The following discussion contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those described here. You should read this section in conjunction with Item 1A, "Risk Factors," of this report beginning on page 14 and the consolidated financial statements and notes thereto contained in Item 8, "Consolidated Financial Statements and Supplementary Data," of this report.

Fiscal Year Change

Effective January 1, 2005, we adopted a 52/53 week fiscal year ending on the Friday closest to December 31st, with interim quarters ending on the Fridays closest to March 31st, June 30th and September 30th. We filed a transition report on Form 10-Q with the SEC for the two months ended December 31, 2004. Our 2006 fiscal year began on December 31, 2005 and ended on December 29, 2006.

Business Summary

We are one of the world's largest engineering design services firms and a major federal government contractor for systems engineering and technical assistance, and operations and maintenance services. Our business focuses primarily on providing fee-based professional and technical services in the engineering and defense markets, although we perform some construction work. As a result, we are labor and not capital intensive. We derive income from our ability to generate revenues and collect cash from our clients through the billing of our employees' time and our ability to manage our costs. We operate our business through two segments: the URS Division and the EG&G Division.

Our revenues are dependent upon our ability to attract qualified and productive employees, identify business opportunities, allocate our labor resources to profitable markets, secure new contracts, renew existing client agreements and provide outstanding services. Moreover, as a professional services company, the quality of the work generated by our employees is integral to our revenue generation.

Our costs are driven primarily by the compensation we pay to our employees, including fringe benefits, the cost of hiring subcontractors and other project-related expenses, and administrative, marketing, sales, bid and proposal, rental and other overhead costs.

Fiscal Year 2006 Revenues

Consolidated revenues for the year ended December 29, 2006 increased 8.2% over the consolidated revenues for the year ended December 30, 2005.

Because our business continues to grow and change, during the fiscal year ended December 29, 2006, we implemented a new process and refined our definitions for identifying contract revenues by client type. For our discussion and analysis of the year ended December 29, 2006 compared with the year ended December 30, 2005, we have reallocated the revenue identified with each market sector for the year ended December 30, 2005 on the basis of the new system adopted in 2006 to provide comparability with the allocation for the year ended December 29, 2006. However, for our discussion of the results of operations of the year ended December 30, 2005 compared with the year ended October 31, 2004, revenue by client type has not been reallocated, but is stated on a consistent basis for both periods presented.

Revenues from our federal government clients for the year ended December 29, 2006 increased approximately 7% compared with the year ended December 30, 2005. The increase reflects continued growth in demand for the services we provide to the Department of Defense ("DOD") and the Department of Homeland Security ("DHS"), as a result of additional spending on engineering and technical services and operations and maintenance activities related to sustained U.S. military operations in the Middle East, and on security preparedness activities in the U.S. In addition, we experienced an increase in environmental and facilities projects, primarily under large bundled contracts for the DOD. We also began to see contract awards under the DOD's Base Realignment and Closure (BRAC) program.

Revenues from our state and local government clients for the year ended December 29, 2006 increased approximately 7% compared with the year ended December 30, 2005. During 2006, many states experienced increases in tax receipts and, as a result, increased their general fund budgets.

The improved economic and fiscal situation contributed to increases in capital funding at the state and local government level for infrastructure projects, including transportation programs. The passage of the TEA-21 successor highway and transit bill, SAFETEA-LU, in August 2005 also had a positive effect on revenues from our state and local government clients. SAFETEA-LU provides $287 billion in federal matching funds for state transportation projects. In addition, during recent elections, voters in several states have passed bond initiatives and tax increases to fund infrastructure projects, including improvements to educational, flood control and transportation facilities.

Revenues from our international clients for the year ended December 29, 2006 increased approximately 7% compared with the year ended December 30, 2005, largely the result of growth in the work we performed under MSAs for multinational corporations outside the U.S., particularly from our clients in the oil and gas industry. The impact of foreign currency fluctuations on our revenues for the 2006 fiscal year was immaterial. In Asia-Pacific, we benefited from strong economic growth, which has lead to increased funding for infrastructure projects, including transportation and water/wastewater projects. In addition, the increased global demand for mineral resources resulted in additional projects for the mining industry. In Europe, more stringent environmental regulations and new investments in infrastructure projects resulted in increased revenues. The growth in our international business reflects the successful implementation of our strategy to diversify beyond environmental services into the facilities and infrastructure markets internationally.

Cash Flows and Debt

During the year ended December 29, 2006, we generated $165.0 million in net cash from operations. (See "Consolidated Statements of Cash Flows" to our "Consolidated Financial Statements" included under Item 8 of this report.) While net income increased during the year ended December 29, 2006 compared with the same period in 2005, cash flows from operations decreased by $35.4 million due primarily to the timing of payments on accounts payable, a decrease in accrued expenses and an increase in deferred income tax asset, offset by increases in collections of accounts receivable.

Our ratio of debt to total capitalization (total debt divided by the sum of debt and total stockholder's equity) improved from 19% at December 30, 2005 to 10% at December 29, 2006. The improvement in our debt to total capitalization ratio reflects our continued focus on de-leveraging our balance sheet.

Business Trends

We believe that our expectations regarding our business trends are reasonable and are based on reasonable assumptions. However, such forward-looking statements, by their nature, involve risks and uncertainties. You should read this discussion of business trends in conjunction with Item 1A, "Risk Factors," of this report beginning on page 14.

Federal Government

Revenues from our federal government clients increased during 2006, and we expect revenue growth from our federal government clients to continue in fiscal year 2007, based on secured funding by the DOD and the DHS. The President has requested $93.4 billion supplemental funding to sustain military operations in the Middle East through the end of fiscal 2007. The request includes $37.2 billion for Operations and Maintenance activities and $735 million for Research, Development, Test and Evaluation - two of the largest service offerings by our EG&G Division. In addition, Congress approved a 7% increase in the DHS budget for 2007, which includes $4.3 billion for port security programs and $3.4 billion for emergency preparedness and prevention. These two items fund a large portion of our homeland security work.

We also view the latest round of the BRAC activities, which are designed to realign and consolidate U.S. military infrastructure worldwide, as a multi-year opportunity for our federal business. In February 2007, Congress approved $2.5 billion to fund BRAC projects in fiscal 2007 and the President's 2008 DOD budget request includes $8.2 billion in BRAC funding, which is more than three times the 2007 funding level. Many of the bases targeted for realignment and closure will require environmental, planning and design services before they can be closed or redeveloped. Accordingly, the BRAC program may result in additional federal government opportunities for our URS Division, though it may have both positive and negative impacts on our EG&G Division.

We also anticipate that federal government infrastructure, facilities and environmental projects at military sites will increase under new and existing DOD contracts. Due to the size of our federal contracting business, we may see increased federal government opportunities for our URS and EG&G Divisions as a result of the increasing use of large "bundled" contracts issued by the DOD, which typically require the provision of a full range of services at multiple sites throughout the world.

State and Local Government

General fund spending by state government clients grew in fiscal 2006, and we expect this trend to continue in fiscal year 2007. Given the growing need to rebuild and modernize aging infrastructure and increasing tax receipts at the state level, we expect increased spending on infrastructure programs for which we provide services. We also expect the $287 billion highway and transit funding bill, SAFETEA-LU, to continue to provide stable funding for current and new transportation projects through 2009. In addition, we anticipate increased infrastructure spending as a result of bond issues, totaling approximately $68 billion, which were approved in November in 19 states to fund highway, public building and school improvement projects.

The increased spending on infrastructure programs, while beneficial to our business, is presenting us with some challenges. Rising raw material costs are leading to higher construction bids and depleting funds more quickly than state and municipal funding agencies had anticipated. As a result, we are seeing delays in the start-up of some planning and design assignments, as these agencies secure additional funding. We are also experiencing the effects of staffing shortages at some state and municipal agencies. After years of employee attrition, some agencies do not have sufficient personnel to manage multiple large programs concurrently.

Domestic Private Industry

We expect revenues from our domestic private industry clients to increase during the 2007 fiscal year compared to fiscal year 2006. The domestic private industry market has shown strong growth, particularly in the oil and gas, power and mining sectors. Many of our private industry clients are increasing capital expenditures as capacity utilization has grown to meet strong demand. We also expect the sustained profitability of our energy sector clients to continue to drive capital investment.

In addition, we anticipate continued growth in the power emissions control business, resulting from the requirements to cut sulfur dioxide and mercury emissions mandated by the Clean Air Interstate and Clean Air Mercury rules. We also expect to continue to benefit from our growing number of MSA contracts with multinational corporations, which have reduced the number of stand-alone consulting assignments we perform and are enabling us to win new work resulting from increased capital spending.

International

The increase in MSAs in our domestic private sector business has benefited and strengthened revenues from our international private sector clients. Notwithstanding the impact of foreign currency exchange rates, we expect revenues from our international clients to continue to increase in fiscal year 2007. In Europe, we expect to see increasing demand of our facilities design services for the United Kingdom Ministry of Defense and for the U.S. DOD at military installations overseas. In addition, we continue to see favorable market trends in Europe, including more stringent environmental regulations from the European Union and new investment in infrastructure projects-both leading to increased demand for the services we provide. In the Asia-Pacific region, we expect strong economic growth to increase opportunities in the infrastructure market. In addition, we anticipate that the increased global demand for mineral resources will provide additional opportunities in the mining sector.

We adopted SFAS 123(R) on December 31, 2005, the beginning of our 2006 fiscal year, using the modified prospective transition method. Accordingly, results of prior periods have not been restated to reflect and do not include the impact of SFAS 123(R). Upon adoption of SFAS 123(R), we recorded stock-based compensation expense for all stock-based compensation awards granted prior to, but not yet recognized as of December 31, 2005, based on the fair value at the grant date in accordance with the original provisions of SFAS 123. In addition, we recorded compensation expense for the share-based payment awards granted between December 31, 2005 and December 29, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R).

In light of the impact associated with the adoption of SFAS 123(R), since its adoption, we have issued only restricted stock awards and units, rather than stock options, to selected employees in order to minimize the volatility of our stock-based compensation expense.

Stock option awards expire ten years from the date of grant. Stock options, restricted stock awards, and restricted stock units vest over service periods that range from three to four years. Our Employee Stock Purchase Plan ("ESPP") qualifies as a non-compensatory plan under SFAS 123(R). As a result of adopting SFAS 123(R) in 2006, our fiscal 2006 net income and diluted earnings per share were reduced by $3.8 million and $0.07, respectively.

Other

Our federal government and state and local government clients have been increasing their use of design-build delivery mechanisms, where we are the designer, but generally team up with a construction contractor in order to obtain the design-build contract. Design-build delivery mechanisms provide high margins, but also involve greater financial risk than traditional design-bid-build programs, where we contract directly with our clients.

We are experiencing an increase in the use of lump-sum fixed price contracts by our clients, which often include higher margins, but also present more financial risk than cost-plus and time-and-materials contracting mechanisms.

Some state and local government projects have been delayed due to the rising raw material costs and a shortage of government staff to implement new projects.

Consolidated


                                      Year Ended     Year Ended                     Percentage
                                     December 29,   December 30,     Increase        Increase
                                         2006           2005        (Decrease)      (Decrease)
                                       (In millions, except percentages and per share amounts)
Revenues                             $    4,240.1   $    3,917.6   $      322.5               8.2 %
Direct operating expenses                 2,737.8        2,555.6          182.2               7.1 %
Gross profit                              1,502.3        1,362.0          140.3              10.3 %
Indirect, general and
administrative expenses                   1,283.5        1,187.6           95.9               8.1 %
Operating income                            218.8          174.4           44.4              25.5 %
Interest expense                             19.8           31.6          (11.8 )           (37.3 %)
Income before income taxes and
minority interest                           199.0          142.8           56.2              39.4 %
Income tax expense                           84.8           60.3           24.5              40.6 %
Minority interest in income of
consolidated subsidiaries, net of
tax                                           1.2              -            1.2             100.0 %
Net income                           $      113.0   $       82.5   $       30.5              37.0 %

Diluted earnings per share           $       2.19   $       1.72   $       0.47              27.3 %

The Year Ended December 29, 2006 Compared with the Year Ended December 30, 2005

Our consolidated revenues for the year ended December 29, 2006 increased by 8.2% compared with the year ended December 30, 2005. The increase was due primarily to a higher volume of work performed in each of our client categories during the year ended December 29, 2006, compared with the year ended December 30, 2005.

The following table presents our consolidated revenues by client type for the years ended December 29, 2006 and December 30, 2005.

                                       Year Ended      Year Ended
                                      December 29,    December 30,
                                          2006            2005         Increase      Percentage Increase
                                                       (In millions, except percentages)
Revenues
Federal government clients            $       1,952   $       1,824   $       128                       7 %
State and local government clients              914             854            60                       7 %
Domestic private industry clients               970             862           108                      13 %
International clients                           404             378            26                       7 %
Total revenues, net of eliminations   $       4,240   $       3,918   $       322                       8 %

Revenues from our federal government clients for the year ended December 29, 2006 increased by 7% compared with the year ended December 30, 2005. The increase reflects continued growth in demand for the services we provide to the DOD and the DHS, as a result of additional spending on engineering and technical services and operations and maintenance activities related to sustained U.S. military operations in the Middle East and on security preparedness activities in the U.S. We also experienced an increase in facilities and environmental projects, primarily under large bundled contracts for DOD agencies. In addition, we benefited from new work associated with the BRAC activities to realign and consolidate U.S. military installations worldwide.

The majority of our work in the state and local government, domestic private industry and the international sectors is derived from our URS Division. Further discussion of the factors and activities that drove changes in operations on a segment basis for the year ended December 29, 2006 can be found beginning on page 35.

Our consolidated direct operating expenses for the year ended December 29, 2006, which consist of direct labor, subcontractor costs and other direct expenses, increased by 7.1% compared with the year ended December 30, 2005. Because our revenues are primarily service-based, the factors that caused revenue growth also drove a corresponding increase in our direct operating expenses.

Our consolidated gross profit for the year ended December 29, 2006 increased by 10.3% compared with the year ended December 30, 2005, primarily due to the increase in our revenue volume described previously and to a lesser extent, pricing and award fee increases.

Our consolidated indirect, general and administrative ("IG&A") expenses for the year ended December 29, 2006 increased by 8.1% compared with the year ended December 30, 2005. The increase was due to the following items:

· an increase of $90.8 million in employee-related expenses due to both changes in headcount and an increase in cost per employee, including stock compensation cost of $18.4 million;

· an increase of $20.2 million in indirect labor, primarily as a result of an increase in employee headcount;

· an increase of $8.7 million in consulting service expense;

· an increase of $7.8 million in rent expense, $7.1 million in insurance expense, and $5.9 million in sales and business development expense; offset by

· a $5.9 million decrease in legal expense, primarily as a result of a $7.0 million payment related to the Banque Saudi Fransi claim which was recognized during fiscal year 2005;

· a $6.5 million decrease in other administrative expense; and

· a $33.1 million in loss on extinguishment of debt recognized in fiscal year 2005 without a comparative charge in 2006.

Our consolidated interest expense for the year ended December 29, 2006 decreased due to lower debt balances.

Our effective income tax rates for the year ended December 29, 2006 increased to 42.6% from 42.3% for the year ended December 30, 2005. (See further discussion Note 4, "Income Taxes" to our "Consolidated Financial Statements and Supplementary Data" included under Item 8 of this report.)

Our consolidated operating income, net income and earnings per share increased as a result of the factors previously described.

Reporting Segments

The Year Ended December 29, 2006 Compared with the Year Ended December 30, 2005

                                                        Direct
                                                      Operating                       Indirect, General       Operating
                                       Revenues        Expenses      Gross Profit    and Administrative     Income (Loss)
                                                              (In millions, except percentages)
Year ended December 29, 2006
URS Division                         $     2,804.7   $    1,707.8   $      1,096.9   $             905.2    $       191.7
EG&G Division                              1,450.9        1,044.5            406.4                 335.0             71.4
Eliminations                                 (15.5 )        (14.5 )           (1.0 )                   -             (1.0 )
                                           4,240.1        2,737.8          1,502.3               1,240.2            262.1
Corporate                                        -              -                -                  43.3            (43.3 )
Total                                $     4,240.1   $    2,737.8   $      1,502.3   $           1,283.5    $       218.8

Year ended December 30, 2005
URS Division                         $     2,556.7   $    1,561.9   $        994.8   $             800.6    $       194.2
EG&G Division                              1,369.0        1,001.3            367.7                 304.3             63.4
Eliminations                                  (8.1 )         (7.6 )           (0.5 )                   -             (0.5 )
                                           3,917.6        2,555.6          1,362.0               1,104.9            257.1
Corporate                                        -              -                -                  82.7            (82.7 )
Total                                $     3,917.6   $    2,555.6   $      1,362.0   $           1,187.6    $       174.4

Increase (decrease) for the year ended December 29, 2006 vs. the year ended December 30, 2005

URS Division                         $       248.0   $      145.9   $        102.1   $             104.6    $        (2.5 )
EG&G Division                                 81.9           43.2             38.7                  30.7              8.0
Eliminations                                  (7.4 )         (6.9 )           (0.5 )                   -             (0.5 )
                                             322.5          182.2            140.3                 135.3              5.0
Corporate                                        -              -                -                 (39.4 )           39.4
Total                                $       322.5   $      182.2   $        140.3   $              95.9    $        44.4

Percentage increase (decrease) for the year ended December 29, 2006 vs. the year ended December 30,

2005
URS Division                                   9.7 %          9.3 %           10.3 %                13.1 %           (1.3 %)
EG&G Division                                  6.0 %          4.3 %           10.5 %                10.1 %           12.6 %
Eliminations                                  91.4 %         90.8 %          100.0 %                   -            100.0 %
Corporate                                        -              -                -                 (47.6 %)         (47.6 %)
Total                                          8.2 %          7.1 %           10.3 %                 8.1 %           25.5 %

URS Division

The URS Division's revenues for the year ended December 29, 2006 increased 9.7% compared with the year ended December 30, 2005. The increase in revenues was due to the various factors discussed below in each of our client markets.

The following table presents the URS Division's revenues by client type for the years ended December 29, 2006 and December 30, 2005.

. . .