10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

x   Quarterly Report Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

For the quarterly period ended June 30, 2007

OR

o   Transition Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the transition period from _____ to _____

Commission File Number 1-33146

KBR, Inc.

(a Delaware Corporation)

20-4536774

601 Jefferson Street

Suite 3400

Houston, Texas  77002

(Address of Principal Executive Offices)

Telephone Number – Area Code (713) 753-3011

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

Yes  x    No  o

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

Large accelerated filer    o Accelerated filer    o Non-accelerated filer    x

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

Yes  o    No  x

As of July 27, 2007, 168,988,336 shares of KBR, Inc. common stock, $0.001 par value per share, were outstanding.

1

KBR, Inc.

Index

		Page No.
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Statements of Operations	3
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41
Item 4.	Controls and Procedures	41
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3.	Defaults Upon Senior Securities	43
Item 4.	Submission of Matters to a Vote of Security Holders	43
Item 5.	Other Information	43
Item 6.	Exhibits	44
	SIGNATURES

2

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

KBR, Inc.

Condensed Consolidated Statements of Operations

(In millions, except for per share data)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended  June 30,
	2007			2006			2007			2006
Revenue:
Services	$	2,114		$	2,228		$	4,143		$	4,308
Equity in earnings (losses) of unconsolidated affiliates, net		38			8			36			(16	)
Total revenue		2,152			2,236			4,179			4,292
Operating costs and expenses:
Cost of services		2,057			2,265			4,010			4,261
General and administrative		30			24			59			41
Other operating income		-			(6	)		-			(6	)
Total operating costs and expenses		2,087			2,283			4,069			4,296
Operating income (loss)		65			(47	)		110			(4	)
Interest expense-related party		-			(11	)		-			(28	)
Interest income, net		14			2			27			5
Foreign currency losses, net		(2	)		(15	)		(5	)		(10	)
Other non-operating gains, net		1			-			1			-
Income (loss) from continuing operations before income taxes and minority interest		78			(71	)		133			(37	)
Benefit (provision) for income taxes		(32	)		29			(58	)		7
Minority interest in net earnings (losses) of subsidiaries		4			46			(1	)		47
Income from continuing operations		50			4			74			17
Income from discontinued operations, net of tax provision of $(128), $(52), $(133) and $(60 )		90			88			94			101
Net income	$	140		$	92		$	168		$	118
Basic income per share (1):
Continuing operations	$	0.30		$	0.03		$	0.44		$	0.13
Discontinued operations, net		0.54			0.65			0.56			0.74
Net income per share	$	0.83		$	0.68		$	1.00		$	0.87
Diluted income per share (1):
Continuing operations	$	0.30		$	0.03		$	0.44		$	0.13
Discontinued operations, net		0.53			0.65			0.56			0.74
Net income per share	$	0.83		$	0.68		$	0.99		$	0.87
Basic weighted average common shares outstanding		168			136			168			136
Diluted weighted average common shares outstanding		169			136			169			136

(1) Due to the effect of rounding, the sum of the individual per share amounts may not equal the total shown.

See accompanying notes to condensed consolidated financial statements.

3

KBR, Inc.

Condensed Consolidated Balance Sheets

(In millions, except share data)

(Unaudited)

	June 30, 2007			December 31, 2006
Assets
Current assets:
Cash and equivalents	$	2,016		$	1,410
Receivables:
Notes and accounts receivable (less allowance for bad debts of $76 and $57)		815			761
Unbilled receivables on uncompleted contracts		836			1,110
Total receivables		1,651			1,871
Deferred income taxes		132			120
Other current assets		270			240
Current assets of discontinued operations, net		11			257
Total current assets		4,080			3,898
Property, plant, and equipment, net of accumulated depreciation of $221 and $205		215			211
Goodwill		251			251
Equity in and advances to related companies		301			296
Noncurrent deferred income taxes		139			156
Unbilled receivables on uncompleted contracts		194			194
Other assets		42			51
Noncurrent assets of discontinued operations, net		-			357
Total assets	$	5,222		$	5,414
Liabilities, Minority Interest and Shareholders’ Equity
Current liabilities:
Accounts payable	$	1,056		$	1,177
Due to Halliburton, net		-			152
Advanced billings on uncompleted contracts		968			767
Reserve for estimated losses on uncompleted contracts		150			180
Employee compensation and benefits		268			259
Other current liabilities		313			174
Current liabilities of discontinued operations, net		-			274
Total current liabilities		2,755			2,983
Noncurrent employee compensation and benefits		206			221
Other noncurrent liabilities		155			149
Noncurrent income tax payable		65			-
Noncurrent deferred tax liability		33			44
Noncurrent liabilities of discontinued operations, net		-			188
Total liabilities		3,214			3,585
Minority interest in consolidated subsidiaries (including $0 and $44 related to discontinued operations)		(33	)		35
Shareholders’ equity and accumulated other comprehensive loss:
Preferred stock, $0.001 par value, 50,000,000 shares authorized, no shares issued and outstanding		-			-
Common shares, $0.001 par value, 300,000,000 shares authorized, 168,939,043 and 167,772,410 shares issued and outstanding		-			-
Paid-in capital in excess of par value		2,066			2,058
Accumulated other comprehensive loss		(210	)		(291	)
Retained earnings		185			27
Total shareholders’ equity and accumulated other comprehensive loss		2,041			1,794
Total liabilities, minority interest, shareholders’ equity and accumulated other comprehensive loss	$	5,222		$	5,414

See accompanying notes to condensed consolidated financial statements.

4

KBR, Inc.

Condensed Consolidated Statements of Cash Flows

(In millions)

(Unaudited)

	Six Months Ended June 30,
	2007			2006
Cash flows from operating activities:
Net income	$	168		$	118
Adjustments to reconcile net income to cash provided by operations:
Depreciation and amortization		24			23
Distribution from (to) related companies, net of equity in earnings (losses) of unconsolidated affiliates		(18	)		-
Deferred income taxes		22			(4	)
Gain on sale of assets, net		(216	)		(129	)
Impairment of equity method investments		18			36
Other		43			(26	)
Changes in operating assets and liabilities:
Receivables		(85	)		291
Unbilled receivables on uncompleted contracts		242			(85	)
Accounts payable		(116	)		(199	)
Advanced billings on uncompleted contracts		201			464
Reserve for estimated loss on uncompleted contracts		(30	)		112
Employee compensation and benefits		9			(90	)
Other assets		(60	)		(90	)
Other liabilities		272			40
Total cash flows provided by operating activities		474			461
Cash flows from investing activities:
Capital expenditures		(23	)		(42	)
Sales of property, plant and equipment		1			4
Disposition of businesses/investments, net of cash disposed		334			276
Other investing activities		(1	)		-
Total cash flows provided by investing activities		311			238
Cash flows from financing activities:
Payments from (to) Halliburton, net		(123	)		(172	)
Payments on long-term borrowings		(7	)		(9	)
Payments of dividends to minority shareholders		(19	)		(4	)
Total cash flows used in financing activities		(149	)		(185	)
Effect of exchange rate changes		(81	)		22
Increase in cash and equivalents		555			536
Cash and equivalents at beginning of period		1,461			394
Cash and equivalents at end of period	$	2,016		$	930

See accompanying notes to condensed consolidated financial statements.

5

KBR, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1.  Description of Business and Basis of Presentation

KBR, Inc. and its subsidiaries (collectively, KBR or the Company) is a global engineering, construction and services company supporting the energy, petrochemicals, government services and civil infrastructure sectors. We offer our wide range of services through three business segments, Energy and Chemicals (“E&C”), Government and Infrastructure (“G&I”) and Ventures. During the first quarter of 2007, we reorganized our operating segments resulting in the creation of Ventures as a new reportable segment.  The business activities included in the Ventures segment had previously been reported as part of the E&C and G&I segments.

Energy and Chemicals. Our E&C segment designs and constructs energy and petrochemical projects, including large, technically complex projects in remote locations around the world. Our expertise includes onshore oil and gas production facilities, offshore oil and gas production facilities, including platforms, floating production and subsea facilities (which we refer to collectively as our offshore projects), onshore and offshore pipelines, liquefied natural gas (“LNG”) and gas-to-liquids (“GTL”) gas monetization facilities (which we refer to collectively as our gas monetization projects), refineries, petrochemical plants and synthesis gas (“Syngas”). We provide a wide range of Engineering Procurement Construction—Commissioning Start-up (“EPC-CS”) services, as well as program and project management, consulting and technology services.

Government and Infrastructure. Our G&I segment delivers on-demand support services across the full military mission cycle from contingency logistics and field support to operations and maintenance on military bases. In the civil infrastructure market, we operate in diverse sectors, including transportation, waste and water treatment, and facilities maintenance. We provide program and project management, contingency logistics, operations and maintenance, construction management, engineering, and other services to military and civilian branches of governments and private customers worldwide. A significant portion of our G&I segment’s current operations relate to the support of United States government operations in the Middle East, which we refer to as our Middle East operations. Through June 28, 2007, we owned the majority of Devonport Management Limited (“DML”), which owns and operates Devonport Royal Dockyard, one of Western Europe’s largest naval dockyard complexes.  On June 28, 2007, we consummated the sale of our 51% ownership interest in DML for cash proceeds of approximately $345 million, net of direct transaction costs, resulting in a gain of approximately $97 million, net of tax of $119 million.  In accordance with the provisions of Statement of Financial Accounting Standards No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets,” the results of operations of DML for the current and prior periods have been reported as discontinued operations.  See Note 17 Discontinued Operations.

Ventures.  Our Ventures segment develops, provides assistance in arranging financing for, makes equity and/or debt investments in and participates in managing entities owning assets generally from projects in which one of our other business segments has a direct role in engineering, construction, and/or operations and maintenance.  The creation of the Ventures segment provides management focus on our investments in the entities that own the assets.  Projects developed and under current management include government services, such as defense procurement and operations and maintenance services for equipment, military infrastructure construction and program management, toll roads and railroads, and energy and chemical plants.

KBR, Inc., a Delaware corporation, was formed on March 21, 2006 as an indirect, wholly owned subsidiary of Halliburton Company (“Halliburton”). KBR, Inc. was formed to own and operate KBR Holdings, LLC (“KBR Holdings”), which was also wholly owned by Halliburton. At inception, KBR, Inc. issued 1,000 shares of common stock. On October 27, 2006, KBR, Inc. effected a 135,627-for-one split of its common stock. In connection with the stock split, the certificate of incorporation was amended and restated to increase the number of authorized shares of common stock from 1,000 to 300,000,000 and to authorize 50,000,000 shares of preferred stock with a par value of $0.001 per share. All share data of KBR, Inc. has been adjusted to reflect the stock split.

In November 2006, KBR, Inc. completed an initial public offering of 32,016,000 shares of its common stock (the “Offering”) at $17.00 per share. The Company received net proceeds of $511 million from the Offering after underwriting discounts and commissions. Halliburton retained all of the KBR shares owned prior to the Offering and, as a result of the Offering, its 135,627,000 shares of common stock represented 81% of the outstanding common stock of KBR, Inc. after the Offering.  Simultaneous with the Offering, Halliburton contributed 100% of the common stock of KBR Holdings to KBR, Inc. KBR, Inc. had no operations from the date of its formation to the date of the contribution of KBR Holdings.  See Note 2 for discussion concerning completion of our separation from Halliburton.

Our condensed consolidated financial statements include the accounts of majority-owned, controlled subsidiaries and variable interest entities where we are the primary beneficiary.  The equity method is used to account for investments in affiliates in which we have the ability to exert significant influence over the affiliates’ operating and financial policies.  The cost method is used when we do not have the ability to exert significant influence.  All material intercompany accounts and transactions are eliminated.

6

Minority interest in consolidated subsidiaries in our condensed consolidated balance sheets principally represents minority shareholders’ proportionate share of the equity in our consolidated subsidiaries.  Minority interest in consolidated subsidiaries is adjusted each period to reflect the minority shareholders’ allocation of income, or the absorption of losses by the minority shareholders on certain majority-owned, controlled investments where the minority shareholders are obligated to fund the balance of their share of these losses.

Our condensed consolidated financial statements reflect all costs of doing business, including certain costs incurred by Halliburton on KBR’s behalf.  Such costs have been charged to KBR in accordance with Staff Accounting Bulletin (“SAB”) No. 55, “Allocation of Expenses and Related Disclosure in Financial Statements of Subsidiaries, Divisions or Lesser Business Components of Another Entity.”

The accompanying unaudited condensed consolidated financial statement have been prepared, in accordance with the rules of the United States Securities and Exchange commission (“SEC”) for interim financial statements and do not include all annual disclosures required by accounting principles generally accepted in the United States.  These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 filed with the SEC.  We believe that the presentation and disclosures herein are adequate to make the information not misleading, and the condensed consolidated financial statements reflect all adjustments that management considers necessary for a fair presentation of our consolidated results of operations, financial position and cash flows.  Operating results for interim periods are not necessarily indicative of results to be expected for the full fiscal year 2007 or any other future periods.

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

Note 2.  Separation from Halliburton

On February 26, 2007, Halliburton’s board of directors approved a plan under which Halliburton would dispose of its remaining interest in KBR through a tax-free exchange with Halliburton’s stockholders pursuant to an exchange offer.  On April 5, 2007, Halliburton completed the separation of KBR by exchanging the 135,627,000 shares of KBR owned by Halliburton for publicly held shares of Halliburton common stock pursuant to the terms of the exchange offer (the “Exchange Offer”) commenced by Halliburton on March 2, 2007.

In connection with the Offering in November 2006 and the separation of our business from Halliburton, we entered into various agreements with Halliburton including, among others, a master separation agreement, tax sharing agreement, transition services agreements and an employee matters agreement.

Pursuant to our master separation agreement, we agreed to indemnify Halliburton for, among other matters, all past, present and future liabilities related to our business and operations, subject to specified exceptions. We agreed to indemnify Halliburton for liabilities under various outstanding and certain additional credit support instruments relating to our businesses and for liabilities under litigation matters related to our business. Halliburton agreed to indemnify us for, among other things, liabilities unrelated to our business, for certain other agreed matters relating to the Foreign Corrupt Practices Act (“FCPA”) investigations and the Barracuda-Caratinga project and for other litigation matters related to Halliburton’s business.  See Note 9 for further discussion of the FCPA investigations and the Barracuda-Caratinga project.

The tax sharing agreement, as amended, provides for certain allocations of U.S. income tax liabilities and other agreements between us and Halliburton with respect to tax matters.  As a result of the Offering, Halliburton will be responsible for filing all U.S. income tax returns required to be filed through April 5, 2007, the date KBR ceased to be a member of the Halliburton consolidated tax group.  Halliburton will also be responsible for paying the taxes related to the returns it is responsible for filing.  We will pay Halliburton our allocable share of such taxes.  We are obligated to pay Halliburton for the utilization of net operating losses, if any, generated by Halliburton prior to the deconsolidation which we may use to offset our future consolidated federal income tax liabilities.

Under the transition services agreements, Halliburton is expected to continue providing various interim corporate support services to us and we will continue to provide various interim corporate support services to Halliburton.  These support services relate to, among other things, information technology, legal, human resources, risk management and internal audit.  The services provided under the transition services agreement between Halliburton and KBR are substantially the same as the services historically provided.  Similarly, the related costs of such services will be substantially the same as the costs incurred and recorded in our historical financial statements.

7

The employee matters agreement provides for the allocation of liabilities and responsibilities to our current and former employees and their participation in certain benefit plans maintained by Halliburton.  Among other items, the employee matters agreement and the KBR, Inc. Transitional Stock Adjustment Plan provide forthe conversion, upon the complete separation of KBR from Halliburton, of stock options and restricted stock awards (with restrictions that have not yet lapsed as of the final separation date) granted to KBR employees under Halliburton’s 1993 Stock and Incentive Plan (“1993 Plan”) to stock options and restricted stock awards covering KBR common stock.  On April 5, 2007, immediately after our separation from Halliburton, the conversion of such stock options and restricted stock awards occurred.  A total of 1,217,095 Halliburton stock options and 612,857 Halliburton restricted stock awards were converted into 1,966,061 KBR stock options with a weighted average exercise price per share of $9.35 and 990,080 million restricted stock awards with a weighted average grant-date fair value per share of $11.01.  The conversion of such stock options and restricted stock was accounted for as a modification in accordance with SFAS No. 123(R) and resulted in an incremental charge to expense of less than $1 million, recognized in the three months ended June 30, 2007, representing the change in fair value of the converted awards from Halliburton stock options and restricted stock awards to KBR stock options and restricted stock awards.  Stock-based compensation expense recognized for all awards for the three and six months ended June 30, 2007 was $3 million and $6 million, respectively.  We estimate approximately $5 million of stock-based compensation expense will be recognized for the remainder of fiscal 2007.

See Note 15 for further discussion of the above agreements and other related party transactions with Halliburton.

Note 3.  Percentage-of-Completion Contracts

Unapproved claims and change orders

The amounts of unapproved claims and change orders recorded as “Unbilled work on uncompleted contracts” or “Other assets” as of June 30, 2007 and December 31, 2006 are as follows:

Energy and Chemicals Division

Millions of dollars	June 30, 2007		December 31, 2006
Probable unapproved claims	$	176	$	178
Probable unapproved change orders		4		51
Probable unapproved claims related to unconsolidated subsidiaries		78		78
Probable unapproved change orders related to unconsolidated subsidiaries		22		-

Government and Infrastructure Division

Millions of dollars	June 30, 2007		December 31, 2006
Probable unapproved claims	$	77	$	37
Probable unapproved change orders		4		3
Probable unapproved change orders related to unconsolidated subsidiaries		3		3

As of June 30, 2007, the probable unapproved claims for the Energy and Chemicals division, including those from unconsolidated subsidiaries, relate to five contracts, most of which are complete or substantially complete.  

A significant portion of the probable unapproved claims as of June 30, 2007 arose from three completed projects with Petroleos Mexicanos (PEMEX) ($148 million related to our consolidated subsidiaries and $45 million related to our unconsolidated subsidiaries) that are currently subject to arbitration proceedings.  In addition, included in non-current “Unbilled receivables on uncompleted contracts” is $64 million related to previously approved services that are unpaid by PEMEX and are a part of these arbitration proceedings.  Actual amounts we are seeking from PEMEX in the arbitration proceedings are in excess of these amounts.  The remaining arbitration proceedings are expected to extend through 2007.  PEMEX has asserted counterclaims the remaining in arbitrations; however, it is premature based upon our current understanding of those counterclaims to make any assessment of their merits.  As of June 30, 2007, we had not accrued any amounts related to the PEMEX counterclaims in the arbitrations.

In July 2007, the arbitration committee awarded claims in favor of one of our three projects for PEMEX which was performed by our unconsolidated subsidiary.  Although full interpretation and calculation of this award is not complete, we estimate the amount awarded approximates the book value of these claims recorded at June 30, 2007.  The arbitration proceedings with respect to a second PEMEX project have been conducted and we are awaiting the results.  Regarding the third PEMEX project, arbitration hearings are scheduled for the fourth quarter of 2007.

8

We have contracts with probable unapproved claims that will likely not be settled within one year totaling $176 million and $175 million at June 30, 2007 and December 31, 2006, respectively, included in the table above, which are reflected as a non-current asset in “Unbilled receivables on uncompleted contracts” on the condensed consolidated balance sheets. Other probable unapproved claims that we believe will be settled within one year, included in the table above, have been recorded as a current asset in “Unbilled receivables on uncompleted contracts” on the condensed consolidated balance sheets.

Note 4. Escravos Project

In connection with our  consolidated 50%-owned GTL project in Escravos, Nigeria, during the first half of 2007, we and our joint venture partner negotiated modifications to the contract terms and conditions resulting in an executed contract amendment in July 2007.  The contract has been amended to convert from a fixed price to a reimbursable contract whereby we will be paid our actual cost incurred less a credit that approximates the charge we identified in the second quarter of 2006.  Also included in the amended contract are client determined incentives that may be earned over the remaining life of the contract.  The effect of the modifications for the three months ended June 30, 2007 resulted in a $3 million increase to operating income.  In addition, minority interest shareholders’ absorption of losses increased by $15 million resulting in net income of $12 million for the three months ended June 30, 2007.  Because our amended agreement with the client provides that we will be reimbursed for our actual costs incurred, as defined, all amounts of probable unapproved change order revenue that were previously included in the project estimated revenues are now considered approved.  

Note 5.  Business Segment Information

We provide a wide range of services; however, the management of our business is heavily focused on major projects within each of our reportable segments. At any given time, relatively few of our projects and joint ventures represent a substantial part of our operations.

As a result of changes in the monthly financial and operating information provided to our chief operating decision maker as defined by the Financial Accounting Standards Board's ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information," during the first quarter of 2007 we redefined our reportable segments on a basis that is representative of how our chief operating decision maker evaluates its operating performance and makes resource allocation decisions. Accordingly, KBR has reorganized its operations, resulting in the Government and Infrastructure, Energy and Chemicals, and Ventures reportable segments.  Segment information has been prepared in accordance with SFAS No. 131 and all prior period amounts have been restated to conform to the current presentation.

The table below presents information on our segments.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
Millions of dollars	2007			2006			2007			2006
Revenue:
Government and Infrastructure	$	1,482		$	1,691		$	2,939		$	3.242
Energy and Chemicals		669			560			1,245			1,101
Ventures		1			(15	)		(5	)		(51	)
Total	$	2,152		$	2,236		$	4,179		$	4,292
Operating income (loss):
Government and Infrastructure	$	25		$	58		$	63		$	93
Energy and Chemicals		41			(97	)		54			(53	)
Ventures		(1	)		(8	)		(7	)		(44	)
Total	$	65		$	(47	)	$	110		$	(4	)

Intersegment revenues included in the Government and Infrastructure segment were $4 million and $8 million for the three and six months ended June 30, 2007, respectively.  Intersegment revenues included in the Government and Infrastructure segment were $3 million and $7 million for the three and six months ended June 30, 2006, respectively.  Intersegment revenues included in the Energy and Chemicals segment were $42 million and $89 million for the three and six months ended June 30, 2007, respectively.

9

Intersegment revenues included in the Energy and Chemicals segment were $51 million and $82 million for the three and six months ended June 30, 2006, respectively.  Our equity in earnings (losses) of unconsolidated affiliates that are accounted for by the equity method is included in revenue and operating income of the applicable segment.

Note 6.  Committed Cash

Cash and equivalents include cash from advanced payments related to contracts in progress held by ourselves or our joint ventures that we consolidate for accounting purposes.  The use of these cash balances is limited to the specific projects or joint venture activities and is not available for other projects, general cash needs, or distribution to us without approval of the board of directors of the respective joint venture or subsidiary.  At June 30, 2007 and December 31, 2006, cash and equivalents include approximately  $771 million and $527 million, respectively, in cash from advanced payments held by ourselves or our joint ventures that we consolidate for accounting purposes.

Note 7.  Comprehensive Income

The components of other comprehensive income included the following:

	Three Months Ended					Six Months Ended
	June 30,					June 30,
Millions of dollars	2007			2006		2007			2006
Net income	$	140		$	92	$	168		$	118
Net cumulative translation adjustments		(17	)		23		(18	)		17
Pension liability adjustment		95			-		100			-
Net unrealized gains (losses) on investments and derivatives		-			6		(1	)		13
Total comprehensive income	$	218		$	121	$	249		$	148

Accumulated other comprehensive income consisted of the following:

	June 30,			December 31,
Millions of dollars	2007			2006
Cumulative translation adjustments	$	25		$	43
Pension liability adjustments		(235	)		(335	)
Unrealized gains (losses) on investments and derivatives		-			1
Total accumulated other comprehensive (loss)	$	(210	)	$	(291	)

Comprehensive income for the three and six months ended June 30, 2007 includes the elimination of net cumulative translation and pension liability adjustments of $(22) million and $90 million, respectively, related to the disposition of our 51% interest in DML.  See Note 17 for further discussion.

Note 8. United States Government Contract Work

We provide substantial work under our government contracts to the United States Department of Defense (“DoD”) and other governmental agencies. These contracts include our worldwide United States Army logistics contracts, known as LogCAP and U.S. Army Europe, known as USAREAR. Our government services revenue related to Iraq totaled approximately $1.1 billion and $2.1 billion for the three and six months ended June 30, 2007, respectively, compared to $1.3 billion and $2.4 billion for the three and six months ended June 30, 2006, respectively.

Given the demands of working in Iraq and elsewhere for the United States government, we expect that from time to time we will have disagreements or experience performance issues with the various government customers for which we work. If performance issues arise under any of our government contracts, the government retains the right to pursue remedies which could include threatened termination or termination, under any affected contract. If any contract were so terminated, we may not receive award fees under the affected contract, and our ability to secure future contracts could be adversely affected, although we would receive payment for amounts owed for our allowable costs under cost-reimbursable contracts. Other remedies that could be sought by our government customers for any improper activities or performance issues include sanctions such as forfeiture of profits, suspension of payments, fines, and suspensions or debarment from doing business with the government. Further, the negative publicity that could arise from disagreements with our customers or sanctions as a result thereof could have an adverse effect on our reputation in the industry, reduce our ability to compete for new contracts, and may also have a material adverse effect on our business, financial condition, results of operations, and cash flow.

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We have experienced and expect to be a party to various claims against us by employees, third parties, soldiers and others that have arisen out of our work in Iraq such as claims for wrongful termination, assaults against employees, personal injury claims by third parties and army personnel, and contractor claims.  While we believe we conduct our operations safely, the environments in which we operate often lead to these types of claims.  We believe the vast majority of these types of claims are governed by the Defense Base Act or precluded by other defenses. However, an unfavorable resolution or disposition of these matters could have a material adverse effect on our business, results of operations, financial condition and cash flow.

DCAA audit issues

Our operations under United States government contracts are regularly reviewed and audited by the Defense Contract Audit Agency (“DCAA”) and other governmental agencies. The DCAA serves in an advisory role to our customer and when issues are found during the audit process, these issues are typically discussed and reviewed with us. The DCAA then issues an audit report with its recommendations to our customer’s contracting officer. In the case of management systems and other contract administrative issues, the contracting officer is generally with the Defense Contract Management Agency (“DCMA”). We then work with our customer to resolve the issues noted in the audit report. If our customer or a government auditor finds that we improperly charged any costs to a contract, these costs are not reimbursable, or, if already reimbursed, the costs must be refunded to the customer. Our revenue recorded for government contract work is reduced for our estimate of costs that may be categorized as disputed or unallowable as a result of cost overruns or the audit process.

Security. In February 2007, we received a letter from the Department of the Army informing us of their intent to adjust payments under the LogCAP III contract associated with the cost incurred by the subcontractors to provide security to their employees. Based on this letter, the DCAA withheld the Army’s initial assessment of $20 million. The Army based its assessment on one subcontract wherein, based on communications with the subcontractor, the Army estimated 6% of the total subcontract cost related to the private security costs. The Army indicated that not all task orders and subcontracts have been reviewed and that they may make additional adjustments. The Army indicated that, within 60 days, they intend to begin making further adjustments equal to 6% of prior and current subcontractor costs unless we provide timely information sufficient to show that such action is not necessary to protect the government’s interest.  We continue to provide additional information as requested by the Army.

The Army indicated that they believe our LogCAP III contract prohibits us from billing costs of privately acquired security. We believe that, while the LogCAP III contract anticipates that the Army will provide force protection to KBR employees, it does not prohibit any of our subcontractors from using private security services to provide force protection to subcontractor personnel. In addition, a significant portion of our subcontracts are competitively bid lump sum or fixed price subcontracts. As a result, we do not receive details of the subcontractors’ cost estimate nor are we legally entitled to it. Accordingly, we believe that we are entitled to reimbursement by the Army for the cost of services provided by our subcontractors, even if they incurred costs for private force protection services. Therefore, we believe that the Army’s position that such costs are unallowable and that they are entitled to withhold amounts incurred for such costs is wrong as a matter of law.

If we are unable to demonstrate that such action by the Army is not necessary, a 6% suspension of all subcontractor costs incurred to date could result in suspended costs of approximately $400 million. The Army has asked us to provide information that addresses the use of armed security either directly or indirectly charged to LogCAP III. The actual costs associated with these activities cannot be accurately estimated, but we believe that they should be substantially less than 6% of the total subcontractor costs. We will continue working with the Army to resolve this issue.  As of June 30, 2007, we had not accrued any amounts related to this matter.

Dining Facility Support Services.  In April 2007, DCAA recommended withholding $13 million of payments from KBR alleging that Eurest Support Services (Cypress) International Limited (“ESS”), a subcontractor to KBR providing dining facility services in conjunction with our LogCAP III contract in Iraq, over-billed for the cost related to the use of power generators.  We disagree with the position taken by the DCAA and we are working to resolve the issue.  We have not accrued any amounts related to this matter as of June 30, 2007.

Laundry. Prior to the fourth quarter of 2005, we received notice from the DCAA that it recommended withholding $18 million of subcontract costs related to the laundry service for one task order in southern Iraq, for which it believed we and our subcontractors did not provide adequate levels of documentation supporting the quantity of the services provided. In the fourth quarter of 2005, the DCAA issued a notice to disallow costs totaling approximately $12 million, releasing $6 million of amounts previously withheld. In the second quarter of 2006, we successfully resolved this matter with the DCAA and received payment of the remaining $12 million.

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Containers. In June 2005, the DCAA recommended withholding certain costs associated with providing containerized housing for soldiers and supporting civilian personnel in Iraq. The DCAA recommended that the costs be withheld pending receipt of additional explanation or documentation to support the subcontract costs. Approximately $30 million has been withheld as of June 30, 2007, of which we withheld $17 million from our subcontractor. During 2006, we resolved approximately $25 million of the withheld amounts with our contracting officer which was received in the first quarter of 2007. We will continue working with the government and our subcontractors to resolve the remaining amounts.

Dining facilities. In September 2005, ESS filed suit against us alleging various claims associated with its performance as a subcontractor in conjunction with our LogCAP III contract in Iraq. The case was settled during the first quarter of 2006 without material impact to us.

In the third quarter of 2006, the DCAA raised questions regarding $95 million of costs related to dining facilities in Iraq. We have responded to the DCAA that our costs are reasonable.

Fuel. In December 2003, the DCAA issued a preliminary audit report that alleged that we may have overcharged the Department of Defense by $61 million in importing fuel into Iraq. The DCAA questioned costs associated with fuel purchases made in Kuwait that were more expensive than buying and transporting fuel from Turkey. We responded that we had maintained close coordination of the fuel mission with the Army Corps of Engineers (COE), which was our customer and oversaw the project, throughout the life of the task orders and that the COE had directed us to use the Kuwait sources. After a review, the COE concluded that we obtained a fair price for the fuel. Nonetheless, Department of Defense officials referred the matter to the agency’s inspector general, which we understand commenced an investigation.

The DCAA issued various audit reports related to task orders under the RIO contract that reported $275 million in questioned and unsupported costs. The majority of these costs were associated with the humanitarian fuel mission. In these reports, the DCAA compared fuel costs we incurred during the duration of the RIO contract in 2003 and early 2004 to fuel prices obtained by the Defense Energy Supply Center (“DESC”) in April 2004 when the fuel mission was transferred to that agency. During the fourth quarter of 2005, we resolved all outstanding issues related to the RIO contract with our customer and settled the remaining questioned costs under this contract.

Other issues. The DCAA is continuously performing audits of costs incurred for the foregoing and other services provided by us under our government contracts. During these audits, there have been questions raised by the DCAA about the reasonableness or allowability of certain costs or the quality or quantity of supporting documentation. The DCAA might recommend withholding some portion of the questioned costs while the issues are being resolved with our customer. Because of the intense scrutiny involving our government contracts operations, issues raised by the DCAA may be more difficult to resolve. We do not believe any potential withholding will have a significant or sustained impact on our liquidity.

Investigations

In the first quarter of 2005, the Department of Justice (“DOJ”) issued two indictments associated with overbilling issues we previously reported to the Department of Defense Inspector General’s office as well as to our customer, the Army Materiel Command (“AMC”), against a former KBR procurement manager and a manager of La Nouvelle Trading & Contracting Company, W.L.L. We provided information to the DoD Inspector General’s office in February 2004 about other contacts between former employees and our subcontractors.  In March 2006, one of these former employees pled guilty to taking money in exchange for awarding work to a Saudi Arabian subcontractor. The Inspector General’s investigation of these matters may continue.

In October 2004, we reported to the DoD Inspector General’s office that two former employees in Kuwait may have had inappropriate contacts with individuals employed by or affiliated with two third-party subcontractors prior to the award of the subcontracts. The Inspector General’s office may investigate whether these two employees may have solicited and/or accepted payments from these third-party subcontractors while they were employed by us.

In October 2004, a civilian contracting official in the COE asked for a review of the process used by the COE for awarding some of the contracts to us. We understand that the DoD Inspector General’s office may review the issues involved.

We understand that the DOJ, an Assistant United States Attorney based in Illinois, and others are investigating these and other matters we have reported related to our government contract work in Iraq. If criminal wrongdoing were found, criminal penalties could range up to the greater of $500,000 in fines per count for a corporation or twice the gross pecuniary gain or loss. We also understand that current and former employees of KBR have received subpoenas and have given or may give grand jury testimony related to some of these matters.

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The House Oversight and Government Reform and Senate Armed Services Committees have conducted hearings on the U.S. military’s reliance on civilian contractors, including with respect to military operations in Iraq. We have provided testimony and information for these hearings. We expect hearings with respect to operations in Iraq to continue in this and other Congressional committees, including the House Armed Services Committee, and we expect to be asked to testify and provide information for these hearings.

We have reported to the U.S. Department of State and Department of Commerce that exports of materials, including personal protection equipment such as helmets, goggles, body armor and chemical protective suits, in connection with personnel deployed to Iraq and Afghanistan may not have been in accordance with current licenses or may have been unlicensed. A failure to comply with export control laws and regulations could result in civil and/or criminal sanctions, including the imposition of fines upon us as well as the denial of export privileges and debarment from participation in U.S. government contracts. In addition, we are responding to a March 19, 2007, subpoena from the DoD Inspector General concerning licensing for armor for convoy trucks and antiboycott issues. As of June 30, 2007, we had not accrued any amounts related to this matter.

Withholding of payments

During 2004, the AMC issued a determination that a particular contract clause could cause it to withhold 15% from our invoices until our task orders under the LogCAP contract are definitized. The AMC delayed implementation of this withholding pending further review. During the third quarter of 2004, we and the AMC identified three senior management teams to facilitate negotiation under the LogCAP task orders, and these teams concluded their effort by successfully negotiating the final outstanding task order definitization on March 31, 2005. This made us current with regard to definitization of historical LogCAP task orders and eliminated the potential 15% withholding issue under the LogCAP contract.

Upon the completion of the RIO contract definitization process, the COE released all previously withheld amounts related to this contract in the fourth quarter of 2005.

The PCO Oil South contract provides the customer the right to withhold payment of 15% of the amount billed, thus remitting a net of 85% of costs incurred until a task order is definitized. Once a task order is definitized, this contract provides that 100% of the costs billed will be paid pursuant to the “Allowable Cost and Payment Clause” of the contract. The PCO Oil South project has definitized substantially all of the task orders, and we have collected a significant portion of any amounts previously withheld. We do not believe the withholding will have a significant or sustained impact on our liquidity because the withholding is temporary, and the definitization process is substantially complete. The amount of payments withheld by the client under the PCO Oil South project was less than $1 million at June 30, 2007.

We are working diligently with our customers to proceed with significant new work only after we have a fully definitized task order, which should limit withholdings on future task orders for all government contracts.

Claims

We had unapproved claims totaling $74 million at June 30, 2007 and $36 million at December 31, 2006 for the LogCAP contract. The unapproved claims outstanding at June 30, 2007 and December 31, 2006, are considered to be probable of collection and have been recognized as revenue.  These amounts are included in the table of Government and Infrastructure unapproved claims and unapproved change orders in Note 3.

In addition, as of June 30, 2007, we had incurred approximately $126 million of costs under the LogCAP III contract that could not be billed to the government due to lack of appropriate funding on various task orders. These amounts were associated with task orders that had sufficient funding in total, but the funding was not appropriately allocated amongst the task orders.  We have submitted requests for reallocations of funding to the U.S. Army and continue to work with them to resolve this matter.  We anticipate the negotiations will result in an appropriate distribution of funding by the client and collection of the full amounts due.

DCMA system reviews

Report on estimating system. In December 2004, the DCMA granted continued approval of our estimating system, stating that our estimating system is “acceptable with corrective action.” We are in the process of completing these corrective actions. Specifically, based on the unprecedented level of support that our employees are providing the military in Iraq, Kuwait, and Afghanistan, we needed to update our estimating policies and procedures to make them better suited to such contingency situations. Additionally, we have completed our development of a detailed training program and have made it available to all estimating personnel to ensure that employees are adequately prepared to deal with the challenges and unique circumstances associated with a contingency operation.

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Report on purchasing system. As a result of a Contractor Purchasing System Review by the DCMA during the fourth quarter of 2005, the DCMA granted the continued approval of our government contract purchasing system. The DCMA’s October 2005 approval letter stated that our purchasing system’s policies and practices are “effective and efficient, and provide adequate protection of the Government’s interest.” During the fourth quarter 2006, the DCMA granted, again, continued approval of our government contract purchasing system.

Report on accounting system. We received two draft reports on our accounting system, which raised various issues and questions. We have responded to the points raised by the DCAA, but this review remains open. In the fourth quarter 2006, the DCAA finalized its report and submitted it to the DCMA, who will make a determination of the adequacy of our accounting systems for government contracting. We have prepared an action plan considering the DCAA recommendations and continue to meet with these agencies to discuss the ultimate resolution. The DCMA has approved KBR’s accounting system as acceptable for accumulating costs incurred under U.S. Government contracts.

SIGIR Report

In October 2006, the Special Inspector General for Iraq Reconstruction, or SIGIR, issued a report stating that we have improperly labeled reports provided to our customer, AMC, as proprietary data, when data marked does not relate to internal contractor information. We believe we have addressed the issues raised by the SIGIR report.

The Balkans

We have had inquiries in the past by the DCAA and the civil fraud division of the DOJ into possible overcharges for work performed during 1996 through 2000 under a contract in the Balkans, for which inquiry has not been completed by the DOJ. Based on an internal investigation, we credited our customer approximately $2 million during 2000 and 2001 related to our work in the Balkans as a result of billings for which support was not readily available. We believe that the preliminary DOJ inquiry relates to potential overcharges in connection with a part of the Balkans contract under which approximately $100 million in work was done. We believe that any allegations of overcharges would be without merit. In the fourth quarter 2006, we reached a negotiated settlement with the DOJ. KBR was not accused of any wrongdoing and did not admit to any wrongdoing. KBR is not suspended or debarred from bidding for or performing work for the U.S. government. The settlement did not have a material impact on our operating results in 2006.

McBride Qui Tam suit

In September 2006, we became aware of a qui tam action filed against us by a former employee alleging various wrongdoings in the form of overbillings of our customer on the LogCAP III contract. This case was originally filed pending the government’s decision whether or not to participate in the suit. In June 2006, the government formally declined to participate. The principal allegations are that our compensation for the provision of Morale, Welfare and Recreation (“MWR”) facilities under LogCAP III is based on the volume of usage of those facilities and that we deliberately overstated that usage. In accordance with the contract, we charged our customer based on actual cost, not based on the number of users. It was also alleged that, during the period from November 2004 into mid-December 2004, we continued to bill the customer for lunches, although the dining facility was closed and not serving lunches. There are also allegations regarding housing containers and our provision of services to our employees and contractors. On July 5, 2007, the court granted our motion to dismiss the qui tam claims and to compel arbitration of employment claims including a claim that the plaintiff was unlawfully discharged.  The majority of the plaintiff’s claims were dismissed but the plaintiff was allowed to pursue limited claims pending discovery and future motions.  All employment claims were sent to arbitration under the Company’s dispute resolution program.  As of June 30, 2007, no amounts were accrued in connection with this matter.

Wilson and Warren Qui Tam suit

During November 2006, we became aware of a qui tam action filed against us alleging that we overcharged the military $30 million by failing to adequately maintain trucks used to move supplies in convoys and by sending empty trucks in convoys. It was alleged that the purpose of these acts was to cause the trucks to break down more frequently than they would if properly maintained and to unnecessarily expose them to the risk of insurgent attacks, both for the purpose of necessitating their replacement thus increasing our revenue. The suit also alleges that in order to silence the plaintiffs, who allegedly were attempting to report those allegations and other alleged wrongdoing, we unlawfully terminated them. On February 6, 2007, the court granted our motion to dismiss the plaintiffs’ qui tam claims as legally insufficient and ordered the plaintiffs to arbitrate their claims that they were unlawfully discharged. The final judgement in our favor was entered on April 30, 2007 and subsequently appealed by the plaintiffs on May 3, 2007.  As of June 30, 2007, we had not accrued any amounts in connection with this matter.

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Note 9. Other Commitments and Contingencies

Foreign Corrupt Practices Act investigations

Halliburton provided indemnification in favor of KBR under the master separation agreement for certain contingent liabilities, including Halliburton’s indemnification of KBR and any of its greater than 50%-owned subsidiaries as of November 20, 2006, the date of the master separation agreement, for fines or other monetary penalties or direct monetary damages, including disgorgement, as a result of a claim made or assessed by a governmental authority in the United States, the United Kingdom, France, Nigeria, Switzerland and/or Algeria, or a settlement thereof, related to alleged or actual violations occurring prior to November 20, 2006 of the FCPA or particular, analogous applicable foreign statutes, laws, rules, and regulations in connection with investigations pending as of that date including with respect to the construction and subsequent expansion by TSKJ of a natural gas liquefaction complex and related facilities at Bonny Island in Rivers State, Nigeria. The following provides a detailed discussion on the FCPA investigation.

The SEC is conducting a formal investigation into whether improper payments were made to government officials in Nigeria through the use of agents or subcontractors in connection with the construction and subsequent expansion by TSKJ of a multibillion dollar natural gas liquefaction complex and related facilities at Bonny Island in Rivers State, Nigeria. The DOJ is also conducting a related criminal investigation. The SEC has also issued subpoenas seeking information, which we are furnishing, regarding current and former agents used in connection with multiple projects, including current and prior projects, over the past 20 years located both in and outside of Nigeria in which we, The M.W. Kellogg Company, M.W. Kellogg Limited or their or our joint ventures are or were participants. In September 2006, the SEC requested that we enter into a tolling agreement with respect to its investigation. We anticipate that we will enter into an appropriate tolling agreement with the SEC.

TSKJ is a private limited liability company registered in Madeira, Portugal whose members are Technip SA of France, Snamprogetti Netherlands B.V. (a subsidiary of Saipem SpA of Italy), JGC Corporation of Japan, and Kellogg Brown & Root LLC (a subsidiary of ours and successor to The M.W. Kellogg Company), each of which had an approximately 25% interest in the venture at June 30, 2007. TSKJ and other similarly owned entities entered into various contracts to build and expand the liquefied natural gas project for Nigeria LNG Limited, which is owned by the Nigerian National Petroleum Corporation, Shell Gas B.V., Cleag Limited (an affiliate of Total), and Agip International B.V. (an affiliate of ENI SpA of Italy). M.W. Kellogg Limited is a joint venture in which we had a 55% interest at June 30, 2007, and M.W. Kellogg Limited and The M.W. Kellogg Company were subsidiaries of Dresser Industries before Halliburton’s 1998 acquisition of Dresser Industries. The M.W. Kellogg Company was later merged with a Halliburton subsidiary to form Kellogg Brown & Root LLC, one of our subsidiaries.

The SEC and the DOJ have been reviewing these matters in light of the requirements of the FCPA. Halliburton and KBR have been cooperating with the SEC and DOJ investigations and with other investigations into the Bonny Island project in France, Nigeria and Switzerland. We also believe that the Serious Frauds Office in the United Kingdom is conducting an investigation relating to the Bonny Island project. Halliburton will continue to oversee and direct the investigations.  We will monitor the continuing investigations directed by Halliburton.

The matters under investigation relating to the Bonny Island project cover an extended period of time (in some cases significantly before Halliburton’s 1998 acquisition of Dresser Industries and continuing through the current time period). We have produced documents to the SEC and the DOJ both voluntarily and pursuant to company subpoenas from the files of numerous officers and employees, including many current and former executives, and we are making our employees available to the SEC and the DOJ for interviews. In addition, we understand that the SEC has issued a subpoena to A. Jack Stanley, who formerly served as a consultant and chairman of Kellogg Brown & Root LLC and to others, including certain of our current and former employees, former executive officers and at least one of our subcontractors. We further understand that the DOJ issued subpoenas for the purpose of obtaining information abroad, and we understand that other partners in TSKJ have provided information to the DOJ and the SEC with respect to the investigations, either voluntarily or under subpoenas.

The SEC and DOJ investigations include an examination of whether TSKJ’s engagement of Tri-Star Investments as an agent and a Japanese trading company as a subcontractor to provide services to TSKJ were utilized to make improper payments to Nigerian government officials. In connection with the Bonny Island project, TSKJ entered into a series of agency agreements, including with Tri-Star Investments, of which Jeffrey Tesler is a principal, commencing in 1995 and a series of subcontracts with a Japanese trading company commencing in 1996. We understand that a French magistrate has officially placed Mr. Tesler under investigation for corruption of a foreign public official. In Nigeria, a legislative committee of the National Assembly and the Economic and Financial Crimes Commission, which is organized as part of the executive branch of the government, are also investigating these matters. Our representatives have met with the French magistrate and Nigerian officials. In October 2004, representatives of TSKJ voluntarily testified before the Nigerian legislative committee.

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We notified the other owners of TSKJ of information provided by the investigations and asked each of them to conduct their own investigation. TSKJ has suspended the receipt of services from and payments to Tri-Star Investments and the Japanese trading company and has considered instituting legal proceedings to declare all agency agreements with Tri-Star Investments terminated and to recover all amounts previously paid under those agreements. In February 2005, TSKJ notified the Attorney General of Nigeria that TSKJ would not oppose the Attorney General’s efforts to have sums of money held on deposit in accounts of Tri-Star Investments in banks in Switzerland transferred to Nigeria and to have the legal ownership of such sums determined in the Nigerian courts.

As a result of these investigations, information has been uncovered suggesting that, commencing at least 10 years ago, members of TSKJ planned payments to Nigerian officials. We have reason to believe, based on the ongoing investigations,  that payments may have been made by agents of TSKJ to Nigerian officials. In addition, information uncovered in the summer of 2006 suggests that, prior to 1998, plans may have been made by employees of The M.W. Kellogg Company to make payments to government officials in connection with the pursuit of a number of other projects in countries outside of Nigeria. Halliburton is reviewing a number of recently discovered documents related to KBR’s activities in countries outside of Nigeria with respect to agents for projects after 1998. Certain of these activities involve current or former employees or persons who were or are consultants to us, and the investigation is continuing.

In June 2004, all relationships with Mr. Stanley and another consultant and former employee of M.W. Kellogg Limited were terminated. The termination of Mr. Stanley occurred because of violations of Halliburton’s Code of Business Conduct that allegedly involved the receipt of improper personal benefits from Mr. Tesler in connection with TSKJ’s construction of the Bonny Island project.

In 2006, Halliburton suspended the services of another agent who, until such suspension, had worked for us outside of Nigeria on several current projects and on numerous older projects going back to the early 1980s. The suspension by Halliburton will continue until such time, if ever, as Halliburton can satisfy itself regarding the agent’s compliance with applicable law and Halliburton’s Code of Business Conduct. In addition, Halliburton suspended the services of an additional agent on a separate current Nigerian project with respect to which Halliburton has received from a joint venture partner on that project allegations of wrongful payments made by such agent.  Until such time as the agents’ suspensions are favorably resolved, KBR will continue the suspension of its use of both of the referenced agents.

If violations of the FCPA were found, a person or entity found in violation could be subject to fines, civil penalties of up to $500,000 per violation, equitable remedies, including disgorgement (if applicable) generally of profits, including prejudgment interest on such profits, causally connected to the violation, and injunctive relief. Criminal penalties could range up to the greater of $2 million per violation and twice the gross pecuniary gain or loss from the violation, which could be substantially greater than $2 million per violation. It is possible that both the SEC and the DOJ could assert that there have been multiple violations, which could lead to multiple fines. The amount of any fines or monetary penalties which could be assessed would depend on, among other factors, the findings regarding the amount, timing, nature and scope of any improper payments, whether any such payments were authorized by or made with knowledge of us or our affiliates, the amount of gross pecuniary gain or loss involved, and the level of cooperation provided the government authorities during the investigations. Agreed dispositions of these types of violations also frequently result in an acknowledgement of wrongdoing by the entity and the appointment of a monitor on terms negotiated with the SEC and the DOJ to review and monitor current and future business practices, including the retention of agents, with the goal of assuring compliance with the FCPA. Other potential consequences could be significant and include suspension or debarment of our ability to contract with governmental agencies of the United States and of foreign countries. In the second quarter of 2007, we had revenue of approximately $1.4 billion from our government contracts work with agencies of the United States or state or local governments. If necessary, we would seek to obtain administrative agreements or waivers from the DoD and other agencies to avoid suspension or debarment. In addition, we may be excluded from bidding on MoD contracts in the United Kingdom if we are convicted for a corruption offense or if the MoD determines that our actions constituted grave misconduct. During the second quarter of 2007, we had revenue of approximately $273 million from our government contracts work with the MoD. Suspension or debarment from the government contracts business would have a material adverse effect on our business, results of operations, and cash flow.

These investigations could also result in (1) third-party claims against us, which may include claims for special, indirect, derivative or consequential damages, (2) damage to our business or reputation, (3) loss of, or adverse effect on, cash flow, assets, goodwill, results of operations, business, prospects, profits or business value, (4) adverse consequences on our ability to obtain or continue financing for current or future projects and/or (5) claims by directors, officers, employees, affiliates, advisors, attorneys, agents, debt holders or other interest holders or constituents of us or our subsidiaries. In this connection, we understand that the government of Nigeria gave notice in 2004 to the French magistrate of a civil claim as an injured party in that proceeding. We are not aware of any further developments with respect to this claim. In addition, our compliance procedures or having a monitor required or agreed to be appointed at our cost as part of the disposition of the investigations could result in a more limited use of agents on large-scale international projects than in the past and put us at a competitive disadvantage in pursuing such projects. Continuing negative publicity arising out of these investigations could also result in our inability to bid successfully for governmental contracts and adversely affect our prospects in the commercial marketplace. In addition, we could incur costs and expenses for any monitor required by or agreed to with a governmental authority to review our continued compliance with FCPA law.

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The investigations by the SEC and DOJ and foreign governmental authorities are continuing. We do not expect these investigations to be concluded in the immediate future. The various governmental authorities could conclude that violations of the FCPA or applicable analogous foreign laws have occurred with respect to the Bonny Island project and other projects in or outside of Nigeria. In such circumstances, the resolution or disposition of these matters, even after taking into account the indemnity from Halliburton with respect to any liabilities for fines or other monetary penalties or direct monetary damages, including disgorgement, that may be assessed by the U.S. and certain foreign governments or governmental agencies against us or our greater than 50%-owned subsidiaries could have a material adverse effect on our business, prospects, results or operations, financial condition and cash flow.

Under the terms of the master separation agreement entered into in connection with the Offering, Halliburton has agreed to indemnify us, and any of our greater than 50%-owned subsidiaries, for our share of fines or other monetary penalties or direct monetary damages, including disgorgement, as a result of claims made or assessed by a governmental authority of the United States, the United Kingdom, France, Nigeria, Switzerland or Algeria or a settlement thereof relating to FCPA Matters (as defined), which could involve Halliburton and us through The M. W. Kellogg Company, M. W. Kellogg Limited or, their or our joint ventures in projects both in and outside of Nigeria, including the Bonny Island, Nigeria project. Halliburton’s indemnity will not apply to any other losses, claims, liabilities or damages assessed against us as a result of or relating to FCPA Matters or to any fines or other monetary penalties or direct monetary damages, including disgorgement, assessed by governmental authorities in jurisdictions other than the United States, the United Kingdom, France, Nigeria, Switzerland or Algeria, or a settlement thereof, or assessed against entities such as TSKJ or Brown & Root–Condor Spa, in which we do not have an interest greater than 50%.

As of June 30, 2007, we are unable to estimate an amount of probable loss or a range of possible loss related to these matters.

Bidding practices investigation

In connection with the investigation into payments relating to the Bonny Island project in Nigeria, information has been uncovered suggesting that Mr. Stanley and other former employees may have engaged in coordinated bidding with one or more competitors on certain foreign construction projects, and that such coordination possibly began as early as the mid-1980s.

On the basis of this information, Halliburton and the DOJ have broadened their investigations to determine the nature and extent of any improper bidding practices, whether such conduct violated United States antitrust laws, and whether former employees may have received payments in connection with bidding practices on some foreign projects.

If violations of applicable United States antitrust laws occurred, the range of possible penalties includes criminal fines, which could range up to the greater of $10 million in fines per count for a corporation, or twice the gross pecuniary gain or loss, and treble civil damages in favor of any persons financially injured by such violations. Criminal prosecutions under applicable laws of relevant foreign jurisdictions and civil claims by or relationship issues with customers are also possible.

The results of these investigations may have a material adverse effect on our business and results of operations. As of June 30, 2007, we are unable to estimate an amount of probable loss or range of possible loss related to these matters.

Possible Algerian investigation

We believe that an investigation by a magistrate or a public prosecutor in Algeria may be pending with respect to sole source contracts awarded to Brown & Root-Condor Spa, a joint venture among Kellogg Brown & Root Ltd UK, Centre de Recherche Nuclear de Draria and Holding Services para Petroliers Spa. We had a 49% interest in this joint venture as of June 30, 2007.

Barracuda-Caratinga project arbitration

In June 2000, we entered into a contract with Barracuda & Caratinga Leasing Company B.V., the project owner, to develop the Barracuda and Caratinga crude oilfields, which are located off the coast of Brazil. We have been in negotiations with the project owner since 2003 to settle the various issues that have arisen and have entered into several agreements to resolve those issues. In April 2006, we executed an agreement with Petrobras that enabled us to achieve conclusion of the Lenders’ Reliability Test and final acceptance of the floating production, storage, and offloading units, commonly referred to as FPSOs. These acceptances eliminated any further risk of liquidated damages being assessed but did not address the bolt arbitration discussed below. Our remaining obligation under the April 2006 agreement is primarily for warranty on the two vessels.

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At Petrobras’ direction, we replaced certain bolts located on the subsea flowlines that failed through mid-November 2005, and we understand that additional bolts have failed thereafter, which have been replaced by Petrobras. These failed bolts were identified by Petrobras when it conducted inspections of the bolts. The original design specification for the bolts was issued by Petrobras, and as such, we believe the cost resulting from any replacement is not our responsibility. In March 2006, Petrobras notified us that they have submitted this matter to arbitration claiming $220 million plus interest for the cost of monitoring and replacing the defective stud bolts and, in addition, all of the costs and expenses of the arbitration including the cost of attorneys fees. We disagree with Petrobras’ claim since the bolts met Petrobras’ design specifications, and we believe there is no basis for the amount claimed by Petrobras. We intend to vigorously defend this matter and pursue recovery of the costs we have incurred to date through the arbitration process. The arbitration hearing is not expected to begin until the first quarter of 2008.  As of June 30, 2007, we had not accrued any amounts related to this arbitration.

Under the master separation agreement, Halliburton has agreed to indemnify us and any of our greater than 50%-owned subsidiaries as of November 2006, for all out-of-pocket cash costs and expenses (except for ongoing legal costs), or cash settlements or cash arbitration awards in lieu thereof, we may incur after the effective date of the master separation agreement as a result of the replacement of the subsea flowline bolts installed in connection with the Barracuda-Caratinga project.

Improper payments reported to the SEC

During the second quarter of 2002, we reported to the SEC that one of our foreign subsidiaries operating in Nigeria made improper payments of approximately $2.4 million to entities owned by a Nigerian national who held himself out as a tax consultant, when in fact he was an employee of a local tax authority. The payments were made to obtain favorable tax treatment and clearly violated our Code of Business Conduct and our internal control procedures. The payments were discovered during our audit of the foreign subsidiary. We conducted an investigation assisted by outside legal counsel, and, based on the findings of the investigation, we terminated several employees. None of our senior officers were involved. We are cooperating with the SEC in its review of the matter. We took further action to ensure that our foreign subsidiary paid all taxes owed in Nigeria. During 2003, we filed all outstanding tax returns and paid the associated taxes.

Litigation brought by La Nouvelle

In October 2004, La Nouvelle, a subcontractor to us in connection with our government services work in Kuwait and Iraq, filed suit alleging breach of contract and interference with contractual and business relations. The relief sought included $224 million in damages for breach of contract, which included $34 million for wrongful interference and an unspecified sum for consequential and punitive damages. The dispute arose from our termination of a master agreement pursuant to which La Nouvelle operated a number of dining facilities in Kuwait and Iraq and the replacement of La Nouvelle with ESS, which, prior to La Nouvelle’s termination, had served as La Nouvelle’s subcontractor. In addition, La Nouvelle alleged that we wrongfully withheld from La Nouvelle certain sums due La Nouvelle under its various subcontracts. During the second quarter of 2005, this litigation was settled without material impact to us.

Iraq overtime litigation

During the fourth quarter of 2005, a group of present and former employees working on the LogCAP contract in Iraq and elsewhere filed a class action lawsuit alleging that KBR wrongfully failed to pay time and a half for hours worked in excess of 40 per work week and that “uplift” pay, consisting of a foreign service bonus, an area differential, and danger pay, was only applied to the first 40 hours worked in any work week. The class alleged by plaintiffs consists of all current and former employees on the LogCAP contract from December 2001 to present. The basis of plaintiffs’ claims is their assertion that they are intended third party beneficiaries of the LogCAP contract and that the LogCAP contract obligated KBR to pay time and a half for all overtime hours. We have moved to dismiss the case on a number of bases. On September 26, 2006, the court granted the motion to dismiss insofar as claims for overtime pay and “uplift” pay are concerned, leaving only a contractual claim for miscalculation of employees’ pay. That claim remains pending. It is premature to assess the probability of an adverse result on that remaining claim. However, because the LogCAP contract is cost-reimbursable, we believe that we could charge any adverse award to the customer. It is our intention to continue to vigorously defend the remaining claim. As of June 30, 2007, we have not accrued any amounts related to this matter.

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Environmental

We are subject to numerous environmental, legal and regulatory requirements related to our operations worldwide. In the United States, these laws and regulations include, among others:

Ÿ the Comprehensive Environmental Response, Compensation and Liability Act;

Ÿ the Resources Conservation and Recovery Act;

Ÿ the Clean Air Act;

Ÿ the Federal Water Pollution Control Act; and

Ÿ the Toxic Substances Control Act.

In addition to the federal laws and regulations, states and other countries where we do business often have numerous environmental, legal and regulatory requirements by which we must abide. We evaluate and address the environmental impact of our operations by assessing and remediating contaminated properties in order to avoid future liabilities and comply with environmental, legal and regulatory requirements. On occasion, we are involved in specific environmental litigation and claims, including the remediation of properties we own or have operated as well as efforts to meet or correct compliance-related matters. Our Health, Safety and Environment group has several programs in place to maintain environmental leadership and to prevent the occurrence of environmental contamination. We do not expect costs related to environmental matters will have a material adverse effect on our consolidated financial position or our results of operations.

Letters of credit

In connection with certain projects, we are required to provide letters of credit, surety bonds or other financial and performance guarantees to our customers. As of June 30, 2007, we had approximately $766 million in letters of credit and financial guarantees outstanding, of which $133 million were issued under our Revolving Credit Facility. Approximately $630 million of the remaining $633 million were issued under various Halliburton facilities and are irrevocably and unconditionally guaranteed by Halliburton.

In addition, we and Halliburton have agreed that until December 31, 2009, Halliburton will issue additional guarantees, indemnification and reimbursement commitments for our benefit in connection with (a) letters of credit necessary to comply with our EBIC contract, our Allenby & Connaught project and all other contracts that were in place as of December 15, 2005; (b) surety bonds issued to support new task orders pursuant to the Allenby & Connaught project, two job order contracts for our G&I segment and all other contracts that were in place as of December 25, 2005; and (c) performance guarantees in support of these contracts. Each credit support instrument outstanding at November 20, 2006, the time of our initial public offering, and any additional guarantees, indemnification and reimbursement commitments will remain in effect until the earlier of: (1) the termination of the underlying project contract or our obligations thereunder or (2) the expiration of the relevant credit support instrument in accordance with its terms or release of such instrument by our customer. In addition, we have agreed to use our reasonable best efforts to attempt to release or replace Halliburton’s liability under the outstanding credit support instruments and any additional credit support instruments relating to our business for which Halliburton may become obligated for which such release or replacement is reasonably available. For so long as Halliburton or its affiliates remain liable with respect to any credit support instrument, we have agreed to pay the underlying obligation as and when it becomes due. Furthermore, we agreed to pay to Halliburton a quarterly carry charge for its guarantees of our outstanding letters of credit and surety bonds and agreed to indemnify Halliburton for all losses in connection with the outstanding credit support instruments and any new credit support instruments relating to our business for which Halliburton may become obligated following the separation.

During the second quarter of 2007, a £20 million letter of credit was issued on our behalf by a bank in connection with our Allenby & Connaught project.  The letter of credit supports a building contract guarantee executed between KBR and certain project joint venture company to provide additional credit support as a result of our separation from Halliburton.  The letter of credit issued by the bank is guaranteed by Halliburton.

Other commitments

As of June 30, 2007, we had commitments to provide funds of $124 million to related companies, including $115 million related to our privately financed projects. As of December 31, 2006, these commitments were approximately $156 million, including $119 million to fund our privately financed projects. These commitments arose primarily during the start-up of these entities or due to losses incurred by them. We expect approximately $8 million of the commitments at June 30, 2007 to be paid during the remainder of 2007. In addition, we continue to fund operating cash shortfalls on the Barracuda-Caratinga project and are obligated to fund total shortages over the remaining life of the project. The remaining estimated project costs, net of revenue to be received, was $6 million at June 30, 2007.

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Liquidated damages

Many of our engineering and construction contracts have milestone due dates that must be met or we may be subject to penalties for liquidated damages if claims are asserted and we were responsible for the delays. These generally relate to specified activities within a project by a set contractual date or achievement of a specified level of output or throughput of a plant we construct. Each contract defines the conditions under which a customer may make a claim for liquidated damages. However, in most instances, liquidated damages are not asserted by the customer, but the potential to do so is used in negotiating claims and closing out the contract. We had not accrued for liquidated damages of $34 million and $38 million at June 30, 2007 and December 31, 2006, respectively (including amounts related to our share of unconsolidated subsidiaries), that we could incur based upon completing the projects as forecasted.

Leases

We are obligated under operating leases, principally for the use of land, offices, equipment, field facilities, and warehouses. We recognize minimum rental expenses over the term of the lease. When a lease contains a fixed escalation of the minimum rent or rent holidays, we recognize the related rent expense on a straight-line basis over the lease term and record the difference between the recognized rental expense and the amounts payable under the lease as deferred lease credits. We have certain leases for office space where we receive allowances for leasehold improvements. We capitalize these leasehold improvements as property, plant, and equipment and deferred lease credits. Leasehold improvements are amortized over the shorter of their economic useful lives or the lease term.

Note 10.  Income Taxes

The effective tax rate for the second quarter of 2007 and 2006 was approximately 41%.  Our effective tax rate for the second quarter of 2007 exceeded our statutory rate of 35% primarily due to not receiving a tax benefit for a portion of our impairment charge related to our investment in BRC, non-deductible operating losses from our railroad investment in Australia, and state and other taxes.  Our effective tax rate in the second quarter of 2006 exceeded our statutory rate of 35% primarily due to not receiving a tax benefit for a portion of our impairment charge related to our railroad investment in Australia, non-deductible operating losses from our railroad investment in Australia, and adjustments for prior year taxes in various tax jurisdictions.  Our effective tax rate for continuing operations for 2007 is forecasted to be approximately 43%.

Effective January 1, 2007, KBR adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (“FIN 48” or the “Interpretation”).  The Interpretation prescribes the minimum recognition threshold a tax position taken or expected to be taken in a tax return is required to meet before being recognized in the financial statements.  It also provides guidance for derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.  As a result of the implementation of FIN 48, we recognized no change in the liability for unrecognized tax benefits and an increase of approximately $10 million for accrued interest and penalties, which was accounted for as a reduction to the January 1, 2007 balance of retained earnings.

As of January 1, 2007, we had total unrecognized tax benefits of $61 million.  During the three and six months ended June 30, 2007, we had no significant changes in these tax positions related to the current reporting or prior reporting periods, changes in settlements with taxing authorities, nor as a result of the lapse of any applicable statutes of limitations.  As of January 1, 2007 and June 30, 2007, KBR estimates that $24 million in unrecognized tax benefits, if recognized, would affect the effective tax rate.

KBR recognizes interest and penalties related to unrecognized tax benefits within the provision for income taxes in our consolidated statement of operations.  As of June 30, 2007, we had accrued approximately $14 million in interest and penalties.  During the quarter ended June 30, 2007, we recognized approximately $1 million in interest and penalties charges related to unrecognized tax benefits.

As of January 1, 2007, we believe that no current tax positions that have resulted in unrecognized tax benefits will significantly increase or decrease within one year.  As of the quarter ended June 30, 2007, no material changes have occurred in our estimates or expected events related to anticipated changes in our unrecognized tax benefits.

KBR is the parent of a group of our domestic companies which are in the U.S. consolidated federal income tax return of Halliburton through April 5, 2007, the date of our separation from Halliburton. We also file income tax returns in various states and foreign jurisdictions.  With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examination by tax authorities for years before 1998.

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Income tax expense for KBR through the date of separation from Halliburton is calculated on a pro rate basis.  Under this method, income tax expense is determined based on KBR operations and their contributions to income tax expense of the Halliburton consolidated group.  For the period subsequent to the date of our separation from Halliburton, income tax expense is calculated based solely on KBR’s own operations.

Note 11.  Income per Share

Basic income per share is based upon the weighted average number of common shares outstanding during the period.  Dilutive income per share includes additional common shares that would have been outstanding if potential common shares with a dilutive effect had been issued.  A reconciliation of the number of shares used for the basic and diluted income per share calculations is as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
Millions of shares	2007		2006		2007		2006
Basic weighted average common shares outstanding		168		136		168		136
Dilutive effect of:
Stock options		1		—		1		—
Restricted shares		—		—		—		—
Diluted weighted average common shares outstanding		169		136		169		136

No adjustments to net income were made in calculating diluted earnings per share for the three and six months ended June 30, 2007 and 2006.

Note 12.  Equity Method Investments and Variable Interest Entities

We conduct some of our operations through joint ventures which are in partnership, corporate, undivided interest and other business forms and are principally accounted for using the equity method of accounting.

Alice Springs-Darwin (“ASD”).  ASD is a joint venture consortium consisting of general partnerships registered in Australia and was created for the purpose of operating a railroad between Alice Springs and Darwin in Australia.  KBR owns a 36.7% interest in the partnership accounted for using the equity method of accounting.  At the end of the first quarter of 2006, we recorded a $26 million impairment charge to our investment due to sustained losses, lower than anticipated freight volume, and a slowdown in the planned expansion of the Port of Darwin.  The impairment charge is classified as a component of “Equity in losses of unconsolidated affiliates” in our condensed consolidated statements of operations.  Summarized financial information for the underlying business of ASD is as follows for the six months ended June 30, 2007 and 2006:

Statements of Operations (in millions)

	Three Months Ended June 30,						Six Months Ended  June 30,
Millions of dollars	2007			2006			2007			2006
Revenue	$	62		$	42		$	108		$	74
Operating loss	$	(13	)	$	(5	)	$	(14	)	$	(6	)
Net Loss	$	(7	)	$	(12	)	$	(19	)	$	(21	)

Brown & Root Condor Spa (“BRC”).  During the first quarter of 2007, BRC experienced a decline in new work awarded from various sources including Sonatrach, which is a significant customer of BRC and also owns a 51% interest in the business along with its Algerian government affiliates.  In addition, Sonatrach has canceled work previously awarded to BRC and has indicated to us that they wish to dissolve BRC.  We are discussing ways to dissolve BRC with Sonatrach including a sale of our interest in BRC to Sonatrach. As a result of its ongoing operating losses and the lack of new project awards, BRC's projected cash flows indicate that BRC will have difficulty in paying its obligations as they become due in 2007.  As a result, during the first quarter of 2007 KBR determined that it was unlikely that the carrying amount of its net investment in BRC would be recovered and, consequently recorded an $18 million impairment charge during the first quarter of 2007.  Of the $18 million charge, approximately $16 million is classified as a component of “Equity in losses of unconsolidated affiliates” and $2 million as a component of “Cost of services” in our condensed consolidated statements of operations.  During the first quarter of 2007, we billed approximately $2 million of services to BRC, which we expensed as a component of “Cost of services”.  During the second quarter of 2007, our discussions with Sonatrach continued.  Should our discussions with Sonatrach result in a sale of our equity interest in BRC, any net proceeds would result in a gain and reversal of a portion of the impairment charges recorded in the first quarter of 2007.

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Note 13.  Retirement Plans

The components of net periodic benefit cost related to pension benefits for the three and six months ended June 30, 2007 and 2006 were as follows:

	Three Months Ended (1)
	June 30, 2007						June 30, 2006
Millions of dollars	United States			International			United States			International
Components of net periodic benefit cost:
Service cost	$	-		$	2		$	-		$	2
Interest cost		1			21			1			16
Expected return on plan assets		(1	)		(24	)		(1	)		(18	)
Recognized actuarial loss		-			5			-			4
Net periodic benefit cost	$	-		$	4		$	-		$	4

	Six Months Ended (1)
	June 30, 2007						June 30, 2006
Millions of dollars	United States			International			United States			International
Components of net periodic benefit cost:
Service cost	$	-		$	5		$	-		$	4
Interest cost		1			41			1			33
Expected return on plan assets		(1	)		(47	)		(1	)		(37	)
Recognized actuarial loss		-			10			-			7
Net periodic benefit cost	$	-		$	9		$	-		$	7

(1) The components of net periodic benefit cost for both the current and prior period exclude pension benefits associated with DML, which was sold in the second quarter of 2007 and is accounted for as discontinued operations.

We currently expect to contribute approximately $25 million to our international pension plans in 2007.  As of June 30, 2007, we contributed $15 million of the $25 million to our international pension plans.  We do not have a required minimum contribution for our domestic plans. We do not expect to make additional contributions to our domestic plans in 2007.

The components of net periodic benefit cost related to other postretirement benefits were immaterial for the three and six months ended June 30, 2007 and 2006.

Note 14.  Reorganization of Business Operations

In the fourth quarter of 2006, we committed to a restructuring plan that included broad based headcount reductions deemed necessary to reduce overhead and better position us for the future. In connection with this reorganization, we recorded restructuring charges totaling $5 million for severance, incentives, and other employee benefit costs for personnel whose employment was involuntarily terminated.  These termination benefits were offered to approximately 139 personnel, with 66 receiving enhanced termination benefits.  The terminated personnel were located in the United States and United Kingdom.  Of this amount, $3 million related to our Energy and Chemicals segment and $2 million related to our Government and Infrastructure segment. The restructuring charge was included in “General and administrative” expense in our consolidated statements of operations for the year ended December 31, 2006.  During the three and six months ended June 30, 2007, approximately $2 million and $4 million, respectively, of the termination benefits were paid.  The remaining balance in the restructuring reserve account included in “Accounts payable” was immaterial as of June 30, 2007.

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Note 15.  Related Party

Halliburton and certain of its subsidiaries provide various interim support services to KBR, including information technology, legal and internal audit. Costs for information technology, including payroll processing services, which totaled $3 million and $5 million for the three and six months ended June 30, 2007, respectively, and $2 million and $5 million for the three and six months ended June 30, 2006, respectively, are allocated to KBR based on a combination of factors of Halliburton and KBR, including relative revenues, assets and payroll, and negotiation of the reasonableness of the charge. Costs for other services allocated to us prior to KBR’s separation from Halliburton were $7 million and $10 million for the three and six months ended June 30, 2007, respectively, compared with $5 million and $11 million for the three and six months ended June 30, 2006, respectively.  Costs for these other services, including legal services and audit services, are primarily charged to us based on direct usage of the service. Costs allocated to KBR using a method other than direct usage are not significant individually or in the aggregate. We believe the allocation methods are reasonable. In addition, KBR leases office space to Halliburton at its Leatherhead, U.K. location.  Subsequent to our separation from Halliburton, costs are no longer allocated but are charged to KBR pursuant to the terms of the transition services agreement.

Historically, Halliburton had centrally developed, negotiated and administered our risk management process. This insurance program had included broad, all-risk coverage of worldwide property locations, excess worker’s compensation, general, automobile and employer liability, director’s and officer’s and fiduciary liability, global cargo coverage and other standard business coverages. Net expenses of $5 million and $9 million, representing our share of these risk management coverages and related administrative costs, had been allocated to us for the three and six months ended June 30, 2006.  These expenses are included in cost of services in the condensed consolidated statements of operations for the period ended June 30, 2006. Historically, we have been self insured, or have participated in a Halliburton self-insured plan, for certain insurable risks, such as general liability, property damage and workers’ compensation. However, subject to specific limitations, Halliburton had umbrella insurance coverage for some of these risk exposures. As a result of our complete separation from Halliburton, we have implemented our own stand-alone insurance and risk management programs with policies that provide substantially the same coverage as we had under Halliburton, with the exception of property coverage.  Our property coverage differs from prior coverage as appropriate to reflect the nature of our properties, as compared to Halliburton’s properties.

The balances for the related party transactions described above are reflected in the consolidated balance sheets as “Due to Halliburton, net”.  KBR had a $0 and $152 million balance payable to Halliburton at June 30, 2007 and December 31, 2006, respectively, which consisted of amounts KBR owed Halliburton for estimated current year outstanding income taxes, amounts owed pursuant to our transition services agreement and other amounts.  The average intercompany balance for the six months ended June 30, 2007 and 2006 was $80 million and $560 million, respectively.

All of the charges described above have been included as costs of our operation in these condensed consolidated statements of operations. It is possible that the terms of these transactions may differ from those that would result from transactions among third parties.

In connection with certain projects, we are required to provide letters of credit, surety bonds or other financial and performance guarantees to our customers. As of June 30, 2007, we had approximately $766 million in letters of credit and financial guarantees outstanding of which $553 million related to our joint venture operations, including $205 million issued in connection with the Allenby & Connaught project.  Of the total $766 million, approximately $630 million in letters of credit were irrevocably and unconditionally guaranteed by Halliburton.  In addition, Halliburton has guaranteed surety bonds and provided direct guarantees primarily related to our performance. Under certain reimbursement agreements, if we were unable to reimburse a bank under a paid letter of credit and the amount due is paid by Halliburton, we would be required to reimburse Halliburton for any amounts drawn on those letters of credit or guarantees in the future.  The Halliburton performance guarantees and letter of credit guarantees that are currently in place in favor of KBR’s customers or lenders will continue until the earlier of (a) the termination of the underlying project contract or KBR’s obligations thereunder or (b) the expiration of the relevant credit support instrument in accordance with its terms or release of such instrument by the customer. Furthermore, we agreed to pay to Halliburton a quarterly carry charge for its guarantees of our outstanding letters of credit and surety bonds and agreed to indemnify Halliburton for all losses in connection with the outstanding credit support instruments and any new credit support instruments relating to our business for which Halliburton may become obligated following the separation.

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We perform many of our projects through incorporated and unincorporated joint ventures. In addition to participating as a joint venture partner, we often provide engineering, procurement, construction, operations or maintenance services to the joint venture as a subcontractor. Where we provide services to a joint venture that we control and therefore consolidate for financial reporting purposes, we eliminate intercompany revenues and expenses on such transactions. In situations where we account for our interest in the joint venture under the equity method of accounting, we do not eliminate any portion of our revenues or expenses. We recognize the profit on our services provided to joint ventures that we consolidate and joint ventures that we record under the equity method of accounting primarily using the percentage-of-completion method. Total revenue from services provided to our unconsolidated joint ventures recorded in our consolidated statements of operations was $94 million and $203 million for the three and six months ended June 30, 2007, respectively.  Total revenue from services provided to our unconsolidated joint ventures recorded in our consolidated statements of operations was $116 million and $218 million for the three and six months ended June 30, 2006, respectively.  Profit on transactions with our unconsolidated joint ventures recognized in our consolidated statements of operations was $2 million and $13 million for the three and six months ended June 30, 2007, respectively and $3 million and $46 million for the three and six months ended June 30, 2006, respectively.

Note 16.  New Accounting Standards

In September 2006, the Financial Accounting Standards Board (“FASB”) Staff issued FASB Staff Position (“FSP”) No. AUG AIR-1, “Accounting for Planned Major Maintenance Activities.”  The FSP prohibits the use of the accrue-in-advance method of accounting for planned major maintenance activities.  The FSP also requires disclosures regarding the method of accounting for planned major maintenance activities and the effects of implementing the FSP.  The guidance in this FSP is effective January 1, 2007 and is to be retrospectively applied for all periods presented.  The guidance in this FSP affects KBR with regard to a 50%-owned joint venture that leases offshore vessels requiring periodic major maintenance.  This joint venture was contributed to KBR by Halliburton on April 1, 2006.  KBR accounts for its investment in this joint venture under the equity method of accounting.  As a result, KBR has retroactively applied the required change in accounting, electing the deferral method of accounting for planned major maintenance activities.  The deferral method requires the capitalization of planned major maintenance costs at the point they occur and the depreciation of these costs over an estimated period until future maintenance activities are repeated.  The result is an increase to KBR’s investment in the equity of this joint venture and an increase to additional paid-in capital of approximately $7 million as of April 1, 2006.  The effect of the change in accounting on KBR’s operating results for the year ended December 31, 2006 was immaterial.

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”).  This statement defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements.  The statement applies whenever other statements require or permit assets or liabilities to be measured at fair value.  SFAS 157 is effective for fiscal years beginning after November 15, 2007.  We are currently evaluating the impact that the adoption of SFAS 157 will have on our financial position, results of operations and cash flows.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115,” (“SFAS 159”).  SFAS 159 provides companies with an option to measure certain financial instruments and other items at fair value with changes in fair value reported in earnings.  SFAS 159 is effective for fiscal years beginning after November 15, 2007.  We are currently evaluating the impact that the adoption of SFAS 159 will have on our financial position, results of operations and cash flows.

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Note 17. Discontinued Operations

In May 2006, we completed the sale of our Production Services group, which was part of our E&C segment. The Production Services group delivered a range of support services, including asset management and optimization; brownfield projects; engineering; hook-up, commissioning and start-up; maintenance management and execution; and long-term production operations, to oil and gas exploration and production customers. In connection with the sale, we received net proceeds of $265 million. The sale of Production Services resulted in a pre-tax gain of approximately $120 million in the year ended December 31, 2006.  During the three and six months ended June 30, 2007,  we settled certain claims and provided an allowance against certain receivables from the Production Services group resulting in a charge of approximately $11 million and $15 million, respectively.  We expect to collect all remaining net receivables from the Production Services group during 2007.

On June 28, 2007, we completed the disposition of our 51% interest in DML to Babcock International Group plc.  DML owns and operates Devonport Royal Dockyard, one of Western Europe’s largest naval dockyard complexes.  Our DML operations, which was part of our G&I segment, primarily involved refueling nuclear submarines and performing maintenance on surface vessels for the U.K. Ministry of Defence as well as limited commercial projects.  In connection with the sale, we received $345 million in cash proceeds, net of direct transaction costs for our 51% interest in DML.  The sale of DML resulted in a gain of approximately $97 million, net of tax of $119 million, calculated as follows:

Millions of dollars
Proceeds, net of direct transaction costs	$	345
Less:  Net book value of DML		(129	)
Gain on sale of DML before income tax		216
Less:  Income tax		(119	)
Gain on sale of DML, net of income tax	$	97

In accordance with the provisions of SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets,” the results of operations of the Production Services group and DML for the current and prior periods have been reported as discontinued operations in our condensed consolidated statements of operations.  The major classes of assets and liabilities of discontinued operations in the condensed consolidated balance sheet at June 30, 2007 and December 31, 2006 are as follows:

	June 30,		December 31,
Millions of dollars	2007		2006
Assets:
Cash and equivalents	$	-	$	51
Accounts receivable—related party		11		62
Accounts receivable and unbilled receivables on uncompleted contracts, net		-		112
Other current assets		-		32
Total current assets related to discontinued operations		11		257
Property, plant, and equipment, net		-		281
Goodwill		-		38
Other noncurrent assets		-		38
Total noncurrent assets related to discontinued operations		-		357
Total assets related to discontinued operations	$	11	$	614
Liabilities:
Accounts payable	$	-	$	99
Advance billings on incomplete contracts		-		136
Other current liabilities		-		39
Total current liabilities related to discontinued operations		-		274
Employee compensation and benefits		-		191
Long-term debt		-		2
Other long-term liabilities		-		(5	)
Total noncurrent liabilities related to discontinued operations		-		188
Total liabilities related to discontinued operations	$	-	$	462
Minority interest in consolidated subsidiaries	$	-	$	44

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The consolidated operating results of our Production Services group and DML, which are classified as discontinued operations in our condensed consolidated statements of operations, are summarized in the following table:

	Three Months Ended June 30,				Six Months Ended  June 30,
Millions of dollars	2007		2006		2007		2006
Revenue	$	225	$	286	$	449	$	693
Operating income	$	11	$	24	$	22	$	49
Pretax income	$	5	$	19	$	11	$	38

The operating results of DML, which are classified as discontinued operations, and included in our consolidated operating results table above, are summarized in the following table:

	Three Months Ended June 30,				Six Months Ended  June 30,
Millions of dollars	2007		2006		2007		2006
Revenue	$	225	$	203	$	449	$	393
Operating income	$	22	$	17	$	37	$	34
Pretax income	$	16	$	12	$	26	$	23

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

The purpose of management’s discussion and analysis (“MD&A”) is to increase the understanding of the reasons for material changes in our financial condition since the most recent fiscal year-end and results of operations during the current fiscal period as compared to the corresponding period of the preceding fiscal year.  The MD&A should be read in conjunction with the condensed consolidated financial statements and accompanying notes and our 2006 Annual Report on Form 10-K.

Forward-Looking Information

This report contains certain statements that are, or may be deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  The Private Securities Litigation Reform Act of 1995 provides safe harbor provisions for forward-looking information. The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “plan,” “expect” and similar expressions are intended to identify forward-looking statements.  All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. Forward-looking statements include information concerning our possible or assumed future financial performance and results of operation and backlog information.

We have based these statements on our assumptions and analyses in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate in the circumstances. Although we believe that the forward-looking statements contained in this report are based upon reasonable assumptions, forward-looking statements by their nature involve substantial risks and uncertainties that could significantly affect expected results, and actual future results could differ materially from those described in such statements. While it is not possible to identify all factors, factors that could cause actual future results to differ materially include the risks and uncertainties described under “Risk Factors” and those risk factors previously disclosed in our 2006 Annual Report on Form 10-K.

Many of these factors are beyond our ability to control or predict. Any of these factors, or a combination of these factors, could materially and adversely affect our future financial condition or results of operations and the ultimate accuracy of the forward-looking statements. These forward-looking statements are not guarantees of our future performance, and our actual results and future developments may differ materially and adversely from those projected in the forward-looking statements. We caution against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels. In addition, each forward-looking statement speaks only as of the date of the particular statement, and we undertake no obligation to publicly update or revise any forward-looking statement.

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Separation from Halliburton

On February 26, 2007, Halliburton’s board of directors approved a plan under which Halliburton would dispose of its remaining interest in KBR through a tax-free exchange with Halliburton’s stockholders pursuant to the Exchange Offer.  On March 2, 2007, KBR filed with the SEC a registration statement on Form S-4 with respect to the terms and conditions of the Exchange Offer.  On April 5, 2007, Halliburton completed the separation of KBR by exchanging the 135,627,000 shares of KBR owned by Halliburton for shares of Halliburton common stock pursuant to the terms of the Exchange Offer.

In connection with the Offering in November 2006 and the separation of our business from Halliburton, we entered into various agreements including, among others, a master separation agreement, tax sharing agreement, transition services agreements, and an employee matters agreement.

Pursuant to our master separation agreement, we agreed to indemnify Halliburton for, among other matters, all past, present and future liabilities related to our business and operations, subject to specified exceptions. We agreed to indemnify Halliburton for liabilities under various outstanding and certain additional credit support instruments relating to our businesses and for liabilities under litigation matters related to our business. Halliburton agreed to indemnify us for, among other things, liabilities unrelated to our business, for certain other agreed matters relating to the FCPA investigations and the Barracuda-Caratinga project and for other litigation matters related to Halliburton’s business.  See Note 9 to our condensed consolidated financial statements for further discussion of the FCPA investigations and the Barracuda-Caratinga project.

The tax sharing agreement, as amended, provides for certain allocations of U.S. income tax liabilities and other agreements between us and Halliburton with respect to tax matters.  As a result of the Offering,  Halliburton will be responsible for filing all U.S. income tax returns required to be filed through April 5, 2007, the date KBR ceased to be a member of the Halliburton consolidated tax group.  Halliburton will also be responsible for paying the taxes related to the returns it is responsible for filing.  We will pay Halliburton our allocable share of such taxes.  We are obligated to pay Halliburton for the utilization of net operating losses, if any, generated by Halliburton prior to the deconsolidation to offset our consolidated federal income tax liability.

Under the transition services agreements, Halliburton is expected to continue providing various interim corporate support services to us and we will continue to provide various interim corporate support services to Halliburton.  These support services relate to, among other things, information technology, legal, human resources, risk management and internal audit.  The services provided under the transition services agreement between Halliburton and KBR are substantially the same as the services historically provided.  Similarly, the related costs of such services will be substantially the same as the costs incurred and recorded in our historical financial statements.

The employee matters agreement provides for the allocation of liabilities and responsibilities to our current and former employees and their participation in certain benefit plans maintained by Halliburton.  Among other items, the employee matters agreement and the KBR, Inc. Transitional Stock Adjustment Plan provide forthe conversion, upon the complete separation of KBR from Halliburton, of stock options and restricted stock awards (with restrictions that have not yet lapsed as of the final separation date) granted to KBR employees under Halliburton’s 1993 Stock and Incentive Plan (“1993 Plan”) to stock options and restricted stock awards covering KBR common stock.  On April 5, 2007, immediately after our separation from Halliburton, the conversion of such stock options and restricted stock awards occurred.  A total of 1,217,095 Halliburton stock options and 612,857 Halliburton restricted stock awards were converted into 1,966,061 KBR stock options with a weighted average exercise price per share of $9.35 and 990,080 million restricted stock awards with a weighted average grant-date fair value per share of $11.01.  The conversion of such stock options and restricted stock was accounted for as a modification in accordance with SFAS No. 123(R) and resulted in an incremental charge to expense of less than $1 million, recognized in the three months ended June 30, 2007, representing the change in fair value of the converted awards from Halliburton stock options and restricted stock awards to KBR stock options and restricted stock awards.  Stock-based compensation expense recognized for all awards for the three and six months ended June 30, 2007 was $3 million and $6 million, respectively.  We estimate approximately $5 million of stock-based compensation expense will be recognized for the remainder of fiscal 2007.

See Notes 2 and 15 to our condensed consolidated financial statements for further discussion of the above agreements and other related party transactions with Halliburton.

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Business Environment and Results of Operations

Business Environment

We are a leading global engineering, construction and services company supporting the energy, petrochemicals, government services and civil infrastructure sectors. We are a leader in many of the growing end-markets that we serve, particularly gas monetization, having designed and constructed, alone or with joint venture partners, more than half of the world’s operating LNG production capacity over the past 30 years. In addition, we are one of the ten largest government defense contractors worldwide according to a Defense News ranking based on fiscal 2005 revenue and, accordingly, we believe we are the world’s largest government defense services provider. For fiscal year 2005, we were the sixth largest contractor for the DoD based on its prime contract awards.

We offer our wide range of services through three business segments, E&C, G&I and Ventures. Although we provide a wide range of services, our business in each of our segments is heavily focused on major projects. At any given time, a relatively few number of projects and joint ventures represent a substantial part of our operations. Our projects are generally long term in nature and are impacted by factors including local economic cycles, introduction of new governmental regulation, and governmental outsourcing of services. Demand for our services depends primarily on our customers’ capital expenditures and budgets for construction and defense services. We have benefitted from increased capital expenditures by our petroleum and petrochemical customers driven by high crude oil and natural gas prices and general global economic expansion. Additionally, the heightened focus on global security and major military force realignments, particularly in the Middle East, as well as a global expansion in government outsourcing, have all contributed to increased demand for the type of services that we provide.

Our operations in some countries may be adversely affected by unsettled political conditions, acts of terrorism, civil unrest, force majeure, war or other armed conflict, expropriation or other governmental actions, inflation, exchange controls, or currency fluctuations.

Contract Structure

Engineering and construction contracts can be broadly categorized as either cost-reimbursable or fixed-price, sometimes referred to as lump sum. Some contracts can involve both fixed-price and cost-reimbursable elements. Fixed-price contracts are for a fixed sum to cover all costs and any profit element for a defined scope of work. Fixed-price contracts entail more risk to us as we must predetermine both the quantities of work to be performed and the costs associated with executing the work. While fixed-price contracts involve greater risk, they also are potentially more profitable for us, since the owner/customer pays a premium to transfer many risks to us. Cost-reimbursable contracts include contracts where the price is variable based upon our actual costs incurred for time and materials, or for variable quantities of work priced at defined unit rates. Profit on cost-reimbursable contracts may be based upon a percentage of costs incurred and/or a fixed amount. Cost-reimbursable contracts are generally less risky to us, since the owner/customer retains many of the risks.

E&C Segment Activity

Our E&C segment designs and constructs energy and petrochemical projects, including large, technically complex projects in remote locations around the world. Our expertise includes onshore oil and gas production facilities, offshore oil and gas production facilities, including platforms, floating production and subsea facilities (which we refer to collectively as our offshore projects), onshore and offshore pipelines, LNG and GTL gas monetization facilities (which we refer to collectively as our gas monetization projects), refineries, petrochemical plants (such as ethylene and propylene) and Syngas, primarily for fertilizer-related facilities. We provide a wide range of Engineering Procurement Construction – Commissioning Start-up (“EPC-CS”) services, as well as program and project management, consulting and technology services.

In order to meet growing energy demands, oil and gas companies are increasing their exploration, production, and transportation spending to increase production capacity and supply. We are currently targeting reimbursable EPC and engineering, procurement, and construction management opportunities in northern and western Africa, the Middle East, the Caspian area, Asia Pacific, Latin America, and the North Sea.

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Outsourcing of operations and maintenance work by industrial and energy companies has been increasing worldwide. Additional opportunities in this area are anticipated as the aging infrastructure in United States refineries and chemical plants requires more maintenance and repairs to minimize production downtime. More stringent industry safety standards and environmental regulations also lead to higher maintenance standards and costs.

During the second quarter of 2006, we were awarded the engineering, procurement and construction (“EPC”) contract for the Sonatrach Skikda LNG project, to be constructed at Skikda, Algeria.  In addition to performing the EPC work for the 4.5 million metric tons per annum LNG train, we will execute the pre-commissioning and commissioning portion of the contract.  The contract has an approximate value of $2.8 billion.

The engineering and construction industry, particularly in the oil and gas sector, continues to experience escalating material and equipment prices, and ongoing supply chain pricing pressures which could cause some delays in awards of and, in other cases, cancellations of major gas monetization and upstream prospects.  Any further delays could impact our long term projected results.  However, we believe the risk of a material negative impact to our results in the near term is low due to recent awards for KBR.  It is generally very difficult to predict whether or when we will receive such awards as these contracts frequently involve a lengthy and complex bidding and selection process which is affected by a number of factors, such as market conditions, financing arrangements, governmental approvals and environmental matters.

Escravos Project. In connection with our consolidated 50%-owned GTL project in Escravos, Nigeria, during the first half of 2007, we and our joint venture partner negotiated modifications to the contract terms and conditions resulting in an executed contract amendment in July 2007.  The contract has been amended to convert from a fixed price to a reimbursable contract whereby we will be paid our actual cost incurred less a credit that approximates the charge we identified in the second quarter of 2006.  Also included in the amended contract are client determined incentives that may be earned over the remaining life of the contract.  The effect of the modifications for the three months ended June 30, 2007 resulted in a $3 million increase to operating income.  In addition, minority interest shareholders’ absorption of losses increased by $15 million resulting in net income of $12 million for the three months ended June 30, 2007.  Because our amended agreement with the client provides that we will be reimbursed for our actual costs incurred, all amounts of probable unapproved change order revenue that were previously included in the project estimated revenues are now considered approved.

Brown & Root Condor Spa (“BRC”). During the first quarter of 2007, BRC experienced a decline in new work awarded from various sources including Sonatrach which is a significant customer of BRC and also owns a 51% interest in the business along with its Algerian government affiliates.  In addition, Sonatrach has canceled work previously awarded to BRC and has indicated to us that they wish to dissolve BRC.  We are discussing ways to dissolve BRC with Sonatrach including a sale of our interest in BRC to Sonatrach. As a result of its ongoing operating losses and the lack of new project awards, BRC's projected cash flows indicate that BRC will have difficulty in paying its obligations as they become due in 2007.  As a result, during the first quarter of 2007 KBR determined that it was unlikely that the carrying amount of its net investment in BRC would be recovered and, consequently recorded an $18 million impairment charge during the first quarter of 2007. During the first quarter of 2007 we billed approximately $2 million of services to BRC which we expensed as incurred. During the second quarter of 2007, our discussions with Sonatrach continued.  Should our discussions with Sonatrach result in a sale of our equity interest in BRC, any net proceeds would result in a gain and reversal of a portion of the impairment charges recorded in the first quarter of 2007.

Barracuda-Caratinga project. In June 2000, we entered into a contract with Barracuda & Caratinga Leasing Company B.V., the project owner, to develop the Barracuda and Caratinga crude oilfields, which are located off the coast of Brazil. We have been in negotiations with the project owner since 2003 to settle the various issues that have arisen and have entered into several agreements to resolve those issues. In April 2006, we executed an agreement with Petrobras that enabled us to achieve conclusion of the Lenders’ Reliability Test and final acceptance of the FPSOs. These acceptances eliminated any further risk of liquidated damages being assessed but did not address the bolt arbitration discussed below. Our remaining obligation under the April 2006 agreement is primarily for warranty on the two vessels.

At Petrobras’ direction, we have replaced certain bolts located on the subsea flowlines that have failed through mid-November 2005, and we understand that additional bolts have failed thereafter, which have been replaced by Petrobras. These failed bolts were identified by Petrobras when it conducted inspections of the bolts. The original design specification for the bolts was issued by Petrobras, and as such, we believe the cost resulting from any replacement is not our responsibility. In March 2006, Petrobras submitted this matter to arbitration claiming $220 million plus interest for the cost of monitoring and replacing the defective stud bolts and, in addition, all of the costs and expenses of the arbitration including the cost of attorneys fees. We disagree with Petrobras’ claim since the bolts met Petrobras’ design specifications, and we believe there is no basis for the amount claimed by Petrobras. We intend to vigorously defend this matter and pursue recovery of the costs we have incurred to date through the arbitration process. Under the master separation agreement we entered into with Halliburton in connection with the Offering, Halliburton agreed, subject to certain conditions, to indemnify us and hold us harmless from all cash costs and expenses incurred as a result of the replacement of the subsea bolts. As of June 30, 2007, we have not accrued any amounts related to this arbitration.  

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PEMEX Arbitration Settlement.  In July 2007, the arbitration committee awarded claims in favor of one of our three projects for PEMEX which was performed by our unconsolidated subsidiary.  Although full interpretation and calculation of this award is not complete, we estimate the amount awarded approximates the book value of these claims recorded at June 30, 2007.  The arbitration proceedings with respect to a second PEMEX project have been conducted and we are awaiting the results.  Regarding the third PEMEX project, arbitration hearings are scheduled for the fourth quarter of 2007.

G&I Segment Activity

Our G&I segment delivers on-demand support services across the full military mission cycle from contingency logistics and field support to operations and maintenance on military bases. In the civil infrastructure market, we operate in diverse sectors, including transportation, waste and water treatment, and facilities maintenance. We provide program and project management, contingency logistics, operations and maintenance, construction management, engineering, and other services to military and civilian branches of governments and private customers worldwide. We currently provide these services in the Middle East to support one of the largest U.S. military deployments since World War II, as well as in other global locations where military personnel are stationed. A significant portion of our G&I segment’s current operations relate to the support of United States government operations in the Middle East, which we refer to as our Middle East operations.

Through June 28, 2007, we were the majority owner of Devonport Management Limited (“DML”), the owner and operator of one of Western Europe’s largest naval dockyard complexes. Our DML shipyard operations are primarily involved refueling nuclear submarines and performing maintenance on surface vessels for the MoD as well as limited commercial projects. On June 28, 2007, we completed the disposition of our 51% interest in DML to Babcock International Group plc.  DML owns and operates Devonport Royal Dockyard, one of Western Europe’s largest naval dockyard complexes.  In connection with the sale, we received $345 million in cash proceeds, net of direct transaction costs for our 51% interest in DML.  The sale of DML resulted in a gain of approximately $97 million, net of tax of $119 million.

In the civil infrastructure sector, there has been a general trend of historic under-investment. In particular, infrastructure related to the quality of water, wastewater, roads and transit, airports, and educational facilities has declined while demand for expanded and improved infrastructure continues to outpace funding. As a result, we expect increased opportunities for our engineering and construction services and for our privately financed project activities as our financing structures make us an attractive partner for state and local governments undertaking important infrastructure projects.

Skopje Embassy Project.  In 2005, we were awarded a fixed-price contract to design and build a U.S. embassy in Skopje, Macedonia.  As a result of a project estimate update and progress achieved on design drawings, we recorded a $12 million loss in connection with this project during the fourth quarter of 2006.  We identified additional increases in cost on this project due to escalating material, labor and other costs including schedule delays.  As a result of these cost increases, we recorded an additional loss on this project of approximately $24 million during the second quarter of 2007 which we believe are not recoverable under the contract.  We could incur additional costs and losses on this project if our plan to make up lost schedule are not achieved or if material, labor or other costs incurred exceed the amounts we have estimated.

LogCap Project.  In August 2006, we were awarded a $3.5 billion task order under our LogCAP III contract for additional work through 2007. Backlog related to the LogCAP III contract at June 30, 2007 was $1.5 billion.   During the almost five-year period we have worked under the LogCAP III contract, we have been awarded 64 “excellent” ratings out of 76 total ratings.  We expect to complete all open task orders under our LogCAP III contract during 2008.

In August 2006, the DoD issued a request for proposals on a new competitively bid, multiple service provider LogCAP IV contract to replace the current LogCAP III contract. We are currently the sole service provider under our LogCAP III contract, which has been extended by the DoD through the fourth quarter of 2007. In June 2007, we were selected as one of the executing contractors under the LogCap IV contract to provide logistics support to U.S. Forces deployed in the Middle East.  Since the award of the LogCAP IV contract, unsuccessful bidders have brought actions at the Government Accountability Office protesting the contract award.  Until these protests are resolved, the DoD is unable to proceed with the transition of the LogCAP III to the LogCAP IV contract.  Despite the award of of a portion of the LogCAP IV contract and extension of our LogCAP III contract, we expect our overall volume of work to decline as our customer scales back its requirement for the types and the amounts of services we provide. However, as a result of the recently announced surge of additional troops and extended tours of duty in Iraq, we expect the decline to occur more slowly than we previously expected.

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Ventures Activity

As a result of changes in the monthly financial and operating information provided to our chief operating decision maker, during the first quarter of 2007, we redefined our reportable segments to now include the Ventures segment.  Our Ventures segment develops, provides assistance in arranging financing for, makes equity and debt investments in, and participates in managing entities owning assets generally from projects in which one of our other business segments has a direct role in the engineering, construction, and/or operations and maintenance.  The creation of the Ventures segment provides management focus on our investments in the entities that owns the assets.  Projects developed and under current management include government services such as defense procurement and operations and maintenance services for equipment, military infrastructure construction and program management, toll roads and railroads, and energy and chemical plants. The results of our Ventures segment are primarily generated by investments accounted for under the equity method.

Results of Operations

	Three Months Ended June 30,
	2007			2006			Increase (Decrease)			Percentage Change
	(In millions of dollars)
Revenue: (1)
E&C—Gas Monetization Projects	$	331		$	180		$	151			84	%
E&C—Offshore Projects		61			71			(10	)		(14	)%
E&C—Other		277			309			(32	)		(10	)%
Total Energy and Chemicals		669			560			109			19	%
G&I—Middle East Operations		1,170			1,409			(239	)		(17	)%
G&I—Other		312			282			30			11	%
Total Government and Infrastructure		1,482			1,691			(209	)		(12	)%
Ventures		1			(15	)		16			107	%
Total revenue	$	2,152		$	2,236		$	(84	)		(4	)%
Operating Income (loss):
E&C—Gas Monetization Projects	$	1		$	(130	)		131			101	%
E&C—Offshore Projects		3			9			(6	)		(67	)%
E&C—Other		37			24			13			54	%
Total Energy and Chemicals		41			(97	)		138			142	%
G&I—Middle East Operations		29			45			(16	)		(36	)%
G&I—Other		(4	)		13			(17	)		(131	)%
Total Government and Infrastructure		25			58			(33	)		(57	)%
Ventures		(1	)		(8	)		7			88	%
Total operating income (loss)	$	65		$	(47	)	$	112			238	%

(1) Our revenue includes both equity in the earnings of unconsolidated affiliates as well as revenue from the sales of services into the joint ventures. We often participate on larger projects as a joint venture partner and also provide services to the venture as a subcontractor. The amount included in our revenue represents our share of total project revenue, including equity in the earnings from joint ventures and revenue from services provided to joint ventures.

Three months ended June 30, 2007 compared to three months ended June 30, 2006

Revenue. E&C revenue increased $109 million to $669 million for second quarter of 2007 compared to $560 million for the second quarter of  2006. This increase in revenue was primarily due to a $151 million increase in revenue from our gas monetization projects. These increases were partially offset by decreases in revenue from offshore and other projects.

E&C revenue from our gas monetization projects for the second quarter of 2007 was $331 million compared to $180 million for the same period in 2006. This increase is primarily due to the start-up of several projects awarded in 2005 or early 2006, including the work performed by us on the Pearl GTL project and revenue earned on the Escravos GTL project. Revenue related to these two projects was $168 million higher in the second quarter of 2007 compared to the same period in 2006.

E&C revenue from our offshore projects for the second quarter of 2007 was $61 million compared to $71 million for the second quarter of 2006. This decrease in revenue is primarily due to the substantial completion of our lump-sum EPIC projects and decrease in the manhours incurred on projects in the Caspian Sea as two of the three projects in this area are near in completion.

E&C other projects includes our North American industrial services and domestic construction businesses, several joint ventures including BRC and MMM, which provides marine vessel support services in the Gulf of Mexico, and many other projects.  E&C other projects for the second quarter of 2007 decreased by $32 million from the second quarter of 2006.  The decrease was primarily due to the decline in work of approximately $18 million from a substantially complete crude oil project in Canada.

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G&I revenue decreased $209 million in the second quarter of 2007 compared to the second quarter of 2006. This decrease is primarily due to a $239 million decrease in revenue from our Middle East operations partially offset by a $30 million increase in revenue from other projects.

G&I revenue from our Middle East operations for the second quarter of 2007 was $1.2 billion compared to $1.4 billion for the second quarter of 2006. The decrease was primarily due to lower activity on our LogCAP III contract as our customer continued to scale back the construction and procurement related to military sites in Iraq.

G&I revenue from other projects increased from $282 million in the second quarter of 2006 to $312 million in the second quarter of 2007.  The increase is primarily due to an increase task orders related to the program management of a U.S. government facility in Florida.  

Ventures revenue increased $16 million to $1 million for the second quarter of 2007 compared to $(15) million for the second quarter of 2006.  The second quarter of 2006 included operating losses of approximately $17 million related to our equity investments in the Alice-Springs Darwin and U.K. roads projects which includes a $10 million impairment charge recorded on our investment in the U.K. roads project.

Operating income. E&C operating income for the second quarter of 2007 was $41 million compared to operating loss of $(97) million in the first three months of 2006.  Operating loss for the second quarter of 2006 was caused by charges of $148 million related to our Escravos GTL project in Nigeria.We and our client have amended the Escravos contract converting the payment terms from fixed price to reimbursable whereby we will be reimbursed for our actual costs incurred in connection with the project less a credit that approximates the charge that we identified in the second quarter of 2006.  As a result of the amendment, we recorded $3 million of operating income on the Escravos project during the second quarter of 2007.

E&C operating income from gas monetization for the second quarter of 2007 was $1 million compared to operating loss of $(130) million for the second quarter of 2006.  In the second quarter of 2006, we identified a $148 million dollar charge, before income taxes and minority interest, related to the Escravos GTL project.  In 2006, the project experienced delays relating to civil unrest and security on the Escravos River, near the project site and further delays resulting from scope changes and engineering and construction modifications.  During the second quarter of 2007, we earned job income of $35 million on our gas monetization projects including the Pearl GTL project, $3 million resulting from the Escravos contract conversion and various gas monetization FEED projects that we have underway.  These job results were partially offset by $34 million of division and general and administrative expenses allocated to gas monetization.

E&C operating income from our offshore projects for the second quarter of 2007 was $3 million compared to operating income of $9 million for the second quarter of 2006. The operating income decrease was primarily due to a decrease in the work on two of our three projects nearing completion in the Caspian Sea.

E&C operating income from other projects increased from $24 million in the second quarter of 2006 to $37 million in the second quarter of 2007.  Equity in earnings from the MMM joint venture that provides vessel support services in the Gulf of Mexico increased $6 million.  The remaining increase is primarily due to a favorable allocation of general and administrative expenses. Operating income for the second quarter of 2007 included positive contributions from our EBIC ammonia project and an export refinery in Saudi Arabia.

G&I operating income decreased $33 million to $25 million for the second quarter of 2007 compared to $58 million for the second quarter of 2006.  Operating income from our Middle East Operations was approximately $16 million lower in the second quarter of 2007 compared to the same period in 2006 primarily due to the lower volume of activity in Iraq.  Additionally, we recorded a $24 million charge in the second quarter of 2007 related to our U.S. Embassy project in Macedonia due to escalating material, labor and other costs including schedule delays.

G&I operating income from our Middle East operations was $29 million for the second quarter of 2007 compared to $45 million in second quarter of 2006.  Operating income on our LogCAP III contract decreased in the second quarter of 2007 as compared to the same period in 2006 as the volume of activity has decreased in Iraq.

G&I operating income from other projects decreased from $13 million in the second quarter of 2006 to an operating loss of  $(4) million in the second quarter of 2007.  This decrease is largely due to the $24 million charge taken in the second quarter of 2007 related to our U.S. Embassy project in, Macedonia.

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Ventures operating loss for the second quarter of 2007 was $(1) million compared to an operating loss of $(8) million in the second quarter of 2006. Operating loss in the second quarter of 2006 included operating losses of approximately $17 million related to our equity investments in the Alice-Springs Darwin and U.K. Roads projects which includes a $10 million impairment charge recorded on our investment in the U.K. roads project..  Theses losses were offset partially by a $6 million gain on the sale of a portion of our interest in the Allenby & Connaught project.

Non-operating items. Related party interest expense was zero for the second quarter of 2007 compared to $11 million for the second quarter of 2006.  The decrease is due to the repayment of our $774 million interest bearing subordinated intercompany notes in November 2006.

Net interest income increased $12 million to $14 million for the second quarter of 2007 compared to net interest income of $2 million for the second quarter of 2006. The increase in net interest income is primarily due to additional interest earned on higher cash balances during the second quarter of 2007.  As of June 30, 2007, we had total cash and equivalents of approximately $2.0 billion (including restricted and committed cash of $771 million) compared to $585 million as of June 30, 2006.

Provision for income taxes from continuing operations in the second quarter of 2007 was $32 million compared to a benefit of $29 million in the second quarter of 2006.  The effective tax rate for the second quarter of 2007 and 2006 was approximately 41%.  Our effective tax rate for the second quarter of 2007 exceeded our statutory rate of 35% primarily due to not receiving a tax benefit for a portion of our impairment charge related to our investment in BRC, non-deductible operating losses from our railroad investment in Australia, and state and other taxes.  Our effective tax rate in the second quarter of 2006 exceeded our statutory rate of 35% primarily due to not receiving a tax benefit for a portion of our impairment charge related to our railroad investment in Australia, non-deductible operating losses from our railroad investment in Australia, and adjustments for prior year taxes in various tax jurisdictions.  .

Discontinued operations. Discontinued operations consists of the sale of our Production Services group in May 2006  and  the disposition of our 51% interest in DML on June 28, 2007.   Revenues from our discontinued operations for the three months ended June 30, 2007 and 2006 were $225 million and $286 million, respectively, while income from discontinued operations, net of tax  was $90 million and $88 million for the three months ended June 30, 2007 and 2006, respectively.  Income from our discontinued operations for the three months ended June 30, 2007 and June 30, 2006 included a gain, net of tax of approximately $97 million and $79 million, respectively.   See Note 17 to the Condensed Consolidated Financial Statements for additional information.

	Six Months Ended June 30,
	2007		2006		Increase (Decrease)		Percentage Change
	(In millions of dollars)
Revenue: (1)
E&C—Gas Monetization Projects	$	588	$	345	$	243		70	%
E&C—Offshore Projects		122		160		(38)		(24	)%
E&C—Other		535		596		(61)		(10	)%
Total Energy and Chemicals		1,245		1,101		144		13	%
G&I—Middle East Operations		2,312		2,603		(291)		(11	)%
G&I—Other		627		639		(12)		(2)	%
Total Government and Infrastructure		2,939		3,242		(303)		(9	)%
Ventures		(5)		(51)		46		90	%
Total revenue	$	4,179	$	4,292	$	(113)		(3)	%
Operating Income (loss):
E&C—Gas Monetization Projects	$	7	$	(121)	$	128		106	%
E&C—Offshore Projects		5		1		4		400	%
E&C—Other		42		67		(25)		(37	)%
Total Energy and Chemicals		54		(53)		107		202	%
G&I—Middle East Operations		53		72		(19)		(26)	%
G&I—Other		10		21		(11)		(52)	%
Total Government and Infrastructure		63		93		(30)		(32)	%
Ventures		(7)		(44)		37		84	%
Total operating income (loss)	$	110	$	(4)	$	114		2,850	%

(1) Our revenue includes both equity in the earnings of unconsolidated affiliates as well as revenue from the sales of services into the joint ventures. We often participate on larger projects as a joint venture partner and also provide services to the venture as a subcontractor. The amount included in our revenue represents our share of total project revenue, including equity in the earnings from joint ventures and revenue from services provided to joint ventures.

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Six months ended June 30, 2007 compared to six months ended June 30, 2006

Revenue. E&C revenue increased $144 million to $1.2 billion for the first six months of 2007 compared to $1.1 billion for the first six months of 2006. This increase in revenue was primarily due to a $243 million increase in revenue from our gas monetization projects. These increases were partially offset by a $21 million decrease in revenue from a substantially complete crude oil project in Canada, a decrease of $16 million related to the substantially complete Barracuda-Caratinga project in Brazil and decreases of $93 million on several other gas projects in Algeria and Canada.

E&C revenue from our gas monetization projects for the first six months of 2007 was $588 million compared to $345 million for the same period in 2006. This increase is primarily due to the start-up of several projects awarded in 2005 or early 2006, including the work performed by us on the Pearl GTL project and revenue earned on the Escravos GTL project. Revenue related to these two projects was $269 million higher in the six months ended June 30, 2007 compared to the same period in 2006.

E&C revenue from our offshore projects for the first six months of 2007 was $122 million compared to $160 million for the first six months of 2006. This decrease in revenue is primarily due to reduced activity on our lump-sum EPIC projects, Barracuda-Caratinga and Belanak. In April of 2006, we received acceptance of the FPSOs on the Barracuda-Carratinga project.  Revenue related to work we are performing for several projects in the Caspian Sea also decreased by approximately $15 million during the second quarter of 2007 because work on certain portions of these projects is nearing completion.

E&C revenue from other projects decreased by $61 million to $535 million in the first six months of 2007 compared to $596 million in the first six months of 2006.  The decrease includes $21 million from a substantially complete crude oil project and $36 million from the Syncrude project in Canada.  Revenue from our BRC joint venture decreased during the first six months of 2007.  See Note 12 to the Condensed Consolidated Financial Statements for additional information.

G&I revenue decreased $303 million in the first six months of 2007 compared to the first six months of 2006. This decrease is primarily due to a $291 million decrease in revenue from Middle East operations, a $45 million decrease in revenue under our Balkans support contract and a $72 million decrease in revenue related to worldwide U.S. Naval assessment and repair work under the under our CONCAP III contract.  These decreases were partially offset by an increase of $28 million on our U.S. government support services contract in Europe and $29 million related to increases in task orders on a program management project for a U.S. government facility in Florida.

G&I revenue from our Middle East operations for the first six months of 2007 was $2.3 billion compared to $2.6 billion for the first six months of 2006. The $291 million decrease was primarily due to lower activity on our LogCAP III contract as our customer continued to scale back the construction and procurement related to military sites in Iraq.

G&I revenue from other projects in the first six months of 2007 was consistent with revenue from the same period in 2006.

Ventures revenue increased $46 million to $(5) million for the first six months of 2007 compared to $(51) million for the first six months of 2006. The first six months of 2006 included a $26 million impairment charge that was recorded on our equity investment in the Alice Springs-Darwin railroad project and $17 million in losses, including a $10 million impairment charge, recorded on an equity investment in a joint venture road project in the U.K.

Operating income. E&C operating income for the first six months of 2007 was $54 million compared to operating loss of $(53) million in the first six months of 2006. During the first quarter of 2007, we recorded $20 million in charges recorded related to our investment in BRC.  During the first six months of 2006, we identified a $144 million charge, before minority interest and income tax, related to our Escravos GTL Project.  Additionally, operating income in the first six months of 2006 related to an ammonia plant construction project in Egypt was higher as a result of the completion of the front end engineering and design work for the plant.

E&C operating income from gas monetization for the first six months of 2007 was $7 million compared to an operating loss of $(121) million for the first six months of 2006.  In the second quarter of 2006, we identified a $148 million dollar charge, before income taxes and minority interest, related to the Escravos GTL project.  In 2006, the project experienced delays relating to civil unrest and security on the Escravos River, near the project site and further delays resulting from scope changes and engineering and construction modifications.

E&C operating income from our offshore projects for the first six months of 2007 was $5 million compared to operating income of $1 million for the first six months of 2006. The operating income increase was primarily due to $15 million of additional charges for our Barracuda-Carratinga project recorded in the first quarter of 2006.

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E&C operating income from other projects decreased from $67 million in the first six months of 2006 to $42 million in the first six months of 2007.  Operating income for the first six months of 2006 related to an ammonia plant construction project in Egypt was $22 million higher as a result of the completion of the front end engineering and design work for the plant.  In addition, operating income in the first six months of 2007 includes $20 million in charges recorded on our investment in the BRC joint venture in Algeria.

G&I operating income decreased $30 million to $63 million for the first six months of 2007 compared to $93 million for the first six months of 2006.  Operating income from our Middle East operations was approximately $27 million lower in the six months ended June 30, 2007 compared to the same period in 2006.  This decrease was partially offset by higher operating income on various other infrastructure projects.

G&I operating income from our Middle East operations decreased $19 million to $53 million for the first six months of 2007 from to $72 million in first six months of 2006.  Operating income on our LogCAP III contract decreased by $23 million in the six months ended June 30, 2007 as compared to the same period in 2006 due to the lower volume of activity in Iraq as the customer continued to scale back the construction and procurement related to military sites in Iraq.

G&I operating income from other projects decreased by $11 million in the first six months of 2007 compared to the same period in 2006 primarily due to the $24 million loss taken in the second quarter of 2007 on the U.S. embassy project in Skopje, Macedonia.  This loss was partially offset by increases in operating income from our Allenby & Connaught project and a windfarm project in the United Kingdom.

Ventures operating loss for the first six months of 2007 was $(7) million compared to an operating loss of $(44) million in the first six months of 2006.  The first six months of 2006 included a $26 million impairment charge that was recorded on our equity investment in the Alice Springs-Darwin railroad project and $17 million in charges recorded on an equity investment in a joint venture road project in the U.K.

Non-operating items. Related party interest expense was zero for the first six months of 2007 compared to $28 million for the first six months of 2006.  The decrease is due to the repayment of our $774 million interest bearing subordinated intercompany notes in November 2006.

Net interest income increased $22 million to $27 million for the first six months of 2007 compared to net interest income of $5 million for the first six months of 2006. The increase in net interest income is primarily due to additional interest earned on higher cash balances during the six months ended June 30, 2007.  As of June 30, 2007, we had total cash and equivalents of approximately $2.0 billion (including restricted and committed cash of $771 million) compared to $585 million as of June 30, 2006.

Provision for income taxes from continuing operations in the first six months of 2007 was $58 million compared to a benefit of $7 million in the first six months of 2006.  The effective tax rate for the six months ended June 30, 2007 was approximately 44% as compared to a rate of  19% for the six months ended June 30, 2006.  Our effective tax rate for the six months ended June 30, 2007 exceeded our statutory rate of 35% primarily due to not receiving a tax benefit for a portion of our impairment charge related to our investment in BRC, operating losses from our railroad investment in Australia, and state and other taxes.  Our effective tax rate for the six months ended June 30, 2006 was below the statutory rate primarily due to the benefit incurred on the loss from continuing operations, offset by not receiving a tax benefit for the impairment charge on our investment in the Alice Spring-Darwin railroad in Australia.

Discontinued operations. Discontinued operations consists of the sale of our Production Services group in May 2006 and  the disposition of our 51% interest in DML on June 28, 2007.   Revenues from our discontinued operations for the six months ended June 30, 2007 and 2006 were $449 million and $693 million, respectively, while income from discontinued operations, net of tax was $94 million and $101 million for the six months ended June 30, 2007 and 2006, respectively.  Income from our discontinued operations for the six months ended June 30, 2007 and June 30, 2006 included a gain, net of tax of approximately $97 million and $79 million, respectively.   See Note 17 in the Notes to Condensed Consolidated Financial Statements for additional information.

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Backlog

Backlog represents the dollar amount of revenue we expect to realize in the future as a result of performing work under multi-period contracts that have been awarded to us. Backlog is not a measure defined by generally accepted accounting principles, and our methodology for determining backlog may not be comparable to the methodology used by other companies in determining their backlog. Backlog may not be indicative of future operating results. Not all of our revenue is recorded in backlog for a variety of reasons, including the fact that some projects begin and end within a short-term period. Many contracts do not provide for a fixed amount of work to be performed and are subject to modification or termination by the customer. The termination or modification of any one or more sizeable contracts or the addition of other contracts may have a substantial and immediate effect on backlog.

We generally include total expected revenue in backlog when a contract is awarded and/or the scope is definitized. For our projects related to unconsolidated joint ventures, we have included in the table below our percentage ownership of the joint venture’s backlog. However, because these projects are accounted for under the equity method, only our share of future earnings from these projects will be recorded in our revenue As of June 30, 2007, our backlog for projects related to unconsolidated joint ventures was $0.9 billion in the E&C segment, $1.9 billion in the G&I segment, and $0.6 billion in the Ventures segment.  As of December 31, 2006, our backlog for projects related to unconsolidated joint ventures was $1.6 billion in the E&C segment, $2.1 billion in the G&I segment, and $0.7 billion in the Ventures segment. We also consolidate joint ventures which are majority-owned and controlled or are variable interest entities in which we are the primary beneficiary. Our backlog included in the table below for projects related to consolidated joint ventures with minority interest includes 100% of the backlog associated with those joint ventures. As of June 30, 2007, our backlog related to consolidated joint ventures with minority interest was $2.5 billion in the E&C segment, $0.1 billion in the G&I segment, and zero in the Ventures segment.  As of December 31, 2006, our backlog for projects related to joint ventures with minority interest was $2.8 billion in the E&C segment, $0.1 billion in the G&I segment, and $0 in the Ventures segment.

For long-term contracts, the amount included in backlog is limited to five years. In many instances, arrangements included in backlog are complex, nonrepetitive in nature, and may fluctuate depending on expected revenue and timing. Where contract duration is indefinite, projects included in backlog are limited to the estimated amount of expected revenue within the following twelve months. Certain contracts provide maximum dollar limits, with actual authorization to perform work under the contract being agreed upon on a periodic basis with the customer. In these arrangements, only the amounts authorized are included in backlog. For projects where we act solely in a project management capacity, we only include our management fee revenue of each project in backlog.

Backlog⁽¹⁾

(in millions)

	June 30, 2007		December 31, 2006
E&C—Gas Monetization	$	3,438	$	3,883
E&C—Offshore Projects		173		130
E&C—Other		1,156		1,700
Total E&C		4,767		5,713
G&I—Middle East Operations		1,515		3,066
G&I—Other		2,728		2,998
Total G&I		4,243		6,064
Ventures		620		660
Total backlog for continuing operations (2)	$	9,630	$	12,437

(1) Our G&I and Ventures segment’s total backlog from continuing operations attributable to firm orders was $4.1 billion and $620 million, respectively, as of June 30, 2007 and $4.0 billion and $660 million, respectively, as of December 31, 2006, respectively. Our G&I segment total backlog from continuing operations attributable to unfunded orders was $144 million as of June 30, 2007 and $2.1 billion as of December 31, 2006.

(2) This amount represents backlog for continuing operations and does not include backlog associated with DML, which was sold in the second quarter of 2007 and is accounted for as discontinued operations.  Backlog for DML was $1.1 billion as of December 31, 2006.

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We estimate that as of June 30, 2007, 46% of our E&C segment backlog, 58% of our G&I segment backlog and 16% of our Ventures segment backlog will be complete within one year. As of June 30, 2007, 29% of our backlog for continuing operations was attributable to fixed-price contracts and 71% was attributable to cost-reimbursable contracts. For contracts that contain both fixed-price and cost-reimbursable components, we characterize the entire contract based on the predominant component. In August 2006, we were awarded a task order for approximately $3.5 billion for our continued services in Iraq through March 2008 under the LogCAP III contract. As of June 30, 2007, our backlog under the LogCAP III contract was $1.5 billion.

Liquidity and Capital Resources

At June 30, 2007 and December 31, 2006, cash and equivalents totaled $2.0 billion and $1.4 billion, respectively. These balances include cash and cash from advanced payments related to contracts in progress held by ourselves or our joint ventures that we consolidate for accounting purposes and which totaled $771 million at June 30, 2007 and $527 million at December 31, 2006. The use of these cash balances is limited to the specific projects or joint venture activities and are not available for other projects, general cash needs or distribution to us without approval of the board of directors of the respective joint venture or subsidiary.

Significant sources of cash

Cash flow provided by operations was $474 million for the first six months of 2007.  Our working capital requirements for our Iraq-related work, excluding cash and equivalents, decreased from $248 million at December 31, 2006 to $214 million at June30, 2007.  Cash flow provided by operations for the six months ended June 30, 2007 includes $358 million related to collections of accounts receivable and a significant milestone payment from one of our joint ventures.

Cash flow provided by investing activities was $311 million for the first six months of 2007.  During the second quarter of 2007, we sold our 51% interest in DML for cash proceeds of approximately $345 million, net of direct transaction costs.

Further available sources of cash.  We have available an unsecured $850 million five-year revolving credit facility.  Letters of credit that totaled $133 million were issued under the revolving credit facility, thus reducing the availability under the credit facility to approximately $717 million at June 30, 2007.  There were no cash drawings under the revolving credit facility as of June 30, 2007.

Significant uses of cash

During the six months ended June 30, 2007, we made net payments of $123 million to Halliburton.  The payments to Halliburton  relate to various support services provided by Halliburton under our transition services agreement and other amounts prior to our separation from Halliburton.  The amount due to Halliburton was $152 million at December 31, 2006. Amounts due to Halliburton at the date of our separation were settled or classified as normal operating activities with an unrelated party elsewhere in our balance sheet.

In the first six months of 2007, we contributed a total of $15 million to our United Kingdom pension plans, excluding DML.

Capital expenditures of $23 million in the first six months of 2007 were $19 million lower than the first six months of 2006.

Future uses of cash.  Future uses of cash will primarily relate to working capital requirements for our operations.  In addition, we expect to use committed cash advanced from customers in 2007, to pay project costs resulting in the use of a significant portion of our committed cash in 2007.  We are reviewing alternatives for the potential strategic uses of our cash including opportunistic acquisitions, increased technology development or investments, project equity investments and returning capital to our shareholders.

As of June 30, 2007, we had commitments to fund approximately $124 million to related companies.  These commitments arose primarily during the start-up of these entities due to the losses incurred by them.  We expect approximately $8 million of commitments to be paid during the remainder of 2007.

We currently expect to contribute approximately $25 million to our international pension plans in 2007, excluding DML.

Capital spending for 2007 is expected to be approximately $69 million, excluding DML.  Capital spending for the remainder relates primarily to information technology and real estate.

Letters of credit, bonds and financial and performance guarantees. In connection with certain projects, we are required to provide letters of credit, surety bonds or other financial and performance guarantees to our customers. As of June 30, 2007, we had approximately $766 million in letters of credit and financial guarantees outstanding of which $133 million were issued under our Revolving Credit Facility.  Approximately $630 million of the remaining $633 million were issued under various Halliburton facilities and are irrevocably and unconditionally guaranteed by Halliburton.  In addition, we and Halliburton have agreed that until December 31, 2009, Halliburton will issue additional guarantees, indemnification and reimbursement commitments for our benefit in connection with  (a) letters of credit necessary to comply with our EBIC contract, our Allenby & Connaught project and all other contracts that were in place as of December 15, 2005; (b) surety bonds issued to support new task orders pursuant to the Allenby & Connaught project, two job order contracts for our G&I segment and all other contracts that were in place as of December 25, 2005; and (c) performance guarantees in support of these contracts. Each credit support instrument outstanding at November 20, 2006, the time of our initial public offering, and any additional guarantees, indemnification and reimbursement commitments will remain in effect until the earlier of: (1) the termination of the underlying project contract or our obligations thereunder or (2) the expiration of the relevant credit support instrument in accordance with its terms or release of such instrument by the customer.  In addition, we have agreed to use our reasonable best efforts to attempt to release or replace Halliburton’s liability under the outstanding credit support instruments and any additional credit support instruments relating to our business for which Halliburton may become obligated for which such release or replacement is reasonably available. For so long as Halliburton or its affiliates remain liable with respect to any credit support instrument, we have agreed to pay the underlying obligation as and when it becomes due. Furthermore, we agreed to pay to Halliburton a quarterly carry charge for its guarantees of our outstanding letters of credit and surety bonds and agreed to indemnify Halliburton for all losses in connection with the outstanding credit support instruments and any new credit support instruments relating to our business for which Halliburton may become obligated following the separation.

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Halliburton is no longer obligated to provide credit support for our letters of credit, surety bonds and other guarantees, except to the limited extent it has agreed to do so under the terms of the master separation agreement entered into in connection with the Offering. We have obtained a limited amount of stand-alone surety capacity and are engaged in discussions with surety companies to obtain additional stand-alone capacity.

During the second quarter of 2007, a £20 million letter of credit was issued on our behalf by a bank in connection with our Allenby & Connaught project.  The letter of credit supports a building contract guarantee executed between KBR and certain project joint venture company to provide additional credit support as a result of our separation from Halliburton.  The letter of credit issued by the bank is guaranteed by Halliburton.

Debt covenants. The Revolving Credit Facility contains a number of covenants restricting, among other things, our ability to incur additional indebtedness and liens, sales of our assets and payment of dividends, as well as limiting the amount of investments we can make. We are limited in the amount of additional letters of credit and other debt we can incur outside of the Revolving Credit Facility. Also, under the current provisions of the Revolving Credit Facility, it is an event of default if any person or two or more persons acting in concert, other than Halliburton or us, directly or indirectly acquire 25% or more of the combined voting power of all outstanding equity interests ordinarily entitled to vote in the election of directors of KBR Holdings, LLC, the borrower under the facility and a wholly owned subsidiary of KBR. We are generally prohibited from purchasing, redeeming, retiring, or otherwise acquiring any of our common stock unless it is in connection with a compensation plan, program, or practice provided that the aggregate price paid for such transactions does not exceed $25 million in any fiscal year.

The Revolving Credit Facility also requires us to maintain certain financial ratios, as defined by the Revolving Credit Facility agreement, including a debt-to-capitalization ratio that does not exceed 55% until June 30, 2007 and 50% thereafter; a leverage ratio that does not exceed 3.5; and a fixed charge coverage ratio of at least 3.0. At June 30, 2007 and December 31, 2006, we were in compliance with these ratios and other covenants.

Off balance sheet arrangements and other factors affecting liquidity

We participate, generally through an equity investment in a joint venture, partnership or other entity, in privately financed projects that enable our government customers to finance large-scale projects, such as railroads, and major military equipment purchases. We evaluate the entities that are created to execute these projects following the guidelines of Financial Accounting Standards Board (“FASB”) Interpretation No. 46R.  These projects typically include the facilitation of non-recourse financing, the design and construction of facilities, and the provision of operations and maintenance services for an agreed period after the facilities have been completed. The carrying value of our investments in privately financed project entities totaled $62 million and $3 million at June 30, 2007 and December 31, 2006, respectively. Our equity in earnings (losses) from privately financed project entities totaled $5 million and $4 million for the three and six months ended June 30, 2007, respectively.  Our equity in earnings (losses) from privately financed project entities totaled $(40) million and $(45) million for the three and six months ended June 30, 2006, respectively.

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As of June 30, 2007, we had incurred $126 million of costs under the LogCAP III contract that could not be billed to the government due to lack of appropriate funding on various task orders. These amounts were associated with task orders that had sufficient funding in total, but the funding was not appropriately allocated within the task order. We have submitted requests for reallocations of funding to the U.S. Army and continue to work with them to resolve this matter.  We believe the negotiations will result in an appropriate distribution of funding by the U.S. Army and collection of the full amounts due.

Security. In February 2007, we received a letter from the Department of the Army informing us of their intent to adjust payments under the LogCAP III contract associated with the cost incurred by the subcontractors to provide security to their employees. Based on this letter, the DCAA withheld the Army’s initial assessment of $20 million. The Army based its assessment on one subcontract wherein, based on communications with the subcontractor, the Army estimated 6% of the total subcontract cost related to the private security costs. The Army indicated that not all task orders and subcontracts have been reviewed and that they may make additional adjustments. The Army indicated that, within 60 days, they intend to begin making further adjustments equal to 6% of prior and current subcontractor costs unless we can provide timely information sufficient to show that such action is not necessary to protect the government’s interest.  We continue to provide additional information as requested by the Army. As of April 20, 2007, the Army has not issued any further payment adjustments regarding security costs.

The Army indicated that they believe our LogCAP III contract prohibits us from billing costs of privately acquired security. We believe that, while LogCAP III contract anticipates that the Army will provide force protection to KBR employees, it does not prohibit any of our subcontractors from using private security services to provide force protection to subcontractor personnel. In addition, a significant portion of our subcontracts are competitively bid lump sum or fixed price subcontracts. As a result, we do not receive details of the subcontractors’ cost estimate nor are we legally entitled to it. Accordingly, we believe that we are entitled to reimbursement by the Army for the cost of services provided by our subcontractors, even if they incurred costs for private force protection services. Therefore, we believe that the Army’s position that such costs are unallowable and that they are entitled to withhold amounts incurred for such costs is wrong as a matter of law.

If we are unable to demonstrate that such action by the Army is not necessary, a 6% suspension of all subcontractor costs incurred to date could result in suspended costs of approximately $400 million. The Army has asked us to provide information that addresses the use of armed security either directly or indirectly charged to LogCAP III. The actual costs associated with these activities cannot be accurately estimated at this time, but we believe that they should be substantially less than 6% of the total subcontractor costs. We will continue working with the Army to resolve this issue.  As of June 30, 2007, no amounts have been accrued for suspended security billings.

Legal Proceedings

We have reported to the U.S. Department of State and Department of Commerce that exports of materials, including personal protection equipment such as helmets, goggles, body armor and chemical protective suits, in connection with personnel deployed to Iraq and Afghanistan may not have been in accordance with current licenses or may have been unlicensed. In addition, we are responding to a  March 19, 2007 subpoena from the DoD Inspector General concerning licensing for armor for convoy trucks and antiboycott issues. A failure to comply with export control laws and regulations could result in civil and/or criminal sanctions, including the imposition of fines upon us as well as the denial of export privileges and debarment from participation in U.S. government contracts. As of June 30, 2007, we had not accrued any amounts related to this matter.  Please read Risk Factors - Our government contracts work is regularly reviewed and audited by our customer, government auditors and other, and these reviews can lead to withholding or delay of payments to us, non-receipt of award fees, legal actions, fines, penalties and liabilities and other remedies against us” in this quarterly report.

Environmental Matters

We are subject to numerous environmental, legal, and regulatory requirements related to our operations worldwide. In the United States, these laws and regulations include, among others: the Comprehensive Environmental Response, Compensation, and Liability Act; the Resources Conservation and Recovery Act; the Clean Air Act; the Federal Water Pollution Control Act; and the Toxic Substances Control Act.

In addition to the federal laws and regulations, states and other countries where we do business often have numerous environmental, legal, and regulatory requirements by which we must abide. We evaluate and address the environmental impact of our operations by assessing and remediating contaminated properties in order to avoid future liabilities and comply with environmental, legal, and regulatory requirements. On occasion, we are involved in specific environmental litigation and claims, including the remediation of properties we own or have operated, as well as efforts to meet or correct compliance-related matters. Our Health, Safety and Environment group has several programs in place to maintain environmental leadership and to prevent the occurrence of environmental contamination. We do not expect costs related to environmental matters to have a material adverse effect on our consolidated financial position or our results of operations.

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New Accounting Standards

In September 2006, the Financial Accounting Standards Board (“FASB”) Staff issued FASB Staff Position (“FSP”) No. AUG AIR-1, “Accounting for Planned Major Maintenance Activities.”  The FSP prohibits the use of the accrue-in-advance method of accounting for planned major maintenance activities.  The FSP also requires disclosures regarding the method of accounting for planned major maintenance activities and the effects of implementing the FSP.  The guidance in this FSP is effective January 1, 2007 and is to be retrospectively applied for all periods presented.  The guidance in this FSP affects KBR with regard to a 50%-owned joint venture that leases offshore vessels requiring periodic major maintenance.  This joint venture was contributed to KBR by Halliburton on April 1, 2006.  KBR accounts for its investment in this joint venture under the equity method of accounting.  As a result, KBR has retroactively applied the required change in accounting, electing the deferral method of accounting for planned major maintenance activities.  The deferral method requires the capitalization of planned major maintenance costs at the point they occur and the depreciation of these costs over an estimated period until future maintenance activities are repeated.  The result is an increase to KBR’s investment in the equity of this joint venture and an increase to additional paid-in capital of approximately $7 million as of April 1, 2006.  The effect of the change in accounting on KBR’s operating results for the year ended December 31, 2006 was immaterial.

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”).  This statement defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements.  The statement applies whenever other statements require or permit assets or liabilities to be measured at fair value.  SFAS 157 is effective for fiscal years beginning after November 15, 2007.  We are currently evaluating the impact that the adoption of SFAS 157 will have on our financial position, results of operations and cash flows.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115,” (“SFAS 159”).  SFAS 159 provides companies with an option to measure certain financial instruments and other items at fair value with changes in fair value reported in earnings.  SFAS 159 is effective for fiscal years beginning after November 15, 2007.  We are currently evaluating the impact that the adoption of SFAS 159 will have on our financial position, results of operations and cash flows.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

We are exposed to financial instrument market risk from changes in foreign currency exchange rates and interest rates. We selectively manage these exposures through the use of derivative instruments to mitigate our market risk from these exposures.  The objective of our risk management is to protect our cash flows related to sales or purchases of goods or services from market fluctuations in currency rates.  Our use of derivative instruments includes the following types of market risk:

- volatility of the currency rates;

- time horizon of the derivative instruments;

- market cycles; and

- the type of derivative instruments used.

We do not use derivative instruments for trading purposes.  We do not consider any of these risk management activities to be material.

Item 4.  Controls and Procedures

In accordance with the Securities Exchange Act of 1934 Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2007 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.  Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

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PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

Information related to various commitments and contingencies is described in Notes 8 and 9 to the condensed consolidated financial statements and in Managements’ Discussion and Analysis of Financial Condition and Results of Operations – Legal Proceedings.

Item 1A.  Risk Factors

Please refer to Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Factors on pages 53-79 of our 2006 Annual Report on Form 10-K, which is incorporated herein by reference. The risk factors discussed below update those risk factors previously disclosed in our 2006 Annual Report on Form 10-K.

Our government contracts work is regularly reviewed and audited by our customer, government auditors and others, and these reviews can lead to withholding or delay of payments to us, non-receipt of award fees, legal actions, fines, penalties and liabilities and other remedies against us.

Given the demands of working in Iraq and elsewhere for the U.S. government, we expect that from time to time we will have disagreements or experience performance issues with the various government customers for which we work. If performance issues arise under any of our government contracts, the government retains the right to pursue remedies, which could include threatened termination or termination under any affected contract. If any contract were so terminated, we may not receive award fees under the affected contract, and our ability to secure future contracts could be adversely affected, although we would receive payment for amounts owed for our allowable costs under cost-reimbursable contracts. Other remedies that our government customers may seek for any improper activities or performance issues include sanctions such as forfeiture of profits, suspension of payments, fines and suspensions or debarment from doing business with the government. Further, the negative publicity that could arise from disagreements with our customers or sanctions as a result thereof could have an adverse effect on our reputation in the industry, reduce our ability to compete for new contracts, and may also have a material adverse effect on our business, financial condition, results of operations and cash flow.

To the extent that we export products, technical data and services outside the United States, we are subject to U.S. laws and regulations governing international trade and exports, including but not limited to the International Traffic in Arms Regulations, the Export Administration Regulations and trade sanctions against embargoed countries, which are administered by the Office of Foreign Assets Control within the Department of the Treasury. A failure to comply with these laws and regulations could result in civil and/or criminal sanctions, including the imposition of fines upon us as well as the denial of export privileges and debarment from participation in U.S. government contracts.

From time to time, we identify certain inadvertent or potential export or related violations. These violations may include, for example, transfers without required governmental authorizations. Although we do not currently anticipate that any past export practice will have a material adverse effect on our business, financial condition or results of operations, we can give no assurance as to whether we will ultimately be subject to sanctions as a result of such practices or the disclosure thereof, or the extent or effect thereof, if any sanctions are imposed, or whether individually or in the aggregate such practices or the disclosure thereof will have a material adverse effect on our business, financial condition or results of operations.

We continue to enhance our export control procedures and educate our executives and other employees who manage our exports concerning the requirements of applicable U.S. law. An effective control system regarding these matters is among our highest priorities. Nonetheless, a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met or that all violations have been or will be detected.

We have identified issues for disclosure, and it is possible that we will identify additional issues for disclosure.  Specifically, we have reported to the U.S. Department of State and Department of Commerce that exports of materials, including personal protection equipment such as helmets, goggles, body armor and chemical protective suits, in connection with personnel deployed to Iraq and Afghanistan may not have been in accordance with current licenses or may have been unlicensed.  In addition, on March 19, 2007, the Department of Defense, Office of the Inspector General, issued a subpoena through the Defense Criminal Investigative Service for information concerning items exported in connection with the our contract to support military operations in Iraq.  The subpoena requests documents that relate to licensing for armor for convoy trucks and antiboycott issues.  We are in the process of responding to that subpoena.  A determination that we have failed to comply with one or more of these export controls could result in civil and/ or criminal sanctions, including the imposition of fines upon us as well as the denial of export privileges and debarment from participation in U.S. government contracts. Any one or more of such sanctions could have a material adverse effect on our business, financial condition or results of operations. We expect to incur legal and other costs, which could include penalties, in connection with these export control disclosures and investigations.

42

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Submission of Matters to a Vote of Security Holders

None.

Item 5.  Other Information

None.

43

Item 6.  Exhibits

*	3.1	Amended and Restated Bylaws of KBR, Inc. (filed only to show date of adoption).
*	10.1+	KBR, Inc. 2006 Stock and Incentive Plan (as amended June 27, 2007).
*	10.2+	Restricted Stock Unit Agreement pursuant to KBR, Inc. 2006 Stock and Incentive Plan.
*	10.3+	Stock Option Agreement pursuant to KBR, Inc. 2006 Stock and Incentive Plan.
*	10.4+	KBR Restricted Stock Agreement pursuant to KBR, Inc. 2006 Stock and Incentive Plan.
*	10.5+	KBR, Inc. Transitional Stock Adjustment Plan Stock Option Award.
*	10.6+	KBR, Inc. Transitional Stock Adjustment Plan Restricted Stock Award.
*	10.7	Agreement relating to the sale and purchase of the entire issued share capital of Devonport Management Limited by and among KBR, Inc., Kellogg Brown & Root Holdings (U.K.) Limited, Balfour Beatty plc, The Weir Group plc, and Babcock International Group plc, dated May 10, 2007.
*	31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*	31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
**	32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
**	32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	*	Filed with this Form 10-Q
	**	Furnished with this Form 10-Q
	+	Management contracts or compensatory plans or arrangements

44

As required by the Securities Exchange Act of 1934, the registrant has authorized this report to be signed on behalf of the registrant by the undersigned authorized individuals.

KBR, INC.
/s/    CEDRIC W. BURGHER	/s/    JOHN W. GANN, JR.
Cedric W. Burgher	John W. Gann, Jr.
Senior Vice President and Chief Financial Officer	Vice President and Chief Accounting Officer
Date: August 2, 2007

45

Exhibit Index

*	3.1	Amended and Restated Bylaws of KBR, Inc. (filed only to show date of adoption).
*	10.1+	KBR, Inc. 2006 Stock and Incentive Plan (as amended June 27, 2007).
*	10.2+	Restricted Stock Unit Agreement pursuant to KBR, Inc. 2006 Stock and Incentive Plan.
*	10.3+	Stock Option Agreement pursuant to KBR, Inc. 2006 Stock and Incentive Plan.
*	10.4+	KBR Restricted Stock Agreement pursuant to KBR, Inc. 2006 Stock and Incentive Plan.
*	10.5+	KBR, Inc. Transitional Stock Adjustment Plan Stock Option Award.
*	10.6+	KBR, Inc. Transitional Stock Adjustment Plan Restricted Stock Award.
*	10.7	Agreement relating to the sale and purchase of the entire issued share capital of Devonport Management Limited by and among KBR, Inc., Kellogg Brown & Root Holdings (U.K.) Limited, Balfour Beatty plc, The Weir Group plc, and Babcock International Group plc, dated May 10, 2007.
*	31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*	31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
**	32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
**	32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	*	Filed with this Form 10-Q
	**	Furnished with this Form 10-Q
	+	Management contracts or compensatory plans or arrangements

46

EX-3.1

Exhibit 3.1

AMENDED AND RESTATED BYLAWS

OF

KBR, INC.

(the “Corporation”)

Adopted and Amended by Resolution of the Board of Directors on

November 10, 2006

ARTICLE I

CAPITAL STOCK

Section 1.  Share Ownership.  Shares for the capital stock of the Corporation shall be certificated; provided, however, that the Board of Directors of the Corporation may provide by resolution or resolutions that some or all of any or all classes or series of the Corporation’s stock may be uncertificated shares.  Owners of shares of the capital stock of the Corporation shall be recorded in the share transfer records of the Corporation and ownership of such shares shall be evidenced by a certificate or book entry notation in the share transfer records of the Corporation.  Any certificates representing such shares shall be signed by the Chairman of the Board, if there is one, the President or a Vice President and by the Treasurer, an Assistant Treasurer, the Corporate Secretary or an Assistant Corporate Secretary and shall be sealed with the seal of the Corporation, which signatures and seal may be facsimiles. In case any officer who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer at the date of its issuance.

Section 2.  Stockholders of Record.  The Board of Directors of the Corporation may appoint one or more transfer agents or registrars of any class of stock or other security of the Corporation.  The Corporation may be its own transfer agent if so appointed by the Board of Directors.  The Corporation shall be entitled to treat the holder of record of any shares of the Corporation as the owner thereof for all purposes, and shall not be bound to recognize any equitable or other claim to, or interest in, such shares or any rights deriving from such shares, on the part of any other person, including (but without limitation) a purchaser, assignee or transferee, unless and until such other person becomes the holder of record of such shares, whether or not the Corporation shall have either actual or constructive notice of the interest of such other person.

Section 3.  Transfer of Shares.  The shares of the capital stock of the Corporation shall be transferable in the share transfer records of the Corporation by the holder of record thereof, or his duly authorized attorney or legal representative.  All certificates representing shares surrendered for transfer, properly endorsed, shall be canceled and new certificates for a like number of shares shall be issued therefor.  In the case of lost, stolen, destroyed or mutilated certificates representing shares for which the Corporation has been requested to issue new certificates, new certificates or other evidence of such new shares may be issued upon such conditions as may be required by the Board of Directors or the Corporate Secretary or an Assistant Corporate Secretary for the protection of the Corporation and any transfer agent or registrar.  Uncertificated shares shall be transferred in the share transfer records of the Corporation upon the written instruction originated by the appropriate person to transfer the shares.

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Section 4.  Stockholders of Record and Fixing of Record Date.  In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or, if permitted by the Certificate of Incorporation of the Corporation, to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date: (1) in the case of determination of stockholders entitled to vote at any meeting of stockholders or adjournment thereof, shall, unless otherwise required by law, not be more than sixty (60) nor less than ten (10) days before the date of such meeting; (2) in the case of determination of stockholders entitled to express consent to corporate action in writing without a meeting, if permitted by the Certificate of Incorporation of the Corporation, shall not be more than ten (10) days from the date upon which the resolution fixing the record date is adopted by the Board of Directors; and (3) in the case of any other action, shall not be more than sixty (60) days prior to such other action. If no record date is fixed: (1) the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; (2) the record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, if permitted by the Certificate of Incorporation of the Corporation, when no prior action of the Board of Directors is required by law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation in accordance with applicable law, or, if prior action by the Board of Directors is required by law, shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action; and (3) the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.

ARTICLE II

MEETINGS OF STOCKHOLDERS

Section 1.  Place of Meetings.  All meetings of stockholders shall be held at the principal office of the Corporation, in the City of Houston, Texas, or at such other place within or without the State of Delaware as may be designated by the Board of Directors or officer calling the meeting.

Section 2.  Annual Meeting.  The annual meeting of the stockholders shall be held on such date and at such time as shall be designated from time to time by the Board of Directors or as may otherwise be stated in the notice of the meeting.  Failure to designate a time for the annual meeting or to hold the annual meeting at the designated time shall not work a dissolution of the Corporation.

Section 3.  Special Meetings.  Except as otherwise provided by the General Corporation Law of the State of Delaware (the “DGCL”) or the Certificate of Incorporation of the Corporation (including any certificate of designations relating to any series of preferred stock), (A) prior to the date on which Halliburton (as hereinafter defined) shall first cease to beneficially own (as such term is defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), directly or indirectly, stock representing in the aggregate a majority of the voting power of all then outstanding shares of capital stock of the Corporation generally entitled to vote in the election of directors, voting together as a single class (such date hereinafter referred to as the “Trigger Date), special meetings of the stockholders of the Corporation may be called at any time only by (i) holders stock representing in the aggregate a majority of the voting power of all then outstanding shares of capital stock of the Corporation generally entitled to vote in the election of directors, voting together as a single class, (ii) the Chairman of the Board of Directors, (iii) the President and Chief Executive Officer of the Corporation, or (iv) the Board of Directors pursuant to a resolution approved by the affirmative vote of at least a majority of the members of the Board of Directors, and no such special meeting may be called by any other person or persons; and (B) effective upon and commencing as of the Trigger Date, special meetings of the stockholders of the Corporation may be called at any time only by (i) the Chairman of the Board of Directors, (ii) the President and Chief Executive Officer of the Corporation, or (iii) the Board of Directors pursuant to a resolution approved by the affirmative vote of at least a majority of the members of the Board of Directors, and no such special meeting may be called by any other person or persons.  As used in these Bylaws, “Halliburton” shall mean Halliburton Company, a Delaware corporation, any successor thereto by means of reorganization, merger, consolidation, conveyance or transfer or any ultimate parent company thereof.

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Section 4.  Notice of Meeting.  Written or printed notice of all meetings stating the place, day and hour of the meeting and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) nor more than sixty (60) days before the date of the meeting, either personally, by mail or by other lawful means, by or at the direction of the Chairman of the Board, if there is one, the Chief Executive Officer, if there is one, the President or the Corporate Secretary to each stockholder of record entitled to vote at such meetings.  If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, postage prepaid, addressed to the stockholder at his address as it appears on the share transfer records of the Corporation, with postage thereon prepaid.  To the fullest extent permitted by Section 233 of the DGCL, if the stockholder consents or is deemed to have consented, only one copy of such notice need be delivered to stockholders who share an address.  If sent by facsimile, such notice shall be deemed to be delivered when directed to a number at which the stockholder has consented to receive notice.  If sent by electronic mail, such notice shall be deemed to be delivered when directed to an electronic mail address at which the stockholder has consented to receive notice.

Any notice required to be given to any stockholder, under any provision of the DGCL, the Certificate of Incorporation of the Corporation or these Bylaws, need not be given to a stockholder if notice of two consecutive annual meetings and all notices of meetings or of the taking of action by written consent without a meeting to such person during the period between those annual meetings, if any, or all (but in no event less than two) payments (if sent by first class mail) of dividends or interest on securities during a 12-month period, have been mailed to that person, addressed at his address as shown on the share transfer records of the Corporation, and have been returned undeliverable.  Any action or meeting taken or held without notice to such person shall have the same force and effect as if the notice had been duly given.  If such a person delivers to the Corporation a written notice setting forth his then current address, the requirement that notice be given to that person shall be reinstated.

Section 5.  Voting List.  The officer or agent having charge of the share transfer records for shares of the Corporation shall prepare and make, at least ten (10) days before each meeting of stockholders, a complete list of the stockholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order, with the address of and the number of shares held by each.  Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting at least ten (10) days prior to the meeting (i) on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of meeting, or (ii) during ordinary business hours at the principal place of business of the Corporation.  Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any stockholder during the whole time of the meeting.  The stock ledger shall be prima facie evidence as to who are the stockholders entitled to examine such list or to vote at any meeting of stockholders.

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Section 6.  Voting; Proxies.  Except as otherwise provided in the Certificate of Incorporation of the Corporation or as otherwise provided under the DGCL, each holder of shares of capital stock of the Corporation entitled to vote shall be entitled to one vote for each share standing in his name on the records of the Corporation, either in person or by proxy.  A proxy shall be revocable unless expressly provided therein to be irrevocable and the proxy is coupled with an interest sufficient in law to support an irrevocable power.  At each election of directors, every holder of shares of the Corporation entitled to vote shall have the right to vote, in person or by proxy, the number of shares owned by him for as many persons as there are directors to be elected, and for whose election he has a right to vote, but in no event shall he be permitted to cumulate his votes for one or more directors.

Section 7.  Quorum and Vote of Stockholders.  Except as otherwise provided by law, the Certificate of Incorporation of the Corporation or these Bylaws, the holders of a majority in voting power of shares issued and outstanding and entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of stockholders, but, if a quorum is not represented, the Chairman of the Meeting (as defined below) or a majority in voting power of the stockholders represented and entitled to vote thereon may adjourn the meeting from time to time.  Directors shall be elected by a plurality of the votes cast by the holders of shares entitled to vote in the election of directors at a meeting of stockholders at which a quorum is present.  With respect to each matter other than the election of directors as to which no other voting requirement is specified by law, the Certificate of Incorporation of the Corporation or in this Section 7, the affirmative vote of the holders of a majority in voting power of the shares entitled to vote on that matter and represented in person or by proxy at a meeting at which a quorum is present shall be the act of the stockholders.  With respect to a matter submitted to a vote of the stockholders as to which a stockholder approval requirement is applicable under the stockholder approval policy of the New York Stock Exchange, Rule 16b-3 under the Exchange Act or any provision of the Internal Revenue Code, in each case for which no higher voting requirement is required by law, the Certificate of Incorporation of the Corporation (including any certificate of designations relating to any series of preferred stock) or these Bylaws, the affirmative vote of the holders of a majority in voting power of the shares entitled to vote on, and voted for or against, that matter at a meeting at which a quorum is present shall be the act of the stockholders.  With respect to the approval of independent public accountants (if submitted for a vote of the stockholders), the affirmative vote of the holders of a majority in voting power of the shares entitled to vote on that matter and represented in person or by proxy at a meeting at which a quorum is present shall be the act of the stockholders.

Section 8.  Presiding Officer and Conduct of Meetings.  The Chairman of the Board, if there is one, or in his absence, the Chief Executive Officer, if there is one, or in his absence, the President shall preside at all meetings of the stockholders or, if such officers are not present at a meeting, by such other person as the Board of Directors shall designate or if no such person is designated by the Board of Directors, the most senior officer of the Corporation present at the meeting.  The Corporate Secretary of the Corporation, if present, shall act as secretary of each meeting of stockholders; if he is not present at a meeting, then such person as may be designated by the presiding officer shall act as secretary of the meeting.  Subject to any rules or procedures adopted by the Board of Directors, the conduct of any meeting of stockholders and the determination of procedure and rules shall be within the absolute discretion of the officer presiding at such meeting (the “Chairman of the Meeting”), and there shall be no appeal from any ruling of the Chairman of the Meeting with respect to procedure or rules.  Accordingly, subject to any rules or procedures adopted by the Board of Directors, in any meeting of stockholders or part thereof, the Chairman of the Meeting shall have the sole power to determine appropriate rules or to dispense with theretofore prevailing rules.  Without limiting the foregoing, the following rules shall apply:

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(a)           If disorder should arise which prevents continuation of the legitimate business of meeting, the Chairman of the Meeting may announce the adjournment of the meeting; and upon so doing, the meeting shall be immediately adjourned.

(b)           The Chairman of the Meeting may ask or require that anyone not a bona fide stockholder or proxy leave the meeting.

(c)           A resolution or motion proposed by a stockholder shall only be considered for vote of the stockholders if it meets the criteria of Article II, Section 9.  The Chairman of the Meeting may propose any resolution or motion for vote of the stockholders.

(d)           The order of business at all meetings of stockholders shall be determined by the Chairman of the Meeting.

(e)           The Chairman of the Meeting may impose any reasonable limits with respect to participation in the meeting by stockholders, including, but not limited to, limits on the amount of time taken up by the remarks or questions of any stockholder, limits on the number of questions per stockholder and limits as to the subject matter and timing of questions and remarks by stockholders.

(f)           Before any meeting of stockholders, the Corporation (i) shall appoint one or more persons other than nominees for office to act as inspectors of election at the meeting or its adjournment or postponement and (ii) may designate one or more alternate inspectors to replace any inspector who fails to act.  If no inspector or alternate is able to act at a meeting of stockholders, the Chairman of the Meeting shall appoint one or more, up to a maximum of three, inspectors of election to act at the meeting of the stockholders.

The duties of the inspectors shall be to:

(i)           determine the number of shares outstanding and the voting power of each such share, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies and ballots;

(ii)           receive votes or ballots;

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(iii)           hear and determine all challenges and questions in any way arising in connection with the vote and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors;

(iv)           count and tabulate all votes and ballots;

(v)           report and certify to the Board of Directors the results based on the information assembled by the inspectors; and

(vi)           do any other acts that may be proper to conduct the election or vote with fairness to all stockholders.

(g)           Each inspector of election, before entering upon the discharge of the duties of inspector, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of such inspector’s ability.

(h)           In determining the validity and counting of proxies and ballots, the inspectors of election shall be limited to an examination of the items specifically allowed by Section 231(d) of the DGCL.

Section 9.  Notice of Stockholder Business and Nominations.

(A)           Annual Meetings of Stockholders.  (1) Nominations of persons for election to the Board of Directors of the Corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders only (a) pursuant to the Corporation’s notice of meeting (or any supplement thereto), (b) by or at the direction of the Board of Directors or any committee thereof or (c) by any stockholder of the Corporation who was a stockholder of record of the Corporation at the time the notice provided for in this Section 9 is delivered to the Secretary of the Corporation, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 9.

(2)           For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (c) of paragraph (A)(1) of this Section 9, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and any such proposed business other than the nominations of persons for election to the Board of Directors must constitute a proper matter for stockholder action.  To be timely, a stockholder’s notice shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the ninetieth (90th) day, nor earlier than the close of business on the one hundred twentieth (120th) day, prior to the first anniversary of the preceding year’s annual meeting (provided, however, that in the event that the date of the annual meeting is more than thirty (30) days before or more than seventy (70) days after such anniversary date, notice by the stockholder must be so delivered not earlier than the close of business on the one hundred twentieth (120th) day prior to such annual meeting and not later than the close of business on the later of the ninetieth (90th) day prior to such annual meeting or the tenth (10th) day following the day on which public announcement of the date of such meeting is first made by the Corporation).  For purposes of the first annual meeting of stockholders of the Corporation following the initial public offering of its capital stock, the first anniversary of the preceding year’s annual meeting shall be deemed to be May 1, 2007.  In no event shall the public announcement of an adjournment or postponement of an annual meeting commence a new time period (or extend any time period) for the giving of a stockholder’s notice as described above.  Such stockholder’s notice shall set forth: (a) as to each person whom the stockholder proposes to nominate for election as a director (i) all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to and in accordance with Regulation 14A under the Exchange Act, and (ii) such person’s written consent to serving as a director if elected; (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the text of the proposal or business (including the text of any resolutions proposed for consideration and in the event that such business includes a proposal to amend the Bylaws of the Corporation, the language of the proposed amendment), the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the Corporation’s books, and of such beneficial owner, (ii) the class and number of shares of capital stock of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner, (iii) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to propose such business or nomination, and (iv) a representation whether the stockholder or the beneficial owner, if any, intends or is part of a group which intends (y) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the Corporation’s outstanding capital stock required to approve or adopt the proposal or elect the nominee and/or (z) otherwise to solicit proxies from stockholders in support of such proposal or nomination.  The foregoing notice requirements of this Section 9 shall be deemed satisfied by a stockholder if the stockholder has notified the Corporation of his, her or its intention to present a proposal at an annual meeting in compliance with applicable rules and regulations promulgated under the Exchange Act and such stockholder’s proposal has been included in a proxy statement that has been prepared by the Corporation to solicit proxies for such annual meeting.  The Corporation may require any proposed nominee to furnish such other information as it may reasonably require to determine the eligibility of such proposed nominee to serve as a director of the Corporation.

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(3)           Notwithstanding anything in the second sentence of paragraph (A)(2) of this Section 9 to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation at an annual meeting is increased and there is no public announcement by the Corporation naming the nominees for the additional directorships at least one hundred (100) days prior to the first anniversary of the preceding year’s annual meeting, a stockholder’s notice required by this Section 9 shall also be considered timely, but only with respect to nominees for the additional directorships, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the tenth (10th) day following the day on which such public announcement is first made by the Corporation.

(B)           Special Meetings of Stockholders.  Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation’s notice of meeting.  Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation’s notice of meeting (1) by or at the direction of the Board of Directors or any committee thereof or (2) provided that the Board of Directors has determined that directors shall be elected at such meeting, by any stockholder of the Corporation who is a stockholder of record at the time the notice provided for in this Section 9 is delivered to the Secretary of the Corporation, who is entitled to vote at the meeting and upon such election and who complies with the notice procedures set forth in this Section 9.  In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder entitled to vote in such election of directors may nominate a person or persons (as the case may be) for election to such position(s) as specified in the Corporation’s notice of meeting, if the stockholder’s notice required by paragraph (A)(2) of this Section 9 shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the close of business on the one hundred twentieth (120th) day prior to such special meeting and not later than the close of business on the later of the ninetieth (90th) day prior to such special meeting or the tenth (10th) day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting.  In no event shall the public announcement of an adjournment or postponement of a special meeting commence a new time period (or extend any time period) for the giving of a stockholder’s notice as described above.

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(C)           General.  (1) Only such persons who are nominated in accordance with the procedures set forth in this Section 9 shall be eligible to be elected at an annual or special meeting of stockholders of the Corporation to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 9.  Except as otherwise provided by law, the Certificate of Incorporation of the Corporation or these Bylaws, the Chairman of the Meeting shall have the power and duty (a) to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 9 (including whether the stockholder or beneficial owner, if any, on whose behalf the nomination or proposal is made solicited (or is part of a group which solicited) or did not so solicit, as the case may be, proxies in support of such stockholder’s nominee or proposal in compliance with such stockholder’s representation as required by clause (A)(2)(c)(iv) of this Section 9) and (b) if any proposed nomination or business was not made or proposed in compliance with this Section 9, to declare that such nomination shall be disregarded or that such proposed business shall not be transacted.  Notwithstanding the foregoing provisions of this Section 9, unless otherwise required by law, if the stockholder (or a qualified representative of the stockholder) does not appear at the annual or special meeting of stockholders of the Corporation to present a nomination or proposed business, such nomination shall be disregarded and such proposed business shall not be transacted, notwithstanding that proxies in respect of such vote may have been received by the Corporation.  For purposes of this Section 9, to be considered a qualified representative of the stockholder, a person must be a duly authorized officer, manager or partner of such stockholder or must be authorized by a writing executed by such stockholder or an electronic transmission delivered by such stockholder to act for such stockholder as proxy at the meeting of stockholders and such person must produce such writing or electronic transmission, or a reliable reproduction of the writing or electronic transmission, at the meeting of stockholders.

(2)           For purposes of this Section 9, “public announcement” shall include disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed or furnished by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.

(3)           Notwithstanding the foregoing provisions of this Section 9, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 9.  Nothing in this Section 9 shall be deemed to affect any rights (a) of stockholders to request inclusion of proposals in the Corporation’s proxy statement pursuant to applicable rules and regulations promulgated under the Exchange Act or (b) of the holders of any series of Preferred Stock (as defined in the Certificate of Incorporation of the Corporation) to elect directors pursuant to any applicable provisions of the Certificate of Incorporation of the Corporation.

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Section 10.  Action by Written Consent. Effective upon and commencing on the Trigger Date, no action required to be taken or that may be taken at any annual or special meeting of the stockholders of the Corporation may be taken without a meeting, and the power of the stockholders of the Corporation to consent in writing to the taking of any action by written consent without a meeting is specifically denied.

ARTICLE III

DIRECTORS

Section 1.  General.  The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors.  In addition to the authority and powers conferred on the Board of Directors by the DGCL or by the Certificate of Incorporation of the Corporation, the Board of Directors is authorized and empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, subject to the provisions of the DGCL, the Certificate of Incorporation of the Corporation and these Bylaws; provided, however, that no Bylaws hereafter adopted, or any amendments thereto, shall invalidate any prior act of the Board of Directors that would have been valid if such Bylaws or amendment had not been adopted.

Section 2.  Classification of Board of Directors; Qualifications.  The number of directors which shall constitute the whole Board of Directors shall be fixed in the manner provided in the Certificate of Incorporation of the Corporation.  As provided in Article FIFTH of the Certificate of Incorporation of the Corporation, effective upon and commencing as of the Trigger Date, the directors, other than those who may be elected by the holders of any series of Preferred Stock, shall be divided into three classes: Class I, Class II and Class III.  Upon the Trigger Date, the Board of Directors shall have the authority to designate the members of the Board of Directors then in office as Class I directors, Class II directors and Class III directors, respectively.

At each annual election on or after the Trigger Date, the directors chosen to succeed those whose terms then expire shall be of the same class as the directors they succeed, unless, by reason of any intervening changes in the authorized number of directors, the Board of Directors shall designate one or more directorships whose term then expires as directorships of another class in order more nearly to achieve equality of number of directors among the classes.

Notwithstanding the provision in Article FIFTH of the Certificate of Incorporation of the Corporation that, commencing as of the Trigger Date, the three classes of directors shall be as nearly equal in number of directors as possible, in the event of any change in the authorized number of directors, each director then continuing to serve as such shall nevertheless continue as a director of the class of which he or she is a member until the expiration of his or her current term, or his or her prior death, resignation, disqualification or removal.  No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director.

Section 3.  Newly Created Directorships and Vacancies.  Except as otherwise provided by a Board of Directors’ resolution providing for the establishment of any series of Preferred Stock, newly created directorships resulting from any increase in the number of directors and any vacancies on the Board of Directors resulting from death, resignation, removal, disqualification or other cause shall be filled by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors, or by a sole remaining director.  Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until that director’s successor shall have been elected and qualified or until his earlier death, resignation or removal.

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Section 4.  Place of Meetings and Meetings by Telephone.  Meetings of the Board of Directors may be held either within or without the State of Delaware, at whatever place is specified by the officer calling the meeting.  Meetings of the Board of Directors may also be held by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other.  Participation in such a meeting by means of conference telephone or other communications equipment shall constitute presence in person at such meeting, except where a director participates in a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened.  In the absence of specific designation by the officer calling the meeting, the meetings shall be held at the principal office of the Corporation.

Section 5.  Regular Meetings.  The Board of Directors shall meet each year immediately following the annual meeting of the stockholders for the transaction of such business as may properly be brought before the meeting.  The Board of Directors shall also meet regularly at such other times as shall be designated by the Board of Directors.  No notice of any kind to either existing or newly elected members of the Board of Directors for such annual or regular meetings shall be necessary.

Section 6.  Special Meetings.  Special meetings of the Board of Directors may be held at any time upon the call of the Chairman of the Board, if there is one, the Chief Executive Officer, if there is one, the President or the Corporate Secretary of the Corporation or a majority of the directors then in office.  Notice shall be sent by mail, facsimile or telegram or other electronic transmission to the last known address of the director at least two (2) days before the meeting, or oral notice may be substituted for such written notice if received not later than the day preceding such meeting.  Notice of the time, place and purpose of such meeting may be waived in writing before or after such meeting, and shall be equivalent to the giving of notice.  Attendance of a director at such meeting shall also constitute a waiver of notice thereof, except where he attends for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened.  Except as otherwise provided by these Bylaws, neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting.

Section 7.  Quorum and Voting.  Except as otherwise provided by law, a majority of the number of directors fixed in the manner provided in the Certificate of Incorporation of the Corporation shall constitute a quorum for the transaction of business.  Except as otherwise provided by law, the Certificate of Incorporation of the Corporation or these Bylaws, the affirmative vote of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors.  Any regular or special directors’ meeting may be adjourned from time to time by those present, whether a quorum is present or not.

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Section 8.  Compensation.  Directors shall receive such compensation and reimbursement of expenses for their services as shall be determined by the Board of Directors.

Section 9.  Removal.  Effective upon and commencing as of the Trigger Date, no director of the Corporation may be removed from office as a director by vote or other action of the stockholders or otherwise except for cause, and then only by the affirmative vote of the holders of at least a majority of the voting power of all then outstanding shares of capital stock of the Corporation generally entitled to vote in the election of directors, voting together as a single class.

Notwithstanding the foregoing, whenever holders of outstanding shares of one or more series of Preferred Stock are entitled to elect members of the Board of Directors, any such director of the Corporation so elected may be removed in accordance with the provisions of the Certificate of Incorporation of the Corporation or that Board of Directors’ resolution.

Section 10.  Committees.  The Board of Directors may designate one or more committees, which shall in each case be comprised of such number of directors as the Board of Directors may determine from time to time.  Subject to such restrictions as may be contained in the Corporation’s Certificate of Incorporation or that may be imposed by the DGCL, any such committee shall have and may exercise such powers and authority of the Board of Directors in the management of the business and affairs of the Corporation as the Board of Directors may determine by resolution and specify in the respective resolutions appointing them, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to the following matters: (a) approving or adopting, or recommending to the stockholders of the Corporation, any action or matter expressly required by the DGCL to be submitted to the stockholders for approval or (b) adopting, amending or repealing any Bylaw of the Corporation.  Each duly authorized action taken with respect to a given matter by any such duly appointed committee of the Board of Directors shall have the same force and effect as the action of the full Board of Directors and shall constitute for all purposes the action of the full Board of Directors with respect to such matter.

The Board of Directors shall have the power at any time to change the membership of any such committee and to fill vacancies in it.  A majority of the members of any such committee shall constitute a quorum.  The Board of Directors shall name a chairman at the time it designates members to a committee.  Each such committee shall appoint such subcommittees and assistants as it may deem necessary.  Except as otherwise provided by the Board of Directors, meetings of any committee shall be conducted in accordance with the provisions of Sections 5 and 7 of this Article III as the same shall from time to time be amended.  Any member of any such committee elected or appointed by the Board of Directors may be removed by the Board of Directors whenever in its judgment the best interests of the Corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed.  Election or appointment of a member of a committee shall not of itself create contract rights.

Section 11.   Standing Committees.  The committees of the Board of Directors may include an audit committee, an executive compensation committee, a nominating and corporate governance committee and an executive committee and any other committees designated by the Board of Directors.

Section 12.   Board and Committee Action Without a Meeting.  Except as otherwise restricted by the Certificate of Incorporation of the Corporation or these Bylaws, any action required or permitted to be taken at a meeting of the Board of Directors or any committee thereof may be taken without a meeting if a consent in writing or by electronic transmission, setting forth the action so taken, is given by all the members of the Board of Directors or such committee, as the case may be, and shall be filed with the Corporate Secretary of the Corporation.

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ARTICLE IV

OFFICERS

Section 1.  Officers.  The officers of the Corporation shall consist of a President and a Corporate Secretary and such other officers and agents as the Board of Directors may from time to time elect or appoint.  The Board of Directors may delegate to the Chairman of the Board, if there is one, and/or the Chief Executive Officer, if there is one, the authority to appoint or remove additional officers and agents of the Corporation.  Each officer shall hold office until his successor shall have been duly elected or appointed and shall qualify or until his death or until he shall resign or shall have been removed in the manner hereinafter provided.  Any two or more offices may be held by the same person.  Except for the Chairman of the Board, if any, no officer need be a director.

Section 2.  Vacancies; Removal.  Whenever any vacancies shall occur in any office by death, resignation, increase in the number of offices of the Corporation, or otherwise, the officer so elected by the Board of Directors to fill such vacancy shall hold office until his successor is chosen and qualified.  The Board of Directors may at any time remove any officer of the Corporation, whenever in its judgment the best interests of the Corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed.  Election or appointment of an officer or agent shall not of itself create contract rights.

Section 3.  Powers and Duties of Officers.  The officers of the Corporation shall have such powers and duties as generally pertain to their offices as well as such powers and duties as from time to time shall be conferred by the Board of Directors.  The Corporate Secretary shall have the duty to record the proceedings of the meetings of the stockholders and directors in a book to be kept for that purpose.

ARTICLE V

INDEMNIFICATION

Section 1.  General.  The Corporation shall, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended, indemnify and hold each Indemnitee (as this and all other capitalized words used in this Article V not previously defined in these Bylaws are defined in Article V, Section 16 (Definitions)) harmless from and against any and all losses, liabilities, claims, damages and Expenses whatsoever arising out of any event or occurrence related to the fact that Indemnitee is or was a director or officer of the Corporation or is or was serving in another Corporate Status.

Section 2.  Expenses.  If Indemnitee is, by reason of his Corporate Status, a party to and is successful, on the merits or otherwise, in any Proceeding, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith.  If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to any Matter in such Proceeding, the Corporation shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him or on his behalf relating to such Matter.  The termination of any Matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such Matter.  To the extent that the Indemnitee is, by reason of his Corporate Status, a witness in any Proceeding, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith.

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Section 3.  Advances.  In the event of any threatened or pending action, suit or proceeding in which Indemnitee is a party or is involved and that may give rise to a right of indemnification under this Article V, following written request to the Corporation by Indemnitee, the  Corporation shall promptly pay to Indemnitee amounts to cover expenses reasonably incurred by Indemnitee in such proceeding in advance of its final disposition upon the receipt by the Corporation of (i) a written undertaking executed by or on behalf of Indemnitee providing that Indemnitee will repay the advance if it shall ultimately be determined that Indemnitee is not entitled to be indemnified by the Corporation as provided in these Bylaws and (ii) satisfactory evidence as to the amount of such expenses.

Section 4.  Repayment of Advances or Other Expenses.  Indemnitee agrees that Indemnitee shall reimburse the Corporation all expenses paid by the Corporation in defending any civil, criminal, administrative or investigative action, suit or proceeding against Indemnitee in the event and only to the extent that it shall be determined pursuant to the provisions of this Article V, applicable law or by final judgment or other final adjudication under the provisions of any applicable law that Indemnitee is not entitled to be indemnified by the Corporation for such expenses.

Section 5.  Request for Indemnification.  To obtain indemnification, Indemnitee shall submit to the Corporate Secretary of the Corporation a written claim or request.  Such written claim or request shall contain sufficient information to reasonably inform the Corporation about the nature and extent of the indemnification or advance sought by Indemnitee.  The Corporate Secretary of the Corporation shall promptly advise the Board of Directors of such request.

Section 6.  Determination of Entitlement; No Change of Control.  If there has been no Change of Control at the time the request for indemnification is submitted, Indemnitee’s entitlement to indemnification shall be determined in accordance with Section 145(d) of the DGCL.  If entitlement to indemnification is to be determined by Independent Counsel, the Corporation shall furnish notice to Indemnitee within ten (10) days after receipt of the request for indemnification, specifying the identity and address of Independent Counsel.  The Indemnitee may, within fourteen (14) days after receipt of such written notice of selection, deliver to the Corporation a written objection to such selection.  Such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of Independent Counsel and the objection shall set forth with particularity the factual basis for such assertion.  If there is an objection to the selection of Independent Counsel, either the Corporation or Indemnitee may petition the Court for a determination that the objection is without a reasonable basis and/or for the appointment of Independent Counsel selected by the Court.

Section 7.  Determination of Entitlement; Change of Control.  If there has been a Change of Control at the time the request for indemnification is submitted, Indemnitee’s entitlement to indemnification shall be determined in a written opinion by Independent Counsel selected by Indemnitee.  Indemnitee shall give the Corporation written notice advising of the identity and address of the Independent Counsel so selected.  The Corporation may, within seven (7) days after receipt of such written notice of selection, deliver to the Indemnitee a written objection to such selection.  Indemnitee may, within five (5) days after the receipt of such objection from the Corporation, submit the name of another Independent Counsel and the Corporation may, within seven (7) days after receipt of such written notice of selection, deliver to the Indemnitee a written objection to such selection.  Any objections referred to in this Section 7 may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of Independent Counsel and such objection shall set forth with particularity the factual basis for such assertion.  Indemnitee may petition the Court for a determination that the Corporation’s objection to the first and/or second selection of Independent Counsel is without a reasonable basis and/or for the appointment as Independent Counsel of a person selected by the Court.

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Section 8.  Procedures of Independent Counsel.  If a Change of Control shall have occurred before the request for indemnification is sent by Indemnitee, Indemnitee shall be presumed (except as otherwise expressly provided in this Article V) to be entitled to indemnification upon submission of a request for indemnification in accordance with Article V, Section 5 (Request for Indemnification), and thereafter the Corporation shall have the burden of proof to overcome the presumption in reaching a determination contrary to the presumption.  The presumption shall be used by Independent Counsel as a basis for a determination of entitlement to indemnification unless the Corporation provides information sufficient to overcome such presumption by clear and convincing evidence or the investigation, review and analysis of Independent Counsel convinces him by clear and convincing evidence that the presumption should not apply.

Except in the event that the determination of entitlement to indemnification is to be made by Independent Counsel, if the person or persons empowered under Article V, Section 6 (Determination of Entitlement; No Change of Control) or Section 7 (Determination of Entitlement; Change of Control) to determine entitlement to indemnification shall not have made and furnished to Indemnitee in writing a determination within sixty (60) days after receipt by the Corporation of the request therefor, the requisite determination of entitlement to indemnification shall be deemed to have been made and Indemnitee shall be entitled to such indemnification unless Indemnitee knowingly misrepresented a material fact in connection with the request for indemnification or such indemnification is prohibited by applicable law.  The termination of any Proceeding or of any Matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Article V) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner that he reasonably believed to be in or not opposed to the best interests of the Corporation, or with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his conduct was unlawful.  A person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan of the Corporation shall be deemed to have acted in a manner not opposed to the best interests of the Corporation.

For purposes of any determination hereunder, a person shall be deemed to have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, or, with respect to any criminal action or Proceeding, to have had no reasonable cause to believe his conduct was unlawful, if his action is based on the records or books of account of the Corporation or another enterprise or on information supplied to him by the officers of the Corporation or another enterprise in the course of their duties or on the advice of legal counsel for the Corporation or another enterprise or on information or records given or reports made to the Corporation or another enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Corporation or another enterprise.  The term “another enterprise” as used in this Section 8 shall mean any other company or any partnership, limited liability company, association, joint venture, trust, employee benefit plan or other enterprise of which such person is or was serving at the request of the Corporation as a director, officer, employee or agent.  The provisions of this paragraph shall not be deemed to be exclusive or to limit in any way the circumstances in which an Indemnitee may be deemed to have met the applicable standards of conduct for determining entitlement to rights under this Article V.

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Section 9.  Independent Counsel Expenses.  The Corporation shall pay any and all reasonable fees and expenses of Independent Counsel incurred acting pursuant to this Article V and in any proceeding to which it is a party or witness in respect of its investigation and written report and shall pay all reasonable fees and expenses incident to the procedures in which such Independent Counsel was selected or appointed.  No Independent Counsel may serve if a timely objection has been made to his selection until a court has determined that such objection is without a reasonable basis.

Section 10.  Adjudication.  In the event that (i) a determination is made pursuant to Article V, Section 6 (Determination of Entitlement; No Change of Control) or Section 7 (Determination of Entitlement; Change of Control) that Indemnitee is not entitled to indemnification under this Article V; (ii) advancement of Expenses is not timely made pursuant to Article V, Section 3 (Advances); (iii) Independent Counsel has not made and delivered a written opinion determining the request for indemnification (a) within ninety (90) days after being appointed by the Court, (b) within ninety (90) days after objections to his selection have been overruled by the Court or (c) within ninety (90) days after the time for the Corporation or Indemnitee to object to his selection; or (iv) payment of indemnification is not made within five (5) days after a determination of entitlement to indemnification has been made or deemed to have been made pursuant to Article V, Section 6 (Determination of Entitlement; No Change of Control), Section 7 (Determination of Entitlement; Change of Control) or Section 8 (Procedures of Independent Counsel), Indemnitee shall be entitled to an adjudication in an appropriate court of the State of Delaware, or in any other court of competent jurisdiction, of his entitlement to such indemnification or advancement of Expenses.  In the event that a determination shall have been made that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to this Section 10 shall be conducted in all respects as a de novo trial on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination.  If a Change of Control shall have occurred, in any judicial proceeding commenced pursuant to this Section 10, the Corporation shall have the burden of proving that Indemnitee is not entitled to indemnification or advancement of Expenses, as the case may be.  If a determination shall have been made or deemed to have been made that Indemnitee is entitled to indemnification, the Corporation shall be bound by such determination in any judicial proceeding commenced pursuant to this Section 10, or otherwise, unless Indemnitee knowingly misrepresented a material fact in connection with the request for indemnification, or such indemnification is prohibited by law.

The Corporation shall be precluded from asserting in any judicial proceeding commenced pursuant to this Section 10 that the procedures and presumptions of this Article V are not valid, binding and enforceable and shall stipulate in any such proceeding that the Corporation is bound by all provisions of this Article V.  In the event that Indemnitee, pursuant to this Section 10, seeks a judicial adjudication to enforce his rights under, or to recover damages for breach of, this Article V, Indemnitee shall be entitled to recover from the Corporation, and shall be indemnified by the Corporation against, any and all Expenses actually and reasonably incurred by him in such judicial adjudication, but only if he prevails therein.  If it shall be determined in such judicial adjudication that Indemnitee is entitled to receive part but not all of the indemnification or advancement of Expenses sought, the Expenses incurred by Indemnitee in connection with such judicial adjudication or arbitration shall be appropriately prorated.

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Section 11.  Participation by the Corporation.  With respect to any such claim, action, suit, proceeding or investigation as to which Indemnitee notifies the Corporation of the commencement thereof:  (a) the Corporation will be entitled to participate therein at its own expense; and (b) except as otherwise provided below, to the extent that it may wish, the Corporation (jointly with any other indemnifying party similarly notified) will be entitled to assume the defense thereof, with counsel reasonably satisfactory to Indemnitee.  After receipt of notice from the Corporation to Indemnitee of the Corporation’s election so to assume the defense thereof, the Corporation will not be liable to Indemnitee under this Article V for any legal or other expenses subsequently incurred by Indemnitee in connection with the defense thereof other than reasonable costs of investigation or as otherwise provided below.  Indemnitee shall have the right to employ his own counsel in such action, suit, proceeding or investigation but the fees and expenses of such counsel incurred after notice from the Corporation of its assumption of the defense thereof shall be at the expense of Indemnitee unless (i) the employment of counsel by Indemnitee has been authorized by the Corporation, (ii) Indemnitee shall have reasonably concluded that there is a conflict of interest between the Corporation and Indemnitee in the conduct of the defense of such action or (iii) the Corporation shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of counsel employed by Indemnitee shall be subject to indemnification pursuant to the terms of this Article V.  The Corporation shall not be entitled to assume the defense of any action, suit, proceeding or investigation brought in the name of or on behalf of the Corporation or as to which Indemnitee shall have made the conclusion provided for in (ii) above.  The Corporation shall not be liable to indemnify Indemnitee under this Article V for any amounts paid in settlement of any action or claim effected without its written consent, which consent shall not be unreasonably withheld.  The Corporation shall not settle any action or claim in any manner that would impose any limitation or unindemnified penalty on Indemnitee without Indemnitee’s written consent, which consent shall not be unreasonably withheld.

Section 12.  Nonexclusivity of Rights.  The rights of indemnification and advancement of Expenses as provided by this Article V shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled to under applicable law, the Certificate of Incorporation of the Corporation, these Bylaws, any agreement, a vote of stockholders or a resolution of directors, or otherwise.  No amendment, alteration or repeal of this Article V or any provision hereof shall be effective as to any Indemnitee for acts, events and circumstances that occurred, in whole or in part, before such amendment, alteration or repeal.  The provisions of this Article V shall continue as to an Indemnitee whose Corporate Status has ceased for any reason and shall inure to the benefit of his heirs, executors and administrators.  Neither the provisions of this Article V nor those of any agreement to which the Corporation is a party shall be deemed to preclude the indemnification of any person who is not specified in this Article V as having the right to receive indemnification or is not a party to any such agreement, but whom the Corporation has the power or obligation to indemnify under the provisions of the DGCL.

Section 13.  Insurance and Subrogation.  The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under applicable law.

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The Corporation shall not be liable under this Article V to make any payment of amounts otherwise indemnifiable hereunder if, but only to the extent that, Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise.

In the event of any payment hereunder, the Corporation shall be subrogated to the extent of such payment to all the rights of recovery of Indemnitee, who shall execute all papers required and take all action reasonably requested by the Corporation to secure such rights, including execution of such documents as are necessary to enable the Corporation to bring suit to enforce such rights.

Section 14.  Severability.  If any provision or provisions of this Article V shall be held to be invalid, illegal or unenforceable for any reason whatsoever, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby; and, to the fullest extent possible, the provisions of this Article V shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable.

Section 15.  Certain Actions for Which Indemnification Is Not Provided.  Notwithstanding any other provision of this Article V, no person shall be entitled to indemnification or advancement of Expenses under this Article V with respect to any Proceeding, or any Matter therein, brought or made by such person against the Corporation.

Section 16.  Definitions.  For purposes of this Article V:

“Change of Control” means a change in control of the Corporation after both the Trigger Date and the date Indemnitee acquired his Corporate Status, which shall be deemed to have occurred in any one of the following circumstances occurring after such date: (i) there shall have occurred an event required to be reported with respect to the Corporation in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the Exchange Act, whether or not the Corporation is then subject to such reporting requirement; (ii) any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) shall have become the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing 35% or more of the combined voting power of the Corporation’s then outstanding voting securities without prior approval of at least two-thirds of the members of the Board of Directors in office immediately prior to such person attaining such percentage interest; (iii) the Corporation is a party to a merger, consolidation, sale of assets or other reorganization, or a proxy contest, as a consequence of which members of the Board of Directors in office immediately prior to such transaction or event constitute less than a majority of the Board of Directors thereafter; or (iv) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors (including, for this purpose, any new director whose election or nomination for election by the Corporation’s stockholders was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that notwithstanding the foregoing, the distribution of the shares of the Corporation’s common stock in one or multiple transactions by Halliburton to its stockholders shall not be a Change of Control.

“Corporate Status” describes the status of Indemnitee as a director, officer, employee, agent or fiduciary of the Corporation or of any other corporation, partnership, limited liability company, association, joint venture, trust, employee benefit plan or other enterprise that Indemnitee is or was serving at the request of the Corporation.

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“Court” means the Court of Chancery of the State of Delaware or any other court of competent jurisdiction.

“Designated Professional Capacity” shall include, but not be limited to, a physician, nurse, psychologist or therapist, registered surveyor, registered engineer, registered architect, attorney, certified public accountant or other person who renders such professional services within the course and scope of his employment, who is licensed by appropriate regulatory authorities to practice such profession and who, while acting in the course of such employment, committed or is alleged to have committed any negligent acts, errors or omissions in rendering such professional services at the request of the Corporation or pursuant to his employment (including, without limitation, rendering written or oral opinions to third parties).

“Expenses” shall include all reasonable attorneys’ fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, or being or preparing to be a witness in a Proceeding.

“Indemnitee” means any present or former officer (including an officer acting in his Designated Professional Capacity) or director of the Corporation who is, or is threatened to be made, a witness in or a party to any Proceeding as described in Article V, Section 1 (General) or Section 2 (Expenses) by reason of his Corporate Status.

“Independent Counsel” means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the five years previous to his selection or appointment has been, retained to represent:  (i) the Corporation or Indemnitee in any matter material to either such party or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder.

“Matter” is a claim, a material issue or a substantial request for relief.

“Proceeding” includes any action, suit, arbitration, alternate dispute resolution mechanism, investigation, administrative hearing or any other proceeding, whether civil, criminal, administrative or investigative, except one initiated by an Indemnitee pursuant to Article V, Section 10 (Adjudication) to enforce his rights under this Article V.

Section 17.  Notices.  Promptly after receipt by Indemnitee of notice of the commencement of any action, suit or proceeding, Indemnitee shall, if he anticipates or contemplates making a claim for expenses or an advance pursuant to the terms of this Article V, notify the Corporation of the commencement of such action, suit or proceeding; provided, however, that any delay in so notifying the Corporation shall not constitute a waiver or release by Indemnitee of rights hereunder and that any omission by Indemnitee to so notify the Corporation shall not relieve the Corporation from any liability that it may have to Indemnitee otherwise than under this Article V.  Any communication required or permitted to the Corporation shall be addressed to the Corporate Secretary of the Corporation and any such communication to Indemnitee shall be addressed to Indemnitee’s address as shown on the Corporation’s records unless he specifies otherwise and shall be personally delivered or delivered by overnight mail delivery.  Any such notice shall be effective upon receipt.

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Section 18.  Contractual Rights.  The right to be indemnified or to the advancement or reimbursement of Expenses (i) is a contract right based upon good and valuable consideration, pursuant to which Indemnitee may sue as if these provisions were set forth in a separate written contract between Indemnitee and the Corporation, (ii) is and is intended to be retroactive and shall be available as to events occurring prior to the adoption of these provisions and (iii) shall continue after any rescission or restrictive modification of such provisions as to events occurring prior thereto.

Section 19.  Indemnification of Employees, Agents and Fiduciaries.  The Corporation, by adoption of a resolution of the Board of Directors, may indemnify and advance expenses to a person who is an employee (including an employee acting in his Designated Professional Capacity), agent or fiduciary of the Corporation including any such person who is or was serving at the request of the Corporation as a director, officer, employee, agent or fiduciary of any other corporation, partnership, joint venture, limited liability company, trust, employee benefit plan or other enterprise to the same extent and subject to the same conditions (or to such lesser extent and/or with such other conditions as the Board of Directors may determine) under which it may indemnify and advance expenses to an Indemnitee under this Article V.

ARTICLE VI

MISCELLANEOUS PROVISIONS

Section 1.  Offices.  The address of the registered office of the Corporation in the State of Delaware is Corporation Trust Center, 1209 Orange Street, City of Wilmington, County of New Castle, 19801, and the name of the registered agent of the Corporation at such address is The Corporation Trust Company.  The principal office of the Corporation shall be located in Houston, Texas, unless and until changed by resolution of the Board of Directors.  The Corporation may also have offices at such other places as the Board of Directors may designate from time to time, or as the business of the Corporation may require.  The principal office and registered office may be, but need not be, the same.

Section 2.  Resignations.  Any director or officer may resign at any time.  Such resignations shall be made in writing or by electronic transmission and shall take effect at the time specified therein, or, if no time is specified, at the time of its receipt by the Chairman of the Board, if there is one, the Chief Executive Officer, if there is one, the President or the Corporate Secretary.  The acceptance of a resignation shall not be necessary to make it effective, unless expressly so provided in the resignation.

Section 3.  Seal.  The Corporate Seal shall be circular in form, shall have inscribed thereon the name of the Corporation and may be used by causing it or a facsimile thereof to be impressed or affixed or otherwise reproduced.

Section 4.  Separability.  If one or more of the provisions of these Bylaws shall be held to be invalid, illegal or unenforceable, such invalidity, illegality or unenforceability shall not affect any other provision hereof and these Bylaws shall be construed as if such invalid, illegal or unenforceable provision or provisions had never been contained herein.

Section 5.  Notice to Stockholders by Electronic Transmission.  Without limiting the manner by which notice may be given effectively to stockholders, any notice required to be given to stockholders by the provisions of these Bylaws may be given by electronic transmission to an electronic address at which the stockholder has consented to receive notice, to the fullest extent allowed under Section 232 of the DGCL.

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ARTICLE VII

AMENDMENT OF BYLAWS

Section 1.   Vote Requirements.  The Board of Directors is expressly empowered to adopt, amend or repeal these Bylaws, and any adoption, amendment or repeal of these Bylaws by the Board of Directors shall require the affirmative vote of a majority of all directors then in office at any regular or special meeting of the Board of Directors called for that purpose.

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EX-10.1

Exhibit 10.1

KBR, INC.

2006 STOCK AND INCENTIVE PLAN

(As Amended June 27, 2007)

I.           PURPOSE

The purpose of the KBR, Inc. 2006 Stock and Incentive Plan (the “Plan”) is to provide a means whereby KBR, Inc., a Delaware corporation (the “Company”), and its Subsidiaries may attract, motivate and retain highly competent employees and to provide a means whereby selected employees can acquire and maintain stock ownership and receive cash awards, thereby strengthening their concern for the long-term welfare of the Company.  The Plan is also intended to provide employees with additional incentive and reward opportunities designed to enhance the profitable growth of the Company over the long term.  A further purpose of the Plan is to allow awards under the Plan to Non-employee Directors in order to enhance the Company’s ability to attract and retain highly qualified Directors.  Accordingly, the Plan provides for granting Incentive Stock Options, Options which do not constitute Incentive Stock Options, Stock Appreciation Rights, Restricted Stock Awards, Restricted Stock Unit Awards, Performance Awards, Stock Value Equivalent Awards, or any combination of the foregoing, as is best suited to the circumstances of the particular employee or Non-employee Director as provided herein.  The Plan is effective as of the closing date of the IPO as defined later in this document.

II.           DEFINITIONS

The following definitions shall be applicable throughout the Plan unless specifically modified by any paragraph:

(a) “Award” means, individually or collectively, any Option, Stock Appreciation Right, Restricted Stock Award, Restricted Stock Unit Award, Performance Award or Stock Value Equivalent Award.

(b) “Award Document” means the relevant award agreement or other document containing the terms and conditions of an Award.

(c) “Beneficial Owners” shall have the meaning set forth in Rule 13d-3 promulgated under the Exchange Act.

(d) “Board” means the Board of Directors of KBR, Inc.

(e) “Change of Control Value” means, for the purposes of Paragraph (f) of Article XIII, the amount determined in Clause (i), (ii) or (iii), whichever is applicable, as follows: (i) the per share price offered to stockholders of the Company in any merger, consolidation, sale of assets or dissolution transaction, (ii) the per share price offered to stockholders of the Company in any tender offer or exchange offer whereby a Corporate Change takes place or (iii) if a Corporate Change occurs other than as described in Clause (i) or Clause (ii), the fair market value per share determined by the Committee as of the date determined by the Committee to be the date of cancellation and surrender of an Award.  If the consideration offered to stockholders of the Company in any transaction described in this Paragraph (e) consists of anything other than cash, the Committee shall determine the fair cash equivalent of the portion of the consideration offered which is other than cash.

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(f) “Code” means the Internal Revenue Code of 1986, as amended.  Reference in the Plan to any section of the Code shall be deemed to include any amendments or successor provisions to such section and any regulations under such section.

(g) “Committee” means, prior to the closing date of the IPO, the committee selected by the board of directors of Halliburton to administer the Plan in accordance with Paragraph (a) of Article IV of the Plan and on and after the closing date of the IPO, the committee selected by the Board to administer the Plan in accordance with Paragraph (a) of Article IV of the Plan.

(h) “Common Stock” means the Common Stock, par value $0.001 per share, of the Company.

(i) “Company” means KBR, Inc., a Delaware corporation.

(j) “Corporate Change” shall conclusively be deemed to have occurred on a Corporate Change Effective Date if an event set forth in any one of the following paragraphs shall have occurred:

(i) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 20% or more of the combined voting power of the Company’s then outstanding securities (the “Outstanding Company Voting Securities”) provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Corporate Change:  (1) an acquisition of securities effected in connection with a distribution of any class of common stock of the Company to shareholders of Halliburton in a transaction (including any distribution in exchange for shares of capital stock or other securities of Halliburton) intended to qualify as a tax-free distribution under Section 355 of the Code (a “Tax-Free Spin Off”), (2) any acquisition by Halliburton Company or any of its affiliates excluding the Company and its Subsidiaries (collectively, “Halliburton Companies”), (3) any acquisition from Halliburton Companies pursuant to a public offering of securities registered under a registration statement filed with the Securities and Exchange Commission, or (4) any acquisition immediately following which Halliburton Companies have beneficial ownership of at least 50% or more of the Outstanding Company Voting Securities; provided that any such acquisition that, but for this clause (4), would otherwise constitute a Corporate Change under this Section II.(j)(i) shall be deemed to be a Corporate Change at the time that Halliburton Companies no longer have beneficial ownership of at least 50% or more of the Outstanding Company Voting Securities, if such individual, entity or group that made such acquisition continues to own 20% or more of the Outstanding Company Voting Securities following such time that Halliburton Companies no longer have such beneficial ownership; or

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(ii) the following individuals cease for any reason to constitute a majority of the number of Directors then serving: individuals who, on the date hereof, constitute the Board and any new Director (other than a Director whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of Directors of the Company) whose appointment or election by the Board or nomination for election by the Company’s stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the Directors then still in office who either were Directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended (the “Incumbent Board); provided, however, that for purposes of this Section II.(j)(ii), any individual becoming a Director subsequent to the date hereof whose election, or nomination for election by the Company’s shareholders, was approved by either (a) a vote of at least a majority of the Directors then comprising the Incumbent Board or (b) Halliburton, shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of Directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than either Halliburton or the Board; or

(iii) there is consummated a merger or consolidation of the Company or any direct or indirect Subsidiary of the Company with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any Subsidiary of the Company, at least 50% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or any of its affiliates other than in connection with the acquisition by the Company or any of its affiliates of a business) representing 20% or more of the combined voting power of the Company’s then outstanding securities; or

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(iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company, other than in connection with the transfer of all or substantially all of the assets of the Company to the Halliburton Companies, or there is consummated an agreement for the sale, disposition, lease or exchange by the Company of all or substantially all of the Company’s assets, other than a sale, disposition, lease or exchange by the Company of all or substantially all of the Company’s assets to the Halliburton Companies or to an entity, at least 50% of the combined voting power of the voting securities of which are owned by stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale.

Notwithstanding the foregoing, a “Corporate Change” shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the Common Stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions.

(k) “Corporate Change Effective Date” shall mean:

(i) the first date that the direct or indirect ownership of 20% or more combined voting power of the Company’s outstanding securities results in a Corporate Change as described in clause (i) of such definition above; or

(ii) the date of the election of Directors that results in a Corporate Change as described in clause (ii) of such definition; or

(iii) the date of the merger or consideration that results in a Corporate Change as described in clause (iii) of such definition; or

(iv) the date of stockholder approval that results in a Corporate Change as described in clause (iv) of such definition.

(l) “Director” means an individual serving as a member of the Board.

(m) “Exchange Act” means the Securities Exchange Act of 1934, as amended.

(n) “Fair Market Value” means, as of any specified date, the closing price of the Common Stock on the New York Stock Exchange (or, if the Common Stock is not then listed on such exchange, such other national securities exchange on which the Common Stock is then listed) on that date, or if no prices are reported on that date, on the last preceding date on which such prices of the Common Stock are so reported or, in the sole discretion of the Committee for purposes of determining the Fair Market Value of the Common Stock at the time of exercise of an Option or a Stock Appreciation Right, such Fair Market Value shall be the prevailing price of the Common Stock as of the time of exercise.   If the Common Stock is not then listed or quoted on any national securities exchange but is traded over the counter at the time a determination of its Fair Market Value is required to be made hereunder, its Fair Market Value shall be deemed to be equal to the average between the reported high and low sales prices of Common Stock on the most recent date on which Common Stock was publicly traded.  If the Common Stock is not publicly traded at the time a determination of its value is required to be made hereunder, the determination of its Fair Market Value shall be made by the Committee in such manner as it deems appropriate.

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(o) “Halliburton” means Halliburton Company, a Delaware corporation.

(p) “Holder” means an employee or Non-employee Director of the Company who has been granted an Award.

(q) “IPO” means the first registered underwritten public offering of shares of Common Stock of the Company.

(r) “Immediate Family” means, with respect to a particular Holder, the Holder’s spouse, parent, brother, sister, children and grandchildren (including adopted and step children and grandchildren).

(s) “Incentive Stock Option” means an Option within the meaning of Section 422 of the Code.

(t) “Minimum Criteria” means a Restriction Period that is not less than three (3) years from the date of grant of a Restricted Stock Award or Restricted Stock Unit Award.

(u) “Non-employee Director” means a member of the Board who is not an employee or former employee of the Company or its Subsidiaries.

(v) “Option” means an Award granted under Article VII of the Plan and includes both Incentive Stock Options to purchase Common Stock and Options which do not constitute Incentive Stock Options to purchase Common Stock.

(w) “Option Agreement” means a written agreement between the Company and a Holder with respect to an Option.

(x) “Optionee” means a Holder who has been granted an Option.

(y) “Parent Corporation” shall have the meaning set forth in Section 424(e) of the Code.

(z) “Performance Award” means an Award granted under Article XI of the Plan.

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(aa) “Person” shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) Halliburton or its subsidiaries or the Company or any of its Subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of Halliburton, or the Company or any of their affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of Halliburton or the Company in substantially the same proportions as their ownership of stock of the Halliburton or the Company.

(bb) “Plan” means the KBR, Inc. 2006 Stock and Incentive Plan.

(cc) “Restricted Stock Award” means an Award granted under Article IX of the Plan.

(dd) “Restricted Stock Award Agreement” means a written agreement between the Company and a Holder with respect to a Restricted Stock Award.

(ee) “Restricted Stock Unit” means a unit evidencing the right to receive one share of Common Stock or an equivalent value equal to the Fair Market Value of a share of Common Stock (as determined by the Committee) that is restricted or subject to forfeiture provisions.

(ff) “Restricted Stock Unit Award” means as Award granted under Article X of the Plan.

(gg) “Restricted Stock Unit Award Agreement” means a written agreement between the Company and a Holder with respect to a Restricted Stock Unit Award.

(hh) “Restriction Period” means a period of time beginning as of the date upon which a Restricted Stock Award or Restricted Stock Unit Award is made pursuant to the Plan and ending as of the date upon which the Common Stock subject to such Award is issued (if not previously issued), no longer restricted or subject to forfeiture provisions.

(ii) “Spread” means, in the case of a Stock Appreciation Right, an amount equal to the excess, if any, of the Fair Market Value of a share of Common Stock on the date such right is exercised over the exercise price of such Stock Appreciation Right.

(jj) “Stock Appreciation Right” means an Award granted under Article VIII of the Plan.

(kk) “Stock Appreciation Rights Agreement” means a written agreement between the Company and a Holder with respect to an Award of Stock Appreciation Rights.

(ll) “Stock Value Equivalent Award” means an Award granted under Article XII of the Plan.

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(mm) “Subsidiary” means a company (whether a corporation, partnership, joint venture or other form of entity) in which the Company or a corporation in which the Company owns a majority of the shares of capital stock, directly or indirectly, owns a greater than 50% equity interest, except that with respect to the issuance of Incentive Stock Options the term “Subsidiary” shall have the same meaning as the term “subsidiary corporation” as defined in Section 424(f) of the Code.

(nn) “Successor Holder” shall have the meaning given such term in Paragraph (f) of Article XV.

III.           EFFECTIVE DATE AND DURATION OF THE PLAN

The Plan shall be effective as of the closing date of the IPO.  Subject to the provisions of Article XIII, the Plan shall remain in effect until all Options and Stock Appreciation Rights granted under the Plan have been exercised or expired by reason of lapse of time, all restrictions imposed upon Restricted Stock Awards and Restricted Stock Unit Awards have lapsed and all Performance Awards and Stock Value Equivalent Awards have been satisfied; provided, however, that, notwithstanding any other provision of the Plan, Awards shall not be granted under the Plan after November 20, 2016.

IV.           ADMINISTRATION

(a) Composition of Committee.  The Plan shall be administered by the Committee.

(b) Powers.  The Committee shall have authority, in its discretion, to determine which eligible individuals shall receive an Award, the time or times when such Award shall be made, whether an Incentive Stock Option, nonqualified Option or Stock Appreciation Right shall be granted, the number of shares of Common Stock which may be issued under each Option, Stock Appreciation Right, Restricted Stock Award and Restricted Stock Unit Award, and the value of each Performance Award and Stock Value Equivalent Award.  The Committee shall have the authority, in its discretion, to establish the terms and conditions applicable to any Award, subject to any specific limitations or provisions of the Plan.  In making such determinations the Committee may take into account the nature of the services rendered by the respective individuals, their responsibility level, their present and potential contribution to the Company’s success and such other factors as the Committee in its discretion shall deem relevant.

(c) Additional Powers.  The Committee shall have such additional powers as are delegated to it by the other provisions of the Plan.  Subject to the express provisions of the Plan, the Committee is authorized to construe the Plan and the respective Award Documents executed thereunder, to prescribe such rules and regulations relating to the Plan as it may deem advisable to carry out the Plan, and to determine the terms, restrictions and provisions of each Award, including such terms, restrictions and provisions as shall be requisite in the judgment of the Committee to cause designated Options to qualify as Incentive Stock Options, and to make all other determinations necessary or advisable for administering the Plan.  The Committee may correct any defect or supply any omission or reconcile any inconsistency in any Award Document relating to an Award in the manner and to the extent the Committee shall deem expedient to carry the Award into effect.  The determinations of the Committee on the matters referred to in this Article IV shall be conclusive.

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(d) Delegation of Authority.  The Committee may delegate some or all of its power to the Chief Executive Officer of the Company as the Committee deems appropriate; provided, however, that (i) the Committee may not delegate its power with regard to the grant of an Award to any person who is a “covered employee” within the meaning of Section 162(m) of the Code or who, in the Committee’s judgment, is likely to be a covered employee at any time during the period an Award to such employee would be outstanding; (ii) the Committee may not delegate its power with regard to the selection for participation in the Plan of an officer or other person subject to Section 16 of the Exchange Act or decisions concerning the timing, pricing or amount of an Award to such an officer or other person and (iii) any delegation of the power to grant Awards shall be permitted by applicable law.

(e) Engagement of an Agent.  The Company may, in its discretion, engage an agent to (i) maintain records of Awards and Holders’ holdings under the Plan, (ii) execute sales transactions in shares of Common Stock at the direction of Holders, (iii) deliver sales proceeds as directed by Holders, and (iv) hold shares of Common Stock owned without restriction by Holders, including shares of Common Stock previously obtained through the Plan that are transferred to the agent by Holders at their discretion.  Except to the extent otherwise agreed by the Company and the agent, when an individual loses his or her status as an employee or Non-employee Director of the Company, the agent shall have no obligation to provide any further services to such person and the shares of Common Stock previously held by the agent under the Plan may be distributed to the person or his or her legal representative.

V.           GRANT OF OPTIONS, STOCK APPRECIATION RIGHTS, RESTRICTED STOCK AWARDS, RESTRICTED STOCK UNIT AWARDS, PERFORMANCE AWARDS AND STOCK VALUE EQUIVALENT AWARDS; SHARES SUBJECT TO THE PLAN

(a) Award Limits.  The Committee may from time to time grant Awards to one or more individuals determined by it to be eligible for participation in the Plan in accordance with the provisions of Article VI.  The aggregate number of shares of Common Stock that may be issued under the Plan shall not exceed 10,000,000 shares, of which no more than 3,500,000 may be issued in the form of Restricted Stock Awards or Restricted Stock Unit Awards, or pursuant to Performance Awards.  Notwithstanding anything contained herein to the contrary, the number of Option shares or Stock Appreciation Rights, singly or in combination, together with shares or share equivalents under Performance Awards granted to any Holder in any one calendar year, shall not in the aggregate exceed 500,000.  The cash value determined as of the date of grant of any Performance Award not denominated in Common Stock granted to any Holder for any one calendar year shall not exceed $10,000,000.  Any shares which remain unissued and which are not subject to outstanding Options or Awards at the termination of the Plan shall cease to be subject to the Plan, but, until termination of the Plan, the Company shall at all times reserve a sufficient number of shares to meet the requirements of the Plan.  Shares shall be deemed to have been issued under the Plan only to the extent actually issued and delivered pursuant to an Award.  To the extent that an Award lapses or the rights of its Holder terminate or the Award is paid in cash, any shares of Common Stock subject to such Award shall again be available for the grant of an Award.  The aggregate number of shares which may be issued under the Plan shall be subject to adjustment in the same manner as provided in Article XIII with respect to shares of Common Stock subject to Options then outstanding.  The 500,000-share limit on Stock Options, Stock Appreciation Rights Awards and Performance Awards denominated in shares to a Holder in any calendar year shall be subject to adjustment in the same manner as provided in Article XIII.  Separate stock certificates shall be issued by the Company for those shares acquired pursuant to the exercise of an Incentive Stock Option and for those shares acquired pursuant to the exercise of any Option which does not constitute an Incentive Stock Option.  The Committee may from time to time adopt and observe such procedures concerning the counting of shares against the Plan maximum as it may deem appropriate.

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(b) Stock Offered.  The stock to be offered pursuant to the grant of an Award may be authorized but unissued Common Stock or Common Stock previously issued and reacquired by the Company.

VI.           ELIGIBILITY

Awards made pursuant to the Plan may be granted to individuals who, at the time of grant, are employees of the Company or any Parent Corporation or Subsidiary of the Company or are Non-employee Directors.  An Award may also be granted to a person who has agreed to become an employee of the Company or any Parent Corporation or Subsidiary of the Company within the subsequent three (3) months.  An Award made pursuant to the Plan may be granted on more than one occasion to the same person, and such Award may include an Incentive Stock Option, an Option which is not an Incentive Stock Option, an Award of Stock Appreciation Rights, a Restricted Stock Award, a Restricted Stock Unit Award, a Performance Award, a Stock Value Equivalent Award or any combination thereof.  Each Award shall be evidenced in such manner and form as may be prescribed by the Committee.

VII.           STOCK OPTIONS

(a) Stock Option Agreement.  Each Option shall be evidenced by an Option Agreement between the Company and the Optionee which shall contain such terms and conditions as may be approved by the Committee.  The terms and conditions of the respective Option Agreements need not be identical.  Specifically, an Option Agreement may provide for the payment of the option price, in whole or in part, by the delivery of a number of shares of Common Stock (plus cash if necessary) having a Fair Market Value equal to such option price.

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(b) Option Period.  The term of each Option shall be as specified by the Committee at the date of grant; provided that, in no case, shall the term of an Option exceed ten (10) years.

(c) Limitations on Exercise of Option.  An Option shall be exercisable in whole or in such installments and at such times as determined by the Committee.

(d) Option Price.  The purchase price of Common Stock issued under each Option shall be determined by the Committee, but such purchase price shall not be less than the Fair Market Value of Common Stock subject to the Option on the date the Option is granted.

(e) Options and Rights in Substitution for Stock Options Granted by Other Corporations.  Options and Stock Appreciation Rights may be granted under the Plan from time to time in substitution for stock options and Stock Appreciation Rights held by employees of corporations who become, or who became prior to the effective date of the Plan, employees of the Company or of any Subsidiary as a result of a merger or consolidation of the employing corporation with the Company or such Subsidiary, or the acquisition by the Company or a Subsidiary of all or a portion of the assets of the employing corporation, or the acquisition by the Company or a Subsidiary of stock of the employing corporation with the result that such employing corporation becomes a Subsidiary.

(f) Repricing Prohibited.  Except for adjustments pursuant to Article XIII, the purchase price of Common Stock for any outstanding Option granted under the Plan may not be decreased after the date of grant nor may an outstanding Option granted under the Plan be surrendered to the Company as consideration for the grant of a new Option with a lower purchase price.  Any other action that is deemed to be a repricing under any applicable rule of the New York Stock Exchange shall be prohibited.

VIII.                      STOCK APPRECIATION RIGHTS

(a) Stock Appreciation Rights.  A Stock Appreciation Right is the right to receive an amount equal to the Spread with respect to a share of Common Stock upon the exercise of such Stock Appreciation Right.  Stock Appreciation Rights may be granted in connection with the grant of an Option, in which case the Option Agreement will provide that exercise of Stock Appreciation Rights will result in the surrender of the right to purchase the shares under the Option as to which the Stock Appreciation Rights were exercised.  Alternatively, Stock Appreciation Rights may be granted independently of Options in which case each Award of Stock Appreciation Rights shall be evidenced by a Stock Appreciation Rights Agreement between the Company and the Holder which shall contain such terms and conditions as may be approved by the Committee.  The terms and conditions of the respective Stock Appreciation Rights Agreements need not be identical.  The Spread with respect to a Stock Appreciation Right may be payable either in cash, shares of Common Stock with a Fair Market Value equal to the Spread or in a combination of cash and shares of Common Stock.  Upon the exercise of any Stock Appreciation Rights granted hereunder, the number of shares reserved for issuance under the Plan shall be reduced only to the extent that shares of Common Stock are actually issued in connection with the exercise of such Right.

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(b) Exercise Price.  The exercise price of each Stock Appreciation Right shall be determined by the Committee, but such exercise price shall not be less than the Fair Market Value of a share of Common Stock on the date the Stock Appreciation Right is granted.

(c) Exercise Period.  The term of each Stock Appreciation Right shall be as specified by the Committee at the date of grant; provided that, in no case, shall the term of a Stock Appreciation Right exceed ten (10) years.

(d) Limitations on Exercise of Stock Appreciation Right.  A Stock Appreciation Right shall be exercisable in whole or in such installments and at such times as determined by the Committee.

(e) Repricing Prohibited.  Except for adjustments pursuant to Article XIII, the exercise price of a Stock Appreciation Right may not be decreased after the date of grant nor may an outstanding Stock Appreciation Right granted under the Plan be surrendered to the Company as consideration for the grant of a new Stock Appreciation Right with a lower exercise price.  Any other action that is deemed to be a repricing under any applicable rule of the New York Stock Exchange shall be prohibited.

IX.           RESTRICTED STOCK AWARDS

(a) Restricted Period To Be Established by the Committee.  At the time a Restricted Stock Award is made, the Committee shall establish the Restriction Period applicable to such Award; provided, however, that, except as set forth below and as permitted by Paragraph (b) of this Article IX, such Restriction Period shall not be less than the Minimum Criteria.  An Award which provides for the lapse of restrictions on shares applicable to such Award in equal annual installments over a period of at least three (3) years from the date of grant shall be deemed to meet the Minimum Criteria.  The foregoing notwithstanding, with respect to Restricted Stock Awards and Restricted Stock Unit Awards of up to an aggregate of 500,000 shares (subject to adjustment as set forth in Article XIII), the Minimum Criteria shall not apply and the Committee may establish such lesser Restriction Periods applicable to such Awards as it shall determine in its discretion.  Subject to the foregoing, each Restricted Stock Award may have a different Restriction Period, in the discretion of the Committee.  The Restriction Period applicable to a particular Restricted Stock Award shall not be changed except as permitted by Paragraph (b) of this Article or by Article XIII.

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(b) Other Terms and Conditions.  Common Stock awarded pursuant to a Restricted Stock Award shall be represented by a stock certificate registered in the name of the Holder of such Restricted Stock Award or, at the option of the Company, in the name of a nominee of the Company.  The Holder shall have the right to receive dividends during the Restriction Period, to vote the Common Stock subject thereto and to enjoy all other stockholder rights, except that (i) the Holder shall not be entitled to possession of the stock certificate until the Restriction Period shall have expired, (ii) the Company shall retain custody of the stock during the Restriction Period, (iii) the Holder may not sell, transfer, pledge, exchange, hypothecate or otherwise dispose of the stock during the Restriction Period, and (iv) a breach of the terms and conditions established by the Committee pursuant to the Restricted Stock Award shall cause a forfeiture of the Restricted Stock Award.  At the time of such Award, the Committee may, in its sole discretion, prescribe additional terms, conditions or restrictions relating to Restricted Stock Awards, including, but not limited to, rules pertaining to the termination of a Holder’s service (by retirement, disability, death or otherwise) prior to expiration of the Restriction Period as shall be set forth in a Restricted Stock Award Agreement.

(c) Payment for Restricted Stock.  A Holder shall not be required to make any payment for Common Stock received pursuant to a Restricted Stock Award, except to the extent otherwise required by law and except that the Committee may, in its discretion, charge the Holder an amount in cash not in excess of the par value of the shares of Common Stock issued under the Plan to the Holder.

(d) Miscellaneous.  Nothing in this Article shall prohibit the exchange of shares issued under the Plan (whether or not then subject to a Restricted Stock Award) pursuant to a plan of reorganization for stock or securities in the Company or another corporation a party to the reorganization, but the stock or securities so received for shares then subject to the restrictions of a Restricted Stock Award shall become subject to the restrictions of such Restricted Stock Award.  Any shares of stock received as a result of a stock split or stock dividend with respect to shares then subject to a Restricted Stock Award shall also become subject to the restrictions of the Restricted Stock Award.

X.           RESTRICTED STOCK UNIT AWARDS

(a) Restricted Period To Be Established by the Committee.  At the time a Restricted Stock Unit Award is made, the Committee shall establish the Restriction Period applicable to such Award; provided, however, that except as set forth below and as permitted by Paragraph (b) of this Article X, such Restriction Period shall not be less than the Minimum Criteria.  An Award which provides for the lapse of restrictions applicable to such Award in equal annual installments over a period of at least three (3) years from the date of grant shall be deemed to meet the Minimum Criteria.  The foregoing notwithstanding, with respect to Restricted Stock Awards and Restricted Stock Unit Awards of up to an aggregate of 500,000 shares (subject to adjustment as set forth in Article XIII), the Minimum Criteria shall not apply and the Committee may establish such lesser Restriction Periods applicable to such Awards as it shall determine in its discretion.  Subject to the foregoing, each Restricted Stock Unit Award may have a different Restriction Period, in the discretion of the Committee.  The Restriction Period applicable to a particular Restricted Stock Unit Award shall not be changed except as permitted by Paragraph (b) of this Article or by Article XIII.

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(b) Other Terms and Conditions.  At the time of a Restricted Stock Unit Award, the Committee may, in its sole discretion, prescribe additional terms, conditions or restrictions relating to the Restricted Stock Unit Award, including, but not limited to, rules pertaining to the termination of a Holder’s service (by retirement, disability, death or otherwise) prior to expiration of the Restriction Period as shall be set forth in a Restricted Stock Unit Award Agreement.  Cash dividend equivalents may be paid during, or may be accumulated and paid at the end of, the Restriction Period with respect to a Restricted Stock Unit Award, as determined by the Committee.  The Committee, in its sole discretion, may provide for the deferral of a Restricted Stock Unit Award.  If a payment of cash or issuance of Common Stock is to be made on a deferred basis, the Committee shall establish whether interest or dividend equivalents shall be credited on the deferred amounts and any other terms and conditions applicable thereto.

(c) Payment for Restricted Stock Unit.  A Holder shall not be required to make any payment for Common Stock received pursuant to a Restricted Stock Unit Award, except to the extent otherwise required by law and except that the Committee may, in its discretion, charge the Holder an amount in cash not in excess of the par value of the shares of Common Stock issued under the Plan to the Holder.

(d) Restricted Stock Units in Substitution for Units or Restricted Stock Granted by Other Corporations.  Restricted Stock Unit Awards may be granted under the Plan from time to time in substitution for restricted stock units or restricted stock held by employees of corporations who become, or who became prior to the effective date of the Plan, employees of the Company or of any Subsidiary as a result of a merger or consolidation of the employing corporation with the Company or such Subsidiary, or the acquisition by the Company or a Subsidiary of all or a portion of the assets of the employing corporation, or the acquisition by the Company or a Subsidiary of stock of the employing corporation with the result that such employing corporation becomes a Subsidiary.

XI.  PERFORMANCE AWARDS

(a) Performance Period.  The Committee shall establish, with respect to and at the time of each Performance Award, a performance period over which the performance applicable to the Performance Award of the Holder shall be measured.

(b) Performance Awards.  Each Performance Award may have a maximum value established by the Committee at the time of such Award.

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(c) Performance Measures.  A Performance Award granted under the Plan that is intended to qualify as qualified performance-based compensation under Section 162(m) of the Code shall be awarded contingent upon the achievement of one or more performance measures.  The performance criteria for Performance Awards shall consist of objective tests based on the following: earnings, cash flow, cash value added performance, stockholder return and/or value, revenues, operating profits (including EBITDA), net profits, earnings per share, stock price, cost reduction goals, debt to capital ratio, financial return ratios, profit return and margins, market share, working capital and customer satisfaction.  The Committee may select one criterion or multiple criteria for measuring performance.  Performance criteria may be measured on corporate, subsidiary or business unit performance, or on a combination thereof.  Further, the performance criteria may be based on comparative performance with other companies or other external measure of the selected performance criteria.  A Performance Award that is not intended to qualify as qualified performance-based compensation under Section 162(m) of the Code shall be based on achievement of such goals and be subject to such terms, conditions and restrictions as the Committee or its delegate shall determine.

(d) Payment.  Following the end of the performance period, the Holder of a Performance Award shall be entitled to receive payment of an amount, not exceeding the maximum value of the Performance Award, if any, based on the achievement of the performance measures for such performance period, as determined by the Committee in its sole discretion.  Payment of a Performance Award (i) may be made in cash, Common Stock or a combination thereof, as determined by the Committee in its sole discretion, (ii) shall be made in a lump sum or in installments as prescribed by the Committee in its sole discretion, and (iii) to the extent applicable, shall be based on the Fair Market Value of the Common Stock on the payment date.  If a payment of cash or issuance of Common Stock is to be made on a deferred basis, the Committee shall establish whether interest or dividend equivalents shall be credited on the deferred amounts and any other terms and conditions applicable thereto.

(e) Termination of Service.  The Committee shall determine the effect of termination of service during the performance period on a Holder’s Performance Award.

XII. STOCK VALUE EQUIVALENT AWARDS

(a) Stock Value Equivalent Awards.  Stock Value Equivalent Awards are rights to receive an amount equal to the Fair Market Value of shares of Common Stock or rights to receive an amount equal to any appreciation or increase in the Fair Market Value of Common Stock over a specified period of time, which vest over a period of time as established by the Committee, without payment of any amounts by the Holder thereof (except to the extent otherwise required by law) or satisfaction of any performance criteria or objectives.  Each Stock Value Equivalent Award may have a maximum value established by the Committee at the time of such Award.

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(b) Award Period.  The Committee shall establish, with respect to and at the time of each Stock Value Equivalent Award, a period over which the Award shall vest with respect to the Holder.

(c) Payment.  Following the end of the determined period for a Stock Value Equivalent Award, the Holder of a Stock Value Equivalent Award shall be entitled to receive payment of an amount, not exceeding the maximum value of the Stock Value Equivalent Award, if any, based on the then vested value of the Award.  Payment of a Stock Value Equivalent Award (i) shall be made in cash, (ii) shall be made in a lump sum or in installments as prescribed by the Committee in its sole discretion, and (iii) shall be based on the Fair Market Value of the Common Stock on the payment date.  Cash dividend equivalents may be paid during, or may be accumulated and paid at the end of, the determined period with respect to a Stock Value Equivalent Award, as determined by the Committee.  If payment of cash is to be made on a deferred basis, the Committee shall establish whether interest shall be credited, the rate thereof and any other terms and conditions applicable thereto.

(d) Termination of Service.  The Committee shall determine the effect of termination of service during the applicable vesting period on a Holder’s Stock Value Equivalent Award.

XIII. RECAPITALIZATION OR REORGANIZATION

(a) After the closing date of the IPO, except as hereinafter otherwise provided, in the event of any recapitalization, reorganization, merger, consolidation, combination, exchange, stock dividend, stock split, extraordinary dividend or divestiture (including a spin-off) or any other change in the corporate structure or shares of Common Stock occurring after the date of the grant of an Award, the Committee shall, in its discretion, make such adjustment as to the number and price of shares of Common Stock or other consideration subject to such Awards as the Committee shall deem appropriate in order to prevent dilution or enlargement of rights of the Holders.

(b) The existence of the Plan and the Awards granted hereunder shall not affect in any way the right or power of the Board or the stockholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company’s capital structure or its business, any merger or consolidation of the Company, any issue of debt or equity securities having any priority or preference with respect to or affecting Common Stock or the rights thereof, the dissolution or liquidation of the Company or any sale, lease, exchange or other disposition of all or any part of its assets or business or any other corporate act or proceeding.

(c) The shares with respect to which Options, Stock Appreciation Rights or Restricted Stock Units may be granted are shares of Common Stock as presently constituted, but, after the closing date of the IPO, if, and whenever, prior to the expiration of an Option, Stock Appreciation Rights or Restricted Stock Unit Award, the Company shall effect a subdivision or consolidation of shares of Common Stock or the payment of a stock dividend on Common Stock without receipt of consideration by the Company, the number of shares of Common Stock with respect to which such Award relates or may thereafter be exercised (i) in the event of an increase in the number of outstanding shares shall be proportionately increased, and, as applicable, the purchase price per share shall be proportionately reduced, and (ii) in the event of a reduction in the number of outstanding shares shall be proportionately reduced, and, as applicable, the purchase price per share shall be proportionately increased.

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(d) After the closing date of the IPO, if the Company recapitalizes or otherwise changes its capital structure, thereafter upon any exercise of an Option or Stock Appreciation Rights or payment in settlement of a Restricted Stock Unit Award theretofore granted, the Holder shall be entitled to purchase or receive, as applicable, under such Award, in lieu of the number of shares of Common Stock as to which such Award relates or shall then be exercisable, the number and class of shares of stock and securities and the cash and other property to which the Holder would have been entitled pursuant to the terms of the recapitalization if, immediately prior to such recapitalization, the Holder had been the holder of record of the number of shares of Common Stock then covered by such Award (or, if a cash payment would otherwise be payable, an amount determined by reference to the value attributable thereto).

(e) In the event of a Corporate Change, unless an Award Document otherwise provides, as of the Corporate Change Effective Date (i) any outstanding Options and Stock Appreciation Rights shall become immediately vested and fully exercisable, (ii) any restrictions on Restricted Stock Awards or Restricted Stock Unit Awards shall immediately lapse, (iii) all performance measures upon which an outstanding Performance Award is contingent shall be deemed achieved and the Holder shall receive a payment equal to the maximum amount of the Award he or she would have been entitled to receive, prorated to the Corporate Change Effective Date, and (iv) any outstanding cash Awards including, but not limited to, Stock Value Equivalent Awards shall immediately vest and be paid based on the vested value of the Award.

(f) In the relevant Award Document, the Committee may provide that, no later than two (2) business days prior to any Corporate Change referenced in Clause (ii), (iii) or (iv) of the definition thereof or ten (10) business days after any Corporate Change referenced in Clause (i) of the definition thereof, the Committee may, in its sole discretion, (i) require the mandatory surrender to the Company by all or selected Optionees of some or all of the outstanding Options held by such Optionees (irrespective of whether such Options are then exercisable under the provisions of the Plan) as of a date (before or after a Corporate Change) specified by the Committee, in which event the Committee shall thereupon cancel such Options and pay to each Optionee an amount of cash per share equal to the excess, if any, of the Change of Control Value of the shares subject to such Option over the exercise price(s) under such Options for such shares, (ii) require the mandatory surrender to the Company by all or selected Holders of Stock Appreciation Rights of some or all of the outstanding Stock Appreciation Rights held by such Holders (irrespective of whether such Stock Appreciation Rights are then exercisable under the provisions of the Plan) as of a date (before or after a Corporate Change) specified by the Committee, in which event the Committee shall thereupon cancel such Stock Appreciation Rights and pay to each Holder an amount of cash equal to the Spread (if any) with respect to such Stock Appreciation Rights with the Fair Market Value of the Common Stock at such time to be deemed to be the Change of Control Value, or (iii) require the mandatory surrender to the Company by selected Holders of Restricted Stock Awards, Restricted Stock Unit Awards or Performance Awards of some or all of the outstanding Awards held by such Holder (irrespective of whether such Awards are vested under the provisions of the Plan) as of a date (before or after a Corporate Change) specified by the Committee, in which event the Committee shall thereupon cancel such Awards and pay to each Holder an amount of cash equal to the Change of Control Value of the shares, if the Award value is determined by the full value of shares of Common Stock, or an amount of cash equal to the value of the Award at such time, if the Award is not determined on that basis.

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(g) Except as hereinbefore expressly provided, the issuance by the Company of shares of stock of any class or securities convertible into shares of stock of any class, for cash, property, labor or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, and in any case whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of shares of Common Stock subject to Awards theretofore granted, the purchase price per share of Common Stock subject to Options or the calculation of the Spread with respect to Stock Appreciation Rights.

XIV. AMENDMENT OR TERMINATION OF THE PLAN

The Board in its discretion may terminate the Plan or alter or amend the Plan or any part thereof from time to time; provided that no change in the Plan may be made which would impair the rights of the Holder in any Award theretofore granted without the consent of the Holder, and provided, further, that the Board may not, without approval of the stockholders, amend the Plan to effect a “material revision” of the Plan, where a “material revision” includes, but is not limited to, a revision that: (a) materially increases the benefits accruing to a Holder under the Plan, (b) materially increases the aggregate number of securities that may be issued under the Plan, (c) materially modifies the requirements as to eligibility for participation in the Plan, (d) changes the types of awards available under the Plan, or (e) amends or deletes the provisions that prevent the Committee from amending the terms and conditions of an outstanding Option or Stock Appreciation Rights to alter the exercise price.

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XV. OTHER

(a) No Right To An Award.  Neither the adoption of the Plan nor any action of the Board or of the Committee shall be deemed to give an employee or a Non-employee Director any right to be granted an Award or any other rights hereunder except as may be evidenced by an Award Document duly executed on behalf of the Company, and then only to the extent of and on the terms and conditions expressly set forth therein.  The Plan shall be unfunded.  The Company shall not be required to establish any special or separate fund or to make any other segregation of funds or assets to assure the payment of any Award.

(b) No Employment Rights Conferred.  Nothing contained in the Plan or in any Award made hereunder shall:

(i) confer upon any employee any right to continuation of employment with the Company or any Subsidiary; or

(ii) interfere in any way with the right of the Company or any Subsidiary to terminate his or her employment at any time.

(c) No Rights to Serve as a Director Conferred.  Nothing contained in the Plan or in any Award made hereunder shall confer upon any Director any right to continue their position as a Director of the Company.

(d) Other Laws; Withholding.  The Company shall not be obligated to issue any Common Stock pursuant to any Award granted under the Plan at any time when the offering of the shares covered by such Award has not been registered under the Securities Act of 1933, such other state and federal laws, rules or regulations, and non-U.S. laws, rules, or regulations as the Company or the Committee deems applicable and, in the opinion of legal counsel for the Company, there is no exemption from the registration requirements of such laws, rules or regulations available for the issuance and sale of such shares.  No fractional shares of Common Stock shall be delivered, nor shall any cash in lieu of fractional shares be paid.  The Company shall have the right to deduct in connection with all Awards any taxes required by law to be withheld and to require any payments necessary to enable it to satisfy its withholding obligations.  The Committee may permit the Holder of an Award to elect to surrender, or authorize the Company to withhold, shares of Common Stock (valued at their Fair Market Value on the date of surrender or withholding of such shares) in satisfaction of the Company’s withholding obligation, subject to such restrictions as the Committee deems appropriate.

(e) No Restriction on Corporate Action.  Nothing contained in the Plan shall be construed to prevent the Company or any Subsidiary from taking any corporate action which is deemed by the Company or such Subsidiary to be appropriate or in its best interest, whether or not such action would have an adverse effect on the Plan or any Award made under the Plan.  No Holder, beneficiary or other person shall have any claim against the Company or any Subsidiary as a result of any such action.

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(f) Restrictions on Transfer.  Except as otherwise provided herein, an Award shall not be sold, transferred, pledged, assigned or otherwise alienated or hypothecated by a Holder other than by will or the laws of descent and distribution or pursuant to a “qualified domestic relations order” as defined by the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, and shall be exercisable during the lifetime of the Holder only by such Holder, the Holder’s guardian or legal representative, a transferee under a qualified domestic relations order or a transferee as described below.  The Committee may prescribe and include in the respective Award Documents hereunder other restrictions on transfer.  Any attempted assignment or transfer in violation of this section shall be null and void.  Upon a Holder’s death, the Holder’s personal representative or other person entitled to succeed to the rights of the Holder (the “Successor Holder”) may exercise such rights as are provided under the applicable Award Document.  A Successor Holder must furnish proof satisfactory to the Company of his or her rights to exercise the Award under the Holder’s will or under the applicable laws of descent and distribution.  Notwithstanding the foregoing, the Committee shall have the authority, in its discretion, to grant (or to sanction by way of amendment to an existing grant) Awards (other than Incentive Stock Options) which may be transferred by the Holder for no consideration to or for the benefit of the Holder’s Immediate Family, to a trust solely for the benefit of the Holder and his Immediate Family, or to a partnership or limited liability company in which the Holder and members of his Immediate Family have at least 99% of the equity, profit and loss interest, in which case the Award Document shall so state.  A transfer of an Award pursuant to this Paragraph (f) shall be subject to such rules and procedures as the Committee may establish.  In the event an Award is transferred as contemplated in this Paragraph (f), such Award may not be subsequently transferred by the transferee except by will or the laws of descent and distribution, and such Award shall continue to be governed by and subject to the terms and limitations of the Plan and the relevant written instrument for the Award and the transferee shall be entitled to the same rights as the Holder under Articles XIII and XIV hereof as if no transfer had taken place.  No transfer shall be effective unless and until written notice of such transfer is provided to the Committee, in the form and manner prescribed by the Committee.  The consequences of termination of employment shall continue to be applied with respect to the original Holder, following which the Awards shall be exercised by the transferee only to the extent and for the periods specified in the Plan and the related Award Document.  The Option Agreement, Stock Appreciation Rights Agreement, Restricted Stock Award Agreement, Restricted Stock Unit Award Agreement or other Award Document shall specify the effect of the death of the Holder on the Award.

(g) Governing Law.  This Plan shall be construed in accordance with the laws of the State of Texas, except to the extent that it implicates matters which are the subject of the General Corporation Law of the State of Delaware which matters shall be governed by the latter law.

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(h) Foreign Awardees.  The Committee may, without amending the Plan, grant Awards to eligible persons who are foreign nationals on such terms and conditions different from those specified in the Plan as may, in the judgment of the Committee, be necessary or desirable to foster and promote achievement of the purposes of the Plan and, in furtherance of such purposes, the Committee may make such modifications, amendments, procedures, subplans and the like as may be necessary or advisable to comply with the provisions of laws and regulations in other countries or jurisdictions in which the Company or its Subsidiaries operate.

(i) Section 409A.  Notwithstanding anything in this Plan to the contrary, if any Plan provision or Award under the Plan, or any deferral permitted under the Plan, would result in the imposition of an applicable tax under Section 409A of the Code and related regulations and Treasury pronouncements (“Section 409A”), that Plan provision or Award will be reformed, and that deferral provision will be structured, to avoid imposition of the applicable tax and no action taken to comply with Section 409A shall be deemed to adversely affect the Participant’s rights with respect to an Award.

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EX-10.2

Exhibit 10.2

FORM OF RESTRICTED STOCK UNIT AGREEMENT

AGREEMENT by and between KBR, Inc., a Delaware corporation (the “Company”) and ___________ (“Employee”) made effective as of the date of the delivery of shares for the closing of the initial public offering of the Company (the “Grant Date”).

1. Grant of Restricted Stock Units.

(a)           Units.  Pursuant to the KBR, Inc. 2006 Stock and Incentive Plan (the “Plan”) units evidencing the right to receive __________ shares of the Company’s common stock (“Stock”), are awarded to Employee, subject to the conditions of the Plan and this Agreement (the “Restricted Stock Units”).

(b)           Plan Incorporated.  Employee acknowledges receipt of a copy of the Plan, and agrees that this award of Restricted Stock Units shall be subject to all of the terms and conditions set forth in the Plan, including future amendments thereto, if any, pursuant to the terms thereof, which Plan is incorporated herein by reference as a part of this Agreement.  Except as defined herein, capitalized terms shall have the same meanings ascribed to them under the Plan.

2.           Terms of Restricted Stock Units.  Employee hereby accepts the Restricted Stock Units and agrees with respect thereto as follows:

(a)           Forfeiture of Restricted Stock Units.  In the event of termination of Employee’s employment with the Company or any employing Subsidiary of the Company for any reason other than (i) normal retirement on or after age sixty-five, (ii) death or (iii) disability (disability being defined as being physically or mentally incapable of performing either the Employee’s usual duties as an Employee or any other duties as an Employee that the Company reasonably makes available and such condition is likely to remain continuously and permanently, as determined by the Company or employing Subsidiary), or except as otherwise provided in the last two sentences of subparagraph (c) of this Paragraph 2, Employee shall, for no consideration, forfeit all Restricted Stock Units to the extent they are not fully vested.

(b)           Assignment of Award.  The Restricted Stock Units may not be sold, assigned, pledged, exchanged, hypothecated or otherwise transferred, encumbered or disposed of.

(c)           Vesting Schedule.  The Restricted Stock Units shall vest in accordance with the following schedule provided that Employee has been continuously employed by the Company from the date of this Agreement through the applicable vesting date.

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Vesting Date	Vested Percentage of Total Number of Restricted Stock Units
1st Anniversary of Grant Date		20	%
2nd Anniversary of Grant Date		40	%
3rd Anniversary of Grant Date		60	%
4th Anniversary of Grant Date		80	%
5th Anniversary of Grant Date		100	%

Notwithstanding the foregoing, the Restricted Stock Units shall become fully vested on the earlier of (i) the occurrence of a Corporate Change (as such term is defined in the Plan), or (ii) the date Employee’s employment with the Company is terminated by reason of death, disability (as determined above) or normal retirement on or after age sixty-five.  In the event Employee’s employment is terminated for any other reason, including retirement prior to age sixty-five with the approval of the Company or employing Subsidiary, the Committee which administers the Plan (the “Committee”) or its delegate, as appropriate, may, in the Committee’s or such delegate’s sole discretion, approve the acceleration of the vesting of any or all Restricted Stock Units still subject to restrictions, such vesting acceleration to be effective on the date of such approval or Employee’s termination date, if later.

(d)           Shareholder Rights.  Employee shall have no rights to dividends, dividend equivalents or any other rights of a shareholder with respect to shares of Stock subject to this Award unless and until such time as the Award has been settled by the transfer of shares of Stock to Employee.

(e)           Settlement and Delivery of Shares.  Payment of vested Restricted Stock Units shall be made as soon as administratively practicable after vesting, but in no event later than thirty days after the vesting date.  Settlement will be made by payment in shares of Stock.  Notwithstanding the foregoing, the Company shall not be obligated to deliver any shares of Stock if counsel to the Company determines that such sale or delivery would violate any applicable law or any rule or regulation of any governmental authority or any rule or regulation of, or agreement of the Company with, any securities exchange or association upon which the Stock is listed or quoted.  The Company shall in no event be obligated to take any affirmative action in order to cause the delivery of shares of Stock to comply with any such law, rule, regulation or agreement.

3.           Withholding of Tax. The Committee may make such provisions as it may deem appropriate for the withholding of any taxes which it determines is required in connection with this Award.  Unless the Committee provides otherwise, the Company shall reduce the number of shares of Stock that would have otherwise been delivered to Employee by a number of shares of Stock having a Fair Market Value equal to the amount required to be withheld.

4.           Employment Relationship.  For purposes of this Agreement, Employee shall be considered to be in the employment of the Company as long as Employee remains an employee of the Company, a Parent Corporation or Subsidiary of the Company, or a corporation or a Parent Corporation or subsidiary of such corporation assuming or substituting a new award for this Award.  Any question as to whether and when there has been a termination of such employment, and the cause of such termination, shall be determined by the Committee, or its delegate, as appropriate, and its determination shall be final.

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5.           Committee’s Powers.  No provision contained in this Agreement shall in any way terminate, modify or alter, or be construed or interpreted as terminating, modifying or altering any of the powers, rights or authority vested in the Committee or, to the extent delegated, in its delegate pursuant to the terms of the Plan or resolutions adopted in furtherance of the Plan, including, without limitation, the right to make certain determinations and elections with respect to the Restricted Stock Units.

6.           Binding Effect.  This Agreement shall be binding upon and inure to the benefit of any successors to the Company and all persons lawfully claiming under Employee.

7.           Compliance with Law.  Notwithstanding anything to the contrary herein, the Company shall not be obligated to issue any Stock in connection with a Restricted Stock Unit, at any time, if the offering or issuance of the Stock, or if acceptance of the Stock by an Employee, violates or is not in compliance with any laws, rules or regulations of the United States or any state or country.

8.           Governing Law.  This Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas.

9.           Section 409A.  Notwithstanding anything in this Agreement to the contrary, if any provision in this Agreement would result in the imposition of an applicable tax under Section 409A of the Code and related regulations and United States Department of the Treasury pronouncements (“Section 409A”), that provision will be reformed to avoid imposition of the applicable tax and no action taken to comply with Section 409A shall be deemed to adversely affect Employee’s rights under this Agreement.

IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed by an officer thereunto duly authorized, and Employee has executed this Agreement, all as of the date first above written.

KBR, INC.

By:

Employee

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EX-10.3

Exhibit 10.3

FORM OF NONSTATUTORY STOCK OPTION AGREEMENT

AGREEMENT by and between KBR, Inc., a Delaware corporation (the “Company”) and _____________ (“Employee”) made effective as of the date of the delivery of shares for the closing of the initial public offering of the Company (the “Grant Date”).

To carry out the purposes of the KBR, Inc. 2006 Stock and Incentive Plan (the “Plan”), by affording Employee the opportunity to purchase shares of common stock of the Company (“Stock”), and in consideration of the mutual agreements and other matters set forth herein and in the Plan, the Company and Employee hereby agree to the following terms set forth herein.  Except as defined herein, capitalized terms shall have the same meanings ascribed to them under the Plan.

1.           Grant of Option.  The Company hereby irrevocably grants to Employee the right and option (“Option”) to purchase an aggregate of _______ shares of Stock at the option price indicated below, on the terms and conditions set forth herein and in the Plan, which Plan is incorporated herein by reference as a part of this Agreement.  This Option shall not be treated as an incentive stock option within the meaning of Section 422(b) of the Code.

2.           Option Price.  The purchase price of Stock to be paid by Employee pursuant to the exercise of this Option shall equal the closing sale price per share for KBR, Inc. as reported in composite transactions for the New York Stock Exchange, Inc. on the Grant Date (the “Exercise Price”).

3.           Exercise of Option.  Subject to the earlier expiration of this Option as herein provided, this Option may be exercised by providing notice of exercise in the manner specified by the Company from time to time.  Exercise of this Option must occur during the regular trading hours in which the Stock is traded on the New York Stock Exchange or other principal exchange on which the Stock is then traded.  Except as otherwise provided below, this Option shall not be exercisable for more than a percentage of the aggregate number of shares of Stock offered by this Option determined by the number of full years from the Grant Date to the date of such exercise, in accordance with the following schedule:

Number of Full Years	Percentage of Stock That May Be Purchased
Less than 1 year		0	%
1 year		331/3	%
2 years		67	%
3 years		100	%

This Option is not transferable otherwise than by will or the laws of descent and distribution or pursuant to a “qualified domestic relations order” as defined by the Code and may be exercised during Employee’s lifetime only by Employee, Employee’s guardian or legal representative or a transferee under a qualified domestic relations order.  Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of this Option or of such rights contrary to the provisions hereof or in the Plan, or upon the levy of any attachment or similar process upon this Option or such rights, this Option and such rights shall immediately become null and void.  This Option may be exercised only while Employee remains an employee of the Company, subject to the following exceptions:

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(a)           If Employee’s employment with the Company terminates by reason of disability (disability being defined as being physically or mentally incapable of performing either the Employee’s usual duties as an Employee or any other duties as an Employee that the Company reasonably makes available and such condition is likely to remain continuously and permanently, as determined by the Company or employing Subsidiary), this Option may be exercised in full by Employee (or Employee’s estate or the person who acquires this Option by will or the laws of descent and distribution or otherwise by reason of the death of Employee) at any time during the period ending on the earlier of the Expiration Date (as defined below) or the third anniversary of the date of Employee’s termination of employment.  Notwithstanding the foregoing, if Employee’s termination of employment by reason of disability occurs during the first six months following the Grant Date, this Option may be exercised in full at any time during the period ending on the earlier of the Expiration Date or the fourth anniversary of the date of Employee’s termination of employment.

(b)           If Employee dies while in the employ of the Company, Employee’s estate, or the person who acquires this Option by will or the laws of descent and distribution or otherwise by reason of the death of Employee, may exercise this Option in full at any time during the period ending on the earlier of the Expiration Date or the third anniversary of the date of Employee’s death.  Notwithstanding the foregoing, if Employee dies during the first six months following the Grant Date, this Option may be exercised in full at any time during the period ending on the earlier of the Expiration Date or the fourth anniversary of the date of Employee’s termination of employment.

(c)           If Employee’s employment with the Company terminates by reason of normal retirement at or after age 65, this Option may be exercised by Employee at any time during the period ending on the Expiration Date, but only as to the number of shares of Stock Employee was entitled to purchase on the date of such exercise in accordance with the schedule set forth above. In connection with the termination of Employee’s employment with the Company by reason of early retirement, applicable management of the Company and/or business unit may recommend to the Committee or its delegate, as applicable, that this Option be retained. In such event, the Committee or its delegate, as the case may be, shall consider such recommendation and may, in the Committee’s or such delegate’s sole discretion, approve the retention of this Option following such early retirement, in which case the Option may be exercised by Employee at any time during the period ending on the Expiration Date, but only as to the number of shares of Stock Employee was entitled to purchase on the date of such exercise in accordance with the schedule set forth above. If, after retirement as set forth above, Employee should die, this Option may be exercised in full by Employee’s estate (or the person who acquires this Option by will or the laws of descent and distribution or otherwise by reason of the death of the Employee) during the period ending on the earlier of the Expiration Date or the third anniversary of the date of Employee’s death.

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(d)           If Employee’s employment with the Company terminates for any reason other than those set forth in subparagraphs (a) through (c) above, this Option may be exercised by Employee at any time during the period of 30 days following such termination, or by Employee’s estate (or the person who acquires this Option by will or the laws of descent and distribution or otherwise by reason of the death of the Employee) during a period of six months following Employee’s death if Employee dies during such 30-day period, but in each case only as to the number of shares of Stock Employee was entitled to purchase hereunder upon exercise of this Option as of the date Employee’s employment so terminates.

This Option shall not be exercisable in any event prior to the expiration of six months from the date of grant hereof or after the expiration of ten years from the date of grant hereof (the “Expiration Date”) notwithstanding anything hereinabove contained. The purchase price of Stock as to which this Option is exercised shall be paid in full at the time of exercise in cash (in the form and manner prescribed by the Company).  At Employee’s request or the request of another person entitled to exercise this Option, and to the extent permitted by applicable law, the Committee in its discretion may selectively approve “cashless exercise” arrangements with a brokerage firm under which such brokerage firm, on behalf of Employee or such other person exercising the Option, shall pay to the Company or its designee the Exercise Price of the Option or of the portion being exercised, and the Company or its designee, pursuant to an irrevocable notice from Employee or such other person exercising the Option, shall promptly deliver the shares being purchased to such firm.  No fraction of a share of Stock shall be issued by the Company upon exercise of an Option or accepted by the Company in payment of the purchase price thereof; rather, Employee shall provide a cash payment for such amount as is necessary to effect the issuance and acceptance of only whole shares of Stock.  Unless and until a certificate or certificates representing such Stock shall have been issued by the Company to Employee, Employee (or the person permitted to exercise this Option in the event of Employee’s death) shall not be or have any of the rights or privileges of a shareholder of the Company with respect to Stock acquirable upon an exercise of this Option.

4.           Withholding of Tax. To the extent that the exercise of this Option or the disposition of shares of Stock acquired by exercise of this Option results in compensation income to Employee for federal or state income tax purposes, Employee shall deliver to the Company at the time of such exercise or disposition such amount of money or shares of Stock as the Company may require to meet its withholding obligation under applicable tax laws or regulations, and, if Employee fails to do so, the Company is authorized to withhold from any cash or Stock remuneration then or thereafter payable to Employee any tax required to be withheld by reason of such resulting compensation income.  Upon an exercise of this Option, the Company is further authorized in its discretion to satisfy any such withholding requirement out of any cash or shares of Stock distributable to Employee upon such exercise.

5.           Status of Stock.  The Company shall not be obligated to issue any Stock pursuant to any Option at any time, when the offering of the Stock covered by such Option has not been registered under the Securities Act of 1933, as amended (the “Act”) and such other country, federal or state laws, rules or regulations as the Company deems applicable and, in the opinion of legal counsel for the Company, there is no exemption from the registration.  The Company intends to use its best efforts to ensure that no such delay will occur. In the event exemption from registration under the Act is available upon an exercise of this Option, Employee (or the person permitted to exercise this Option in the event of Employee’s death or incapacity), if requested by the Company to do so, will execute and deliver to the Company in writing an agreement containing such provisions as the Company may require to assure compliance with applicable securities laws.

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Employee agrees that the shares of Stock which Employee may acquire by exercising this Option will not be sold or otherwise disposed of in any manner which would constitute a violation of any applicable securities laws, whether federal or state. Employee also agrees (i) that the certificates representing the shares of Stock purchased under this Option may bear such legend or legends as the Company deems appropriate in order to assure compliance with applicable securities laws, (ii) that the Company may refuse to register the transfer of the shares of Stock purchased under this Option on the stock transfer records of the Company if such proposed transfer would in the opinion of counsel satisfactory to the Company constitute a violation of any applicable securities law and (iii) that the Company may give related instructions to its transfer agent, if any, to stop registration of the transfer of the Stock purchased under this Option.

6.           Employment Relationship.  For purposes of this Agreement, Employee shall be considered to be in the employment of the Company as long as Employee remains an employee of the Company, a Parent Corporation or Subsidiary of the Company, or a corporation or a Parent Corporation or subsidiary of such corporation assuming or substituting a new option for this Option.  Any question as to whether and when there has been a termination of such employment, and the cause of such termination, shall be determined by the Committee or its delegate, as appropriate, and such determination shall be final.

7.           Binding Effect. This Agreement shall be binding upon and inure to the benefit of any successors to the Company and all persons lawfully claiming under Employee.

8.           Compliance with Law.  Notwithstanding anything to the contrary herein, the Company shall not be obligated to issue any Stock pursuant to any Option, at any time, if the offering of the Stock covered by such Option, or the exercise of an Option by an Employee, violates or is not in compliance with any laws, rules or regulations of the United States or any state or country.

9.           Governing Law.  This Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas.

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IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed by its officer thereunto duly authorized, and Employee has executed this Agreement, all as of the day and year first above written.

KBR, INC.

By:

Employee

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EX-10.4

Exhibit 10.4

RESTRICTED STOCK AGREEMENT

AGREEMENT by and between KBR, Inc., a Delaware corporation (the “Company”) and _____________________ (“Employee”) made effective as of ____________________ (the “Grant Date”).

1.           Grant of Restricted Stock.

(a)           Stock.  Pursuant to the KBR, Inc. 2006 Stock and Incentive Plan (the “Plan”), Employee is hereby awarded _____________ shares of the Company’s common stock (“Stock”), subject to the conditions of the Plan and this Agreement (the “Restricted Stock”).

(b)           Plan Incorporated.  Employee acknowledges receipt of a copy of the Plan, and agrees that this award of Restricted Stock shall be subject to all of the terms and conditions set forth in the Plan, including future amendments thereto, if any, pursuant to the terms thereof, which Plan is incorporated herein by reference as a part of this Agreement.  Except as defined herein, capitalized terms shall have the same meanings ascribed to them under the Plan.

2.           Terms of Restricted Stock.  Employee hereby accepts the Restricted Stock and agrees with respect thereto as follows:

(a)           Forfeiture of Restricted Stock.  In the event of termination of Employee’s employment with the Company or any employing Subsidiary of the Company for any reason other than (i) normal retirement on or after age sixty-five, (ii) death or (iii) disability (disability being defined as being physically or mentally incapable of performing either the Employee’s usual duties as an Employee or any other duties as an Employee that the Company reasonably makes available and such condition is likely to remain continuously and permanently, as determined by the Company or employing subsidiary), or except as otherwise provided in the last two sentences of subparagraph (c) of this Paragraph 2, Employee shall, for no consideration, forfeit all Restricted Stock to the extent then subject to the Forfeiture Restrictions (as defined below).  The obligation to forfeit and surrender Restricted Stock to the Company upon termination of employment and the prohibition against transfer in Paragraph 2(b) below are herein referred to as “Forfeiture Restrictions.”

(b)           Assignment of Award.  The Restricted Stock may not be sold, assigned, pledged, exchanged, hypothecated or otherwise transferred, encumbered or disposed of to the extent then subject to the Forfeiture Restrictions.

(c)           Lapse of Forfeiture Restrictions.  The Forfeiture Restrictions shall lapse as to the Restricted Stock in accordance with the following schedule provided that Employee has been continuously employed by the Company or any of its Subsidiaries from the date of this Agreement through the applicable lapse date.

Lapse Date	Percentage of Total Number of Restricted Stock
1st Anniversary of Grant Date		20	%
2nd Anniversary of Grant Date		40	%
3rd Anniversary of Grant Date		60	%
4th Anniversary of Grant Date		80	%
5th Anniversary of Grant Date		100	%

Notwithstanding the foregoing, the Forfeiture Restrictions shall lapse as to all of the Restricted Stock on the earlier of (i) the occurrence of a Corporate Change (as such term is defined in the Plan) or (ii) the date Employee’s employment with the Company is terminated by reason of death, disability (as determined above) or normal retirement on or after age sixty-five.  In the event Employee’s employment is terminated for any other reason, including retirement prior to age sixty-five with the approval of the Company or employing Subsidiary, the Committee which administers the Plan (the “Committee”) or its delegate, as appropriate, may, in the Committee’s or such delegate’s sole discretion, approve the lapse of Forfeiture Restrictions as to any or all Restricted Stock still subject to such restrictions, such lapse to be effective on the date of such approval or Employee’s termination date, if later.

(d)           Certificates.  A certificate evidencing the Restricted Stock shall be issued by the Company in Employee’s name, or at the option of the Company, in the name of a nominee of the Company, pursuant to which Employee shall have voting rights and shall be entitled to receive currently all dividends until the Restricted Stock are forfeited pursuant to the provisions of this Agreement.  The certificate shall bear a legend evidencing the nature of the Restricted Stock, and the Company may cause the certificate to be delivered upon issuance to the Secretary of the Company or to such other depository as may be designated by the Company as a depository for safekeeping until the forfeiture occurs or the Forfeiture Restrictions lapse pursuant to the terms of the Plan and this Agreement.  Upon request of the Committee or its delegate, Employee shall deliver to the Company a stock power, endorsed in blank, relating to the Restricted Stock then subject to the Forfeiture Restrictions.  Upon the lapse of the Forfeiture Restrictions without forfeiture, the Company shall cause a new certificate or certificates to be issued without legend in the name of Employee for the shares upon which Forfeiture Restrictions lapsed.  Notwithstanding any other provisions of this Agreement, the issuance or delivery of any shares of Stock (whether subject to restrictions or unrestricted) may be postponed for such period as may be required to comply with applicable requirements of any national securities exchange or any requirements under any law or regulation applicable to the issuance or delivery of such shares.  The Company shall not be obligated to issue or deliver any shares of Stock if the issuance or delivery thereof shall constitute a violation of any provision of any law or of any regulation of any governmental authority or any national securities exchange.

3.           Withholding of Tax.  The Committee may make such provisions as it may deem appropriate for the withholding of any taxes that it determines is required in connection with this Award and unless otherwise approved by the Committee, the Company shall reduce the number of shares of Stock that would have otherwise been delivered to Employee by a number of shares of Stock having a Fair Market Value equal to the amount required to be withheld.

4.           Status of Stock.  Employee agrees that the Restricted Stock will not be sold or otherwise disposed of in any manner that would constitute a violation of any applicable federal or state securities laws.  Employee also agrees (i) that the certificates representing the Restricted Stock may bear such legend or legends as the Company deems appropriate in order to assure compliance with applicable securities laws, (ii) that the Company may refuse to register the transfer of the Restricted Stock on the stock transfer records of the Company if such proposed transfer would be in the opinion of counsel satisfactory to the Company constitute a violation of any applicable securities law and (iii) that the Company may give related instructions to its transfer agent, if any, to stop registration of the transfer of the Restricted Stock.

5.           Employment Relationship.  For purposes of this Agreement, Employee shall be considered to be in the employment of the Company as long as Employee remains an employee of (i) the Company, a Parent Corporation, or Subsidiary of the Company or (ii) a corporation or a Parent Corporation or subsidiary of such corporation assuming or substituting a new award for this Award.  Any question as to whether and when there has been a termination of such employment, and the cause of such termination, shall be determined by the Committee, or its delegate, as appropriate, and its determination shall be final.

6.           Committee’s Powers.  No provision contained in this Agreement shall in any way terminate, modify or alter, or be construed or interpreted as terminating, modifying or altering any of the powers, rights or authority vested in the Committee or, to the extent delegated, in its delegate pursuant to the terms of the Plan or resolutions adopted in furtherance of the Plan, including, without limitation, the right to make certain determinations and elections with respect to the Restricted Stock.

7.           No Section 83(b) Election.  Employee shall not make an election, under section 83(b) of the Code, to include an amount in income in respect of the award of Restricted Shares under this Agreement.

8.           Binding Effect.  This Agreement shall be binding upon and inure to the benefit of any successors to the Company and all persons lawfully claiming under Employee.

9.           Governing Law.  This Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas.

10.        Section 409A.  Notwithstanding anything in this Agreement to the contrary, if any provision in this Agreement would result in the imposition of an applicable tax under Section 409A of the Code and related regulations and United States Department of the Treasury pronouncements (“Section 409A”), that provision will be reformed to avoid imposition of the applicable tax and no action taken to comply with Section 409A shall be deemed to adversely affect the Employee’s rights under this Agreement.

IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed by an officer thereunto duly authorized, and Employee has executed this Agreement, all as of the date first above written.

KBR, INC.

By:

Employee

EX-10.5

Exhibit 10.5

KBR, INC.

TRANSITIONAL STOCK ADJUSTMENT PLAN

NONSTATUTORY STOCK OPTION AWARD

for

________________________

(“Employee”)

As a result of the consummation of the Exchange Offer by Halliburton Company (“Halliburton”) to dispose of its remaining interest in KBR, Inc., a Delaware corporation (the “Company”), Halliburton and the Company have become independent separate companies.  Halliburton and the Company have adopted the KBR, INC. TRANSITIONAL STOCK ADJUSTMENT PLAN (the “Plan”) to convert options to purchase shares of Halliburton common stock (the “Halliburton Options”) issued under the HALLIBURTON COMPANY 1993 STOCK AND INCENTIVE PLAN ("Halliburton Plan") into options to purchase shares of the Company’s common stock, par value $0.001 per share (“KBR Common Stock”), in accordance with the applicable adjustment provisions of the Halliburton Plan as a result of the separation of Halliburton and the Company.

In accordance with the terms of the Plan, Employee is entitled to receive option(s) to purchase a number of shares of KBR Common Stock, determined by a formula set forth in the Plan, in lieu of outstanding Halliburton Option(s).  Employee is entitled to option(s) to purchase a number of shares of KBR Common Stock under the Plan, as set forth on Exhibit A hereto (the “KBR Options”), pursuant to the terms described herein.

Capitalized terms used and not otherwise defined herein will have the meaning given thereto in the Plan.

1.General Terms of KBR Options.  Except to the extent otherwise in conflict as provided below, the KBR Options shall be subject to all of the terms and conditions contained in the corresponding original grant(s) of Halliburton Options, as evidenced by the agreement(s) granting such Halliburton Options, pursuant to the Halliburton Plan.

(a)           Converted Shares.  In accordance with the Plan, Employee’s Halliburton Options set forth on Exhibit A are converted into KBR Options identified on Exhibit A, and at the option price(s) so identified.

(b)           Plan Incorporated.  The KBR Options shall be subject to all of the terms and conditions set forth in the Plan, including future amendments thereto, if any, pursuant to the terms thereof, which Plan is incorporated herein by reference.

2.           KBR Options.  The KBR Options are subject to the following terms:

(a)           Change in Control.  For all purposes concerning the KBR Options hereunder, the definition for Change in Control shall be the definition in the Plan.

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(b)           KBR Option Price.  The purchase price of KBR Common Stock to be paid by Employee pursuant to the exercise of the KBR Options shall be the applicable share price as indicated on Exhibit A.

(c)           Non-transferability.  The KBR Options are not transferable otherwise than by will or the laws of descent and distribution or pursuant to a “qualified domestic relations order” as defined by the Code and may be exercised during Employee’s lifetime only by Employee, Employee’s guardian or legal representative or a transferee under a qualified domestic relations order.  Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of the KBR Option or of such rights contrary to the provisions hereof or in the Plan, or upon the levy of any attachment or similar process upon the KBR Option or such rights, the KBR Option and such rights shall immediately become null and void.  The KBR Option may be exercised only while Employee remains an employee of the Company, subject to any exceptions, as provided in the original agreement granting such Halliburton Option.

3.           Exercise of KBR Options.  Subject to the earlier expiration of the applicable KBR Option as herein provided, the KBR Options may be exercised, by providing notice of exercise in the manner specified by the Company from time to time, but, except as otherwise provided herein, the KBR Option shall not be exercisable for more than a percentage of the aggregate number of shares of KBR Common Stock offered by the KBR Option determined by the number of full years from the date of grant of the applicable Halliburton Option to the date of such exercise, in accordance with the schedule as contained in the agreement granting such Halliburton Option.

To clarify, each KBR Option will continue to vest in accordance with the terms and conditions of the agreement granting such corresponding Halliburton Option; provided that Employee has been continuously employed by Halliburton or the Company from the original date the applicable Halliburton Option was granted through the lapse date.  Prior to the Effective Date, a Participant’s employment or service with the Company, Halliburton or any of their respective Subsidiaries shall be deemed to be employment or service with the Company for all purposes hereunder and under the agreement granting the Halliburton Option(s) and from and after the Effective Date, a Participant’s employment or service with the Company or any of its Subsidiaries shall be deemed to be employment or service with the Company for all purposes under such award.  The Effective Date, as defined in the Plan, is indicated on Exhibit A.

4.           Withholding of Tax.  To the extent that the exercise of a KBR Option or the disposition of shares of KBR Common Stock acquired by exercise of a KBR Option results in compensation income to Employee for federal or state income tax purposes, Employee shall deliver to the Company at the time of such exercise or disposition such amount of money or shares of KBR Common Stock as the Company may require to meet its withholding obligation under applicable tax laws or regulations, and, if Employee fails to do so, the Company is authorized to withhold from any cash or KBR Common Stock remuneration then or thereafter payable to Employee any tax required to be withheld by reason of such resulting compensation income.  Upon an exercise of a KBR Option, the Company is further authorized in its discretion to satisfy any such withholding requirement out of any cash or shares of KBR Common Stock distributable to Employee upon such exercise.

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5.           Status of KBR Options.  The Company shall not be obligated to issue any KBR Common Stock pursuant to any KBR Option at any time, when the offering of the KBR Common Stock covered by such KBR Option has not been registered under the Securities Act of 1933, as amended (the “Act”) and such other country, federal or state laws, rules or regulations as the Company deems applicable and, in the opinion of legal counsel for the Company, there is no exemption from the registration.  The Company intends to use its best efforts to ensure that no such delay will occur.  In the event exemption from registration under the Act is available upon an exercise of a KBR Option, Employee (or the person permitted to exercise such KBR Option in the event of Employee’s death or incapacity), if requested by the Company to do so, will execute and deliver to the Company in writing an agreement containing such provisions as the Company may require to assure compliance with applicable securities laws.

Employee agrees that the shares of KBR Common Stock which Employee may acquire by exercising a KBR Option will not be sold or otherwise disposed of in any manner which would constitute a violation of any applicable securities laws, whether federal or state.  Employee also agrees (i) that the certificates representing the shares of KBR Common Stock purchased under a KBR Option may bear such legend or legends as the Company deems appropriate in order to assure compliance with applicable securities laws, (ii) that the Company may refuse to register the transfer of the shares of KBR Common Stock purchased under a KBR Option on the stock transfer records of the Company if such proposed transfer would in the opinion of counsel satisfactory to the Company constitute a violation of any applicable securities law and (iii) that the Company may give related instructions to its transfer agent, if any, to stop registration of the transfer of the KBR Common Stock purchased under a KBR Option.

6.           Employment Relationship.  For purposes of the KBR Options, Employee shall be considered to be in the employment of the Company as long as Employee remains an employee of either the Company, any successor corporation or a parent or subsidiary corporation (as defined in section 424 of the Code) of the Company or any successor corporation.  Any question as to whether and when there has been a termination of such employment, and the cause of such termination, shall be determined by the Compensation Committee of the Company (“Compensation Committee”) or the Chief Executive Officer of the Company (the “CEO”), as appropriate, and such determination shall be final.

7.           Governance by the Compensation Committee.  The KBR Options converted hereunder will hereby be governed by the Compensation Committee or the CEO, as appropriate, and no longer governed by Halliburton.  No provision contained herein shall in any way terminate, modify or alter, or be construed or interpreted as terminating, modifying or altering any of the powers, rights or authority vested in the Compensation Committee or the CEO pursuant to the terms of the Plan or resolutions adopted in furtherance of the Plan, including, without limitation, the right to make certain determinations and elections with respect to the KBR Options.

8.           Binding Effect.  This award shall be binding upon and inure to the benefit of any successors to the Company and all persons lawfully claiming under Employee.

9.           Governing Law.  This award shall be governed by, and construed in accordance with, the laws of the State of Texas.

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IN WITNESS WHEREOF, the Company has caused this document to be executed by its officer thereunto duly authorized evidencing the terms authorized by the Transitional Stock Adjustment Plan adopted February 26, 2007.

	KBR, INC.
By:

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EX-10.6

Exhibit 10.6

KBR, INC.

TRANSITIONAL STOCK ADJUSTMENT PLAN

RESTRICTED STOCK AWARD

for

________________________

(“Employee”)

As a result of the consummation of the Exchange Offer by Halliburton Company (“Halliburton”) to dispose of its remaining interest in KBR, Inc., a Delaware corporation (the “Company”), Halliburton and the Company have become independent separate companies.  Halliburton and the Company have adopted the KBR, INC. TRANSITIONAL STOCK ADJUSTMENT PLAN (the “Plan”) to convert restricted shares of Halliburton common stock (the “Halliburton Restricted Shares”) issued under the HALLIBURTON COMPANY 1993 STOCK AND INCENTIVE PLAN ("Halliburton Plan") into restricted shares of the Company’s common stock in accordance with the applicable adjustment provisions of the Halliburton Plan as a result of the separation of Halliburton and the Company.

In accordance with the terms of the Plan, Employee is entitled to receive a number of restricted shares of the Company’s common stock, par value $0.001 per share (“KBR Common Stock”), determined by a formula set forth in the Plan, in lieu of outstanding Halliburton Restricted Shares.  Employee is entitled to a number of restricted shares of KBR Common Stock under the Plan, as set forth on Exhibit A hereto (the “KBR Restricted Shares”), pursuant to the terms described herein.

Capitalized terms used and not otherwise defined herein will have the meaning given thereto in the Plan.

1.General Terms of KBR Restricted Shares.  Except to the extent otherwise in conflict as provided below, the KBR Restricted Shares shall be subject to all of the terms and conditions contained in the corresponding original grant(s) of Halliburton Restricted Shares, as evidenced by the agreement(s) granting such Halliburton Restricted Shares, pursuant to the Halliburton Plan.

(a)           Converted Shares.  In accordance with the Plan, Employee’s Halliburton Restricted Shares set forth on Exhibit A are converted into the number of KBR Restricted Shares identified on Exhibit A.  The KBR Restricted Shares shall be issued as hereinafter provided in Employee’s name subject to certain restrictions thereon.

(b)           Plan Incorporated.  This award of KBR Restricted Shares shall be subject to all of the terms and conditions set forth in the Plan, including future amendments thereto, if any, pursuant to the terms thereof, which Plan is incorporated herein by reference.

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2.           KBR Restricted Shares.  The KBR Restricted Shares are subject to the following terms:

(a)           Forfeiture Restrictions.  The KBR Restricted Shares may not be sold, assigned, pledged, exchanged, hypothecated or otherwise transferred, encumbered or disposed of to the extent then subject to the Forfeiture Restrictions (as hereinafter defined), and in the event of termination of Employee’s employment with the Company or employing Subsidiary for any reason that does not result in the lapse of those restrictions, Employee shall, for no consideration, forfeit to the Company all KBR Restricted Shares to the extent then subject to the Forfeiture Restrictions.  The prohibition against transfer and the obligation to forfeit and surrender KBR Restricted Shares to the Company upon termination of employment are herein referred to as “Forfeiture Restrictions.”  The Forfeiture Restrictions shall be binding upon and enforceable against any transferee of KBR Restricted Shares.

(b)           Lapse of Forfeiture Restrictions.  The Forfeiture Restrictions shall lapse as to the KBR Restricted Shares in accordance with the same schedule and conditions as specified in Employee’s agreement(s) granting Halliburton Restricted Shares, provided that Employee has been continuously employed by Halliburton or the Company from the original date the Halliburton Restricted Shares were granted through the lapse date.  Prior to the Effective Date, a Participant’s employment or service with the Company, Halliburton or any of their respective Subsidiaries shall be deemed to be employment or service with the Company for all purposes hereunder and under the agreement granting the Halliburton Restricted Shares and from and after the Effective Date, a Participant’s employment or service with the Company or any of its Subsidiaries shall be deemed to be employment or service with the Company for all purposes under such award.  The Effective Date, as defined in the Plan, is indicated on Exhibit A.

(c)           Change in Control.  For all purposes concerning the award(s) hereunder, the definition for Change in Control shall be the definition in the Plan.

(d)           Certificates.  A certificate evidencing the KBR Restricted Shares shall be issued by the Company in Employee’s name, or at the option of the Company, in the name of a nominee of the Company, pursuant to which Employee shall have voting rights and shall be entitled to receive all dividends unless and until the KBR Restricted Shares are forfeited pursuant to the provisions herein, or of the agreement granting the Halliburton Restricted Shares.  The certificate shall bear a legend evidencing the nature of the KBR Restricted Shares, and the Company may cause the certificate to be delivered upon issuance to the Secretary of the Company or to such other depository as may be designated by the Company as a depository for safekeeping until the forfeiture occurs or the Forfeiture Restrictions lapse pursuant to the terms of the Plan and this award.  Upon request of the Compensation Committee of the Company (the “Compensation Committee”) or the Chief Executive Officer of the Company (the “CEO”), as appropriate, Employee shall deliver to the Company a stock power, endorsed in blank, relating to the KBR Restricted Shares then subject to the Forfeiture Restrictions.  Upon the lapse of the Forfeiture Restrictions without forfeiture, the Company shall cause a new certificate or certificates to be issued without legend in the name of Employee for the shares upon which Forfeiture Restrictions lapsed.  Notwithstanding any other provisions herein, the issuance or delivery of any shares of stock (whether subject to restrictions or unrestricted) may be postponed for such period as may be required to comply with applicable requirements of any national securities exchange or any requirements under any law or regulation applicable to the issuance or delivery of such shares.  The Company shall not be obligated to issue or deliver any shares of stock if the issuance or delivery thereof shall constitute a violation of any provision of any law or of any regulation of any governmental authority or any national securities exchange.

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3.           Withholding of Tax.  To the extent that the receipt of the KBR Restricted Shares or the lapse of any Forfeiture Restrictions results in income to Employee for federal or state income tax purposes, Employee shall deliver to the Company at the time of such receipt or lapse, as the case may be, such amount of money or shares of unrestricted stock as the Company may require to meet its withholding obligation under applicable tax laws or regulations, and, if Employee fails to do so, the Company is authorized to withhold from any cash or stock remuneration then or thereafter payable to Employee any tax required to be withheld by reason of such resulting compensation income.

4.           Status of Shares.  Employee agrees that the KBR Restricted Shares will not be sold or otherwise disposed of in any manner which would constitute a violation of any applicable federal or state securities laws.  Employee also agrees (i) that the certificates representing the KBR Restricted Shares may bear such legend or legends as the Company deems appropriate in order to assure compliance with applicable securities laws, (ii) that the Company may refuse to register the transfer of the KBR Restricted Shares on the stock transfer records of the Company if such proposed transfer would in the opinion of counsel satisfactory to the Company constitute a violation of any applicable securities law and (iii) that the Company may give related instructions to its transfer agent, if any, to stop registration of the transfer of the KBR Restricted Shares.

5.           Employment Relationship.  For all purposes herein, Employee shall be considered to be in the employment of the Company as long as Employee remains an employee of either the Company, any successor corporation or a parent or subsidiary corporation (as defined in section 424 of the Code) of the Company or any successor corporation.  Any question as to whether and when there has been a termination of such employment, and the cause of such termination, shall be determined by the Compensation Committee or the CEO, as appropriate, and such determination shall be final.

6.           Governance by the Compensation Committee.  The KBR Restricted Shares converted hereunder will hereby be governed by the Compensation Committee or the CEO, as appropriate, and no longer governed by Halliburton.  No provision contained herein shall in any way terminate, modify or alter, or be construed or interpreted as terminating, modifying or altering any of the powers, rights or authority vested in the Compensation Committee or the CEO pursuant to the terms of the Plan or resolutions adopted in furtherance of the Plan, including, without limitation, the right to make certain determinations and elections with respect to the KBR Restricted Shares.

7.           No Section 83(b) Election.  Employee shall not make an election, under section 83(b) of the Code, to include an amount in income in respect of the award of KBR Restricted Shares hereunder.

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8.           Binding Effect.  This award shall be binding upon and inure to the benefit of any successors to the Company and all persons lawfully claiming under Employee.

9.           Governing Law.  This award shall be governed by, and construed in accordance with, the laws of the State of Texas.

IN WITNESS WHEREOF, the Company has caused this document to be executed by its officer thereunto duly authorized evidencing the terms authorized by the Transitional Stock Adjustment Plan adopted February 26, 2007.

	KBR, INC.
By

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EX-10.7

Exhibit 10.7

DATED May 10 2007

(1) THOSE COMPANIES PARTICULARS OF  WHICH ARE SET OUT IN SCHEDULE 1

(2) BABCOCK INTERNATIONAL GROUP PLC

(3) KBR, INC.

AGREEMENT

relating to the sale and purchase of the entire issued share capital of Devonport Management Limited

Kirkpatrick & Lockhart Preston Gates Ellis LLP

110 Cannon Street London EC4N 6AR

Tel: +44 (0)20 7648 9000

Fax: +44 (0)20 7648 9001

Ref: HDK/JRD/6011542.0001

CONTENTS

Clause		Page
1.	Interpretation	1
2.	Sale of Shares	10
3.	Conditions	11
4.	Conduct of the Group before Completion	12
5.	Consideration	14
6.	Completion	16
7.	Post-Completion Undertakings	17
8.	Sellers' Warranties	18
9.	Scope of Sellers' Warranties	19
10.	Purchaser Remedies	21
11.	Purchaser's Warranties	23
12.	Restrictions on Sellers' Business Activities	23
13.	Information, Records and Assistance	24
14.	Guarantee	24
15.	Announcements	26
16.	Costs	26
17.	Interest on Late Payment	26
18.	Further Assurance	27
19.	Entire Agreement	27
20.	Variation	27

21.	Waivers and Remedies	28
22.	Counterparts	28
23.	Invalidity	28
24.	Effect of Completion	29
25.	Assignment	29
26.	Notices	29
27.	Contracts (Rights of Third Parties) Act 1999	30
28.	Confidential Information	31
29.	Governing Law and Jurisdiction	31
SCHEDULE 1  The Sellers		33
SCHEDULE 2  The Company		34
SCHEDULE 3  The Subsidiaries		35
SCHEDULE 4  The Properties		49
SCHEDULE 5  Conditions To Completion		56
SCHEDULE 6  Conduct of the Group before Completion		57
SCHEDULE 7  Completion		60
SCHEDULE 8  Sellers' Warranties		64
SCHEDULE 9  Limitations on Sellers' Liability		88
SCHEDULE 10  Purchaser's Warranties		96
SCHEDULE 11  Registered Intellectual Property Rights		97
SCHEDULE 12  IT Systems and IT Contracts		100

THIS AGREEMENT is made on  May 10 2007

BETWEEN:

(1) THOSE COMPANIES PARTICULARS OF WHICH ARE SET OUT IN SCHEDULE 1 (the "Sellers");

(2) BABCOCK INTERNATIONAL GROUP PLC, a company incorporated in England and Wales with company number 02342138 and whose registered office is at 2 Cavendish Square, London W1G 0PX (the "Purchaser"); and

(3) KBR, INC., a company incorporated in the state of Delaware, USA and whose principal place of business is at 601 Jefferson Street, Houston, Texas 77002, USA (the "Guarantor").

WHEREAS:

(A) The Company is a private company limited by shares incorporated in England and Wales with company number 02959785.

(B) The Sellers have agreed to sell and the Purchaser has agreed to purchase all of the issued shares in the capital of the Company on the terms and subject to the conditions set out in this Agreement.

(C) The Guarantor has agreed to guarantee the performance of the obligations of KBR under this Agreement.

NOW IT IS AGREED as follows:

1. Interpretation

1.1 In this Agreement, unless the context requires otherwise:

"Accounts" means the audited consolidated financial statements of the Company for the accounting period ended on the Accounts Date comprising a balance sheet of the Company, a consolidated balance sheet, profit and loss account and cash flow statement of the Group and notes thereon together with the directors' report and the auditors' report;

"Accounts Date" means 31 December 2006;

"Alliance Agreement" means an agreement dated 8 April 1997 between (1) DRDL; (2) Kellogg Brown & Root Limited (formerly known as Brown and Root Limited); (3) Rolls Royce Power Engineering Plc; (4) Strachan & Henshaw Limited; (5) Jacobs U.K. Limited (formerly known as Babtie Group Limited); and (6) BNFL Engineering Limited, and relating to the D154 Agreement;

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"Alliance Deed of Adherence" means the deed of adherence in the agreed form in respect of the Alliance Agreement together with such amendments thereto as are required by any third party thereto, and are consented to by the Purchaser and the Sellers, such consent not to be unreasonably withheld or delayed;

"ASL" means Appledore Shipbuilders (2004) Limited;

"Authority" means The Secretary of State for Defence;

"Authority Contracts" means all and any agreements entered into between any member of the Group and the Authority;

"Business Day" means a day (other than a Saturday or Sunday) on which banks generally are open for business in London for the transaction of normal banking business;

"Company" means Devonport Management Limited, brief details of which are set out in Schedule 2;

"Completion" means completion of the sale and purchase of the Shares in accordance with Clause 6;

"Completion Date" has the meaning given to that expression in Clause 6.1;

"Conditions" means the conditions referred to in Clause 3 and set out in Schedule 5;

"Confidential Information" means confidential information, know-how and records, in each case, to the extent relating to any Group Company's business or affairs, including (i) drawings, designs, formulae, specifications, processes, data relating to inventions, testing procedures, test results and instruction and trading manuals; (ii) customer lists, sales targets and statistics, market research surveys and reports and marketing and promotional information; (iii) business plans and forecasts; and (iv) technical expertise;

"Connected Persons" means, in relation to any party, that party's group undertakings, other than in the case of the Sellers, any Group Company;

"Consideration" means the consideration for the sale and purchase of the Shares as stated in Clause 5.1;

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"D154 Agreement" means an agreement for the provision of refitting and refuelling of submarines at Devonport Royal Dockyard dated 13 March 1997 and entered into between the Authority and DRDL (as varied from time to time);

"Data Room" means the data room operated by the Sellers' Solicitors and made available to the Purchaser for the purpose of reviewing information relating inter alia to the Company, the Subsidiaries and the Properties;

"Deeds of Adherence" means the deeds of adherence in the agreed form together with such amendments thereto as are required by the Authority and are consented to by the Purchaser and the Sellers, such consent not to be unreasonably withheld or delayed, in respect of various guarantees and parent company guarantees given by the Sellers and the Sellers' parent companies pursuant to inter alia the Principal Agreement and the D154 Agreement (but excluding, for the avoidance of doubt, the Alliance Deed of Adherence);

"Disclosure Letter" means the letter of the same date as this Agreement from the Sellers to the Purchaser qualifying the Sellers' Warranties;

"DRDL" means Devonport Royal Dockyard Limited, brief details of which are set out in Schedule 3;

"Enabling Agreement" means an agreement dated 13 March 1997 between (1) the Authority; and (2) DRDL, entered into pursuant to the Principal Agreement relating to the terms on which DRDL can carry out certain work (placed other than by competitive tender) on behalf of the Authority;

"Encumbrance" means a mortgage, charge, pledge, lien or other form of security or any proprietary interest or right of any third party including any option, right of pre-emption or right of first refusal;

"Environment" means all or any living organism (including man), ecosystems and the media of the air (including air within natural or man-made structures above or below ground), water and land;

"Environmental Laws" means all Laws concerning the protection or prevention of harm to the Environment or worker health and safety which are in force and binding on any Group Company at or prior to the date of this Agreement but excluding for the avoidance of doubt Nuclear Laws, laws relating to fire precautions and laws relating to town and country planning;

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"Environmental Licences" means any permit, licence, consent, exemption, registration or authorisation required under Environmental Laws or Nuclear Laws in relation to the operation of the business of any Group Company;

"FNC Group" means Frazer-Nash Consultancy Group Limited and its subsidiaries;

"full title guarantee" has the meaning given to that expression by the Law of Property (Miscellaneous Provisions) Act 1994;

"Group" means the Company and the Subsidiaries and "Group Company" means a member of the Group;

"group undertaking" shall be construed in accordance with section 259 of the Companies Act 1985;

"Hazardous Substances" means any natural or artificial substance (whether solid, liquid, gas, noise, ion, vapour, electromagnetic or radiation, and whether alone or in combination with any other substance) which is capable of causing harm to or have a deleterious effect on the Environment;

"holding company" means a holding company within the meaning of section 736 of the Companies Act 1985;

"Information Memorandum" means the information memorandum relating to the Group dated  March 2007;

"Intellectual Property Rights" means patents, trade marks, service marks, logos, get-up, rights in design, trade or business names, copyright (including rights in computer software) and moral rights, topography rights and database rights (whether or not any of these is or are registered and including applications for registration);

"Interest Payment" means the sum, if any, calculated in accordance with Clause 5.2;

"IT Contracts" means all agreements under which any third party provides to a Group Company any material element of, or material services relating to, the IT Systems (including leasing, licensing, maintenance and service agreements) as listed in Part 2 of Schedule 12;

"IT Systems" means the material computer and communications systems (including all material computer hardware) owned or used by a Group Company (but excluding the IT Contracts) as listed in Part 1 of Schedule 12;

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"KBR" means Kellogg Brown & Root Holdings (U.K.) Limited (registered number 01870934), being one of the Sellers;

"Laws" means all laws, statutes, orders, regulations or subordinate legislation or common law, all orders, ordinances, decrees or regulatory codes of practice, circulars, statutory guidance, written agreements with regulators and equivalent control;

"Leakage" means any of the following which occur on or after the Accounts Date but on or before the Completion Date:

(a) any dividend, or distribution declared, paid or made by any Group Company (other than to another Group Company) on any of the issued share capital of the Company;

(b) any payments made (including management fees), or agreed to be made, by any Group Company, to (or assets transferred or surrendered to or liabilities assumed, indemnified, or incurred for the benefit of) any of the Sellers or any of their Connected Persons (including, without limitation, any payment or accrual of interest) by any Group Company;

(c) any payments made or agreed to be made by any Group Company other than to another Group Company in respect of any share capital or other securities of any Group Company being issued, redeemed, purchased or repaid, or any other return of capital;

(d) any payments made or agreed to be made by any Group Company (other than to another Group Company) to the Sellers or any of their Connected Persons in respect of any loan capital of any Group Company;

(e) the waiver by any Group Company of any amount owed to that Group Company by any of the Sellers or any of their Connected Persons;

(f) any payment by any Group Company of any fees or expenses in connection with the preparation for, negotiation or consummation of the sale of the Shares pursuant to, or the entry into of, this Agreement; and

(g) the agreement or undertaking by any Group Company to do any of the matters set out in (a) to (f) above,

but does not include the following items:

(i) management fees payable to the Sellers or any of their Connected Persons in respect of the period up to Completion of an amount equal to £11,220 multiplied by the number of days elapsed from (and including) 1 January 2007 to (but excluding) the Completion Date;

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(ii) payments to the Sellers or any of their respective Connected Persons for goods or services in the ordinary course of business and on an arms length basis of a kind supplied by any of them to persons (other than their Connected Persons) in the ordinary course of their business;

(iii) the services provided by KBR or any of its Connected Persons as detailed in Clause 7.2;

(iv) the dividend declared by the Company on 14 December 2006 in the sum of £10,000,000 (ten million pounds) and paid on 18 January 2007;

(v) any fees and expenses incurred by any Group Company and reimbursed on or prior to Completion by any of the Sellers or their respective Connected Persons to any such Group Company; and

(vi) any fees paid by any Group Company to KBR or any of its Connected Persons in respect of the secondment of J. Lofty to any Group Company;

"Lease" means a lease under which a Property is held by a Group Company;

"Licences In" and "Licences Out" have the meanings given to those expressions in paragraph 26.2 of Schedule 8;

"Losses" means all losses, damages, liabilities, costs (including without limitation reasonable legal costs) charges, expenses, actions, proceedings, claims and demands;

"LSC Group" means LSC Group Holdings Limited and its subsidiaries;

"Management Accounts" means the unaudited consolidated management accounts of the Company for the period from the Accounts Date to 31 March 2007 copies of which are attached to the Disclosure Letter;

"Material Contract" means any contract between a Group Company and any person supplying goods or services to it in relation to which estimated expenditure for the calendar year 2007 by the Group is in excess of £5,000,000 (five million pounds), any contract between a Group Company and any customer of it in relation to which estimated expenditure for the calendar year 2007 by the customer is in excess of £5,000,000 (five million pounds), the contracts referred to in paragraph 10.7 of Schedule 8, the Privatisation Agreements and all other agreements with the Authority listed in Document 1.17.1 of the Data Room;

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"Nuclear Laws" means all Laws (including without limitation the Nuclear Installations Act 1965 and the Ionising Radiation Regulations 1999) concerning radioactive substances which are in force and binding on any Group Company at or prior to the date of this agreement;

"Operating Agreement" means an agreement dated 13 March 1997 between the Authority and DRDL entered into pursuant to the Principal Agreement relating to terms and conditions with which DRDL is required to comply in relation to the operation of Devonport Royal Dockyard;

"Permit" means a permit, licence, consent, approval, certificate, qualification, specification, registration and other authorisation and a filing of a notification report or assessment necessary in any jurisdiction for the proper and efficient operation of any Group Company's business, its ownership, possession, occupation or use of an asset or the execution and performances of this Agreement;

"Principal Agreement" means the agreement dated 11 February 1997 between (1) the Authority; (2) KBR (formerly known as Halliburton Holdings Limited); (3) The Weir Group plc; (4) Balfour Beatty Plc (formerly known as BICC plc); (5) DRDL; (6) Kellogg Brown & Root Limited (formerly known as Brown & Root Limited); (7) Halliburton Company; (8) ASL; and (9) and the Company pursuant to which, inter alia, the entire issued ordinary share capital of DRDL (save for the Special Share retained by the Authority) was acquired by the Sellers;

"Privatisation Agreements" means the Principal Agreement, the Operating Agreement, the Enabling Agreement and the Services Agreement, each as amended by the Privatisation Amendment Agreement;

"Privatisation Amendment Agreement" means the agreement dated on or about 17 September 2002 between the Authority (1) KBR (formerly known as Halliburton Holdings Limited); (2) The Weir Group plc; (3) Balfour Beatty Plc (formerly known as BICC plc); (4) DRDL; (5) Kellogg Brown & Root Limited (formerly known as Brown & Root Limited); (6) Halliburton Company; (7) ASL (formerly known as Devonport Management Limited); and (8) and the Company amending certain provisions of the Principal Agreement, the Enabling Agreement, the Operating Agreement and the Services Agreement;

"Properties" means the freehold and leasehold properties referred to in Schedule 4;

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"Purchaser's Group" means the Purchaser, its subsidiaries, any holding company of the Purchaser and all other subsidiaries of any such holding company, in each case from time to time;

"Purchaser's Solicitors" means Ashurst of Broadwalk House, 5 Appold Street, London EC2A 2HA;

"Purchaser's Warranties" means the warranties given by the Purchaser pursuant to Clause 11 and set out in Schedule 10;

"Sellers' Solicitors" means Kirkpatrick & Lockhart Preston Gates Ellis LLP of 110 Cannon Street, London EC4N 6AR;

"Sellers' Warranties" means the warranties given by the Sellers pursuant to Clause 8 and set out in Schedule 8;

"Senior Employee" means any employee of any Group Company whose basic rate of remuneration exceeds £75,000 per annum;

"Services Agreement" means an agreement dated 13 March 1997 between the Authority and DRDL entered into pursuant to the Principal Agreement relating to the provision of specified services;

"Shares" means 204 fully paid ordinary A shares of £1 each and 196 fully paid ordinary B shares of £1 each in the capital of the Company comprising the entire issued share capital of the Company;

"Special Share" means the one special share of £1 in the capital of DRDL owned by the Authority;

"Subsidiaries" means the companies brief details of which are set out in Schedule 3;

"subsidiary" means a subsidiary within the meaning of section 736 of the Companies Act 1985;

"Tax" or "Taxation" has the meaning given to that expression in the Tax Covenant;

"Tax Authority" has the meaning given to that expression in the Tax Covenant;

"Tax Covenant" means the tax covenant in the agreed form;

"Taxation Statute" means any statute, statutory instrument, decree, order, enactment, law, bye law, regulation or legislative provision, whether domestic or foreign, providing for or imposing any Taxation including, for the avoidance of doubt, any directives and regulations adopted by the Council of the European Union;

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"Tax Warranties" means the Sellers' Warranties set out in paragraph 29 of Schedule 8;

"Termination Deed" means the deed of termination in the agreed form in relation to the services provided to the Group by the Sellers and their respective Connected Persons to be entered into at Completion in accordance with Clause 7.2;

"Transaction Documents" means this Agreement, the Disclosure Letter, the Tax Covenant and any other agreement entered into pursuant to this Agreement;

"Transfer Regulations" means Transfer of Undertakings (Protection of Employment) Regulations 2006;

"the Transitional Services Agreement" means the Transitional Services Agreement between KBR (1) and the Company (2) in the agreed form; and

"TULR(C)A" means Trade Unions and Labour Relations (Consolidation) Act 1992.

1.2 In this Agreement, unless the context requires otherwise:

(a) references to Clauses and Schedules are references to clauses of and schedules to this Agreement;

(b) the Schedules form part of this Agreement and shall have the same force and effect as if expressly set out in the body of this Agreement and any reference to this Agreement includes the Schedules;

(c) headings are included for convenience only and shall not affect the interpretation of this Agreement;

(d) the singular includes the plural and vice versa and use of any gender includes the other genders;

(e) references to a "company" mean any company, corporation or other body corporate (wherever incorporated);

(f) references to a "person" mean any individual, trust, firm, company, government, governmental (or supra-governmental) agency, authority or department or any joint venture, partnership or association (whether or not having separate legal personality);

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(g) any reference to a party means any party to this Agreement;

(h) any reference to a document in the "agreed form" means the document in a form agreed between the parties and initialled for the purposes of identification by or on behalf of the Sellers and the Purchaser;

(i) where any statement is qualified by the expression "so far as the Sellers are aware" or any similar expression, that statement shall be limited to the actual awareness only of David Dunbar, Bang Chaun Liew, Alan Mitchelson, Sir Malcolm Pledger, Andrew Rose, Mark Selway, Bruce Stanski, Ian Tyler, Dennis Gilbert and Henry Warren and shall be treated as including an additional statement that it has been made after reasonable enquiry of the following persons only: Peter Whitehouse, Gareth Unsworth, Roger Hardy, Phil Jones, Andrew Hamilton, Stephen Hills, Ray Wyborn, David Nobes, Frank Francis, Andy Nicholls and Mark Lomas;

(j) any agreement, covenant, warranty, statement or undertaking on the part of 2 or more parties (including, for the avoidance of doubt, the Tax Covenant) is made or given by such parties severally and not jointly and severally; and

(k) any reference to any statute or statutory provision includes that statute or statutory provision as from time to time amended, modified, consolidated or re-enacted (whether before or after the date of this Agreement), except to the extent that any such amendment, modification, consolidation or re-enactment would increase or extend the liability of the Sellers or any of them under this Agreement.

2. Sale of Shares

2.1 Subject to the terms of this Agreement, each Seller shall sell with full title guarantee and as legal and beneficial and free from all Encumbrances the number of Shares set out opposite its name in the second column of Schedule 1 and the Purchaser shall purchase all of the Shares together with all rights attaching to them at the Completion Date (including the right to receive all dividends and distributions declared, paid or made after the Accounts Date, other than the dividend of £10,000,000 (ten million pounds) declared on 14 December 2006 and paid on 18 January 2007).

2.2 Each of the Sellers waives or agrees to provide the waiver of any rights it or any other person may have in relation to the Shares under the articles of association of the Company or otherwise prior to Completion.

2.3 The Sellers shall procure that the Company shall provide to the Authority upon request such information as the Authority is entitled pursuant to the articles of association of DRDL (including, without limitation, article 7(B)(1)) to request in respect of the Purchaser or any person connected with the Purchaser and the Purchaser shall promptly provide such information to the Sellers and the Company on request for onward transmission to the Authority.

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3. Conditions

3.1 Completion of the sale and purchase of the Shares pursuant to this Agreement is subject to the Conditions having been fulfilled or waived in accordance with this Agreement.

3.2 The Sellers and the Purchaser shall each use all reasonable endeavours to fulfil or procure the fulfilment of the Condition set out in paragraph 2 of Schedule 5 as soon as possible and in any event by not later than 5.00 p.m. on 9 July 2007.

3.3 The Purchaser shall use all reasonable  endeavours to fulfil or procure the fulfilment of the Condition set out in paragraph 1 of Schedule 5 as soon as reasonably practicable and each of the Sellers shall provide, and shall procure that each Group Company shall provide to the Purchaser, as soon as reasonably practicable after being requested by the Purchaser therefor, all necessary information relating to the Group required for the preparation of the circular referred to in clause 3.4(a) in order for the Purchaser to fulfil or procure the fulfilment of such Condition.

3.4 Without prejudice to the generality of Clause 3.3, the Purchaser undertakes to procure that, subject to the Sellers' compliance with Clause 3.3:

(a) a circular is despatched to its shareholders as soon as reasonably practicable following the date of this Agreement containing a notice convening an extraordinary general meeting of the Purchaser for no later than 30 June  2007 and that there is proposed at such meeting the resolution referred to in paragraph 1 of Schedule 5; and

(b) the circular referred to in sub-paragraph (a) above contains a recommendation by the directors of the Purchaser recommending  shareholders to vote in favour of such resolution.

3.5 With regard to the waiver of any of the Conditions:

(a) the Purchaser may, with the consent of the Sellers, waive in whole or part the Condition listed in paragraph 1 of Schedule 5; and

(b) the Condition set out in paragraph 2 of Schedule 5 may not be waived by any party.

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3.6 If either of the Conditions set out in Schedule 5 is not fulfilled or waived (if capable of being waived) on or before 5.00 p.m. on 9 July 2007 (or such later time and/or date as the parties may agree), this Agreement shall automatically terminate and cease to have effect (save for this Clause 3.6 and Clauses 1, 3.7, 15, 16, and 19 to 27 (inclusive)  and 29 which shall continue to have effect) and no party shall have any claim under this Agreement against any other party save in respect of any rights and liabilities of the parties which have accrued under this Agreement before its termination or in relation to those provisions of this Agreement referred to above which continue to have effect following its termination.

3.7 If Completion does not take place as a result of a failure by the Purchaser to fulfil the Condition set out in paragraph 1 of Schedule 5 (and provided such failure has not resulted from any act or omission on the part of any Seller including an omission by any Seller to act in accordance with its obligations under Clause 3.3), the Purchaser shall pay £8,000,000 (eight million pounds) to the Sellers in immediately available funds which is a genuine pre-estimate of the Sellers' damages.

4. Conduct of the Group before Completion

4.1 Subject to Clause 4.2, each Seller undertakes to the Purchaser to procure that, during the period between the date of this Agreement and Completion:

(a) each Group Company carries on its business in the ordinary and usual course in all material respects;

(b) each Group Company takes all reasonable steps to preserve and protect its assets so as to prevent a material diminution in the value thereof compared to the value at the date hereof;

(c) each Group Company continues to undertake the Authority Contracts as such contracts are being carried out at the date hereof; and

(d) save with the prior written consent of the Purchaser (such consent not to be unreasonably withheld or delayed), no Group Company shall undertake, carry out or enter into any of the acts, matters or transactions listed in Schedule 6.

4.2 (Save as to Clause 4.2(f) being subject to paragraph (x) of Schedule 6) nothing in Clause 4.1 and/or Schedule 6 shall operate so as to prevent or restrict or require the consent of the Purchaser for:

(a) the performance by any Group Company of any of its obligations pursuant to a contract or arrangement entered into before the date of this Agreement;

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(b) any action reasonably undertaken by any Group Company in an emergency or disaster situation with the bona fide intention of mitigating any adverse effect thereof;

(c) any act, matter or transaction contemplated by any of the Transaction Documents;

(d) any act, matter or transaction undertaken at the request of the Purchaser;

(e) the payment for any of the matters listed in paragraphs (i), (ii), (iii), (v) and (vi)  to the definition of "Leakage"; or

(f) subject to paragraph (x) of Schedule 6, any act, matter or transaction taken by any Group Company with a view to preserving its relationship with the Authority and in particular (but without limitation) so as not to prejudice the WSMI contract or any renewal or extension of it, provided that the relevant Group Companies shall consult with the Purchaser in relation to any discussions with the Authority in relation to the WSMI contract.

4.3 Pending Completion the Purchaser and any person reasonably authorised by it (subject to all applicable security restrictions) shall be given access to the Properties and to all the books and records of each Group Company, and the directors and Senior Employees of each Group Company shall be instructed to give promptly all such information and explanation as the Purchaser or any such person may reasonably request, in each case, in order to allow the Purchaser to prepare for its ownership of the Company.

4.4 The Purchaser and the Sellers shall use their respective reasonable endeavours to agree the final form of the Alliance Deed of Adherence with the third parties thereto.

4.5 As soon as reasonably practicable after the final form of the Alliance Deed of Adherence shall be agreed with the third parties thereto (but not earlier than Completion):

(a) the Purchaser shall duly execute and deliver a counterpart of the final form of the Alliance Deed of Adherence to the other parties thereto;

(b) the Sellers shall and shall procure that any of their respective Connected Persons who are parties thereto shall duly execute and deliver a counterpart of the final form of the Alliance Deed of Adherence to the other parties thereto; and

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(c) the Purchaser and the Sellers shall use their respective reasonable endeavours to procure the execution and delivery of a counterpart of the final form of the Alliance Deed of Adherence by the other parties thereto.

4.6 After the date of this Agreement KBR or its relevant Connected Persons shall contact the software providers listed in Schedule 1 of the Transitional Services Agreement in order to request that such software providers consent to the Group benefiting from such software licences in accordance with the terms of the Transitional Services Agreement.

4.7 For the purposes of Clause 4.1(d), the Purchaser shall nominate a person or persons  who will liaise with the Group Companies and/or the Sellers in order to ensure that any requests for any necessary consents and agreements are dealt with in an efficient manner.

5. Consideration

5.1 The consideration for the sale and purchase of the Shares shall be the aggregate of the cash sum of £350,000,000 (three hundred and fifty million pounds) and, if relevant, a sum equal to the Interest Payment, exclusive of stamp duty and other transfer taxes (if any).

5.2 The Interest Payment shall be a sum equal to notional interest on £350,000,000 (three hundred and fifty million pounds) calculated, if such date shall be before the Completion Date, from 8 July 2007 until the Completion Date (or if Completion shall be delayed as a consequence of any act or omission of the Sellers, then the date Completion would have occurred, but for such act or omission) at a rate per annum of 1.5 per cent. above the average (rounded upward when necessary to the nearest ¹/₁₆th of one per cent) of the London Inter-Bank Offered Rates of the last 3 Business Days immediately preceding the date hereof.  The London Inter-Bank Offered Rates for such days shall be the rate at which Barclays Bank plc (or such other London bank as the Sellers shall nominate for the purpose) shall offer 6 month sterling deposits of £1,000,000 (one million pounds) to leading banks in the London Inter-Bank Market at or about 11.00 am (London time) on such days.  The certificate of Barclays Bank plc (or such other London bank as the Sellers shall nominate for the purpose) as to the rate of interest shall be conclusive and binding on the parties and, when determining the interest rate, Barclays Bank plc shall be acting as an expert.

5.3 The Consideration, which shall be apportioned among the Sellers as shown in the third column of Schedule 1, shall be paid in cash on Completion in accordance with Clause 6 and paragraph 3(a) of Schedule 7.

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5.4 The Consideration shall be deemed to be reduced by the amount of any payment to the Purchaser in respect of any claim under the Sellers' Warranties or under the Tax Covenant.

5.5 At Completion each of the Sellers covenants to pay to the Purchaser:

(a) an amount equal to their relevant percentage (and for this purpose the relevant percentage in relation to each Seller shall be the percentage which is set opposite its name in column 5 of Schedule 1) of all sums payable at Completion by DRDL to four of the management team of DRDL (being Henry Warren, Dennis Gilbert, Gareth Unsworth and Peter Whitehouse) under a potential retention pay plan (equating to each individual's annual base salary with a possible entitlement to an additional amount equal to twice each individual's annual base salary), together with a further amount equal to 12.8 per cent. thereon, and further amounts equal to any PAYE income tax and employees' national insurance contributions unless such amounts have already been deducted from the sums stated to be payable to the individuals and accounted for to HM Revenue & Customs; and

(b) an amount equal to the relevant percentage (and for this purpose the relevant percentage in relation to each Seller shall be the percentage which is set opposite its name in column 5 of Schedule 1) of all fees of DRDL (including any VAT) due to certain professional advisers (being PricerWaterhouseCoopers, Herbert Smith, KPMG, Bond Pearce and Wolferstans) in relation to services provided in respect of the sale of the Shares under this Agreement, which services (and the fees or estimates therefor) are set out in paragraph 7.1(l) of the Disclosure Letter.

5.6 The precise amount of the sums and fees referred to in Clause 5.5 shall be notified to the Purchaser by the Sellers not later than two Business Days prior to the Completion Date.

5.7 The Purchaser is hereby irrevocably authorised to deduct an amount equal to the payments to be made by each Seller to the Purchaser pursuant to Clause 5.5 from the Consideration payable to that Seller.

5.8 Subject to compliance by the Sellers with Clause 5.5, the Sellers shall have no further obligation to the Purchaser or any Group Company in respect of the sums payable by DRDL referred to in Clause 5.5.

5.9 When and to the extent that DRDL obtains and utilises a tax deduction for the payments made by it referred to in Clause 5.5, the Purchaser will pay to the Sellers an amount equal to one half of the amount of the tax saved (including the 12.8 per cent. paid in respect of employers' national insurance contributions) in the relevant percentages (and for this purpose the relevant percentage in relation to each Seller shall be the percentage which is set opposite its name in column 5 of Schedule 1).

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5.10 All payments under Clauses 5.5 and 5.9 shall be treated as adjustments to the Consideration.

6. Completion

6.1 Completion shall take place on the third Business Day following the first Business Day on or by which all the Conditions have been fulfilled or waived (if capable of being waived) at the offices of the Sellers' Solicitors (or at such other time and place as the Sellers and the Purchaser may agree in writing) (the "Completion Date").

6.2 At Completion the Sellers and the Purchaser shall comply with their respective obligations set out in Schedule 7.

6.3 Payment by the Purchaser of the Consideration (less the deduction referred to in Clause 5.7) in accordance with paragraph 3(a) of Schedule 7 shall constitute payment of the consideration for the Shares and shall constitute a valid discharge of the Purchaser's obligations under Clause 2.1.

6.4 If the respective obligations of the Sellers and/or the Purchaser under Clause 6.2 and Schedule 7 are not complied with in full on the Completion Date, the Purchaser or (as the case may be) the Sellers may (in their sole discretion):

(a) defer Completion to a date not more than 28 days after the date specified in Clause 6.1 in which event the provisions of this Clause 6 shall apply to Completion as so deferred; or

(b) proceed to Completion as far as practicable without prejudice to its or their rights under this Agreement; or

(c) provided that the 28 day period referred to in Clause 6.4(a) has elapsed, terminate this Agreement by notice in writing to the Sellers or (as the case may be) the Purchaser.

6.5 If this Agreement is terminated pursuant to Clause 6.4, this Agreement shall cease to have effect (save for this Clause 6.5 and Clauses 1, 3.7, 15, 16 and 19 to 27 (inclusive) and 29 which shall continue to have effect) and no party shall have any claim under this Agreement against any other party save in respect of rights and liabilities of the parties which have accrued under this Agreement before its termination or in relation to those provisions of this Agreement referred to above which continue to have effect following its termination.

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6.6 Neither the Purchaser nor any of the Sellers shall be obliged to complete the sale and purchase of any of the Shares unless the sale and purchase of all the Shares is completed at the same time in accordance with this Agreement.

7. Post-Completion Undertakings

7.1 Without prejudice to the provisions of Clause 6 and Schedule 7, the Purchaser shall use its reasonable endeavours to procure that, as soon as reasonably practicable after Completion, each Seller and each of its Connected Persons is released from any guarantee, indemnity, counter-indemnity, bond, letter of comfort or other similar obligation given or incurred by it prior to Completion (including, for the avoidance of doubt, any guarantees given in the Alliance Agreement) (provided that, if any such obligation is given or incurred after the date of this Agreement but prior to Completion, the Purchaser has consented to the grant or incurrence of such obligations) in respect of a liability or obligation of any Group Company and pending such release the Purchaser undertakes to each Seller (for itself and on behalf of each of its Connected Persons) to indemnify each Seller and each of its Connected Persons on demand against all Losses arising under or by reason of any such guarantee, indemnity, counter-indemnity, bond, letter of comfort or other similar obligation.

7.2 The parties hereby acknowledge that with effect from Completion, the provision of the following goods or services previously supplied to Group Companies shall (save to the extent otherwise provided for in the Transitional Services Agreement) cease in accordance with the Termination Deed:

(a) insurance policies provided by KBR or any of its Connected Persons;

(b) software licences provided by KBR or any of its Connected Persons; and

(c) management services provided by any of the Sellers or any of their respective Connected Persons,

in each case without any liability to any Group Company and without prejudice to any accrued rights of any Group Company.

7.3 Without prejudice to the provisions of Clause 6 and Schedule 7, each of the Sellers shall use its reasonable endeavours to procure that, as soon as reasonably practicable after Completion, each Group Company is released from any guarantee, indemnity, counter-indemnity, bond, letter of comfort or other similar obligation given or incurred by it prior to Completion in respect of a liability or obligation of any of the Sellers or any of their Connected Persons and pending such release each of the Sellers undertakes to the Purchaser and each Group Company to indemnify the Purchaser and each Group Company on demand against all Losses arising under or by reason of any such guarantee, indemnity, counter-indemnity, bond, letter of comfort or other similar obligation.

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8. Sellers' Warranties

8.1 Subject to Clause 9 and Schedule 9, each Seller warrants to the Purchaser that each of the Sellers' Warranties is true and accurate at the date of this Agreement and each Seller shall be deemed to warrant that paragraph 10.2 only of the Sellers' Warranties is true and accurate immediately prior to Completion by reference to the facts and circumstances then subsisting.

8.2 Each of the Sellers' Warranties shall be construed as a separate and independent warranty and, save as expressly otherwise provided in this Agreement, shall not be limited by reference to or inference from the terms of any other Sellers' Warranty.

8.3 Without prejudice in any way to the Sellers' Warranties, the Purchaser acknowledges and agrees that:

(a) the Sellers' Warranties are the only warranties given by the Sellers on which the Purchaser may rely in entering into this Agreement;

(b) no representation or warranty is made or given by any of the Sellers as to the completeness, truth or accuracy of the matters disclosed in the Disclosure Letter;

(c) without prejudice to Clause 19 (Entire Agreement), no representation or warranty is made or given by any of the Sellers in relation to the Information Memorandum or as to the accuracy or reasonableness of any forecast, estimate or projection made or provided to the Purchaser or any of its advisers (in whatever form) on or before the date of this Agreement; and

(d) no representation or warranty is made or given by any of the Sellers as to the future requirements of the Authority for any goods or services to be provided by any Group Company.

8.4 No information relating to the Group of which the Purchaser or any of its agents or advisers has knowledge (whether actual, imputed or constructive or any of them or as a result of any investigation by or on behalf of the Purchaser), other than that contained in or referred to in this Agreement and/or fairly disclosed in the Disclosure Letter in accordance with Clause 9.3, shall prejudice any claim by the Purchaser under the Sellers' Warranties or reduce any amount recoverable thereunder.

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8.5 The Sellers irrevocably and unconditionally agree with the Purchaser and its professional advisers that they will not (and will procure that none of their respective Connected Persons will) bring any claim or other action under the Civil Liability (Contribution) Act 1978 of whatever nature and which exists now or may exist in the future and whether known or not known to the Sellers at the date hereof and whether in relation to a matter which is past, present or future and in respect of negligence ("Claim") against any professional advisers of the Purchaser in relation to any work carried out for the Purchaser in respect of this Agreement and/or any Transaction Document.  To the extent that any such Claim exists (if any and without prejudice to the aforesaid), the Sellers severally irrevocably and unconditionally waive  the right to bring any form of claim against or recover any sums from any of the Purchaser's professional advisers in relation to any Claim and unconditionally and irrevocably release the Purchaser's professional advisers from any liability in respect of any such Claim.  It is intended that any relevant professional adviser of the Purchaser shall be entitled to the benefit of the undertakings, releases and waivers provided for in this clause for the purpose of, inter alia, the Contracts (Rights of Third Parties) Act 1999.  Nothing in this clause shall exclude or limit liability in respect of Claims arising directly out of any statements made fraudulently or arising as a direct result of wilful concealment by the Purchaser's professional advisers.

9. Scope of Sellers' Warranties

9.1 The Purchaser agrees and acknowledges that:

(a) the only Sellers' Warranties given in respect of the Properties are those contained in paragraph 24 (Property) of Schedule 8 and that none of the other Sellers' Warranties shall or shall be deemed to be, whether directly or indirectly, a Sellers' Warranty in respect of the Properties;

(b) the only Sellers' Warranties given in respect of matters relating to or governed under Environmental Laws or Nuclear Laws are those contained in paragraphs 25 (Environment), 10.1(e), 10.2  (Contracts and Commitments) and 13.4 (Assets) of Schedule 8 and that none of the other Sellers' Warranties shall or shall be deemed to be, whether directly or indirectly, a Sellers' Warranty in respect of such matters;

(c) the only Sellers' Warranties given in respect of Intellectual Property Rights are those contained in paragraph 26 (Intellectual Property) of Schedule 8 and that none of the other Sellers' Warranties shall or shall be deemed to be, whether directly or indirectly, a Sellers' Warranty in respect of Intellectual Property Rights;

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(d) the only Sellers' Warranties given in respect of employment matters are those contained in paragraphs 20 (Compliance), 21 (Data Protection) and 22 (Employment) of Schedule 8 and that none of the other Sellers' Warranties shall or shall be deemed to be, whether directly or indirectly, a Sellers' Warranty in respect of employment matters;

(e) the only Sellers' Warranties given in respect of pensions matters are those contained in paragraphs 22.18 (Employment) and 23 (Pensions) of Schedule 8 and that none of the other Sellers' Warranties shall or shall be deemed to be, whether directly or indirectly, a Sellers' Warranty in respect of pensions matters; and

(f) the only Sellers' Warranties given in respect of Taxation are those contained in paragraph 29 (Tax) of Schedule 8 and that none of the other Sellers' Warranties shall or shall be deemed to be, whether directly or indirectly, a Sellers' Warranty in respect of Taxation.

9.2 The Sellers' Warranties set out in paragraph 1 of Schedule 8 are given by each Seller in relation to itself and its Connected Persons only and not in relation to any other Seller or that Seller's Connected Persons.

9.3 None of the Sellers shall be under any liability in respect of any claim under the Sellers' Warranties if and to the extent that the fact, matter or circumstance giving rise to the claim is fairly disclosed (with sufficient detail reasonably to identify the nature and scope of the matters disclosed) in the Disclosure Letter or in any document referred to in the Disclosure Letter and delivered or deemed to be delivered with it.

9.4 The Purchaser confirms that none of William Tame, Albert Dungate and Kevin Thomas is aware that any of the Sellers' Warranties is reasonably likely to be incorrect at the date of this Agreement.

9.5 The provisions of Schedule 9 shall apply in relation to claims under the Sellers' Warranties and (to the extent provided therein), the Agreement and the Tax Covenant and shall in particular limit the liability of the Sellers thereunder.

9.6 Any information supplied by or on behalf of any Group Company to or on behalf of any of the Sellers in connection with the Sellers' Warranties, the Disclosure Letter or otherwise in relation to the business and affairs of any Group Company shall not constitute a representation or warranty or guarantee as to the accuracy thereof by any Group Company and each of the Sellers undertakes to the Purchaser and each Group Company (and their respective directors, officers, employees, agents and advisers) that, other than in the case of fraud, it will not bring any and all claims which it might otherwise have against any Group Company or any of their respective employees, agents or advisers in respect thereof.

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10. Purchaser Remedies

10.1 If at any time between the date of this Agreement and Completion:

(a) the Purchaser becomes aware of any fact, matter or circumstance which constitutes a material breach of any of the Sellers' Warranties or which would constitute a material breach of any of the Sellers' Warranties if the Sellers' Warranties were repeated at Completion by reference to the facts and circumstances then subsisting;

(b) there is any breach or non-fulfilment by a Seller of its obligations pursuant to Clause 4.1; or

(c) there has been any material adverse change in the business, operations, assets, liabilities, financial position, trading position, profits or future prospects, in each case of the Group as a whole, or any event or circumstance that is reasonably likely to result in such a material adverse change,

and which, in any such case, is incapable of remedy or, if capable of remedy, has not been remedied by the Sellers within 15 Business Days of the Purchaser making a written request to the Sellers to remedy such breach (or, in any event, has not been so remedied by the last Business Day prior to Completion), the Purchaser shall be entitled by notice in writing to all the Sellers served prior to Completion to terminate this Agreement.

10.2 For the purpose of:

(a) Clause 10.1(a), a breach or deemed breach shall only be 'material' if it would, if the Sellers' Warranties were repeated at Completion by reference to the facts and circumstances then subsisting, entitle the Purchaser to an amount in damages, following Completion, equal to £52,500,000 (fifty two million, five hundred thousand pounds); and

(b) Clause 10.1(c), a "material adverse change" in respect of any of the matters listed in such Clause shall mean such a material adverse change resulting in a diminution in the value of the Company (on the basis that the Sellers' Warranties were true and accurate at the date hereof) equal to £52,500,000 (fifty two million, five hundred thousand pounds).

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10.3 If this Agreement is terminated pursuant to Clause 10.1, this Agreement shall cease to have effect (save for this Clause 10.3 and Clauses 1, 15, 16, 19 to 27 (inclusive) and 29 which shall continue to have effect) and no party shall have any claim under this Agreement against any other party save in respect of rights and liabilities of the parties which have accrued under this Agreement before its termination or in relation to those provisions of this Agreement referred to above which continue to have effect following its termination.

10.4 If the Purchaser having become entitled to terminate this Agreement pursuant to Clause 10.1 chooses not to do so, it shall not be entitled to pursue any claim for damages or exercise any other right, power or remedy under this Agreement or otherwise provided in law in respect of the breach or deemed breach of the Sellers' Warranty giving rise to the entitlement to terminate save in respect of any matter referred to in sub-Clause 10.1(b).

10.5 Subject to Clause 10.4, the sole remedy of the Purchaser in respect of any breach of any of the Sellers' Warranties shall be an action for damages (subject to the limitations set out in this Agreement) and, save as expressly set out in this Agreement (other than pursuant to Clause 21.5) and except in the case of any fraudulent act or omission by the Sellers, the Purchaser shall not be entitled to terminate or rescind this Agreement in any circumstances whatsoever, whether before or after Completion.

10.6 The Sellers undertake to the Purchaser that they will disclose promptly in writing to the Purchaser any matter or thing of which any of them has actual knowledge after the date hereof and prior to Completion which constitutes a material breach of any of the Sellers' Warranties.  If the Sellers fail to make any disclosure required to be made pursuant to this Clause 10.6, which disclosure would have related to a breach of any of the Sellers' Warranties entitling the Purchaser to terminate this Agreement pursuant to Clause 10.1, then the sole remedy of the Purchaser shall be damages for its loss of opportunity to so terminate this Agreement as a consequence of such non-disclosure provided that the Sellers shall not be liable pursuant to this Clause 10.6 in the event that the Purchaser shall not have complied with its obligations pursuant to Clause 10.7.

10.7 The Purchaser undertakes to the Sellers that it will disclose promptly in writing to the Sellers any matter or thing of which it has actual knowledge after the date hereof and prior to Completion which constitutes a material breach of any of the Sellers' Warranties to the extent that such material breach would give rise to a right of termination of this Agreement in favour of the Purchaser.

10.8 Each of the Sellers confirms that there has been no, and undertakes to procure that prior to Completion there will not be any, Leakage.  Subject to Completion, each of the Sellers undertakes, to the extent that there has been or is any Leakage, to pay to the Purchaser, or as it may direct, immediately on demand an amount equal to the Leakage together with interest on such amount at the rate set out in Clause 17 from the date of the Leakage to the date of payment to the Purchaser, or, in respect of the payment itself, as it directs.

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10.9 For the avoidance of doubt, if the Purchaser terminates this Agreement pursuant to Clause 10.1 as a consequence of changes in the requirements of the Authority, the Purchaser shall (subject to Clause 10.3) not have any claim under this Agreement against the Sellers.

11. Purchaser's Warranties

The Purchaser warrants to each Seller that each of the Purchaser's Warranties is true and accurate at the date of this Agreement.

12. Restrictions on Sellers' Business Activities

12.1 Each Seller undertakes to the Purchaser that it will not, and that it will procure that none of its Connected Persons from time to time will either directly or indirectly and either solely or jointly with any other person (either on its own account or as the agent of any other person) and in any capacity whatsoever:

(a) for a period of 2 years from the Completion Date solicit or seek to entice away from the employment of any Group Company any person who was at any time during the 12 months before the Completion Date employed by any Group Company in a senior or managerial capacity; or

(b) at any time after the Completion Date use or hold itself out as using any of the trading or operating names of any Group Company or any similar such name, trading style or derivation therefrom.

12.2 Each undertaking in Clause 12.1 shall be construed as a separate undertaking and if one or more of the undertakings is held to be against the public interest or in any way an unreasonable restraint of trade, the remaining undertakings shall continue to bind each Seller.

12.3 Each of the Sellers agrees that the undertakings contained in this Clause 12 are reasonable and are entered into for the purpose of protecting the goodwill of the business of each Group Company.

12.4 If any undertaking contained in this Clause 12 shall be held to be void but would be valid if deleted in part or reduced in application, such undertaking shall apply with such deletion or modification as may be necessary to make it valid and enforceable.  Without prejudice to the generality of the foregoing, in such circumstances, any relevant period of time (as the same may previously have been reduced by virtue of this Clause 12.4) shall take effect as if reduced by successive six month periods until the resulting period shall be valid and enforceable.

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13. Information, Records and Assistance

13.1 Following Completion, the Purchaser shall procure that each Seller is provided with such financial and other information relating to, and is given such access to the books, accounts and other records of, any Group Company in respect of the period up to Completion as the relevant Seller may reasonably request in order to enable it to satisfy its tax, accounting and reporting requirements.

13.2 In the event of an audit by the Authority after Completion directly in relation to the payment of management charges paid by any Group Company to any Seller or any of their Connected Persons prior to Completion, each of the Sellers shall provide the Authority with such information and assistance as, in each case, the Authority may reasonably request for the purposes of providing answers to any queries raised by the Authority in respect of any such audit.

14. Guarantee

14.1 In consideration of the Purchaser entering into this Agreement with KBR, the Guarantor (subject to Clause 14.7) unconditionally and irrevocably undertakes to the Purchaser:

(a) to procure that KBR will fully and promptly perform and discharge all present and future actual and purported obligations and liabilities of KBR (referred to in this Clause as the "Guaranteed Obligations") under or in respect of the Transaction Documents; and

(b) that, if KBR fails to do so, it will itself (and without the need for any demand) perform and discharge the Guaranteed Obligations and indemnify the Purchaser against all losses, liabilities, claims, demands, costs, charges and expenses directly or indirectly suffered or incurred by or made against the Purchaser in connection with or arising out of such failure.

14.2 The liability of the Guarantor under this Clause 14 shall be that of principal obligor and not merely as surety and shall not be limited, discharged or otherwise affected by any time, indulgence, waiver or concession granted by the Purchaser to KBR, by the invalidity, unenforceability or frustration of any of the Guaranteed Obligations, by any lack of capacity or lack or misuse of authority on the part of KBR or its officers, by the liquidation, administration or dissolution of KBR or the disclaimer of any of the Guaranteed Obligations, by any variation or termination of any of the Guaranteed Obligations or by any other fact or circumstance which would or might (but for this provision) limit, discharge or otherwise affect the liability of the Guarantor.

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14.3 The obligations of the Guarantor under this Clause 14 are continuing obligations and shall remain in full force and effect so long as any of the Guaranteed Obligations has yet to be fully performed or discharged.

14.4 Until all of the Guaranteed Obligations have been fully performed and discharged the Guarantor shall not, without the prior written consent of the Purchaser:

(a) exercise as against KBR, in respect of any amount previously paid by the Guarantor under this guarantee, any right of subrogation or any other right or remedy which the Guarantor may have in respect of the same;

(b) (while any sum is due and payable by the Guarantor hereunder or if it is otherwise liable to perform any of the Guaranteed Obligations) receive, claim or have the benefit of any payment, distribution or security from KBR or exercise any other right or remedy (including, but not limited to, any right of set-off) which the Guarantor may have in respect of the same; or

(c) prove in any liquidation of KBR in competition with the Purchaser for any sums owing to the Guarantor by KBR,

unless in any such case instructed in writing by the Purchaser to do so; and the Guarantor shall hold in trust for the Purchaser (for application by the Purchaser in or towards the discharge of the Guaranteed Obligations) the benefit of all such rights, remedies, payments, distribution and security and moneys at any time received or held by the Guarantor in respect of any of them.

14.5 The obligations of the Guarantor under this Clause 14 shall be in addition to and shall not merge with or prejudice or be prejudiced by any collateral or other security now or in future held by the Purchaser.

14.6 The Guarantor warrants to the Purchaser in the terms of paragraph 1 (Capacity and Authority) and 28 (Insolvency) of Schedule 8 both at the date of this Agreement and immediately prior to Completion save that:

(a) reference in paragraph 1 to Kellogg Brown & Root Holdings (U.K.) Limited and the Seller shall be replaced by the appropriate references to the Guarantor; and

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(b) reference in paragraph 28 to any proceedings, events and appointments shall, for the purposes of this Clause 14.6, also include any analogous proceedings, events or appointments in any relevant jurisdiction.

14.7 Notwithstanding anything express or implied in this Agreement, the obligations and liabilities of the Guarantor to the Purchaser under this Clause 14 shall be no greater in any respect than the obligations and liabilities of KBR to the Purchaser under this Agreement.

15. Announcements

15.1 Subject to Clause 15.2 and Clause 15.3, no announcement or circular concerning the sale of the Shares or any related or ancillary matter shall be made or issued by any party (whether before or after Completion) without the prior written consent of the other parties, such consent not to be unreasonably withheld or delayed.

15.2 Without prejudice to Clause 15.3, a party may make an announcement concerning the sale of the Shares or a related or ancillary matter if required to do so by law or by any securities exchange or governmental or other regulatory or supervisory body or authority of competent jurisdiction to which that party is subject but in such circumstances the party required to make the announcement shall take such steps as shall be reasonable and practicable in the circumstances to agree the contents of the announcement with the other parties prior to the release of the announcement.

15.3 Notwithstanding Clauses 15.1 and 15.2, the Purchaser may (without the need for consent from the other parties) make such announcements and issue such circulars concerning the sale of the Shares or any related ancillary matter as may be required in order to satisfy its obligations to fulfil the Condition set out in paragraph 1 of Schedule 5 in accordance with Clause 3.3.

16. Costs

16.1 Unless expressly otherwise provided in this Agreement, each party shall bear its own legal, accountancy and other costs, charges and expenses incurred in connection with the negotiation, preparation and implementation of this Agreement and the sale and purchase of the Shares.

16.2 The Purchaser shall bear all stamp duty on the transfer of the Shares to it pursuant to the terms of this Agreement.

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17. Interest on Late Payment

If any party defaults in the payment when due of any sum which is required to be paid under this Agreement, the liability of the defaulting party shall be increased to include interest on such sum from the due date for payment until the date of actual payment (after as well as before judgment) at a rate per annum of 4 per cent. above the base lending rate from time to time of Barclays Bank plc.  Interest shall accrue from day to day and shall be compounded quarterly.

18. Further Assurance

Insofar as it is reasonably able to do so after Completion, each Seller shall (at its own cost) do or procure the doing of such acts and execute or procure the execution of such documents as the Purchaser may reasonably consider necessary for the purpose of vesting legal and beneficial title to the Shares in the Purchaser in accordance with the terms of this Agreement.

19. Entire Agreement

19.1 The Transaction Documents constitute the whole and only agreements between the parties relating to the sale and purchase of the Shares.

19.2 Each party agrees and acknowledges that:

(a) in entering into this Agreement, it is not relying on any warranty, representation, undertaking, assurance, promise or other commitment of any nature whatsoever (whether or not in writing) made or given by any other party or any of its Connected Persons prior to the entering into of this Agreement which is not expressly set out in this Agreement; and

(b) except in the case of fraud, no party shall have any right of action against any other party arising out of or in connection with any such warranty, representation, undertaking, assurance, promise or other commitment except to the extent that it is repeated in this Agreement.

20. Variation

No variation of this Agreement shall be effective unless it is in writing and signed by or on behalf of each of the parties.

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21. Waivers and Remedies

21.1 A waiver of any provision of, or right under, this Agreement shall only be effective if it is in writing and signed by the waiving party and shall only be applicable in the circumstances and for the purpose for which it is given.

21.2 No failure or delay by any party in exercising any right, power or remedy provided by law or under this Agreement shall affect that right, power or remedy or operate as a waiver thereof.

21.3 The single or partial exercise by any party of any right, power or remedy provided by law or under this Agreement shall not preclude any other or further exercise of that right, power or remedy or the exercise of any other right, power or remedy.

21.4 Except as otherwise expressly provided in this Agreement, the rights, powers and remedies of any party provided under this Agreement are cumulative and not exclusive of any rights, powers or remedies provided by law.

21.5 Subject to Clause 10.5, without affecting any other rights or remedies that any party may have, each party acknowledges and agrees that damages alone may not be an adequate remedy for any breach by it of any of the provisions of this Agreement, that, accordingly, each party shall be entitled to the remedies of injunction, specific performance and other equitable relief for any threatened or actual breach of this Agreement by another party, that no proof of special damages will be necessary for the enforcement of such remedies and that no party will raise any objection to the application by any other party for any such remedies.

22. Counterparts

22.1 This Agreement may be executed in any number of counterparts and by the parties to it on separate counterparts but shall not be effective until each party has executed at least one counterpart.

22.2 Each counterpart shall constitute an original of this Agreement but all the counterparts shall together constitute one and the same instrument.

23. Invalidity

If any provision of this Agreement is held to be illegal, invalid or unenforceable, in whole or in part, under any enactment or rule of law, then such provision (or part thereof) shall to that extent be deemed not to be included in this Agreement but the legality, validity and enforceability of the other provisions of this Agreement shall not be affected.

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24. Effect of Completion

The terms of this Agreement (insofar as not performed at Completion and so far as capable of having effect after Completion) shall remain in full force and effect notwithstanding Completion.

25. Assignment

25.1 Subject to Clause 25.2 no party shall, without the prior written consent of each other party, assign all or any part of the benefit of, or any right or interest in or under or arising from, this Agreement.

25.2 The Purchaser may (without the consent of the Sellers or the Guarantor) assign to any member of the Purchaser's Group the benefit of all or any of the Sellers' obligations or any benefit it enjoys under this Agreement provided however that such assignment shall not be absolute but shall be expressed to have effect only for so long as the assignee remains a member of the Purchaser's Group and that immediately before ceasing to be such a member the assignee shall assign the benefit to another member of the Purchaser's Group.  The sale or transfer of all or part of the business of any member of the Group to any member of the Purchaser's Group shall not affect the liability of any of the Sellers under any provision of this Agreement whatsoever.

26. Notices

26.1 Any notice to be given under or in connection with this Agreement:

(a) shall be in writing;

(b) shall be marked for the attention of the person and sent to the address or fax number specified in Clause 26.3 (or such other person, address or fax number as the relevant party may notify to the other parties in accordance with this Clause 26); and

(c) shall be delivered personally or sent by prepaid first class post, recorded delivery or (if relevant) airmail or by fax.

26.2 Any notice is deemed to have been received:

(a) if delivered personally, at the time of delivery;

(b) if sent by pre-paid first class post, recorded delivery or (if relevant) airmail, the second Business Day after the date of posting; and

29

(c) if sent by fax, at the time of transmission,

provided that if a notice is, or would (but for this proviso) be deemed to be, received on a day that is not a Business Day or after 5.00 pm on a Business Day, it shall instead be deemed to be received at 9.00 am on the Business Day next following that day.

26.3 The addresses and fax numbers of the parties for the service of notices are:

Kellogg Brown & Root Holdings (U.K.) Limited

Address:  Hill Park Court, Springfield Drive, Leatherhead, Surrey KT22 7NL

Fax no:  01372 866 951

For the attention of:  The Company Secretary

Balfour Beatty plc

Address:  130 Wilton Road, London SW1V 1LX

Fax no:  020 7216 6901

For the attention of: The Company Secretary

The Weir Group plc

Address: Clydesdale Bank Exchange, 20 Waterloo Street, Glasgow G2 6DB

Fax no: +44 141 221 9789

For the attention of:  The Company Secretary

KBR, Inc.

Address: 601 Jefferson Street, Houston, Texas 77002, USA

Fax No: +1 713 753 2017

For the attention of: The General Counsel

Babcock International Group PLC

Address:  2 Cavendish Square, London W1G DPX

Fax no:  020 7291 5055

For the attention of:  The Company Secretary

26.4 To prove service, it shall be sufficient to prove that:

(a) the envelope containing the notice was properly addressed and delivered to the appropriate address; or

(b) the envelope containing the notice was properly addressed and posted by

pre-paid first class post, recorded delivery or (if relevant) airmail; or

(c) the notice was transmitted by fax to the fax number of the party to be served.

27. Contracts (Rights of Third Parties) Act 1999

27.1 Subject to Clause 27.2, a person who is not a party to this Agreement shall have no right under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this Agreement, but this shall not affect any right or remedy of a third party which is granted by the provisions of this Agreement or which exists or is available apart from that Act.

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27.2 Any person (other than the parties) who is given any rights or benefits under Clauses 7.1, 7.3, 8.5 and 9.6 (a "Third Party") shall be entitled to enforce those rights or benefits against the parties in accordance with the Contracts (Rights of Third Parties) Act 1999 but the Purchaser and the Sellers may amend Clauses 7.1, 7.3, 8.5 and 9.6 without the consent of the Third Party.

28. Confidential Information

28.1 Each of the Sellers shall not, and shall procure that none of its Connected Persons or any director, officer or employee of such Seller or any such Connected Person shall, use or disclose to any person Confidential Information.

28.2 Clause 28.1 does not apply to:

(a) disclosure of Confidential Information to or at the written request of the Purchaser;

(b) use or disclosure of Confidential Information required to be disclosed by law, regulation, the London Stock Exchange, the UK Listing Authority or any other applicable stock exchange;

(c) disclosure of Confidential Information to any Tax Authority;

(d) disclosure of Confidential Information to professional advisers for the purpose of advising the relevant Seller; or

(e) Confidential Information which is in the public domain other than by a Seller's breach of Clause 28.1.

29. Governing Law and Jurisdiction

29.1 This Agreement (and any disputes, proceedings or claims arising out of or in connection with this Agreement) shall be governed by and construed in accordance with English law.

29.2 Each party agrees that the courts of England are to have exclusive jurisdiction to settle any dispute or claim arising out of or in connection with this Agreement and each party irrevocably submits to the jurisdiction of the English courts.

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29.3 Without prejudice to any other permitted mode of service the parties agree that service of any claim form, notice or other document for the purpose of any proceedings begun in England which may arise out of or in any way relate to this Agreement or its formation shall be duly served upon it if delivered personally or sent by recorded or special delivery post (or any substantially similar form of mail), in the case of:

(a) the Guarantor to KBR, Inc. c/o Kellogg Brown & Root Holdings (U.K.) Limited, Hill Park Court, Springfield Drive, Leatherhead, Surrey KT22 7NL) marked for the attention of The Company Secretary; and

(b) all other parties to this Agreement, in accordance with the notice provisions set out in Clause 26.3,

or such other person and address in England and/or Wales as the relevant party shall notify the other parties from time to time.

SIGNED by or on behalf of the parties.

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SCHEDULE 1

The Sellers

(1)	(2)	(3)	(4)	(5)
Name, address and registered number of each Seller	No. of Shares	Consideration	Maximum aggregate liability of each Seller	Relevant Percentage
Kellogg Brown & Root Holdings (U.K.) Limited Hill Park Court Springfield Drive Leatherhead Surrey KT22 7NL Registered number: 01870934	204 A ordinary shares of £1 each	£178,500,000	£51,000,000 plus 51 per cent. of any re-calculated interest pursuant to paragraphs 3.3(a) and 3.4 of Schedule 9	51%
Balfour Beatty plc 130 Wilton Road London SW1V 1LX Registered number: 00395826	98 B ordinary shares of £1 each	£85,750,000	£24,500,000 plus 24.5 per cent. of any re-calculated interest pursuant to paragraphs 3.3(a) and 3.4 of Schedule 9	24.5%
The Weir Group plc Clydesdale Bank Exchange, 20 Waterloo Street, Glasgow, Scotland G2 6DB Registered number: SC 002934	98 B ordinary shares of £1 each	£85,750,000	£24,500,000 plus 24.5 per cent. of any re-calculated interest pursuant to paragraphs 3.3(a) and 3.4 of Schedule 9	24.5%

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SCHEDULE 2

The Company

1.	Date of incorporation:	17 August 1994
2.	Place of incorporation:	England and Wales
3.	Registered number:	2959785
4.	Registered office	c/o Devonport Royal Dockyard Limited Devonport Plymouth PL1 4SG
5.	Directors:	●David Addison Milne Dunbar* ●Dennis Ernest Gilbert ●Bang Chuan Liew* ●Alan Wallace Fernie Mitchelson* ●Sir Malcolm David Pledger* ●Andrew Edward Rose* ●Mark Wayne Selway* ●Bruce Alan Stanski* ●Ian Paul Tyler* ●Henry William Warren
6.	Secretary	Henry William Warren
7.	Authorised share capital:	£600 divided into 204 A ordinary shares of £1 each, 196 B ordinary shares of £1 each and 200 deferred shares of £1 each
8.	Issued share capital:	£400 divided into 204 A ordinary shares of £1 each and 196 B ordinary shares of £1 each
9.	Registered shareholders:	●Kellogg Brown & Root Holdings (U.K.) Limited - 204 A ordinary shares of £1 each ●Balfour Beatty plc - 98 B ordinary shares of £1 each ●The Weir Group plc - 98 B ordinary shares of £1 each
10.	Auditors:	KPMG LLP
11.	Accounting reference date:	31 December

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SCHEDULE 3

The Subsidiaries

Devonport Royal Dockyard Limited

1.	Date of incorporation:	26 November 1986
2.	Place of incorporation:	England and Wales
3.	Registered number	2077752
4.	Registered office	Devonport Royal Dockyard Devonport Plymouth PL1 4SG
5.	Directors:	●David Addison Milne Dunbar* ●Dennis Ernest Gilbert ●Bang Chuan Liew* ●Alan Wallace Fernie Mitchelson* ●Sir Malcolm David Pledger* ●Andrew Edward Rose* ●Mark Wayne Selway* ●Bruce Alan Stanski* ●Ian Paul Tyler* ●Henry William Warren
6.	Secretary	Henry William Warren
7.	Authorised share capital:	£5,350,002 divided into 5,350,001 ordinary shares of £1 each and 1 special share of £1
8.	Issued share capital:	£5,350,002 divided into 5,350,001 ordinary shares of £1 each and 1 special share of £1
9.	Registered shareholders:	●Devonport Management Limited - 5,350,001 ordinary shares of £1 each ●Secretary of State for Defence - 1 special share of £1
10.	Auditors:	KPMG LLP
11.	Accounting reference date:	31 December

35

Appledore Shipbuilders (2004) Limited

1.	Date of incorporation:	5 September 1986
2.	Place of incorporation:	England and Wales
3.	Registered number:	2052982
4.	Registered office:	Devonport Royal Dockyard Devonport Plymouth PL1 4SG
5.	Directors:	●David Addison Milne Dunbar* ●Dennis Ernest Gilbert ●Henry William Warren
6.	Secretary	Henry William Warren
7.	Authorised share capital:	£1,000,000 divided into 103,000 A ordinary shares of £1 each and 897,000 B ordinary shares of £1 each
8.	Issued share capital:	£1,000,000 divided into 103,000 A ordinary shares of £1 each and 897,000 B ordinary shares of £1 each
9.	Registered shareholders:	Devonport Management Limited
10.	Auditors:	KPMG LLP
11.	Accounting reference date:	31 December

36

Defence Supply Chain Solutions Limited

1.	Date of incorporation:	29 September 2003
2.	Place of incorporation	England and Wales
3.	Registered number:	4915240
4.	Registered office:	Devonport Royal Dockyard Devonport Plymouth Devon PL1 4SG
5.	Directors:	●Dennis Ernest Gilbert ●Henry William Warren
6.	Secretary	Henry William Warren
7.	Authorised share capital:	£1,000 divided into 1,000 ordinary shares of £1 each
8.	Issued share capital:	£1 divided into 1 ordinary share of £1
9.	Registered shareholders:	Devonport Management Limited
10.	Accounting reference date:	31 December

37

Frazer-Nash Consultancy Group Limited

1.	Date of incorporation:	29 November 2001
2.	Place of incorporation:	England and Wales
3.	Registered number:	4331183
4.	Registered office:	c/o Devonport Royal Dockyard Limited Devonport Plymouth Devon PL1 4SG
5.	Directors:	●Paul John Best ●Robert Ronald Burge ●David Addison Milne Dunbar* ●Dennis Ernest Gilbert ●Christopher Charles Henry Guyott ●Andrew Graham Milton ●Martin John Simon Palmer ●Henry William Warren
6.	Secretary	Robert Ronald Burge
7.	Authorised share capital:	£165,000 divided into 15,000,000 A ordinary shares of 1 penny each and 1,500,000 B ordinary shares of 1 penny each
8.	Issued share capital:	£115,671 divided into 10,908,600 A ordinary shares of 1 penny each and 658,500 B ordinary shares of 1 penny each
9.	Registered shareholders:	Devonport Management Limited
10.	Accounting reference date:	31 December

38

Frazer-Nash Consultancy Limited

1.	Date of incorporation:	27 November 1990
2.	Place of incorporation:	England and Wales
3.	Registered number:	2562870
4.	Registered office:	c/o Devonport Royal Dockyard Ltd Devonport Plymouth Devon PL1 4SG
5.	Directors:	●Paul John Best ●Mark Stephen Brennan ●Robert Ronald Burge ●David Addison Milne Dunbar* ●Christopher Alexander Edwards ●Dennis Ernest Gilbert ●Steven Grant ●Christopher Charles Henry Guyott ●Neil Malcolm McDougall ●Andrew Graham Milton ●Martin John Simon Palmer ●Henry William Warren
6.	Secretary:	Robert Ronald Burge
7.	Authorised share capital:	£500,000 divided into 500,000 ordinary shares of £1 each
8.	Issued share capital:	£115,671 divided into 112,671 A ordinary shares of £1 each and 3,000 B ordinary shares of £1 each
9.	Registered shareholders:	Frazer-Nash Consultancy Group Limited
10.	Auditors:	KPMG LLP
11.	Accounting reference date:	31 December

39

FNC Group Limited

1.	Date of incorporation:	21 February 2001
2.	Place of incorporation:	England and Wales
3.	Registered number:	4168638
4.	Registered office:	c/o Devonport Royal Dockyard Limited Devonport Plymouth Devon PL1 4SG
5.	Directors:	●Robert Ronald Burge ●Andrew Graham Milton
6.	Secretary:	Robert Ronald Burge
7.	Authorised share capital:	£10,000 divided into 10,000 ordinary shares of £1 each
8.	Issued share capital:	£2 divided into 2 ordinary shares of £1 each
9.	Registered shareholders:	Frazer-Nash Consultancy Group Limited
10.	Accounting reference date:	31 December

40

FNC Limited

1.	Date of incorporation:	7 November 1996
2.	Place of incorporation:	England and Wales
3.	Registered number:	3277619
4.	Registered office:	c/o Devonport Royal Dockyard Limited Devonport Plymouth Devon PL1 4SG
5.	Directors:	Andrew Graham Milton
6.	Secretary:	Robert Ronald Burge
7.	Authorised share capital:	£100 divided into 100 shares of £1 each
8.	Issued share capital:	£2 divided into 2 shares of £1 each
9.	Registered shareholders:	FNC Group Ltd
10.	Accounting reference date:	31 December

41

F N Consultancy Limited

1.	Date of incorporation:	6 March 1991
2.	Place of incorporation:	England and Wales
3.	Registered number:	2588970
4.	Registered office:	c/o Devonport Royal Dockyard Limited Devonport Plymouth Devon PL1 4SG
5.	Directors:	●Robert Ronald Burge ●Andrew Graham Milton
6.	Secretary:	Robert Ronald Burge
7.	Authorised share capital:	£100,000 divided into 100,000 ordinary shares of £1 each
8.	Issued share capital:	£2 divided into 2 ordinary shares of £1 each
9.	Registered shareholders:	FNC Group Ltd
10.	Accounting reference date:	31 December

42

LSC Group Holdings Limited

1.	Date of incorporation:	24 March 1998
2.	Place of incorporation:	England and Wales
3.	Registered number:	3533640
4.	Registered office:	Devonport Royal Dockyard Devonport Plymouth PL1 4SG
5.	Directors:	●Clive Laurence Bullen ●Paul Clark ●David Addison Milne Dunbar* ●Dennis Ernest Gilbert ●Nicholas Paul Hawkes ●Andrew Heap ●Andrew Graham Milton ●Michael Owen ●Martin John Simon Palmer ●Mark Pearson ●Henry William Warren
6.	Secretary	Nicholas Paul Hawkes
7.	Authorised share capital:	£100,000 divided into 100,000 ordinary shares of £1 each
8.	Issued share capital:	£100,000 divided into 100,000 ordinary shares of £1 each
9.	Registered shareholders:	Devonport Management Limited
10.	Auditors:	KPMG LLP
11.	Accounting reference date:	31 December

43

LSC Group Limited

1.	Date of incorporation:	8 July 1988
2.	Place of incorporation:	England and Wales
3.	Registered number:	2275471
4.	Registered office:	Devonport Royal Dockyard Devonport Plymouth PL1 4SG
5.	Directors:	●Clive Laurence Bullen ●Paul Clark ●David Addison Milne Dunbar* ●Dennis Ernest Gilbert ●Nicholas Paul Hawkes ●Andrew Heap ●Andrew Graham Milton ●Michael Owen ●Martin John Simon Palmer ●Mark Pearson ●Henry William Warren
6.	Secretary:	Nicholas Paul Hawkes
7.	Authorised share capital:	£349,097 divided into 349,097 ordinary shares of £1 each
8.	Issued share capital:	£349,097 divided into 349,097 ordinary shares of £1 each
9.	Registered shareholders:	LSC Group Holdings Ltd
10.	Auditors:	KPMG LLP
11.	Accounting reference date:	31 December

44

Locam Limited

1.	Date of incorporation:	28 April 1999
2.	Place of incorporation:	England and Wales
3.	Registered number:	3761194
4.	Registered office:	Devonport Royal Dockyard Devonport Plymouth PL1 4SG
5.	Directors:	●Martin John Simon Palmer ●Henry William Warren
6.	Secretary:	Nicholas Paul Hawkes
7.	Authorised share capital:	£100 divided into 100 ordinary shares of £1 each
8.	Issued share capital:	1 ordinary share of £1
9.	Registered shareholders:	LSC Group Ltd
10.	Accounting reference date:	31 December

45

Devonport Royal Dockyard Pension Trustees Limited

1.	Date of incorporation:	17 February 1987
2.	Place of incorporation:	England and Wales
3.	Registered number:	2100466
4.	Registered office:	Devonport Royal Dockyard Devonport Plymouth PL1 4SG
5.	Directors:	●Robert Charles Docherty ●Christopher John Elliott ●John Patrick Homeyard ●Philip Ross Jones ●Richard Glanville Margetts ●David Frank Nobes ●Derick Richard Northcott ●Peter Sydney Ernest Smith ●The Trustee Corporation Limited ●James Brian Varney ●Henry William Warren
6.	Secretary:	Neil Martin Skinner
7.	Authorised share capital:	£100 divided into 100 ordinary shares of £1 each
8.	Issued share capital:	£100 divided into 100 ordinary shares of £1 each
9.	Registered shareholders:	●Devonport Royal Dockyard Limited - 99 ordinary shares of £1 each ●Secretary of State for Defence - 1 share of £1
10.	Accounting reference date:	31 March

46

Devonport Royal Dockyard DC Pension Trustees Limited

1.	Date of incorporation:	14 December 2005
2.	Place of incorporation:	England and Wales
3.	Registered number:	5653437
4.	Registered office:	Central Office Block Devonport Royal Dockyard Devonport Plymouth PL1 4SG
5.	Directors:	●Robert Charles Docherty ●Christopher John Elliott ●John Patrick Homeyard ●Philip Ross Jones ●Richard Glanville Margetts ●Derick Richard Northcott ●Peter Sydney Ernest Smith ●The Trustee Corporation Limited ●Henry William Warren
6.	Secretary:	Neil Martin Skinner
7.	Authorised share capital:	£1,000 divided into 1,000 ordinary shares of £1 each
8.	Issued share capital:	1 ordinary share of £1
9.	Registered shareholders:	Devonport Royal Dockyard Limited - 1 ordinary share of £1
10.	Accounting reference date:	31 December

47

CSMG Inc.

1.	Date of incorporation:	12 January 2006
2.	Place of incorporation:	Ontario, Canada
3.	Registered number:	650505-8
4.	Registered office:	c/o Mr Alan J.H. Whiteley 2309 County Road 13 PR3 Picton Ontario, KOK2TO Canada
5.	Directors:	●William Dube ●Henry William Warren ●Alan J.H. Whiteley
6.	Share capital:	2 issued shares
7.	Registered shareholders:	●Devonport Management Limited - 1 share ●Weir Canada Inc - 1 share

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SCHEDULE 4

The Properties

Date	Parties	Description
		Freehold land and buildings being Devonport Royal Dockyard, Devonport, Plymouth, registered under title number DN380866
		Land abutting 4 Basin North (North Yard) at Devonport Road Dockyard, Devonport, Plymouth, registered under title number DN388779
		Land (known as Nuclear Transfer Route) in North Yard at Devonport Naval Base, Devonport, Plymouth registered under title number DN479585
13.03.1997	(1)           The Authority (2)           DRDL	Lease of Land and Buildings M001A and M002 (known as Amenity Room and Refuse Compactor Station) in Morice Yard at Devonport Royal Dockyard, Devonport, Plymouth
13.03.1997	(1)           The Authority (2)           DRDL	Lease of Building M002B and M004 (known as Gas Meter House and Plant/Boiler House) in Morice Yard at Devonport Royal Dockyard, Devonport, Plymouth, registered under title number DN388795
25.03.2003	(1)           The Authority (2)           DRDL	Lease relating to Land and Buildings number S081, S086, S087, S089, S084 and S090 being part of Zone 1, in South Yard at Devonport Naval Base, Devonport, Plymouth
25.03.2003	(1)           The Authority (2)           DRDL	Lease relating to Land and Building numbered S113 Devonport Naval Base, Devonport, Plymouth known as Zone 2A
25.03.2003	(1)           The Authority (2)           DRDL	Lease re Land and Building numbered S115 at Devonport Naval Base known as Zone 2B

49

Date	Parties	Description
25.03.2003	(1)           The Authority (2)           DRDL	Lease relating to Land and Building numbered S110, S111, S112, S114, S117, S122, S188 and S189, Devonport Naval Base, Devonport, Plymouth known as Zone 2C
25.03.2003	(1)           The Authority (2)           DRDL	Lease relating to Land and Building numbered S100 (comprising Zone 3B) in South Yard, Devonport Naval Base, Devonport, Plymouth
25.03.2003	(1)           The Authority (2)           DRDL	Lease relating to Land and Building S094 (comprising Zones 3C) in South Yard, Devonport Naval Base, Plymouth
25.03.2003	(1)           The Authority (2)           DRDL	Lease relating to Land and Buildings S056, S057 and S058 in South Yard, Devonport Naval Base, Devonport, Plymouth
25.03.2003	(1)           The Authority (2)           DRDL	Lease relating to Land and Building numbered S130 (known as Machine Shop no. 3) and S133 (Office and Amenity Centre) being Zone 4 in South Yard at Devonport Naval Base, Devonport, Plymouth
13.03.1997	(1)           The Authority (2)           DRDL	Lease of Land and Building S040 (known as the Dockyard Laboratory) being Zone 5 in South Yard at Devonport Royal Dockyard, Devonport, Plymouth, registered under title number DN388781
25.03.2003	(1)           The Authority (2)           DRDL	Lease relating to Land and Building numbered S151 and known as Zone 7B in South Yard at Devonport Naval base, Devonport, Plymouth
13.03.1997	(1)           The Authority (2)           DRDL	Lease of Building N005 (known as Plant/Boiler House) at Devonport Royal Dockyard, Devonport, Plymouth, registered under title number DN388786
13.03.1997	(1)           The Authority (2)           DRDL	Lease of car parking spaces at Hill 60 at Devonport Royal Dockyard, registered under title number DN388784

50

Date	Parties	Description
19.02.2002	(1)           The Authority (2)           DRDL	Lease of Land and Buildings numbered S142 (Amenity Centre and Store), S171 (Latrine), S172 (Number 2 Machine Shop), S181 (Offices), S182 (Workshop and Amenity Centre) and the structures known as Number 3 Slip, Shallow Dock and Slip Jetty and associated parking areas in South Yard at Devonport Royal Dockyard, Devonport, Plymouth
17.09.2002	(1)           The Authority (2)           DRDL	Lease relating to Premises at HM Naval Base Devonport, Plymouth (Parts of North Yard, Morice Yard, South Yard excluding enclave, Bull Point and Weston Mill - following buildings still occupied by DRDL: N003 N229 N229A N236 N238 S023 S024 S105 S107 S108 S118 S119 Laydown Area Container Pound M011 M023 M024 M025 M027 M028 M031A M031B M031C M033 M034 BP26 BP27 BP28 BP41 BP51 BP53 BP53A WM08 WM014 WM015 WM018 Trailer Park

51

Date	Parties	Description
13.10.2004	(1)           The Authority (2)           DRDL	Lease relating to Premises at HM Naval Base Devonport Plymouth Building S154 South Yard Enclave
15.04.2005	(1)           The Authority (2)           DRDL	Lease relating to Buildings S167, S168, S169 and additional land, HM Naval Base, Devonport, Plymouth
30.09.2005	(1)           The Authority (2)           DRDL	Lease relating to Building M006, HM Naval Base, Devonport, Plymouth
13.10.2004	(1)           The Authority (2)           DRDL	Lease relating to Premises at HM Naval Base, Devonport, Plymouth Building M008 Morice Yard
13.10.2004	(1)           The Authority (2)           DRDL	Lease relating to Premises at HM Naval Base, Devonport, Plymouth Building M044 Morice Yard
15.04.2005	(1)           The Authority (2)           DRDL	Lease relating to Land and Buildings comprising Devonport Distribution Facility (DDF) HM Naval Base, Devonport, Plymouth
17.09.2002	(1)           The Authority (2)           DRDL	Occupational Licence relating to premises at HM Naval Base, Devonport, Plymouth - following buildings still occupied by DRDL: N019 * N019A N019B N213 N215 (Ground and Second floors only) N259 (Ground floor workshops) S014 S015 WM005 WM006 * 100% Ground Floor (excluding Radiological Area), 80% Mezzanine floor, 50% First Floor

52

Date	Parties	Description
15.04.2005	(1)           The Authority (2)           DRDL	Lease relating to Buildings M067 and M068 HM Naval Base, Devonport, Plymouth
22.01.2003	(1)           HRH Prince of Wales (2)           DRDL	The Lease of foreshore adjoining Pottery Quay in the City of Plymouth
15.03.2004	(1)           Appledore Land Limited (2)           Dorhold Limited (3)           DRDL	Lease of Bidna and Newquay Shipyards, registered under title number DN495720
31.10.2005	(1)           Keynsham Assets Limited and Keynsham Assets (No. 2) Limited (2)           DRDL	Lease relating to Durley Park, Keynsham, registered under title number ST241216
20.05.2002	(1)           Dagnastar (2)           LSC Group Limited	Lease of Offices at Catherine House, 40A St Thomas Street, Weymouth

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Date	Parties	Description
24.12.2004	(1)           Punch Taverns (Offices) Limited (2)           LSC Group Limited	Lease of Lincoln House, Fradley Park, Lichfield, registered under title number SF496605
29.09.2001	(1)           Hurst Warne Pension Scheme (2)           Frazer-Nash Consultancy Limited	Lease of 1 Trinity Street, Bristol
29.09.2001	(1)           College Green Small Self-Administered Pension Scheme (2)           Frazer-Nash Consultancy Limited	Lease of 4/5 College Green, Bristol
30.03.2006	(1)           Spectrum Properties (Scotland) Limited (2)           Frazer-Nash Consultancy Limited	Lease of 18 Woodside Place, Glasgow
07.11.2006	(1)           Intelligenzia Property LLP (2)           Frazer-Nash Consultancy Limited	Lease of First Floor, The Cube, 1 Lower Lamb Street, Bristol, registered under title number BL96916
10.02.2006	(1)           Francis Mark Cancellor Bettison and Oliver Joseph Samuel Bettison (2)           Frazer-Nash Consultancy Limited	Lease of First Floor at Gordon Court, The Millfields, Plymouth

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Date	Parties	Description
07.11.2006	(1)           Norwich Property Trust Limited (2)           Frazer-Nash Consultancy Limited	Lease of Stonebridge House, Dorking Business Park, Station Road, Dorking, registered under title number SY757595
16.08.2005	(1)           HHC Advertising & Design Limited (2)           Frazer-Nash Consultancy Limited	Sub-underlease of Suite A, Third Floor, The Colston Tower, Colston Street, Bristol
04.11.2003	(1)           Morgan Industrial Properties Limited (2)           Frazer-Nash Consultancy Limited	Lease of Cayman House, Crown Square, Centrum 100, Burton on Trent, registered under title number SF480137
26.02.2007	(1)           MEPC Birchwood Park No.1 Limited and MEPC Birchwood Park No.2 Limited (2)           Frazer-Nash Consultancy Limited	Licence to occupy of Suites 403/404 Chadwick House, Birchwood Park, Birchwood, Warrington Cheshire

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SCHEDULE 5

Conditions To Completion

1. Shareholder Approvals

The passing, at a duly convened and held extraordinary general meeting (or any adjournment thereof) of the Purchaser, of any resolution or resolutions which are necessary, or in the opinion of the Purchaser desirable, to approve, effect and implement the transactions contemplated by this Agreement and to amend any restriction in the Purchaser's articles of association on the Purchaser's ability to borrow.

2. Authority Consent

Confirmation (to the extent required) of the consent of the Authority to the sale and purchase of the Shares hereunder and the execution and delivery to all the parties thereto of the Deeds of Adherence by the Authority provided that the final form of the Deeds of Adherence contain, in substantially the same form, those provisions of clauses 2.2 and 3.1 of the Deeds of Adherence annexed hereto.

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SCHEDULE 6

Conduct of the Group before Completion

The acts, matters and transactions referred to in Clause 4.1(d) are as follows:

(a) the allotment or issue of, or the grant of any right to call for the allotment or issue of,  any share or loan capital of any Group Company;

(b) the redemption or purchase by any Group Company of any of its own share capital;

(c) the declaration, making or payment of any dividend (whether in cash or in specie) or other distribution (other than a dividend or other distribution lawfully made to another Group Company);

(d) the passing of a shareholders' resolution;

(e) the entering into of any transaction with any Seller or any of its Connected Persons otherwise than on arm's length terms and in the ordinary course of business;

(f) the amendment of a Material Contract outside the ordinary course of business or termination of a Material Contract;

(g) the acquisition or disposal of any interest in real property;

(h) the approval by any Group Company of any capital expenditure (or the entering into of any such capital expenditure which has not been previously approved) which individually, or which, when aggregated with all other capital commitments entered into between the date of this Agreement and Completion, exceeds £500,000 (five hundred thousand pounds);

(i) the disposal of the whole or any significant part of the business and undertaking of any Group Company;

(j) the acquisition of any company, business or undertaking;

(k) the acquisition, otherwise than in the ordinary course of trading, of any asset  for a consideration which individually, or which, when aggregated with all other such acquisitions of such assets exceeds £500,000 (five hundred thousand pounds);

(l) the amendment, or agreement to amend, the terms of its borrowing or indebtedness in the nature of borrowing or create, incur, or agree to create or incur, borrowing or indebtedness in the nature of borrowing (except pursuant to facilities disclosed in the Disclosure Letter where the borrowing or indebtedness in the nature of borrowing does not exceed the amount available to be drawn by each Group Company under those facilities);

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(m) the grant of any guarantee, security or indemnity for the obligations of any person (other than a Group Company);

(n) the cancellation of any Policy (as defined in paragraph 18.1 of Schedule 8);

(o) the offer by any Group Company to engage a new employee who would become a Senior Employee;

(p) the dismissal of any Senior Employee by any Group Company except for cause;

(q) any material amendment (including any increase in emoluments) to the terms of employment of any category of employees of any Group Company;

(r) the amendment or discontinuance (wholly or partly) of a Disclosed Scheme (as defined in paragraph 23.1 of Schedule 8) or plan, proposal or intent to amend, discontinue (wholly or partly), or exercise a discretion in relation to a Disclosed Scheme;

(s) the creation of any form of security (other than a lien arising by operation of law or in the ordinary course of business) on or over the whole or any part of the undertaking or assets of any Group Company;

(t) the commencement of litigation or arbitration proceedings;

(u) the compromise, settlement, release, discharge or compounding of litigation or arbitration proceedings or the waiver of a right in relation to litigation or arbitration proceedings or the waiver of any material right other than in the ordinary course of trading;

(v) the entering into of any agreement (whether or not conditional) to do any of the foregoing;

(w) the surrender or variation of or the application for any material Environmental Licences;

(x) the entering into of any agreement for or relating to the extension of the WSMI contract;

(y) the entering into or making of any contract or tender for any contract, or amendment or variation of any contract or tender with any customer or proposed customer, in each case, where the expected total revenue is in excess of £3,000,000 (three million pounds);

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(z) the entering into of any purchase order, sub-contract or service contract for an amount in excess of £500,000 (five hundred thousand pounds), unless as part of an approved contract or as required in order to fulfil the requirements of an existing contract;

(aa) the entering into of any yacht construction contract or tender for any yacht construction contract (for the avoidance of doubt excluding the provision of non-binding illustrative values in respect of potential new business);

(bb) the hiring of in excess of 20 (twenty) new employees or contractors;

(cc) the making of in excess of 20 (twenty) redundancies; and

(dd) without prejudice to Clauses 15.2 and 15.3, the issuing of any press releases or the giving of any press interviews in relation to the sale of the Shares or the future prospects of the business of the Group.

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SCHEDULE 7

Completion

1. At Completion, the Sellers shall (save in respect of paragraph 1(r) in respect of which only KBR shall) deliver or cause to be delivered to the Purchaser or the Purchaser's Solicitors:

(a) transfers in respect of the Shares duly executed by the registered holders in favour of the Purchaser together with the share certificates in respect of the Shares (or an indemnity in the agreed form in respect of any missing certificate);

(b) share certificates in respect of all the issued shares in each Subsidiary other than the Special Share in the capital of DRDL held by the Authority, the share in the capital of Devonport Royal Dockyard Pension Trustees Limited held by the Authority and the share in the capital of CSMG, Inc. held by Weir Canada Inc.;

(c) powers of attorney in the agreed form given by each of the Sellers in favour of the Purchaser to enable the Purchaser to exercise all voting and other rights attaching to the Shares pending registration of the Purchaser as the holder of the Shares;

(d) the statutory books (written up to but not including Completion), the certificate of incorporation, any certificate of incorporation on change of name and the common seal of each Group Company (other than CSMG, Inc.);

(e) schedules of the title deeds of the Properties together with undertakings from the solicitors holding such title deeds to hold the same to the order of the Purchaser;

(f) written resignations in the agreed form from each director and the secretary of each Group Company who has an asterisk next to his name in Schedule 2 or Schedule 3.

(g) a copy of the written resignation in the agreed form of the auditors of each Group Company accompanied in each case by a statement that there are no circumstances connected with their resignation which should be brought to the attention of the members or creditors of the relevant Group Company and confirmation that the resignation and statement will be deposited at the registered office of the Group Company in accordance with section 394 of the Companies Act 1985;

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(h) a counterpart of the Tax Covenant duly executed by each Seller;

(i) (subject to the same containing the provisions referred to in the proviso to the Condition set out in paragraph 2 of Schedule 5) a counterpart of each of the Deeds of Adherence duly executed by each Seller;

(j) the Termination Deed duly executed by the parties thereto;

(k) certified copies of the minutes of the board meetings held pursuant to paragraph 2 of this Schedule;

(l) a certified copy of any power of attorney under which any document to be delivered to the Purchaser or the Purchaser's Solicitors pursuant to this paragraph 1 has been executed;

(m) a certified copy of resolutions of the directors of each Seller approving and authorising the execution of each Transaction Document to which it is a party;

(n) a certified copy of resolutions of the directors of the Guarantor approving and authorising the execution of each Transaction Document to which it is a party;

(o) to the extent not in the possession of any Group Company, all books of account or references as to customers and/or suppliers and other records and, all insurance policies, in each case, owned by any Group Company;

(p) to the extent not in the possession of any Group Company, all licences, consents, permits and authorisations obtained by or issued to any Group Company;

(q) a release in the agreed form duly executed as a deed, releasing each Group Company and their respective officers and employees from any liability whatsoever (actual or contingent) which may be owing to the Sellers or any of their Connected Persons by any Group Company; and

(r) a counterpart of the Transitional Services Agreement duly executed by KBR.

2. At Completion, the Sellers shall procure that:

(a) a meeting of the directors of the Company is duly convened and held at which resolutions are passed to:

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(i) approve the registration of the transfers referred to in paragraph 1(a) of this Schedule (subject to stamping of the transfers) and authorise the issue of share certificates to the Purchaser;

(ii) change the Company's accounting reference date to 31 March;

(iii) appoint persons nominated by the Purchaser as directors and the secretary of the subsidiary and to accept the resignations referred to in paragraph 1(f) of this Schedule;

(iv) appoint PricewaterhouseCoopers LLP as the auditors of the Company;

(v) revoke all existing bank mandates and give new instructions to the relevant bank in such form as the Purchaser may require if requested by the Purchaser at least 5 Business Days prior to Completion;

(vi) change the registered office of the Company to 2 Cavendish Square, London W1G 0PX;

in each case with effect from Completion; and

(b) a meeting of the directors of each Subsidiary is duly convened and held at which resolutions are passed to:

(i) change the Subsidiary's accounting reference date to 31 March;

(ii) appoint persons nominated by the Purchaser as the directors and the  secretary of the Subsidiary and to accept the resignations referred to in paragraph 1(f) of this Schedule;

(iii) appoint PricewaterhouseCoopers LLP as the auditors of the Company;

(iv) revoke all existing bank mandates and give new instructions to the relevant bank in such form as the Purchaser may require,

(v) change the registered office of the Subsidiary to 2 Cavendish Square, London W1G 0PX,

in each case with effect from Completion.

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3. At Completion, the Purchaser shall:

(a) pay the Consideration (less the deductions referred to in Clause 5.7) to the Sellers' Solicitors by way of bank transfer to Lloyds TSB Bank plc, Moorgate Branch, 34 Moorgate, London EC2R 6DN; Sort Code: 30-95-74; Account name: Kirkpatrick & Lockhart Preston Gates Ellis LLP Client account; Account No: 0214272, reference "HDK/6011542.0001";

(b) deliver to the Sellers' Solicitors:

(i) a counterpart of the Tax Covenant duly executed by the Purchaser;

(ii) (subject to the same containing the provisions referred to in the proviso to the Condition set out in paragraph 2 of Schedule 5) a counterpart of each of the Deeds of Adherence duly executed by the Purchaser;

(iii) a certified copy of resolutions of the directors of the Purchaser approving and authorising the execution of each Transaction Document to which it is a party;

(iv) a certified copy of the resolution of the shareholders of the Purchaser referred to in paragraph 1 of Schedule 5; and

(v) a counterpart of the Transitional Services Agreement duly executed by the Purchaser.

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SCHEDULE 8

Sellers' Warranties

1. Capacity and Authority

1.1 Each of Kellogg Brown & Root Holdings (U.K.) Limited and Balfour Beatty plc is a company duly incorporated and validly existing under the laws of England and Wales.  The Weir Group plc is a company duly incorporated and validly existing under the laws of Scotland.

1.2 Each Seller has the power to enter into, perform and deliver, and has taken all necessary action to authorise its entry into, performance and delivery of, this Agreement and any Transaction Document to which it is a party.

1.3 The obligations assumed by each Seller under this Agreement and any Transaction Document to which it is a party are valid, legal and binding obligations.

1.4 Subject to the fulfilment of the Conditions, the entering into of, and the performance by each Seller of its obligations under, this Agreement and any Transaction Document to which it is a party will not:

(a) amount to a violation or breach of any law or regulation applicable to it; or

(c) violate or conflict with the provisions of its constitutional documents.

1.5 Save as set out in Clause 3 and Schedule 5, all necessary governmental and other consents, approvals, licences and authorisations required by each Seller to enable such Seller lawfully to enter into, and to exercise its rights and comply with its obligations under, this Agreement and any Transaction Document to which it is a party have been obtained or effected and are in full force and effect.

2. Corporate Information

2.1 The information regarding the Company set out in Schedule 2 is true and accurate.

2.2 The information regarding each of the Subsidiaries set out in Schedule 3 is true and accurate.

2.3 Each Group Company is a company duly incorporated and validly existing under the laws of England and Wales.

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2.4 The copies of the memorandum and articles of association of each Group Company attached to the Disclosure Letter:

(a) are complete and accurate;

(c) have attached to them copies of all resolutions and other documents required by law to be so attached; and

(d) fully set out the rights and restrictions attaching to each class of share capital of the Group Company to which they relate.

2.5 The statutory books and registers of each Group Company have been properly maintained.

2.6 All returns, particulars, resolutions and other documents which any Group Company is required by law to file with or deliver to the Register of Companies in England and Wales have been duly filed or delivered.

3. Share Capital of the Company

3.1 The Shares comprise the whole of the issued and allotted share capital of the Company and are fully paid or credited as fully paid.

3.2 There is no Encumbrance over or affecting any of the Shares and there is no agreement (whether actual or contingent) to create any Encumbrance over any of the Shares.  No person has claimed to be entitled to an Encumbrance in relation to any of the Shares.

3.3 There is no agreement or commitment outstanding which calls for the allotment, issue or transfer of, or confers on any person the right to call for the allotment, issue or transfer of, any shares or securities of the Company.

4. Share Capital of the Subsidiaries

4.1 All of the issued shares of each of the Subsidiaries have been properly allotted and issued and are fully paid or credited as fully paid.

4.2 All of the issued shares of each of the Subsidiaries are legally and beneficially owned by the Company (or another Group Company) other than the Special Share in the capital of DRDL held by the Authority and the ordinary share in the capital of Devonport Royal Dockyard Pension Trustees Limited held by the Authority.

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4.3 There is no Encumbrance over or affecting any of the issued shares of any of the Subsidiaries and there is no agreement (whether actual or contingent) to create any Encumbrance over any of such shares.

4.4 There is no agreement or commitment outstanding which calls for the allotment, issue or transfer of, or confers on any person the right to call for the allotment, issue or transfer of, any shares or securities of any of the Subsidiaries.

5. Other Interests

No Group Company:

(a) owns or has any interest in any securities of any company (other than shares held by it in another Group Company);

(b) is a member of any partnership or other unincorporated association, joint venture or consortium (other than recognised trade associations); or

(c) has any branch or permanent establishment outside the United Kingdom.

6. Accounts

6.1 The Accounts were prepared in accordance with applicable statutory requirements and with accounting standards, policies, principles and practices generally accepted in the United Kingdom at the time they were audited.

6.2 The Accounts show a true and fair view of the state of affairs of the Company and of the Group as a whole as at the Accounts Date and of the profits and losses for the financial year ended on the Accounts Date.

6.3 The Accounts were prepared on a basis consistent with, and using the same accounting policies as those used in the preparation of, the audited consolidated financial statements of the Company for the previous two accounting periods.

6.4 The Management Accounts are not audited but have been prepared so far as relevant in all material respects in accordance with accounting policies consistent with those used in preparing the management accounts of the Company for the previous two accounting periods.

6.5 No Group Company is engaged in any financing (including incurring of any borrowing or any indebtedness in the nature of acceptances or acceptance credits) of a type which would not be required to be shown or reflected in the Accounts.

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7. Changes since the Accounts Date

7.1 Since the Accounts Date:

(a) the business of the Group as a whole has been carried on in the ordinary and usual course without material alteration in its nature or scope;

(b) no change in the accounting reference period of any Group Company has been made and no accounting period of any Group Company has ended;

(c) no resolution in general meeting or written resolution of the members of any Group Company has been passed (other than resolutions relating to the routine business of annual general meetings);

(d) no share or loan capital has been allotted or issued or agreed to be allotted or issued by any Group Company (other than to another Group Company);

(e) no Material Contract has been entered into by any Group Company and no Material Contract to which a Group Company was a party as at the Accounts Date has been or terminated (other than by virtue of the expiry of its term);

(f) no dividend or other distribution has been declared, made or paid by any Group Company (except for the dividend declared by the Company on 14 December 2006 in the sum of £10,000,000 (ten million pounds) and paid on 18 January 2007);

(g) no Group Company has disposed of or agreed to dispose of an asset having a value exceeding £50,000 otherwise than on an arm's length basis;

(h) so far as the Sellers are aware no Group Company has acquired or agreed to acquire an asset having a value exceeding £50,000 otherwise than on an arm's length basis;

(i) no Group Company has made, or agreed to make, capital expenditure exceeding in total £500,000 (five hundred thousand pounds) or incurred, or agreed to incur, a commitment or connected commitments involving capital expenditure exceeding in total £500,000 (five hundred thousand pounds);

(j) neither any supplier listed at document 1.36.2 of the Data Room nor the Authority has ceased or substantially reduced its trade with any Group Company or has altered the terms of trade to the Group Company's material disadvantage or so far as the Sellers are aware given written notice of its intention to do so;

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(k) no Group Company has repaid, purchased or redeemed share capital or, to the Sellers, loan capital, or made (whether or not subject to conditions) an agreement to do any of those things; and

(l) there has been no Leakage.

8. Accounting Records

8.1 The accounting records of each Group Company have been properly maintained in all material respects in accordance with the law.

8.2 No notice that any of such records is incorrect or should be rectified has been received by any Group Company.

9. Effect of Sale

9.1 So far as the Sellers are aware, neither the execution nor performance of this Agreement or any Transaction Document will:

(a) result in any Group Company losing the benefit of a material Permit or a material asset which it enjoys at the date of this Agreement in any jurisdiction; or

(b) result in a breach of, or give rise to an event of default under, or require the consent of a person under, any Material Contract or any legal or regulatory requirement in any jurisdiction; or

(c) make a Group Company liable to offer for sale, transfer or otherwise dispose of or purchase or otherwise acquire any assets, including shares held by it in other bodies corporate under their articles of association or any agreement or arrangement (save in accordance with the rights attaching to the Special Share); or

(d) result in any supplier listed at document 1.36.2 of the Data Room being entitled (and if such a supplier is so entitled, so far as the Sellers are aware, it will not exercise any such entitlement) to cease supplying any Group Company or substantially to reduce its supplies to or to change the terms upon which it supplies a Group Company.

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10. Contracts and Commitments

10.1 No Group Company is a party to:

(a) any agency, distributorship or franchise agreement;

(b) any joint venture agreement or any agreement under which it participates with any other person in any business;

(c) any agreement which was entered into otherwise than at arm's length;

(d) any Material Contract pursuant to the terms of which any other party will, by virtue of the acquisition of the Shares by the Purchaser, be relieved of any obligation or become entitled to exercise any right (including any right of termination) thereunder;

(e) any Material Contract (other than those Material Contracts which are listed in the Disclosure Letter); or

(f) any Material Contract which is incapable of termination in accordance with its terms, by such Group Company, on 12 months' notice or less.

10.2 No Group Company is in material breach of any Material Contract to which it is a party or any other agreement, the breach of which would have a material adverse effect on the business of the Group.

10.3 So far as the Sellers are aware, no party with whom any Group Company has entered into a Material Contract is in material breach thereof.

10.4 No person has received or is entitled to receive from a Group Company any finder's fee, brokerage or commission in connection with the purchase of the Shares by the Purchaser.

10.5 The Sellers have no knowledge of the invalidity or unenforceability of, or a ground for termination, avoidance or repudiation of, any Material Contract.  No party with whom a Group Company has entered into any Material Contract or any other agreement, the termination of which would have a material adverse effect on the business of the Group as a whole, has given written notice (or, so far as the Sellers are aware, any other notice) of its intention to terminate, or has sought to repudiate or disclaim, such Material Contract or such other agreement.

10.6 Paragraph 10.6 of the Disclosure Letter contains details (including all liabilities of the parties thereto) of all contracts or arrangements to which each of the Sellers and/or their Connected Persons are party with, or which relate in any way to, any Group Company.

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10.7 The Disclosure Letter refers to and has appended to it copies of all contracts with customers of the Group for the construction of yachts by the Group (including material amendments thereto, but excluding specifications relating thereto) which are uncompleted or under which liabilities or obligations (in each case whether absolute or contingent) of any Group Company remain outstanding.

10.8 The Disclosure Letter contains details of all Phase II works which remain outstanding under the D154 Agreement.

11. Dealings with the Sellers

There is no: (i) outstanding indebtedness (ii) other liability or obligation or (iii) outstanding agreement between any Group Company on the one hand and any Seller or any of its Connected Persons on the other.

12. Powers of Attorney

No Group Company has given any power of attorney or other written authority which is still outstanding or effective to any person to enter into any contract or commitment on its behalf (other than to its directors, officers and employees to enter into routine trading contracts in the normal course of their duties).

13. Assets

13.1 So far as the Sellers are aware, each material asset (other than Property) included in the Accounts or acquired by a Group Company since the Accounts Date (other than current assets disposed of, realised or applied in the normal course of trading) is owned both legally and beneficially by the relevant Group Company and, where capable of possession, is in the possession or under the control of the relevant Group Company.

13.2 No Encumbrance (other than a lien arising by operation of law in the ordinary course of trading) over or affecting the whole or any part of the undertaking or assets of any Group Company is outstanding and there is no agreement or commitment to give or create any and no claim has been made by any person to be entitled to any.

13.3 Each Group Company owns or has the right to use, and will immediately following Completion own or have the right to use, all material assets necessary, in the reasonable opinion of the board of directors of each Group Company, for the operation of its business as currently conducted in all material respects and without limitation no rights (other than rights as shareholders in the Company) relating to the business of each Group Company are owned or otherwise enjoyed by or on behalf of any Seller or their Connected Persons.

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13.4 All material items of plant, machinery, vehicles and equipment in use in the ordinary course of the business as currently carried on by each Group Company and which are owned by a Group Company and/or which a Group Company is obliged to maintain are, in the reasonable opinion of the board of directors of such Group Company, in reasonable working order for their age and degree of use.

13.5 Copies of every bill of sale or any hiring or leasing agreement, hire purchase agreement, credit or conditional sale agreement, agreement for payment on deferred terms or any other similar agreement to which a Group Company is party in each case exceeding £500,000 (five hundred thousand pounds) in value annually, and which has been entered into since the Accounts Date are annexed to the Disclosure Letter.

13.6 So far as the Sellers are aware, and only in connection with the Supacat and rail-related businesses of the Group, no Group Company has supplied, since 1 Janauary 2005, goods which have been defective or which failed materially to comply with their terms of sale.

13.7 The Disclosure Letter includes a list setting out details of all assets which the Authority has designated as "Strategic Assets" for the purposes of article 6 of DRDL's articles of association and has attached to it a true and complete copy of the Illustrative Programme of 29 November 1996.

14. Bank Facilities

14.1 A summary of all overdrafts, loans and other  financial facilities made available to the Group is set out in the Disclosure Letter (the "Facilities").

14.2 So far as the Sellers are aware, no event which constitutes or would (with the giving of notice, lapse of time or fulfilment of any other condition) constitute an event of default under, or otherwise give rise to an obligation to repay prior to its stated maturity, any of the Facilities has occurred (or been alleged to have occurred).

15. Debts

The Disclosure Letter contains a list setting out details of all debts in excess of £500,000 (five hundred thousand pounds) due to any Group Company which, so far as the Sellers are aware, are likely to be bad or doubtful debts.

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16. Grants

16.1 No Group Company has received any grant from any governmental or other body since 1 January 2005.

16.2 No Group Company is liable to repay an investment or other grant or subsidy made to it by any person (including the Department of Trade and Industry or its predecessor) which either individually or in aggregate are material to any Group Company.

17. Licences

17.1 Each Group Company has obtained all material licences, permissions, authorisations and consents necessary for carrying on its business effectively in the places and in the manner in which such business is now carried on.

17.2 The licences, permissions, authorisations and consents referred to in paragraph 17.1 are in full force and effect and, so far as the Sellers are aware are being complied with in all material respects.

17.3 No written notice has been received by any Group Company from any applicable authority since 1 January 2005 indicating that any of the licences, permissions, authorisations or consents referred to in paragraph 17.1 are likely to be suspended, cancelled, revoked or not renewed.

18. Insurance

18.1 A summary of the insurance policies in which a Group Company has an interest (the "Policies") is attached to the Disclosure Letter.

18.2 All the Policies are in full force and effect and are not void or voidable.

18.3 There are no material outstanding claims under any of the Policies and so far as the Sellers are aware, no matter exists which might give rise to a material claim under any of the Policies.

19. Litigation

19.1 No Group Company is engaged in any litigation, arbitration or other dispute resolution process or administrative or criminal proceedings or regulatory action (whether as claimant, defendant or otherwise) where in any such case the amount in dispute or which is likely to be in dispute or the liability incurred or likely to be incurred by any Group Company exceeds, or ought reasonably to be expected to exceed, £100,000 (one hundred thousand pounds) in respect of an individual claim or £1,000,000 (one million pounds) when aggregated with all other claims and so far as the Sellers are aware, there are no current outstanding matters which are likely to lead to such a dispute.

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19.2 So far as the Sellers are aware, no litigation, arbitration or other dispute resolution process or administrative or criminal proceedings or regulatory action by or against any Group Company which would have a material adverse effect on the business of the Group as a whole is pending.

19.3 There is no outstanding judgment, order or decree of any court or any governmental or regulatory authority in any jurisdiction against any Group Company.

20. Compliance

20.1 No Group Company has received notice in writing from any applicable authority since 1 January 2005 that it does not conduct its business in all material respects in accordance with applicable legal and administrative requirements.

20.2 Each Group Company conducts its business and affairs and deals with its assets in all material respects in accordance with all applicable legal and regulatory requirements in any jurisdiction and so far as the Sellers are aware has done so since 1 January 2005.

21. Data Protection

21.1 So far as the Sellers are aware, the Group complies in all material respects with the Data Protection Act 1998.

21.2 No Group Company has received within the 12 months prior to the date of this Agreement:

(a) any notice or complaint from the office of the Information Commissioner under the Data Protection Act 1998 (including any information or enforcement notice) alleging non-compliance by it with that Act; or

(b) any claim for compensation under the Data Protection Act 1998 for loss or unauthorised disclosure of data.

22. Employment

22.1 The Disclosure Letter contains copies of the service agreements (including any other documents which form part of the Senior Employee's material terms and conditions of employment) for each Senior Employee.

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22.2 No Senior Employee has given notice terminating his contract of employment or is under notice of dismissal and no material dispute under any employment legislation is outstanding between any Senior Employee or former Senior Employee relating to his or her employment or its termination and, so far as the Sellers are aware, no such dispute is pending or threatened.

22.3 No offer of employment has been made by any Group Company which has not been accepted at the date of this Agreement but which remains capable of acceptance and which, if accepted, would result in the person to whom the offer has been made becoming a Senior Employee.

22.4 The Disclosure Letter contains copies of all of the standard terms and conditions of employment, staff handbook and HR policies which are generally applicable to employees of the Group or applicable to a particular grade or category thereof.

22.5 There are no terms and conditions in any contract with any employee pursuant to which such person will be entitled to receive any payment or benefit or such person's rights will change as a direct consequence of the transaction contemplated by this Agreement.

22.6 All contracts of employment between a Group Company and any of its employees can be terminated by the employing company without damages or compensation (other than that payable under Parts X and XI of the Employment Rights Act 1996) by giving at any time only the minimum period of notice applicable to that contract which is specified in section 86 of the Employment Rights Act 1996.

22.7 Since the Accounts Date, no variation has been made in the terms of employment of the employees of any Group Company (except for increases in emoluments made in accordance with normal Group practice) and no future variation in respect of salary has been promised or agreed to any material number of employees by any Group Company and for Senior Employees no such future variation has been promised or agreed to by any Group Company.  For the purpose of this paragraph 22.7 a material number of employees means more than twenty (20) employees.

22.8 The Disclosure Letter contains copies of all collective agreements (whether with a trade union, staff association or any other body representing employees of the Group) concerning any Group Company.

22.9 Copies of all share incentive schemes, share option schemes or profit sharing, bonus or other incentive schemes (the "Schemes") applicable to the employees of the Group or any of them are attached to the Disclosure Letter.

22.10 So far as the Sellers are aware, the Schemes have at all times been operated in accordance with their governing rules or terms and all applicable laws and all documents which are required to be filed with any regulatory authority have been so filed.

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22.11 So far as the Sellers are aware no past or present employee or any dependent thereof or any other participant in any Scheme has made any claim against any Group Company in respect of any Scheme and so far as the Sellers are aware no event has occurred which could or might give rise to any such claim.

22.12 No Group Company is engaged (or has been in the two years prior to the date of this Agreement) in any industrial or trade dispute with any trade union or other organisation representing employees of the Group and, so far as the Sellers are aware, none is pending or threatened.

22.13 The Disclosure Letter contains details of all outstanding claims brought by employees or former employees of the Group whether in the Employment Tribunal or otherwise.

22.14 So far as the Sellers are aware, no Group Company has within the 12 months prior to the date of this Agreement made or promised to make, or given or promised to give, any payment or other benefit on or following the actual or proposed termination, or in connection with the variation, of any contract of employment.

22.15 Copies of the framework agreements for the engagement of temporary workers currently engaged by DRDL who are not employees of any Group Company are contained in the Disclosure Letter.

22.16 All salaries, wages, fees and other benefits of all employees of the Group have, to the extent due, been paid or discharged in full together with all related payments to third party benefit providers and relevant authorities, save for one month's arrears of employee remuneration accrued or due or for reimbursement of authorised business expenses incurred within the 3 months prior to the date of this Agreement.

22.17 So far as the Sellers are aware, there are no enquiries or investigations existing, pending or threatened affecting any Group Company in relation to any worker by the Equal Opportunities Commission, the Commission for Racial Equality, the Disability Rights Commission or the Health and Safety Executive or any other bodies with similar functions or powers in relation to workers.

22.18 Details are disclosed in the Disclosure Letter of any redundancy scheme or redundancy formula or redundancy policy (whether contractual or discretionary) that applies to the employees of any Group Company and save as disclosed no employee is entitled to a redundancy payment made in excess of the statutory redundancy entitlement, and so far as the Sellers are aware, there is no provision in any occupational pension scheme in which employees participate which provides enhanced benefits on redundancy.

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22.19 All Group Companies have in the 12 months prior to the date of this Agreement complied with their obligations to inform and consult with trade unions an other representatives of employees and to send notices to the Secretary of State pursuant to sections 188 to 194 of the TULR(C)A and regulations 10 and 11 of the Transfer Regulations.

22.20 No Group Company has received, or sought to receive, any payment from the Authority in respect of the redundancy of employees of the Group save to the extent that such payments have been made to employees whose employment has been terminated by any Group Company by reason of redundancy and in respect of whom the Group has been entitled to receive payment under the Authority Contracts.

23. Pensions

23.1 For the purposes of this paragraph 21 and Schedule 6, the following expressions shall have the following meanings:

“DB Scheme” means the Devonport Royal Dockyard Defined Benefit Scheme;

“DC Scheme” means the Devonport Royal Dockyard Defined Contribution Pension Scheme;

"Defined Benefit Occupational Pension Scheme Rights" means rights or benefits other than money purchase benefits as defined in section 181 of the Pension Schemes Act 1993;

“Disclosed Schemes” means, as the context so requires, each, any or all of the following:

(a) the DB Scheme;

(b) the DC Scheme;

(c) the SIPS;

(d) the LSC GPP with Norwich Union, policy number 16554;

(e) the LSC (DML) Group Personal Pension Plan with Norwich Union, policy number 17631;

(f) the LSC Group Personal Payment Plan with AXA Sunlife, policy number 820631;

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(g) the LSC Group Holdings Executive Pension Plan with Clerical Medical;

(h) the Frazer-Nash Group Personal Pension Plan with Norwich Union;

(i) the Frazer-Nash Group Personal Pension Plan with NPI;

(j) the Frazer-Nash Stakeholder Pension Scheme with Norwich Union;

(k) the LSG Group Holdings Life Assurance Scheme;

(l) the personal pension arrangement for Mark Pearson with Norwich Union under policy number PO517999A;

(m) the self-invested personal pension scheme for Martin Palmer; and

(n) the self-invested personal pension schemes in respect of CA Edwards, NM McDougall, PJ Best, MR Brennan and AG Milton;

"Relevant Benefits" means relevant benefits as defined in section 393B(1) of the Income Tax (Earnings and Pensions) Act 2003;

“SIPS” means the Shipbuilding Industry Pension Scheme;

“Employee” means an employee or a director of any one Group Company.

23.2 Other than the Disclosed Schemes, there are no legally binding agreements or arrangements under which any Group Company is required to make payment of a contribution towards or other provision of Relevant Benefits for the benefit of an Employee or an Employee's dependant.

23.3 No Group Company is making any voluntary or ex gratia payment of any Relevant Benefits to or in respect of any employee or former employee.

23.4 No promise has been given, or representation made, to any Employee (or employee representative) by any Group Company as to the establishment, continuance, alteration or improvement of any Relevant Benefits.

23.5 The Purchaser has been supplied with a true and complete list of all the Employees who are members of the Disclosed Schemes or who are eligible for such membership together with true and complete details of their category of membership and the rates of employer contributions made to the Disclosed Schemes in respect of each Employee. So far as the Sellers are aware, no Employee has been excluded from membership of any Disclosed Scheme in contravention of the law. All documents provided in the Data Room and annexed to the Disclosure Letter in respect of the Disclosed Schemes are true and accurate in all material respects.

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23.6 The Disclosed Schemes are registered for the purposes of the Finance Act 2004.

23.7 A valid contracting-out certificate has been issued pursuant to the Pension Schemes Act 1993 relating to the employments which are contracted out in relation to the DB Scheme.

23.8 So far as the Sellers are aware, the Disclosed Schemes have been operated in accordance with their governing documents in all material respects.

23.9 So far as the Sellers are aware, each Group Company has in all material respects complied with all its obligations and applicable primary and secondary legislation (including under European Law) in relation to the Disclosed Schemes.

23.10 There are not in respect of any of the Disclosed Schemes any outstanding contributions payable by any Group Company or the Employees.

23.11 So far as the Sellers are aware, any lump-sum ill-health or death in service benefits which may be payable under the Disclosed Schemes (other than a return of the member's own contributions and contributions in respect of him) are fully insured with an insurance company and all premiums due to the insurance company have been paid. Each member has been covered for insurance at normal rates and on normal terms for persons in good health.

23.12 The benefits payable under the Disclosed Schemes (other than the DB Scheme) consist exclusively of money purchase benefits as defined in section 181 of the Pension Schemes Act 1993.

23.13 So far as the Sellers are aware, no claim has been made or threatened in writing against any Group Company or the trustees or administrators of any of the Disclosed Schemes (including any complaint under any internal dispute resolution procedure or to the Pensions Ombudsman) in connection with any of the Disclosed Schemes (other than routine claims for benefits).

23.14 So far as the Sellers are aware, each Group Company complies with the requirements set out in section 3 of the Welfare Reform and Pensions Act 1999 (duty of employers to facilitate access to stakeholder pension schemes), the provisions of the Stakeholder Pension Scheme Regulations 2000 (SI 2000/1403) and any other legislation applicable to stakeholder pension schemes.

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23.15 So far as the Sellers are aware, apart from the Transferred Employees and the WSMI Transferred Employees (as defined under the DB Scheme) no Employee has had his contract of employment transferred to any Group Company from another employer in circumstances where the Transfer of Undertakings (Protection of Employment) Regulations 1981 or the Transfer of Undertakings (Protection of Employment) Regulations 2006 applied and the Employee was entitled to Defined Benefit Occupational Pension Scheme Rights in respect of the former employment.

23.16 Since 27 April 2004, the Pensions Regulator has not imposed a Contribution Notice or Financial Support Direction on any Group Company under sections 38 to 51 (inclusive) of the Pensions Act 2004 and so far as the Sellers are aware, no circumstances exist which would result in a Contribution Notice or Financial Support Direction being imposed on any Group Company, other than the circumstances relating to the transaction, actions or omissions contemplated by this Agreement.

23.17 The DB Scheme provides broadly comparable benefits to the Civil Service Pension Scheme in so far as there is any legal obligation upon the Group to provide such benefits in respect of its Employees (and former Employees).

23.18 There is no impact on the funding of the DB Scheme by virtue of any redundancy policy, arrangement or agreement operated by any Group Company.

24. Property

24.1 The Properties comprise the only freehold or leasehold properties owned, used or occupied by any Group Company or in which any Group Company has an interest.

24.2 The replies to enquiries (as contained in the Data Room at documents 2.22.1, 2.22.2 and 2.22.3) relating to the Properties given by or on behalf of the Sellers are true and accurate in all material respects.

24.3 So far as the Sellers are aware, no Group Company has any material actual or contingent liability in respect of any estate or interest in real property (whether arising as original tenant, assignee, guarantor or otherwise) other than in respect of the Properties.

24.4 So far as the Sellers are aware, there are, appurtenant to each of the Properties, all rights and easements necessary for its existing use and enjoyment.

24.5 Each Group Company has, in relation to each Lease vested in it, complied substantially with all material covenants on the part of the tenant contained therein and, so far as the Sellers are aware, no collateral assurances, undertakings or concessions have been made by any landlord.

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24.6 The Properties are free from any Encumbrance and there is no agreement to create or permit to arise any Encumbrance.

24.7 No Group Company has, so far as the Sellers are aware, received notice alleging any material breach of any covenant, restriction, stipulation or other encumbrance affecting any Property.

24.8 No Group Company has, so far as the Sellers are aware, received written notice alleging that the existing use of any Property is not a lawful use under planning legislation or in the case of leasehold Property, under the terms of the lease or tenancy agreement.

24.9 So far as the Sellers are aware, all material permissions and consents have been obtained in respect of any alterations and improvements to any Property carried out by the relevant Group Company.

24.10 No Group Company has, so far as the Sellers are aware, received notice alleging breach of any applicable statutory requirements relating to the Properties.

24.11 So far as the Sellers are aware, there exists no dispute between any Group Company as the owner or occupier of a Property on the one hand and the owner or occupier of any other premises adjacent to or neighbouring the Property on the other and, so far as the Sellers are aware, there exists no circumstances that may give rise to any such dispute.

24.12 Each Group Company has under its control all material title deeds and documents necessary to prove its title to the interest it has in each Property in which it has an interest.

25. Environment

For the purposes of this paragraph 25 of Schedule 8, "material" shall be deemed to refer to facts, matters, circumstances, issues or events which have resulted in or are likely to result in an aggregate cost of £250,000 (two hundred and fifty thousand pounds) or more.

25.1 No Group Company:

(a) is causing; or

(b) has caused since 1^st April 2000; or

(b) so far as the Sellers are aware in the period since 5 April 1987 no other party has caused

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on at from or under the Properties or any former property owned or occupied by any Group Company any spillage, disposal, discharge, release, leakage, migration, entry, escape, deposit or emission (a "Release") of any Hazardous Substances where any such Release gives rise to or will prior to the expiry of the period specified in paragraph 2.1(b) of Schedule 9 give rise to a material liability (actual or contingent)  for any Group Company under Environmental Laws or Nuclear Laws.

25.2 There are no outstanding judgments orders or decrees of any court or any regulatory authority or any current or pending claims or proceedings against any Group Company with respect to any material breach of or material liability under Environmental Laws or Nuclear Laws and so far as the Sellers are aware no matters are existing at the date hereof that are likely to lead to any such claims or proceedings.

25.3 No written notice or formal regulatory action in writing from any relevant authority under Environmental Laws or Nuclear Laws have been received by any Group Company alleging or specifying any material breach of or material liability under any Environmental Laws or Nuclear Laws which remains outstanding at the date of this Agreement and no written notice or written correspondence has been received by any Group Company indicating any actual or potential revocation, suspension or any material modification of any Environmental Licence.

25.4 Each Group Company is complying and so far as the Sellers are aware has in the last three years complied in all material respects with all Environmental Laws and Nuclear Laws and all material Environmental Licences have been obtained and are in full force and effect.

25.5 Copies of all material environmental or health and safety reports, surveys, assessments and investigations prepared by third party consultants engaged by any Group Company or the Sellers or upon which any Group Company or the Sellers has reliance or involving intrusive investigations in the last three years in respect of the Properties or any Group Company and in the possession of the Sellers or the Group have been disclosed to the Purchaser.

25.6 No application for the surrender or variation of the terms of any Environmental Licences or the transfer of such Environmental Licences to or from  any Group Company is pending or has been refused for any reason and there are no appeals pending or being contemplated in respect of refusal of or conditions contained in any Environmental Licences.

25.7 The Group has recovered from the Authority under the Authority Contracts without delay or dispute all Losses arising under Environmental Laws or Nuclear Laws which it has sought to recover.

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25.8 All necessary insurance arrangements required, in the reasonable opinion of the directors of each Group Company, under Nuclear Laws by such Group Company are in place and are in full force and effect and there are no material outstanding claims under any such insurance arrangement.

26. Intellectual Property

26.1 Details of registered Intellectual Property Rights (including applications for registration) owned by a Group Company is set out in Schedule 11.  The Group is not reliant to any material extent on any unregistered Intellectual Property Rights which are not owned by or licensed to any Group Company.

26.2 So far as the Sellers are aware, there are no written licences or agreements which are material to the operation of the business of the Group, other than the IT Contracts pursuant to which:

(a) a Group Company has been licensed or otherwise permitted to use Intellectual Property Rights owned by a third party ("Licences In"); or

(b) a Group Company has licensed or otherwise permitted the use of Intellectual Property Rights owned by it to or by a third party ("Licences Out").

26.3 So far as the Sellers are aware all material steps required for the maintenance and protection of the registered Intellectual Property Rights set out in Schedule 11 (including the payment of all application and renewal fees) have been taken.

26.4 No written notice has been received by any Group Company within the 12 months prior to the date of this Agreement challenging or disputing the ownership or validity of any Intellectual Property Rights set out in Schedule 11.

26.5 So far as the Sellers are aware, the activities and operations of the Group do not materially infringe the Intellectual Property Rights of any third party and no written notice has been received by any Group Company within the 12 months prior to the date of this Agreement claiming or alleging that any such infringement is taking or has taken place.

26.6 So far as the Sellers are aware, no third party is infringing the Intellectual Property Rights owned by any Group Company and no written claim has been made by any Group Company within the 12 months prior to the date of this Agreement claiming or alleging that any such infringement is taking or has taken place.

26.7 Each Group Company owns or has licensed to it, and will immediately following Completion own or have licensed to it, all material Intellectual Property Rights necessary, in the reasonable opinion of the board of directors of such Group Company, to carry on in all material respects the business of such Group Company as it is carried on at the date of this Agreement.

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27. IT Systems

27.1 Details of:

(a) the IT Systems; and

(b) the IT Contracts,

which are material to the operation of the Group as it is carried on at the date of this Agreement are set out in Parts 1 and 2 respectively of Schedule 12.

27.2 The IT Systems:

(a) have not suffered any material failure or breakdown resulting in material disruption to the business of the Group within the 12 months prior to the date of this Agreement;

(b) have the benefit of maintenance and support agreements; and

(c) have sufficient capacity for the requirements of the business of the Group as it is carried on at the date of this Agreement.

27.3 So far as the Sellers are aware, the Group has in place appropriate procedures for ensuring the security of the IT Systems and the confidentiality and integrity of the data stored on the IT Systems.

27.4 No Group Company is in material breach of any IT Contract and, so far as the Sellers are aware, no other party is in material breach thereof.

27.5 No IT Contract is currently the subject of any dispute or proceeding and, so far as the Sellers are aware, none is pending or threatened.

27.6 No IT Contract which is material to the operation of the business of the Group as it is carried on at the date of this Agreement contains any term which would, by virtue of the acquisition of the Shares by the Purchaser, relieve any other party of any obligation or entitle any other party to exercise any right (including any right of termination) thereunder.

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28. Insolvency

28.1 No resolution has been passed for the winding up of any Group Company.

28.2 No order has been made and, so far as the Sellers are aware, no petition has been presented for the winding up of any Group Company.

28.3 No administration order has been made in relation to any Group Company and, so far as the Sellers are aware, no petition or application for such an order has been made or presented and no person who is entitled to do so has given written notice of its intention to appoint an administrator of any Group Company or filed such a notice with the court.

28.4 No receiver or administrative receiver has been appointed in respect of any Group Company or all or any of its assets.

28.5 No voluntary arrangement under section 1 of the Insolvency Act 1986 has been proposed or approved in respect of any Group Company.

28.6 No compromise or arrangement under section 425 of the Companies Act 1985 has been proposed or sanctioned in respect of any Group Company.

28.7 No Group Company has entered into any compromise or arrangement with its creditors or any class of its creditors generally.

29. Tax

29.1 Each Group Company has filed or caused to be filed all returns which were required to be filed for the purpose of any form of Taxation and has paid or caused to be paid all taxes and duties as shown on the said returns and on all assessments received by it and has duly and punctually paid any other taxes or duties, and all such returns were, so far as the Sellers are aware, accurate and complete in all material respects and are not the subject of any dispute with any Tax Authority and each Group Company has provided all information required to be provided under any Tax Statute or pursuant to any notice served under any Tax Statute.

29.2 The Accounts reserve or provide for all Tax or other sums imposed, charged, assessed, levied or payable under any Tax Statute for which each Group Company was at the Accounts Date liable whether or not that Group Company has or may have any right of reimbursement against any other person and proper provision has been made and shown in the Accounts for deferred taxation in accordance with generally accepted accounting principles, including. where relevant, International Accounting Standards, subject to the stated threshold of materiality.

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29.3 Each Group Company has maintained and has in its possession all records and documentation which it is required by any Tax Statute to maintain (including, for the avoidance of doubt, copies of all stamp duty land tax returns and/or self certificates filed by any Group Company).

29.4 The amounts of tax chargeable on any Group Company during any accounting period ending on or within six years before the Accounts Date has not, to any material extent, depended on any concession, agreement or other formal or informal arrangement with any Tax Authority.

29.5 No Group Company is involved in any ongoing dispute with any Tax Authority.

29.6 Each Group Company is, and has been, resident solely in the United Kingdom for Tax purposes and has never been resident in any other territory or treated as so resident for the purposes of any double tax agreement nor does any Group Company have a permanent establishment or other taxable presence in any jurisdiction other than that in which it was incorporated.

29.7 The Company does not own any asset which was acquired from another company within the last 6 years which was at the time a member of a group of companies for the purposes of section 179 Taxation of Chargeable Gains Act 1992.

29.8 All instruments (other than those which have ceased to have any legal effect) which are necessary to enforce a Group Company's title to an asset and which, whether in the United Kingdom or elsewhere, either attract stamp duty or are required to be stamped with a particular stamp denoting that no duty is chargeable or that the document has been produced to the appropriate authority, have been properly stamped.

29.9 The Disclosure Letter contains details of all land transactions, within the meaning of section 43 Finance Act 2003, in which a Group Company was the purchaser and in respect of which that Group Company has future compliance obligations.

29.10 No Group Company has within the last 6 years been treated as a member of a group under section 43 Value Added Tax Act 1994.

29.11 No Group Company has within the last 6 years made an election to waive exemption in relation to any land in accordance with paragraph 2 schedule 10 Value Added Tax Act 1994.

29.12 No action has been taken by any Group Company in respect of which any consent or clearance from HMRC or other Taxation Authority was required save in circumstances where such consent or clearance was validly obtained, and where any conditions attaching thereto were and will, immediately following completion, continue to be met.

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29.13 Each Group Company has properly operated the PAYE system deducting Tax as required by law from all payments to or treated as made to or benefits provided for employees, ex-employees or independent contractors of that Company.

29.14 Since the Accounts Date:

(a) no Group Company has undertaken any transaction outside the ordinary course of its business which has given, may give or would, but for the availability of any relief, give rise to any Tax; and

(b) no disposal has taken place or other event occurred such that any Group Company would be required to bring a disposal value into account for the purposes of the Capital Allowances Act 2001 or such that a chargeable gain could or would accrue to any Group Company, in either case of an amount greater than £100,000 (one hundred thousand pounds).

29.15 The Disclosure Letter contains particulars of all arrangements relating to the surrender of relief under sections 402-413 of the TA to which any Group Company remains a party.

29.16 (a) No Group Company has given or guaranteed a tax indemnity in respect of any company sold by any Group Company in the last seven years.

(b) No transaction or event, other than arrangements for the surrender of trading losses from the Sellers, has occurred in consequence of which any Group Company is or may be held liable for any Tax where any Seller is primarily liable for the Tax in question (whether by reason of any such other company being or having been a member of the same group of companies or otherwise).

29.17 (a) Each Group Company is a registered taxable person for VAT legislation.

(b) In the past three years, each Group Company has complied in all respects with the requirements and provisions of the VAT legislation and has made and maintained and will pending Completion make and maintain accurate and up-to-date records, invoices, accounts and other documents required by or necessary for the purposes of the VAT legislation and each Group Company has punctually paid and made all payments and returns required thereunder.

(c) No Group Company has made any exempt supplies in consequence of which it is or will be unable to obtain credit for all input tax paid by it during any VAT quarter ending after the Accounts Date.

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29.18 Any property beneficially owned by any Group Company is also legally owned by the same Group Company.

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SCHEDULE 9

Limitations on Sellers' Liability

1. GENERAL

1.1 The provisions of this Schedule shall operate to limit the liability of the Sellers under:

(a) the Sellers' Warranties; and

(c) the Tax Covenant but only insofar as any provision in this Schedule is expressed to be applicable to the Tax Covenant.

1.2 The provisions of the Tax Covenant shall further operate to limit the liability of the Sellers in respect of any claim under the Tax Covenant and (to the extent stated therein) any claim under the Tax Warranties.

1.3 Each provision of this Schedule shall be read and construed separately and, unless expressly provided to the contrary, shall not be limited by the terms of any other provision of this Schedule or by any other term of this Agreement.

2. Time Limitations

2.1 The Sellers shall be under no liability in respect of any claim under the Sellers' Warranties or the Tax Covenant and any such claim shall be wholly barred and unenforceable unless the Purchaser shall have given to all the Sellers written notice of such claim:

(a) in the case of a claim under the Sellers' Warranties (other than the Tax Warranties and those Sellers' Warranties given in respect of matters relating to or governed under Environmental Laws or Nuclear Laws in paragraphs 10.1(e), 10.2, 13.4 and 25 of Schedule 8 (together the "Environmental Warranties"), by not later than midnight on the date falling fifteen months after the Completion Date;

(b) in the case of a claim under the Environmental Warranties by not later than midnight on the second anniversary of the Completion Date; and

(c) in the case of a claim under the Tax Warranties or the Tax Covenant, by not later than midnight on the seventh anniversary of the Completion Date.

2.2 Save as provided in paragraphs 5.2 and 9.2, the liability of the Sellers in respect of any claim of which notice shall have been given to the Sellers prior to the expiry of the time limits set out in paragraph 2.1 shall (if such claim has not been previously satisfied, settled or withdrawn) absolutely cease and determine if legal proceedings in respect of such claim have not been commenced within 9 months of the date of such notification.

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2.3 For the purpose of paragraph 2.2, proceedings shall not be deemed to have been commenced unless and until they shall have been properly issued and validly served upon all the Sellers.

2.4 The time limitations in this paragraph 2 shall not apply to any claim which arises or is delayed as a result of any fraudulent act or omission by any of the Sellers.

3. Financial Limitations

3.1 The Sellers shall be under no liability in respect of any claim under the Sellers' Warranties unless the liability of the Sellers to the Purchaser and/or its assignees in respect of the claim would be more than £100,000 (one hundred thousand pounds) (excluding costs and interest) (a "Relevant Claim") provided that, for the purpose of this paragraph, claims arising from the same facts or circumstances shall be aggregated and regarded as a single Relevant Claim.

3.2 The Purchaser shall not be entitled to damages or any other payment or remedy in respect of any claim under the Sellers' Warranties unless and until the aggregate amount (excluding costs and interest) of all Relevant Claims under the Sellers' Warranties for which the Sellers are liable to the Purchaser and/or its assignees (entirely disregarding for the avoidance of doubt those claims for which the Sellers have no liability as a result of paragraph 3.1) shall exceed  £4,000,000 (four million pounds) in which event the Sellers' liability shall be for the total amount of such claims and shall not be limited to the excess.

3.3 The total aggregate liability of:

(a) all the Sellers to the Purchaser and/or its assignees in respect of all claims under the Sellers' Warranties and the Tax Covenant (including costs and interest) shall not in any circumstances exceed £100,000,000 (one hundred million pounds) increased by, if such liability includes an amount in respect of interest, an amount equal to such interest re-calculated at the rate per annum of 1½per cent above the average (rounded upward when necessary to the nearest 1/16^th of one per cent) of the London Inter Bank Offered Rates on each of the dates on which each successive 6 monthly period commences during the period for which such interest is calculated.  The London Inter Bank Offered Rates for such dates shall be the rate at which Barclays Bank plc (or such other London banks as the Sellers shall nominate for this purpose) shall offer 6 month sterling deposits of £1,000,000 (one million pounds) to leading banks in the London Inter Bank Market at or about 11.00 am (London time) on such days.  The certificate of Barclays Bank plc (or such other London bank as the Sellers shall nominate for the purpose) as to the rate of interest shall be conclusive and binding on the parties and, when determining the interest rate Barclays Bank plc shall be acting as an expert; and

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(b) each Seller to the Purchaser and/or its assignees in respect of all claims under the Sellers' Warranties and the Tax Covenant shall not in any circumstances exceed the amount set opposite its name in column 4 of Schedule 1.

3.4 (Subject to, for the avoidance of doubt, such total aggregate liability never exceeding the total aggregate liability calculated under paragraph 3.3(a) of this Schedule 9) with effect from the second anniversary of the Completion Date, the total aggregate liability of all the Sellers to the Purchaser and/or its assignees under the Tax Warranties and the Tax Covenant (including costs and interest) shall be reduced so as not to exceed £50,000,000 (fifty million pounds) plus the amount of any such Tax claim which has been notified to the Sellers pursuant to paragraph 2.1 of this Schedule 9 but remains unsettled and increased by, if such liability includes an amount in respect of interest, an amount equal to such interest re-calculated at the rate per annum of 1½per cent above the average (rounded upward when necessary to the nearest 1/16^th of one per cent) of the London Inter Bank Offered Rates on each of the dates on which each successive 6 monthly period commences during the period for which such interest is calculated.  The London Inter Bank Offered Rates for such dates shall be the rate at which Barclays Bank plc (or such other London banks as the Sellers shall nominate for this purpose) shall offer 6 month sterling deposits of £1,000,000 (one million pounds) to leading banks in the London Inter Bank Market at or about 11.00 am (London time) on such days.  The certificate of Barclays Bank plc (or such other London bank as the Sellers shall nominate for the purpose) as to the rate of interest shall be conclusive and binding on the parties and, when determining the interest rate Barclays Bank plc shall be acting as an expert.

3.5 In respect of any claim or claims under this Agreement, the Sellers' Warranties or the Tax Covenant for which all of the Sellers are or may be liable to the Purchaser, the liability of each Seller to the Purchaser in relation thereto shall be equal to the relevant percentage of the total liability of all the Sellers in respect of such claim or claims and for this purpose the relevant percentage in relation to each Seller shall be the percentage which is set opposite its name in column 5 of Schedule 1.

3.6 The financial limitations in this paragraph 3 shall not apply to any claim which arises or is delayed as a result of any fraudulent act or omission by the Sellers.

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4. Exclusion of Certain Claims

4.1 The Sellers shall not be liable in respect of any claim under the Sellers' Warranties if and to the extent that:

(a) the claim would not have arisen but for any act, omission, transaction or arrangement carried out at the request of the Purchaser before Completion or pursuant to the terms of this Agreement or any other agreement entered into pursuant to this Agreement;

(b) any claims under the Tax Warranties would not have arisen but for:

(i) the making of any claim, election, surrender or disclaimer made, the giving of any notice or consent or the doing of any other thing under or in connection with the provisions of any enactment or regulation by any member of the Purchaser's Group after Completion (other than the making, giving or doing of which was taken into account in computing the provision for Taxation in the Accounts);

(ii) any negligent failure or omission by any member of the Purchaser's Group to make any claim, election, surrender or disclaimer or give any notice or consent or do any other thing under or in connection with the provisions of any enactment or regulation after Completion, the anticipated making, giving or doing of which was taken into account in computing the provision for Taxation in the Accounts;

(c) the claim would not have arisen but for any reorganisation of any member of the Purchaser's Group (including any winding up or cessation of the whole or any part of any business or trade carried on by any member of the Purchaser's Group) after Completion;

(d) the claim would not have arisen but for any change in the accounting principles, practices or policies of any member of the Purchaser's Group introduced or having effect after Completion other than any change required to ensure compliance with GAAP; or

(e) the claim would not have arisen but for a change of the use of the relevant Property to a more sensitive use from that at the date of Completion.

5. Contingent Claims

5.1 The Sellers shall be under no liability in respect of any claim under the Sellers' Warranties which is based upon a liability which is contingent only or otherwise not capable of being quantified (a "Contingent Claim") unless and until such liability becomes an actual liability or becomes capable of being quantified.

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5.2 For the avoidance of doubt, a Contingent Claim must be notified to the Sellers within the time limit specified in paragraphs 2.1(a) and (b).  However, provided that it has been so notified, the 9 month period referred to in paragraph 2.2 shall, in the case of a Contingent Claim, commence on the date that the underlying contingent liability becomes an actual liability or becomes capable of being quantified.

6. Changes in Legislation

The Sellers shall not be liable in respect of any claim under any of the Sellers' Warranties to the extent that the claim arises or is increased directly or indirectly as a result of:

(a) the passing or coming into force of, or any change in, any legislation after the date of this Agreement; or

(b) any increase in the rate of Taxation or any imposition of new Taxation after the date of this Agreement; or

(c) the withdrawal or amendment after the date of this Agreement of any extra-statutory concession or other formal agreement or arrangement currently granted by or made with any governmental, fiscal or regulatory body (whether or not having the force of law); or

(d) any change after the date of this Agreement in any generally accepted interpretation or application of any legislation or in the policy or practice (if published) of any relevant governmental, fiscal or regulatory body.

7. No Liability if Loss is Otherwise Compensated For

7.1 The Sellers shall not be liable in respect of any claim for breach of any of the Sellers' Warranties if and to the extent that the loss occasioned by the breach has been recovered by the Purchaser pursuant to a claim under any other Seller Warranty or term of this Agreement or any other document entered into pursuant to this Agreement.  The Purchaser shall not be entitled to recover more than once in respect of the same loss.

7.2 If the Purchaser is entitled to claim under the Tax Covenant and under the Sellers' Warranties in respect of the same matter, the Purchaser may in its discretion choose to claim under either or both but payments under the Tax Covenant shall pro tanto satisfy and discharge any claim which is capable of being made under the Sellers' Warranties in respect of the same matter and vice versa.

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7.3 In calculating the liability of the Sellers for any breach of the Sellers' Warranties, there shall be taken into account any benefit accruing to any member of the Purchaser's Group arising directly or indirectly as a result of the matter giving rise to the breach including without prejudice to the generality of the foregoing:

(a) the amount of any tax relief thereby obtained or obtainable by any member of the Purchaser's Group; and

(b) the amount by which any Taxation for which any member of the Purchaser's Group is now or in the future accountable or liable to be assessed is thereby reduced or extinguished.

8. Third Party Claims

8.1 The provisions of this paragraph 8 shall apply in circumstances where:

(a) a claim, demand or action is made, brought or threatened against the Purchaser or any other member of the Purchaser's Group by any third party (an "Actual Third Party Claim") or the Purchaser or another member of the Purchaser's Group becomes aware of any fact, matter, event or circumstance which may give rise to such a claim, demand or action (a "Potential Third Party Claim"); and

(b) the Actual Third Party Claim or Potential Third Party Claim (or the matter giving rise thereto) is likely to give rise to a claim against the Sellers under the Sellers' Warranties (other than the Tax Warranties).

8.2 For the purpose of this paragraph 8, a "Third Party Claim" shall mean an Actual Third Party Claim or a Potential Third Party Claim.

8.3 The Purchaser shall:

(a) procure that the Sellers are notified in writing of the Third Party Claim as soon as reasonably practicable after the relevant member of the Purchaser's Group becomes aware of the Third Party Claim;

(b) consult with the Sellers in relation to the Third Party Claim and the action to be taken in response thereto; and

(c) provide, and procure that the relevant member of the Purchaser's Group shall provide, such information, documentation and assistance to the Sellers and its professional advisers as the Sellers may reasonably request to enable the Sellers to investigate the Third Party Claim and to determine the action to be taken in response thereto.

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8.4 Subject to the relevant member of the Purchaser's Group being indemnified to the reasonable satisfaction of the Purchaser against any liability, cost, damage, charge or expense which may thereby be properly incurred (but so that the provision of any such indemnity shall not imply any admission of liability on the part of the Sellers) if the subject matter of the Third Party Claim is not being pursued by, or otherwise directly involves, the Authority, then the Purchaser shall, and shall procure that the relevant member of the Purchaser's Group shall:

(a) take such action as the Sellers may reasonably request to avoid, dispute, resist, mitigate, settle, compromise or defend the Third Party Claim or appeal any decision, judgment or adjudication with respect thereto; and

(b) not make any admission of liability with respect to the Third Party Claim or settle or compromise the Third Party Claim without the prior written consent of the Sellers (such consent not to be unreasonably withheld or delayed).

8.5 If the subject matter of the Third Party Claim is being pursued by, or otherwise directly involves, the Authority, then the Purchaser shall:

(a) give due consideration to such suggestions as the Sellers may make to avoid, resist, contest or compromise or generally in relation to the conduct of any Third Party Claim; and

(b) not settle, make any admission of liability or compromise any claim or matter which gives rise to a Third Party Claim without informing the Sellers in advance and giving the Sellers the opportunity to make representations in relation thereto.

9. Recovery from Third Parties

9.1 Where the Purchaser or any member of the Purchaser's Group is at any time entitled to recover from some other person (including an insurer under an insurance policy) any sum in respect of any matter or event which gives rise to a claim under the Sellers' Warranties (other than the Tax Warranties), the Purchaser shall (subject to being fully indemnified by the Sellers) use reasonable endeavours to recover that sum and any sum recovered (net of all costs of recovery and any tax payable):

(a) will reduce the amount of the claim under the Sellers' Warranties (other than the Tax Warranties); or

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(b) in the event of the recovery being delayed until after the relevant claim under the Sellers' Warranties (other than the Tax Warranties) has been satisfied (to the extent of the maximum aggregate amount of the Sellers' liability under paragraph 3.3 of this Schedule 9) by the Sellers, shall be paid to the Sellers in the relevant proportions,

provided that none of the provisions contained in this paragraph 9 shall oblige the Purchaser to take any action if the Purchaser reasonably considers that such action is likely to have a material adverse effect on the business of the Group or the Purchaser's Group (including, without limitation, any material effect on relationships with customers, suppliers, intermediaries, agents or insurers).

9.2 For the avoidance of doubt, a claim under the Sellers' Warranties in respect of a matter which is also the subject of a recovery claim against some other person pursuant to paragraph 9.1 must be notified to the Sellers within the time limit specified in paragraph 2.1(a). However, provided that it has been so notified, the 9 month period in paragraph 2.2 shall, in the case of such a claim, commence on the date that the recovery claim against the other person is finally settled or finally determined.

10. Mitigation

10.1 Nothing in this Agreement shall or shall be deemed to relieve the Purchaser of any common law or other duty to mitigate any loss or damage which it may suffer as a result of any matter giving rise to a claim under the Sellers' Warranties or to restrict or limit any such duty.

10.2 In the case of a claim relating to the warranty in paragraph 25.1 of Schedule 8 (Environment), the Purchaser shall where relevant and reasonably practicable  consult with the Sellers as to methods of remediation and discuss with the Sellers the potential for minimising remediation costs.  The Purchaser shall provide the Sellers (at the Sellers' cost) with such information and documents as they may reasonably request in relation to any process of agreeing remediation with the relevant regulator.

11. Tax Warranties

Clause 5.2 (Payment Date) of the Tax Covenant shall apply to the Tax Warranties as if a claim under a Tax Warranty were a claim under Clause 2.1(a) of the Tax Covenant.

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SCHEDULE 10

Purchaser's Warranties

1. The Purchaser is a company, duly incorporated, validly existing and in good standing under the laws of England and Wales.

2. The Purchaser has the power to own its assets and carry on its business as it is currently being conducted.

3. The Purchaser has the power to enter into, perform and deliver, and has taken all necessary action to authorise its entry into, performance and delivery of, this Agreement and any Transaction Document to which it is a party.

4. The obligations assumed by the Purchaser under this Agreement and any Transaction Document to which it is a party are legal, valid, binding and enforceable obligations.

5. Subject to the fulfilment of the Conditions, the entering into of, and the performance by the Purchaser under, this Agreement and any Transaction Document to which it is a party will not:

(a) amount to a violation or breach of any law or regulation applicable to either of it; or

(b) violate or conflict with the provisions of its respective constitutional documents.

6. Save as set out in Clause 3 and Schedule 5, all necessary governmental and other consents, approvals, licences and authorisations required by the Purchaser to enable it to lawfully to enter into, and to exercise its rights and comply with its obligations under, this Agreement and any Transaction Document to which it is a party have been obtained or effected and are in full force and effect.

7. On Completion, the shares held by the Company in DRDL will not become Foreign-held shares (as defined in the articles of association of DRDL).

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SCHEDULE 11

Registered Intellectual Property Rights

DML

Patents

Patent Number	Title	Filing Date	Registration Date
US5879778	Strengthening of Structural Members	22.01.1996	09.03.1999
GB9501193.8	Reinforced Material	21.01.1995	pending
WO9622432	PCT Application: Reinforcement of Structural Members	22.01.1996	Unknown status

DRDL

Trade Marks

TM Number	Mark Text	Type	Date	Status	Classes
EP003082658	DML DEVONPORT	Figurative	07/12/2004	Registration published	7, 9, 12, 35, 37, 41, 42
EP004138319	DML APPLEDORE	Figurative	19/01/2006	Registration published	7, 9, 12, 35, 37, 41, 42
EP004138574	DML GROUP	Figurative	09/01/2006	Registration published	7, 9, 12, 35, 37, 41, 42
EP003082625	DML	Word	29/11/2005	Registration published	7, 9, 12, 35, 37, 41, 42
EP003082633	DEVONPORT	Word	29/11/2005	Registration published	7, 9, 12, 35, 37, 41, 42

Patents

Patent Number	Title	Filing Date	Registration Date
EP0827563	Strengthening of Structural Members	22.01.1996	17.03.1999
CA2216631	Unknown (relates to Structural Members and PCT Application WO9622432)	Unknown	unknown
AU706549B	Reinforcement of Structural Members	22.01.1996	unknown
NZ298854	Reinforcement of structural members by drawing curable resin through dry fibres of high aspect ratio	Published 1999-02-25	09.06.1999
WO/1999/010675	Joint PCT Application with Rockwater Limited for Pipeline Manufacture.	21.08.1998	unknown

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LSC Group Holdings Limited

Trade marks

TM Number	Mark Text	Type	Date	Status	Classes
2032479	MODULEMASTER	WO	05.09.1995	Expired	09
2155438	LACE	WO	14.01.1998	Registered	09
2161786	OFFICEMaster	WO	21.03.1998	Registered	09
2206377	LOCAM	WO	19.08.1999	Registered	09 16

Frazer-Nash Consultancy Limited

Trade marks

TM Number	Mark Text	Type	Date	Status	Classes
2372447	D-Risk	WO	08.09.2004	Registered	09 42
1575494	FNGUN	WO	15.06.1994	Registered	09
2440411	D-CIDE	WO	02.12.2006	Examined	09 42

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Patents

Patent Number	Title	Filing Date	Registration Date
GB2383264	Seat Suspension System	20.12.2001	07.10.2003
GB2348496A	Method and apparatus for the detection of scratching and similar surface action to glass	31.03.1999	Not yet registered
GB2383264A	Seat suspension system	20.12.2001	Not yet registered
GB2305995A	Actuator for ejector release units	31.01.1986	Not yet registered
WO03070306	PCT Application for Breathing Device jointly owned with EME Electro Medical Equipment Ltd.	21.02.2003	Unknown status
AU2003232304	Breathing Device	10.09.2004	21.2.2003
JP2003569259	Breathing Device	20.08.2004	unknown
NZ535238	Breathing Device	10.09.2004	28.10.2005
US10505466	Breathing Device	14.03.2005	unknown

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SCHEDULE 12

IT Systems and IT Contracts

Part 1

IT Systems

Relevant Group sites are as follows for the purposes of this Schedule 12 Part 1:

● DRDL: Devonport, Keynsham and satellite offices at HMNB Clyde and Rolls Royce Derby;

● ASL: Appledore;

● LSC Group: Fradley Park (Litchfield), Weymouth and satellite office at RAF Wyton; and

● FNC Group: Bristol (7 separate office premises), Dorking, Burton on Trent, Glasgow, Plymouth and Warrington.

1. The DRDL, ASL, LSC Group and FNC Group sites all utilise local servers, communications networks, desktops, printers and other peripheral devices with connectivity to other DML Group sites via the DML Group WAN and the Internet via connections at Litchfield, Dorking and Plymouth.

2. The computing environments in use across all sites are predominantly client/server based.  DRDL, ASL and LSC Group back office services are based on the use of Windows client/server software with Office and Outlook basic productivity tools. The DRDL Windows Active Directory forest extends beyond the Devonport site and supports the Keynsham, ASL and LSC Group-based services and users.

3. FNC Group sites currently use Novell/GroupWise collaboration and productivity software.

4. DRDL utilises Windows 2000 or 2003, VMS 6/7 or HPUX servers.  DRDL’s eBusiness Suite enterprise application modules and the bespoke, Oracle-based, planning and production management application run in the UNIX environment.  Legacy applications are time and attendance, labour booking and material procurement and these run in the VMS environment on Digital VAX and Alpha servers. Windows servers also run CAD (Autodesk), document management (Documentum), asset configuration and maintenance (Maximo), Dosimetry Control System (DCS) and major project planning and control (Primavera P3).

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5. LSC Group and FNC Group use a variety of engineering and analytical software packages, running them in a number of different environments as appropriate.

6. The primary database products in use across all sites are Oracle and SQL*Server, with Oracle and other (eg, Crystal) reporting tools used for data extraction and report production.

7. The DRDL Devonport site utilises two general purpose Windows attached Storage Area Networks (SANs), two UNIX SANs and one legacy VMS Shared Data Store.

8. Legato Networker software manages corporate data backups.  These are taken nightly between computer suites to fully automated tape libraries for business resilience purposes.

9. The main DRDL network backbone design carries IP traffic that is switched/routed between the campus nodes and the user/server sub-networks. DML Group networks are predominantly based on CISCO architectures and products for which there are significant internal design and support skills/experience.

10. There is a secure wide area network (DML Group WAN) provided as a managed service by Affiniti, used to store, process, import and export data with a maximum security marking of "UK-Restricted".  It uses the “wires only” BT MPLS IP Clear Network. There are standalone Group LAN’s at other non-DML Group sites at RAF Whyton, Rolls Royce Derby and Faslane which are also connected to the DML Group WAN.

11. The DRDL Devonport and Keynsham sites have secure LAN connections with the main Authority network to support joint access to MoD & DML intranets, collaborative working, workflow, Restricted e-mail, etc.

12. DRDL also has a separate “commercial” Windows infrastructure that hosts a Group Internet Collaborative Working Environment.

13. The Group’s primary internet connectivity is hosted from the DRDL Devonport site, via a BT-managed secure and accredited configuration that uses dual resilient 100 MB bearers ramped down to 10 MB and incorporating dual resilient in-line firewalls for content and virus protection.  All DRDL internet browsing, internet e-mail and dial-in VPN services are provided via this connection.  The LSC Group and FNC Group sites have their own secure internet connections at the Litchfield and Dorking sites.

14. The telephone services at the main DRDL Devonport Site are provided via two Siemens Realtis switches in a resilient configuration, with integrated cross-site DECT services also provided.  DML Group Mobile phone services are provided by T-Mobile, with a direct Mobex connection into the DRDL exchange.  There are small local exchanges at the ASL, DRDL, Keynsham and FNC Group sites.  The LSC Group Fradley Park site has a Cisco VOIP service.

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15. Polycom video conference facilities, linked via ISDN, are installed at the DRDL Devonport, Keynsham, ASL, FNC Group Dorking, Burton and Glasgow and LSC Group Fradley Park sites. These are maintained by a single service provider.

16. DRDL’s applications portfolio comprises both Web and thick client COTS and bespoke applications.  Bespoke development strategy is now to develop for web deployment wherever possible.  DRDL Oracle applications are managed and developed using Oracle’s Designer and Developer 2000 toolset.  SQL*Server applications are developed using the Visual Studio software suite.

17. The DML Group WAN and associated infrastructure is accredited (ADS Rev A Nov 2005) in accordance with the Manual of Protective Security (MPS) issued by the Cabinet Office and is authorised to hold information up to and including UK-Restricted. Various stand alone systems are accredited to hold information up to and including Top Secret.  DML also complies in general with the MoD's Security Manual (JSP440) where required as this is now closely aligned to the MPS.

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Part 2

IT Contracts

Product/Service	Start	End	Supplier
Managed Service - Supply and Maintenance HP equipment	28-Jul-04	31-Mar-08	Hewlett Packard
Renewal of Desktop licences - Microsoft through Halliburton	01-Oct-06	30-Sep-07	KBR
PIE Licence	01-Jan-07	01-Mar-15	LSC Group
Omnetica WAN Connection (incl RAF Wyton and FNC)	22-Mar-05	21-Mar-10	Affiniti
Document Services Contract	01-Oct-04	30-Sep-09	Canon
MTI Maintenance (New Hardware) design supply support	01-Jul-05	30-Jun-08	MTI Technologies
Continuum (Managed Service)	01-Nov-05	31-Oct-08	TAC UK
T-Mobile Phones	01-Nov-05	31-Dec-07	T-Mobile
Desktop Software Visio	01-Oct-06	30-Sep-09	KBR
Oracle licences via Halliburton Agreement	01-Jun-06	25-May-09	KBR
Variation on WAN Contract	01-Oct-06	21-Mar-10	Affiniti
Oracle (Migrated CPU licenses - 4 CPU's)	01-Jul-06	30-Jun-07	Oracle
PS - Knowcom Amendment 6	01-Jun-06	31-May-07	Knowcom
Documentum -Halliburton	01-Jan-07	31-Dec-07	KBR
Server Software Desktop true-up	01-Oct-06	01-Sep-09	KBR
Network Disaster (NT & VMS combined)	01-Sep-06	31-Aug-07	NDR

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Product/Service	Start	End	Supplier
AutoCAD	01-Jan-07	31-Dec-07	Autodesk
Maximo (Incl Primavera Interfaces)	01-Apr-06	31-Mar-07	MRO
HP Maintenance Service	01-Jan-07	31-Mar-08	Hewlett Packard
Kingston - Exchange Maintenance (All 3)	01-Feb-06	31-Jan-07	Affiniti
BT iNet Fortinet/Fortigate 3 year managed Service	01-Nov-06	01-Nov-09	BT iNet
Provision of support to Mercury Hardware	01-Jan-07	31-Dec-07	DML
Usage charges for outgoing telephone calls	01-Jan-07	30-Jun-07	Cable & Wireless
Annual maintenance contract for on-site desktop services	01-Apr-06	31-Mar-08	Hewlett Packard
Provision of support services and out of hours cover for SSMG IT Systems	01-Sep-03	01-Mar-08	ISHELP

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SIGNED by
for and on behalf of KELLOGG BROWN
& ROOT HOLDINGS (U.K.) LIMITED	/S/ Paul Ferguson
SIGNED by
for and on behalf of BALFOUR
BEATTY PLC	/S/ Peter Zinkin
SIGNED by
for and on behalf of THE WEIR GROUP PLC	/S/Alan Mitchelson
SIGNED by
for and on behalf of BABCOCK
INTERNATIONAL GROUP PLC	/S/Peter Rogers
SIGNED by
for and on behalf of KBR, INC.	/S/Andrew D. Farley

105

ANNEXURE

106

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

I, William P. Utt, certify that:

1. I have reviewed this quarterly report on Form 10-Q of KBR, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 2, 2007

/s/ WILLIAM P. UTT

William P. Utt

Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

I, Cedric W. Burgher, certify that:

1. I have reviewed this quarterly report on Form 10-Q of KBR, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 2, 2007

/s/ CEDRIC W. BURGHER

Cedric W. Burgher

Chief Financial Officer

EX-32.1

Exhibit 32.1

WRITTEN STATEMENT OF

CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002

The undersigned, the Chief Executive Officer of KBR, Inc. (“the Company”), hereby certifies that to his knowledge, on the date hereof:

(a) the Form 10-Q of the Company for the quarter ended June 30, 2007, filed on the date hereof with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section l3(a) or 15(d) of the Securities Exchange Act of 1934; and

(b) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ WILLIAM P. UTT

William P. Utt

Chief Executive Officer

Date: August 2, 2007

EX-32.2

Exhibit 32.2

WRITTEN STATEMENT OF

CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002

The undersigned, the Chief Financial Officer of KBR, Inc. (“the Company”), hereby certifies that to his knowledge, on the date hereof:

(a) the Form 10-Q of the Company for the quarter ended June 30, 2007, filed on the date hereof with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section l3(a) or 15(d) of the Securities Exchange Act of 1934; and

(b) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ CEDRIC W. BURGHER

Cedric W. Burgher

Chief Financial Officer

Date: August 2, 2007