SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

QUARTERLY REPORT

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

For the Quarterly Period Ended

April 1, 2005

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

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

ý Yes o 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 Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

ý Yes o No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

ý Yes o No

At April 25, 2005, 26,031,653 shares of the registrant’s $.01 par value common stock were outstanding.

NOTE REGARDING FORWARD-LOOKING INFORMATION

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

• Our business strategy and competitive advantages

• Our expectations as to potential revenues from designated markets or customers

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

• Our expectations as to new work and backlog

• The markets for our services and products

• Our anticipated contractual obligations, capital expenditures and funding requirements

Forward-looking statements are only predictions. The forward-looking statements in this report are subject to risks and uncertainties, including, among others, the risks and uncertainties identified in this report and other operational, business, industry, market, legal and regulatory developments, which could cause actual events or results to differ materially from those expressed or implied by the forward-looking statements. Important factors that could prevent us from achieving the expectations expressed include, but are not limited to, our failure to:

• Manage and avoid delays or cost overruns on existing and future contracts

• Maintain relationships with key customers, partners and suppliers

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

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

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

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

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

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

• Maintain access to sufficient working capital through our existing revolving credit facility or otherwise

• Maintain access to sufficient bonding capacity

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(UNAUDITED)

	Three months ended
	April 1, 2005			April 2, 2004
Revenue	$	700,861		$	754,164
Cost of revenue	(654,788		)	(716,775		)
Gross profit	46,073			37,389
Equity in income of unconsolidated affiliates	7,343			10,680
General and administrative expenses	(15,306		)	(13,962		)
Operating income	38,110			34,107
Interest income	1,847			594
Interest expense	(3,400		)	(4,414		)
Other income (expense), net	22			(529		)
Income before income taxes and minority interests	36,579			29,758
Income tax expense	(14,632		)	(12,052		)
Minority interests in income of consolidated subsidiaries	(4,717		)	(4,640		)
Net income	$	17,230		$	13,066
Net income per share:
Basic	$	.68		$	.52
Diluted	.60			.47
Common shares used to compute net income per share:
Basic	25,509			25,133
Diluted	28,788			27,580

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

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CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(UNAUDITED)

	April 1, 2005			December 31, 2004
ASSETS

Current assets
Cash and cash equivalents	$	337,167		$	286,078
Short-term investments	—			30,200
Accounts receivable, including retentions of $16,666 and $14,973, respectively	242,057			250,251
Unbilled receivables	223,145			214,437
Investments in and advances to construction joint ventures	32,659			24,321
Deferred income taxes	91,903			94,343
Other	45,430			49,642
Total current assets	972,361			949,272

Investments and other assets
Investments in unconsolidated affiliates	176,720			179,347
Goodwill	301,839			307,817
Deferred income taxes	68,241			64,479
Other assets	16,935			18,078
Total investments and other assets	563,735			569,721
Property and equipment
Construction equipment	88,243			81,432
Other equipment and fixtures	33,217			31,954
Buildings and improvements	11,858			11,543
Land and improvements	2,459			2,491
Total property and equipment	135,777			127,420
Less accumulated depreciation	(62,390		)	(58,207		)
Property and equipment, net	73,387			69,213
Total assets	$	1,609,483		$	1,588,206

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

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CONDENSED CONSOLIDATED BALANCE SHEETS (continued)

(In thousands, except per share data)

(UNAUDITED)

	April 1, 2005			December 31, 2004
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and subcontracts payable, including retentions of $31,203 and $30,154, respectively	$	219,829		$	206,180
Billings in excess of cost and estimated earnings on uncompleted contracts	179,614			204,263
Accrued salaries, wages and benefits, including compensated absences of $53,460 and $48,908, respectively	141,262			149,502
Other accrued liabilities	67,140			61,919
Total current liabilities	607,845			621,864
Non-current liabilities
Self-insurance reserves	68,139			67,945
Pension and post-retirement benefit obligations	103,912			103,398
Other non-current liabilities	17,133			14,158
Total non-current liabilities	189,184			185,501
Contingencies and commitments
Minority interests	54,056			47,920
Stockholders’ equity
Preferred stock, par value $.01 per share, 10,000 shares authorized	—			—
Common stock, par value $.01 per share, 100,000 shares authorized; 26,023 and 25,474 shares issued, respectively	260			255
Capital in excess of par value	560,740			542,514
Stock purchase warrants	28,166			28,167
Retained earnings	148,131			130,901
Treasury stock, 26 shares, at cost	(1,012		)	(1,012		)
Deferred compensation - restricted stock, 124 shares	(4,956		)	—
Accumulated other comprehensive income	27,069			32,096
Total stockholders’ equity	758,398			732,921
Total liabilities and stockholders’ equity	$	1,609,483		$	1,588,206

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

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(UNAUDITED)

	Three months ended
	April 1, 2005			April 2, 2004
Operating activities
Net income	$	17,230		$	13,066
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Cash paid for reorganization items	(327		)	(665		)
Depreciation of property and equipment	4,285			4,128
Amortization of financing fees	855			733
Non-cash income tax expense	14,089			10,801
Minority interests in net income of consolidated subsidiaries	4,717			4,640
Equity in income of unconsolidated affiliates, less dividends received	(3,747		)	(10,271		)
Gain on sale of assets, net	(397		)	(641		)
Changes in operating assets and liabilities and other	(13,813		)	(65,199		)
Net cash provided (used) by operating activities	22,892			(43,408		)
Investing activities
Property and equipment additions	(9,047		)	(6,388		)
Property and equipment disposals	631			6,792
Purchases of short-term investments	(74,900		)	(134,200		)
Sales of short-term investments	105,100			164,400
Contributions and advances to unconsolidated affiliates	(708		)	(2,664		)
Net cash provided by investing activities	21,076			27,940
Financing activities
Payment of financing fees	—			(1,524		)
Contributions from (distributions to) minority interests, net	(1,602		)	1,946
Proceeds from exercise of stock options and warrants	8,723			4,727
Net cash provided by financing activities	7,121			5,149
Increase (decrease) in cash and cash equivalents	51,089			(10,319		)
Cash and cash equivalents at beginning of period	286,078			188,835
Cash and cash equivalents at end of period	$	337,167		$	178,516
Supplemental disclosure of cash flow information:
Interest paid	$	2,520		$	4,235
Income taxes paid, net	455			2,249

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

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(UNAUDITED)

	Three months ended
	April 1, 2005			April 2, 2004
Net income	$	17,230		$	13,066
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	(5,189		)	(1,773		)
Other	162			—
Other comprehensive loss, net of tax	(5,027		)	(1,773		)
Comprehensive income	$	12,203		$	11,293

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(UNAUDITED)

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

1. DESCRIPTION OF THE BUSINESS

We are an international provider of a broad range of design, engineering, construction, construction management, facilities and operations management, environmental remediation and mining services to diverse public and private sector clients, including (1) engineering, construction and operations and maintenance services in nuclear and fossil power markets; (2) diverse engineering and construction and construction management services for the highway and bridge, airport and seaport, dam, tunnel, water resource, railway and commercial building markets; (3) design, engineering, procurement, construction and construction management and operations and maintenance services to industrial companies; (4) contract mining, technical and engineering services for the metals, precious metals, coal, minerals and minerals processes markets; (5) comprehensive nuclear and other environmental and hazardous substance remediation as well as management and operations services for governmental and private-sector clients and (6) design, engineering, construction, management and operations, and closure services for weapons and chemical demilitarization programs for governmental and private-sector clients. In providing these services, we enter into four basic types of contracts: fixed-price or lump-sum contracts providing for a fixed price for all work to be performed, fixed-unit-price contracts providing for a fixed price for each unit of work to be performed; target-price contracts providing for an agreed upon price whereby we absorb cost escalations to the extent of our expected fee or profit and are reimbursed for costs which continue to escalate beyond our expected fee; and 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 target-price and cost-type contracts. Engineering, construction management, maintenance and environmental and hazardous substance remediation contracts are typically awarded pursuant to a cost-type contract.

We participate in construction joint ventures, often as sponsor and manager of projects, which are formed for the sole purpose of bidding, negotiating and completing specific projects. We participate in two incorporated mining ventures: MIBRAG mbH (“MIBRAG”), a company that operates lignite coal mines and power plants in Germany, and Westmoreland Resources, Inc. (“Westmoreland Resources”), a coal mining company in Montana. We also own two government contracting ventures, collectively the Westinghouse Businesses, in which British Nuclear Services, Inc. (“BNFL”) previously held a 40% economic interest. See Note 10, “Acquisition of BNFL’s Interest in Westinghouse Businesses,” regarding our purchase of BNFL’s 40% economic interest.

2. BASIS OF PRESENTATION

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

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These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in our 2004 Annual Report. The comparative balance sheet and related disclosures at December 31, 2004 have been derived from the audited balance sheet and consolidated footnotes referred to above.

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

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

The preparation of our consolidated financial statements in conformity with GAAP 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 revenues 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 cause us to revise estimates.

Reclassifications

Certain reclassifications, as described below, have been made to the accompanying condensed consolidated financial statements for the three months ended April 2, 2004 to conform to the current period presentation. The reclassifications did not impact previously reported revenues, operating income, net income, total assets, total liabilities or stockholders’ equity.

In February 2005, we determined that investments in Auction Rate Securities (“ARS”) should not be considered cash equivalents. ARS generally have long-term stated maturities; however, these investments have characteristics similar to short-term investments because at pre-determined intervals, generally within 7 to 90 days of the purchase, there is a new auction process. At April 2, 2004 and January 2, 2004, we reclassified ARS of $19,800 and $50,000, respectively, that were previously included in cash and cash equivalents to short-term investments. We have included the purchases and sales of ARS in the consolidated statements of cash flows as a component of investing activities. The reclassification resulted in an increase of net cash provided (used) by investing activities from $(2,260) as previously reported to $27,940 in the condensed consolidated statement of cash flows for the three months ended April 2, 2004. We have held ARS since May 2003. All ARS were sold in February 2005.

Stock-based compensation

We have used the intrinsic value method to account for stock-based employee compensation under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations for all periods presented. The following table illustrates the pro forma effect on net income and income per share if we had applied the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

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	Three months ended
	April 1, 2005			April 2, 2004
Net income as reported	$	17,230		$	13,066
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards	(1,885		)	(1,730		)
Add: Compensation cost recognized using intrinsic value method	—			784
Tax effects	736			369
Pro forma net income	$	16,081		$	12,489
Net income per share
As reported - basic	$	.68		$	.52
As reported – diluted	.60			.47
Pro forma - basic	.63			.50
Pro forma – diluted	.56			.45

3. ACCOUNTING STANDARDS

Recently Issued Accounting Standards

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised), Share-Based Payment (“SFAS 123-R”). SFAS 123-R replaces SFAS 123 and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”). Adoption of SFAS 123-R will require us to record a non-cash expense for our stock compensation plans using the fair value method. Historically we have recorded our compensation cost in accordance with APB No. 25, which does not require the recording of an expense for our equity related compensation plans if stock options were granted at a price equal to the fair market value of our common stock on the grant date. SFAS 123-R is effective for us beginning the first quarter of 2006. Based on the options outstanding as of April 1, 2005, we estimate the adoption of SFAS 123-R will result in an additional expense of approximately $5,900 in 2006. The actual expense will change from the estimate for new option grants and for forfeitures of current outstanding options.

In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary Assets – An Amendment of APB Opinion No. 29. ABP Opinion 29 provided an exception to the basic measurement principle (fair value) for exchanges of similar productive assets. That exception required that some non-monetary exchanges, although commercially substantive, be recorded on a carryover basis. SFAS No. 153 eliminates the exception to fair value for exchanges of similar productive assets and replaces it with a general exception for exchange transactions that do not have commercial substance – that is, transactions that are not expected to result in significant changes in the cash flows of the reporting entity. SFAS No. 153 is effective for us in the third quarter of 2005 but is not expected to have a significant impact on our financial position, results of operations or cash flows.

In the mining industry, companies may be required to remove overburden and waste materials to access mineral deposits. The costs of removing overburden and waste materials are referred to as “stripping costs.” In March 2005, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 04-6, Accounting for Stripping Costs Incurred during Production in the Mining Industry (“EITF 04-6”). The EITF concluded that stripping costs incurred during the production phase of a mine are variable production costs that should be included in the cost of the inventory produced during the period that the stripping costs are incurred. EITF 04-6 is effective for us in the first quarter of 2006. We are currently evaluating the impact of EITF 04-6 on our financial position, results of operations and cash flows.

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In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations – an interpretation of FASB Statement No. 143 (“FIN 47”). FIN 47 clarifies the term conditional asset retirement obligation as used in SFAS No. 143, Accounting for Asset Retirement Obligations, and requires a liability to be recorded if the fair value of the obligation can be reasonably estimated. The types of asset retirement obligations that are covered by FIN 47 are those for which an entity has a legal obligation to perform an asset retirement activity, however the timing and (or) method of settling the obligation are conditional on a future event that may or may not be within the control of the entity. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective for us in the fourth quarter of 2005. We are currently evaluating the impact of FIN 47 on our financial position, results of operations and cash flows.

4. VENTURES

Construction joint ventures

We participate in unconsolidated construction joint ventures that are formed to bid, negotiate and complete specific projects. The unconsolidated construction joint ventures are reflected in our consolidated balance sheets as investments in and advances to construction joint ventures and are accounted for under the equity method. Our proportionate share of revenue, cost of revenue, and gross profit for these unconsolidated construction joint ventures is included in our consolidated statements of operations. The size, scope and duration of joint-venture projects vary among periods. The tables below present the financial information for our unconsolidated construction joint ventures in which we do not hold a controlling interest but exercise significant influence. At April 1, 2005, $19,168 was included in our consolidated balance sheet under the caption “Billings in excess of cost and estimated earnings on uncompleted contracts,” representing our share of unconsolidated construction joint ventures that had an excess of liabilities over assets primarily due to accrued contract losses.

Combined financial position of non-consolidated construction joint ventures	April 1, 2005			December 31, 2004
Current assets	$	188,666		$	182,127
Property and equipment, net	4,920			3,707
Current liabilities	(178,385		)	(171,476		)
Net assets	$	15,201		$	14,358

Combined results of operations of	Three months ended
non-consolidated construction joint ventures	April 1, 2005			April 2, 2004
Revenue	$	129,234		$	159,421
Cost of revenue	(122,947		)	(160,604		)
Gross profit (loss)	$	6,287		$	(1,183	)

Washington Group’s share of results of operations of	Three months ended
non-consolidated construction joint ventures	April 1, 2005			April 2, 2004
Revenue	$	52,004		$	59,556
Cost of revenue	(46,453		)	(62,560		)
Gross profit (loss)	$	5,551		$	(3,004	)

During 2004, a construction joint venture in which we have a 50% interest recorded a contract loss on a $362,000 fixed-price roadway interchange and bridge project. Our share of the loss amounted to $27,500 of which $5,000 was recorded during the three months ended April 2, 2004. For the three months ended April 1, 2005, the joint venture recorded no operating profit or loss. The contract loss is primarily a result of cost growth due to design changes, quantity growth, price escalation, and project delays. As of April 1, 2005, the project is approximately 30% percent complete and scheduled to be completed in the fourth quarter of 2006. A portion of

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the joint venture losses may be recovered through change orders or claims; however, since realization can not be assured at this time, no potential change orders or claims have been considered in calculating the estimated loss. The change orders and claims will be recognized when it is probable that they will result in additional contract revenue and can be reliably estimated. While the entire amount of the current estimated loss has been recognized, actual results may differ from our estimates.

Unconsolidated affiliates

At April 1, 2005, we held ownership interests in several unconsolidated affiliates that are accounted for under the equity method, the most significant of which are two incorporated mining ventures: MIBRAG (50%) and Westmoreland Resources (20%). We provide consulting services to MIBRAG and contract mining services to Westmoreland Resources. The tables below present the financial information for our unconsolidated affiliates in which we do not hold a controlling interest but exercise significant influence.

Combined financial position of
unconsolidated affiliates	April 1, 2005			December 31, 2004
Current assets	$	155,122		$	184,801
Property and equipment, net	613,284			615,475
Other non-current assets	651,276			686,849
Current liabilities	(90,306		)	(98,424		)
Long-term debt, non-recourse to parents	(244,532		)	(257,950		)
Other non-current liabilities	(728,673		)	(769,739		)
Net assets	$	356,171		$	361,012

Combined results of operations of	Three months ended
unconsolidated affiliates	April 1, 2005			April 2, 2004
Revenue	$	118,187		$	117,992
Cost of revenue	(102,867		)	(96,178		)
Gross profit	$	15,320		$	21,814

5. CREDIT FACILITIES

We have a Senior Secured Revolving Credit Facility (the “Credit Facility”) that provides for up to $350,000 in the aggregate of loans and other financial accommodations allocated pro rata between a tranche A facility in the amount of $115,000 and a tranche B facility in the amount of $235,000. The scheduled termination dates for tranche A and tranche B are October 9, 2007 and August 5, 2008, respectively. The borrowing rate for tranche A is the greater of LIBOR or 2%, plus an additional margin of 3.50%. The borrowing rate for tranche B is LIBOR, plus an additional margin of 2.50%. As of April 1, 2005, the effective borrowing rate was 6.37% for tranche A and 5.37% for tranche B. The Credit Facility also provides for other fees, including commitment and letter of credit fees, normal and customary for such credit agreements. Under the current terms of the agreement, letters of credit are allocated pro rata between the facilities on the same basis as loans. Letter of credit fees are calculated using the applicable LIBOR margins of 3.50% for tranche A and 2.50% for tranche B plus an issuance fee. The average issuance fee for both tranches was 0.25%. Commitment fees are calculated on the remaining borrowing capacity of each tranche after subtracting all loans and letters of credit. The commitment fee is 1.50% for tranche A and 2.50% for tranche B. At April 1, 2005, $128,712 in face amount of letters of credit were issued and outstanding and no borrowings were outstanding leaving a borrowing capacity of $221,288 under the Credit Facility. The Credit Facility contains financial covenants requiring the maintenance of specified financial and operating ratios, and specified events of default that are typical for a credit facility of this size, type and tenor. The Credit Facility also contains affirmative and negative covenants that limit our ability and the ability of some of our subsidiaries to incur debt or liens, provide guarantees, make investments, merge with or acquire other companies, and pay dividends. At April 1, 2005, we were in compliance with all of the financial covenants under

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the Credit Facility. The Credit Facility is secured by substantially all of the assets of Washington Group and our wholly owned domestic subsidiaries.

6. OPERATING SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION

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

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

Infrastructure provides diverse engineering and construction 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 and hydroelectric facilities. The business unit generally performs as a general contractor or as a joint venture partner with other contractors on domestic and international projects.

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

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

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

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

The accounting policies of the segments are the same as those described in Note 1, “Significant Accounting Policies,” of the Notes to Consolidated Financial Statement in Part II, Item 8 of our 2004 Annual Report on Form 10-K. We evaluate performance and allocate resources based on segment operating income. Segment operating income is total segment revenue reduced by segment cost of revenue and includes equity in net earnings of unconsolidated affiliates. Intersegment and other unallocated operating costs principally consist of residual costs of our non-union subsidiary and unallocated costs of our self insurance program.

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SEGMENT OPERATING INFORMATION

	Three months ended
	April 1, 2005			April 2, 2004
Revenue
Power	$	150,649		$	150,202
Infrastructure	160,897			277,650
Mining	27,593			20,370
Industrial/Process	97,256			90,804
Defense	152,570			122,181
Energy & Environment	112,115			96,470
Intersegment, eliminations and other	(219		)	(3,513		)
Total revenue	$	700,861		$	754,164
Gross profit (loss)
Power	$	14,004		$	8,217
Infrastructure	3,362			5,852
Mining	(508		)	585
Industrial/Process	(1,884		)	1,488
Defense	15,111			8,570
Energy & Environment	16,765			17,299
Intersegment and other unallocated operating costs	(777		)	(4,622		)
Total gross profit	$	46,073		$	37,389
Equity in income (loss) of unconsolidated affiliates
Power	$	21		$	69
Infrastructure	148			182
Mining	7,168			10,434
Industrial/Process	208			136
Defense	—			—
Energy & Environment	(202		)	(141		)
Intersegment and other	—			—
Total equity in income of unconsolidated affiliates	$	7,343		$	10,680
Operating income (loss)
Power	$	14,025		$	8,286
Infrastructure	3,510			6,034
Mining	6,660			11,019
Industrial/Process	(1,676		)	1,624
Defense	15,111			8,570
Energy & Environment	16,563			17,158
Intersegment and other unallocated operating costs	(777		)	(4,622		)
General and administrative expenses, corporate	(15,306		)	(13,962		)
Total operating income	$	38,110		$	34,107

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7. TAXES ON INCOME

The effective tax rates for the three months ended April 1, 2005 and April 2, 2004, were 40.0% and 40.5%, respectively. The components of the effective tax rates are shown in the table below:

	Three months ended
	April 1, 2005		April 2, 2004
Federal tax rate	35.0	%	35.0	%
State tax	3.2		3.0
Nondeductible items	1.6		1.9
Foreign tax	.2		.6
Effective tax rate	40.0	%	40.5	%

The effective tax rate for the three months ended April 1, 2005 has decreased from the effective tax rate for the three months ended April 2, 2004 primarily due to a decrease in estimated non-deductible expenses and lower estimated foreign taxes during 2005 primarily due to the ratification of the 2004 Protocol to U.S.-Netherlands Income Tax Treaty.

8. BENEFIT PLANS

The components of net benefit cost for our pension and post-retirement benefit plans were as follows:

	Pension Benefits						Post-retirement Benefits
Three months ended	April 1, 2005			April 2, 2004			April 1, 2005			April 2, 2004
Service cost	$	1,268		$	1,007		$	198		$	305
Interest cost	1,175			1,088			729			826
Expected return on assets	(469		)	(346		)	—			—
Recognized net actuarial loss	96			26			(2		)	69
Net benefit cost	$	2,070		$	1,775		$	925		$	1,200

Employer Contributions

We previously disclosed in our financial statements for the year ended December 31, 2004, we expect to contribute $8,400 and $4,100, respectively, to our pension and post-retirement plans during 2005. During the three months ended April 1, 2005, $1,439 and $1,315, respectively, have been contributed to our pension and post-retirement plans. We anticipate contributing an additional $6,961 and $2,785, respectively, to fund our pension and post-retirement plans in 2005.

9. CONTINGENCIES AND COMMITMENTS

Contract related matters

We have cost-type contracts with the U.S. government that require the use of estimated annual rates for indirect costs. The estimated rates are analyzed periodically and adjusted based on changes in the level of indirect costs we expect to incur and the volume of work we expect to perform. The cumulative effect of changes to estimated rates is recorded in the period of the change. Additionally, the allowable indirect costs for U.S. government cost-type contracts are subject to adjustment upon 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 regulations, we could be required to reimburse the government for amounts previously received. Audits by the U.S. government of indirect costs are substantially complete through 2001. Audits of 2002 and 2003 indirect costs are in process.

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U.S. Government Cost Accounting Standards and other regulations also require that accounting changes, as defined, be evaluated for potential impact to the amount of indirect costs allocated to government contracts and that cost impact statements be submitted to the U.S. government for audit. We have prepared and submitted cost impact statements for 1989 through 1998 that have been audited by the U.S. government. We are currently negotiating the resolution of certain proposed audit adjustments to the cost impact statements. We are also in the process of preparing cost impact statements for 1999 through 2004.

While we have recorded reserves for amounts we believe are owed to the U.S. government under cost-type contracts, actual results may differ from our estimates. We believe that the results of the indirect cost audits, the resolution of the proposed audit adjustments related to the 1989 through 1998 cost impact statements, and the final submission and audit of cost impact statements for 1999 through 2004 will not have a material adverse effect on 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 accompanying condensed consolidated balance sheets. We are obligated to reimburse the issuer of such letters of credit for any payments made thereunder. At April 1, 2005 and December 31, 2004, $155,712 and $157,881, 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 $27,000 in face amount of letters of credit that were outstanding at April 1, 2005 not related to the Credit Facility. At April 1, 2005, $128,712 of the outstanding letters of credit were issued under the Credit Facility.

Guarantees

We have guaranteed the indemnity obligations of the Westinghouse Businesses relating to the sale of their Electro-Mechanical Division to Curtiss-Wright Corporation in October 2002 for the potential occurrence of specified events, including breaches of representations and warranties and/or failure to perform certain covenants or agreements. Generally, the indemnification provisions expire by October 2005 and are capped at $20,000. In addition, the indemnity provisions relating to environmental conditions obligate the Westinghouse Businesses to pay Curtiss-Wright Corporation up to a maximum $3,500 for environmental losses they incur over $5,000 until October 2007. The Westinghouse Businesses are also responsible for environmental losses that exceed $1,300 related to a specified parcel of the sold property through October 2012. If the Westinghouse Businesses are unable to perform their indemnity obligations, BNFL has agreed to indemnify us for 40% of losses we incur as a result of our guarantee. We believe that the indemnification provisions will not have a material adverse effect on our financial position, results of operations or cash flows.

Legal Matters

Tar Creek Litigation. 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 “USACOE”) with respect to remediation at the Tar Creek Superfund site at a former mining area in northeast Oklahoma. The USACOE had contracted with the U.S. Environmental Protection Agency (the “EPA”) 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 records at the Tar Creek project site. 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. A qui tam lawsuit was filed against us under the federal False Claims Act by private citizens (the relators), alleging fraudulent or false claims by us for payments we received in connection with the Tar Creek remediation project. In March 2004, the Department of Justice declined to intervene in this civil lawsuit, with the

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exception of four claims, which are stayed and remain under seal. The relators filed an amended complaint in March 2004, which eliminated the four claims that had been reserved to the government. We have moved to dismiss the relators’ claims, and the Court has yet to rule on our motion to dismiss. Also, in April 2004, we received a letter from the EPA’s Suspension and Debarment Division seeking information from us regarding the qui tam allegations, in order for the EPA to determine whether we were a responsible contractor. In October 2004, we were advised by the government that the criminal investigation had been concluded in September 2004 without any criminal prosecution. We believe that there was no wrongdoing by us or our employees at this project. Based on the status of this matter, we cannot make an estimate of potential additional loss, if any.

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

We were notified by the Department of Justice in March 2003 that the U.S. government was considering civil litigation against us for potential violations of the USAID source, origin and nationality regulations in connection with five of our USAID-financed host-country projects located in Egypt beginning in 1996. Following that notification we responded to inquiries from the Department of Justice and otherwise cooperated with the government’s investigation. In November 2004, the government filed an action in the U.S. District Court for the District of Idaho against us and the companies referred to above with respect to the Egyptian projects. The action was brought under the Federal False Claims Act, the Federal Foreign Assistance Act of 1961, and common law theories of payment by mistake and unjust enrichment. The complaint seeks damages and civil penalties for violations of the statutes and asserts that the government is entitled to a refund of all amounts paid to us and the other defendants under the specified contracts. The government alleges that approximately $373,000 was paid under those contracts. We have been in discussions and mediation with the government concerning these matters for an extended period of time, although no resolution of the matter has been reached. In March of 2005, we filed papers in the U.S. District Court for the District of Idaho asserting that the government’s claims against us are subject to the confirmation order and discharge injunction issued by the Bankruptcy Court in Nevada when we emerged from bankruptcy and seeking to dismiss the government’s complaint, or in the alternative to stay the action, as it relates to us. The government is required to respond to our motion to dismiss by mid-June 2005. At the same time, we filed an adversary proceeding in the Bankruptcy Court in Nevada along with a motion seeking to enforce that court’s confirmation order and discharge injunction as they may apply to the government’s claims. The hearing on our motion to enforce is scheduled for late June 2005. We and the government have agreed to schedule additional mediation sessions for early May 2005. We have agreed to delay the government’s obligations to respond to our motions until following those mediation sessions. We continue to dispute the government’s damages allegations and its entitlement to any recovery. We intend to vigorously defend against the allegations and claims in the litigation and to pursue continued discussions with the government.

Our joint venture for one of the five projects referred to above has brought arbitration proceedings before an arbitral tribunal in Egypt in which it has asserted a claim for additional compensation for the construction of water and wastewater treatment facilities in Egypt. The project owner, an Egyptian government agency, has asserted in a counterclaim that, by reason of alleged violations of the USAID source, origin and nationality regulations and alleged violations of Egyptian law, our joint venture should forfeit its claim, and pay damages of approximately $6,000 and the owner’s costs of defending against the joint venture’s claims.

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Based on our assessment of these matters, we recorded a charge of $8,200 in the fourth quarter of 2004. We cannot make an estimate of potential additional loss, if any.

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

10. ACQUISITION OF BNFL’s INTEREST IN WESTINGHOUSE BUSINESSES

On August 25, 2004, we entered into an agreement to acquire BNFL’s 40% economic interest in the Westinghouse Businesses, effective July 31, 2004. The Westinghouse Businesses manage highly complex facilities and programs for the U.S. Department of Energy (“DoE”) and Department of Defense (“DoD”) and provide engineering, construction, management, and risk-analysis services for a variety of governmental markets. Under the terms of the agreement, we control the Westinghouse Businesses and will generally pay BNFL 40% of net future profits from certain existing contracts and on future Washington Group contracts, if any, at certain DoE sites and one DoD site (the “40% Legacy Contracts”) and 10% of the profits from all other future contracts with the DoE through September 30, 2012 (the “10% Contracts”). BNFL will not share in any losses related to 10% Contracts if they occur in the future, but will retain its portion of liabilities incurred prior to July 31, 2004. The acquisition was subject to compliance with the Hart-Scott-Rodino Antitrust Act (the “HSR Act”). The acquisition became effective on April 7, 2005 (the “Effective Date”) under HSR Act exemption rules recently adopted by the Federal Trade Commission.

For accounting purposes, the agreement is bifurcated between the 40% Legacy Contracts and the 10% Contracts. Prior to our acquisition of BNFL’s economic interest, BNFL had a 40% economic interest in the 40% Legacy Contracts and will continue to receive 40% of the net profits from such contracts, in substance there will be no change in the economic relationship of the parties and therefore payments to BNFL for their share of the cash flows from the 40% Legacy Contracts will not be recorded as consideration for the acquisition of a minority interest. Currently, BNFL’s portion of the earnings related to the 40% Legacy Contracts is classified on the statement of income as minority interest in income of consolidated subsidiaries. BNFL’s portion of the cash flows related to the 40% Legacy Contracts is classified on the statement of cash flows as a financing activity as distributions to minority interests. After the Effective Date, BNFL’s share of the earnings related to the 40% Legacy Contracts will be classified as cost of revenue and BNFL’s share of the cash flows related to the 40% Legacy Contracts will be classified as an operating activity.

Payments to BNFL for the 10% Contracts will be treated as consideration for the acquisition of a minority interest and will be recorded using the purchase method of accounting. The acquired interest in assets and assumed liabilities will be recorded at estimated fair value. We do not expect that the fair values of assets and liabilities will differ significantly from currently recorded balances, except for goodwill. To the extent the fair value of assets acquired exceeds liabilities assumed, contingent consideration will be recorded at the date of acquisition. If future payments for the 10% Contracts exceed the amount of initial contingent consideration recorded, the excess payments will be recorded as goodwill.

On a pro forma basis, assuming the acquisition was effective as of April 1, 2005, significant impacts on the balance sheet would include: (i) elimination of minority interest of approximately $46,100 related to BNFL’s current interest in the Westinghouse Businesses, (ii) elimination of approximately $64,100 of goodwill currently recorded, and (iii) recording a receivable from BNFL for its portion of liabilities retained consisting primarily of pension liabilities. We do not anticipate that the acquisition will have a significant impact on our results of operations and cash flows except for the classification of BNFL’s portion of the earnings and payments for the 40% Legacy Contracts as explained above.

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

OVERVIEW

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

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

CRITICAL ACCOUNTING POLICIES AND RELATED CRITICAL ACCOUNTING ESTIMATES

Our accounting and financial reporting policies are in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet date, and the reported amounts of revenue and expenses during the reporting period. Our significant accounting policies are described in Note 1, “Significant Accounting Policies” of the Notes to Consolidated Financial Statements in Item 8 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2004 (the “2004 Annual Report”). The following discussion is intended to describe those accounting policies most critical to the preparation of our consolidated financial statements. The development and selection of the critical accounting policies, related critical accounting estimates and the disclosure below have been reviewed with the audit review committee of our board of directors. There were no changes in our critical accounting policies during the three months ended April 1, 2005.

Revenue recognition. We follow the provisions of SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. We recognize revenue on engineering and construction-type contracts using the percentage-of-completion method of accounting whereby revenue is recognized as performance under the contract progresses. For most of our fixed-price and target-price contracts, we use a cost-to-cost approach to measure progress toward completion. Under the cost-to-cost method, we make periodic estimates of our progress toward completion by comparing costs incurred to date with total estimated contract costs. Revenue is then calculated on a cumulative basis (project-to-date) as the total contract value multiplied by the current percentage complete. Revenue for a reporting period is calculated as the cumulative project-to-date revenue less project revenue recognized in prior periods. However, we defer profit recognition on fixed-price and certain target-priced construction contracts until progress is sufficient to estimate the probable outcome, which generally does not occur until the project is at least 20% complete. Fixed-price contracts accounted for 25% and 31% of our total revenue for the three months ended April 1, 2005 and April 2, 2004, respectively.

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

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

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

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

Costs related to change orders and claims are recognized when they are incurred. Change orders are included in total estimated contract revenue when it is probable that the change order will result in a bona fide addition to contract value and can be reliably estimated. 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 costs are recognized in one period and revenue is recognized when customer agreement is obtained or claim resolution occurs, which can be in subsequent periods. We recognized $9.7 million and $2.4 million of claim revenue during the three months ended April 1, 2005 and April 2, 2004, respectively. Substantially all claims were settled and collected during each respective period for which claim revenue was recognized. Additional contract related costs, including subcontractors share of claim settlement, of $0.2 million for the three months ended April 1, 2005 reduced the impact on operating income of the claim settlements disclosed above.

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

Goodwill. As of April 1, 2005, we have $301.8 million of goodwill. Pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, goodwill is no longer amortized but is to be tested for impairment at least annually. We regularly evaluate whether events and circumstances have occurred which may indicate a possible impairment of goodwill and perform the annual impairment test for all of our reporting units each October. In conducting the impairment test, we apply various techniques to estimate the fair value of our reporting units. These techniques are inherently subjective, and the resulting values are not necessarily representative of the values we might obtain in a sale of our reporting units to a willing third party. Based on our annual review of the recoverability of goodwill as of October 31, 2004, we determined that our goodwill is not impaired. However, our businesses are cyclical and subject to competitive pressures. Therefore it is possible that the goodwill values of our business units could be adversely impacted in the future by these or other factors and that a significant impairment adjustment, which would reduce earnings and potentially affect debt covenants, could be required in such circumstances.

Litigation claims and contingencies. In the normal course of business, we are subject to a variety of contractual guarantees and litigation. In general, guarantees can relate to project scheduling, project completion, plant performance or meeting required standards of workmanship. Most of our litigation involves us as a defendant in workers’ compensation, personal injury, contract, environmental, environmental exposure, professional liability and other similar lawsuits. We maintain insurance coverage for some aspects of our business and operations. In addition, we have elected to retain a portion of insured losses that may occur through the use of various deductibles, limits and retentions under our insurance programs. This situation may subject us to some future liability for which we are only partially insured, or completely uninsured. Self-insurance reserves are established and maintained for uninsured business risks.

Government funded contracts are, and are expected to continue to be, a significant part of our business. We derived 51% of our consolidated operating revenues in 2004 from contracts with the U.S. government, including 19% from work performed in the Middle East. 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 convenience of the customer. However, we have not experienced any unilateral termination of U.S. government contracts within the recent past.

Estimating liabilities and costs associated with such claims, guarantees, litigation and audits and investigations requires judgment and assessment based on professional knowledge and experience of our management and legal counsel. In accordance with SFAS No. 5, Accounting for Contingencies, amounts are recorded as charges to earnings when we determine that it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The ultimate resolution of any such exposure may vary from earlier estimates as further facts and circumstances become known. We maintain reserves for both self-insured claims that are known as well as for self-insured claims that are believed to have been incurred based on actuarial

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analysis, but have not yet been reported to our claims administrators. We include any adjustments to such insurance reserves in our consolidated results of operations.

OTHER SIGNIFICANT ACCOUNTING POLICIES AND TERMS

The following summary of significant accounting policies and terms is presented to provide a better understanding of our industry, our consolidated financial statements and discussion and analysis of our results of operations and financial position and liquidity.

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

Backlog represents the total accumulation of new work awarded less the amount of revenue, or equity in income of unconsolidated affiliates, recognized to date on contracts at a specific point in time. It comprises the total value of awarded contracts that are not complete and the revenue, or equity in income of unconsolidated affiliates, that is expected to be recognized over the remaining life of the projects in process. We believe backlog is a key predictor of future earnings potential. Although backlog reflects business that we consider to be firm, cancellations or reductions may occur and may reduce backlog and future 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 until awarded.

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

• Government contracts - Most of our government contracts cover several years. However, funding for the contracts is subject to annual appropriations by Congress. To account for the risk that future amounts may not be appropriated, we only include the most immediate two years of forecast revenue in our backlog. Therefore, as time passes and appropriations occur, additional new work is recorded on existing government contracts. At April 1, 2005, U.S. government funded contracts comprised approximately 39% of our total backlog.

• Mining contracts - Mining contracts span varying periods of time up to the life of the resource. For new work and backlog purposes, we limit the amount recorded to five years. Similar to our practices with government contracts, as time passes, we recognize additional new work as commitments for that future work are firmed up. At April 1, 2005, mining contracts comprised approximately 14% of our total backlog.

• At-risk and agency contracts - The amount of new work and related backlog recognized depends on whether the contract or project is determined to be an “at-risk” or “agency” relationship between the client and us. For “at-risk” relationships, the expected gross revenue is included in new work and backlog. For relationships where we act as an agent for our client, only the expected net fee revenue is included in new work and backlog. At April 1, 2005, agency contracts comprised approximately 6% of our total backlog.

Joint ventures and equity investments are utilized when contracts are executed jointly through partnerships and joint ventures with unrelated third parties.

• Joint ventures. A large part of our work on large construction and engineering projects is performed through unincorporated joint ventures with one or more partners. For those in which we control the joint venture by contract terms or other means, the assets, liabilities and results of operations of the joint venture are fully consolidated in our financial statements, and the minority interests of third parties are separately deducted in our financial statements. For those construction joint ventures in which we do not control the joint venture, we report our pro rata portion of revenue and costs, but the balance sheet reflects

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only our net investment in the project. Joint ventures not involving construction or engineering activities, and which we do not control, are reported using the equity method of accounting in which we record our portion of the joint venture’s net income or loss as equity in income or loss of unconsolidated affiliates and our investment on the balance sheet reflects our original investment, at cost, as adjusted for our equity in the income or loss of the joint venture.

• Partially owned subsidiary companies. For incorporated ventures in which we have a controlling interest, the assets, liabilities and results of operations of the subsidiary company are fully consolidated in our financial statements, and the minority interests of third parties are separately deducted in our financial statements. However, for those in which we do not have a controlling interest but do have significant influence, we use the equity method of accounting in which we record our portion of the subsidiary company’s net income or loss as equity in income or loss of unconsolidated affiliates and our investment on the balance sheet reflects our original investment, at cost, as adjusted for our equity in the income or loss of the subsidiary company.

Accounts receivable represent amounts billed to clients that have not been paid. On large fixed-price construction contracts, contract provisions may allow the client to withhold from 5% to 10% of invoices until the project is completed, which may be several months or years. These amounts withheld, referred to as retentions, are recorded as receivables and are separately disclosed in the financial statements.

Unbilled receivables include costs incurred on projects, together with any profit recognized on projects using the percentage-of-completion method, and represents work performed but not yet billed pursuant to contract terms or billed after the accounting period cut-off occurred.

Billings in excess of cost and estimated earnings on uncompleted contracts represent amounts actually billed to clients, and perhaps collected, in excess of costs incurred and profits recognized on a project. Also, in limited situations, we negotiate substantial advance payments as a contract condition. These advance payments are reflected in billings in excess of cost and estimated earnings on uncompleted contracts. Provisions for losses on contracts, reclamation 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 are also included in billings in excess of cost and estimated earnings on uncompleted contracts.

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

General and administrative expenses include executive and corporate functions, such as legal, human resources and finance and accounting.

Self-insurance reserves are maintained for uninsured business risks. We carry substantial premium-paid, traditional insurance for our various business risks; however, we do self-insure the lower level deductibles for workers’ compensation and general, automobile and professional liability. As such, we carry self-insurance reserves on our balance sheet. 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, and is comprised primarily of BNFL’s interest in the Westinghouse Businesses.

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Government contract costs are incurred under some of our contracts, primarily in our Defense, Energy & Environment, and Infrastructure business units. We have contracts with the U.S. government that contain provisions requiring compliance with the U.S. Federal Acquisition Regulations and the U.S. Cost Accounting Standards. The allowable costs we charge to those contracts are subject to adjustment upon audit by various agencies of the U.S. government. Audits of indirect costs are complete through 2000. Audits of 2001 and 2002 indirect costs are in process. We have prepared and submitted cost impact statements for 1989 through 1998 that have been audited by the U.S. government. We are currently negotiating the resolution of certain proposed audit adjustments to the cost impact statements. We are also in the process of preparing cost impact statements for 1999 through 2004. While we have recorded reserves for amounts we believe may be owed to the U.S. government under cost reimbursable contracts, actual results may differ from our estimates. We believe that the results of indirect cost audits and cost impact assessments will not have a material adverse effect on our financial position, results of operations or cash flows.

Pension and post-retirement benefit obligations include defined benefit pension plans that primarily cover certain groups of employees of the Westinghouse Businesses. We make actuarially-computed contributions as necessary to adequately fund benefits for these plans. We also provide benefits under company-sponsored retiree health care and life insurance plans for certain groups of employees of the Westinghouse Businesses. 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. We also sponsor certain frozen benefit plans for certain groups of employees and retirees other than the Westinghouse Businesses. Depending on the plan, the retirees are entitled to health care, life insurance, or retirement benefits. Some of the plans require retiree contributions.

BUSINESS UNIT NEW WORK AND BACKLOG

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

NEW WORK	Three months ended
(In millions)	April 1, 2005			April 2, 2004
Power	$	324.9		$	85.4
Infrastructure	166.4			284.3
Mining	187.1			13.8
Industrial/Process	119.1			164.5
Defense	152.3			112.9
Energy & Environment	518.7			125.1
Other	(.2		)	(3.5		)
Total new work	$	1,468.3		$	782.5

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

CHANGES IN BACKLOG	Three months ended
(In millions)	April 1, 2005			April 2, 2004
Beginning backlog	$	4,004.1		$	3,322.5
New work	1,468.3			782.5
Revenue and equity income recognized	(708.2		)	(764.9		)
Ending backlog	$	4,764.2		$	3,340.1

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Backlog at April 1, 2005 and December 31, 2004 consisted of the following for each business unit:

BACKLOG (In millions)	April 1, 2005		December 31, 2004
Power	$	890.7	$	716.4
Infrastructure	1,126.7		1,121.3
Mining	668.4		516.1
Industrial/Process	315.1		293.5
Defense	869.4		869.7
Energy & Environment	893.9		487.1
Total backlog	$	4,764.2	$	4,004.1

New work and backlog

At April 1, 2005, our backlog was $4,764.2 million, an increase of $760.1 million from December 31, 2004. Backlog on government contracts includes only two years’ worth of the portions of such contracts that are currently funded or which management is highly confident will be funded. In this regard, the reported backlog at April 1, 2005 excludes $2.8 billion of government contracts in progress for work to be performed beyond the first quarter of 2007. Our backlog at April 1, 2005 consisted of approximately 71% cost-type and 29% fixed-price contracts compared with 64% cost-type and 36% fixed-price contracts at the end of 2004.

New work for the three months ended April 1, 2005 includes the following significant contracts:

(In millions)	Three months ended April 1, 2005
Power
Middle East task orders	$	139.0
Plant modification contract	92.9
Infrastructure
Operations and maintenance contract	55.2
Middle East task orders	34.2
Mining
Silver and zinc mining contract	152.9
Defense
Chemical demilitarization contract continuations	107.4
Energy & Environment
Department of Energy environmental, decontamination and demolition contract	440.0

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RESULTS OF OPERATIONS

The following table summarizes our results of operations for the three months ended April 1, 2005 and April 2, 2004, and is included to facilitate our analysis and discussion of results of operations.

	Three months ended
(In millions)	April 1, 2005			April 2, 2004
Total revenue	$	700.9		$	754.2
Gross profit	$	46.1		$	37.4
Equity in income of unconsolidated affiliates	7.3			10.7
General and administrative expenses	(15.3		)	(14.0		)
Operating income	38.1			34.1
Interest income	1.8			.6
Interest expense	(3.4		)	(4.4		)
Other income (expense), net	.1			(.5		)
Income before income taxes and minority interests	36.6			29.8
Income tax expense	(14.7		)	(12.1		)
Minority interests in income of consolidated subsidiaries	(4.7		)	(4.6		)
Net income	$	17.2		$	13.1

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THREE MONTHS ENDED APRIL 1, 2005 COMPARED TO

THREE MONTHS ENDED APRIL 2, 2004

Revenue and operating income

Revenue for the three months ended April 1, 2005 declined $53.3 million, or 7% from the comparable period in 2004. The decline in revenue was primarily due to a $146.1 million reduction in revenue from the Middle East due to the substantial completion of a large contract with the USACOE in the Infrastructure and Power business units, partially offset by an increase in revenue in the Defense business unit from threat reduction contracts in the former Soviet Union, revenue from new Infrastructure highway and light rail projects, and increasing scope on several Power contracts.

Operating income for the three months ended April 1, 2005 increased $4.0 million from the comparable period of 2004. The increase is primarily due to a $9.2 million claim settlement on a completed international power project, award fees earned on chemical demilitarization projects and an increase in earnings on threat reduction projects in the former Soviet Union. The increase in operating income was partially offset by a decline in earnings of $6.4 million from the completion of contracts in the Middle East, a decrease in equity earnings of $3.3 million from lower coal shipments by our MIBRAG mining venture in Germany, and an operating loss in our Industrial/Process business unit.

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

Operating income for the three months ended April 2, 2004	$	34.1

Increase in earnings from increase in claim settlements	7.3
Significant project loss in 2004	5.0
Increase in earnings from ongoing projects	3.2
Decrease in earnings from Middle East contracts	(6.4		)
Decrease in earnings from MIBRAG mining venture	(3.3		)
Other	(1.8		)
Operating income for the three months ended April 1, 2005	$	38.1

The diversification of our business may cause margins to vary between periods due to the inherent risks and rewards on fixed-price contracts causing unplanned gains and losses on contracts. Margins may also vary between periods due to changes in mix and timing of contracts executed by us, which contain various risk and profit profiles and are subject to uncertainties inherent in the estimation process.

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

Equity in income of unconsolidated affiliates

Equity in income of unconsolidated affiliates for the three months ended April 1, 2005 declined by $3.4 million from the comparable period in 2004 primarily due to our MIBRAG mining venture in Germany. The two primary customers of MIBRAG from time to time have planned maintenance and other outages, as well as fluctuations in utilization, at the power plants they operate. The timing and duration of such outages and fluctuations vary from year to year. Equity earnings from MIBRAG declined from the comparable prior year period attributable to lower coal sales to one of its primary customers resulting from lower utilization due to performance issues at one of its power plants. We expect coal sales to decline further in the second quarter of 2005 while the customer makes repairs to that power plant and as a result of a scheduled maintenance and modification outage at one of the other customer’s power plants. We do not, however expect that these outages and fluctuations will materially affect the equity earnings from the MIBRAG mining venture for 2005 relative to prior years.

General and administrative expenses

General and administrative expenses for the three months ended April 1, 2005 increased $1.3 million from the comparable period of 2004 primarily due to an increase in incentive compensation, based on higher earnings.

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Interest Income

Interest income for the three months ended April 1, 2005 increased $1.2 million from the comparable period of 2004 due to larger cash balances available for investment and more favorable interest rates on invested cash balances.

Interest expense

Interest expense for the three months ended April 1, 2005 declined $1.0 million from the comparable period of 2004 due to improved terms from amendments to our credit facility. On March 19, 2004, and again on August 5, 2004, we amended the credit facility to include more favorable terms and reduce interest expense over the remaining term of the agreement.

Income tax expense

The components of the effective tax rate for the three months ended April 1, 2005 and April 2, 2004 are as follows:

	Three months ended
	April 1, 2005		April 2, 2004
Federal tax rate	35.0	%	35.0	%
State tax	3.2		3.0
Nondeductible items	1.6		1.9
Foreign tax	.2		.6
Effective tax rate	40.0	%	40.5	%

Minority interests

Minority interests in income of consolidated subsidiaries for the three months ended April 1, 2005 increased slightly from the comparable period of 2004. The majority of our minority interests relates to BNFL’s 40% ownership of the Westinghouse Businesses that are included in the Energy & Environment business unit. On April 7, 2005, we consummated the acquisition of BNFL’s interest in the Westinghouse Businesses. See Note 10, “Acquisition of BNFL’s Interest in Westinghouse Businesses” of condensed consolidated financial statements in Item 1 of this report. Beginning in the second quarter of 2005, BNFL will receive 40% of the net profits of the 40% Legacy Contracts but their share will be classified as cost of revenue rather than minority interest in income of consolidated subsidiaries.

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BUSINESS UNIT RESULTS

(In millions)

	Three months ended
Revenue	April 1, 2005			April 2, 2004
Power	$	150.6		$	150.2
Infrastructure	160.9			277.6
Mining	27.6			20.4
Industrial/Process	97.3			90.8
Defense	152.6			122.2
Energy & Environment	112.1			96.5
Intersegment and other	(.2		)	(3.5		)
Total revenue	$	700.9		$	754.2
Operating income (loss)
Power	$	14.0		$	8.3
Infrastructure	3.5			6.0
Mining	6.7			11.0
Industrial/Process	(1.7		)	1.6
Defense	15.1			8.6
Energy & Environment	16.6			17.2
Intersegment and other unallocated operating costs	(.8		)	(4.6		)
Total segment operating income	53.4			48.1
General and administrative expenses, corporate	(15.3		)	(14.0		)
Total operating income	$	38.1		$	34.1

Power

Revenue for the three months ended April 1, 2005 of $150.6 million was essentially unchanged from $150.2 million in the comparable period of 2004. During the first quarter of 2005, revenue grew by $15.7 million from increasing scope on four modification services contracts, $9.2 million from a claim settlement on a completed international power project, increased activity on a new power generation plant in Puerto Rico, and an increase in engineering services. Revenue declined by $14.8 million during the first quarter of 2005 from work in the Middle East due to the completion of a major task order which was partially offset by work on new power projects in Iraq. In addition, revenue decreased $13.1 million from the winding down of two plant modification projects in Alabama, and $7.1 million from the completion of a steam generator replacement project in South Carolina. Revenue from work in the Middle East totaled $31.2 million and $46.0 million, respectively, for the three months ended April 1, 2005 and April 2, 2004.

Operating income for the three months ended April 1, 2005 increased $5.7 million from the comparable period of 2004 due to the $9.2 million claim settlement on a completed international power project and earnings from the final contract close out of two steam generator replacement projects. The increase in operating income was partially offset by a decline in earnings from increased costs on a new generation power project and a decrease in earnings in the Middle East. Operating income from projects in the Middle East totaled $0.8 million and $2.6 million, respectively, for the three months ended April 1, 2005 and April 2, 2004.

Infrastructure

Revenue for the three months ended April 1, 2005 declined $116.7 million, or 42%, from the comparable period of 2004. The decline was primarily due to the substantial completion of a large contract in the Middle East with the USACOE, resulting in a $143.4 million decrease in revenue. The decline was partially offset by an increase in revenue from a new highway project in California and a new light rail project in California. Revenue from work in the Middle East totaled $25.4 million and $168.8 million, respectively, for the three months ended April 1, 2005 and April 2, 2004.

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Operating income for the three months ended April 1, 2005 declined $2.5 million from the comparable period of 2004 due to the substantial completion of a large contract in the Middle East that resulted in a $5.7 million reduction in earnings. During the first quarter of 2004, operating income was impacted by a $5.0 million charge recorded for estimated cost overruns on a large highway project in California. Operating income from projects in the Middle East totaled $4.0 million and $9.7 million, respectively, for the three months ended April 1, 2005 and April 2, 2004.

Due to the dynamic nature of the work we have performed in the Middle East under cost reimbursable contracts with the U.S. government, as is the case with all contractors, costs incurred on these contracts are subject to review and audit by the U.S. government. Based on all current available information, we believe we have established adequate reserves for estimated unallowable, non-recoverable, or disputed costs incurred to date.

Mining

Revenue for the three months ended April 1, 2005 increased $7.2 million, or 35%, from the comparable period of 2004. The increase is primarily due to the operation of a new copper mine in Nevada.

Operating income for the three months ended April 1, 2005 declined $4.3 million from the comparable period in 2004. The decline in operating income was primarily due to a decrease of $3.3 million in earnings from our MIBRAG mining venture in Germany. The two primary customers of MIBRAG from time to time have planned maintenance and other outages, as well as fluctuations in utilization, at the power plants they operate. The timing and duration of such outages and fluctuations vary from year to year. The decline in MIBRAG’s earning during the three months ended April 1, 2005 was attributable to lower coal sales to one of MIBRAG’s primary customers as a result of lower utilization due to performance issues at one of its power plants. We expect MIBRAG’s coal sales to decline further in the second quarter of 2005 while the customer makes repairs to that power plant and as a result of a scheduled maintenance and modification outage at one of the other customer’s power plants. We do not, however, expect that these outages and fluctuations will materially affect the earnings of the MIBRAG mining venture for 2005 relative to prior years. Mining’s operating income also declined from the shutdown of a phosphate mine in Idaho and start-up activities at a reclamation project in Wyoming. The decline in operating income for the first quarter of 2005 was partially offset by $1.0 million of income from the new copper mine in Nevada.

Industrial/Process

Revenue for the three months ended April 1, 2005 increased $6.5 million, or 7%, from the comparable period of 2004. Revenue increased $19.8 million due primarily to a new food processing facility construction contract, increased volume on a new facilities management project and a new life sciences project. The increase in revenue was partially offset by the winding down of four facilities management contracts, the completion of a major automotive project and the completion of an industrial maintenance shutdown project.

Operating income (loss) for the three months ended April 1, 2005 decreased $3.3 million from the comparable period in 2004. Operating income (loss) for the first quarter of 2005 was impacted by increased proposal costs, a short-fall in work to cover fixed costs, including specialists’ down time pending the award of new contracts, and a loss on a life sciences project pending change orders. Operating income for the first quarter of 2004 was favorably impacted due to earnings from an industrial maintenance shut down project and the settlement of claims on two projects totaling $2.1 million.

Defense

Revenue for the three months ended April 1, 2005 increased by $30.4 million, or 25%, from the comparable period in 2004 primarily due to higher procurement activities on a plutonium reactor conversion project, $8.4 million from the start-up of two other threat reduction projects in the former Soviet Union, and increased activity on a power enhancement project. The increase in revenue was partially offset by a decline of $16.8 million from reduced task order activity on a program in the former Soviet Union.

Operating income for the three months ended April 1, 2005 increased $6.5 million from the first quarter of 2004 principally due to increases in award fees earned on chemical demilitarization projects and higher earnings from an increase in the volume of work and award fees earned on threat reduction projects in the former Soviet Union.

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Energy & Environment

Revenue for the three months ended April 1, 2005 increased $15.6 million, or 16%, from the comparable period of 2004. The increase was primarily due to revenue from new contracts in the Middle East totaling $12.1 million and a contract modification at a decontamination and demolition project. The increase in revenue was partially offset by reduced activity at a large DoE management services contract.

Operating income for the three months ended April 1, 2005 declined by $0.6 million from the comparable period of 2004. The decline in operating income was due to lower activity at a large DoE management services contract during the current quarter and from income from the substantial completion and closeout of an energy project in the first quarter of 2004. The decline in operating income was partially offset by earnings of $1.1 million in the first quarter of 2005 from new contracts in the Middle East and a contract modification at a decontamination and demolition project.

Intersegment and other

Intersegment operating loss of $(0.8) million for the three months ended April 1, 2005, primarily consists of $1.0 million of residual costs from our non-union subsidiary. Intersegment operating loss of $(4.6) million for the three months ended April 2, 2004 included residual costs of $1.2 million from our non-union subsidiary and $2.1 million of expense related to our self-insurance program.

FINANCIAL CONDITION AND LIQUIDITY

We have three principal sources of liquidity: (1) cash generated by operations; (2) existing cash and cash equivalents and (3) available capacity under our credit facility. We had cash and cash equivalents of $337.2 million at April 1, 2005, of which $65.0 million was restricted for use in the normal operations of our consolidated joint venture projects or was restricted under our self-insurance programs. At April 1, 2005, we had no borrowing and $128.7 million in face amount of letters of credit outstanding under the credit facility, leaving a borrowing capacity of $221.3 million under the facility. For more information on our financing activities, see Note 5 “Credit Facilities,” of the Notes to Condensed Consolidated Financial Statements in Item 1.

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

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

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

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

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

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Cash flows

(In millions)

Liquidity and capital resources	April 1, 2005		December 31, 2004
Cash and cash equivalents	$	337.2	$	286.1
Short-term investments	—		30.2
Total	$	337.2	$	316.3

	Three months ended
Cash flow activities	April 1, 2005		April 2, 2004
Net cash provided (used) by:
Operating activities	$	22.9	$	(43.4	)
Investing activities	21.1		27.9
Financing activities	7.1		5.1

The discussion below highlights significant aspects of our cash flows.

• Operating activities:

For the three months ended April 1, 2005, operating activities provided $22.9 million of cash. During the three months, operating activities included net income of $17.2 million and several significant non-cash charges including non-cash income taxes of $14.1 million and depreciation and amortization of $5.1 million. Cash flow was impacted by an increase in working capital requirements of $13.8 million principally due to payments made for incentive compensation. At April 1, 2005, capital invested in contracts in the Middle East declined to $37.7 million from $51.6 million at December 31, 2004.

In the three months ended April 2, 2004, operating activities used $43.4 million of cash. During the quarter, cash was impacted by an increase in working capital of $65.2 million principally due to working capital requirements for USACOE task orders and payments made for incentive compensation. Operating earnings generated during the first quarter of 2004 partially offset the increase in working capital.

• Investing activities:

During the three months ended April 1, 2005, investing activities provided $21.1 million of cash consisting of $30.2 million from the liquidation of short-term investments net of purchases offset by $9.0 million in property and equipment acquisitions, primarily for our Infrastructure and Mining business units.

In the three months ended April 2, 2004, investing activities provided $27.9 million of cash consisting of $30.2 million from the liquidation of short-term investments net of purchases offset by $2.7 million of contributions and advances to unconsolidated affiliates. During the quarter, property and equipment sales were $6.8 million, primarily from equipment sales from the dam and hydropower project in the Philippines. Equipment acquisitions from new work orders in the Infrastructure and Mining business units used $6.4 million.

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• Financing activities:

During the three months ended April 1, 2005, financing activities generated $7.1 million of cash, consisting of $8.7 million in proceeds from the exercise of stock options reduced by $1.6 million in distributions to minority interests. Beginning in the second quarter of 2005, payments made to BNFL for their 40% interest in the 40% Legacy Contracts of the Westinghouse Business will be classified as an operating activity rather than a financing activity.

During the three months ended April 2, 2004, financing activities generated $5.1 million of cash, consisting of $4.7 million in proceeds from the exercise of stock options and warrants and $1.9 million related to minority interests share of additional investment in our consolidated joint ventures in our Infrastructure business unit.

Income taxes

We anticipate that cash payments for income taxes for 2005 and later years will be substantially less than income tax expense recognized in the financial statements. This difference results from expected tax deductions for goodwill amortization and from use of net operating loss (“NOL”) carryovers. As of April 1, 2005, we have remaining tax goodwill of approximately $57 million resulting from the acquisition of the Westinghouse Businesses and $566 million resulting from the acquisition of Raytheon Engineers & Constructors International, Inc. The amortization of this tax goodwill is deductible over remaining periods of 9.0 and 10.3 years, respectively, resulting in annual tax deductions of approximately $61 million, net of minority interest. The federal NOL carryovers as of April 1, 2005 were approximately $208 million, most of which are subject to an annual limitation of approximately $27 million and expire in years 2020 through 2022. Unused available NOL carryovers from previous years plus the 2005 annual limitation of $27 million, would allow us to use as much as $82 million of the NOL carryovers in 2005 or beyond. Until the tax goodwill deductions and the NOL carryovers are exhausted, we will not pay cash taxes (other than a minimal impact for alternative minimum tax) on the first $88 million of federal taxable income before tax goodwill amortization and application of NOL carryovers each year.

Cash flows for 2005

As in 2004, we expect to generate positive cash flows from operations in 2005. Specific issues which are relevant to understanding 2005 cash flows include:

• Income taxes: During the three months ended April 1, 2005, we paid $455 thousand of state and foreign tax. Because of anticipated utilization of tax goodwill amortization of $61 million, and the availability of $82 million of NOL carryovers, we will not pay federal taxes, other than a minimal impact for alternative minimum tax. Our partners in joint ventures are responsible for their share of the income tax liabilities of the joint ventures.

• Property and equipment: Capital expenditures for current construction and mining projects, along with normal capital expenditures to upgrade our information systems hardware and software, are expected to be approximately $20 to $30 million during the remainder of 2005. Additional capital may be required for new projects obtained during the year. Additionally, in the normal course of business, we sell a portion of our construction and mining equipment fleet each year, depending on expected future requirements.

• Pension and post-retirement benefit obligations: During the three months ended April 1, 2005, we contributed $1.4 million and $1.3 million, respectively, to our pension and post-retirement plans. We presently anticipate contributing an additional $7.0 million and $2.8 million, respectively, to fund our pension and retirement plans during the remainder of 2005, for a total of $8.4 million and $4.1 million, respectively. During the three months ended April 1, 2005, we recognized expense of $2.1 million and $0.9 million, respectively, for our pension and post-retirement plans.

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• Financing activities: At April 1, 2005, we had outstanding approximately 8.4 million warrants to purchase common stock. These warrants will expire in January 2006. Additionally, we have issued common stock options that are currently exercisable. At April 1, 2005, the market price of our common stock exceeded the exercise price of the warrants and options. If the warrants or options are exercised, we will receive proceeds to the extent of the exercise price of the warrants or options. For a complete discussion of these, see Note 16, “Capital Stock, Stock Purchase Warrants and Stock Compensation Plans” of the Notes to Consolidated Financial Statements in Item 8 of our 2004 Annual Report.

Financial condition and liquidity

We expect to use cash to, among other things, satisfy contractual obligations, fund working capital requirements and make capital expenditures. For additional information on contractual obligations and capital expenditures, see “Contractual Obligations” below and “Property and Equipment” above.

We believe that our cash flows from operations, existing cash, cash equivalents, and short-term investments, and available capacity under our revolving credit facility will be sufficient to meet our reasonably foreseeable liquidity needs.

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

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

Off-balance sheet arrangements

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

Contractual obligations

During the three months ended April 1, 2005, a seven year extension, through 2015, of the Boise, Idaho Corporate and Business Unit headquarters lease was signed for an additional total lease commitment of approximately $22.0 million. There were no other material changes in contractual obligations and other commercial commitments from such obligations and commitments as of December 31, 2004.

Guarantees

We have guaranteed the indemnity obligations of the Westinghouse Businesses relating to the sale of EMD to Curtiss-Wright Corporation for the potential occurrence of specified events, including breaches of representations and warranties and/or failure to perform certain covenants or agreements. Generally, the indemnification provisions expire by October 2005 and are capped at $20 million. In addition, the indemnity provisions relating to environmental conditions obligate the Westinghouse Businesses to pay Curtiss-Wright Corporation up to a

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maximum $3.5 million for environmental losses they may incur over $5 million until October 2007. The Westinghouse Businesses are also responsible for environmental losses that exceed $1.3 million related to a specified parcel of the sold property through October 2012. If the Westinghouse Businesses are unable to perform their indemnity obligations, BNFL has agreed to indemnify us for 40% of losses we incur as a result of our guarantee. We believe that the indemnification provisions will not have a material adverse effect on our financial position, results of operations or cash flows.

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

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

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

Components of EBITDA are presented below:

	Three months ended
(In millions)	April 1, 2005		April 2, 2004
Net income	$	17.2	$	13.1
Interest expense	3.4		4.4
Taxes	14.7		12.1
Depreciation and amortization	4.2		4.1
Total	$	39.5	$	33.7

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RECONCILIATION OF EBITDA TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES

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

	Three months ended
(In millions)	April 1, 2005			April 2, 2004
EBITDA	$	39.5		$	33.7
Interest expense	(3.4		)	(4.4		)
Tax expense	(14.7		)	(12.1		)
Cash paid for reorganization items	(.3		)	(.6		)
Amortization of financing fees	0.9			0.7
Non-cash income tax expense	14.1			10.8
Minority interests in income of consolidated subsidiaries	4.7			4.6
Equity in income of unconsolidated affiliates, less dividends received	(3.7		)	(10.3		)
Gain on sale of assets, net	(.4		)	(.6		)
Changes in net operating assets and liabilities and other	(13.8		)	(65.2		)
Net cash provided (used) by operating activities	$	22.9		$	(43.4	)

ACCOUNTING STANDARDS

Recently issued accounting standards

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised), Share-Based Payment (“SFAS 123-R”). SFAS 123-R replaces SFAS 123 and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”). Adoption of SFAS 123-R will require us to record a non-cash expense for our stock compensation plans using the fair value method. Historically we have recorded our compensation cost in accordance with APB No. 25, which does not require the recording of an expense for our equity related compensation plans if stock options were granted at a price equal to the fair market value of our common stock on the grant date. SFAS 123-R is effective for us beginning the first quarter of 2006. Based on the options outstanding as of April 1, 2005, we estimate the adoption of SFAS 123-R will result in an additional expense of approximately $5.9 million in 2006. The actual expense will change from the estimate for new option grants and for forfeitures of current outstanding options.

In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary Assets – An Amendment of APB Opinion No. 29. APB Opinion No. 29 provided an exception to the basic measurement principle (fair value) for exchanges of similar productive assets. That exception required that some non-monetary exchanges, although commercially substantive, be recorded on a carryover basis. SFAS No. 153 eliminates the exception to fair value for exchanges of similar productive assets and replaces it with a general exception for exchange transactions that do not have commercial substance – that is, transactions that are not expected to result in significant changes in the cash flows of the reporting entity. SFAS No. 153 is effective for us in the third quarter of 2005 but is not expected to have a significant impact on our financial position, results of operations or cash flows.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate risk

Our exposure to market risk for changes in interest rates relates primarily to our credit facility. Our short-term investment portfolio, at December 31, 2004, consisted primarily of highly liquid instruments sold or re-priced as to interest rate in periods less than three months. In February 2005, we liquidated our entire short-term investment portfolio and invested the proceeds in cash equivalents. Substantially all cash and cash equivalents at April 1, 2005 of $337.2 million were held in highly liquid instruments.

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

Foreign currency risk

We conduct our business in various regions of the world. Our operations are, therefore, subject to volatility because of currency fluctuations, inflation changes and changes in political and economic conditions in these countries. We are subject to foreign currency translation and exchange issues, primarily with regard to our mining venture, MIBRAG, in Germany. At April 1, 2005 and December 31, 2004, the cumulative adjustments for translation gains (losses), net of related income tax benefits, were $29.7 million and $34.8 million, respectively. While we endeavor to enter into contracts with foreign customers with repayment terms in U.S. dollars in order to mitigate foreign exchange risk, our revenues and expenses are sometimes denominated in local currencies, and our results of operations may be affected adversely as currency fluctuations affect our pricing and operating costs or those of our competitors. We may engage from time to time in hedging operations, including forward foreign exchange contracts, to reduce the exposure of our cash flows to fluctuations in foreign currency rates. We do not engage in hedging for speculative investment reasons. We can give no assurances that our hedging operations will eliminate or substantially reduce risks associated with fluctuating currencies.

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ITEM 4. CONTROLS AND PROCEDURES

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

• CEO and CFO certificates

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

• Disclosure controls

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

• Internal controls over financial reporting

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

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

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

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

• Limitations on the effectiveness of controls

Our management, including the CEO and CFO, does not expect that our Disclosure Controls and/or our Internal Control over Financial Reporting will prevent or detect all error or fraud. A system of controls is able to provide only reasonable, not complete, assurance that the control objectives are being met, no matter how extensive those control systems may be. Also, control systems must be established considering the benefits of a control system relative to its costs. Because of these inherent limitations that exist in all control systems, no evaluation of controls can provide absolute assurance that all errors or fraud, if any, have been detected. The inherent limitations in control systems include various human and

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system factors that may include errors in judgment or interpretation regarding events or circumstances or inadvertent error. Additionally, controls can be circumvented by the acts of a single person, by collusion on the part of two or more people or by management override of the control. Over time, controls can also become ineffective as conditions, circumstances, policies, technologies, level of compliance and people change. Because of such inherent limitations, in any cost-effective control system over financial information, misstatements may occur due to error or fraud and may not be detected.

• Scope of evaluation of Disclosure Controls

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

• Conclusions

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

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

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PART II. OTHER INFORMATION

ITEM 1. 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 never were a manufacturer of asbestos or products which contain asbestos. Asbestos-related lawsuits against us result from allegations that third parties sustained injuries and damage from the inhalation of asbestos fibers contained in materials used in construction projects and that we allegedly were negligent, the typical negligence claim being that we had a duty but failed to warn the plaintiff or claimant of, or failed to protect the plaintiff or claimant from, the dangers of asbestos. We expect that additional asbestos claims will be filed against us in the future.

Previously, we had determined that all of the asbestos claims relating to Old MK are fully insured and most, but potentially not all, of the asbestos claims relating to RE&C are fully insured. The potentially uninsured asbestos claims relate to a company acquired by RE&C in 1986. We recently reviewed the 1986 stock purchase agreement, pursuant to which RE&C had acquired that company, and have recently obtained and reviewed the insurance policies obtained by the prior owners of the company. Based on these reviews, we believe we are entitled to the benefit of the insurance coverage obtained by the prior owners. We have tendered the claims related to the acquired company to such insurance carriers, but we do not yet know if the carriers will accept the claims.

The outcome of these claims, including the adequacy of insurance coverage, cannot be predicted with certainty. Prior to receiving and reviewing the insurance policies, we believed that the annual range of reasonably possible additional loss, including related legal costs, was zero to $1.2 million. After analyzing the recently obtained insurance policies and reviewing the solvency of the insurance carriers, we believe the most likely annual loss to be at the lower end of the range.

We also incorporate by reference the information regarding legal proceedings set forth under the caption “Legal Matters” in Note 9, “Contingencies and Commitments” of the Notes to Consolidated Financial Statements in Item 1 of this report.

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

The qui tam lawsuit discussed under the caption “Legal Matters” and referred to as “Tar Creek Litigation” in Note 9, “Contingencies and Commitments” of the Notes to Consolidated Financial Statements in Item 1 of this report refers to United States ex. rel. Lovelace et. al. v. Washington Group International, Inc., Case No. 00-CV-61 EA(M) in the U.S. District Court for the Northern District of Oklahoma.

The lawsuit relating to our USAID-financed projects in Egypt discussed under the caption “Legal Matters” and referred to as “Litigation and Investigation related to USAID Egyptian Projects” in Note 9, “Contingencies and Commitments” of the Notes to Consolidated Financial Statements in Item 1 of this report refers to United States of American v. Washington Group International, Inc., et al., Case No. CIV-04545S-EJL in the U.S. District Court for the District of Idaho.

ITEM 6. EXHIBITS

(a) Exhibits

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

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	Note Regarding Forward-Looking Information

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Statements of Income for the
	Three Months Ended April 1, 2005 and April 2, 2004

	Condensed Consolidated Balance Sheets at
	April 1, 2005 and December 31, 2004

	Condensed Consolidated Statements of Cash Flows for the
	Three Months Ended April 1, 2005 and April 2, 2004

	Condensed Consolidated Statements of Comprehensive Income for the
	Three Months Ended April 1, 2005 and April 2, 2004

	Notes to Condensed Consolidated Financial Statements

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.	Quantitative and Qualitative Disclosures about Market Risk

Item 4.	Controls and Procedures

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings

Item 6.	Exhibits

SIGNATURES

	WASHINGTON GROUP INTERNATIONAL, INC.

	/s/ George H. Juetten
	George H. Juetten
	Executive Vice President and Chief Financial Officer,
	in his respective capacities as such

Date: May 4, 2005

Exhibit Number		Exhibit Description

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

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

32.1†		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.