussed above, gross profit
increased $56.2 million from $59.4 million in 2000 to $115.6 million in 2001.
The increase was attributable to the recognition of normal profit on contracts
from the RE&C acquisition of $87.2 million in 2001 compared to $50.2 million in
2000 as a result of a full year of revenue on projects to which the normal
profit relates. The recognition of normal profit has no impact on our cash
flows. In addition, gross profit for 2000 included a $20.3 million provision
related to the Summitville environmental matter. Operating unit overhead
included in cost of revenue increased 19.5% from 2001 compared to 2000 due to
the inclusion of a full year of indirect costs associated with the RE&C business
in 2001 compared to five months of comparable indirect costs in 2000. Operating
unit overhead was initially structured to support a $5 billion revenue
organization envisioned at the time of the RE&C acquisition. During the last
half of 2001, steps were taken to reduce operating overhead to support lower
expected future revenue. Our gross profit (loss) as a percent of revenue was
2.4% and 2.8% for the quarter and year ended November 30, 2001, respectively,
and (18.6)% and (2.6)% for the comparable periods of 2000.

Our gross margins often vary between periods due to inherent risks and
rewards on fixed-price contracts causing unexpected gains and losses on
contracts. Gross margins may also vary between periods due to changes in the 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.

At November 30, 2001, backlog of $3,547.5 million was comprised of $1,500.9
million (42%) of revenue from cost-type contracts and $2,046.6 million (58%) of
revenue from fixed-price and fixed-unit-price contracts and our share of revenue
from mining ventures. During 2001, we reversed previously recorded backlog of
$1,020.6 million. This reversal was principally due to the suspension of work in
two large construction projects located in Massachusetts that were part of the
RE&C acquisition. See Note 3, "Acquisitions - Acquisition of Raytheon Engineers
& Constructors" of the Notes to Consolidated Financial Statements in Item 8 of
this report.

II-7

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses for the quarter and year ended November
30, 2001 increased $.4 million and $19.1 million compared to 2000. The increase
relates to a full year of general and administrative costs associated with the
acquisition of RE&C. Certain actions taken during 2001 should reduce general and
administrative expenses in 2002 by $12 to $16 million.

GOODWILL AMORTIZATION

For the year ended November 30, 2001, goodwill amortization decreased $10.6
million as compared to 2000, to $14.6 million. The decrease in goodwill was
principally due to the impairment, in the fourth quarter of 2000, of goodwill
related to the acquisition of RE&C.

In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141 BUSINESS COMBINATIONS and No. 142
GOODWILL AND OTHER INTANGIBLE ASSETS. These statements will be effective for our
fiscal year 2002. Under the new rules, goodwill will no longer be amortized, but
will be subject to annual impairment tests.

INTEGRATION AND MERGER COSTS

As a result of the acquisition of RE&C on July 7, 2000, we incurred
significant costs associated with the integration and merger of the two
companies. For the quarter and year ended November 30, 2001, those costs were
$1.2 million and $18.8 million, respectively, versus $5.2 million and $15.3
million for the comparable periods in 2000. In 2001 and 2000, the costs were
primarily incurred for accounting, legal and financial advisory fees.

IMPAIRMENT OF ACQUIRED ASSETS

During the fourth quarter of 2000, we recognized asset impairment losses of
$444.1 million and $747.5 million for our inability to collect our purchase
price adjustment from the Sellers and for impairment of goodwill and other
assets acquired as a part of the RE&C transaction, respectively. There were no
such charges in 2001.

RESTRUCTURING COSTS

During the fourth quarter of 2001, we initiated restructuring actions to
improve operational effectiveness and efficiency and reduce expenses worldwide
relative to employment levels and excess facilities resulting from the proposed
plan of reorganization during the pendency of our bankruptcy. Restructuring
costs for the year include a pre-tax charge for termination benefits of $2.4
million for employees notified as of November 30, 2001, an impairment charge of
$4.1 million for nonrecoverable asset values and enhanced pension benefits of
$.5 million. The severance costs represent expected reductions in work force for
687 employees representing management, professional, administrative and
operational overhead. Actual reductions in work force are 538 through November
30, 2001. In December 2001 and during the quarter ended March 29, 2002,
additional restructuring charges were accrued of $6.6 million for 657 additional
employee terminations and facility closure costs of $19.7 million.

INVESTMENT INCOME

Investment income for the quarter and year ended November 30, 2001
decreased $4.3 million and $1.7 million, respectively, from the comparable
periods in 2000 due to a significant decrease in cash balances.

INTEREST EXPENSE

Interest expense includes three components: amortization of fees associated
with our lines of credit, fees on letters of credit, and interest expense.
Interest expense for the quarter ended November 30, 2001 decreased $11.0

II-8

million over the comparable period of 2000 due to a cessation of accrual of
interest expense at the date of our bankruptcy filing. Had we continued to
accrue interest expense, we would have recognized an additional $20.9 million
and $48.2 million during the quarter and year ended November 30, 2001,
respectively. Had we recognized all contractual interest expense during 2001,
interest expense would have exceeded amounts recognized during 2000 due to
the impact of a full year of interest expense and fees on the debt and credit
line fees related to the acquisition of RE&C.

OTHER INCOME (EXPENSE), NET

Other income (expense) was $(4.0) million and $(10.5) million,
respectively, for the quarter and year ended November 30, 2001 compared to
$(6.6) million for the quarter and $(5.3) million, respectively, for the
comparable period in 2000. Other income (expense) for the fourth quarter of 2000
included $(6.2) million related to the MK Gold Corporation litigation
settlement. Other income (expense) for the fourth quarter of 2001 included
$(3.5) million for costs associated with our office destroyed in the World Trade
Center terrorist attacks. See Note 13, "Contingencies and Commitments - Other"
of the Notes to Consolidated Financial Statements in Item 8 of this report for a
description of the MK Gold litigation settlement.

REORGANIZATION ITEMS

As a result of bankruptcy, we incurred charges of $91.1 million associated
with the process of filing a plan of reorganization, offset by a net gain from
liquidation of insolvent foreign subsidiaries of $34.5 million. The costs
incurred included accounting, legal and financial advisory fees of $54.7 million
and charges for asset impairment of assets of rejected contracts of $36.4
million. See Note 4, "Reorganization and Fresh-start Reporting" of the Notes to
Consolidated Financial Statements in Item 8 of this report.

INCOME TAX EXPENSE

The effective tax rate for the quarter and year ended November 30, 2001 was
27.8% compared to 38.6% for the comparable periods of 2000. The primary reason
for the decrease in the effective tax rate for 2001 was the impact of
nondeductible expenses, mainly reorganization costs, reducing the tax deductible
loss. This accounted for a 11.4% reduction in the effective tax rate.

Cash tax payments for 2002 and later years are anticipated to be
substantially less than the related tax liability reported in the financial
statements. The NOL carryover for federal and state income taxes will be
substantially utilized after 2002 as a result of the cancellation of debt income
in the bankruptcy restructuring. However, the recognition of loss reserves and
deferred deductions and the amortization of goodwill for tax reporting purposes
will cause the taxable income reported on future federal and state tax returns
to be substantially less than pre-tax income reported on the financial
statements. Goodwill, for tax purposes, has a remaining life of 13.5 years at
the beginning of 2002, and annual amortization is expected to be at least $40
million.

MINORITY INTERESTS

Minority interests in the income of consolidated subsidiaries for the
quarter and year ended November 30, 2001 increased to $6.6 million and $15.5
million, respectively, compared to $2.9 million and $9.4 million for the
comparable periods of 2000 due to increases in income from WGSG in 2001.
Minority interests consist of the 40% minority interest of BNFL in the income of
WGSG and a 35% minority interest in the income of Safe Sites of Colorado, LLC, a
subsidiary of WGSG.

2000 COMPARED TO 1999

REVENUE AND GROSS PROFIT

Revenue for the year ended December 1, 2000 increased 35% to $3,103.9
million compared to $2,304.4 million for the comparable period in 1999. The
increase is due to the inclusion of the post-acquisition results of

II-9

RE&C, acquired on July 7, 2000, and a full-year of results the Westinghouse
Businesses, acquired on March 22, 1999. Revenue for the quarter ended
December 1, 2000 increased 53% or $358.7 million over the comparable period
in 1999, also due to the consolidation of results of RE&C.

Cost of revenue for the year ended December 1, 2000 includes $141 million
in charges for items related to the acquisition of RE&C that were identified
subsequent to the initial purchase price allocation based on additional
information we obtained, but that were not included in the arbitration claim.
See Note 3, "Acquisitions - Acquisition of Raytheon Engineers & Constructors,"
of the Notes to Consolidated Financial Statements in Item 8 of this report.
These amounts are comprised of the following:

Exclusive of the $141.0 million in charges discussed above, gross profit
for the year ended December 1, 2000 decreased 52% to $59.4 million from the
previous year primarily due to incremental losses of $47.3 million on five large
fixed-price contracts acquired in the RE&C acquisition. These losses resulted
from events that arose after the acquisition. In addition, our Infrastructure &
Mining operating unit recognized approximately $12.1 million in losses on seven
domestic projects and a $4.9 million loss on an international water distribution
project. Our Government operating unit recognized a $10.2 million loss on an
environmental remediation project. Lastly, a $20.3 million reserve was
established for the settlement of the Summitville environmental matters. See
Note 13, "Contingencies and Commitments - Summitville environmental matters" of
the Notes to Consolidated Financial Statements in Item 8 of this report. Our
gross profit for the quarter and year ended December 1, 2000 included $25.7 and
$50.2 million, respectively, for the recognition of normal profit on contracts
related to the acquisition of RE&C. The recognition of normal profit had no
impact on our cash flows. There was no normal profit in 1999.

Substantially all of the above noted losses and provisions were recorded in
the quarter ended December 1, 2000, causing the $90 million decline from the
gross profit recognized in the previous year's fourth quarter.

Our gross margins often vary between periods due to inherent risks and
rewards of fixed-price contracts causing unexpected gains and losses on
contracts. Gross margins may also vary between periods due to changes in the 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.
During 2000, these profit margin fluctuations were over shadowed by the impact
of losses recognized on projects obtained in the acquisition of RE&C.

At December 1, 2000, backlog of $5,659.4 million was comprised of
$1,365.7 million (24%) of revenue from cost-type contracts and $4,293.7
million (76%) of revenue from fixed-price and fixed-unit-price contracts and
the uncompleted portions of mining service contracts and ventures. During
2001, we reversed previously recorded backlog of $1,020.6 million. This
reversal was principally due to the suspension of work on two large
construction projects located in Massachusetts that were part of the RE&C
acquisition. See Note 3, "Acquisitions - Acquisition of Raytheon Engineers &
Constructors" of the Notes to Consolidated Financial Statements in Item 8 of
this report.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses for the quarter and year ended December
1, 2000 increased $6.6 million and $11.8 million, respectively, compared to
1999. The increase for the quarter and year is due to the general and
administrative costs supporting RE&C businesses.

II-10

GOODWILL AMORTIZATION

Amortization of goodwill for the year ended December 1, 2000 increased
$12.6 million over the comparable period of 1999. The increase is due to the
full year of amortization (over a period of 20 years) of goodwill arising from
the acquisition of the Westinghouse Businesses, which amortization began on
March 22, 1999, the date of the acquisition, and the amortization of goodwill of
$8.7 million arising from the acquisition of RE&C, which amortization began on
July 7, 2000, the date of the acquisition. The annual amortization of the
Westinghouse goodwill is currently estimated at $13.7 million through 2001. See
"Impairment of acquired assets" below for the impairment of goodwill associated
with the RE&C acquisition.

In connection with the acquisition of Old MK, we allocated the purchase
price of Old MK to the assets and liabilities assumed, including preacquisition
contingencies, on the basis of estimated fair values at September 11, 1996.
During the fourth quarter of 2000, we reevaluated the likelihood of the future
realization of the tax benefits of NOL carryforwards relating to Old MK and
concluded, based on available evidence, including the utilization of NOL's upon
emergence from bankruptcy in 2002, that it was more likely than not that the tax
benefits previously reserved would be realized. This conclusion resulted in a
$44.3 million increase in deferred tax assets and a corresponding decrease in
recorded goodwill at December 1, 2000.

INTEGRATION AND MERGER COSTS

As a result of the acquisition of RE&C on July 7, 2000, we incurred
significant costs associated with the integration and merger of the two
companies. During the quarter and year ended December 1, 2000, those costs were
$5.2 million and $15.3 million, respectively. They consisted primarily of legal,
accounting, consulting and other fees. There were no such costs in 1999.

IMPAIRMENT OF ACQUIRED ASSETS

During the fourth quarter of 2000, we recognized asset impairment losses of
$444.1 million and $747.5 million for our inability to collect our purchase
price adjustment from the Sellers and for impairment of goodwill and other
assets acquired as a part of the RE&C transaction, respectively. There were no
such costs in 1999.

INVESTMENT INCOME

Investment income for the quarter and year ended December 1, 2000 increased
$4.4 million and $7.5 million, respectively, as a result of investment income
from excess funds derived from the financing for the acquisition of RE&C.

INTEREST EXPENSE

Interest expense includes three components: amortization of fees associated
with our lines of credit, fees on letters of credit, and interest expense.
Interest expense for the quarter and year ended December 1, 2000 increased $17.8
million and $30.8 million, respectively, over the comparable period of 1999,
which reflects the increase in borrowings, the increase in borrowing rates, and
credit line fees related to the acquisition of RE&C.

OTHER INCOME (EXPENSE), NET

Other income (expense) was $(6.6) million and $(5.3) million, respectively,
for the quarter and year ended December 1, 2000 compared to $(.7) million and
$9.7 million, respectively, for the comparable periods in 1999. Other income
(expense) for the quarter and year ended December 1, 2000 includes a charge of
$6.2 million related to the settlement of the MK Gold Corporation litigation.
Other income of $9.7 million for the year ended December 3, 1999 included $8.7
million of gain from the sale of two non-core subsidiaries.

II-11

INCOME TAX EXPENSE (BENEFIT)

The effective tax rate for the quarter and year ended December 1, 2000 was
a 38.6% benefit compared to a 37% expense in the comparable periods of 1999.
State taxes, including the impact of adjusting prior year's state tax attributes
for current year changes in apportionment factors, account for 4.1% of the 2000
effective tax rate. Foreign taxes, net of federal benefit, reflect both the
value of the benefit from foreign net operating losses and the expense of
current foreign tax liability in those jurisdictions where net income was
reported. A valuation allowance was established in 2000 against the benefit for
foreign net operating losses incurred that year to reflect the expected future
utilization of those losses on a more likely than not basis.

MINORITY INTERESTS

Minority interests in the income of consolidated subsidiaries for the
quarter and year ended December 1, 2000 increased to $2.9 million and $9.4
million, respectively, compared to $2.5 million and $8.8 million, respectively,
for the comparable periods of 1999 due to an increase in income from the
Westinghouse Businesses, which were acquired on March 22, 1999. Minority
interests consist of the 40% minority interest of BNFL in the income of WGSG and
a 35% minority interest in the income of Safe Sites of Colorado, LLC, a
subsidiary of WGSG.

OPERATING UNIT RESULTS
(IN MILLIONS)

Operating income (loss) for the operating units was as follows:

For purposes of the following comparison, we have excluded the $141 million
charge for changes to estimates at completion on acquired contracts, which has
been discussed previously, from our 2000 operating unit income (loss) amounts.

II-12

2001 COMPARED TO 2000

POWER

Revenue for 2001 was $839.4 million, an increase of 74.6% compared to 2000
due principally to a full year of revenues from the acquisition of RE&C.
Approximately $437.1 million of revenue is related to four projects acquired
from the Sellers which were originally fixed-price contracts, but which were
converted during 2001 to cost-reimbursable contracts. The Sellers remain
responsible for the performance of the contracts and as such continues to fund
the construction of the projects. We are retained on a cost-reimbursable basis
and continue to provide construction management services on the projects.

Operating income (loss) for 2001 was a loss of $8.3 million compared to
income of $4.3 million in 2000. Operating income included recognition of normal
profit of $26.4 million in 2001 compared to $21.3 million in 2000. However, upon
conversion of the four projects referred to above to cost-reimbursable
contracts, the recognition of normal profit was eliminated and the related
reserve reclassified to accrued liabilities until the settlement with the
Sellers. Only fee income was recognized for the balance of the year. Normal
profit on these fixed-price contracts was substantially higher than fees earned
on the cost-reimbursable contracts. During 2001, the Power operating unit
recognized losses of $11.4 related to the completion of a significant
international project which came with the RE&C acquisition and recognized cost
overruns of $9.0 on a domestic nuclear facility. In 2000, the operating unit
recognized losses of $24.3 million related to the completion and start-up of two
power generation projects, one in the United States and one in the United
Kingdom. Also, operating unit overhead was $11.9 higher in 2001 than in 2000
reflecting the inclusion of a full year of expenses for the acquired RE&C
businesses. However, during the year, the level of these expenses was reduced
and the overhead costs for 2002 will be lower.

New work booked for 2001 was $571.2 million compared to $251.0 million in
2000. Backlog at November 30, 2001 was $472.6 million, a decrease of $1,069.2
compared to December 1, 2000. During the first quarter of 2001, we reversed
previously recorded backlog of $801 million due to suspension of work on two
large construction projects in Massachusetts that were part of the RE&C
acquisition. See Note 3, "Acquisitions - Acquisition of Raytheon Engineers &
Constructors" of the Notes to Consolidated Financial Statements in Item 8 of
this report.

INFRASTRUCTURE & MINING

During the third quarter of 2001, we completed the acquisition of an
additional 17% of MIBRAG mbH for approximately $17.5 million, increasing its
ownership to 50%. We financed the acquisition through dividends from MIBRAG mbH.

II-13

Revenue for 2001 was $1,050.5 million, an increase of $239.5 million
compared to 2000 due principally to the acquisition of RE&C, in particular a
large hydroelectric dam in the Philippines and a large rail project in New
Jersey.

Operating income for 2001 increased $31.4 million to $52.0 million compared
to 2000. Operating profit for 2001 included recognition of normal profit of
$42.2 million, primarily on the hydroelectric dam and light rail projects
referred to above, compared to $15.3 million during 2000. Operating income for
2000 included a $20.3 million provision to settle the Summitville environmental
matter. See Note 13, "Contingencies and Commitments - Summitville environmental
matters" of the Notes to Consolidated Financial Statements in Item 8 of this
report. Both years' operating income were impacted by the recognition of losses
on fixed-price contracts totaling $17.0 million in 2000 and $25.0 million in
2001.

New work booked for 2001 was $602.3 million compared to $1,249.3 million
in 2000. Backlog at November 30, 2001 was $1,360.6 million, a decrease of
$486.4 million compared to December 1, 2000.

INDUSTRIAL/PROCESS

Revenue for 2001 was $776.4 million, an increase of $48.3 million
compared to 2000. Revenue increased as a result of a full year of activity
from the acquisition of RE&C and the addition of a large telecom project.

Operating income (loss) for 2001 was a loss of $15.1 million compared to
income of $6.4 million in 2000 due to excess personnel costs as new work
declined during the year, provisions related to uncollectable receivables on
certain contracts, restructuring charges incurred to adjust the size of the
operating unit to reflect lower levels of activity expected in 2002 and
higher overhead costs reflecting a full year of activity from the acquisition
of RE&C.

New work booked for 2001 was $741.5 million compared to $723.9 million
in 2000. Backlog at November 30, 2001 was $405.0 million, a decrease of
$126.5 million compared to December 1, 2000.

GOVERNMENT

Revenue for 2001 was $1,180.6 million, an increase of $182.8 million
compared to 2000 due principally to a full year of activity from the
acquisition of RE&C.

Operating income for 2001 was $83.8 million, an increase of $66.6
million compared to 2000 due principally to: (i) increased earnings and
higher award fees on certain projects and (ii) reductions in the cost
estimates of two large projects as a result of conversion from fixed-price to
cost-reimbursable. The same project recorded significant cost overruns during
2000. Our operating income was increased $10.5 million and $9.1 million in
2001 and 2000, respectively, by the recognition of normal profit related to
certain fixed-price contracts from the acquisition of RE&C. The operating
income rate for 2001 was 7.1% compared to 1.7% in 2000.

New work booked for 2001 was $1,018.7 million compared to $405.2 million
in 2000. Backlog at November 30, 2001 was $1,200.9 million, a decrease of
$162.0 million compared to December 1, 2000.

PETROLEUM & CHEMICALS

Revenue for 2001 was $218.4 million, an increase of $127.9 million
compared to 2000, due principally to the incorporation in 2001 of a full year
of results for RE&C, while 2000 only reflected results from the date of the
acquisition of RE&C on July 7, 2000.

Operating income for 2001 was a loss of $11.21 million compared to a loss
of $5.6 million in 2000. Recognition of normal profit was $7.4 million in 2001
and $4.1 million in 2000. A large international project acquired as part of RE&C
experienced significant completion and operational start-up issues and a
provision of $9.1 million was recorded in 2001 to cover additional costs on the
project.

II-14

New work booked for 2001 was $40.4 million compared to $29.3 million in
2000. Backlog at November 30, 2001 was $108.4 million, a decrease of $267.9
million compared to December 1, 2000. Of the decrease, $89.8 million was
attributable to a reduction of backlog caused by the bankruptcy of our
subsidiary in The Hague. See Note 4, "Reorganization Case and Fresh-start
Reporting - Washington International B.V." of the Notes to Consolidated
Financial Statements in Item 8 of this report.

INTERSEGMENT, IMPAIRMENT AND OTHER

Intersegment, impairment and other for 2001 consisted primarily of
integration and merger costs of $18.9 million and corporate restructuring
charges of $3.7 million. For 2000, this amount consisted principally of the
impairment of arbitration claim ($444.1 million), the impairment of acquired
assets ($747.5 million), integration and merger costs ($15.2 million) and
amortization of goodwill associated with the acquisition of Old MK ($10.1
million).

2000 COMPARED TO 1999

POWER

Revenue for 2000 was $480.7 million, an increase of $431.5 million compared
to 1999 due principally to the acquisition of RE&C.

Operating income for 2000 was $4.3 million, an increase of $2.2 million
over the prior year due to an increased volume of work related to the
acquisition of RE&C. Operating income in 2000 included $21.3 million of normal
profit related to certain fixed-price contracts from the acquisition of RE&C on
July 7, 2000. The Power operating unit recognized losses of $24.3 million in
2000 related to problems that arose in connection with the completion and
operational start-up of two large power generation facilities, one in the United
States and one in the United Kingdom. There was no normal profit in 1999. The
operating income rate for 2000 was .9% compared to 4.3% in 1999.

New work booked for 2000 was $251.0 million compared to $164.9 million in
1999. Backlog at December 1, 2000 was $1,541.8 million, an increase of $1,286.1
million compared to December 3, 1999 primarily due to $1,515.9 million of
backlog acquired in the RE&C acquisition. During 2001, we reversed previously
recorded backlog of $801.0 million. This reversal was principally due to the
suspension of work on two large construction projects located in Massachusetts
that were part of the RE&C acquisition. See Note 3, "Acquisitions - Acquisition
of Raytheon Engineers & Constructors" of the Notes to Consolidated Financial
Statements in Item 8 of this report.

INFRASTRUCTURE & MINING

Revenue for 2000 was $811.0 million, an increase of $40.1 million compared
to 1999 due principally to the acquisition of RE&C.

Operating income for 2000 was $20.6 million, a decrease of $25.1 million
compared to 1999 due principally to the recognition of $12.1 million of losses
related to cost overruns on domestic infrastructure and heavy civil projects, a
$4.9 million loss from an international project and $20.3 million to establish a
reserve related to the Summitville environmental matters. See Note 13,
"Contingencies and Commitments - Summitville environmental matters" of the Notes
to Consolidated Financial Statements in Item 8 of this report. Operating income
in 2000 included approximately $15.3 million of normal profit related to certain
fixed-price contracts from the acquisition of RE&C on July 7, 2000. There was no
normal profit in 1999. The operating income rate for 2000 was 2.5% compared to
5.9% in 1999.

II-15

New work booked for 2000 was $1,249.3 million compared to $898.6 million
in 1999. Backlog at December 1, 2000 was $1,847.0 million, an increase of
$835.3 million, including $396.6 million of backlog acquired in the RE&C
acquisition, compared to December 3, 1999.

INDUSTRIAL/PROCESS

Revenue for 2000 was $728.1 million, an increase of $129.35 million
compared to 1999 due principally to the acquisition of RE&C.

Operating income for 2000 was $6.4 million, a decrease of $5.0 million
compared to 1999. The decrease was caused primarily by write-offs of acquired
accounts receivable and increased insurance costs. Operating income in 2000
was increased $.4 million by the recognition of normal profit related to
certain fixed-price contracts from the acquisition of RE&C on July 7, 2000.
There was no normal profit in 1999. The operating income rate for 2000 was
...8% compared to 1.9% in 1999.

New work booked for 2000 was $723.9 million compared to $562.7 million
in 1999. Backlog at December 1, 2000 was $531.5 million, an increase of $94.4
million, including $98.6 million of backlog acquired in the RE&C acquisition,
compared to December 3, 1999.

GOVERNMENT

Revenue for 2000 was $997.8 million, an increase of $110.5 million
compared to 1999 due principally to the inclusion of a full year of
Westinghouse operations and the acquisition of RE&C.

Operating income for 2000 was $17.2 million, a decrease of $36.3 million
compared to 1999 due principally to the recognition of cost overruns on a
large fixed-price contract acquired in the RE&C acquisition for a private
sector client and on a large environmental remediation project. Most of the
overruns were ultimately resolved favorably during 2001 through contract
renegotiation, resulting in additional profit recognition. Operating income
in 2000 included $9.1 million of normal profit related to certain fixed-price
contracts from the acquisition of RE&C on July 7, 2000. There was no normal
profit in 1999. The operating income rate for 2000 was $1.7% compared to 6.0%
in 1999.

New work booked for 2000 was $405.2 million compared to $701.2 million
in 1999. Backlog at December 1, 2000 was $1,362.9 million, an increase of
$247.7 million, including $840.2 million of backlog acquired in the RE&C
acquisition, compared to December 3, 1999.

PETROLEUM & CHEMICALS

We had no revenue or operating income from this segment except that
which we acquired in the purchase of RE&C. Revenue for 2000 was $90.5
million. Operating income (loss) for 2000 was $(5.6) million. Operating
income in 2000 was negatively impacted by operating losses generated by one
of our wholly-owned subsidiaries operating in The Hague, the Netherlands.
Operating income in 2000 included $4.1 million of normal profit related to
certain fixed-price contracts from the acquisition of RE&C on July 7, 2000.
The operating income rate for 2000 was (6.2)%.

New work booked for 2000 was $29.3 million. Backlog at December 1, 2000
was $376.3 million, virtually all of which came with the RE&C acquisition.

INTERSEGMENT, IMPAIRMENTS AND OTHER

Intersegment, impairments and other for 2000 consisted primarily of the
impairment of arbitration claim $(444.1) million and the impairment of
acquired assets $(747.5) million, integration and merger costs ($15.3
million) and amortization of goodwill associated with the acquisition of Old
MK. For 1999, this amount consisted

II-16

of the results of operations of Broadway Insurance Company, a wholly-owned
captive Bermuda insurance subsidiary, and amortization of goodwill associated
with the acquisition of Old MK.

OPERATING UNIT NEW WORK

New work for each operating unit is presented below:

FINANCIAL CONDITION AND LIQUIDITY

Cash and cash equivalents decreased $265 million from $393 million at
December 1, 2000 to $128 million at November 30, 2001. During 2001, the
primary reductions in cash were for working capital needs during the pendency
of bankruptcy and fees to secure our DIP Facility. At November 30, 2001 and
December 1, 2000, cash and cash equivalents included amounts totaling $57.7
million and $19.0 million, respectively, that was restricted for use on the
normal operations of our consolidated construction joint ventures, by
projects having contractual cash restrictions and our self-insurance
programs. For more information on our financing activities, see the comments
below and Note 8, "Credit Facilities" of the Notes to Consolidated Financial
Statements in Item 8 of this report.

We received authorization in January 1998 to repurchase, in open market
transactions, block trades or otherwise, up to 2 million shares of
outstanding common stock and up to 2.765 million of warrants to purchase
common stock. As of June 1999, all 2 million shares of common stock had been
repurchased. In July 1999, we received authorization to repurchase an
additional 2 million shares of our outstanding common stock. As of November
30, 2001, we had not repurchased any shares under the new authorization.

On March 19, 1999, we replaced our existing bank credit facility with
new uncollateralized revolving credit facilities providing an aggregate
borrowing capacity of $250 million in order to acquire the Westinghouse
Businesses, to provide for general corporate purposes, to support working
capital requirements and to support letters of credit and other potential
acquisitions. On May 21, 1999, the new credit facilities were increased to
$325 million consisting of a $195 million five-year facility, which provided
for both revolving borrowings and the issuance of letters of credit, and a
$130 million one-year facility, which provided for revolving borrowings. The
one-year facility included terms permitting extensions in one-year increments
by mutual agreement of the banks

II-17

and us or converted, at our option, to a term loan having a maturity of one
year after the then current expiration of such facility. The facilities'
covenants required the maintenance of financial ratios, and placed
limitations on guarantees, liens, investments, dividends and other matters.
At December 3, 1999, $55 million and $45 million were outstanding on the
one-year and five-year facilities, respectively.

The facilities provided for interest on loans, payable at the conclusion
of each interest commitment period not to exceed quarterly, at the applicable
LIBOR rate or the base rate, as defined, plus an additional margin. The
additional margin ranged from 1.25% to 2.00% for the LIBOR rate and .25% to
1.00% for the base rate, based on the ratio of earnings before interest,
taxes, depreciation and amortization to our funded debt. The effective
interest rate at December 3, 1999 was 6.98%. On March 19, 1999, we paid $3.7
million in underwriting fees to the banks and were required to pay quarterly
commitment and letter of credit fees. Commitment fees were based on the
unused portion of the facilities. Letter of credit fees were based on a
percentage of the letter of credit amount.

On July 7, 2000, in order to finance the acquisition of RE&C, refinance
existing revolving credit facilities, fund working capital requirements and
pay related fees and expenses, we (i) obtained the RE&C Financing Facilities
providing for an aggregate of $1 billion of term loans and revolving
borrowing capacity consisting of a $100 million Tranche A term loan facility,
a $400 million Tranche B term loan facility and $500 million of revolving
credit and (ii) issued and sold $300 million aggregate principal amount of
Senior Unsecured Notes. On October 5, 2000, we terminated the Tranche A term
loan facility to eliminate ongoing related commitment fees. See Note 8,
"Credit Facilities - RE&C Financing Facilities and Senior Unsecured Notes" of
the Notes to Consolidated Financial Statements in Item 8 of this report.

Also, on July 7, 2000, we borrowed net proceeds of $697.3 million
consisting of (i) $400 million from the Tranche B term loan facility of the
RE&C Financing Facilities at an interest rate based upon the applicable LIBOR
plus an additional margin of 3.25% for an effective interest rate of 9.87%
and (ii) $297.3 million in net proceeds from the $300 million aggregate
principal amount of Senior Unsecured Notes with a stated coupon rate of
11.0%. The proceeds were used to (i) repay $96 million outstanding under the
prior unsecured revolving credit facilities, (ii) pay financing fees of
approximately $29 million for the RE&C Financing Facilities, (iii) fund the
$53 million cash component of the purchase price for RE&C, the $30.8 million
paid to the Sellers for cash held on April 30, 2000 by RE&C and the $84.4
million paid to the Sellers representing the net cash advanced or paid by the
Sellers for the use or benefit of the purchased business between April 30,
2000 and closing and (iv) fund $7.7 million in acquisition related expenses.
Cash on hand of $15.8 million at July 7, 2000 was retained by the RE&C
businesses. The balance remained in cash and was anticipated to be used for
our working capital requirements.

We announced on March 2, 2001 that we faced severe near-term liquidity
problems due to delays in resolving purchase price adjustments in connection
with our acquisition of RE&C and due to substantial cost overruns and
negative cash flows associated with certain RE&C projects acquired. We also
announced that we were in default under certain covenants in our RE&C
Financing Facilities and we were unable to secure performance bonds necessary
to obtain certain new projects. We funded approximately $250 million of cash
flow deficits (i.e., cash disbursements in excess of receipts) generated by
RE&C projects between December 2, 2000 and May 14, 2001.

We announced on March 8, 2001, that we had filed a fraud lawsuit against
the Sellers and that we ceased activities on two RE&C contracts (the Mystic
and Fore River power projects) with very large negative cash flows. The
Sellers remained responsible for the performance of the contracts and as such
continued to fund the construction of the projects. We were retained on a
cost-reimbursable basis and continue to provide construction management and
craft personnel to complete the projects.

On May 7, 2001, a letter of credit in the amount of $96 million was
drawn and on May 10, 2001 two additional letters of credit totaling $76
million were drawn for a total of $172 million. The letters of credit were
issued under the $500 million revolving credit facility of RE&C Financing
Facilities and became funded debt. The borrowing rate for funded debt under
the revolving credit facility was based upon the applicable LIBOR plus an
additional margin of 2.75%, for an initial effective interest rate of 9.37%.
The total funded debt as of May 10, 2001, was $870 million.

II-18

We considered all alternatives to obtain additional sources of cash,
including seeking waivers of default under the RE&C Financing Facilities, the
incurrence of additional debt, the issuance of additional equity and the sale
of non-core assets. However, our near-term liquidity problems limited our
strategic alternatives. We were ultimately unable to find additional sources
of cash and sought protection from our creditors under Chapter 11 of the U.S.
Bankruptcy Code.

DIP FACILITY

On May 14, 2001, we filed voluntary petitions for relief under Chapter
11 of the U.S. Bankruptcy Code. See Note 4, "Reorganization Case and
Fresh-start Reporting" of the Notes to Consolidated Financial Statements in
Item 8 of this report. On the same day, we entered into a Secured
Super-Priority Debtor In Possession Revolving Credit Agreement (the "DIP
Facility"), with some of our subsidiaries as guarantors, with a commitment of
$195 million with the ability to increase the total commitment to $350
million. On June 5, 2001 the DIP Facility lenders approved an increase in the
total commitment from $195 million to $220 million. The DIP Facility was to
be used (i) to finance the costs of restructuring; and (ii) for ongoing
working capital, general corporate purposes and letter of credit issuance.
The borrowing rate under the DIP Facility was the prime rate, plus an
additional margin of 4.0%. The effective interest rate was 11.0% as of May
2001. The DIP Facility carried other fees, including commitment fees and
letter of credit fees, normal and customary for such credit agreements. The
credit agreement under which the DIP Facility was made available contained
affirmative and negative covenants, reporting covenants and specified events
of default typical for a credit agreement governing credit facilities of the
size, type and tenor of the DIP Facility. Among the covenants were those
limiting our ability and the ability of some of our subsidiaries to incur
debt or liens, provide guarantees, make investments and pay dividends. As of
January 24, 2002, we had no outstanding debt and $32.8 million of outstanding
letters of credit under the DIP Facility. As discussed below, the DIP
Facility was replaced by exit financing facilities on January 25, 2002.

During 2001, cash and cash equivalents declined by $265 million from
$393 million to $128 million. The primary use of cash between December 2,
2000 and May 14, 2001 was the $250 million required to fund construction
activities on projects acquired from the Sellers that led to the filing of
petitions to reorganize under Chapter 11 of the U.S. Bankruptcy Code.
Included in the cash and cash equivalents balance at November 30, 2001 was
$22.4 million of cash held at our captive insurance subsidiary. A similar
amount was reflected as securities available for sale at December 1, 2000,
but the securities were converted to cash during 2001.

During 2001, as the bankruptcy filing caused revenue levels to decline,
billed and unbilled receivables also declined, and the payment of some
accounts payable were delayed to generate cash to fund operations and capital
expenditures until our Plan of Reorganization could be implemented.

Cash flow during the reorganization, between May 14, 2001 and our
emergence from bankruptcy on January 25, 2002, was slightly positive despite
the added costs associated with the reorganization and our first-day motion
allowing us to pay critical pre-petition subcontractors and suppliers. The
primary reason for cash flow being slightly positive was $63 million cash
settlement of a claim against the Department of Defense on a chemical
demilitarization project in Umatilla, Oregon, in June 2001. During the
pendency of the bankruptcy, we borrowed under the DIP Facility only to pay
related fees.

In addition to affecting negatively our ability to fund cash outlays on
existing projects, our near-term liquidity problems also affected our ability
to obtain future projects. Immediately prior to and during the pendency of
our bankruptcy proceedings, our ability to obtain performance bonds from
surety companies was severely limited. As a result, we were able to bid only
on contracts that limited surety bonds or on contracts in which we were to
partner with a company able to obtain surety bonds.

We were able to successfully reorganize in the bankruptcy proceedings,
and we emerged from bankruptcy on January 25, 2002, when our Plan of
Reorganization became effective. In connection with our emergence from
bankruptcy protection, we entered into (i) exit financing facilities under
the Senior Secured Revolving Credit

II-19

Facility providing for an aggregate of $350 million of revolving borrowing
and letter of credit capacity, and (ii) exit bonding facilities, providing
for up to an aggregate amount of $500 million of surety bonds.

SENIOR SECURED REVOLVING CREDIT FACILITY

The Senior Secured Revolving Credit Facility provides for a senior
secured facility in an amount up to $350 million in the aggregate of loans
and other financial accommodations allocated pro rata between two facilities
as follows: a Tranche A facility in the amount of $208.35 million and a
Tranche B facility in the amount of $141.65 million. The scheduled
termination date for the Senior Secured Revolving Credit Facility is thirty
months from January 24, 2002, and it may be increased up to a total of $375
million with the approval of the lenders.

The Senior Secured Revolving Credit Facility was entered into (i) to
retire our DIP Facility and repay any DIP Facility balance (of which there
was none); (ii) to replace or backstop approximately $122 million in letters
of credit issued under our pre-petition RE&C Financing Facilities; (iii) to
replace approximately $32.8 million in letters of credit issued under the DIP
Facility; (iv) to make payments to the pre-petition senior secured lenders
and Mitsubishi Heavy Industries pursuant to our Plan of Reorganization; (v)
to finance the costs of restructuring; and (vi) for ongoing working capital,
general corporate purposes and letter of credit issuance. The initial
borrowing rate under the Senior Secured Revolving Credit Facility is the
applicable LIBOR, which has a stated floor of 3%, plus an additional margin
of 5.5%. Alternatively, we may choose the prime rate, plus an additional
margin of 4.5%. As of January 2002, the effective LIBOR- and prime-based
rates were 8.5% and 9.25%, respectively. The Senior Secured Revolving Credit
Facility carries other fees, including commitment fees and letter of credit
fees, normal and customary for such credit agreements. The Senior Secured
Revolving Credit Facility contains affirmative, negative and financial
covenants, including minimum net worth, capital expenditures, maintenance of
certain financial and operating ratios, and specified events of default which
are typical for a credit agreement governing credit facilities of the size,
type and tenor of the Senior Secured Revolving Credit Facility. Among the
covenants are those limiting our ability and the ability of certain of our
subsidiaries to incur debt or liens, provide guarantees, make investment and
pay dividends.

POST-EMERGENCE FINANCIAL CONDITION AND LIQUIDITY

Currently, we have three principal sources of near-term liquidity: (1)
cash generated by operations; (2) existing cash and cash equivalents; and (3)
revolving loan borrowings under our Senior Secured Revolving Credit Facility.
In the three months ended March 29, 2002, we generated $4 million of net cash
from our operating activities. We had cash and cash equivalents of $105.8
million at March 29, 2002, $78.6 million of which were restricted for use on
the normal operations of our consolidated construction joint ventures, by
projects having contractual cash restrictions and our self-insurance
programs. At March 29, 2002, we had $137.5 million in letters of credit
outstanding under the Senior Secured Revolving Credit Facility which when
combined with existing borrowings of $25 million, leave $187.5 million
available for borrowings and letters of credit.

We expect to use cash to, among other things, fund working capital
requirements, make capital expenditures and make cure payments pursuant to
our Plan of Reorganization. We anticipate capital expenditures for normal
renewal and replacement will be approximately $25 million for the year.
Funding of working capital and capital expenditures for major new
construction projects will depend upon new awards during the balance of the
year. It is anticipated that we will begin to sell equipment from the large
hydroelectric project in the Philippines beginning in the third quarter of
2002. Currently we estimate proceeds from the sale of this equipment will be
approximately $10 million during the balance of the year with an additional
$25 to $30 million to be realized in 2003. However, we may use this equipment
if a new project is awarded that would need the same type of equipment and is
not otherwise available in our equipment fleet.

We believe that our cash flow from operations, existing cash and cash
equivalents and available borrowings under our revolving credit facility will
be sufficient to meet our reasonably foreseeable liquidity needs. We may,
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.

II-20

In addition to the above sources of liquidity, we have certain non-core
assets held for sale (the Technology Center and EMD), which we expect will
generate cash proceeds. The sales of these assets are expected to close
during fiscal year 2002.

In line with industry practice, we are often required to provide
performance and surety bonds to customers under fixed-price contracts. These
bonds indemnify the customer should we fail to perform our obligations under
the contract. If a bond is required for a particular project and we are
unable to obtain an appropriate bond, we cannot pursue that project. We have
an existing bonding facility with an aggregate capacity of $500 million, but,
as is customary, the issuance of bonds under that facility is at the surety's
sole discretion. Moreover, due to events that affect the insurance and
bonding markets generally, bonding may be more difficult to obtain in the
future or may only be available at significant additional cost. While 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.

ENVIRONMENTAL CONTINGENCY

From July 1985 to June 1989, Industrial Constructors Corp. ("ICC"), one
of our wholly-owned subsidiaries, performed various contract mining and
construction services at the Summitville mine near Del Norte, Colorado. In
1996, the United States and the State of Colorado commenced an action under
CERCLA in the U.S. District Court for the District of Colorado against Mr.
Robert Friedland, a potentially responsible party, to recover the response
costs incurred and to be incurred at the Summitville Mine Superfund Site (the
"Site"). No other parties were named as defendants in the original complaints
in this action. On April 30, 1999, Friedland filed a third-party complaint
naming ICC and nine other defendants, alleging that such defendants are
jointly and severally liable for such costs and requesting that the response
costs be equitably allocated. In October 1999, the United States and Colorado
amended their complaints to add direct claims against ICC and other parties.

On December 22, 2000, the United States and Colorado signed a Settlement
Agreement and Consent Decree wherein Friedland agreed to pay $27.5 million in
exchange for various promises by the United States and Colorado, including
dismissal of Friedland from the action filed in 1996.

On January 2, 2001, Colorado filed a new federal action in Colorado,
naming five defendants: Sunoco, ARCO, Asarco, Bechtel and A.O. Smith,
alleging that these defendants are jointly and severally liable for costs
incurred and to be incurred by Colorado at the Site. On January 12, 2001,
Colorado amended this complaint by naming WGI, Washington Contractors Group,
Inc., another one of our wholly-owned subsidiaries, and Dennis R. Washington,
our chairman, as additional defendants. That case was dismissed on September
14, 2001 on the basis that the statute of limitations had expired and the
complaint was untimely.

The United States and Colorado have estimated that the total response
costs incurred and to be incurred at the Site will approximate $150 million.
Prior to our bankruptcy filings, neither we nor Mr. Washington were a party
to any agreement regarding allocation of responsibility, and neither the
United States nor Colorado has made any formal allocation of responsibility
among those defendants.

During the course of our bankruptcy proceedings, we entered into
negotiations with the United States, Colorado and Mr. Friedland to settle the
issues related to these matters. In December 2001, we entered into settlement
agreements with the United States, Colorado and Mr. Friedland. As a result,
the United States and Colorado were deemed to have a general unsecured claim
against us in the amount of $20.3 million in the bankruptcy proceedings and
Mr. Friedland obtained a settlement in the amount of $15 million. In
connection with the bankruptcy cases, the general unsecured claim of the
United States and Colorado was discharged on the Effective Date pursuant to
our Plan of Reorganization. Mr. Friedland has been assigned the right to
proceed against insurance carriers under specified insurance policies by
which we were insured with respect to claims for defense, contribution or
indemnity relating to the Site and to the actions brought by the United
States and Colorado. Mr. Friedland has agreed to proceed directly against the
insurance carriers and will not enforce or seek the payment of the settlement
by us. As a result of this settlement, we recorded a liability of $20.3
million at December 1, 2000.

II-21

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standards Board ("FASB") issued
two new pronouncements, Statement No. 141 BUSINESS COMBINATIONS ("SFAS No.
141") and Statement No. 142 GOODWILL AND OTHER INTANGIBLE ASSETS ("SFAS No.
142"). SFAS No. 141, which is effective for acquisitions initiated after June
30, 2001, prohibits the use of the pooling-of-interest method for business
combinations and establishes the accounting and financial reporting
requirements for business combinations accounted for by the purchase method.
Adoption of this statement had no effect on our financial statements. SFAS
No. 142 requires that an intangible asset that is acquired shall be initially
recognized and measured based on its fair value. The statement also provides
that goodwill should not be amortized, but shall be tested for impairment
annually, or more frequently if circumstances indicate potential impairment,
through a comparison of fair value to its carrying amount. SFAS No. 142 will
become effective for us for our fiscal year beginning December 29, 2001. The
adoption of this statement is not expected to have a significant impact on
the financial statements due to our adoption of fresh-start reporting on
February 1, 2002. Fresh-start reporting revalues all of our assets and
liabilities at fair value on that date. See Note 4, "Reorganization Case and
Fresh-start Reporting" of the Notes to Consolidated Financial Statements in
Item 8 of this report. The net book value of goodwill was $176.1 million and
$265.1 million as of November 30, 2001 and December 1, 2000, respectively,
exclusive of goodwill included in assets held for sale at November 30, 2001.
See Note 7, "Sales of Businesses and Businesses Held for Sale" of the Notes
to Consolidated Financial Statements in Item 8 of this report.

In July 2001, the FASB issued Statement No. 143 ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS ("SFAS No. 143"). Upon emergence from bankruptcy, we
are required to early adopt SFAS No. 143 effective February 1, 2002. This
statement addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The implementation of SFAS No. 143 will
not have a significant impact on our financial statements.

In August 2001, the FASB issued Statement No. 144 ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS which replaces SFAS No. 121 and
APB No. 30, and became effective for us on February 1, 2002. This statement
retains the requirements to (i) recognize an impairment loss only if the
carrying amount of a long-lived asset is not recoverable from its
undiscounted cash flows and (ii) measure an impairment loss as the difference
between the carrying amount and fair value of the asset. This statement
removes goodwill from its scope, eliminating the requirement to allocate
goodwill to long-lived assets to be tested for impairment. This statement
requires that a long-lived asset to be abandoned, exchanged for similar
productive asset or distributed to owners in a spin-off, be considered held
and used until it is disposed of. This statement requires the accounting
model for long-lived assets to be disposed of by sale, be used for all
long-lived assets, whether previously held and used or newly acquired.
Discontinued operations are no longer measured on a net realization value
basis, and future operating losses are no longer recognized before they
occur. This statement broadens the presentation of discontinued operations in
the income statement to include a component of an entity (rather than a
segment of a business). A component of an entity comprises operations and
cash flows that can be clearly distinguished, operationally and for financial
reporting purposes, from the rest of the entity. The adoption of this
statement will not have a significant effect on our financial statements.

II-22

QUARTERLY FINANCIAL DATA
(IN MILLIONS EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
Selected quarterly financial data for the years ended November 30, 2001 and
December 1, 2000 are presented below.

(a) As discussed previously, significant adjustments were recorded to these
items during the fourth quarter of 2000 resulting from the RE&C acquisition.

II-23

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
(IN MILLIONS)

INTEREST RATE RISK

Our exposure to market risk for changes in interest rates relates
primarily to our short-term investment portfolios and debt obligations. Our
short-term investment portfolio consists primarily of highly liquid
instruments with maturities of one month or less. As of November 30, 2001, we
had $32 million in short-term investments classified as cash equivalents. Of
total cash and cash equivalents at November 30, 2001 of $128 million, $57.7
million was restricted for use on the normal operations of our consolidated
joint ventures, by projects having contractual cash restrictions and our
self-insurance programs.

From time to time, we effect borrowings under bank credit facilities or
otherwise for general corporate purposes, including working capital
requirements and capital expenditures. Borrowings under our DIP Facility at
November 30, 2001, of which there were none, bear interest at the applicable
LIBOR or prime rate, plus an additional margin and, therefore, were 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 mbH, in Germany.
At November 30, 2001 and December 1, 2000, the cumulative adjustments for
translation gains (losses), net of related income tax benefits, were $1.9
million and $(8.6) million, respectively. While we endeavor to enter into
contracts with foreign customers with repayment terms in U.S. currency 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 pricing and operating
costs or those of our competitors. We 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.

II-24

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

WASHINGTON GROUP INTERNATIONAL, INC., AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)

Consolidated Financial Statements and Financial Statement Schedule as of
November 30, 2001 and December 1, 2000, and for each of the three years in
the period ended November 30, 2001

II-25

REPORT OF MANAGEMENT

Management prepared, and is responsible for, the consolidated financial
statements and the other information appearing in this annual report. The
consolidated financial statements present fairly the company's financial
position, results of operations and cash flows in conformity with accounting
principles generally accepted in the United States. In preparing its
consolidated financial statements, the company includes amounts that are
based upon estimates and judgments that management believes are reasonable
under the circumstances.

The company maintains internal controls designed to provide reasonable
assurance that the company's assets are protected from unauthorized use and
that all transactions are executed in accordance with established
authorizations and recorded properly. The internal controls are supported by
written policies and guidelines and are complemented by a staff of internal
auditors. Management believes that the internal controls in place at November
30, 2001 provide reasonable assurance that the books and records reflect the
transactions of the company and there has been compliance with its policies
and procedures.

The company's fiscal 2001 and 2000 consolidated financial statements have
been audited by Deloitte & Touche LLP, and the company's fiscal 1999
consolidated financial statements have been audited by PricewaterhouseCoopers
LLP, both independent auditors. Management has made available to both
independent auditors all of the company's financial records and related data,
as well as the minutes of stockholders' and directors' meetings.

/s/ Stephen G. Hanks /s/ George H. Juetten
- ------------------------------ ---------------------------------
Stephen G. Hanks George H. Juetten
President and Executive Vice President and
Chief Executive Officer Chief Financial Officer

June 21, 2002

II-26

DELOITTE & TOUCHE LLP
Suite 1800
101 South Capitol Boulevard
Boise, Idaho 83702

Tel: (208) 342-9361
Fax: (208) 342-2199
www.us.deloitte.com

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of Washington Group International,
Inc. (Debtor-in-Possession)

We have audited the accompanying consolidated balance sheets of
Washington Group International, Inc. and subsidiaries (the "Corporation")
(Debtor-in-Possession) as of November 30, 2001 and December 1, 2000, and the
related consolidated statements of operations, comprehensive income (loss),
stockholders' equity (deficit), and cash flows for each of the two years in
the period ended November 30, 2001. Our audits also included the consolidated
financial statement schedule listed in the Index at Item 8. These financial
statements and financial statement schedule are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on
these financial statements and financial statement schedule based on our
audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Washington Group
International, Inc. and subsidiaries as of November 30, 2001 and December 1,
2000, and the results of their operations and their cash flows for each of
the two years in the period ended November 30, 2001 in conformity with
accounting principles generally accepted in the United States of America.
Also, in our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set
forth therein.

As discussed in Note 3, on July 7, 2000, the Corporation purchased the
capital stock and certain other assets and assumed certain liabilities of
Raytheon Engineers & Constructors International, Inc. Subsequent to the
purchase, substantial litigation was commenced between the parties. The
litigation was settled effective January 25, 2002.

As discussed in Note 4, the Corporation and certain of its subsidiaries
filed for reorganization under Chapter 11 of the Federal Bankruptcy Code on
May 14, 2001. Also, as discussed in Note 4, on December 21, 2001, the
Bankruptcy Court entered an order confirming the plan of reorganization that
became effective after the close of business on January 25, 2002. The
accompanying consolidated financial statements and financial statement
schedule do not purport to reflect or provide for the consequences of the
bankruptcy proceedings. In particular, such financial statements do not
purport to show (a) as to assets, their realizable value on a liquidation
basis or their availability to satisfy liabilities; (b) as to pre-petition
liabilities, the amounts that were allowed for claims or contingencies, or
the status and priority thereof; (c) as to stockholder accounts, the effect
of any changes that were made in the capitalization of the Corporation; or
(d) as to operations, the effect of any changes that were made in its
business.

DELOITTE & TOUCHE LLP

Boise, Idaho
June 21, 2002

II-27

REPORT OF INDEPENDENT ACCOUNTANTS

To Board of Directors and Stockholders
of Washington Group International, Inc. (formerly Morrison Knudsen Corporation):

In our opinion, the accompanying consolidated statements of operations,
comprehensive income (loss), stockholders' equity (deficit) and cash flows
present fairly, in all material respects, the results of operations and cash
flows of Washington Group International, Inc. (formerly Morrison Knudsen
Corporation) and its subsidiaries (the "Corporation") for the year ended
December 3, 1999 in conformity with accounting principles generally accepted in
the United States of America. In addition, in our opinion, the accompanying
financial statement schedule (Schedule II Valuation, Qualifying, and Reserve
Accounts) for the year ended December 3, 1999 presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and the
financial statement schedule are the responsibility of the Corporation's
management; our responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our audit. We conducted
our audit of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.

As discussed in Note 13 to the consolidated financial statements, a subsidiary
of the Corporation has been named as a defendant in litigation regarding the
Summitville Mine Superfund Site. The outcome of the litigation is not presently
determinable and, accordingly, response costs have not been accrued in the
accompanying financial statements.

PricewaterhouseCoopers LLP

Boise, Idaho
January 28, 2000

II-28

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.

II-29

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.

II-30

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE DATA)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.

II-31

II-32

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

Supplemental disclosure of cash flow information (Note 14)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
II-33

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.

II-34

WASHINGTON GROUP INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT PER SHARE DATA)

The terms "we," "us" and "our" as used in this annual report include
Washington Group International, Inc. ("WGI") and its consolidated
subsidiaries unless otherwise indicated. On May 14, 2001, WGI and several but
not all of its subsidiaries filed for Chapter 11 bankruptcy protection. See
Note 14, "Reorganization Case and Fresh-start Reporting."

1. SIGNIFICANT ACCOUNTING POLICIES

BUSINESS

We were originally incorporated in Delaware on April 28, 1993 under the
name Kasler Holding Company. In April 1996, we changed our name to Washington
Construction Group, Inc. On September 11, 1996, we purchased Morrison Knudsen
Corporation, which we refer to as "Old MK," and changed our name to Morrison
Knudsen Corporation. On September 15, 2000, we changed our name to Washington
Group International, Inc.

We are an international provider of a broad range of design,
engineering, construction, construction management, facilities and operations
management, environmental remediation and mining services to diverse public
and private sector clients, including (i) engineering, construction and
operations and maintenance services in nuclear and fossil power markets, (ii)
diverse engineering and construction and construction management services for
the highway and bridge, airport and seaport, dam, tunnel, water resource,
railway, mining and commercial building markets, (iii) engineering, design,
procurement, construction and construction management services to industrial
companies, (iv) comprehensive nuclear and other environmental and hazardous
substance remediation services and weapons and chemical demilitarization
programs for governmental and private-sector clients, and (v) technology,
engineering, procurement and construction services to the petroleum and
chemical industries worldwide. In providing such services, we enter into
three basic types of contracts: fixed-price or lump-sum contracts providing
for a fixed price for all work to be performed, fixed-unit-price contracts
providing for a fixed price for each unit of work performed, and cost-type
contracts providing for reimbursement of costs plus a fee. Both anticipated
income and economic risk are greater under fixed-price and fixed-unit-price
contracts than under cost-type contracts. Engineering, construction
management 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 also participate in two
incorporated mining ventures: Westmoreland Resources, Inc., a coal mining
company in Montana, and MIBRAG mbH, a company that operates lignite coal
mines and power plants in Germany. On March 22, 1999, we and BNFL Nuclear
Services, Inc. ("BNFL"), an unrelated entity, acquired the government and
environmental services businesses of CBS Corporation (now Viacom, Inc.). On
July 7, 2000, we purchased from Raytheon Company ("Raytheon") and Raytheon
Engineers & Constructors International, Inc. ("RECI") the capital stock of
the subsidiaries of RECI and specified other assets of RECI and we assumed
specified liabilities of RECI. The businesses that we purchased provide
engineering, design, procurement, construction, operation, maintenance and
other services on a worldwide basis. See Note 3, "Acquisitions - Acquisition
of Raytheon Engineers & Constructors."

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of WGI and
all of its majority-owned subsidiaries and certain construction joint
ventures. Investments in non-consolidated construction joint ventures and
mining ventures are accounted for by the equity method. For these
non-consolidated construction joint ventures, our proportionate share of
revenue, cost of revenue and gross profit (loss) is included in the
consolidated statements

II-35

of operations, and equity in net earnings of our incorporated mining ventures
is accounted for on the equity method. Intercompany accounts and transactions
have been eliminated.

Our fiscal year had historically ended on November 30. Effective
December 1, 1998, we adopted a 52/53 week fiscal year ending on the Friday
closest to November 30. Effective December 1, 2001, we changed our fiscal
year to the 52/53 weeks ending on the Friday closest to December 31. The
changes in reporting period have not materially affected comparability
between the reporting periods presented.

REVENUE RECOGNITION

Revenue is generally recognized on the percentage-of-completion method.
Completion on contracts is generally measured based on the proportion of
costs incurred to total estimated contract costs or on the proportion of
labor hours or labor costs incurred to total estimated labor hours or labor
costs. For certain long-term contracts involving mining, environmental and
hazardous substance remediation, completion is measured on estimated physical
completion or units of production.

Revenue recognition on certain fixed-price construction contracts begins
when progress is sufficient to estimate the probable outcome, or on the
completed contract method if the probable outcome cannot be reasonably
estimated. The cumulative effect of revisions to contract revenue and
estimated completion costs, including incentive awards, penalties, change
orders, claims and anticipated losses, is recorded in the accounting period
in which the amounts are known and can be reasonably estimated. Such
revisions could occur at any time and the effects could be material. 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. If it is probable that the change order will
result in the contract price exceeding the related costs incurred, that the
excess over cost can be reliably estimated, and if realization is assured
beyond a reasonable doubt, the original contract price is adjusted to the
probable revised contract amount as the costs are recognized. 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. No profit is recognized on claims until final
settlement occurs.

We have a number of contracts and subcontracts with various agencies of
the U.S. government which extend beyond one year and for which government
funding has not yet been approved. All contracts with agencies of the U.S.
government and some commercial and foreign contracts are subject to
unilateral termination at the option of the customer. In the event of a
termination, we would not receive projected revenues associated with the
terminated portion of such contracts.

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 contracts.
However, due to uncertainties inherent in the estimation process, it is
possible that actual completion costs may vary from estimates.

USE OF ESTIMATES

The preparation of our consolidated financial statements in conformity
with generally accepted accounting principles necessarily 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 costs during the
reporting periods. Actual results could differ from those estimates. On an
ongoing basis, we review our estimates based on information that is currently
available. Changes in facts and circumstances may result in revised estimates.

CLASSIFICATION OF CURRENT ASSETS AND LIABILITIES

We include in current assets and liabilities amounts realizable and
payable under contracts that extend beyond one year. Accounts receivable at
November 30, 2001 and December 1, 2000 include approximately $27,496 and

II-36

$25,524, respectively, of contract retentions, which are not expected to be
collected within one year. At November 30, 2001 and December 1, 2000,
accounts receivable include $18,974 and $8,526, respectively, of short-term
marketable securities jointly held with customers as contract retentions, the
market value of which approximated the carrying amounts. We recognize
interest income from marketable securities as earned. Advances from customers
are non-interest bearing. Subcontracts payable, billings in excess of costs
and estimated earnings on uncompleted contracts and estimated costs to
complete long-term contracts each contain amounts that, depending on contract
performance, resolution of U.S. government contract audits, negotiations,
change orders, claims or changes in facts and circumstances, may not require
payment within one year.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of liquid securities with remaining
maturities of three months or less at the date of acquisition that are
readily convertible into known amounts of cash. At November 30, 2001 cash and
cash equivalents included amounts totaling $57,672 that were restricted for
use on the normal operations of our consolidated construction joint ventures,
by projects having contractual cash restrictions and our self-insurance
programs. The comparable amount at December 1, 2000 was $18,961.

UNBILLED RECEIVABLES

Unbilled receivables represent costs incurred under contracts in process
that have not yet been invoiced to customers, and arise from the use of the
percentage-of-completion method of accounting, cost reimbursement-type
contracts and the timing of billings. Substantially all unbilled receivables
at November 30, 2001 are expected to be billed and collected within one year.

INVENTORIES

Inventories are stated at the lower of cost or market on a first-in,
first-out basis and consist of inventoried costs relating to long-term
contracts. The elements of cost included in inventories are direct labor,
direct material and certain overhead costs.

CREDIT RISK CONCENTRATION

By policy, we limit the amount of credit exposure to any one financial
institution and place investments with financial institutions evaluated as
highly creditworthy. Concentrations of credit risk with respect to accounts
receivable and unbilled receivables are believed to be limited due to the
number, diversification and character of the obligors and our credit
evaluation process. Typically, we have not required collateral for such
obligations, but can place liens against property, plant or equipment
constructed if a default occurs. Historically, we have not incurred any
material credit-related losses.

GOODWILL

Goodwill is amortized using the straight-line method over 20 to 40
years. The carrying value of goodwill or other long-lived assets is reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. If impairment is indicated by the
facts and circumstances, an impairment loss will be recognized based on a
comparison of the carrying value of the long-lived assets and associated
goodwill with the discounted cash flow of such assets. The carrying amount of
the goodwill identifiable with such assets will be eliminated before
recognition of impairment of the related long-lived tangible and identifiable
intangible assets.

PROPERTY AND EQUIPMENT

Property and equipment is stated at cost. Major renewals and
improvements are capitalized, while maintenance and repairs are expensed when
incurred. Depreciation of construction equipment is provided on straight-line
and accelerated methods, after an allowance for estimated salvage value, over
estimated lives of 2 to

II-37

10 years. Depreciation of buildings is provided on the straight-line method
over estimated lives of 10 to 40 years, and improvements are amortized over
the shorter of the asset life or lease term. Depreciation of equipment is
provided under the straight-line method over estimated lives of 3 to 12
years. Upon disposition, cost and related accumulated depreciation of
property and equipment are removed from the accounts and the gain or loss is
reflected in results of operations.

FOREIGN CURRENCY TRANSLATION

The functional currency for foreign operations is generally the local
currency. Translation of assets and liabilities to U.S. dollars is based on
exchange rates at the balance sheet date. Translation of revenue and expenses
to U.S. dollars is based on a weighted-average rate during the period.
Translation gains or losses, net of income tax effects, are reported as a
component of other comprehensive income (loss). Because of the short-term
duration of certain construction and engineering projects, related
translation gains or losses are recognized currently. Gains or losses from
foreign currency transactions are included in the results of operations of
the period in which the transaction is completed.

ENVIRONMENTAL LIABILITIES

Accruals for estimated costs of response actions for environmental
matters are recorded when it is probable that a liability has been incurred
and the amount of the liability can be reasonably estimated. On a quarterly
basis, we review estimates of costs of response actions at various sites,
including sites in respect of which government agencies have designated us as
a potentially responsible party ("PRP"). Accrued liabilities may be
discounted and are exclusive of claims for recovery, if any. However, due to
uncertainties inherent in the estimation process, it is possible that actual
results may vary from estimates.

INCOME TAXES

Deferred income tax assets and liabilities are recognized for the
effects of temporary differences between the carrying amounts and the income
tax basis of assets and liabilities using enacted tax rates. A valuation
allowance is established when it is more likely than not that net deferred
tax assets will not be realized. Tax credits are generally recognized in the
year they arise.

INCOME (LOSS) PER SHARE

Basic income (loss) per share is calculated on the weighted-average
number of outstanding common shares during the applicable period. Diluted
income (loss) per share is based on the weighted-average number of
outstanding common shares plus the weighted-average number of potential
outstanding common shares. Income (loss) per share is computed separately for
each period presented.

In 2001 and 2000, because of our operating losses, all options and
warrants were antidilutive and, therefore, are excluded from earnings per
share calculations. For 1999, the additional weighted-average number of
potential outstanding common shares for purposes of computing diluted
earnings per share consisted solely of stock options for all periods
presented. Stock purchase warrants were not included in the computation of
diluted earnings per share because the exercise price was greater than the
average market price of the warrants, and, therefore, the effect would be
antidilutive.

Our emergence from bankruptcy in January 2002 resulted in the
cancellation of all of our then outstanding capital stock, stock options and
stock purchase warrants and the issuance of new shares of capital stock,
stock purchase warrants and stock options. As such, we believe the
presentation of income (loss) per share for these canceled instruments is not
meaningful. For a detailed discussion of our bankruptcy proceedings and
emergence from bankruptcy protection, see Note 4, "Reorganization Case and
Fresh-start Reporting."

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RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standards Board ("FASB") issued
two new pronouncements, Statement No. 141 BUSINESS COMBINATIONS ("SFAS No.
141") and Statement No. 142 GOODWILL AND OTHER INTANGIBLE ASSETS ("SFAS No.
142"). SFAS No. 141, which is effective for acquisitions initiated after June
30, 2001, prohibits the use of the pooling-of-interest method for business
combinations and establishes the accounting and financial reporting
requirements for business combinations accounted for by the purchase method.
Adoption of this statement had no effect on our financial statements. SFAS
No. 142 requires that an intangible asset that is acquired shall be initially
recognized and measured based on its fair value. The statement also provides
that goodwill should not be amortized, but shall be tested for impairment
annually, or more frequently if circumstances indicate potential impairment,
through a comparison of fair value to its carrying amount. SFAS No. 142 will
become effective for us for our fiscal year beginning December 29, 2001. The
adoption of this statement is not expected to have a significant impact on
the financial statements due to our adoption of fresh-start reporting on
February 1, 2002. Fresh-start reporting revalues all of our assets and
liabilities at fair value on that date. See Note 4, "Reorganization Case and
Fresh-start Reporting." The net book value of goodwill was $176,108 and
$265,068 as of November 30, 2001 and December 1, 2000, respectively,
exclusive of goodwill included in assets held for sale at November 30, 2001.
See Note 7, "Sales of Businesses and Businesses Held for Sale."

In July 2001, the FASB issued Statement No. 143 ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS ("SFAS No. 143"). Upon emergence from bankruptcy, we
will be required to early adopt SFAS No. 143 effective February 1, 2002. This
statement addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The implementation of SFAS No. 143 will
not have a significant impact on our financial statements.

In August 2001, the FASB issued Statement No. 144 ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS which replaces SFAS No. 121 and
APB No. 30, which became effective for us on February 1, 2002. This statement
retains the requirements to (i) recognize an impairment loss only if the
carrying amount of a long-lived asset is not recoverable from its
undiscounted cash flows and (ii) measure an impairment loss as the difference
between the carrying amount and fair value of the asset. This statement
removes goodwill from its scope, eliminating the requirement to allocate
goodwill to long-lived assets to be tested for impairment. This statement
requires that a long-lived asset to be abandoned, exchanged for similar
productive asset or distributed to owners in a spin-off, be considered held
and used until it is disposed of. This statement requires the accounting
model for long-lived assets to be disposed of by sale, be used for all
long-lived assets, whether previously held and used or newly acquired.
Discontinued operations are no longer measured on a net realization value
basis, and future operating losses are no longer recognized before they
occur. This statement broadens the presentation of discontinued operations in
the income statement to include a component of an entity (rather than a
segment of a business). A component of an entity comprises operations and
cash flows that can be clearly distinguished, operationally and for financial
reporting purposes, from the rest of the entity. The adoption of this
statement will not have a significant effect on our financial statements.

RECLASSIFICATIONS

Certain reclassifications have been made to prior year financial
statements to conform to the current year presentation.

2. ADOPTION OF ACCOUNTING STANDARDS

Effective December 2, 2000, we adopted FASB Statement No. 133 ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS No. 133"). SFAS No.
133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded into other
contracts and for hedging activities. Under SFAS No. 133, we are required to
recognize derivative instruments, including those embedded into other
contracts as either assets or liabilities in our consolidated balance sheets
and to measure them at fair value.

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SFAS No. 133 requires that the gain or loss on a derivative instrument,
designated and qualifying as a fair value hedging instrument, as well as the
offsetting gain or loss on the hedged item be recognized currently in
earnings in the same accounting period. It also provides that the effective
portion of the gain or loss on a derivative instrument designated and
qualifying as a cash flow hedge be reported as a component of other
comprehensive income. That amount would subsequently be reclassified into
earnings in the same period or periods in which the hedge forecasted
transaction affects earnings. Any remaining gain or loss on the derivative
instrument, if any, must be recognized in earnings in the current period.

Our financial risk management philosophy is to ensure that financial
exposures created by changes in foreign currency rates, interest rates and
commodity prices are minimized. The intent of this philosophy is to minimize
the volatility of cash flows and reported earnings which result from
financial rather than business related factors, and thus minimize the
financial consequences caused by fluctuations in financial and commodity
markets.

Currently, we hedge certain foreign currency transactions denominated in
the Philippine peso and the Euro to reduce exposure to change in the U.S.
dollar / peso and U.S. dollar / Euro exchange rates. Previously, hedge
accounting under generally accepted accounting principles allowed us to
account for these forward contracts at spot exchange rates with the related
market adjustment made to other comprehensive income. SFAS No. 133 eliminates
special hedge accounting for such contracts, requiring us to account for the
forward contracts at their fair value (that is, based on the forward exchange
rate) with all changes in fair value reported currently in earnings. The
adoption of SFAS No. 133 during 2001 resulted in an increase in liabilities
of $1,901 and a corresponding pre-tax increase to other comprehensive income
classified as a cumulative effect of adoption of accounting principle. The
foreign currency contracts were terminated during 2001 in connection with our
bankruptcy filing, resulting in a recognized loss of $1,396. We plan to
continue our practice of hedging our foreign currency contracts because such
an approach economically reduces the risks.

During the first quarter of 2001, we entered into an interest rate swap
to reduce interest rate risk on our long-term debt obligations. The swap was
designated as a cash flow hedge of variable rate debt obligations under SFAS
No. 133. The interest rate swap was recorded at fair value with changes in
fair value recorded in other comprehensive income. As of the first quarter of
2001, we recorded the fair value of the swap as a liability of $1,826 with a
corresponding pre-tax entry to other comprehensive income. The swap was
terminated during the second quarter of 2001 in connection with our
bankruptcy filing, resulting in a recognized loss of $2,425.

In the ordinary course of business in executing construction,
construction management, operations management and mining services, we enter
into fixed-price contracts for future purchases of commodities from our
suppliers. The nature of the terms and conditions of the contracts are
considered normal purchases of inventory and have no financial statement
impact under SFAS No. 133.

During the first quarter of 2001, we adopted Securities and Exchange
Commission ("SEC") Staff Accounting Bulletin No. 101 ("SAB 101") which
summarizes the SEC staff's position on selected revenue recognition issues.
The implementation of SAB 101 did not have a significant impact on our
results of operations or financial position.

3. ACQUISITIONS

ACQUISITION OF WESTINGHOUSE BUSINESSES

On March 22, 1999 BNFL and WGI acquired the government and environmental
businesses, ("Westinghouse Businesses") of CBS Corporation.

Operations of the Westinghouse Businesses are conducted through the
following two companies:

o Westinghouse Government Services Company LLC ("WGS"), a limited
liability company that provides defense-related operations and
maintenance services for the U.S. Departments of Energy and Defense,

II-40

including the production of tritium for national weapons programs and
high-level waste solidification (also known as "vitrification").

o Westinghouse Government Environmental Services Company LLC ("WGES"), a
limited liability company that provides non-defense related
governmental and environmental services, including environmental
remediation and waste management services.

Our and BNFL's rights and obligations with respect to WGS and WGES are
described in the Amended and Restated Consortium Agreement dated March 19, 1999
and in other related documents, collectively called the "Consortium Agreement."
Under the Consortium Agreement, 60% of the profits, losses and cash flows of WGS
and WGES are allocated to us and 40% are allocated to BNFL. WGS and WGES are
components of our Government operating unit.

The aggregate purchase price of the Westinghouse Businesses was $207,611,
consisting of net cash paid to CBS Corporation of $201,060 and acquisition costs
of $6,551. Our share of the aggregate purchase price, $124,567 was funded
primarily through borrowings under our bank credit facilities. The remaining
balance of $83,044 was paid by BNFL.

We have accounted for the acquisition of the Westinghouse Businesses as a
purchase business combination. The results of our operations, financial position
and cash flows include WGS and WGES on a consolidated basis from the acquisition
date with BNFL's 40% minority interest in WGS and WGES and a third party's 35%
minority interest in Safe Sites of Colorado LLC, a subsidiary of WGES, reflected
in a single minority interest line item in our consolidated financial
statements. The aggregate purchase price was allocated to the net assets we
acquired on the basis of estimates of fair values with the excess recorded as
goodwill, as follows:

- --------------------------------------------------------------------------------------------------------------------------

Working capital $ (2,188)
Investments and other assets 8,405
Property, plant and equipment 25,496
Post-retirement benefit obligation (27,000)
Pension liabilities (55,908)
Other non-current liabilities and minority interests (15,054)
Goodwill 273,860
- --------------------------------------------------------------------------------------------------------------------------
Total acquisition costs 207,611
Less BNFL portion of total acquisition costs (83,044)
- --------------------------------------------------------------------------------------------------------------------------
WGI portion of total acquisition costs $124,567
==========================================================================================================================

Completion of the purchase allocation resulted primarily in a reduction of
employee benefit obligations of $18,050 with a corresponding reduction in
goodwill. During the quarter ended December 1, 2000, a pre-acquisition
contingency related to the Westinghouse Businesses was resolved. That resulted
in an additional reduction in employee benefit obligations of $6,900 with a
corresponding reduction in goodwill. Also, we revised our original estimate of
legal costs, reducing the purchase price by an additional $5,130.

The following unaudited pro forma information presents our consolidated
operating results as if the acquisition of the Westinghouse Businesses had taken
place on December 1, 1998. These pro forma operating results have been prepared
for illustrative purposes only and are not indicative of operating results that
would have been experienced if the Westinghouse Businesses acquisition occurred
on the dates indicated, or of future operating results.

II-41

ACQUISITION OF RAYTHEON ENGINEERS & CONSTRUCTORS

On July 7, 2000, pursuant to a stock purchase agreement dated April 14,
2000 (the "Stock Purchase Agreement"), we purchased from Raytheon and RECI
(collectively with Raytheon, the "Sellers") the capital stock of the
subsidiaries of RECI, and specified other assets of RECI and we assumed
specified liabilities of RECI. The businesses that we purchased, hereinafter
called "RE&C", provide engineering, design, procurement, construction,
operation, maintenance and other services on a worldwide basis. We financed the
acquisition by obtaining new senior secured facilities (the "RE&C Financing
Facilities") and issuing senior unsecured notes due July 1, 2010 (the "Senior
Unsecured Notes"). See Note 8, "Credit Facilities" for a more detailed
description of the RE&C Financing Facilities and the Senior Unsecured Notes.

The purchase price paid at the closing of the acquisition on July 7, 2000
was $53,000 in cash and the assumption of net liabilities originally estimated
at $450,000. We also incurred acquisition costs of $7,705. The cash portion of
the purchase price paid at closing was determined based upon a formula contained
in the Stock Purchase Agreement and represented the estimated amount of the
Adjusted Non-Current Net Assets and Adjusted Net Working Capital (as the terms
are defined in the Stock Purchase Agreement) that we acquired, valued as of
April 30, 2000. The amounts of Adjusted Non-Current Net Assets and Adjusted Net
Working Capital were subject to post-closing finalization, including an audit by
independent accountants, and other adjustments to the price paid at closing. In
addition, the Stock Purchase Agreement contained a provision requiring us to
either pay the Sellers or to be paid by the Sellers, the net amount of cash the
Sellers either advanced to or withdrew from RE&C between April 30, 2000 and July
7, 2000. After closing, we paid the Sellers $84,400 representing the net amount
of cash advanced or paid by the Sellers for the use or benefit of RE&C between
April 30, 2000 and July 7, 2000.

The Stock Purchase Agreement provided that the Sellers would retain all
non-restricted cash and cash equivalents held by RE&C at the close of business
on April 30, 2000 ("Cut-Off Date Cash Balances"). At closing, for purposes of
administrative convenience, RE&C kept all cash held by it ($15,790), and we paid
the Sellers an additional $30,800 for the cash balances on April 30, 2000. That
amount was subject to post-closing verification by us and adjustment in the
event it was not equal to the Cut-Off Date Cash Balances held by RE&C. We
subsequently verified the amount and no adjustment was required. In total, we
paid net cash of $160,130 for the RE&C acquisition.

RECI retained, among other assets, all of its interest in and rights with
respect to some of the existing contracts. In addition, the Stock Purchase
Agreement provided that the contracts related to four specified construction
projects would be transferred to RECI, and RE&C would enter into subcontracts to
perform, on a cost-reimbursed basis, all of RECI's obligations under the
contracts. Because the customer consents required to transfer the four contracts
to RECI could not be obtained as of closing, we agreed to remain the contract
party and continued to be directly obligated to the customers and other third
parties under the contracts relating to the four projects. Accordingly, we and
the Sellers agreed that the Sellers would provide us with full indemnification
with respect to any risks associated with those contracts, which arrangement
accomplished the original intent of the Stock Purchase Agreement. Under the
Stock Purchase Agreement, we agreed that we would complete the four specified
projects for the Sellers' account and the Sellers agreed to reimburse our costs
to do so and to share equally with us any positive variance between actual costs
and estimated costs. The Sellers also agreed to indemnify us against any losses,
claims or liabilities under the contracts relating to such projects, except
losses, claims or liabilities resulting from our gross negligence or willful
misconduct, against which we would indemnify the Sellers.

The Stock Purchase Agreement did not contain a fixed purchase price at
closing for the transaction, but rather, as noted above, provided that the
purchase price would be adjusted post-closing upward or downward based on the
effect on a formula that would be applied to an audited RE&C April 30, 2000
balance sheet to be prepared by the Sellers and audited by the Sellers'
independent accountants. After closing, we extended the delivery date for the
final audited RE&C balance sheet for April 30, 2000 to January 14, 2001.

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As part of the acquisition of RE&C, we undertook a comprehensive review of
existing contracts that we acquired for the purpose of making a preliminary
allocation of the acquisition price to the net assets acquired. As part of this
review, we evaluated, among other matters, RECI's estimates of the costs at
completion of the long-term contracts that were underway as of July 7, 2000
("Acquisition Date EAC's"). During this process, information came to our
attention that raised questions as to whether the Acquisition Date EAC's needed
to be adjusted significantly. Our review process involved the analysis of an
extensive amount of supporting data, including analysis of numerous, large
construction projects in various stages of completion. Based on the information
available at the time of the review, the preliminary results of this review
indicated that the Acquisition Date EAC's of numerous long-term contracts
required substantial adjustment. The adjustments resulted in contract losses or
lower than market rate margins. As a result, in our report on Form 10-Q for the
quarter ended September 1, 2000, we significantly decreased the carrying value
of the net assets acquired and increased the goodwill associated with the
transaction. Because many of the contracts we acquired contained either
unrecorded losses or lower than market profits, these contracts were adjusted to
their estimated fair value at the July 7, 2000 acquisition date in order to
allow for a reasonable profit margin for completing the contracts, and a gross
margin or normal profit reserve of $233,135 was established and recorded in
billings in excess of cost and estimated earnings on uncompleted contracts.

Our review of the RE&C contracts and the purchase price allocation process
continued thereafter, and, based on the results of that review, we expected
that, as a result of the purchase price adjustment process, the purchase price
of RE&C would be adjusted downward by a significant amount. Subsequent to the
quarter ended September 1, 2000, we completed the review and made additional
adjustments to the contracts we had acquired, resulting from a more accurate
determination of the actual contract status at the acquisition date.

The normal profit reserve has been reduced as work has been performed on
the affected projects. The reduction results in reductions to cost of revenue
and corresponding increases in gross profit, but has no effect on cash. The
establishment of and decreases in cost of revenue for the periods indicated are
as follows:

An audited RE&C April 30, 2000 balance sheet was not delivered by Sellers,
and therefore, on February 27, 2001, we filed a lawsuit against the Sellers
seeking specific performance of the purchase price adjustment provisions of the
Stock Purchase Agreement. On March 8, 2001, we amended our complaint to also
seek money damages for misstatements and omissions allegedly made by the
Sellers. Our lawsuit seeking specific performance was successful, and we and the
Sellers thereafter commenced an arbitration proceeding before an independent
accountant approved by the court to determine the purchase price adjustment. A
significant arbitration claim was ultimately filed against the Sellers, as
discussed below.

During the spring of 2000, in connection with the acquisition of RE&C, we
received from the Sellers audited RECI financial statements at December 31, 1999
and 1998 and for each of the three years in the period ended December 31, 1999
and unaudited RECI financial statements as of and for the three months ended
April 2, 2000 and April 4, 1999. In accordance with federal securities law
disclosure requirements, we filed on July 13, 2000 those audited and unaudited
financial statements and our related unaudited pro forma condensed combined
financial statements as of and for the year ended December 3, 1999 and for the
quarter ended March 3, 2000 in a current report on Form 8-K. Subsequently, in
our current report on Form 8-K filed March 8, 2001, we advised that, for the
reasons stated in such report, the foregoing audited and unaudited financial
statements of RECI and our related unaudited pro forma condensed combined
financial statements, which were derived therefrom, no longer should be relied
upon.
II-43

On March 2, 2001 we announced that we faced severe near-term liquidity
problems as a result of our acquisition of RE&C. On March 9, 2001, because of
those liquidity problems, we suspended work on two large construction projects
located in Massachusetts that were part of the acquisition. The Sellers had
provided the customer with parent performance guarantees on those two contracts,
and the guarantees remained in effect after closing. Those performance
guarantees required the Sellers to complete the work on the contracts in the
event RE&C (owned by us as of July 7, 2000) did not complete them. The contracts
were fixed-price in nature and our review of cost estimates indicated that there
were substantial unrecognized future costs in excess of future contract revenues
that were not reflected in RECI's Acquisition Date EAC's.

Upon our suspension of work, the Sellers undertook performance of those
contracts pursuant to the outstanding performance guarantees. We, however, were
obligated under the Stock Purchase Agreement to indemnify the Sellers for losses
they incurred under those guarantees. The Sellers also assumed obligations under
other contracts, primarily in the RE&C power generation construction business
unit, which resulted in significant additional indemnification obligations by us
to the Sellers. As a result of costs they incurred to perform under the parent
guarantees, the Sellers filed a claim against us in the bankruptcy process for
approximately $940,000. As further discussed below, this claim was ultimately
settled without payment to the Sellers in connection with our emergence from
bankruptcy protection. See Note 4, "Reorganization Case and Fresh-start
Reporting." Until such settlement, we retained all liabilities related to the
contracts, including normal profit reserves, on our balance sheet as accrued
liabilities included in liabilities subject to compromise.

On May 14, 2001, because of the severe near-term liquidity problems
resulting from our acquisition of RE&C, we filed for protection under Chapter
11 of the U.S. Bankruptcy Code. At various times between May 14, 2001 and
November 20, 2001, we "rejected" numerous contracts (construction contracts,
leases and others), as that term is used in the legal sense in bankruptcy
law. Included in these rejections were numerous contracts that we acquired
from the Sellers. Effective August 27, 2001, we also rejected the Stock
Purchase Agreement.

On December 21, 2001, the bankruptcy court entered an order confirming the
Second Amended Joint Plan of Reorganization of Washington Group International,
Inc., et al., as modified (the "Plan of Reorganization"). The Plan of
Reorganization became effective and we emerged from bankruptcy protection on
January 25, 2002 (the "Effective Date").

During the pendency of the bankruptcy, we continued to negotiate with the
Sellers a settlement of our outstanding litigation with respect to the RE&C
acquisition. As a result of those negotiations, we reached a settlement
regarding all issues and disputes between the parties, which settlement was
incorporated into our Plan of Reorganization (the "Raytheon Settlement").

Under the Raytheon Settlement, the Sellers agreed that, with respect to
their bankruptcy claim, the Sellers would be considered unpaid, unsecured
creditors having rights in the unsecured creditor class, but that, upon
completion of our Plan of Reorganization, they would waive any rights to receive
any distributions to be given to unsecured creditors with allowed claims. In
exchange, we agreed to dismiss all litigation against the Sellers related to the
acquisition and to discontinue the purchase price adjustment and binding
arbitration process. We released all claims based on any act occurring prior to
the Effective Date of the Plan of Reorganization, including all claims against
the Sellers, their affiliates and directors, officers, employees, agents and
specified professionals. The Sellers released all claims based on any act
occurring prior to the Effective Date of our Plan of Reorganization, including
any claims related to any contracts or projects not assumed by us during the
bankruptcy cases, against us and our directors, officers, employees, agents and
professionals. No cash was exchanged as a result of this settlement.

In addition, under a services agreement entered into as a part of the
Raytheon Settlement, the Sellers will direct the process for resolving
pre-petition claims asserted against us in the bankruptcy case relating to any
contract or project that we rejected and that involved some form of support
arrangement from the Sellers. We will assist the Sellers in settling or
litigating various claims related to those rejected projects. We will also
complete work as requested by the Sellers on those rejected projects, and will
be reimbursed on a cost-reimbursable basis.

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The Sellers may, with respect to the rejected projects described above,
pursue or settle any of our claims against project owners, contractors or
other third parties and will retain any resulting proceeds, except that for
specified projects, recoveries in excess of amounts paid by the Sellers will
be returned to us.

While this settlement eliminated our ability to continue to seek to collect
our arbitration claim, it was necessary because the Sellers' large unsecured
claims in the bankruptcy were substantially impeding our Plan of Reorganization
process. Without this settlement, a successful emergence from Chapter 11 would
have been delayed or impossible.

We have made adjustments to the preliminary purchase price allocation of
the RE&C acquisition price to the net assets acquired that was included in the
unaudited quarterly information at September 1, 2000, including the following,
as a result of completing our review:

o We have made adjustments for amounts that were recorded as part of and
subsequent to the initial preliminary purchase price allocation, as a
result of additional information we obtained that supported that some
of the July 7, 2000 balances were materially misstated based on
generally accepted accounting principles and were, therefore, included
in our purchase price adjustment arbitration claim against the Sellers.
In the lawsuits and purchase price adjustment arbitration claim
referred to above, we asserted that the Sellers should have recorded
these as adjustments in the RE&C financial statements prior to the
acquisition. The adjustments primarily relate to provisions for
anticipated losses on fixed-price contracts that were not recorded in
the RE&C financial statements prior to the acquisition. We recorded
these amounts as a $444,055 arbitration claim receivable from the
Sellers. However, as noted above, under the terms of the Raytheon
Settlement we subsequently agreed to dismiss all litigation against the
Sellers related to the acquisition and to discontinue the purchase
price adjustment and binding arbitration process. Therefore, we wrote
off the receivable from the Sellers as an asset impairment during 2000.

o We also have made adjustments for items that were identified subsequent
to the initial purchase price allocation that we believe were
additional misstatements, based on additional information we obtained,
but that were not included in the arbitration claim. Cost of revenue
included adjustments to estimates at completion on contracts and
increases in self-insurance reserves. The impairment of assets was
primarily unrecoverable accounts receivable. These amounts totaled
$144,481 and were charged to operations in the three months ended
December 1, 2000 as follows:

- --------------------------------------------------------------------------------------------------------------------------

Cost of revenue $(140,954)
Impairment of assets (4,685)
Other 1,158
- --------------------------------------------------------------------------------------------------------------------------
Total $(144,481)
==========================================================================================================================

Because we cannot determine the final impact of the matters discussed above
on the pre-acquisition RE&C financial statements or the pro forma adjustments
that would be appropriate for the year ended December 1, 2000, unaudited pro
forma consolidated results of operations as if the acquisition of RE&C had taken
place on December 4, 1999 have not been presented.

We have accounted for the acquisition of the RE&C as a purchase business
combination. The results of our operations, financial position and cash flows
include the operations of RE&C on a consolidated basis from the July 7, 2000
acquisition date. We have made an allocation of the aggregate purchase price to
the net assets we acquired, with the remainder recorded as goodwill, on the
basis of estimates of fair values after adjustments for the arbitration claim
against the Sellers and adjustments charged to operations, as follows:

II-45

- ----------------------------------------------------------------------------------------------------------------------------

Working capital $(958,636)
Arbitration claim receivable 444,055
Investments and other assets 42,633
Property and equipment 139,868
Pension and post-retirement benefit obligations (16,427)
Deferred income taxes (83,222)
Other non-current liabilities (88,351)
Goodwill 680,210
- ----------------------------------------------------------------------------------------------------------------------------
Total acquisition costs, net of cash acquired of $15,790 $ 160,130
============================================================================================================================

Of the 23 major RE&C projects that had significant contract adjustments
discussed above, 7 are now complete and 5 were eliminated in the insolvency
proceedings of Washington International B.V. See Note 4, "Reorganization Case
and Fresh-start Reporting - Washington International B.V." Of the remaining
projects, 6 have undergone reformation of the contracts to terms and conditions
that permitted us to continue working on the original project and 5 are
continuing under the original terms and conditions. Most of the projects will be
completed by the end of 2002, and the remaining projects in 2003.

As a result of the foregoing events, and the substantial negative cash
flows of RE&C, we analyzed for impairment the assets acquired in the acquisition
of RE&C, including goodwill. Based upon the results of our analysis, we have
taken a charge against income during the quarter ended December 1, 2000 for the
following impairments of acquired assets:

- ----------------------------------------------------------------------------------------------------------------------------

Goodwill, net of accumulated amortization of $8,727 $671,483
Indemnification amounts receivable from the Sellers under the Stock Purchase Agreement:
Billed and unbilled receivables on closed contracts 46,562
Partial indemnification of loss on government contract 25,115
Reimbursement for restructuring costs 3,026
Reimbursement of legal fees 1,305
- ----------------------------------------------------------------------------------------------------------------------------
Impairment of assets $747,491
============================================================================================================================

As a result of the acquisition, we incurred significant costs associated
with the integration and merger of the two companies. They consisted primarily
of incremental costs for legal, accounting, consulting and other fees, including
business consulting, promotion and systems integration. For the quarter and year
ended November 30, 2001, those costs were $1,209 and $18,858, respectively,
versus $5,246 and $15,302 for the comparable periods in 2000.

4. REORGANIZATION CASE AND FRESH-START REPORTING

REORGANIZATION CASE

On May 14, 2001, because of severe near-term liquidity issues WGI and
several but not all of its direct and indirect wholly-owned domestic
subsidiaries (the "Debtors") filed voluntary petitions to reorganize under
Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the
District of Nevada. The various individual bankruptcy cases were administered
jointly.

Under Chapter 11, certain claims against a debtor in existence prior to the
filing of a petition for relief under the federal bankruptcy laws ("Pre-petition
Claims") are stayed while the debtor continues business operations as a
debtor-in-possession. Each of our Debtors in this case continued to operate its
business and manage its property as a debtor-in-possession during the pendency
of the case. Subsequent to the filing date, additional Pre-petition Claims
resulted from the rejection of executory contracts, including leases, and from
the resolution of claims for contingencies and other disputed amounts. The
Pre-petition Claims are reflected in balance sheets as of dates between May 14,
2001 and February 1, 2002 as "liabilities subject to compromise." Secured
claims, primarily

II-46

representing liens on the Debtors' assets related to the RE&C Financing
Facilities, were also stayed during the pendency of the bankruptcy.

The Debtors received approval from the bankruptcy court under first-day
orders to pay and did pay specified pre-petition obligations, including employee
wages and benefits, foreign vendors, tax obligations and critical vendor
obligations.

Our ability to continue as a going-concern during the pendency of the
bankruptcy was dependent upon obtaining sufficient debtor-in-possession
financing in order to continue operations while in bankruptcy, the confirmation
of a plan of reorganization by the bankruptcy court, and resolution of disputes
between the Sellers and us. See Note 3, "Acquisitions - Acquisition of Raytheon
Engineers & Constructors" for a description of these disputes.

As of May 14, 2001, we obtained a Secured Super-Priority Debtor in
Possession Revolving Credit Facility (the "DIP Facility") with a commitment of
$195,000 that was available to provide both ongoing funding and to support
letters of credit. On June 5, 2001, the DIP Facility lenders approved an
increase in the total commitment from $195,000 to $220,000. See Note 8, "Credit
Facilities - DIP Facility." The DIP Facility was available and utilized as
needed throughout the pendency of the bankruptcy, had no outstanding balance at
November 30, 2001 and was replaced by a secured $350,000 30-month revolving
credit facility (the "Senior Secured Revolving Credit Facility") entered into on
January 25, 2002. For a detailed discussion of the Senior Secured Revolving
Facility, see Note 8, "Credit Facilities - Senior Secured Revolving Credit
Facility."

On December 21, 2001, the bankruptcy court entered an order confirming the
Plan of Reorganization. Substantially all liabilities of the Debtors as of the
date of the bankruptcy filing were subject to settlement under our Plan of
Reorganization.

During the pendency of the bankruptcy, we continued to negotiate with the
Sellers a settlement of our outstanding litigation with respect to the RE&C
acquisition. As a result of those negotiations, we entered into the Raytheon
Settlement.

The Plan of Reorganization became effective and the Debtors emerged from
bankruptcy protection on the Effective Date. Our Plan of Reorganization provided
for the following upon the Effective Date:

o All of our equity securities (common stock, stock purchase warrants and
stock options) existing prior to the Effective Date were canceled and
extinguished.

o $570,000 of secured debt under the RE&C Financing Facilities was
exchanged for $20,000 in cash and 20,000 shares of the new common stock
of reorganized WGI ("New Common Stock") as discussed further below. See
Note 8, "Credit Facilities."

o We entered into a registration rights agreement with each holder of a
secured claim who received New Common Stock and requested to be a party
to such agreement.

o Vendor and subcontractor claims directly related to contracts we
assumed during bankruptcy or upon emergence from bankruptcy that were
not paid as critical vendor payments were to be paid in cash in a cure
amount equal to the total claim.

o Each holder of unsecured claims at or under $5 (five thousand dollars)
is to receive cash in an amount equal to its total unsecured claim
("Convenience Class Payments").

o Accounts payable and subcontracts payable that were not related to cure
payments or Convenience Class Payments were discharged.

II-47

o The holders of $300,000 of Senior Unsecured Notes and all other
unsecured creditors were to receive a pro rata share of 5,000 shares of
the New Common Stock and a pro rata share of 8,520 fully vested stock
warrants to purchase additional shares of New Common Stock. The stock
warrants expire if unexercised four years after the Effective Date. A
reorganization plan committee has been established to evaluate and
resolve objections to disputed claims of unsecured creditors and to
determine each unsecured creditor's pro rata share of shares and
warrants. The warrants consist of three tranches as follows:

o Specified members of management and designated employees were granted
stock options pursuant to a management option plan. The management
option plan provided for nonqualified stock option grants as of the
Effective Date totaling 1,389 aggregate shares of the New Common Stock
with a term of 10 years and a strike price of $24.00 per share. In
addition, another 1,389 shares of the New Common Stock may be granted
after the Effective Date at strike prices to be established by our
board of directors.

o The chairman of our board of directors, Mr. Dennis R. Washington, was
granted stock options to purchase shares of New Common Stock in three
tranches. The first tranche expires five years after the Effective
Date. The remaining tranches expire four years after the Effective
Date. One-third of each tranche vested on the Effective Date, one-third
of each tranche will vest on the first anniversary of the Effective
Date and the final third of each tranche will vest on the second
anniversary of the Effective Date. However, all options immediately
vest if Mr. Washington is removed from his position as chairman for
reasons other than death or disability or if we undergo a change of
control. We also agreed with Mr. Washington that our amended
certificate of incorporation and bylaws would permit his accumulation
of up to 40% of the fully diluted shares of New Common Stock in open
market or privately-negotiated transactions, including exercise of the
stock options, and that we would take no action inconsistent with those
provisions. The number of shares and respective strike prices for each
tranche are as follows:

o We adopted fresh-start reporting as of February 1, 2002 as discussed
below.

o We filed an amended and restated certificate of incorporation and
adopted amended and restated bylaws and established a new board of
directors.

On January 25, 2002, we entered into the Senior Secured Revolving Credit
Facility to fund our working capital requirements. The Senior Secured Revolving
Credit Facility bears variable interest at 5.5% above LIBOR, with a LIBOR floor
of 3%, or 4.5% above the prime rate, at our choice. It is comprised of a
$208,350 revolver and a $141,650 credit-linked note. Repayments are made on a
pro rata basis between the revolver and the credit-linked note. The
credit-linked note can be utilized for letters of credit or funded borrowings as
needed. We are required to meet various financial covenants contained in the
Senior Secured Revolving Credit Facility. $28,800 in letters of credit remain
outstanding from previous credit facilities until they expire, primarily in
2002.

WASHINGTON INTERNATIONAL B.V.

As a result of our filing for protection under Chapter 11 of the U.S.
Bankruptcy Code, the board of directors of Washington International B.V., one of
our wholly-owned subsidiaries located in The Hague, the Netherlands,

II-48

("BV"), determined that BV would have insufficient funds to continue
operations in the same manner as it had prior to our bankruptcy filing. The
determination was made based on the existing financial condition of BV and
the fact that our DIP Facility contained terms that prohibited the additional
commitment of our resources for BV operations.

On May 21, 2001, the BV board of directors directed management to consider
strategic restructuring alternatives including the filing of a petition for
suspension of payment under Dutch law. On May 29, 2001, the suspension of
payment was granted and a trustee was appointed pursuant to Dutch law. Under the
joint management of the trustee and the BV management, all payments to third
parties were temporarily postponed while the trustee and management attempted to
pursue strategic alternatives, including the sale of the business to various
potentially interested parties. From the date of the trustee's appointment
through June 21, 2001, the trustee and management gathered facts and attempted
to sell the business to several interested parties.

Following discussions with the interested parties, it became clear that a
sale of the business was not feasible. On June 21, 2001, the trustee transformed
the suspension of payments to a procedure of insolvency and a curator was
appointed to take over all management responsibilities and to liquidate the BV
estate. The curator has been managing the estate since that date and we have
cooperated and will continue to cooperate with the curator to resolve various
intercompany issues, including third party intellectual property rights, foreign
intercompany loans and other matters.

During the second quarter of 2001, as a result of the insolvency and
liquidation of BV, we wrote off $30,652 of assets, $64,517 of liabilities and
$1,904 of foreign currency translation losses, resulting in a net gain of
$31,961 from the discharge of liabilities, which is included in reorganization
items.

WASHINGTON INTERNATIONAL, LLC

Washington International, LLC, a Delaware limited liability company and
wholly-owned subsidiary of Washington International Holding Limited, a United
Kingdom wholly-owned subsidiary of WGI, filed for protection under the U.S.
Bankruptcy Code in connection with our Chapter 11 filing. Washington
International Holding Limited did not file for bankruptcy protection and,
therefore, was not a debtor in our bankruptcy proceedings in the United States.
Washington International, LLC conducted business primarily in the United
Kingdom. On December 5, 2001, Washington E&C Limited, also a United Kingdom
wholly-owned subsidiary of Washington International Holding Limited, purchased
specified contracts, constituting the ongoing business of Washington
International, LLC, for $250. At that time, Washington International, LLC ceased
conducting business and on February 20, 2002, a "Winding Up" order was made
under the insolvency laws of England and Wales against Washington International,
LLC. Washington International, LLC is now under the control of a liquidator
pursuant to the insolvency laws of England and Wales, and we no longer have any
control over its activities. Once the winding up process is complete, Washington
International, LLC will be dissolved and will cease to exist. Creditors of
Washington International, LLC will not receive any shares of the New Common
Stock or stock warrants to be distributed to the unsecured creditors of the
Debtors.

Upon adoption of liquidation basis accounting in the quarter ending
November 30, 2001, Washington International, LLC had assets of $9,208,
liabilities of $12,155 and $364 of foreign currency translation losses,
resulting in a net gain of $2,583, which is included in reorganization items.

REORGANIZATION ITEMS

Reorganization items for the year ended November 30, 2001 consisted of the
following:

- ----------------------------------------------------------------------------------------------------------------------------

Professional fees and other expenses related to bankruptcy proceedings $54,663
Impairment of assets of rejected contracts 36,360
Net gain from liquidation of insolvent subsidiaries (34,544)
- ----------------------------------------------------------------------------------------------------------------------------
Total reorganization items $56,479
============================================================================================================================

II-49

LIABILITIES SUBJECT TO COMPROMISE

At November 30, 2001, liabilities subject to compromise consisted of the
following:

- ----------------------------------------------------------------------------------------------------------------------------

Current liabilities
Current portion of long-term debt $ 4,000
Accounts payable and subcontracts payable 66,989
Billings in excess of cost and estimated earnings on uncompleted contracts 213,637
Estimated costs to complete long-term contracts 30,199
Accrued salaries, wages and benefits, including compensated absences 40,608
Other accrued liabilities 509,249
- ----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 864,682
- ----------------------------------------------------------------------------------------------------------------------------
Non-current liabilities
Long-term debt, less current portion 863,940
Self-insurance reserves 105,023
Pension and post-retirement obligations 80,729
Environmental remediation obligations 3,975
Other non-current liabilities 9,870
- ----------------------------------------------------------------------------------------------------------------------------
Total non-current liabilities 1,063,537
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities subject to compromise $1,928,219
============================================================================================================================

During the pendency of our bankruptcy proceedings, we ceased accruing
interest on our long-term debt. Contractual interest expense during 2001 not
recorded was $48,235.

FRESH-START REPORTING

As of February 1, 2002, we adopted fresh-start reporting pursuant to the
guidance provided by the American Institute of Certified Public Accountants
Statement of Position 90-7 FINANCIAL REPORTING BY ENTITIES IN REORGANIZATION
UNDER THE BANKRUPTCY CODE. In connection with the adoption of fresh-start
reporting, a new entity has been created for financial reporting purposes. The
effective date of our emergence from bankruptcy is considered to be the close of
business on February 1, 2002 for financial reporting purposes. In the tables
below, the periods presented through February 1, 2002 have been designated
"Predecessor Company" and the period ending subsequent to February 1, 2002 has
been designated "Successor Company."

Pursuant to this guidance, we used the purchase method of accounting to
allocate our reorganization value to our net assets with the excess recorded as
goodwill on the basis of estimates of fair values. The reorganization value was
determined to be $550,000 as of February 1, 2002.

The reorganization value of $550,000 was developed by an independent
financial advisor and was based upon the use of three valuation methodologies as
follows:

o Comparable public company analysis is generally a historic or
backward-looking technique. It is premised on the idea that the price
an investor is willing to pay in the public markets for securities of
similar publicly traded companies is a relevant measure to determine
what an investor is willing to pay today for a target company. Publicly
traded companies were selected that were generally comparable to us.
Criteria for selection included lines of business, business risks,
growth prospects, maturity of the business, market presence and size
and scale of operations.

o Discounted cash flow valuation is a forward-looking approach that
relates the value of an asset or business to the present value of
expected future cash flows to be generated by that asset or business.
The discount rate used to arrive at present values is a function of the
risk inherent in estimated cash flows,

II-50

with investors requiring higher rates of return for riskier assets and
lower rates for assets with less expected risk.

o Precedent transaction analysis estimates value by examining public
merger and acquisition transactions. An analysis of the disclosed
purchase price as a multiple of various operating statistics reveals
industry sales multiples for companies in similar lines of business.
Merger and acquisition transactions in the engineering and construction
sector and prices paid as a multiple of key operating statistics were
analyzed.

Different weights were placed on each of these analyses and judgments were
made as to the relative significance of each in determining an indicated
enterprise value range. The weighted valuation methodologies resulted in an
enterprise value range for the consolidated businesses. The total enterprise
value was determined by applying valuation metrics against the various risks and
opportunities identified to each business segment. Our reorganization value
represented the value of the reorganized consolidated entity. This value was
viewed as the fair value of our capital, comprising the value of long-term
capital investment, including both long-term debt and equity, and the
approximate amount a willing buyer would have paid for our net assets
immediately after the reorganization was completed.

The calculated reorganization value was based upon a variety of estimates
and assumptions about circumstances and events, not all of which have taken
place to date. These estimates and assumptions are inherently subject to
significant economic and competitive uncertainties beyond our control, including
but not limited to, our ability to obtain and perform new contracts profitably.

On the Effective Date, we borrowed $40,000 under the Senior Secured
Revolving Credit Facility; however, because the borrowings under the Senior
Secured Revolving Credit Facility are revolving working capital loans, they were
not included as part of the reorganization value. Therefore, the reorganization
value of $550,000 represents the value of our stockholders' equity as of the
Effective Date. Based on values determined by our financial advisor, we
allocated $28,647 of the equity value to the stock purchase warrants and the
remainder to the New Common Stock.

II-51

The reorganization and the adoption of fresh-start reporting resulted in
the following adjustments to our consolidated balance sheet as of February 1,
2002:

II-52

- --------------------------------
Debt discharge:
(a) Reflects payment of $24,500 in payments to creditors under the Plan of
Reorganization and $34,749 in deferred financing costs for the Senior
Secured Revolving Credit Facility. These emergence costs necessitated a
$40,000 draw under the Senior Secured Revolving Credit Facility.
(b) Records the effect of income taxes on the gain from debt discharge. The
discharge of liabilities in bankruptcy is a taxable event. The pre-tax gain
reported for financial statement purposes is $910,732. Our net operating
loss carryforward, certain tax credit carryforwards and a portion of tax
basis of goodwill and depreciable assets were utilized to offset the tax
obligation arising on the discharge of liabilities.
(c) Reflects the write-off of $22,123 in fees on the RE&C Financing Facilities
and the Senior Unsecured Notes, and the payment of $34,749 of deferred
financing costs for the Senior Secured Revolving Credit Facility.
(d) Of the $1,880,900 of liabilities subject to compromise:
o $373,545 of unsecured liabilities were retained by us and $4,500 was
paid at emergence.
o $926,288 in unsecured obligations were exchanged for 5,000 shares of
New Common Stock and 8,520 warrants. The unsecured obligations include
$300,000 of Senior Unsecured Notes and approximately $415,000 related
to specified Power operating unit projects that were subject to
guarantees by the Sellers. See Note 3, "Acquisitions - Acquisition of
Raytheon Engineers & Constructors."
o $576,567 in secured obligations, including accrued interest, were
exchanged for 20,000 shares of New Common Stock, and $20,000 in cash
paid on the Effective Date.
(e) Reflects the gain on debt discharge of $1,460,732, less the value of New
Common Stock and warrants issued of $550,000, net of income taxes of
$343,539.
Fresh-start adjustments:
(f) Reflects the reclassification of Predecessor Company goodwill.
(g) Records goodwill for value in excess of amounts allocable to identifiable
assets.
(h) Records adjustments to reflect assets and liabilities at fair market
values.
(i) Adjusts to reflect the assets and liabilities of businesses held for sale
at their estimated realizable values.
(j) Adjusts pension plan and post-employment obligations to recognize
unrealized actuarial gains and losses.
(k) Reflects the elimination of the deferred tax assets related to the
remaining basis differences between book and tax goodwill of the
Predecessor Company. This goodwill will continue to be amortized by the
Successor Company over the remaining 13.5 year period for tax purposes.
Also records adjustments to deferred tax assets and liabilities resulting
from the adjustments to reflect assets and liabilities at fair value.
(l) Records the cancellation of Predecessor Company common stock and
elimination of retained earnings.

II-53

On May 14, 2001, all liabilities of the Debtors were reclassified as
liabilities subject to compromise. The resolution of liabilities subject to
compromise was as follows:

5. RESTRUCTURING CHARGES

During the fourth quarter of 2001, we initiated restructuring actions to
improve operational effectiveness and efficiency and reduce expenses worldwide
relative to employment levels and excess facilities consistent with the Plan of
Reorganization. A liability was recorded in other accrued liabilities with a
corresponding charge to restructuring costs of $6,963 for employee termination
benefits, impairment charges and enhanced pension benefits. The severance costs
represent expected reductions in work force for 687 employees representing
management, professional, administrative and operational overhead. Actual
reductions in work force were 538 through November 30, 2001. Additional charges
of $6,596 for 657 additional employee terminations and $19,667 for facility
closure costs were accrued in December 2001 and during the quarter ended March
29, 2002.

During 2000, as part of the acquisition of RE&C, we established a
restructuring liability of $28,264 for closure and consolidation of office
facilities, some of which were already contemplated by the Sellers.

The following presents restructuring charges accrued and costs incurred:

II-54

6. VENTURES

CONSTRUCTION JOINT VENTURES

We participate in joint ventures that are formed to bid, negotiate and
complete specific projects. We generally participate in joint ventures as the
sponsor and manager of projects. The size, scope and duration of joint-venture
projects vary among periods. The tables below exclude consolidated joint
ventures.

MINING VENTURES:

At November 30, 2001, we held ownership interests in two incorporated
mining ventures, MIBRAG mbH (50%) and Westmoreland Resources, Inc.
("Westmoreland Resources") (20%) which are accounted for under the equity
method. We provide contract mining services to these ventures. Effective March
28, 2001, we increased our ownership interest in MIBRAG mbH from 33% to 50% by
purchasing the additional interests for approximately $17,500, which was funded
through the reinvestment of dividend distributions from MIBRAG mbH. We are
currently in litigation with Westmoreland Resources concerning the contract
mining services we provide to it. See Note 13, "Contingencies and Commitments -
Other."

II-55

Undistributed earnings from mining ventures totaled $108,815 at November
30, 2001.

7. SALES OF BUSINESSES AND BUSINESSES HELD FOR SALE

During the year ended December 3, 1999, we sold a foreign non-core
subsidiary and a domestic subsidiary engaged in the concrete and aggregate
business. The $8,730 pretax gain on the sale of these businesses was recognized
as other income. Operations of the subsidiaries resulted in revenue of $11,985
and net losses of $481 for 1999. Proceeds from the sales of both businesses
totaled $25,914.

In November 2001, we and BNFL agreed to pursue the sale of the
Electro-Mechanical Division ("EMD") of our Westinghouse Businesses. EMD designs
and manufactures components for the U.S. Navy, nuclear power utilities and other
industries. We are in discussions with potential buyers and anticipate that a
sale will be completed in 2002. Operating results for EMD are included as part
of the Government operating unit in Note 12, "Operating Segment, Geographic and
Customer Information."

During 2001, we elected to pursue the sale of the process technology
development portion of our petroleum and chemical business (the "Technology
Center"). We are in discussions with potential buyers, and anticipate that a
sale will be completed in 2002. Operating results for the Technology Center are
included as part of the Petroleum & Chemicals operating unit in Note 12,
"Operating Segment, Geographic and Customer Information."

For financial reporting purposes, the assets and liabilities of businesses
held for sale have been classified as "Assets held for sale" and "Liabilities
held for sale" in the Consolidated Balance Sheets. The table below provides
detail of the assets and liabilities of EMD and the Technology Center as of
November 30, 2001.

- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
- ----------------------------------------------------------------------------------------------------------------------------

Accounts receivable and unbilled receivables $ 25,742
Inventories 25,029
Goodwill 74,368
Property and equipment, net of accumulated depreciation 28,700
Other assets 881
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS HELD FOR SALE $154,720
============================================================================================================================
- ----------------------------------------------------------------------------------------------------------------------------
LIABILITIES
- ----------------------------------------------------------------------------------------------------------------------------
Accounts payable and subcontracts payable $ 11,426
Billings in excess of cost and estimated earnings on uncompleted contracts 28,515
Estimated costs to complete long-term contracts 13,441
Accrued salaries, wages and benefits, including compensated absences 5,788
Other accrued liabilities 458
Pension and post-retirement benefit obligations 45,238
Self-insurance reserves 2,843
Other liabilities 7,027
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES HELD FOR SALE $114,736
============================================================================================================================

II-56

Operating results of businesses held for sale are as follows:

8. CREDIT FACILITIES

CREDIT FACILITIES AND ACQUISITION FINANCING

On March 19, 1999, we replaced our existing bank credit facility with new
uncollateralized revolving credit facilities providing an aggregate borrowing
capacity of $250,000 in order to acquire the Westinghouse Businesses, to provide
for general corporate purposes, to support working capital requirements and to
support letters of credit and other potential acquisitions. On May 21, 1999, the
new credit facilities were increased to $325,000 consisting of a $195,000
five-year facility, which provided for both revolving borrowings and the
issuance of letters of credit, and a $130,000 one-year facility, which provided
for revolving borrowings. The one-year facility included terms permitting
extensions in one-year increments by mutual agreement of the banks and us or
converted, at our option, to a term loan having a maturity of one year after the
then current expiration of such facility. The facilities' covenants required the
maintenance of financial ratios, and placed limitations on guarantees, liens,
investments, dividends and other matters. At December 3, 1999, $55,000 and
$45,000 were outstanding on the one-year and five-year facilities, respectively.

The facilities provided for interest on loans, payable at the conclusion of
each interest commitment period not to exceed quarterly, at the applicable LIBOR
rate or the base rate, as defined, plus an additional margin. The additional
margin ranged from 1.25% to 2.00% for the LIBOR rate and .25% to 1.00% for the
base rate, based on the ratio of earnings before interest, taxes, depreciation
and amortization to our funded debt. The effective interest rate at December 3,
1999 was 6.98%. On March 19, 1999, we paid $3,700 in underwriting fees to the
banks and were required to pay quarterly commitment and letter of credit fees.
Commitment fees were based on the unused portion of the facilities. Letter of
credit fees were based on a percentage of the letter of credit amount.

On July 7, 2000, in order to finance the acquisition of RE&C, refinance
existing revolving credit facilities, fund working capital requirements and pay
related fees and expenses, we (i) obtained the RE&C Financing Facilities,
providing for an aggregate of $1,000,000 of term loans and revolving borrowing
capacity and (ii) issued and sold $300,000 aggregate principal amount of Senior
Unsecured Notes. The terms of the RE&C Financing Facilities and Senior Unsecured
Notes are briefly summarized below.

RE&C FINANCING FACILITIES

The RE&C Financing Facilities provided for, on the terms and subject to the
conditions stated in the RE&C Financing Facilities: (i) two senior secured term
loan facilities in an aggregate principal amount of up to $500,000, including a
multi-draw Tranche A term loan facility in an aggregate principal amount of
$100,000 that matured July 7, 2005 and a Tranche B term loan facility in an
aggregate principal amount of $400,000 that matured July 7, 2007, and (ii) a
five-year senior secured revolving credit facility in an aggregate principal
amount of up to $500,000, all of which was available for letters of credit.
Initial borrowings under the RE&C Financing Facilities totaled $400,000,
representing the full amount available under the Tranche B term loan facility.
The initial borrowing rate under the Tranche B term loan facility was the
applicable LIBOR plus an additional margin of 3.25%. The effective interest rate
was 9.87% at December 1, 2000. The borrowing rate, when utilized, under the
Tranche A term loan facility and the senior secured revolving credit facility
was the applicable LIBOR plus an additional margin of 2.75% for an effective
interest rate of 9.37% at December 1, 2000. The additional margins, which were
determined based on an agreed pricing grid, could increase or decrease from time
to time as the ratio of debt to EBITDA (as such term is defined in the RE&C
Financing Facilities) increased or decreased. The credit agreement under which
the RE&C Financing Facilities were made available contained affirmative,
negative and

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financial covenants and specified events of default which are typical for a
credit agreement governing credit facilities of the size, type and tenor of
the RE&C Financing Facilities. Among the covenants were those limiting our
ability and the ability of certain of our subsidiaries to incur debt or
liens, provide guarantees, make investments and pay dividends or repurchase
shares. On October 5, 2000, we terminated the Tranche A term loan facility to
eliminate ongoing related commitment fees.

SENIOR UNSECURED NOTES

The Senior Unsecured Notes were unsecured senior obligations that were to
mature on July 1, 2010. Interest on the Senior Unsecured Notes was payable
semiannually in arrears on January 1 and July 1, commencing January 1, 2001. The
Senior Unsecured Notes were sold in a private offering to qualified
institutional buyers. Under a registration rights agreement for the benefit of
the holders of the Senior Unsecured Notes, we were required to offer to exchange
the Senior Unsecured Notes for new Senior Unsecured Notes that were registered
under the Securities Act of 1933. The Senior Unsecured Notes provided for
additional interest to the extent and for the period that the registration
process was not completed within the specified periods. The Senior Unsecured
Notes accrued interest at a rate of 11% per annum through September 20, 2000,
and were then adjusted to 11.5% per annum. They were scheduled to continue at
that rate until we fully complied with the registration requirements of the
registration rights agreement, subject to a further increase in interest rate of
...5% per annum from and after December 20, 2000, until the registration process
was completed. At that time, the Senior Unsecured Notes would accrue interest at
the annual rate of 11%. The Senior Unsecured Notes ranked equally with our
existing and future senior unsecured indebtedness. The Senior Unsecured Notes
effectively ranked junior to all of our secured indebtedness and to all
liabilities of our subsidiaries that were not guarantors of the Senior Unsecured
Notes. The Senior Unsecured Notes ranked senior to any future subordinated
indebtedness we might have incurred. The Senior Unsecured Notes were guaranteed
on a senior basis by certain of our subsidiaries. The indenture under which the
Senior Unsecured Notes were issued contained affirmative, restrictive and
financial covenants and specified events of default which are typical for an
indenture governing an issue of high-yield senior unsecured notes. Among the
covenants were those limiting our ability and the ability of certain of our
subsidiaries to incur debt or liens, provide guarantees, make investments and
pay dividends or repurchase shares.

BANKRUPTCY DISCHARGE

As discussed in Note 4, "Reorganization Case and Fresh-start Reporting,"
our obligations under the RE&C Financing Facilities and the Senior Unsecured
Notes were discharged upon our emergence from bankruptcy on January 25, 2002.

DIP FACILITY

On May 14, 2001, we filed a voluntary petitions for relief under Chapter 11
of the U.S. Bankruptcy Code. See Note 4, "Reorganization Case and Fresh-start
Reporting." On the same day, we entered into the DIP Facility with some of our
subsidiaries as guarantors, for a commitment of $195,000 with the ability to
increase the total commitment to $350,000. On June 5, 2001 the DIP Facility
lenders approved an increase in the total commitment from $195,000 to $220,000.
The DIP Facility was to be used (i) to finance the costs of restructuring; and
(ii) for ongoing working capital, general corporate purposes and letter of
credit issuance. The borrowing rate under the DIP Facility was the prime rate,
plus an additional margin of 4.0%. The effective interest rate was 11.0% as of
May 2001. The DIP Facility carried other fees, including commitment fees and
letter of credit fees, normal and customary for such credit agreements. The
credit agreement under which the DIP Facility was made available contained
affirmative and negative covenants, reporting covenants and specified events of
default typical for a credit agreement governing credit facilities of the size,
type and tenor of the DIP Facility. Among the covenants were those limiting our
ability and the ability of some of our subsidiaries to incur debt or liens,
provide guarantees, make investments and pay dividends. As of January 24, 2002,
we had no outstanding debt and $32,800 of outstanding letters of credit under
the DIP Facility. As discussed below, the DIP Facility was replaced by the
Senior Secured Revolving Credit Facility on January 25, 2002.

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SENIOR SECURED REVOLVING CREDIT FACILITY

In connection with our emergence from bankruptcy protection on January 25,
2002, we entered into: (i) the Senior Secured Revolving Credit Facility,
providing for an aggregate of $350,000 of revolving borrowing and letter of
credit capacity, and (ii) exit bonding facilities, providing for an aggregate
amount of $500,000 of surety bonds. The Senior Secured Revolving Credit Facility
provides for an amount up to $350,000 in the aggregate of loans and other
financial accommodations allocated pro rata between two facilities as follows: a
Tranche A facility in the amount of $208,350 and a Tranche B facility in the
amount of $141,650. The scheduled termination date for the Senior Secured
Revolving Credit Facility is thirty months from January 24, 2002, and it may be
increased up to a total of $375,000 with the approval of the lenders.

The Senior Secured Revolving Credit Facility was entered into (i) to retire
our DIP Facility and to repay any DIP Facility balance (of which there was
none); (ii) to replace or backstop approximately $122,000 letters of credit
issued under our pre-petition RE&C Financing Facilities; (iii) to replace
approximately $32,800 letters of credit issued under the DIP Facility; (iv) to
make payments to the pre-petition senior secured lenders and Mitsubishi Heavy
Industries pursuant to our Plan of Reorganization; (v) to finance the costs of
restructuring; and (vi) for ongoing working capital, general corporate purposes
and letter of credit issuance. The initial borrowing rate under the Senior
Secured Revolving Credit Facility is the applicable LIBOR, which has a stated
floor of 3%, plus an additional margin of 5.5%. Alternatively, we may choose the
prime rate, plus an additional margin of 4.5%. As of January 2002, the effective
LIBOR- and prime-based rates were 8.5% and 9.25%, respectively. The Senior
Secured Revolving Credit Facility carries other fees including commitment fees
and letter of credit fees normal and customary for such credit agreements. The
Senior Secured Revolving Credit Facility contains affirmative, negative and
financial covenants, including minimum net worth, capital expenditures,
maintenance of certain financial and operating ratios, and specifies events of
default, which are typical for a credit agreement governing credit facilities of
the size, type and tenor of the Senior Secured Revolving Credit Facility. Among
the covenants are those limiting our ability and the ability of some of our
subsidiaries to incur debt or liens, provide guarantees, make investments and
pay dividends.

9. TAXES ON INCOME

The components of the U.S. federal, state and foreign income tax expense
(benefit) were as follows:

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The components of the deferred tax assets and liabilities and the related
valuation allowances were as follows:

At November 30, 2001, we had consolidated regular tax net operating loss
("NOL") carryforwards for federal, state and foreign tax purposes of
approximately $347,748, $271,580 and $145,654, respectively. The federal NOL's
expire in years 2009 through 2021 and the state NOL's expire in years 2002
through 2016. The foreign NOL's primarily consist of losses incurred on two
construction projects in the United Kingdom which were acquired as part of the
RE&C acquisition. We also had a federal capital loss carry forward of $3,077. In
addition, we had $18,802 of federal alternative minimum tax credits at November
30, 2001 which carry forward indefinitely and $11,149 of foreign tax credits
which currently have no expiration date. The federal and state NOL's, federal
capital loss and federal alternative minimum tax credits will be substantially
eliminated due to the 2002 bankruptcy restructuring. Foreign NOL's will not be
impacted.

The $44,675 valuation allowance reduces the deferred tax assets
associated with the foreign NOL carryforwards to a level which we believe
will, more likely than not, be realized based on estimated future taxable
income. The increase of $90 in the valuation allowance at November 30, 2001
reflects the uncertainty regarding the future utilization of current year
foreign net operating losses. The valuation allowance for the 2000 year
reflected both an increase of $43,264 and a decrease of $40,666. The net
change in valuation allowance at December 1, 2000 resulted from an evaluation
of the likelihood of the future utilization of the NOL's of Old MK and
foreign NOL's which were part of the acquisition of RE&C. The valuation
allowance relating to the NOL's of Old MK was reduced by $40,666 with an
equivalent reduction to goodwill. The reduction in the valuation allowance
for the NOL's of Old MK reflects that the federal and state NOL's will be
substantially utilized to offset the gain on cancellation of debt that was
recognized on emergence from bankruptcy. See Note 4, "Reorganization Case and
Fresh-start Reporting." The valuation allowance related to foreign NOL's
includes $12,023 that was established as part of the acquisition of RE&C and
was increased by $31,241 at December 1, 2000 to reduce the deferred tax asset
associated with the foreign NOL's to a level that we believe, more likely
than not, will be realized based on future foreign taxable income. The net
decrease of $50,000 in the valuation allowance at December 3, 1999 resulted
from an evaluation of the likelihood of the future realization of deductible
temporary differences and utilization of NOL's of Old MK with an equivalent
reduction to goodwill. The reduction in deferred tax liabilities related to
investments in affiliates for 2000 is due to losses incurred by foreign
subsidiaries, currency translation losses and Subpart F income recognized for
U.S. federal income tax purposes.

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Years prior to 1994 are closed to examination for federal tax purposes. We
believe that adequate provision has been made for probable tax assessments for
all open tax years.

Income tax expense (benefit) differed from income taxes at the U.S. federal
statutory tax rate of 35% as follows:

State taxes, net of federal benefit, include the impact of the cumulative
effect of the state tax rate changes caused by to the impact of recent
acquisitions. These acquisitions significantly impacted our state apportionment
factors that had a corresponding impact on our deferred state tax assets and
liabilities. Foreign taxes for the year ended November 30, 2001 include a
benefit for current year losses in certain foreign jurisdictions. A full
valuation allowance has been placed against the resulting foreign NOL's.
Nondeductible expenses, net was principally comprised of nondeductible
reorganization expenses and the nondeductible portion of meals and entertainment
expenses.

Income (loss) before reorganization items, income taxes and minority
interests is comprised of the following:

10. BENEFIT PLANS

PENSION PLANS

Through the RE&C acquisition, we assumed sponsorship of contributory
defined benefit pension plans which covered employees of legal entities in the
Netherlands and the United Kingdom. We made actuarially computed contributions,
as necessary, based on local standards in the respective countries to adequately
fund benefits for these plans. At December 1, 2000, plan assets for the pension
plan in the Netherlands were invested in separate accounts through an insurance
contract, and plan assets for the pension plan in the United Kingdom were
invested in a pooled pension fund. Investments consisted primarily of publicly
traded equity securities, bonds, government securities and cash equivalents. In
May 2001 and November 2001, respectively, the legal entities sponsoring the
pension plans in the Netherlands and the United Kingdom filed for bankruptcy and
the plans were transferred to independent trustees and the related liabilities
were extinguished. See Note 4, "Reorganization Case and Fresh-start Reporting."

Through the Westinghouse Businesses acquisition, we assumed sponsorship of
contributory defined benefit pension plans which cover employees of Westinghouse
Government Services Group ("WGSG"), which is comprised of the Westinghouse
Businesses acquired by us. We make actuarially computed contributions as
necessary to adequately fund benefits for these plans. As of December 1, 2000
and November 30, 2001, plan assets were invested in a WGSG master pension trust
that invested primarily in publicly traded common stocks,

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bonds, government securities and cash equivalents. The portion of the
unfunded obligation for these plans expected to be sold as part of EMD has
been reclassified as part of liabilities held for sale. See Note 7, "Sales of
Businesses and Businesses Held for Sale."

SUPPLEMENTAL RETIREMENT PLANS

We have an unfunded supplemental retirement plan for key executives of WGSG
providing for periodic payments upon retirement. Benefits from this plan are
based on salary and years of service and are reduced by benefits earned from
certain other pension plans in which the executives participate. Benefits from
this plan were frozen effective July 1, 2001, resulting in a curtailment gain of
$4,382. The portion of the unfunded obligation for this plan expected to be sold
as part of EMD has been reclassified as part of liabilities held for sale. See
Note 7, "Sales of Businesses and Businesses Held for Sale."

We have assumed the nonqualified pension liabilities to approximately 60
employees and former employees of an acquired company. In addition, we have an
unfunded pension liability for former non-employee directors of an acquired
company. Participants do not accrue any service cost under the plans.

POST-RETIREMENT HEALTH CARE PLANS

We are the sponsors of an unfunded plan to provide certain health care
benefits for employees of an acquired company who retired before July 1, 1993,
including their surviving spouses and dependent children. Employees who retired
after July 1, 1993 are not eligible for subsidized post-retirement health care
benefits. The plan was amended in past years, and we reserve the right to amend
or terminate the post-retirement health care benefits currently provided under
the plan and may increase retirees' cash contributions at any time. The
unrecognized prior service cost is being amortized to periodic health care
expense over the 13-year average future expected lifetime of retirees and their
surviving spouses beginning in 1997, the date of the last plan change.

We provide benefits under company sponsored retiree health care and life
insurance plans for substantially all employees of WGSG. The portion of the
unfunded obligation for these plans expected to be sold as part of EMD has been
reclassified as part of liabilities held for sale. See Note 7, "Sales of
Businesses and Businesses Held for Sale." We also provide benefits under company
sponsored retiree health care to approximately 260 retired employees and provide
a life insurance plan for substantially all retirees of RE&C. The retiree health
care plans require retiree contributions and contain other cost sharing
features. The retiree life insurance plans provide basic coverage on a
noncontributory basis.

The actuarial assumptions used to determine costs and benefit obligations
for the U.S. plans are as follows:

Experience gains and losses, as well as the effects of changes in actuarial
assumptions and plan provisions, are amortized over the average future service
period of employees.

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The components of net pension and post-retirement costs for the U.S. plans
are as follows:

Reconciliation of beginning and ending balances of benefit obligations and
fair value of plan assets and the funded status of the U.S. plans are as
follows:

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Amounts recognized in the balance sheet for the U.S. plans are as follows:

At November 30, 2001, the benefit obligation for each pension and
post-retirement benefit plan disclosed above exceeded the fair value of plan
assets. Upon our emergence from bankruptcy, we applied fresh-start reporting
that required the elimination of all unrecognized amounts as described above.
See Note 4, "Reorganization Case and Fresh-start Reporting" for disclosure of
the effect of the elimination.

An annual rate increase of 11.5% in the per capita cost of health care
benefits was assumed, gradually declining to 5.5% in the year 2006 and
continuing thereafter at that rate over the projected payout period of the
benefits. The health care cost trend rate assumption has a significant effect on
the accumulated projected benefit obligation. The effect of a 1% change in this
assumption would be as follows:

DEFERRED COMPENSATION PLANS

We adopted a deferred compensation plan effective January 1, 1998 for the
benefit of executive officers and key employees. The unfunded plan allowed
participants to elect to defer salary and bonus subject to certain limits. The
plan was terminated and assets were distributed to participants in March 2001.
The net cost of this plan was $102 in 2001, $317 in 2000 and $221 in 1999.

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OTHER RETIREMENT PLANS

We sponsor a number of defined contribution retirement plans. Participation
in these plans is available to substantially all salaried employees and to
certain groups of hourly employees. Our cash contributions to these plans are
based on either a percentage of employee contributions or on a specified amount
per hour depending on the provisions of each plan. The net cost of these plans
was $36,368 in 2001, $24,310 in 2000 and $13,767 in 1999.

MULTIEMPLOYER PENSION PLANS

We participate in and make contributions to numerous construction-industry
multiemployer pension plans. Generally, the plans provide defined benefits to
substantially all employees covered by collective bargaining agreements. Under
the Employee Retirement Income Security Act, a contributor to a multiemployer
plan is liable, upon termination or withdrawal from a plan, for its
proportionate share of a plan's unfunded vested liability. We currently have no
intention of withdrawing from any of the multiemployer pension plans in which we
participate. The net cost of these plans was $42,452 in 2001, $30,420 in 2000
and $18,874 in 1999.

11. TRANSACTIONS WITH AFFILIATES

We purchased goods and services from and participated in joint ventures
with affiliates of a principal stockholder who is also chairman of the board of
directors, and was president and chief executive officer, of WGI (the "Principal
Stockholder") as follows:

We performed construction services, mined and sold ballast, sold an
aircraft and realized gains on sales of equipment to affiliates of the Principal
Stockholder as follows:

Insurance, surety bonds and financial advisory services were purchased by
us from firms owned by or affiliated with persons who were members of our board
of directors at the time of purchase as follows:

In the first quarter of 2000, related to our acquisition of RE&C, we
entered into an agreement with a financial services advisory firm, the Chairman
and Chief Executive Officer of which was and continues to be a member of our
board of directors. Pursuant to the agreement, we paid the financial services
firm a success fee of $4,000 upon completion of the RE&C acquisition and paid an
aggregate retainer fee of $50 per quarter.

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In January 1998, we entered into an agreement with an insurance brokerage
firm owned by a then member of our board of directors for insurance and bond
services. The agreement was effective January 1, 1998 and expired December 31,
2000. Pursuant to the agreement, the brokerage firm received an annual fixed fee
of $1,150, which was paid in equal quarterly installments. All insurance
commissions earned on policies purchased for us were credited 100% against the
fee. The insurance brokerage firm retains 50% of all surety commissions in
excess of $250 during each calendar year. In 1999, our board of directors
approved an amendment to the agreement to increase the annual fee payable to the
brokerage firm to $1,250, effective January 1, 1999. A new agreement, effective
January 1, 2001, was approved by our board of directors in January 2001. The new
agreement reduced the fixed fee to $850 and eliminated the provision allowing
the retention of any surety commissions.

12. OPERATING SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION

We operate through five operating units, each of which comprised a separate
reportable business segment: Power, Infrastructure & Mining, Industrial/Process,
Government and Petroleum & Chemicals. The reportable segments were separately
managed, served different markets and customers, and differed in their
expertise, technology and resources necessary to perform their services. The
presentation of operating unit information for the years ended December 1, 2000
and December 3, 1999 have been reclassified to conform to the presentation for
the year ended November 30, 2001.

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

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

Industrial/Process provides engineering, design, procurement, construction
services and total facilities management for general manufacturing,
pharmaceutical and biotechnology, process, metals processing, institutional
buildings, food and consumer products, automotive, aerospace, telecommunications
and pulp and paper industries.

Government provides a complete range of technical services to the U.S.
Departments of Energy and Defense, including operations and management services,
environmental and chemical demilitarization services, waste handling and storage
and weapons stockpile support. Services provided for commercial clients include
design and manufacture of components of nuclear power facilities, safety
management services, waste and environmental technology, design and manufacture
of radioactive waste containers and licensing.

Petroleum & Chemicals provides technology, engineering, procurement and
construction services to the petroleum and chemical industries worldwide. Major
markets include commodity-organic chemicals, polymers, Fischer-Tropsch
chemistry, fertilizers, oleochemicals, petroleum processing and lube oil
processing.

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The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. We evaluate performance and
allocate resources based on segment operating income. In 2000, segment asset
balances were not measures reported to the chief operating decision-maker for
purposes of making decisions about allocating resources to segments and
assessing performance. Segment operating income is total segment revenue reduced
by segment cost of revenue and goodwill amortization related to the acquisition
of the Westinghouse Businesses. No other goodwill amortization is allocated to
the segments. Corporate and other expense consists principally of general and
administrative expenses.

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INVESTMENT IN EQUITY METHOD INVESTEES

At November 30, 2001 and December 1, 2000, we had $83,792 and $66,008,
respectively, in investments accounted for by the equity method. We recorded
earnings totaling $17,890, $13,080 and $12,435 in 2001, 2000 and 1999,
respectively. These investments were held and reported as part of the
Infrastructure & Mining segment.

GEOGRAPHIC AREAS

Geographic data regarding our revenue is shown below. Geographical
disclosures of long-lived assets were impracticable.

Revenue from international operations in 2001, 2000 and 1999 were in
numerous geographic areas without significant concentration.

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MAJOR CUSTOMERS

Ten percent or more of our total revenues for one or more of the three
years in the period ended November 30, 2001 were derived from contracts and
subcontracts performed by the Industrial/Process and Government segments with
the following customers:

13. CONTINGENCIES AND COMMITMENTS

SUMMITVILLE ENVIRONMENTAL MATTERS

From July 1985 to June 1989, Industrial Constructors Corp. ("ICC"), one of
our wholly-owned subsidiaries, performed various contract mining and
construction services at the Summitville mine near Del Norte, Colorado. In 1996,
the United States and the State of Colorado commenced an action under the
Comprehensive Environmental Response, Compensation and Liability Act in the U.S.
District Court for the District of Colorado against Mr. Robert Friedland, a PRP,
to recover the response costs incurred and to be incurred at the Summitville
Mine Superfund Site (the "Site"). No other parties were named as defendants in
the original complaints in this action. On April 30, 1999, Friedland filed a
third-party complaint naming ICC and nine other defendants, alleging that such
defendants are jointly and severally liable for the response costs and
requesting that the response costs be equitably allocated. In October 1999, the
United States and Colorado amended their complaints to add direct claims against
ICC and other parties.

On December 22, 2000, the United States and Colorado signed a Settlement
Agreement and Consent Decree wherein Friedland agreed to pay $27,500 in exchange
for various promises by the United States and Colorado, including dismissal of
Friedland from the action filed in 1996.

On January 2, 2001, Colorado filed a new federal action in Colorado, naming
five defendants: Sunoco, ARCO, Asarco, Bechtel and A.O. Smith, alleging that
these defendants are jointly and severally liable for costs incurred and to be
incurred by Colorado at the Site. On January 12, 2001, Colorado amended this
complaint by naming WGI, Washington Contractors Group, Inc., which is another
one of our wholly-owned subsidiaries, and Dennis R. Washington, our chairman, as
additional defendants. That case was dismissed on September 14, 2001 on the
basis that the statute of limitations had expired and the complaint was
untimely.

The United States and Colorado have estimated that the total response
costs incurred and to be incurred at the Site will approximate $150,000.
Prior to our bankruptcy filings neither we nor Mr. Washington were a party to
any agreement regarding allocation of responsibility, and neither the United
States nor Colorado had made any formal allocation of responsibility among
those defendants.

During the course of our bankruptcy proceedings we entered into
negotiations with the United States, Colorado and Mr. Friedland to settle the
issues related to these matters. In December 2001, we entered into settlement
agreements with the United States, Colorado and Mr. Friedland. As a result,
the United States and Colorado were deemed to have a general unsecured claim
against us in the amount of $20,288 in the bankruptcy proceedings and Mr.
Friedland obtained a settlement in the amount of $15,000. In connection with
the bankruptcy cases, the general unsecured claim of the United States and
Colorado was discharged on the Effective Date pursuant to our Plan of
Reorganization. Mr. Friedland has been assigned the right to proceed against
insurance carriers under specified insurance policies by which we were
insured with respect to claims for defense, contribution or indemnity
relating to the Site and to the actions brought by the United States and
Colorado. Mr. Friedland has agreed to proceed directly against the insurance
carriers and will not enforce or seek the payment of the settlement by us. As
a result of this settlement, we recorded a liability of $20,288 at December
1, 2000.

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OTHER ENVIRONMENTAL MATTERS

We were identified as a PRP and were contingently liable for remediation
liabilities in connection with Old MK's former transit business. We were
obligated to indemnify the buyer of the transit business for remediation
costs and have therefore accrued a $3,000 liability. Our obligations under
this indemnification were discharged in our bankruptcy proceedings on the
Effective Date of our Plan of Reorganization.

We are responsible for decontaminating and decommissioning a nuclear
licensed site owned and operated by EMD, part of the Government operating
unit, a business held for sale. During 2001, one facility underwent
decontamination and decommissioning at a total cost of $8,000, of which the
U.S. Navy paid 75% and we paid 25%. In April 2002, we presented a claim to
the U.S. Navy requesting funding for the decontamination and decommissioning
of the remaining site. Although we do not have a commitment from the U.S.
Navy to pay for such future costs, we expect that, as in the past, the U.S.
Navy will share in the responsibility for such costs. At November 30, 2001,
we accrued $701 for what we currently estimate to be our share of the future
decontamination and decommissioning costs at this site.

CONTRACT RELATED MATTERS

We have contracts with the U.S. government, the allowable costs of which
are subject to adjustments upon audit and negotiation by various agencies of
the U.S. government. Audits by the U.S. government and negotiations of
indirect costs are substantially complete through 1999. Audits by the U.S.
government of 2000 indirect costs are in progress. We are also in the process
of preparing cost impact statements as required under U.S. Cost Accounting
Standards for 1999 through 2001, which are subject to audit by the U.S.
government and negotiation. We have also prepared and submitted to the
government cost impact statements for 1989 through 1995 for which we believe
no adjustments are necessary. We believe that the results of the indirect
costs audits and negotiations and the cost impact statements will not result
in a material change to our financial position, results of operations or cash
flows.

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 balance sheet. We are obligated to reimburse
the issuer of such letters of credit for any payments made thereunder. At
November 30, 2001 and December 1, 2000, $177,247 and $253,927, respectively,
in face amount of letters of credit were outstanding. We have pledged cash
and cash equivalents as collateral for our reimbursement obligations with
respect to $22,410 in face amount of specified letters of credit that were
outstanding at November 30, 2001. At November 30, 2001, $122,040 of the
outstanding letters of credit were issued under the $500,000 RE&C Financing
Facilities and $32,782 of outstanding letters of credit were issued under the
DIP Facility described in Note 8, "Credit Facilities."

In connection with a 1989 sale of Old MK's ownership interest in a
shipbuilding subsidiary, we assumed a guarantee of port facility bonds of
$21,000 through 2002. The former subsidiary collateralized the bonds with
some of its assets and has established a sinking fund for the bonds. This
guarantee was rejected during our bankruptcy process without liability to us.

LONG-TERM LEASES

Total rental and long-term lease payments for real estate and equipment
charged to operations in 2001, 2000 and 1999 were $74,718, $85,520 and
$60,561, respectively. Future minimum rental payments under operating leases,
some of which contain renewal or escalation clauses, with remaining
noncancelable terms in excess of one year at November 30, 2001 were as
follows:

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The table above represents obligations existing for the respective periods
after adjustment for approximately $250,808 of future lease obligations that
were rejected, eliminated or renegotiated during the bankruptcy process through
reformation of the related lease.

OTHER

In May 1998, Leucadia National Corporation filed an action against us and
some of our officers and directors in the U.S. District Court for the District
of Utah. The complaint alleged fraud in the sale of shares of MK Gold
Corporation ("MK Gold") by Old MK to Leucadia and sought rescission of the sale
and restitution of $22,500. Leucadia contended that we knew or believed that a
non-competition agreement between us and MK Gold was unenforceable and failed to
disclose that belief to Leucadia. The non-competition agreement is the subject
of separate litigation between MK Gold and WGI. MK Gold was seeking alleged
damages of up to $10,000. On January 5, 1999, the two cases were
consolidated for trial. In April 2001, we entered into a settlement agreement
with Leucadia and MK Gold and, as a result, (i) the litigation was dismissed and
the parties granted one another mutual releases; (ii) we paid to MK Gold $1,500;
(iii) we issued a promissory note to MK Gold for $10,000; and (iv) we agreed to
extend the term of the non-competition agreement through 2006. We recorded the
charge for this settlement in November 2000. In our bankruptcy proceedings, the
non-competition agreement and the extension thereof contained in the settlement
agreement were rejected and terminated and amounts due to MK Gold under the
promissory note were treated as a general unsecured claim and were discharged on
the Effective Date pursuant to our Plan of Reorganization.

Some current and former officers, employees and directors of WGI were named
defendants in an action filed by two former participants in the Old MK 401(k)
Plan and Employee Stock Ownership Plan in the U.S. District Court for the
District of Idaho. The complaint alleges, among other things, that the
defendants breached certain fiduciary duties. On July 12, 2000, the court denied
plaintiffs' motion to reconsider a prior summary judgment in favor of specified
defendants and granted summary judgment with respect to specified other
defendants with the result that WGI and all current and former officers,
employees and directors have been dismissed from the action. The court also
certified the case as a class action. The remaining defendants in this
proceeding are the two plan committees and two companies (to which we had
indemnification obligations that were discharged in our bankruptcy proceedings)
involved in administration of the plans.

In September 2001, Westmoreland Resources, a mining venture in which we
hold a 20% ownership interest and to which we provide contract mining services,
asserted claims against us in our bankruptcy proceedings. As a threshold matter,
Westmoreland Resources objected to our assumption in the course of our
bankruptcy proceedings of the mining contract between us and Westmoreland
Resources, and we have reserved the right to reject all pending agreements
between Westmoreland Resources and us. In addition, Westmoreland Resources
claimed that (i) we had been overpaid under various mining contracts over a
six-year period, (ii) we likely would be obligated to reimburse Westmoreland
Resources for a portion of past due royalties that may be imposed against
Westmoreland Resources by the U.S. government and the Crow Indian Tribe, (iii)
we are obligated to pay for repairs to mining equipment (a dragline) owned by
Westmoreland Resources and (iv) Westmoreland Resources is entitled to adequate
assurances about whether we would be able to perform final reclamation at the
end of mining operations on the properties leased by Westmoreland Resources.
Westmoreland Resources has also asserted that we are being overpaid by them for
contract mining services we currently provide them.

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The claim for damage to the dragline was originally filed by Westmoreland
Resources in the U.S. District Court for the District of Montana in March 2000
and will be tried in that court. We expect that the other disputes between us
and Westmoreland Resources will be resolved as adversary proceedings in the
bankruptcy court. Dispositive motions on the issues before the bankruptcy court
are to be filed on or before November 15, 2002, and a trial date has been set
for January 20, 2003 to resolve those claims. We will not be required to assume
or reject the contracts between us and Westmoreland Resources until all
adversary proceedings are resolved.

From the spring of 1996 through the spring of 2001, we were the
environmental remediation contractor for the U.S. Army Corps of Engineers (the
"Corps") with respect to remediation at the Tar Creek Superfund Site at a former
mining area in northeast Oklahoma. The Corps had contracted with the U.S.
Environmental Protection Agency to remove lead contaminated soil in residential
areas from more than 2,000 sites and replace it with clean fill material. In
February 2000, various federal investigators working with the U.S. Attorney's
Office for the Northern District of Oklahoma executed search warrants and seized
our local project records. Allegations made at the time included claims that the
project had falsified truck load tickets and had claimed compensation for more
loads than actually were hauled, or had indicated that full loads had been
hauled when partial loads actually were carried, as well as claims that the
project had sought compensation for truckers and injured workers who were
directed to remain at the job site, but not to work. The criminal investigation
that relates to the execution of the search warrants remains pending. Through
claims filed in our bankruptcy proceedings and conversations with lawyers from
the Civil Division of the U.S. Department of Justice, we have learned that a QUI
TAM lawsuit has been filed against us under the federal False Claims Act by
private citizens alleging fraudulent or false claims by us for payments we
received in connection with the Tar Creek remediation project. We believe that
there was no wrongdoing by us or our employees at this project.

Although the ultimate outcome of the matters discussed in the three
preceding paragraphs cannot be predicted with certainty, we believe that the
outcome of these actions, individually or collectively, will not have a material
adverse impact on our financial position, results of operations or cash flows.

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 are
not expected to have a material adverse effect on our financial position,
results of operations or cash flows.

14. SUPPLEMENTAL CASH FLOW INFORMATION

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15. COMPREHENSIVE INCOME (LOSS)

Comprehensive income for the years ended November 30, 2001, December 1,
2000 and December 3, 1999 was as follows:

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The accumulated balances related to each component of other comprehensive
income (loss) were as follows:

16. CAPITAL STOCK, STOCK PURCHASE WARRANTS AND STOCK COMPENSATION PLAN

As discussed in Note 4, "Reorganization Case and Fresh-start Reporting,"
our Plan of Reorganization canceled all of the then outstanding shares of
capital stock, stock purchase warrants and stock options as of January 25, 2002,
and new capital stock, stock purchase warrants and stock options were issued.
The following was the status of these shares, warrants and options as of
November 30, 2001 prior to our filing for and emergence from bankruptcy
protection.

CAPITAL STOCK

Pursuant to our certificate of incorporation, we had the authority to issue
100,000 shares of common stock and 10,000 shares of preferred stock. Preferred
stock could be issued at any time or from time to time in one or more series
with such designations, powers, preferences and rights, qualifications,
limitations and restrictions thereon as determined by our board of directors.

STOCK PURCHASE WARRANTS

At November 30, 2001, we had outstanding stock purchase warrants giving
rights to acquire 2,865 shares of our old common stock at an exercise price of
$12.00 per share. All such warrants were scheduled to expire in March 2003.

STOCK REPURCHASE PROGRAM

In January 1998, our board of directors authorized the purchase, from time
to time, of up to 2,000 shares of our common stock and up to 2,765 of our stock
purchase warrants. As of June 1999, 2,000 shares had been repurchased. In July
1999, our board of directors authorized the purchase of an additional 2,000
shares of our common stock. As of November 30, 2001, no shares had been
repurchased under the new authorization.

STOCK COMPENSATION PLAN

We had a stock compensation plan for employees and non-employee directors
(the "1994 Plan") which provided for grants in the form of nonqualified stock
options or incentive stock options ("ISOs") and restricted stock awards.
Additional shares of common stock available each year for grants under the 1994
Plan were equal to 3% of the outstanding shares as of the first day of such
year. Exercise prices for nonqualified stock options were determined by our
board of directors. Exercise prices for ISOs were equal to the fair market value
of our common stock at the date of grant. Stock options extended for and vested
over periods of up to ten years as determined by our board of directors. Our
board of directors could accelerate the vesting period after award of an option.
The number of shares available for grant of ISOs could not exceed 2,900 shares,
and no individual could be granted stock options or restricted stock awards for
more than 5,000 shares over any three-year period.

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Non-employee directors could elect to forego receipt in cash of certain
fees earned during any year in return for an option with a grant price equal
to 80% of the fair market value of our common stock, vesting quarterly during
the year with a term period of up to ten years as determined by our board of
directors. Non-employee directors elected options for 95, 85 and 83 shares in
lieu of fees earned in 2001, 2000 and 1999, respectively.

On April 11, 1997, our stockholders adopted the 1997 Stock Option and
Incentive Plan for Non-employee Directors (the "1997 Plan") which provided
for grants in the form of nonqualified stock options and restricted stock
awards. Grant prices per share for stock options were at fair market value at
the date of grant. The number of shares available for grant as options and
restricted stock awards was 500 shares, of which no more than 100 shares
could be awarded as restricted. Grants of nonqualified stock options and
restricted stock awards to the non-employee directors under the 1997 Plan did
not preclude grants under the 1994 Plan. Options were subject to terms and
conditions determined by our board of directors and had a term not exceeding
10 years from the date of grant. Option activity under our stock plans is
summarized as follows:

The terms and conditions of restricted stock awards issued to key
employees were determined by our board of directors. Upon termination of
employment, shares that remained subject to restriction were forfeited. At
November 30, 2001, there were no restricted shares outstanding. No restricted
stock awards were made in 2001, 2000 and 1999.

STOCK-BASED COMPENSATION

We adopted the disclosure-only provisions of the Financial Accounting
Standards Board Statement No. 123 ACCOUNTING FOR STOCK-BASED COMPENSATION
("SFAS No. 123") issued in October 1995. Accordingly, compensation cost has
been recorded based only on the intrinsic value of the options granted. We
recognized $4, $192 and $219 of compensation cost in 2001, 2000 and 1999,
respectively, for stock-based compensation awards. If we had elected to
recognize compensation cost based on the fair value of the options granted at
grant date as prescribed by SFAS No. 123, net income (loss) would have been
adjusted to the pro forma amounts as follows:

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The pro forma amounts set forth above reflect the portion of the estimated
fair value of awards earned in 2001, 2000 and 1999 based on the vesting period
of the options.

The Black-Scholes option valuation model was used to estimate the fair
value of the options for purposes of the pro forma presentation set forth above.

The following assumptions were used in the valuation and no dividends were
assumed:

The assumptions used in the Black-Scholes option valuation model are
highly subjective, particularly as to stock price volatility of the
underlying stock, and can materially affect the resulting valuation.

The following table summarizes information regarding options that were
outstanding at November 30, 2001:

STOCKHOLDER RIGHTS PLAN

On June 21, 2002, our board of directors adopted a stockholder rights
plan under which we will issue one right for each outstanding share of our
common stock. The rights expire in 2012 unless they are earlier redeemed,
exchanged or amended by the board of directors. The board also adopted a
Three-Year Independent Director Evaluation ("TIDE") policy with respect to
the plan. Under the TIDE policy, a committee comprised solely of independent
directors will review the plan at least once every three years to determine
whether to modify the plan in light of all relevant factors.

The rights will initially trade together with our common stock and will
not be exercisable until after 10 days from the earlier of a public
announcement that a person or group has acquired beneficial ownership of 15%
or more, with certain exceptions, of our common stock or the commencement of,
or public announcement of an intent to commence, a tender or exchange offer
which, if successful, would result in the offeror acquiring 15% or

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more of our common stock. Once exercisable, each right would separate from
the common stock and be separately tradeable.

If a person or group acquires 15% or more, with certain exceptions, of
our common stock, or if we are acquired in a merger or other business
combination, each right then exercisable would entitle its holder to
purchase, at the exercise price of $125 per right, shares of our common
stock, or the surviving company's stock if we are not the surviving company,
with a market value equal to twice the right's exercise price.

We may redeem the rights for $.01 per right until the rights become
exercisable. We also may exchange each right for one share of common stock or
an equivalent security until an acquiring person or group owns 50% or more of
the outstanding common stock.

The rights are not considered to be common stock equivalents because
there is no indication that any event will occur that would cause them to
become exercisable.

17. FINANCIAL INSTRUMENTS

The estimated fair values of financial instruments at November 30, 2001
were determined by us, using available market information and valuation
methodologies believed to be appropriate. However, judgment is necessary in
interpreting market data to develop the estimates of fair values.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts that we could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies could have a
material effect on the estimated fair value amounts.

The carrying amounts and estimated fair values of certain financial
instruments at November 30, 2001 and December 1, 2000 were as follows:

The fair value of other financial instruments, including those included
in assets and liabilities held for sale, was comprised of (i) cash and cash
equivalents, accounts receivable excluding customer retentions, unbilled
receivables and accounts and subcontracts payable excluding retentions which
approximate cost because of the immediate or short-term maturity and (ii)
customer retentions, subcontract retentions and customer advances estimated
by discounting expected cash flows at rates currently available to us for
instruments with similar risks and maturities. As discussed in Note 4,
"Reorganization Case and Fresh-start Reporting," a significant amount of our
liabilities, including all of our outstanding debt, were liabilities subject
to compromise at November 30, 2001. As such, fair values for these
liabilities are not meaningful.

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ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Following the commencement of the bankruptcy cases in 2001,
PricewaterhouseCoopers LLP informed us that it had concluded that it was not
a "disinterested person" with respect to the Debtors and, accordingly, could
not continue to serve as independent public accountants of the Debtors during
the pendency of the bankruptcy proceedings. In addition,
PricewaterhouseCoopers LLP notified us that they could give no assurance that
they would be able to act as our independent public accountants following the
Debtors' emergence from bankruptcy protection. As a result, on October 3,
2001, we dismissed PricewaterhouseCoopers LLP and selected Deloitte & Touche
LLP as our independent public accountants. For a more detailed discussion,
see our current report on Form 8-K filed October 3, 2001

During the fiscal year ended November 30, 2001, there were no
disagreements with accountants on accounting and financial disclosure matters.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Certain information with respect to our board of directors as of April
30, 2002, including business experience for the past five years and all
positions held by them with the registrant, is set forth below. The
authorized number of directors for our board of directors is eleven, and the
directors are divided into three classes. Class I consists of three directors
who will hold office until the annual meeting of stockholders to be held in
2003, Class II consists of four directors who will hold office until the
annual meeting of stockholders to be held in 2004, and Class III consists of
four directors who will hold office until the annual meeting of stockholders
to be held in 2005.

III-2

EXECUTIVE OFFICERS

Certain information with respect to our executive officers as of April
30, 2002, including all positions held by them with us, is set forth below. Our
executive officers are elected by our board of directors for terms of one year
and until their successors are elected and qualified.

(1) For certain biographical information regarding Mr. Washington, see
"DIRECTORS" above.

(2) For certain biographical information regarding Mr. Hanks, see
"DIRECTORS" above.

(3) Mr. Oliver is a member of the Office of the Chairman. He formerly served
the registrant as Senior Executive Vice President and Chief Business
Development Officer. He also formerly served Fluor Daniel, Inc.
(engineering and construction) in various group president positions related
to sales, strategic planning, project development and project finance.

(4) Mr. Johnson is a member of the Office of the Chairman. He formerly served
the registrant as Senior Vice President. He also formerly served as Senior
Vice President of Global Development, Marketing and Strategy for Fluor
Corporation (engineering, procurement, construction, and maintenance
services) and as Vice President of Sales for Fluor Daniel, Inc.
(engineering and construction). Mr. Johnson is also a member of the Board
of Directors of North-South American Trading Company (NSAT) of Montreal,
Quebec, Canada.

(5) Mr. Juetten is a member of the Office of the Chairman. He formerly served
Dresser Industries, Inc. (supplier of products and services for oil and
natural gas industry) as Senior Vice President and Chief Financial Officer,
and as Vice President and Controller.

(6) Mr. Williams formerly served the registrant as President and Chief
Executive Officer of Industrial/Process and as Executive Vice President
of Industrial/Process.

(7) Mr. DiSibio formerly served the registrant as Executive Vice President of
Business Development-Power. He also formerly served Parsons Power Group as
President.

(8) Mr. Schwallie formerly served the registrant as Executive Vice President
and President and Chief Executive Officer of MK Government Services Group.
He also formerly served as President of Westinghouse Savannah River Company
(defense program contract services).

(9) Mr. Stricklin formerly served Flatiron Structures Company as President of
Design/Build Division.

(10) Mr. Therrien formerly served the registrant as Executive Vice
President-Operations of Industrial/Process, Senior Vice President-
Automotive/Manufacturing/Buildings of Industrial/Process, and Vice
President-Automotive Industrial Manufacturing of Industrial/Process.

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(11) Mr. Zarges formerly served the registrant as President and Chief Executive
Officer of Industrial/Process Group and MK Engineers and Constructors and
as Senior Vice President-Operations.

(12) Mr. Brimhall formerly served the registrant as Vice President of Audit
and Government Accounting. He also formerly served as Secretary and
Controller of Scientech, Inc. (energy and telecommunication consulting
and technical services) and in various other executive and management
positions at Stanford University (educational institution).

(13) Mr. Myers formerly served the registrant as Senior Vice President of
Business Operations for Washington Government. He also formerly served
as Vice President of Human Resources for Westinghouse Savannah River
Company (defense program contract services) and in a variety of senior
human resource positions.

(14) Mr. Parry formerly served the registrant as Vice President -Legal.

(15) Mr. Finlayson formerly served the registrant as Vice President of Project
Finance.

(16) Ms. Stinger formerly served GPU Inc. as Vice President of Government
Affairs and President of the GPU Foundation.

(17) Mr. Taylor formerly served the registrant as Associate General Counsel.

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ITEM 11. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table summarizes all plan and non-plan compensation
awarded or paid to, or earned by, each individual who acted as our chief
executive officer during the last fiscal year and our other four most highly
compensated executive officers (collectively, the "Named Executives") (as
well as David L. Myers, for whom disclosure would have been provided but for
the fact that he was not serving as an executive officer at the end of the
last completed fiscal year) during the fiscal years indicated:

(1) The numbers in this column notwithstanding, effective as of January 25,
2002, all of the above options were canceled pursuant to the Plan of
Reorganization; therefore, none of these options are currently exercisable or
will become exercisable at any time in the future.

(2) Consists of disability insurance premium of $10,712, imputed income of
$810 in connection with an executive term life insurance policy, tax gross-up
of $10,916 on the foregoing disability insurance premium and the value of the
term life insurance premium, and distribution of $2,139 preferential interest
earned on deferred compensation.

(3) Consists of $8,500 matching contributions to Mr. Hanks' 401(k) account,
service recognition of $3,102, and $36,318 representing Mr. Hanks' interest
in his executive life insurance policy's cash surrender value as projected on
an actuarial basis attributable to the 2001 premium.

(4) Consists of disability insurance premium of $10,712, imputed income of
$610 in connection with an executive life insurance policy, and tax gross-up
of $10,727 on the foregoing disability insurance premium and the value of the
term life insurance premium reported in the last column of this table.

(5) Consists of disability insurance premium of $10,712, imputed income of
$520 in connection with an executive term life insurance policy, and tax
gross-up of $10,641 on the foregoing disability insurance premium and the
value of the term life insurance premium.

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(6) Consists of $8,500 matching contribution to Mr. Kontny's 401(k) account.

(7) Consists of perquisite allowance of $8,000 and $4,354 for personal
financial planning service.

(8) Consists of $5,103 matching contribution to Mr. Schwallie's 401(k)
account.

(9) Consists of imputed income of $661 in connection with executive life
insurance, $8,000 perquisite allowance and $2,250 for personal financial
planning services.

(10) Consists of perquisite allowance of $8,000 and $2,250 for personal
financial planning services.

(11) Consists of disability insurance premium of $7,441, imputed income of
$889 in connection with an executive term life insurance policy, tax gross-up
of $6,309 on the foregoing disability insurance premium and the value of the
term life insurance premium, reimbursement for $9,000 of incidental expenses
in connection with relocation, and distribution of $8,701 preferential
interest earned on deferred compensation.

(12) Consists of $8,500 matching contributions to Mr. Zarges' 401(k) account,
relocation incentive payment of $142,323, tax gross-up of $81,852 on
foregoing relocation incentive payment, imputed income of $1,937 with respect
to relocation, tax gross-up of $1,648 on foregoing imputed income, and
$17,375 representing Mr. Zarges' interest in his executive life insurance
policy's cash surrender value as projected on an actuarial basis attributable
to the 2001 premium.

(13) Consists of disability insurance premium of $7,342, imputed income of
$780 in connection with an executive life insurance policy, and tax gross-up
of $8,106 on the foregoing disability insurance premium and the value of the
term life insurance premium reported in the last column of this table.

(14) Consists of disability insurance premium of $7,153, imputed income of
$720 in connection with an executive term life insurance policy and tax
gross-up of $7,139 on the foregoing disability insurance premium and the
value of the term life insurance premium.

(15) Consists of $8,500 matching contribution to Mr. Oliver's 401(k) account,
imputed income of $18,468 with respect to relocation, and tax gross-up of
$16,840 on the foregoing imputed income.

(16) Consists of $8,500 matching contribution to Mr. Myers' 401(k) account,
imputed income of $33,820 with respect to relocation, and tax gross-up of
$30,671 on the foregoing imputed income.

(17) Consists of imputed income of $842 with respect to a life insurance
policy and $1,706 with respect to relocation, as well as $1,536,880 in
connection with retention and change in control arrangements with former
employer.

OPTION GRANTS

The following table summarizes pertinent information concerning individual
grants of options to purchase our common stock during fiscal year 2001,
including a theoretical grant date present value for each grant:

(1) Messrs. Zarges' Oliver's, and Myers' options were granted on January 25,
2001. Mr. Oliver's options would have become exercisable in their entirety on
January 1, 2003. The options awarded to Messrs. Zarges, and Myers become
exercisable in four equal increments on each of the first four anniversaries
of the date of grant.

Effective as of January 25, 2002, all of the above options were canceled
pursuant to our Plan of Reorganization; therefore, none of these options are
currently exercisable or will become exercisable at any time in the future.

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AGGREGATE OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES

The following table summarizes pertinent information concerning the
exercise of options to purchase our common stock during fiscal year 2001 by
each of the Named Executives and the fiscal year-end value of unexercised
options:

Effective as of January 25, 2002, all of the above options were canceled
pursuant to the Plan of Reorganization; therefore, none of these options are
currently exercisable or will become exercisable at any time in the future.

PENSION

Mr. Hanks is entitled to pension benefits payable under the terms of a
group annuity contract purchased upon the termination of the Morrison Knudsen
Corporation Retirement Plan of 1970. This plan was terminated December 12,
1987. Assuming a five-year certain and life annuity upon normal retirement,
Mr. Hanks' total annual benefit at age 65 would be $7,142. For purposes of
this benefit, Mr. Hanks has 12 years of credited service with us.

Mr. Schwallie is eligible for retirement benefits under the Westinghouse
Government Services Group Pension Plan (the "WGS Plan"), the Westinghouse
Savannah River Company/Bechtel Savannah River, Inc. Pension Plan (the "WSRC
Plan") and the Westinghouse Government Services Group Executive Pension Plan
(the "WGS Executive Pension Plan") (collectively, the "Westinghouse Pension
Plans"). The following table indicates the approximate amounts of annual
retirement income that would be payable as of June 30, 2001 to employees who
were participants in the Westinghouse Pension Plans:

The WGS Plan and the WSRC Plan are contributory, defined benefit plans
designed to provide retirement income related to an employee's salary and
years of active service. All of our contributions are actuarially determined.
The WGS Executive Pension Plan, which was frozen effective June 30, 2001,
provides for

III-7

supplemental pension payments, provided certain eligibility requirements are
met. Such payments, when added to the pensions under the WGS Plan and the
WSRC Plan as of June 30, 2001, result in a total average pension equal to
1.47% for each year of credited service multiplied by the employee's average
annual compensation as defined by the WGS Executive Pension Plan. Average
annual compensation is equal to the average of the five highest annualized
base salaries plus the average of the five highest annual incentive awards,
each in the last ten years of employment prior to June 30, 2001. In the event
of retirement prior to age 60, the total annual pension would be reduced by
an amount equal to the reduction in the benefits payable under the WGS Plan
and the WSRC Plan.

The amounts presented in the above table are based on straight life
annuity amounts and are not subject to any reduction for Social Security
benefits but may be offset by amounts payable under certain other pension
plans previously sponsored by Westinghouse. As of June 30, 2001, Mr.
Schwallie had 29.25 years of credited service under the Westinghouse Pension
Plans.

After the WGS Executive Pension Plan was frozen on June 30, 2001, Mr.
Schwallie earned an additional monthly pension benefit under the WGS Plan of
$118, or 2% of his eligible compensation from July 1, 2001 through November
30, 2001.

RETENTION AGREEMENTS

In March of 2001, we entered into retention agreements with Messrs.
Hanks, Kontny, Schwallie, Zarges and Oliver, as part of a program to retain
key personnel in order to preserve the value of the business and to optimize
our financial performance and performance on projects. Each retention
agreement provided a retention bonus as well as a severance benefit, payable
under certain conditions.

Under the terms of Mr. Hanks' retention agreement, we agreed to pay to
Mr. Hanks a retention bonus equal to 1.5 times his "Target Bonus" (which is
defined as 120% of his base salary in effect on March 31, 2001) in three
equal installments on each of September 1, 2001, March 1, 2002, and September
1, 2002, each such payment to be payable provided that Mr. Hanks was or is
still employed by us on the applicable payment date. Payment of the first
installment was postponed until after the Effective Date of our emergence
from bankruptcy protection that occurred on January 25, 2002. If Mr. Hanks'
employment with us were to terminate before any of the above payment dates
due to his death or disability, we would pay to Mr. Hanks, or his estate, a
pro rated portion of the payment otherwise due based upon the number of days
he remained employed by us since the previous payment date. Mr. Hanks'
retention agreement further provides that if we experience a change in
control before December 31, 2002, or if Mr. Hanks' employment with us were to
be terminated before December 31, 2002 (other than for cause or by reason of
his death, disability or voluntary resignation or retirement), we would pay
Mr. Hanks an amount equal to the sum of his base salary and his Target Bonus.
In addition, Mr. Hanks would receive an amount equal to the pro rated portion
of the next retention bonus payment, if any, that would otherwise be payable
if Mr. Hanks' employment had not been terminated, based on the number of days
he remained employed by us since the previous payment date.

Under the terms of the retention agreements entered into with Messrs.
Kontny, Schwallie, Zarges and Oliver, we agreed to pay each of them
individually a retention bonus equal to 1.5 times their individual "Target
Bonus" (which is defined as 100% of base salary in effect on March 31, 2001)
in three equal installments on each of September 1, 2001, March 1, 2002, and
September 1, 2002, each such payment to be payable provided that the
executive is still employed by us on the applicable payment date. Payments of
the first installments were postponed until after the Effective Date of our
emergence from bankruptcy protection, which occurred January 25, 2002. If any
such executive's employment with us were to terminate before any of the above
payment dates due to his death or disability, we would pay to him, or his
estate, a pro rated portion of the payment otherwise due based upon the
number of days he remained employed by us since the previous payment date.
The retention agreements further provide that if the applicable executive's
employment with us is terminated before December 31, 2002 (other than for
cause for by reason of his death, disability or voluntary resignation or
retirement), or if, following a change in control, such executive's base
salary is reduced or he is asked to relocate to a city more than 50 miles
from the office or location in which he is based on the date of the change in
control and he resigns employment before December 31, 2002, rather than
accepting such reduction in base salary or change of location,

III-8

we will pay to him an amount equal to the sum of his base salary and his
Target Bonus. In addition, he would receive an amount equal to the pro rated
portion of the next retention bonus payment, if any, that would otherwise be
payable if his employment had not been terminated, based on the number of
days he remained employed by us since the previous payment date.

Notwithstanding any provision of the retention agreements to the
contrary, if any amount or benefit to be paid or provided under any such
retention agreement would be an "Excess Parachute Payment" within the meaning
of Section 280G of the Internal Revenue Code of 1986, as amended (the
"Code"), or any successor provision thereto, the payments and benefits to be
paid or provided would be reduced to the minimum extent necessary (but in no
event less than zero) so that no portion of any such payment or benefit, as
so reduced, constitutes an Excess Parachute Payment; provided, however, that
the foregoing reduction would be made only if and to the extent that such
reduction would result in an increase in the aggregate payment and benefits
to be provided, determined on an after-tax basis (taking into account the
excise tax imposed pursuant to Section 4999 of the Code and any tax imposed
by any comparable provision of state law, and any applicable federal, state
and local income and employment taxes).

III-9

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table shows stock ownership information as of April 30,
2002, for (i) the persons (as the term is used in Section 13(d)(3) of the
Exchange Act) known to us to beneficially own more than 5% of our common
stock, (ii) each director of WGI, (iii) each of the Named Executives; and
(iv) all our current directors and executive officers as a group:

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* Indicates that the percentage of shares beneficially owned does not
exceed 1% of the class.

(1) Except as otherwise indicated, the mailing address of each person
shown is c/o Washington Group International, Inc., 720 Park Boulevard,
Boise, Idaho 83712.
(2) For purposes of this table, shares are considered to be "beneficially"
owned if the person directly or indirectly has the sole or shared power
to vote or direct the voting of the securities or the sole or shared
power to dispose of or direct the disposition of the securities, and a
person is considered to be the beneficial owner of shares if that person
has the right to acquire the beneficial ownership of the shares within
60 days of April 30, 2002. Unless otherwise noted, the beneficial owners
have sole voting and dispositive power over their shares listed in this
column.
(3) Indicates shares included in the amounts shown to be beneficially owned
as of April 30, 2002, by reason of a right to acquire beneficial
ownership thereof within 60 days of such date.
(4) The percentages shown are calculated based upon the number of shares of
our common stock shown in the second column of this table, which
includes shares that the stockholder has the right to acquire beneficial
ownership of within 60 days of April 30, 2002.
(5) Mr. Kontny retired on November 15, 2001.
(6) Mr. Myers' employment terminated on March 1, 2002.

III-10

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

From time to time, we engage Batchelder & Partners, Inc., an investment
advisory and consulting firm ("BPI"), of which Mr. Batchelder is chairman and
chief executive officer, to act as our financial advisor with respect to
potential acquisitions and divestitures pursuant to written engagement
agreements. Such agreements traditionally include a retainer fee,
reimbursement of reasonable out-of-pocket expenses, indemnification and
payment of a success fee based upon the transaction value payable upon
completion of the transaction.

In 1999, BPI entered into an engagement agreement with us (the "1999
Agreement") with respect to our acquisition of RE&C and other unrelated
engagements. The RE&C acquisition was completed on July 7, 2000 and,
accordingly, in fiscal year 2000, we paid BPI a success fee of $4 million as
prescribed in the 1999 Agreement. In addition, pursuant to the 1999
Agreement, in fiscal year 2000, we paid to BPI $200,000 in retainer fees
($50,000 per quarter) and $100,190 for expenses related to the acquisition of
RE&C and other unrelated engagements.

On March 15, 2001, BPI entered into a Letter Agreement with us that
superseded all previous engagement agreements. Pursuant to the Letter
Agreement, BPI agreed to act as our financial advisor in relation to the
emerging liquidity crisis and we agreed to pay a monthly retainer fee of
$100,000 to BPI, effective January 1, 2001. Accordingly, we paid BPI $500,000
in retainer fees for January through May 2001, which included a $50,000
credit for a first quarter 2001 retainer fee paid under the 1999 Agreement.
Upon our filing for bankruptcy protection on May 14, 2001, subsequent
retainer fees were not paid. However, under our Plan of Reorganization, the
Letter Agreement was assumed and all amounts owing thereunder (i.e., retainer
amounts from June 1, 2001 forward) were brought current promptly after the
Effective Date of the Plan of Reorganization. Accordingly, in February 2002,
we paid BPI $700,000 in retainer fees for June through December 2001. With
the consent of both WGI and BPI, the Letter Agreement expired upon the
Effective Date of our emergence from bankruptcy protection.

Terry W. Payne, who was one of our directors during fiscal year 2001, is
Chairman and owner of Terry Payne & Co., Inc. ("TPC"), which provides
insurance and bonding brokerage services to us and our subsidiaries. In
January 1998, our board of directors approved a Professional Services
Agreement for insurance brokering services supplied by TPC to us effective
January 1, 1998, and expiring December 31, 2000, with automatic renewal
annually for 12-month terms thereafter, unless canceled by either party prior
to the annual date (the "1998 Professional Services Agreement"). Pursuant to
the 1998 Professional Services Agreement, TPC would receive an annual fixed
fee of $1,150,000 to be paid in equal quarterly installments with all
insurance and surety commissions earned on policies purchased for the
registrant to be credited 100% against the fee, except that, should surety
commissions exceed $250,000 in any given calendar year, then TPC would credit
only 50% of all surety commissions above $250,000 for the remainder of the
year. In 1999, our board of directors approved an amendment to the 1998
Professional Services Agreement to increase the annual fixed fee payable to
TPC to $1,250,000 per calendar year, effective as of January 1, 1999.

In January 2001, the board of directors approved a new agreement with
TPC, effective January 1, 2001, substantially similar to the 1998
Professional Services Agreement, as amended, except for the following
material differences: the scope of insurance services is reduced; the annual
fixed fee is $850,000; and the $250,000 threshold with respect to surety
commissions is eliminated and 100% of all insurance commissions and 50% of
all surety commissions are credited against the fixed fee.

In addition, in February 2001, we paid $425,000 to TPC for services
performed in connection with due diligence and post-closing activities
related to our acquisition of the RE&C businesses.

Mr. Washington is the founder and owner of Washington Corporations
("WC"). We chartered a corporate jet from WC and WC Leasing Corporation ("WC
Leasing"), a WC wholly-owned subsidiary, in connection with our business.
During fiscal year 2001, we paid WC and WC Leasing approximately $3.4 million
for such jet usage

III-11

and related maintenance and support services. Also, during fiscal year 2001,
we paid WC $250,000 for miscellaneous support services performed in
connection with the registrant's business.

As the pit mine operator at the Pipestone Mine Project in Montana, we
sell ballast to Montana Rail Link, Inc., a corporation owned by Mr.
Washington. During fiscal year 2001, the registrant realized revenues
totaling $1.9 million from such ballast sales.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act and the rules thereunder require our
officers and directors and persons who own more than 10% of our outstanding
common stock to file reports of ownership and changes in ownership with,
among others, the Securities and Exchange Commission and to furnish us with
copies.

Except as disclosed below, based on our review of copies of such forms
or written representations from certain reporting persons, we believe that,
during fiscal year 2001, all directors, executive officers and beneficial
owners of greater than 10% of our outstanding common stock complied with the
filing requirements applicable to them.

Each of our following directors and officers inadvertently failed to
timely file a Form 5, Annual Statement of Beneficial Ownership, for fiscal
year ended November 30, 2001: David H. Batchelder, George H. Juetten, Larry
L. Myers, Charles R. Oliver, G. Bretnell Williams and Thomas H. Zarges
(current directors and officers); R. S. Miller, Dorn Parkinson and Terry W.
Payne (former directors); and David L. Myers and James P. O'Donnell (former
officers). Each such Form 5 that was not timely filed disclosed one
transaction with respect to each of the above listed officers and directors,
involving grants in January 2001 of options to purchase our common stock to
each above listed director and officer. All of such options were canceled on
the Effective Date pursuant to our Plan of Reorganization.

III-12

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K

(a) DOCUMENTS FILED AS A PART OF THIS ANNUAL REPORT OF FORM 10-K.

IV-1

Deloitte & Touche LLP as successor independent accountants,
subject to the approval of the bankruptcy court.

On October 15, 2001, we filed a current report on Form 8-K dated
October 15, 2001, reporting that we would not timely file our
quarterly report on Form 10-Q for the quarterly period ended
August 31, 2001 because we needed additional time to prepare the
consolidated financial statements and related disclosures required
to be included in that quarterly report.

On October 16, 2001, we filed a current report on Form 8-K dated
October 15, 2001, reporting that, on October 15, 2001, we filed
with the bankruptcy court a monthly operating report for the month
ended August 31, 2001, including certain financial information.

On November 21, 2001, we filed a current report on Form 8-K dated
November 15, 2001, reporting that, on November 15, 2001, we filed
with the bankruptcy court a monthly operating report for the month
ended September 28, 2001, including certain financial information.
We also reported certain executive and organizational changes.

IV-2

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, we have duly caused this annual report on Form 10-K to be signed on
our behalf by the undersigned, thereunto duly authorized on July 9, 2002.

Washington Group International, Inc.

By /s/ George H. Juetten
- --------------------------------------------------------------------------------
George H. Juetten, Executive Vice President and Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this annual
report on Form 10-K has been signed below on July 9, 2002 by the following
persons on our behalf in the capacities indicated.

Chief Executive Officer and President and Director
/s/ Stephen G. Hanks (Principal Executive Officer)
- -------------------------------------
Executive Vice President and Chief Financial Officer
/s/ George H. Juetten (Principal Financial Officer)
- -------------------------------------

Senior Vice President and Controller
/s/ Reed N. Brimhall (Principal Accounting Officer)
- -------------------------------------

/s/ Dennis R. Washington* Chairman and Director
- -------------------------------------

/s/ David H. Batchelder* Director
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/s/ Michael R. D'Appolonia * Director
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/s/ William J. Flanagan* Director
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/s/ C. Scott Greer* Director
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/s/ William H. Mallender* Director
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/s/ Michael P. Monaco* Director
- -------------------------------------

/s/ Cordell Reed* Director
- -------------------------------------

/s/ Bettina M. Whyte* Director
- -------------------------------------

/s/ Dennis K. Williams* Director
- -------------------------------------

*Craig G. Taylor, by signing his name hereto, does hereby sign this annual
report on Form 10-K on behalf of each of the above-named officers and directors
of Washington Group International, Inc., pursuant to powers of attorney executed
on behalf of each such officer and director.

By /s/ Craig G. Taylor
- -----------------------------------------
Craig G. Taylor, Attorney-in-fact

WASHINGTON GROUP INTERNATIONAL, INC.
SCHEDULE II. VALUATION, QUALIFYING AND RESERVE ACCOUNTS
FOR THE YEAR ENDED NOVEMBER 30, 2001
(IN THOUSANDS)

ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLES DEDUCTED IN THE
BALANCE SHEET FROM ACCOUNTS RECEIVABLE

DEFERRED INCOME TAX ASSET VALUATION ALLOWANCE DEDUCTED IN THE
BALANCE SHEET FROM DEFERRED INCOME TAX ASSET

ESTIMATED COSTS TO COMPLETE LONG-TERM CONTRACTS REFLECTED
IN THE BALANCE SHEET

PROVISION FOR FUTURE LOSSES ON JOINT VENTURE CONTRACTS DEDUCTED
IN THE BALANCE SHEET FROM INVESTMENTS IN AND ADVANCES TO JOINT VENTURES

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(1) Change in valuation allowance related to estimates of the future
realization of acquired deductible temporary differences that have been
treated as a reduction of goodwill.
(2) Value of foreign net operating losses acquired in acquisition of RE&C.
(3) Represents amount transferred to liabilities held for sale.

S-1

WASHINGTON GROUP INTERNATIONAL, INC.
EXHIBIT INDEX

COPIES OF EXHIBITS WILL BE SUPPLIED UPON REQUEST. EXHIBITS WILL BE PROVIDED AT
A FEE OF $.25 PER PAGE REQUESTED.

- ----------------

# Management contract or compensatory plan
* Filed herewith

E-4