QuickLinks -- Click here to rapidly navigate through this documentUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-K(Mark One) ýANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934For the Fiscal Year Ended December 28, 2007.OroTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934For the Transition Period from to .Commission File Number 001-33076WILLDAN GROUP, INC.(Exact name of registrant as specified in its charter)Delaware(State or other jurisdiction ofincorporation or organization) 14-1951112(I.R.S. Employer Identification No.)2401 East Katella Avenue, Suite 300, Anaheim, California 92806(Address of principal executive offices) (Zip Code)(800) 424-9144(Registrant's telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act:Common Stock, $0.01 par value(Title of class) NASDAQ Global Market(Name of exchange)Securities registered pursuant to Section 12(g) of the Act:NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ýIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes o No ýIndicate 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 1934during 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 filingrequirements for the past 90 days. Yes ý No oIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the bestof registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K. oIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.Large accelerated filer o Accelerated filer o Non-accelerated filer o(Do not check if a smaller reportingcompany) Smaller reporting company ýThe aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the commonequity was last sold, as reported on the NASDAQ Global Market, as of the last business day of the registrant's most recently completed second fiscal quarterwas $59.4 million.Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý On March 19, 2008, 7,156,461 shares of the registrant's common stock were issued and outstanding.DOCUMENTS INCORPORATED BY REFERENCEPart III of this Form 10-K incorporates information by reference from the registrant's definitive proxy statement for the 2008 Annual Meeting to be filed on orprior to April 25, 2008. TABLE OF CONTENTS Page PART I ITEM 1. BUSINESS 1ITEM 1A. RISK FACTORS 14ITEM 1B. UNRESOLVED STAFF COMMENTS 21ITEM 2. PROPERTIES 21ITEM 3. LEGAL PROCEEDINGS 21ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 22 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES 22ITEM 6. SELECTED FINANCIAL DATA 24ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 27ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 37ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 38ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 38ITEM 9A. CONTROLS AND PROCEDURES 38ITEM 9B. OTHER INFORMATION 39 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 39ITEM 11. EXECUTIVE COMPENSATION 39ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDERMATTERS 40ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 40ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 40 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 40 PART I ITEM 1. BUSINESS Overview We are a leading provider of outsourced services to small and mid-sized public agencies in California and other western states. Outsourcing enables theseagencies to provide a wide range of specialized services without having to incur and maintain the overhead necessary to develop staffing in-house. Weprovide a broad range of services to public agencies, including:•Civil Engineering; •Building and Safety Services; •Geotechnical Engineering; •Financial and Economic Consulting; and •Disaster Preparedness and Homeland Security. We operate our business through a network of over 20 offices located throughout California and other western states and had a staff of 628 as ofDecember 28, 2007 that includes licensed engineers and other professionals. We ranked 136 out of 500 top design firms in Engineering News-Record's 2007Design Survey. Our core clients are public agencies in communities with populations ranging from 10,000 to 300,000 people. We believe communities ofthis size are underserved by large outsourcing companies that tend to focus on securing large federal and state projects, as well as projects for the privatesector. We seek to establish close working relationships with our public agency clients and, over time, to expand the breadth and depth of the services weprovide to them. While we currently serve communities throughout the country, our business is concentrated in California and neighboring states. We provide services toapproximately 60% of the 478 cities and over 60% of the 58 counties in California. We also serve special districts, school districts and other public agencies. We were founded over 40 years ago, and today consist of a family of wholly owned companies that operate within the following areas:•Engineering Services. Our subsidiaries, Willdan, Arroyo Geotechnical, Public Agency Resources and Willdan Resource Solutions compriseour Engineering Services segment. Willdan and Public Agency Resources provide engineering-related services to public agencies. ArroyoGeotechnical offers geotechnical engineering services. Willdan Resource Solutions, a subsidiary we formed in September 2007, providesenvironmental engineering and environmental related services to public and private sector clients. For fiscal years 2007 and 2006, revenue forthe Engineering Services segment represented 81.7% and 84.1% respectively, of our overall contract revenue. •Public Finance Services. Our subsidiary, MuniFinancial, offers financial and economic services to public agencies. For fiscal years 2007 and2006, contract revenue for the Public Finance Services segment represented 16.1% and 14.7%, respectively, of our overall contract revenue. •Homeland Security Services. Our subsidiary, American Homeland Solutions, offers homeland security, disaster preparedness and public safetyconsulting services. For fiscal years 2007 and 2006, contract revenue for our Homeland Security Services segment represented 2.2% and 1.2%respectively, of our overall contract revenue. In the first half of 2007, we made changes to our executive and senior management team. Win Westfall, our former President, Chief Executive Officer andChairman of the Board of Directors, resigned from his positions as President and Chief Executive Officer as of February 8, 2007.1 Mr. Westfall continues to serve as Chairman. Following Mr. Westfall's resignation, Tracy Lenocker served as interim President and Chief Executive Officeruntil April 2, 2007 when Thomas D. Brisbin was appointed President and Chief Executive Officer. Upon Mr. Brisbin's appointment, Mr. Lenocker resumedhis duties on our board of directors, which he had resigned from while serving as interim President and Chief Executive Officer. On July 23, 2007, MalloryMcCamant, our former Chief Financial Officer, assumed the role of Chief Operations Officer and Kimberly D. Gant was appointed Chief Financial Officer.Our Markets We provide engineering, public finance and homeland security services to government agencies. We believe the market for these privatizedgovernmental services is, and will be, driven by a number of factors, including:•Population growth, which leads to a need for increased capacity in government services and infrastructure; •Demand by constituents for a wider variety of services; •The creation of new municipalities and the growth of smaller communities, which creates the need to obtain highly specialized serviceswithout incurring the costs of hiring permanent staffing and the associated support structure; •The deterioration of local infrastructures, especially in aging areas; and •Government funding programs, such as federal homeland security grants and various state legislation, that provide funds for localcommunities to provide services to their constituents.Engineering Services Engineering services encompass a variety of disciplines associated with the design and construction of public infrastructure improvements. We expectdemand for engineering services to grow as continued population growth in California and other western states places significant strain on the infrastructurein those areas, driving the need for both new infrastructure and the rehabilitation of aging structures. Federal, state and local governments have responded tothis growth in demand by increasing their funding of infrastructure related activities, and voters in California and Arizona have recently passed sales taxincreases to fund transportation improvements.Public Finance Services Public agencies face an increasing burden to raise the necessary funding to build, improve and maintain infrastructure and to provide services to theirlocal communities. While tax revenues are a primary source of funding, in California there are property tax and spending limits that curtail the generation ofthese funds. Alternatives include the issuance of tax-exempt securities; the formation of special financing districts to assess property owners on a parcel basisfor infrastructure and public improvements, such as assessment districts and community facilities districts (known as Mello-Roos districts in California); theimplementation of development impact fee programs that require developers to bear the cost of the impact of development on local infrastructure; user feeprograms that pass costs along to the actual users of services; optimization of utility rates; and special taxes enacted by voters for specific purposes. Public agencies frequently contract with private consultants to provide the advance studies, manage the processes and provide the administrationnecessary to support these methods. Consultants have the expertise necessary to form the special financing districts and produce an impact fee study used todevelop a schedule of developer fees. Privatized services are also utilized to implement the programs or2 revised rate schedules, and in the case of special financing districts, administer the districts through the life of the bonds. Consultants also frequently providethe services necessary to comply with federal requirements for tax-exempt debt, such as arbitrage rebate calculations and continuing disclosure reports. Use ofsuch services allows public agencies to capitalize on innovative public finance techniques without incurring the cost of developing in-house expertise.Homeland Security Services After September 11, 2001, the need to protect civil infrastructure and implement additional security measures became a priority at all levels ofgovernment. In addition to the threat of terrorism, Hurricanes Katrina and Rita highlighted the vulnerability of our country's infrastructure to natural disasters.These events placed an increased burden on local and regional public agencies to be prepared to respond. In addition to fire and safety personnel, agenciesresponsible for the physical safety of infrastructure elements, such as water and wastewater systems, ports and airports, roads and highways, bridges and dams,are under increased pressure to prepare for natural and man-made disasters. Accordingly, the federal government now considers public works staff members tobe "first responders" to such incidents and we believe that agencies are allocating resources accordingly. For fiscal year 2007, under the Department of Homeland Security Grant Program, or HSGP, the federal government will provide $1.7 billion to the states,which in turn will disburse these funds to local law enforcement and other agencies. The federal Department of Homeland Security, or DHS, has designated 45metropolitan areas throughout the country to receive almost half of the HSGP funds through a program called the DHS Urban Area Security Initiative, orUASI. Designated UASI metropolitan areas include five metropolitan areas in California; the Phoenix, Arizona (Maricopa County) metropolitan area; Denver,Colorado; and Las Vegas, Nevada. States and local communities also are increasing budget funds for immigration and homeland security matters.Our Services We specialize in providing privatized services to public agencies. Our core client base is composed of cities, counties, special districts, other local andstate agencies, and tribal governments. We are organized to profitably manage numerous small to mid-size contracts at the same time. With our focus on local and regional agencies, typicalcontracts can range from $5,000 to over $1,000,000 in contract revenue. Our typical project contract has a duration of less than 12 months, although we havecity services contracts that have been in effect for over 25 years. At December 28, 2007, we had approximately 3,400 open projects. We offer services in three segments: Engineering Services, Public Finance Services, and Homeland Security Services. The interfaces and synergies amongthese segments are key elements of our strategy. Management established these segments based upon the services provided, the different marketing strategiesassociated with these services and the specialized needs of their respective clients. The following table presents, for the periods indicated, the approximatepercentage of our consolidated contract revenue attributable to each segment: Fiscal Year 2007 2006 2005Engineering Services 81.7% 84.1% 84.6%Public Finance Services 16.1% 14.7% 15.3%Homeland Security Services 2.2% 1.2% 0.1% See Item 8 of Part II, "Financial Statements and Supplementary Data" for additional segment information.3 Engineering Services We provide a wide range of engineering services to the public sector. In general, contracts for engineering services (as opposed to construction contracts)are awarded by public agencies based primarily upon the qualifications of the engineering professional, rather than the proposed fees. Many jobs are awardedwithout a mandated proposal process, especially if an agency has a longstanding relationship with an engineering professional with relevant expertise. Asubstantial percentage of our engineering related work is for existing clients and represents an extension of our long-term associations with them. We offer our clients a broad range of engineering services, listed in the following table and described individually below:City Engineering Structural EngineeringBuilding and Safety PlanningPublic Works and Infrastructure Design Landscape ArchitectureConstruction Management Geotechnical EngineeringTraffic Engineering Flood ControlWater and Wastewater Engineering Code Enforcement City Engineering. We specialize in providing engineering services tailored to the unique needs of municipalities. City Engineering can range fromstaffing an entire engineering department to carrying out specific projects within a municipality, such as developing a pavement management program orreviewing engineering plans on behalf of a city. This is the core of our original business and was the first service offered when we were founded. Building and Safety. Our building and safety services can range from managing and staffing an entire municipal building department to providingspecific outsourced services such as plan review and field inspections. Other aspects of this discipline include performing accessibility compliance andproviding disaster recovery teams, energy compliance evaluations, permit processing and issuance, seismic retrofitting programs and structural plan review.Many of our building and safety services engagements are with municipalities and counties in high growth areas where workloads exceed the capacity of in-house staff. Public Works and Infrastructure Design. This sector constitutes our traditional engineering design function. Our engineers design streets andhighways, airport and transit facilities, freeway interchanges, high occupancy vehicle lanes, pavement reconstruction, and other elements of city, county andstate infrastructure. Construction Management. We have developed construction and program management systems specifically devoted to our public sector clients. Weprovide inspection services, along with full construction management and support, depending on the client's needs and the scope of the specific project. Ourconstruction management experience encompasses projects such as streets, bridges, sewers and storm drains, water systems, parks, pools and utilities. Traffic Engineering. Our traffic engineering services involve serving as the contract city traffic engineer in communities, as well as performing designand traffic planning projects for our clients. These services and projects include parking management studies, intersection analyses and improvements, trafficimpact reports, and traffic signal and control systems. Water and Wastewater Engineering. Our water and wastewater engineering services include design and project management of public water andwastewater facilities. Our core competencies include hydraulic modeling, master planning, rate studies and design and construction services. Our design4 experience includes reservoirs, pressure reducing stations, pump and lift stations, and pipeline alignment studies, as well as water/wastewater collection,distribution and treatment facilities. Structural Engineering. Our structural engineering services include bridge design, bridge evaluation and inspection, highway and railroad bridgeplanning and design, highway interchange design, railroad grade separation design, bridge seismic retrofitting, building design and retrofit, sound wall andretaining wall design, and planning and design for bridge rehabilitation and replacement. Planning. We offer services to planning agencies as well as community development/redevelopment departments within cities. Typically, citiescontract with us to relieve peak workload situations or to fill vacant planning positions on an interim basis. In other instances, we handle the entire planningfunction for small or newly incorporated cities. Landscape Architecture. Our services in the area of landscape architecture include design, planning, landscape management and urban forestry.Specific projects include park design and master planning, bidding and construction documents, water conservation plans, urban beautification programs,landscape maintenance management, site planning and assessment district management. Geotechnical Engineering. We provide geotechnical engineering services, including soil testing, slope stability evaluations, earthquake engineering,engineering geology and hydrogeology. We have a licensed, full service geotechnical laboratory at our headquarters in Anaheim, California, which offers anarray of testing services, including the relatively new line of construction materials testing and inspection. Flood Control. We provide a complete analysis and projection of storm flows for use in master drainage plans and for individual storm drain systems toreduce flooding in streets and adjacent properties. Code Enforcement. We assist municipalities with the development and implementation of neighborhood preservation programs and the staffing ofcode enforcement personnel. Selected Projects. Examples of typical ongoing projects we have in the Engineering Services segment include:•City of Maricopa, Arizona. The City of Maricopa was incorporated in October 2003 and we were hired in April 2004 to assist with creating adevelopment services department for the city. This included continual staffing to respond to requests for building plan review and inspection,counter services and public works plan review, as well as serving as the community's designated building official. After developing a numberof standards, procedures and processes which relied heavily on our experience in other cities, we successfully opened the doors to the city'sfirst community development services department in July 2004. Since then, we have logged over 10,000 hours of counter staffing, providedbuilding plan review and permitting for over 12,000 housing units and 100 commercial projects, and provided plan review for plats andinfrastructure improvements on over 200 subdivisions ranging in size from 150 to 2,000 lots. Our relationship with the City of Maricopa hasexpanded to include the preparation of the city's first General Plan, and we assisted with the development of code enforcement policies andprocedures. We have also been requested by the community to assist in bridge design, construction administration and, through our PublicFinance Services segment, in the city's annexation fiscal analysis. •Clark County, Nevada. In 1987, we were engaged by the Clark County, Nevada Department of Building and Safety to provide plan reviewservices. In 1989, the Clark County Department of Public Works contracted with us to provide review services for drainage studies. Since then,our contracts have been renewed continuously and expanded to include review of traffic studies and5 public improvement plans as well. At the inception of these contracts, we provided these review services on an overflow, as-needed basis, butthe scope and quantity of services has grown over the past 20 years. In Clark County's fiscal year 2006-2007, we provided 680 engineeringreviews for the Department of Public Works and 1,893 reviews for the Department of Building and Safety.•City of La Canada Flintridge, California. In 1996, we began working as the prime consultant for the City of La Canada Flintridge on itsapproximately $85 million project to convert the city from individual septic systems to a traditional sewer collection system. Our ongoingservices for this project include assessment district formation, engineering design, construction management and inspection. To launch theproject, we prepared the sewer master plan, through which the city was divided into four separate phases. Funding for the design andconstruction of improvements within each phase was provided by the formation of assessment districts. Phases 1 and 2 are complete and theconstruction of Phase 3 is near completion. The city is currently evaluating preliminary designs for Phase 4 and construction is expected tobegin in early 2009. •Colorado River Indian Tribes, Blue Water Casino and Resort. In February 2007, we contracted with the Colorado River Indian community toreview building plans and conduct inspections for the reconstruction of a seven-year-old, 286,000-square-foot facility. The facility wasoriginally constructed without the benefit of an inspection and has been plagued with code-related issues. Our staff has been integral inbringing the project into compliance with the adopted codes, plans and specifications. We will continue to assist the community with on-callassignments for future commercial developments.Public Finance Services We acquired our public finance consulting business in 1999 to supplement the services we offer our public sector clients. In general, we supply expertiseand support for the various financing techniques employed by public agencies to finance their operations and infrastructure. We also support the mandatedreporting and other requirements associated with these financings. We do not provide underwriting or financial advisory services for municipal securities. Unlike our Engineering Services business, we often compete for business, at least initially, through a competitive bid process. However, since manypublic sector financing instruments, such as tax-exempt bonds, remain outstanding for up to 30 years, once we have established a client relationship, theclient tends to retain us for as long as the financing remains in place. Our services in this segment include the following: District Administration. We administer special districts on behalf of public agencies. The types of special districts administered include communityfacilities districts (in California, Mello-Roos districts), assessment districts, landscape and lighting districts, school facilities improvement districts, waterdistricts, benefit assessment districts, fire suppression districts, and business improvement districts. Our administration services include calculating the annuallevy for each parcel in the district; billing charges directly or through a county tax roll; preparing the annual Engineer's Report, budget and resolutions;reporting on collections and payment status; calculating prepayment quotes; and providing financial analyses, modeling and budget forecasting. From July2007 to June 2008, we expect to administer over 1,600 districts on behalf of more than 230 public agencies, involving an annual levy of more than6.3 million parcels that is expected to generate approximately $637 million in public revenue. The key to our District Administration services is our proprietary software package, MuniMagic®: Municipal Administration & Government InformationCoordinator, which we developed internally to redefine the way we administer special districts. MuniMagic® is a database management program thatmaintains parcel data; calculates special taxes, assessments, fees and charges; manages payment tracking; maintains bond-related information in a single,central location; and provides reporting,6 financial modeling and analysis at multiple levels of detail. MuniMagic® offers a significant competitive advantage in an industry driven by the ability toaccurately process extremely large quantities of data. MuniMagic® is also available for licensing by our existing clients. See "—Intellectual Property" for adiscussion of the licensing terms. Financial Consulting Services. We perform economic analyses and financial projects for public agencies, including:•Fee and rate studies, such as cost allocation studies, user fee analysis, utility rate analysis, fiscal impact studies and development fee studies; •Special district formation, which involves the design, development and initiation of community facilities districts, school facilities,improvement districts, assessment districts, landscape and lighting districts, benefit assessment districts, business improvement districts, firesuppression assessments and re-engineering; •Facility financing plans; •Economic impact analyses; •The formation of new public entities, annexations and incorporations; •Reassessment engineering for bond refunding; and •Infrastructure analysis both to evaluate the need for rehabilitation efforts, and for financial reporting purposes, in association with Willdan. Federal Compliance Services. We offer federal compliance services to issuers of municipal securities, which can be cities, towns, school districts,housing authorities and other entities that are eligible to issue tax-exempt securities. Specifically, we provide arbitrage rebate calculations and municipaldisclosure services that help issuers remain in compliance with federal regulations. We provide these reports, together with related compliance services suchas bond elections, temporary period yield restriction, escrow fund monitoring, rebate payments and refund requests. In terms of continuing disclosureservices, we both produce the required annual reports and disseminate those reports on behalf of the issuers. We provide federal compliance services toapproximately 550 issuers in 38 states and the District of Columbia on more than 1,600 bond issues totaling over $43 billion in municipal debt. Selected Projects. Examples of typical ongoing projects we have in the Public Finance Services segment include:•Metropolitan Water District of Southern California. Since 2002, we have administered water standby charges for the Metropolitan WaterDistrict of Southern California, or MWD. This involves the placement of standby charges onto the property tax bills of parcel owners withinthe six-county area serviced by MWD. We manage data for over 4.0 million parcels with over 3.3 million parcels, totaling $42.8 million inwater district revenue, levied on an annual basis. In 2005, our contract with the MWD was extended for an additional five years. •City of Indio, California. In 1997, the City of Indio engaged us to administer their landscape and lighting districts. In April 2005, our serviceswere expanded to include the administration of their local improvement and community facilities districts, as well as delinquencymanagement and municipal disclosure services. This agreement is in effect for as long as the underlying districts are active. Since 2005, ourrelationship with the city has expanded further to include assessment engineering services, a water rate study, and special district formations.Arbitrage rebate calculations and continuing disclosure reports have also been contracted with us for a term of 30 years.7 •City of Roseville, California. Our association with the City of Roseville also began in 1997, with the administration of 11 special financingdistricts. Since then, our administration services have expanded to encompass 33 special financing districts, with contracts that will remain ineffect for as long as the districts remain active. Delinquency management and municipal disclosure are included in these contracts. We alsohave provided the city with a number of consulting services, including two fiscal impact analyses, an update to a public facilities fee study, afire facilities impact fee study, an animal control facilities fee study, and arbitrage rebate services. The contract for arbitrage rebate services isopen for the lives of the underlying bonds.Homeland Security Services We provide homeland security and public safety consulting services to cities, counties and related municipal service agencies such as utility and watercompanies, as well as school districts, port and transportation authorities, tribal governments and large business enterprises with a need for homeland securityrelated services. We staff our projects in this area with former high-level local and regional public safety officers and focus on solutions tailored for localagencies and their personnel. We entered this segment in fiscal year 2004 with the formation of our subsidiary, American Homeland Solutions, or AHS, and began generating revenuein the second half of fiscal year 2005. Our services include: Training Services. We design customized training courses for all aspects of disaster, unusual occurrence and emergency responses. In this regard, wehave developed and own several training courses that meet or exceed the requirements for the federal National Incident Management System, or NIMS,training. These courses assist clients in meeting their obligations to prepare their staff to utilize the NIMS. Our courses have been approved by California'sCommission on Peace Officers Standards and Training, the California Office of Emergency Services and the Federal National Integration Center, Training andEducation Division, formerly the Department of Homeland Security's "Office of Grants and Training". Emergency Operations Planning. We design, implement, review and evaluate public and private agencies' emergency operations plans, includingcompliance and consistency with federal, state and local laws and policies. Plans are tailored to respond to terrorism, intentional acts of sabotage and naturaldisasters. We also provide command and control and emergency response training for all types of unusual occurrences. Terrorism and Threat Vulnerability Assessments. These assessments involve the development of policies and procedures to assess threats and thevulnerability of local, regional, state and national infrastructures, including city and county buildings, ports and airports, facilities, power supplies, watersupplies, communications networks and transportation systems. Planning Evaluations and Exercises. We conduct planning sessions and exercises, including those relating to weapons of mass destruction, largeevents, mass casualty transportation disasters, terrorism incident response, natural disaster response and recovery, and civil disorder events. We design theseexercises for multi-agency involvement and are fully compliant with NIMS, the State Emergency Management System for California, and the NationalResponse Framework. Exercises are designed to evaluate and test "first responders" and support personnel, as well as elected officials and agencymanagement. Public Safety and Management Consulting. We provide independent analyses, evaluations and recommendations for enhancing the performance ofpublic safety agencies, such as police and fire departments.8 Selected Projects. Examples of typical Homeland Security Services projects include:•NIMS Training Sessions. We conduct NIMS training sessions for law enforcement, fire protection, building department and public workspersonnel, and other "first responders". In 2007, representatives from over 500 public agencies attended AHS training courses. •City of Norwalk, California. We are currently assisting the City of Norwalk with an update of its emergency response plan. The projectincludes executive course training, and development of a field operations guide for emergency operations command and emergency disasterresponse. •City of Huntington Park, California. We conducted an analysis of the structure and effectiveness of the police department in the City ofHuntington Park and offered recommendations as to how the department could better serve the community. •City of Stanton, California. We conducted an analysis of the city's policing contract with the county sheriff's department for cost effectivenessand service levels.Competitive Strengths Founded over 40 years ago, we have a well-established track record of providing a wide range of privatized services to the public sector. We havedeveloped the experience base, professional staff and support technology and software necessary to quickly and effectively respond to the needs of ourclients. We believe we have developed a reputation within our industry as problem solvers across a broad range of client issues. Some of our competitivestrengths include: Quality of Service. We pride ourselves on the quality of service that we provide to our clients. The work for which we compete is awarded primarilybased on the company's qualifications, rather than the fees proposed. We believe that our service levels, experience and expertise satisfy even the mostrigorous qualification standards. We have developed a strong reputation for quality, based upon our depth of experience, ability to attract qualityprofessionals, customized technology and software that support our services, local knowledge and the expertise we possess across multiple disciplines. Webelieve we are well-positioned to serve public sector clients due to our knowledge of the unique reporting processes and operating procedures of publicagencies, which differ substantially from the private sector. We believe our high quality of service is a significant reason we currently provide services to over60% of the cities and counties in California. Broad range of services. Our focus on customer service has led us to continually broaden the scope of the services we provide. At different stages in our40-year history, as the needs of our public sector clients have evolved, we have developed service capabilities complementary to our core engineeringbusiness, including building and safety services, financial and economic services, planning services, geotechnical services, code enforcement services and,most recently, disaster planning and homeland security services. Further, because we recognize that local public sector projects and issues often crossdepartmental lines, we have developed the ability to deliver multiple services in a cohesive manner to better serve our client communities as a whole. Strategic locations in key markets. Local agencies want professionals who understand their local needs. Therefore, we deliver our services through anetwork of over 20 offices dispersed throughout the western United States. Each of our offices is staffed with quality professionals, including formermanagement level public sector employees, such as planners, engineers, inspectors, and police and fire department personnel. These professionals understandthe local and regional markets in which they work. In addition, we operate in some of the fastest growing states, counties and cities in the country, includingthree of the five fastest growing counties in the country (based on number of residents added from July 2005 to July 2006): Maricopa County, Arizona; ClarkCounty, Nevada; and Riverside County, California. Furthermore, seven of the top 10 fastest growing cities in the nation (with populations over9 100,000) are located in California, Arizona and Nevada, where we have significant operations. (Source: U.S. Census Bureau, Population Division, June 2007). Strong, long-term client relationships. We have developed strong relationships with our public agency clients, some of whom we have worked with forover 25 years. The value of these long-term relationships is reflected in the recurring award of new projects, ongoing staffing assignments, and long-termprojects that require high-level supervision. We also seek to maintain close personal relationships with public agency decision-makers to strengthen ourrelationships with them and the agencies with which they work. We frequently develop new client relationships as our public agency contacts are promotedor move to other agencies. Our strong culture of community involvement and leadership in key public agency organizations underscores our customer focusand helps us cultivate and expand our client base. Experienced, talented and motivated employees. Our staff consists of seasoned professionals with a broad array of specialties, and a strong customerservice orientation. Our corporate culture places a high priority on investing in our people, including providing opportunities for stock ownership to attract,motivate and retain top professionals. Our executive officers have an average of more than 23 years of experience in or supporting the public sector, and anaverage of 6 years with our company.Clients Our clients primarily consist of cities, counties, redevelopment agencies, water districts, school districts and universities, state agencies, federal agencies,a variety of other special districts and agencies, and tribal governments. Our typical client is an agency serving a community of 10,000 to 300,000 people. Infiscal year 2007, we served over 800 distinct clients. No individual client accounted for over 3.5% of our consolidated contract revenue in fiscal year 2007.For fiscal year 2007, each of our top eight clients accounted for between 1.6% and 3.5% of our consolidated contract revenue. Our clients are predominantlybased in California, although we have major clients in both Arizona and Nevada. For fiscal year 2007, services provided to public agencies in Californiaaccounted for approximately 81% of our contract revenue.Contract Structure We provide our services under contracts, purchase orders or retainer letters. The contracts we enter into with our clients contain three principal types ofpricing provisions:•Time-and-materials provisions provide for reimbursement of costs and overhead plus a fee for labor based on the time expended on a projectmultiplied by a negotiated hourly billing rate. The profitability achievable on a time and materials basis is driven by billable headcount andcost control. •Unit-based provisions require the delivery of specific units of work, such as arbitrage rebate calculations, dissemination of municipalsecurities continuing disclosure reports, or building plan checks, at an agreed price per unit, with the total payment under the contractdetermined by the actual number of units performed. •Fixed price provisions require all work under a contract to be performed for a specified lump sum, which may be subject to adjustment if thescope of the project changes. Contracts with fixed price provisions carry certain inherent risks, including risks of losses from underestimatingcosts, delays in project completion, problems with new technologies, price increases for materials, and economic and other changes that mayoccur over the contract period. Consequently, the profitability, if any, of fixed price contracts can vary substantially.10 The following table presents, for the periods indicated, the approximate percentage of our contract revenue subject to each type of pricing provision: Fiscal Year 2007 2006 Time-and-materials 59%58%Unit-based 25%28%Fixed price 16%14% Total 100%100% Under each of the different types of contracts, other than unit-based, we bill our clients periodically in accordance with the contract terms based on costsincurred, on either an hourly-fee basis or on a percentage of completion basis, as the project progresses. For unit-based contracts, we bill our clients upondelivery of the contracted item or, in some cases, in advance of delivery. Our contracts come up for renewal periodically and at the time of renewal may be subject to renegotiation, which could impact the profitability on thatcontract. In addition, during the term of a contract, public agencies may request additional or revised services which may impact the economics of thetransaction. Most of our contracts permit our clients, with prior notice, to terminate the contracts at any time without cause. While the renewal, termination ormodification of a contract may materially impact an individual project, we do not believe the renewal, termination or modification of any specific contractwould have a material adverse effect on our consolidated operations due to our large volume of transactions and low customer concentration.Competition The market for our services is highly fragmented. We often compete with many other firms ranging from small local firms to large national firms. Contractawards are based primarily on qualifications, relevant experience, staffing capabilities, geographic presence, stability and price. Doing business with governmental agencies is complex and requires the ability to comply with intricate regulations and satisfy periodic audits. We havebeen serving cities, counties, special districts and other public agencies for over 40 years. We believe that the ability to understand these requirements and tosuccessfully conduct business with governmental entities and agencies is a barrier to entry for potential competitors. Our competition varies by type of client, type of service and geography. The range of competitors for any one project can vary depending upon technicalspecialties, the relative value of the project, geographic location, financial terms, risks associated with the work, and any client imposed restrictions. Unlikemost of our competitors, we focus our services on public sector clients. Public sector clients generally choose among competing firms by weighing thequality, experience, innovation and timeliness of the firm's services. When selecting consultants for engineering projects, many government agencies arerequired to, and others choose to, employ Qualifications Based Selection, or QBS. QBS requires the selection of the most technically qualified firms for aproject, while the financial and legal terms of the engagement are generally secondary. QBS applies primarily to work done by our Engineering Servicessegment. Contracts in the Public Finance Services and Homeland Security Services areas typically are not subject to mandatory QBS standards, and often areawarded through a competitive bid process. Our competition varies geographically. Although we provide services in several states, we may be stronger in certain service lines in some geographicalareas than in other regions. Similarly, some of our larger competitors are stronger in some service lines in certain localities but are not as competitive11 in others. Our smaller competitors generally are limited both geographically as well as in the services they are able to provide. We believe that the primary competitors for our Engineering Services segment include: Charles Abbott & Associates, Inc., Bureau Veritas, Harris &Associates, Psomas, RBF Consulting, Tetra Tech, Inc., Stantec, Inc., Michael Baker Corporation, TRC Companies, Inc. and Jacobs Engineering Group, Inc.Our chief competitors in our Public Finance Services segment, include David Taussig & Associates, Harris & Associates, NBS Government Finance Groupand Ernst & Young LLP. We believe the Homeland Security Services segment competes primarily with EG&G (a division of URS Corporation) and SRAInternational, Inc.Insurance We currently maintain general liability insurance, with coverage in the amount of $1.0 million per occurrence, subject to a $2.0 million generalaggregate limit; and professional liability insurance, with $5.0 million in coverage per claim, and a $10.0 million annual aggregate limit. Our professionalliability policy is a "claims made" policy. We also carry excess coverage of an additional $9.0 million for general liability claims. We are liable to pay theseclaims from our assets if and when the aggregate settlement or judgment amount exceeds our policy limits.Employees At December 28, 2007, we had approximately 447 full-time employees and 181 part-time employees. All Public Agency Resources' employees areclassified as part-time. Our employees include, among others, licensed civil, traffic and structural engineers, land surveyors, certified building officials,licensed geotechnical engineers and engineering geologists, certified inspectors and plans examiners, licensed architects and landscape architects, certifiedplanners, and information technology specialists. We believe that we attract and retain highly skilled personnel with significant industry experience andstrong client relationships by offering them challenging assignments in a stable work environment. We believe that our employee relations are good. The following table sets forth the number of our employees in each of our business segments and our holding company: As ofFiscal Year End 2007 2006 2005Engineering Services 496 542 481Public Finance Services 75 78 78Homeland Security Services 8 4 1Holding Company Employees (Willdan Group, Inc.) 49 46 39 Total 628 670 599 At December 28, 2007, we contracted with approximately 60 former and current public safety officers to conduct homeland security services trainingcourses. These instructors are classified as subconsultants and not employees. At December 28, 2007, all three of our field survey employees were covered bya Master Labor Agreement between the International Union of Operating Engineers Local Union No. 12 and the Southern California Association of CivilEngineers and Land Surveyors, which expires in October 2010.12 Intellectual Property The Willdan Group of Companies, Willdan, MuniFinancial, Arroyo Geotechnical, and AHS names and logos are service marks of ours, and we haveapplied for federal trademark registrations for each with the United States Patent and Trademark Office. We believe we have strong name recognition in thewestern United States and that this provides us a competitive advantage in obtaining new business. Consequently, we believe it is important to protect ourbrand identity through trademark registrations. The name and logo of our proprietary software, MuniMagic®, are registered trademarks of MuniFinancial,and we have registered a federal copyright for the source code for the MuniMagic® software. We license the MuniMagic® software to existing clientspursuant to licensing agreements that allow varying levels of access to data. This technology allows clients to view their own data and is a form ofdeliverable to our clients. The use of licensing provides us protection for this proprietary technology. MuniMagic® is not a commercial product offered forsale.Available Information Our website is www.willdangroup.com and our investor relations page is under the caption "Investor Relations" on our website. We make available onthis website under "SEC Filings," free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, andamendments to those reports as soon as reasonably practicable after we electronically file or furnish such materials to the U.S. Securities and ExchangeCommission, or SEC. We also make available on this website our prior earnings calls and, under the heading "Corporate Governance", our Code of EthicalConduct. Further, a copy of this annual report on Form 10-K is located at the SEC's Public Reference Room at 100 F Street, NE, Room 1580, Washington,D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains anInternet site that contains reports, proxy and information statements and other information regarding our filings at http://www.sec.gov.13 ITEM 1A. RISK FACTORS Risks Relating to Our Business and Industry A downturn in public and private sector construction activity in the regions we serve may have a material adverse effect on our business, financialcondition and results of operations. A downturn in construction activity in our geographic service areas may affect demand for our services, which could have a material adverse effect on theresults of our operations and our financial condition. During fiscal year 2007, a majority of our contract revenue was generated by services rendered to publicagencies in connection with private and public sector construction projects. Our business, financial condition and results of operations may also be adversely affected by conditions that impact the construction sector in general,including, among other things:•Changes in national and local market conditions due to changes in general or local economic conditions and neighborhood characteristics; •Slow-growth or no-growth initiatives or legislation; •Adverse changes in local and regional governmental policies on investment in infrastructure; •Adverse changes in federal and state policies regarding the allocation of funds to local and regional agencies; •The impact of present or future environmental legislation and compliance with environmental laws and other regulatory requirements; •Changes in real estate tax rates and assessments; •Increases in interest rates and changes in the availability, cost and terms of financing; •Adverse changes in other governmental rules and fiscal policies; and •Earthquakes and other natural disasters, which can cause uninsured losses, and other factors which are beyond our control. Any of these factors could adversely affect the demand for our services, which could have a material adverse effect on our business, results of operationsand financial condition.Changes in the local and regional economies of California could have a material adverse effect on our business, financial condition and results ofoperations. Adverse economic and other conditions affecting the local and regional economies of California may reduce the demand for our services, which couldhave a material adverse effect on our business, financial condition and results of operations. During fiscal year 2007, approximately 81% of our contractrevenue was derived from services rendered to public agencies in California. From 1991 to 1996, California experienced an economic downturn that had anegative impact on the construction and development sectors. This economic downturn caused us to experience cash flow difficulties and substantialoperating losses. We believe California is currently experiencing another economic downturn, which could negatively impact our revenues and profitability.We believe the downturn in the residential housing market has already impacted our revenues, in particular revenue from fees associated with buildingpermits.Reductions in state and local government budgets could negatively impact their capital spending and adversely affect our business, financial conditionand results of operations. Our state and local government clients may face budget deficits that prohibit them from funding new or existing projects. In addition, existing andpotential clients may either postpone entering into14 new contracts or request price concessions. If we are not able to reduce our costs quickly enough to respond to the revenue decline from these clients that mayoccur, our operating results would be adversely affected. Accordingly, these factors affect our ability to accurately forecast our future revenue and earningsfrom business areas that may be adversely impacted by market conditions.Legislation may be enacted that limits the ability of state, regional or local agencies to contract for our privatized services. Such legislation would affectour ability to obtain new contracts and may decrease the demand for our services. Legislation is proposed periodically, particularly in California, that attempts to limit the ability of governmental agencies to contract with privateconsultants to provide services. Should such legislation pass and be upheld, demand for our services may be materially adversely affected. During fiscal year2007, approximately 81% of our contract revenue was derived from services rendered to public agencies in California. While attempts at such legislationhave failed in the past, as the composition of California's legislative body changes over time there is an increased risk that measures could be adopted in thefuture that limit the market for privatized services.State and other public employee unions may bring litigation that seeks to limit the ability of public agencies to contract with private firms to performgovernment employee functions in the area of public improvements. Judicial determinations in favor of these unions could affect our ability to compete forcontracts and may have an adverse effect on our revenue and profitability. Over at least the last 20 years, state and other public employee unions have challenged the validity of propositions, legislation, charters and othergovernment regulations that allow public agencies to contract with private firms to provide services in the fields of engineering, design and construction ofpublic improvements that might otherwise be provided by public employees. These challenges could have the affect of eliminating, or severely restricting,the ability of municipalities to hire private firms for the purpose of designing and constructing public improvements, and otherwise require them to use unionemployees to perform the services. For example, the Professional Engineers in California Government, or PECG, a union representing state civil service employees, has been challengingCaltrans' hiring of private firms since 1986, and in 2002 began a judicial challenge of Caltrans' hiring practices based on Caltrans' interpretation of the effectof Proposition 35 (Professional Engineers in California Government, et al. v. Jeff Morales, et al.). The California Supreme Court ruled in favor of Caltrans,concluding that Caltrans may hire private contractors to perform architectural and engineering services on public works. Although Caltrans was successful inthis recent litigation, similar claims may be brought in the future and we cannot predict their outcome. If a state or other public employee union is successfulin its challenge and as a result the ability of state agencies to hire private firms is severely limited, such a decision would likely lead to additional litigationchallenging the ability of the state, counties, municipalities and other public agencies to hire private engineering, architectural and other firms, the outcomeof which could affect our ability to compete for contracts and may have an adverse effect on our revenue and profitability.Changes in elected or appointed officials could have a material adverse effect on our ability to retain an existing contract with or obtain additionalcontracts from a public agency. Since the decision to retain our services is made by individuals, such as city managers, city councils and other elected or appointed officials, ourbusiness and financial results or condition could be adversely affected by the results of local and regional elections. A change in the individuals responsiblefor selecting consultants for and awarding contracts on behalf of a public agency due to an election could adversely affect our ability to retain an existingcontract with or obtain additional contracts from such public agency.15 Fixed price contracts under which we perform some of our services impose risks to our ability to maintain or grow our profitability. In fiscal year 2007, approximately 16% of our contract revenue was derived from fixed price contracts. Under fixed price contracts, we perform servicesunder a contract at a stipulated price which protects clients but exposes us to a greater number of risks than time-and-materials and unit-based contracts.These risks include:•Underestimation of costs; •Ambiguities in specifications; •Problems with new technologies; •Unforeseen costs or difficulties; •Failures of subcontractors; •Delays beyond our control; and •Economic and other changes that may occur during the contract period. The occurrence of any such risk could have a material adverse effect on our results of operations or financial condition.Because we primarily provide services to municipalities and other public agencies, we are more susceptible to the unique risks associated with governmentcontracts. We primarily work for municipalities and other public agencies. Consequently, we are exposed to certain risks associated with government contracting,any one of which can have a material adverse effect on our business, financial condition or results of operations. These risks include:•The ability of the public agency to terminate the contract with 30 days' prior notice or less; •Changes in government spending and fiscal policies which can have an adverse effect on demand for our services; •Contracts that are subject to government budget cycles, and often are subject to renewal on an annual basis; •The often wide variation of the types and pricing terms of contracts from agency to agency; •The difficulty of obtaining change orders and additions to contracts; and •The requirement to perform periodic audits as a condition of certain contract arrangements.Changes in the perceived risk of acts of terrorism or natural disasters could have a material adverse effect on our ability to grow our American HomelandSolutions business. If there is a significant decrease in the perceived risk of the likelihood that one or more acts of terrorism will be conducted in the United States, or asignificant decrease in the perceived risk of the occurrence of natural disasters, our ability to grow and generate revenue through American HomelandSolutions, or AHS, could be negatively affected. AHS provides training and consulting services to local and regional agencies related to preparing for andresponding to incidents of terrorism and natural disaster. Should the perceived risk of such incidence decline, federal and state funding for homeland securityand emergency preparedness could be reduced which might decrease demand for our services and have a material adverse affect on our business, financialcondition and results of operations.16 The loss of certain of our key executives could adversely affect our business, including our ability to secure and complete engagements and attract andretain employees. In 2006 and 2007, we experienced significant turnover in our management team. In 2006, our co-founder and Chief Executive Officer, Mr. Dan Heil,passed away unexpectedly. Just prior to Mr. Heil's death, and at his recommendation, our Board of Directors elected Win Westfall to succeed Mr. Heil.Mr. Westfall resigned as our Chief Executive Officer in February 2007 and one of our directors, Tracy Lenocker, agreed to serve as our interim ChiefExecutive Officer. Mr. Lenocker resigned as our interim Chief Executive Officer when we appointed Tom Brisbin as our new President and Chief ExecutiveOfficer on April 2, 2007. In addition, Mallory McCamant, our former Chief Financial Officer, assumed the role of Chief Operations Officer in July 2007 andKimberly Gant was appointed our new Chief Financial Officer. Richard Kopecky, our former Senior Vice President and the President of our subsidiary,Willdan, was also terminated in February 2007 and replaced by David Hunt, who has been with Willdan for more than 21 years. Because of the recent turnover of our management team, any additional losses of our management team or key employees could have a material adverseeffect on our business, including the ability to secure or complete contracts and to attract and retain additional employees. Our success is highly dependentupon the efforts, talents, abilities, marketing skills and operational execution of our key executives and managers.Our ability to grow and compete in our industry will be hampered if we are unable to retain the continued service of our key professionals or to identify,hire and retain additional qualified professionals. A critical factor to our business is our ability to attract and retain qualified professionals. We are continually at risk of losing current professionals orbeing unable to hire additional professionals as needed. If we are unable to attract new qualified employees, our ability to grow will be adversely affected. Ifwe are unable to retain current employees, our financial condition and results of operations may be adversely affected. We would also be increasing ourcompetition, as former employees pose the greatest threat of significant competition to our business.We operate in a highly fragmented industry, and we may not be able to compete effectively with our larger competitors. The market for services in the engineering, municipal consulting, public finance consulting, geotechnical, homeland security and other technicalservices industries is competitive and highly fragmented. Contract awards are based primarily on quality of service, relevant experience, staffing capabilities,reputation, geographic presence, stability and price. Some of our competitors in certain service areas have more personnel and greater financial, technical andmarketing resources than us. With regard to engineering related services, which represented approximately 82% and 84% of our contract revenue for fiscalyears 2007 and 2006, respectively, our competitors include many larger consulting firms such as AECOM Technology Corporation, CH2M Hill, JacobsEngineering Group and Tetra Tech, Inc. In certain public finance consulting services, we may compete with large accounting firms, such as Ernst &Young LLP. We can offer no assurance that we will be able to compete successfully in the future with these or other competitors.Our services may expose us to liability in excess of our current insurance coverage, which may have a material adverse effect on our liquidity. Our services involve significant risks of professional and other liabilities, which may substantially exceed the fees we derive from our services. Inaddition, from time to time, we assume liabilities as a result of indemnification provisions contained in our service contracts. We cannot predict themagnitude of these potential liabilities.17 We currently maintain general liability insurance, with coverage in the amount of $1.0 million per occurrence, subject to a $2.0 million generalaggregate limit; and professional liability insurance, with $5.0 million in coverage per claim, and a $10.0 million annual aggregate limit. We also carryexcess coverage of an additional $9.0 million for general liability claims. Claims may be made against us that exceed these limits. We are liable to pay claimsfrom our assets if and when the aggregate settlement or judgment amount exceeds our policy limits. In 2002, we experienced two claims against ourprofessional liability insurance that exceeded by $3.1 million the aggregate annual limit of our coverage, which at that time was $5.0 million. Followingresolution of these disputes, we were liable for the $3.1 million in excess of our policy limits. Our professional liability policy is a "claims made" policy.Thus, only claims made during the term of the policy are covered. If we terminate our professional liability policy and do not obtain retroactive coverage, wewould be uninsured for claims made after termination even if these claims are based on events or acts that occurred during the term of the policy. Further, ourinsurance may not protect us against liability because our policies typically have various exceptions to the claims covered and also require us to assumesome costs of the claim even though a portion of the claim may be covered. In addition, if we expand into new markets, we may not be able to obtaininsurance coverage for these new activities or, if insurance is obtained, the dollar amount of any liabilities incurred could exceed our insurance coverage. Apartially or completely uninsured claim, if successful and of significant magnitude, could have a material adverse effect on our liquidity.The quality of our service and our ability to perform under some of our contracts would be adversely affected if qualified subconsultants are unavailablefor us to engage. Under some of our contracts, we rely on the efforts and skills of subconsultants for the performance of some of the tasks. In fiscal years 2007 and 2006,subconsultant costs comprised approximately 6.0% and 5.0%, respectively, of our contract revenue. The absence of qualified subconsultants with whom wehave a satisfactory relationship could adversely affect the quality of our service offerings and therefore our financial results.Potential future acquisitions could be difficult to integrate, divert the attention of key personnel, disrupt our business, dilute stockholder value and impairour financial results. As part of our business strategy, we intend to consider acquisitions of companies that are complementary to our business. Appropriate acquisitions couldallow us to expand into new geographical locations, offer new services, or acquire additional talent. Accordingly, our future performance will be impacted byour ability to identify appropriate businesses to acquire, negotiate favorable terms for such acquisitions and then effectively and efficiently integrate suchacquisitions into our existing businesses. There is no certainty that we will succeed in such endeavors. Acquisitions involve numerous risks, any of which could harm our business, including:•Difficulties in integrating the operations, technologies, products, existing contracts, accounting and personnel of the target company andrealizing the anticipated synergies of the combined businesses; •Difficulties in supporting and transitioning customers, if any, of the target company; •Diversion of our financial and management resources from existing operations; •The price we pay or other resources that we devote may exceed the value we realize, or the value we could have realized if we had allocatedthe purchase price or other resources to another opportunity; •Risks of entering new markets in which we have limited or no experience;18 •Potential loss of key employees, customers and strategic alliances from either our current business or the target company's business; •Assumption of unanticipated problems or latent liabilities, such as problems with the quality of the target company's services; and •Inability to generate sufficient net income to justify the acquisition costs. Acquisitions also frequently result in the recording of goodwill and other intangible assets which are subject to potential impairment in the future thatcould harm our financial results. In addition, if we finance acquisitions by issuing convertible debt or equity securities, our existing stockholders may bediluted, which could lower the market price of our common stock. As a result, if we fail to properly evaluate acquisitions or investments, we may not achievethe anticipated benefits of any such acquisitions, and we may incur costs in excess of amounts that we anticipate.If we fail to comply with the requirements imposed by Section 404 of the Sarbanes-Oxley Act, the trading price of our stock could drop significantly. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, we are required to provide a management certification on our internalcontrols over financial reporting. Because we are not an accelerated filer, we are not required to provide an attestation report related to the effectiveness of ourinternal controls over financial reporting from our independent registered public accounting firm for fiscal year 2007. In order to achieve compliance withSection 404 of Sarbanes-Oxley, we engaged outside professional consultants to assist us in documenting and evaluating our internal control over financialreporting. This exercise has been both costly and challenging. We believe the efforts we have put forth to date give us the basis to conclude that we haveeffective internal controls over financial reporting. When our independent auditors attest to the effectiveness of our internal controls over financial reportingin future years, our auditors may not agree with our management's conclusion and, as a result, would not be able to conclude that our internal controls overfinancial reporting are effective. Moreover, the costs to comply with the provisions of Section 404 of Sarbanes-Oxley, as presently in effect, could continue tobe significant. In addition, during the course of testing the design and effectiveness of our internal controls, we or our independent registered public accounting firmmay identify deficiencies that we may not be able to remediate in time to allow for unqualified reports from our independent registered public accountingfirm. Furthermore, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended fromtime to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting inaccordance with Section 404 of Sarbanes-Oxley. Effective internal controls, particularly those related to revenue recognition, are necessary for us to producereliable financial reports and are important to helping prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our businessand operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our stock could dropsignificantly.We have incurred, and will continue to incur, significant costs as a public company. As a public company, we incur significant legal, accounting and other expenses that we did not incur prior to November 2006 as a private company. Newrules and regulations for public companies may increase our legal and financial compliance costs and will make some activities more time-consuming andcostly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to maintain director and officer liabilityinsurance, and we may be required to incur substantial costs to maintain the same or similar coverage.19 We may not be able to obtain capital when desired on favorable terms, if at all, or without dilution to our stockholders. We anticipate that our current cash, liquid investments, cash equivalents, cash provided by operating activities and funds available through ourrevolving line of credit will be sufficient to meet our current and anticipated needs for general corporate purposes during the next 12 months. It is possible,however, that we may not generate sufficient cash flow from operations or otherwise have the capital resources to meet our future capital needs. If this occurs,we may need additional financing to execute on our current or future business strategies, which include the following:•Hire additional personnel; •Develop new or enhance existing service lines; •Expand our business geographically; •Enhance our operating infrastructure; •Acquire complementary businesses; or •Otherwise respond to competitive pressures. If we raise additional funds through the issuance of convertible debt or equity securities, the percentage ownership of our stockholders could besignificantly diluted, and these newly issued securities may have rights, preferences or privileges senior to those of existing stockholders. We cannot assureyou that additional financing will be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms,if and when needed, our ability to fund our operations, take advantage of unanticipated opportunities, develop or enhance our products, or otherwise respondto competitive pressures would be significantly limited.The concentration of ownership of our stock may delay or prevent a change of control of our company or changes in our management, and as a result mayhinder the ability of our stockholders to take advantage of a premium offer. The concentration of ownership of our stock may have the effect of delaying or preventing a change in control of the company or a change in ourmanagement and may adversely affect the voting or other rights of other holders of our common stock. As of March 19, 2008 our directors and executiveofficers beneficially own 1,264,251 shares of common stock, or approximately 17.5% of our outstanding common stock. Of these shares, 922,120 shares, orapproximately 12.9% of our outstanding common stock, are owned by Linda L. Heil, a member of our board of directors.Cautionary Statement Regarding Forward-Looking Information In addition to current and historical information, this report contains forward-looking statements within the meaning of the Private Securities LitigationReform Act of 1995. These statements relate to our future operations, prospects, potential products, services, developments and business strategies. Thesestatements can, in some cases, be identified by the use of words like "may," "will," "should," "could," "would," "intend," "expect," "plan," "anticipate,""believe," "estimate," "predict," "project," "potential," or "continue" or the negative of such terms or other comparable terminology. This report includes,among others, forward-looking statements regarding our:•Expectations about future customers; •Expectations about expanded service offerings; •Expectations about our ability to cross-sell additional services to existing clients; •Expectations about our intended geographical expansion;20 •Expectations about our ability to attract executive officers and key employees; •Evaluation of the materiality of our current legal proceedings; and •Expectations about positive cash flow generation and existing cash and investments being sufficient to meet normal operating requirements. These statements involve certain known and unknown risks and uncertainties that could cause our actual results to differ materially from those expressedor implied in our forward-looking statements. Such risks and uncertainties include, among others, those listed in this section. We do not intend, andundertake no obligation, to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES Our corporate headquarters are located in approximately 41,000 square feet of office space that we lease at 2401 East Katella Avenue, Anaheim,California. In addition, we lease office space in over 20 other locations principally in California, Nevada, and Arizona. In total, our facilities containapproximately 150,000 square feet of office space and are subject to leases that expire through fiscal year 2013. We also rent additional office space on amonth-to-month basis. We believe that our existing facilities are adequate to meet current requirements and that suitable additional or substitute space willbe available as needed to accommodate any expansion of operations and for additional offices. ITEM 3. LEGAL PROCEEDINGS We are subject from time to time to claims and lawsuits, including those alleging professional errors or omissions, that arise in the ordinary course ofbusiness against firms, like ours, that operate in the engineering and consulting professions. We carry professional liability insurance, subject to certaindeductibles and policy limits, for such claims as they arise and may from time to time establish reserves for litigation that is considered probable of a loss. Wemay incur substantial expenses in defending against third party claims. In the event of a determination adverse to us, we may incur substantial monetaryliability and be required to change our business practices. Either of these results could have a material adverse effect on our financial position, results ofoperations or cash flows. We were involved in a dispute with the City of West Hollywood, California over a project in 2002. This matter concerned a construction project in theCity of West Hollywood for the improvement of Santa Monica Boulevard. The project required the reconstruction of approximately three miles of roadway.The city and the general contractor claimed that the design we prepared was inadequate for the volume and type of traffic on Santa Monica Boulevard. Thecity also claimed that we failed to control the costs of the project due to contractor claims for extra costs. In the fourth quarter of 2005, following a trial in the Los Angeles County Superior Court, the jury rendered a verdict against us and awarded damages tothe city in the amount of $6.3 million, including attorney's fees, interest and costs. Our insurance company posted bonds and filed an appeal with respect tothis matter. During the appeal process, interest accrued on the outstanding judgment at the rate of 10% per annum. As of December 30, 2005, we believed thatapproximately $3.2 million of the damages was covered by our professional liability insurance policy. Therefore, in fiscal year 2005, we expensed$2.7 million of this judgment and recorded related interest expense of $0.4 million related to the West Hollywood case.21 In the third quarter of 2006, we obtained a court ruling with respect to an unrelated claim that also arose in fiscal year 2002 awarding us approximately$1.0 million on a claim for indemnity, recovering the settlement amount and interest thereon and attorney fees and costs. At that time, we reflected anadditional receivable of approximately $1.0 million from our insurance company because we were able to replenish our insurance coverage by approximately$1.0 million for the 2002 policy year since our insurance carrier had previously paid the settlement amount. In our consolidated balance sheet as ofDecember 29, 2006, we therefore reflected a total liability of $6.9 million and related receivables of $4.2 from the insurance company. We entered into a settlement agreement, effective March 6, 2007, with the City of West Hollywood relating to the Santa Monica Boulevard matter.Pursuant to the settlement agreement, both parties agreed to a full mutual release of all claims related to the lawsuit and appeal, subject to dismissal of theappeal. Neither party admitted any fault or liability related to the claims in the lawsuit. Under the terms of the settlement agreement, we agreed to pay$6.2 million in cash to the city. Our insurance company paid $3.2 million of the settlement amount and we paid $3 million. We also agreed to provide an$85,000 credit to the city for future services. The future services are to be provided at our then prevailing rates and can be chosen in the city's sole discretionfrom services provided by us to our municipal clients. The city must use the credit before December 31, 2012. The city has used $21,133 of this credit to date,leaving a balance of $63,867. In February 2008, the ruling for the unrelated $1.0 million indemnity claim was appealed by the cross-defendant and overturned by the court. Becausethe ruling was overturned, we reversed the receivable we recorded in fiscal year 2006 and reflected an expense of $1.0 million in the fourth quarter of fiscalyear 2007. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of our stockholders during the last quarter of our fiscal year ended December 28, 2007. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIES Market Information for Common Stock Since November 21, 2006, the common stock of Willdan Group, Inc. has been listed and traded on the Nasdaq Global Market under the symbol "WLDN".The following table sets out the high and low daily closing sale prices as reported on the NASDAQ Global Market. These reported prices reflect inter-dealerprices without adjustments for retail markups, markdowns, or commissions. 2007 2006 High Low High Low1st Quarter $10.10 $8.90 N/A N/A2nd Quarter $10.07 $9.00 N/A N/A3rd Quarter $10.49 $9.58 N/A N/A4th Quarter $10.40 $6.31 $10.00 $10.64 On March 26, 2008, the closing sales price per share of our common stock, as reported on the Nasdaq Global Market, was $5.51.Stockholders As of March 26, 2008, there were 97 stockholders of record of our common stock.22 Dividends We did not declare or pay cash dividends on our common stock in fiscal years 2006 and 2007. We declared our final S Corporation distribution of$6.3 million to holders of our common stock in 2006. The distribution was paid in two equal portions in December 2006 and January 2007. Our revolvingcredit agreement prohibits the payment of any dividend or distribution on our common stock either in cash, stock or any other property without the lender'sconsent.Recent Sales of Unregistered Securities In the three years preceding the filing of this report, we have issued the following securities that were not registered under the Securities Act: On November 27, 2006, we issued stock warrants in connection with our initial public offering to the underwriter, Wedbush Morgan Securities, Inc., forthe right to purchase 290,000 common shares at 120% of the IPO share price (or $12.00 per share). The warrants became exercisable on November 20, 2007and expire on November 20, 2011. The stock warrants were issued in reliance on Regulation D promulgated under the Securities Act of 1933, as amended. On June 30, 2006, we issued an aggregate of 4,712,640 shares of our common stock to the 75 shareholders of The Willdan Group of Companies, Inc., aCalifornia corporation ("Willdan California"). The shares were issued in connection with the merger of Willdan California into Willdan Group in order toeffect its reincorporation in the state of Delaware. The shares were issued in reliance on Rule 145(a)(2) of the Securities Act of 1933, as amended. In January 2006, we issued an aggregate of 4,900 shares of our common stock to four purchasers, described below, for an aggregate purchase price of$17,798 (or $3.62 per share). From August 2005 through October 2005, we issued an aggregate of 953,500 shares of our common stock to 59 purchasers, described below, for anaggregate purchase price of $3,594,695 (or $3.77 per share). These issuances were all part of the same stock offering. With respect to the transactions in January 2006 and from August 2005 through October 2005, the purchasers were a select group of our officers,directors, key managers or consultants of the Company and/or its subsidiaries. The offer and sale of shares during these periods were not registered orqualified under federal or state securities laws, and exemptions from registration and qualification provided by these securities laws may not have beenavailable or may not have been perfected. Consequently, we may be deemed to have violated the registration and qualification requirements of thesesecurities laws with respect to the offer and sale of the common stock. To address this matter, in July 2006 we made a repurchase offer to the holders of theshares of common stock in accordance with the rules and regulations promulgated by the commissioner of the California Department of Corporations. Underthe repurchase offer, we offered to repurchase from each stockholder all of his or her shares purchased during the period in question at a price equal to theoriginal purchase price paid by such stockholder plus interest at an annual rate of 7% from the date of purchase. All of the stockholders elected to decline therepurchase offer. Unless otherwise stated, the sales of the above securities were deemed by the Registrant to be exempt from registration under the Securities Act inreliance upon Section 4(2) of the Securities Act as transactions by an issuer not involving any public offering. The purchasers comprised a select group of ourofficers, directors, managers and service providers who, as a group, have had longstanding relationships with and knowledge of our Company, our seniormanagement and our board of directors. The purchasers were provided financial and other information concerning us and were allowed the opportunity to askquestions and receive information from us prior to making their investment decisions. The purchasers represented their intention to acquire the securities forinvestment purposes and not with a view to sell or for sale in connection with any distribution thereof. Based on the limited nature of the offering, the level ofknowledge and relationships of the purchasers with us, the provision and access to information and the restrictions on transfer, we believe our offeringssatisfied the Section 4(2) exemption of the Act.Issuer Purchases of Equity Securities None.23 ITEM 6. SELECTED FINANCIAL DATA The financial data set forth below should be read in conjunction with our corresponding consolidated financial statements and notes thereto andManagement's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this annual report. Fiscal Year 2007 2006 2005 2004 2003 (in thousands except per share amounts) Consolidated Statement of Operations Data: Contract revenue $78,798 $78,339 $67,263 $58,263 $54,485 Direct costs of contract revenue: Salaries and wages 25,769 24,602 20,918 15,623 14,522 Production expenses 1,568 1,496 1,529 1,497 1,327 Subconsultant services 4,600 4,168 4,745 6,089 7,360 Total direct costs of contract revenue 31,937 30,266 27,192 23,209 23,209 General and administrative expenses: Salaries and wages, payroll taxes, employee benefits 25,061 26,051 22,720 19,711 17,473 Facilities 4,546 4,046 3,481 3,267 3,466 Stock-based compensation 209 38 2,737 — — Depreciation and amortization 1,747 1,584 1,257 1,056 865 Litigation accrual (reversal) 1,049 (1,049) 2,686 — — Other 11,727 10,359 7,935 6,923 6,202 Total general and administrative expenses 44,339 41,029 40,816 30,957 28,006 Income (loss) from operations 2,522 7,044 (745) 4,097 3,270 Other income (expense): Interest expense 499 (773) (630) (272) (366) Other, net 666 2,470 11 (6) 1 Total other income (expense) 1,165 1,697 (619) (278) (365) Income (loss) before income tax expense 3,687 8,741 (1,364) 3,819 2,905 Income tax expense 1,543 2,021 17 47 53 Net income (loss) $2,144 $6,720 $(1,381)$3,772 $2,852 Earnings per common share, basic and diluted(1) $0.30 $1.37 $(0.35)$1.03 $0.79 Weighted average common shares outstanding: Basic(1) 7,149 4,900 3,994 3,653 3,633 Diluted 7,150 4,900 3,994 3,653 3,633 S Corporation distributions paid per share(1) $— $1.16 $0.46 $0.30 $0.11 Pro Forma Data (unaudited)(2): Pro forma provision for income taxes $2,596 $549 $1,528 $1,162 Pro forma net income (loss) $6,145 $(1,913)$2,291 $1,743 Pro forma earnings per common share, basic and diluted $1.25 $(0.48)$0.63 $0.48 Other Operating Data (unaudited): Adjusted EBITDA(3) $5,363 $7,651 $5,951 $5,163 $4,154 Revenue per employee(4) $132 $131 $125 $119 $113 Employee headcount at period end(5) 628 670 599 508 451 24 Fiscal Year Ended December 28,2007 December 29,2006 December 30,2005 December 31,2004 January 2,2003Consolidated Balance Sheet Data: Cash and cash equivalents $15,511 $20,633 $3,066 $266 $498Working capital 30,171 26,721 9,429 7,195 5,199Total assets 48,226 57,108 32,797 23,223 21,460Total indebtedness 1,547 1,632 1,858 3,543 5,033Total redeemable common stock — — 14,660 11,477 8,661Total stockholders' equity 35,652 33,264 — — —(1)Per share amounts have been adjusted for a stock dividend paid on January 1, 2005 of three shares per each outstanding share. (2)Prior to our initial public offering in November 2006, we were taxed as an S Corporation for purposes of federal and state income taxes. As a result ofthat offering, our S Corporation status terminated and we are now taxed as a C Corporation under federal and state tax laws. The pro forma data reflectscombined federal and state income taxes on a pro forma basis as if we had been taxed as a C Corporation during those periods using an effective taxrate of 40%. (3)Adjusted EBITDA is a supplemental measure used by our management to measure our operating performance. We define Adjusted EBITDA as netincome plus net interest expense, income tax expense (benefit), depreciation and amortization, loss (gains) on sales of assets, accrued expenses relatedto a litigation matter and a one-time stock-based compensation expense recorded in anticipation of our IPO, less proceeds from life insurance policiescarried on our former chief executive officer. Our definition of Adjusted EBITDA may differ from those of many companies reporting similarly namedmeasures. This measure should be considered in addition to, and not as a substitute for or superior to, other measures of financial performanceprepared in accordance with U.S. generally accepted accounting principles, or GAAP, such as operating income and net income. We believe AdjustedEBITDA enables management to separate non-recurring income and expense items from our results of operations to provide a more normalized andconsistent view of operating performance on a period-to-period basis. We use Adjusted EBITDA to evaluate our performance for, among other things,budgeting, forecasting and incentive compensation purposes. We also believe Adjusted EBITDA is useful to investors, research analysts, investmentbankers and lenders because it removes from our operational results the impact of certain non-recurring income and expense items, which mayfacilitate comparison of our results from period to period. Adjusted EBITDA is not a recognized term under GAAP and does not purport to be an alternative to operating income or net income as an indicator ofoperating performance or any other GAAP measure. 25 The following is a reconciliation of net income to Adjusted EBITDA (in thousands): Fiscal Year 2007 2006 2005 2004 2003 Net income (loss) $2,144 $6,720 $(1,381)$3,772 $2,852 Interest income (649) (135) (19) (2) (1)Interest expense (499) 773 630 272 366 Income tax provision 1,543 2,021 17 47 53 Depreciation and amortization 1,747 1,584 1,257 1,056 865 Loss (gain) on sale of assets 28 (13) 24 18 19 Life insurance proceeds — (2,250) — — — Litigation accrual (reversal) 1,049 (1,049) 2,686 — — Stock-based compensation expense recorded in anticipation ofour IPO — — 2,737 — — Adjusted EBITDA $5,363 $7,651 $5,951 $5,163 $4,154 (4)Reflects contract revenue, excluding revenue related to reimbursement of subconsultants and other costs, divided by the average number of full-timeequivalent employees during the period. (5)Includes full-time and part-time employees.26 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview We are a leading provider of outsourced services to small and mid-sized public agencies in California and other western states. Outsourcing enables theseagencies to provide a wide range of specialized services, without having to incur and maintain the overhead necessary to develop staffing in-house. Weprovide a broad range of services to public agencies, including:•Civil Engineering; •Building and Safety Services; •Geotechnical Engineering; •Financial and Economic Consulting; and •Disaster Preparedness and Homeland Security. We operate our business through a network of over 20 offices located throughout California and other western states and had a staff of 628 as ofDecember 28, 2007 that includes licensed engineers and other professionals. We ranked 136 out of 500 top design firms in Engineering News-Record's 2007Design Survey. Our core clients are public agencies in communities with populations ranging from 10,000 to 300,000 people. We believe communities ofthis size are underserved by large outsourcing companies that tend to focus on securing large federal and state projects, as well as projects for the privatesector. We seek to establish close working relationships with our public agency clients and, over time, to expand the breadth and depth of the services weprovide to them. While we currently serve communities throughout the country, our business is concentrated in California and neighboring states. We provide services toapproximately 60% of the 478 cities and over 60% of the 58 counties in California. We also serve special districts, school districts and other public agencies. Willdan Group, Inc. is a Delaware corporation formed in 2006 for the purposes of effecting the reincorporation of The Willdan Group of Companies, aCalifornia corporation, formed in 2001 to serve as our holding company. The reincorporation was completed effective June 30, 2006. Prior to our initial public offering in November 2006, we were taxed as an S Corporation for purposes of federal and state income taxes. As a result of theoffering, our S Corporation status terminated and we are now taxed as a C Corporation under federal and state tax laws. In fiscal year 2006, we recognized anet deferred income tax liability of $1.5 million resulting from the termination of our S Corporation status. We were founded over 40 years ago, and today consist of a family of wholly owned companies that operate within the following segments for financialreporting purposes:•Engineering Services. Our Engineering Services segment includes the businesses of our subsidiary, Willdan, which provides engineering-related services, and our subsidiary, Arroyo Geotechnical, which provides geotechnical engineering services. The segment also includes oursubsidiaries, Public Agency Resources (PARs), which primarily provides staffing to Willdan, and Willdan Resource Solutions, which providesenvironmental engineering and environmental related services to public and private sector clients. Willdan is our largest subsidiary andcurrently represents our core business. Contract revenue for the Engineering Services segment represented 81.7% and 84.1% of ourconsolidated contract revenue for fiscal year 2007 and fiscal year 2006, respectively.27 •Public Finance Services. Our Public Finance Services segment consists of the business of our subsidiary, MuniFinancial, which offersfinancial and economic services to public agencies. Contract revenue for the Public Finance Services segment represented 16.1% and 14.7% ofour consolidated contract revenue for fiscal year 2007 and fiscal year 2006, respectively. •Homeland Security Services. Our Homeland Security Services segment consists of the business of our subsidiary, American HomelandSolutions, which offers homeland security and public safety consulting services. We formed this subsidiary in fiscal year 2004 and beganoperations in the second half of fiscal year 2005. Contract revenue for our Homeland Security Services segment represented 2.2% and 1.2% ofour consolidated contract revenue for fiscal year 2007 and fiscal year 2006, respectively.Recent DevelopmentsLitigation In the third quarter of 2006, we obtained a court ruling awarding us approximately $1.0 million on a claim for indemnity, recovering the settlementamount and interest thereon and attorney fees and costs in connection with a claim that arose in fiscal year 2002. This ruling was appealed by the cross-defendant and the ruling was overturned in February 2008. Because the claim arose in 2002 and our insurance carrier previously paid the settlement amount,we were able to replenish our insurance coverage by approximately $1.0 million for that policy year. Therefore, in the third quarter of 2006 we reflected areceivable from our insurance company of approximately $1.0 million. Given that the ruling was overturned, we reversed the receivable and reflected theexpense in the fourth quarter of fiscal year 2007.Components of Income and ExpenseContract Revenue We enter into contracts with our clients that contain three principal types of pricing provisions: fixed fee, time-and-materials and unit-based. Contractrevenue on our fixed fee contracts is determined on the percentage-of-completion method based generally on the ratio of direct costs incurred to date toestimated total direct costs at completion. Many of our fixed fee contracts are relatively short in duration, thereby lowering the risks of not properlyestimating the percent complete. Revenue on our time-and-materials and unit-based contracts are recognized as the work is performed in accordance withspecific terms of the contract. A large percentage of our contracts are based on contractual rates per hour plus costs incurred. Some of these contracts includemaximum contract prices, but the majority of these contracts are not expected to exceed the maximum. Adjustments to contract cost estimates are made in the periods in which the facts requiring such revisions become known. When the revised estimateindicates a loss, such loss is provided for currently in its entirety. Claims revenue is recognized only upon resolution of the claim. Change orders in disputeare evaluated as claims. Costs related to unpriced change orders are expensed when incurred and recognition of the related contract revenue is based on anevaluation of the probability of recovery of the costs. Estimated profit is recognized for unpriced change orders if realization of the expected price of thechange order is assured beyond a reasonable doubt.Direct Costs of Contract Revenue Direct costs of contract revenue consist primarily of that portion of technical and nontechnical salaries and wages that has been incurred in connectionwith revenue producing projects. Direct costs of contract revenue also include production expenses, subconsultant services and other expenses that areincurred in connection with revenue producing projects. Direct costs of contract revenue exclude28 that portion of technical and nontechnical salaries and wages related to marketing efforts, vacations, holidays and other time not spent directly generatingrevenue under existing contracts. Such costs are included in general and administrative expenses. Additionally, payroll taxes, bonuses and employee benefitcosts for all of our personnel are included in general and administrative expenses since no allocation of these costs is made to direct costs of contract revenue.No allocation of facilities costs is made to direct costs of contract revenue nor is depreciation and amortization allocated to direct costs. We expense directcosts of contract revenue when incurred. As a firm that provides multiple and diverse outsource services, we do not believe gross margin is a consistent or appropriate indicator of ourperformance and therefore we do not use this measure as construction contractors and other types of consulting firms may. Other companies may classify asdirect costs of contract revenue some of the costs that we classify as general and administrative expenses. As a result, our direct costs of contract revenue maynot be comparable to direct costs for other companies, either as a line item expense or as a percentage of contract revenue.General and Administrative Expenses General and administrative expenses include the costs of the marketing and support staffs, other marketing expenses, management and administrativepersonnel costs, payroll taxes, bonuses and employee benefits for all of our employees and the portion of salaries and wages not allocated to direct costs ofcontract revenue for those employees who provide our services. General and administrative expenses also include facility costs, depreciation andamortization, professional services, legal and accounting fees and administrative operating costs. Within general and administrative expenses, "Other"includes expenses such as professional services, legal and accounting, computer costs, travel and entertainment and marketing costs. We expense general andadministrative costs when incurred. Until November 2006, we had not operated as a public company. As a public company, we have and will continue to incur significant legal, accountingand other expenses that we did not incur as a private company, and we expect our general and administrative expenses to increase as a result. Ourmanagement and other personnel need to devote a substantial amount of time to comply with the requirements of being a public company. Moreover, rulesand regulations for public companies have increased our legal and financial compliance costs and has made some activities more time-consuming and costly.Critical Accounting Policies This discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have beenprepared in accordance with generally accepted accounting principles in the U.S., or GAAP. To prepare these financial statements in conformity with GAAP,we must make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reportedamount of revenue and expenses in the reporting period. Our actual results may differ from these estimates. We have provided a summary of our significantaccounting policies in Note 2 to our consolidated financial statements included elsewhere in this report. We describe below those accounting policies thatrequire material subjective or complex judgments and that have the most significant impact on our financial condition and results of operations. Ourmanagement evaluates these estimates on an ongoing basis, based upon information currently available and on various assumptions management believesare reasonable as of the date of this report.Contract Accounting Applying the percentage-of-completion method of recognizing revenue requires us to estimate the indicated outcome of our long-term contracts. Weforecast such outcomes to the best of our knowledge29 and belief of current and expected conditions and our expected course of action. Differences between our estimates and actual results often occur resulting inchanges to reported revenue and earnings. Such changes could have a material effect on our future consolidated financial statements. Accounts receivable are carried at original invoice amount less an estimate made for doubtful accounts based upon our review of all outstandingamounts on a monthly basis. We determine the allowance for doubtful accounts by identifying troubled accounts and by using historical experience appliedto an aging of accounts. Our credit risk is minimal with governmental entities. Account receivables are written off when deemed uncollectible. Recoveries ofaccounts receivable previously written off are recorded when received. For further information on the types of contracts under which we perform our services,see "Business—Contract Structure" elsewhere in this report.Goodwill Impairment Valuation Goodwill primarily represents the excess of the purchase price paid for our Pubic Finance Services reporting unit over the estimated fair value of the netidentified tangible and intangible assets acquired. We perform an annual review in the fourth quarter of each fiscal year, or more frequently if indicators ofpotential impairment exist, to determine if the recorded goodwill is impaired. We compare the fair value of the reporting unit to its carrying value, includinggoodwill. To estimate the fair value, we use a valuation approach based on a multiple of historical cash flows, management's estimates of future cash flows,and other market data. This estimate of fair value is highly subjective and is based in part on assumptions that could differ materially from actual results. Ifour evaluation indicates that goodwill is impaired, we perform an additional assessment to determine the extent of the impairment based on the implied fairvalue of goodwill compared with the carrying amount of the goodwill. We did not recognize any impairment charges in fiscal years 2007, 2006 and 2005.Accounting for Claims Against the Company We record liabilities to claimants for probable and estimable claims on our consolidated balance sheet, which is included in accrued liabilities, andrecord a corresponding receivable from our insurance company for the portion of the claim that is probable of being covered by insurance, which is includedin other receivables. The estimated claim amount net of the amount estimated to be recoverable from the insurance company is included in our general andadministrative expenses. Determining probability and estimating claim amounts is highly judgmental. Initial accruals and any subsequent changes in ourestimates could have a material effect on our consolidated financial statements.30 Results of Operations The following table sets forth, for the periods indicated, certain information derived from our consolidated statements of operations expressed as apercentage of contract revenue. Amounts may not add to the totals due to rounding. Fiscal Year 2007 2006 2005 Statement of Operations Data: Contract revenue 100.0%100.0%100.0%Direct costs of contract revenue: Salaries and wages 32.7 31.4 31.1 Production expenses 2.0 1.9 2.3 Subconsultant services 5.8 5.3 7.1 Total direct costs of contract revenue 40.5 38.6 40.4 General and administrative expenses: Salaries and wages, payroll taxes, employee benefits 31.8 33.3 33.8 Facilities 5.8 5.2 5.2 Stock-based compensation 0.3 — 4.1 Depreciation and amortization 2.2 2.0 1.9 Litigation accrual 1.3 (1.3)4.0 Other 14.9 13.2 11.8 Total general and administrative expenses 56.3 52.4 60.7 Income (loss) from operations 3.2 9.0 (1.1) Other income (expense): Interest 0.6 (1.0)(0.9) Other, net 0.8 3.2 — Total other income (expense) 1.5 2.2 (0.9) Income (loss) before income tax expense 4.7 11.2 (2.0)Income tax expense 2.0 2.6 — Net income (loss) 2.7%8.6%(2.1)% Fiscal Year 2007 Compared to Fiscal Year 2006 Contract revenue. Our contract revenue was $78.8 million for fiscal year ended December 28, 2007, with $64.4 million attributable to the EngineeringServices segment and $12.7 million attributable to the Public Finance Services segment. Our Homeland Security Services segment generated $1.7 millionduring this period. Consolidated contract revenue increased $0.5 million, or 0.6%, from $78.3 million in the fiscal year ended December 29, 2006. Thisincrease was due primarily to an increase of $1.2 million, or 10.3%, and $0.8 million, or 82.0%, in contract revenue of the Public Finance Services andHomeland Security Services segments, respectively, offset by a decrease of $1.5 million, or 2.3%, in contract revenue of the Engineering Services segment.Revenue in the Public Finance Services segment increased primarily due to increased district formation services to fund infrastructure projects as well asincreased delinquency management services in our district administration services. Revenue in Homeland Security Services has increased due to an increasein our emergency response training courses, particularly in Southern California. Our Engineering Services segment decline was due in part to the slowdownin residential housing construction in the western31 United States. A source of revenue in our Engineering Services segment is fees assessed for building permits. In the latter part of fiscal year 2006 andthroughout fiscal year 2007, we experienced a reduction in revenue from these fees because of the downturn in the housing market. Direct costs of contract revenue. Direct costs of contract revenue was $31.9 million for the fiscal year ended December 28, 2007, with $27.7 millionattributable to the Engineering Services segment and $3.4 million attributable to the Public Finance Services segment. The additional $0.8 million isattributable to direct costs of contract revenue for our Homeland Security Services segment. Direct costs of contract revenue increased $1.7 million, or 5.6%,from $30.3 million for the fiscal year ended December 29, 2006. Of this total increase, direct costs of contract revenue increased $0.8 million, or 2.6%, in theEngineering Services segment and $0.6 million, or 21.4%, in the Public Finance Services segment. The remaining $0.3 million increase was attributable tothe Homeland Security Services segment. Direct costs of contract revenue as a percentage of contract revenue for the fiscal year ended December 28, 2007increased to 40.5% from 38.6% for the fiscal year ended December 29, 2006, primarily because our direct costs of contract revenue increased without acorresponding increase in our revenue. This is due in part to higher levels of non-salaries and wages cost which are passed through to clients at a lower mark-up than salaries and wages. Within direct costs of contract revenue, salaries and wages increased to 32.7% of contract revenue for the fiscal year ended December 28, 2007 from31.4% for the fiscal year ended December 29, 2006. Comparing those same periods, subconsultant services increased to 5.8% of contract revenue from 5.3%of contract revenue. General and administrative expenses. General and administrative expenses increased by $3.3 million, or 8.1%, to $44.3 million for the fiscal yearended December 28, 2007 from $41.0 million for the fiscal year ended December 29, 2006. This was due primarily to increases of $3.1 million and$0.2 million in general and administrative expenses of the Engineering Services and Homeland Security Services segments, respectively. General andadministrative expenses for the Public Finance Services segment and unallocated corporate expenses remained flat. The Engineering Services segmentincrease includes a $2.0 million change in our litigation accrual as a result of the $1.0 million charge in fiscal year 2007 for reversal of the $1.0 millionrecovery of a prior indemnity claim recorded during fiscal year 2006. The litigation accrual is discussed above in "—Recent Developments-Litigation." Alsoincluded in our general and administrative expenses are the costs associated with management changes in the fiscal year ended December 28, 2007. Thesecosts resulted in an increase of approximately $0.6 million in expenses for the payment of severance and other employee benefits. Overall, general andadministrative expenses as a percentage of contract revenue increased to 56.3% in the fiscal year ended December 28, 2007 from 52.4% in the fiscal yearended December 29, 2006. The increases in general and administrative expenses also resulted from (i) an increase of approximately $1.4 million, or 13.2%, in other general andadministrative expenses, which includes $0.4 million of legal fees related to the settlement of the West Hollywood litigation and (ii) an increase of$1.5 million related to increased costs associated with being a public company, of which $0.5 million related to costs associated with compliance withSection 404 of the Sarbanes-Oxley Act. The balance includes additional audit and legal fees and Board of Director fees. Additionally, approximately$0.4 million of the increase to other general and administrative expenses resulted from increased insurance premiums, computer expenses and other costsassociated with our increase in contract revenue offset by decreases in marketing expenses, bad debt expenses and other expenses of approximately$0.9 million. As discussed above under "—Components of Income and Expense-Direct Costs of Contract Revenue," we do not allocate that portion of salaries andwages not related to time spent directly generating revenue to direct costs of contract revenue.32 Income from operations. As a result of the above factors, income from operations was $2.5 million for the fiscal year ended December 28, 2007 ascompared to a $7.0 million for the fiscal year ended December 29, 2006. Income from operations as a percentage of contract revenue, decreased to 3.2% in thefiscal year ended December 28, 2007 from 9.0% in the prior year period. Other income (expense). Other income (expense), net, decreased by $0.5 million, or 31.4%, to $1.2 million of income in the fiscal year endedDecember 28, 2007 from $1.7 million of income in the fiscal ended December 29, 2006. This decrease was primarily due to $2.3 million of life insuranceproceeds received in 2006 as a result of the death of our former chief executive officer in May 2006, partially offset by a decrease in interest expense ofapproximately $1.3 million primarily as a result of (i) the reversal of $0.6 million of accrued interest payable associated with the West Hollywood litigationsettlement and (ii) an increase in interest income of approximately $0.5 million from invested initial public offering proceeds. Income tax expense. Effective as of the first day of trading of our common stock, November 21, 2006, the S Corporation status of our Company and the"qualified S subsidiary" status of our subsidiaries terminated and thereafter we were subject to federal and state income taxes as a C Corporation. Thus wewere taxed at regular corporate rates during the fiscal year ended December 28, 2007 and the income tax expense for fiscal year 2007 and 2006 is notcomparable.Fiscal Year 2006 Compared to Fiscal Year 2005 Contract revenue. Our contract revenue was $78.3 million for the fiscal year ended December 29, 2006, with $65.9 million attributable to theEngineering Services segment and $11.5 million attributable to the Public Finance Services segment. Our Homeland Security Services segment generated$0.9 million during this period. Consolidated contract revenue increased $11.0 million, or 16.3%, from $67.3 million in the fiscal year ended December 30,2005. This was due primarily to increases of $9.0 million, or 15.8%, and $1.2 million, or 12.0%, in contract revenue of the Engineering Services and PublicFinance Services segments, respectively. In addition, 2006 was the first fiscal year in which our Homeland Security Services segment, which began operationsin the second half of fiscal year 2005, generated notable revenue. Contract revenue in the Homeland Security Services segment increased from $0.1 million infiscal year 2005 to $1.0 million in fiscal year 2006. Overall headcount increased to 670 as of December 29, 2006 from 599 as of December 30, 2005, anincrease of 11.9%. The growth in contract revenue for the Engineering Services segment was due primarily to increased demand for our existing services. To respond to thisdemand, our Engineering Services segment increased its total headcount to 542 as of December 29, 2006 from 481 as of December 30, 2005, representing anincrease of 12.7%. To respond to demand for our services in additional geographic areas of California, we opened a new satellite office in Santa Rosa,California in May 2006. To respond to demand for our services in our existing geographic locations, in fiscal year 2006, we relocated and/or expanded ourfacilities in Bakersfield, Fresno, Redding, and Sacramento, California, as well as in Phoenix and Tucson, Arizona and Henderson, Nevada. In fiscal year 2005,we opened two new satellite office locations in Fresno and Marysville, California. The growth in contract revenue for our Public Finance Services segment also was due primarily to increased demand for our existing services. To respondto this demand, we opened two new MuniFinancial locations in June 2006 and September 2006 in Bellevue, Washington and Orlando, Florida. Our PublicFinance Services segment met this increased demand for services without increasing its total headcount. Total headcount was 78 as of December 29, 2006which represents no change from the total headcount as of December 30, 2005. To provide for demand for our Homeland Security Services, we opened a separate location for these services in Anaheim, California in March 2006.33 Direct costs of contract revenue. Direct costs of contract revenue was $30.3 million in the fiscal year ended December 29, 2006, with $27.0 millionattributable to the Engineering Services segment and $2.8 million attributable to the Public Finance Services segment. The additional $0.5 million isattributable to direct costs of contract revenue for our Homeland Security Services segment. This represented a total increase of $3.1 million, or 11.4%, from$27.2 million in the fiscal year ended December 30, 2005. Of this total increase, direct costs of contract revenue increased $2.7 million, or 11.0%, in theEngineering Services segment and there was no increase in the Public Finance Services segment. The remaining $0.4 million is attributable to the HomelandSecurity Services segment. These increases were primarily the result of the increased volume of activity that generated the increased contract revenuepreviously discussed for our three operating segments. Direct costs of contract revenue as a percentage of contract revenue for the fiscal year endedDecember 29, 2006 decreased to 38.6% from 40.4% for the fiscal year ended December 30, 2005. Within direct costs of contract revenue, salaries and wages increased from 31.1% of contract revenue in the fiscal year ended December 30, 2005 to31.4% in the fiscal year ended December 29, 2006. Comparing those same periods, subconsultant services decreased from 7.1% of contract revenue to 5.3%of contract revenue. This shift within direct costs of contract revenue is primarily due to the establishment of our subsidiary, PARs, in fiscal year 2005. PARsprovides in-house staffing services to Willdan by hiring professionals that would in the past have been engaged as subconsultants or independentcontractors. Numerous subconsultants whom we previously engaged as independent contractors for projects within our Engineering Services segment becameemployees of PARs. All contract revenue and expenses associated with the operation of PARs are included in the Engineering Services segment. General and administrative expenses. General and administrative expenses increased by $0.2 million, or 0.5%, to $41.0 million in the fiscal year endedDecember 29, 2006 from $40.8 million in the fiscal year ended December 30, 2005. This was due primarily to increases of $0.9 million and $0.9 million ingeneral and administrative expenses of the Engineering Services and Public Finance Services segments, respectively, along with expenses of $0.4 millionrelated to the establishment of our Homeland Security Services segment. These increases were partially offset by a reduction of $2.0 million attributed tounallocated corporate expenses. General and administrative expenses as a percentage of contract revenue decreased to 52.4% in the fiscal year endedDecember 29, 2006 from 60.7% in the prior year period. The increases in general and administrative expenses in the Engineering Services and Public Finance Services segments were due primarily to increasedcosts related to the growth in headcount of engineers and other professionals. Additionally, the $0.9 million increase in the Engineering Services segment isnet of a $1.0 million reduction in our litigation accrual as a result of the recovery of a prior indemnity claim, which reduction was subsequently reversed inthe fourth quarter of 2007. Employee related costs included in general and administrative expenses such as payroll taxes, employee benefits, bonuses andthat portion of salaries and wages related to time not spent directly generating revenue increased by $3.3 million, or 14.7%. Facilities costs increased by$0.6 million, or 16.2%, as a result of additional needs created by the increased headcount. Depreciation and amortization increased by $0.3 million, or26.0%, as a result of additional needs for leasehold improvements, furniture, fixtures and equipment created by additional personnel. Other general andadministrative expenses increased by approximately $2.4 million, or 30.5%. This includes an increase of $0.2 million for bad debt expense related to anEngineering Services segment project, an increase of $0.3 million in marketing expense primarily due to design and printing costs related to our namechange in June 2006, an increase of $0.3 million in insurance premiums and an increase in $0.2 million in computer expense related to increases in employeeheadcount, and expenses related to our initial public offering. As discussed above under "—Components of Income and Expense—Direct Costs of ContractRevenue," we do not allocate the costs discussed above to direct costs of contract revenue.34 The $2.0 million decrease in unallocated corporate expense is primarily the result of a decrease of $2.7 million in stock-based compensation expense in2006 compared to 2005. Stock-based compensation expense in anticipation of the initial public offering of $2.7 million was recorded in the fiscal year endedDecember 30, 2005 in connection with stock issuances during that period. Income (loss) from operations. As a result of the above factors, income from operations was $7.0 million for the fiscal year ended December 29, 2006 ascompared to a $0.7 million loss from operations for the fiscal year ended December 30, 2005. Income from operations as a percentage of contract revenue,increased to 9.0% in the fiscal year ended December 29, 2006 from (1.1)% in the prior year period. As discussed above, income from operations for the fiscalyear ended December 29, 2006 includes a reduction in litigation accrual of $1.0 million as a result of the recovery in 2006 on a prior 2002 claim, whichreduction was subsequently reversed in the fourth quarter of 2007, and a decrease from fiscal year 2005 of $2.7 million in stock-based compensation expense. Other income (expense). Other income (expense), net increased by $2.3 million to $1.7 million of income in the fiscal year ended December 29, 2006from $0.6 million of expense in the fiscal year ended December 30, 2005. This was due primarily to the receipt of $2.3 million in life insurance proceeds as aresult of the death of our former chief executive officer and the recovery of $53,000 on legal matters, partially offset by increased interest expense of$0.1 million. Interest expense increased due to $0.6 million accrued during fiscal year 2006 related to the West Hollywood litigation and this increase waspartially offset by decreased interest as a result of lower outstanding principal balances on our debt. Income tax expense. In fiscal year 2006, income tax expense increased by $2.0 million to $2.0 million from $17,000 in fiscal year 2005. This increasewas due primarily to an increase of $1.5 million to record our deferred tax liability at C Corporation federal and state tax rates that resulted from thetermination of our S Corporation status upon completion of our initial public offering. To a lesser extent, the increase in income tax expense relates tocalculating the expense for the post-IPO period using C Corporation tax rates.Liquidity and Capital Resources As of December 28, 2007, we had $15.5 million of cash and cash equivalents. Our primary sources of liquidity are cash generated from operations andborrowings under our revolving line of credit. We believe that our cash on hand, cash generated by operating activities and funds available under our creditfacility will be sufficient to finance our operating activities for at least the next 12 months.Cash Flows from Operating Activities Cash flows used in operating activities was $0.3 million for the fiscal year ended December 28, 2007 compared to cash flows provided by operatingactivities of $6.3 million for fiscal year 2006 and $4.6 million for fiscal year 2005. The cash flows used in operating activities in the fiscal year endedDecember 28, 2007 were comparatively higher than in fiscal year 2006 due primarily to the payment of accrued liabilities related to the West Hollywoodlitigation net of amounts paid for by our insurance company along with payment of increased general and administrative costs. In the 2006 period, net cashprovided by operating activities included $2.3 million of life insurance proceeds received as a result of the death of our former chief executive officer in May2006.Cash Flows from Investing Activities Cash flows used in investing activities were $1.9 million for the fiscal year ended December 28, 2007 compared to $2.9 million for fiscal year 2006 and$1.9 million for fiscal year 2005. The decrease of cash used in investing activities for fiscal year 2007 over fiscal year 2006 resulted primarily from thedecrease in expenditures for equipment and leasehold improvements. This decrease was offset by an increase of $1.3 million in the net purchase of temporaryliquid investments with the proceeds from our initial public offering in November 2006. Fiscal years 2006 and 2005 included higher than historical levels ofequipment and leasehold improvements purchases due to the establishment of new office locations and the relocation of existing office facilities, includingour corporate offices.35 Cash Flows from Financing Activities Cash flows used in financing activities were $2.9 million for the fiscal year ended December 28, 2007 compared to cash flows provided by financingactivities of $14.2 million for the fiscal year ended December 29, 2006 and $0.1 million for fiscal 2005. The net change between fiscal years 2007 and 2006for cash from financing activities is $17.2 million, which is primarily the result of net proceeds of $20.4 million received in fiscal 2006 from the sale of stockin our initial public offering and the exercise of the overallotment option, partially offset by a decrease of $2.3 million in distributions paid to holders of ourredeemable common stock. The fiscal year 2007 distribution was our final S corporation distribution to our stockholders and we used the proceeds from ourinitial public offering to pay this amount. We will not make a similar distribution in the future because we can no longer elect to be treated as an Scorporation. Cash flows provided by financing activities for the fiscal year 2006 increased from fiscal year 2005 primarily as a result of an increase in netproceeds from issuance of common stock of $16.9 million as a result of our initial public offering and the exercise of the over-allotment option and a decreasein net debt repayments of $1.2 million, partially offset by an increase in the distributions to holders of redeemable common stock of $3.8 million.Outstanding Indebtedness We currently have a revolving line of credit with a bank. We also finance insurance premiums by entering into unsecured notes payable with insurancecompanies. Under the terms of the credit agreement, we can borrow up to $10.0 million from time to time up to and until January 1, 2010. Loans made under therevolving line of credit will accrue interest at either (i) the floating rate of 0.50% below the prime rate in effect from time to time or (ii) the fixed rate of 1.25%above LIBOR, at our election. For prime rate loans, the interest rate will be adjusted when each prime rate change by the bank is announced and becomeseffective. The interest rate is subject to adjustment based on changes in our ratio of total funded debt to EBITDA (as defined in the credit agreement). Upon adefault, the interest rate will be increased by a default rate margin of 4.00%. Upon the occurrence of an event of default under the credit agreement, the bankhas the option to make all indebtedness then owed by us under the credit agreement immediately due and payable. The revolving line of credit matures onJanuary 31, 2010. Borrowings under the credit agreement are secured by all accounts receivable and other rights to payment, general intangibles, inventory and equipmentincluding those of our subsidiaries. Each subsidiary (except Public Agency Resources) has signed an unconditional guaranty of our obligations under theagreements. The credit agreement also contains customary representations and affirmative covenants, including covenants to maintain a minimum tangiblenet worth, a minimum net income, a minimum asset coverage ratio and a maximum ratio of total funded debt to EBITDA (each ratio as specifically defined inthe credit agreement). The credit agreement also includes customary negative covenants, including a covenant that prohibits the incurrence of additionalindebtedness by us or our subsidiaries other than purchase money indebtedness not to exceed $2.0 million and indebtedness existing on the date of the creditagreement, and a covenant that prohibits payment of dividends on our stock. In addition, the credit agreement includes customary defaults for a creditfacility. There were no outstanding borrowings under this agreement as of December 28, 2007. We terminated our prior business loan agreement, promissory note and commercial security agreement with Orange County Business Bank, or OCBB, onDecember 31, 2007. We terminated the loan agreement with OCBB in connection with the entering into of our new revolving credit facility described above.We paid no fees or penalties as a result of terminating the our loan agreement with OCBB. In connection with the June 2006 acquisition of the assets of an entity that developed and delivered training courses, we entered into a $150,000 notepayable to the seller for a portion of the36 purchase price. The seller was hired as an employee in connection with this acquisition. This related party note bore interest at 6.0% and was repaid duringfiscal year 2007.Contractual obligations We have certain cash obligations and other commitments which will impact our short- and long-term liquidity. At December 28, 2007, such obligationsand commitments consisted of long-term debt, operating leases and capital leases. The following table sets forth our contractual obligations as ofDecember 28, 2007:Contractual Obligations Total Less than 1 Year 1-3 Years 3-5 Years More than 5 YearsLong term debt(1) $1,116,000 $1,116,000 $— $— $—Operating leases 15,931,000 4,060,000 5,740,000 4,285,000 1,846,000Capital leases 675,000 278,000 349,000 48,000 — Total contractual cash obligations $17,722,000 $5,454,000 $6,089,000 $4,333,000 $1,846,000 (1)Long-term debt includes principal and interest payments under our debt agreements assuming no additional borrowings or principal payments.New Accounting Pronouncements In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes"(FIN 48), an interpretation of FASB Statement of Financial Accounting Stands (SFAS) No. 109, which clarifies the accounting for uncertainty in income taxesrecognized in an enterprise's financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes (SFAS 109)". SFAS 109 does not prescribea recognition threshold or measurement attribute for the financial statement recognition and measurement of a tax position taken in a tax return. Diversity inpractice existed in the accounting for income taxes. To address that diversity, FIN 48 clarifies the application of SFAS 109 by defining a criterion that anindividual tax position must meet for any part of the benefit of that position to be recognized in an enterprise's financial statements. Additionally, FIN 48provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 iseffective for fiscal years beginning after December 15, 2006. Our adoption of FIN 48 did not have a material effect on our consolidated financial statements. SFAS No. 157, "Fair Value Measurements" (SFAS 157), defines fair value, establishes a framework for measuring fair value in accordance with generallyaccepted accounting principles, and expands disclosures about fair value measurements. We adopted the provisions of SFAS 157 effective as of thebeginning of fiscal year 2008. We do not expect SFAS 157 to have a material impact on our results of operations, financial position, or cash flows. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" (SFAS 159) which permitsentities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value.SFAS 159 will be effective as of the beginning of fiscal year 2008. The provisions of SFAS 159 are elective, and we have not determined whether and to whatextent we may implement its provisions or how if implemented, it might affect our financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss to future earnings, to fair values or to future cash flows that may result from changes in the price of a financial instrument.The value of a financial instrument may37 change as a result of changes in interest rates, exchange rates, commodity prices, equity prices and other market changes. Market risk is attributed to allmarket risk sensitive financial instruments, including long-term debt. As a result of our initial public offering, we had cash and cash equivalents of $15.5 million as of December 28, 2007. Of this amount, $0.5 million wasinvested in the Orange County Business Bank Money Market Fund and $14.2 million was invested in cash in the Lehman Brothers National Muni MoneyFund Reserve Class. Although these investments are subject to variable interest rates, we do not believe we are subject to significant market risk for theseshort-term investments. We do not engage in trading activities and do not participate in foreign currency transactions or utilize derivative financial instruments. Additionally, asof December 28, 2007, we did not have any outstanding debt under our revolving credit facility that bears interest at variable or fixed rates. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and related financial information, as listed under Item 15, appear in a separate section of this annual report beginning on page F-1. Index to Consolidated Financial Statements PageReport of Independent Registered Public Accounting Firm F-1Consolidated Balance Sheets as of December 28, 2007 and December 29, 2006 F-2Consolidated Statements of Operations for each of the fiscal years in the three-year period ended December 28, 2007 F-3Consolidated Statements of Redeemable Common Stock and Stockholders' Equity for each of the fiscal years in the three-year period endedDecember 28, 2007 F-4Consolidated Statements of Cash Flows for each of the fiscal years in the three-year period ended December 28, 2007 F-5Notes to Consolidated Financial Statements F-6 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in and/or disagreements with accountants on accounting and financial disclosure during the year ended December 28, 2007. ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures defined in Rule 13a-15(e) under the Exchange Act, as controls and other procedures that are designed toensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarizedand reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls andprocedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act is accumulatedand communicated to our management, including our President and Chief Executive Officer, Tom Brisbin, and our Chief Financial Officer, Kimberly Gant, asappropriate to allow timely decisions regarding required disclosure. In connection with the preparation of this Annual Report, an evaluation was performed under the supervision and with the participation of management,including the Chief Executive Officer and Chief38 Financial Officer, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief FinancialOfficer concluded that our disclosure controls and procedures were effective as of December 28, 2007.Management's Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate control over financial reporting (as defined in Rule 13a-15(f) under theSecurities Exchange Act of 19434, as amended). Internal control over financial reporting is a process to provide reasonable assurance regarding the reliabilityof our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States. Because of its inherentlimitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would beprevented or detected. Our management assessed the effectiveness of our internal control over financial reporting as of December 28, 2007. In making thisassessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in InternalControl-Integrated Framework. Our management has concluded that, as of December 28, 2007, our internal control over financial reporting was effectivebased on these criteria.Report of Independent Registered Public Accounting Firm This annual report does not include an attestation report of the company's registered public accounting firm regarding internal control over financialreporting. Management's report was not subject to attestation by the company's registered public accounting firm pursuant to temporary rules of the Securitiesand Exchange Commission that permit the company to provide only management's report in this annual report.Changes in Internal Controls Based on our evaluation carried out in accordance with SEC Rule 15d-15(b) under the supervision and with the participation of our management,including our President and Chief Executive Officer and our Chief Financial Officer, we concluded that there were no changes during the fourth fiscal quarterof 2007 our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls overfinancial reporting. ITEM 9B. OTHER INFORMATION None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated by reference to Willdan Group, Inc.'s Proxy Statement for its 2008 Annual Meeting of Stockholdersto be filed with the SEC within 120 days after the end of the Company's 2007 fiscal year. We have posted our Code of Ethical Conduct on our website, www.willdangroup.com, under the heading "Corporate Governance". The Code of EthicalConduct applies to our Chief Executive Officer, and Chief Financial Officer. Upon request, we will provide any person with a copy of the Code of EthicalConduct. See "Item 1. Business—Available Information." ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to Willdan Group, Inc.'s Proxy Statement for its 2008 Annual Meeting of Stockholdersto be filed with the SEC within 120 days after the end of the Company's 2007 fiscal year.39 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS The information required by this item is incorporated by reference to Willdan Group, Inc.'s Proxy Statement for its 2008 Annual Meeting of Stockholdersto be filed with the SEC within 120 days after the end of the Company's 2007 fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to Willdan Group, Inc.'s Proxy Statement for its 2008 Annual Meeting of Stockholdersto be filed with the SEC within 120 days after the end of the Company's 2007 fiscal year. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this item is incorporated by reference to Willdan Group, Inc.'s Proxy Statement for its 2008 Annual Meeting of Stockholdersto be filed with the SEC within 120 days after the end of the Company's 2007 fiscal year. PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a)The following documents are filed as part of this report: 1.Financial Statements The following financial statements of Willdan Group, Inc. and report of independent auditors are included in Item 8 of this annual report and submittedin a separate section beginning on page F-1: PageReport of Independent Registered Public Accounting Firm F-1Consolidated Balance Sheets as of December 28, 2007 and December 29, 2006 F-2Consolidated Statements of Operations for each of the fiscal years in the three-year period ended December 28, 2007 F-3Consolidated Statements of Redeemable Common Stock and Stockholders' Equity for each of the fiscal years in the three-year period endedDecember 28, 2007 F-4Consolidated Statements of Cash Flows for each of the fiscal years in the three-year period ended December 28, 2007 F-5Notes to Consolidated Financial Statements F-62.Financial Statements Schedules All required schedules are omitted because they are not applicable or the required information is shown in the financial statements or the accompanyingnotes.3.Exhibits The exhibits filed as part of this annual report are listed in Item 15(b).40 (b)Exhibits. The following exhibits are filed as a part of this report:Exhibit Number Exhibit Description3.1 Articles of Incorporation of Willdan Group, Inc., including amendments thereto(1)3.2 Bylaws of Willdan Group, Inc.(1)4.1 Specimen Stock Certificate for shares of the Registrant's Common Stock(1)4.2 The Company agrees to furnish to the Securities and Exchange Commission upon request a copy of each instrument with respect toissues of long-term debt of Willdan Group, Inc. and its subsidiaries, the authorized principal amount of which does not exceed 10% ofthe consolidated assets of Willdan Group, Inc. and its subsidiaries.10.1 Credit Agreement for $10,000,000 Revolving Line of Credit, dated December 28, 2007, between Willdan Group, Inc. and Wells FargoBank Bank, National Association, relating to the Credit Note in 10.2(5)10.2 Revolving Line of Credit Note for $10,000,000, dated December 28, 2007, by Willdan Group, Inc. in favor of Wells Fargo Bank,National Association(5)10.3 Security Agreement, dated December 28, 2007, between Willdan Group, Inc. and Wells Fargo Bank, National Association, relating to theCredit Note in 10.2(5)10.4 Continuing Security Agreement: Rights to Payment and Inventory, dated December 28, 2007, between Willdan Group, Inc. and WellsFargo Bank, National Association, relating to the Revolving Line of Credit Note in 10.2(5)10.5† Willdan Associates Incentive Bonus Plan, effective May 1, 1996(1)10.6† MuniFinancial 2005 Bonus Plan(1)10.7† Form of Tax Agreement Relating to S Corporation Distributions by the Registrant and its shareholders(1)10.8† Willdan Group, Inc. 2006 Stock Incentive Plan(1)10.9† Form of Incentive Stock Option Agreement(1)10.10† Form of Non-Qualified Stock Option Agreement(1)10.11† Amended and Restated Willdan Group, Inc. 2006 Employee Stock Purchase Plan(6)10.12† Form of Indemnification Agreement between Willdan Group, Inc. and its Directors and Officers(1)10.13 Office Lease by and between Spectrum Waples Street, LLC, a California limited liability company, Spectrum Lambert Plaza, LLC, aCalifornia limited liability company and The Willdan Group of Companies dated October 15, 2004 for the principal office located at2401 East Katella Avenue, Anaheim, California(1)10.14 First Amendment to Lease by and between 2401 Katella, LLC and The Willdan Group of Companies, dated February 27, 2006 for theprincipal office located at 2401 Katella Avenue, Anaheim, California(1)10.15 Second Amendment to Lease by and between 2401 Katella, LLC and The Willdan Group of Companies dated March 6, 2006 for theprincipal office located at 2401 Katella Avenue, Anaheim, California(1)10.16 Warrant Agreement between Willdan Group, Inc. and Wedbush Morgan Securities Inc.(1)10.17† Indemnification Agreement between Willdan Group, Inc. and Linda Heil(1)10.18† Agreement and General Release between Willdan Group, Inc. and Richard Kopecky effective February 20, 2007(2)10.19 Settlement Agreement among the City of West Hollywood, Willdan and Willdan Group, Inc., effective March 6, 2007(3)10.20† Employment Agreement between Willdan Group, Inc. and Thomas D. Brisbin dated April 2, 2007(7)41 10.21† Employment Agreement between Willdan Group, Inc. and Mallory McCamant dated July 23, 2007(8)10.22† Employment Agreement between Willdan Group, Inc. and Kimberly D. Gant dated July 23, 2007(8)14.1 Code of Ethical Conduct of Willdan Group, Inc.(6)21.1 Subsidiaries of Willdan Group, Inc.(1)23.1 Consent of Independent Registered Public Accounting Firm*24.1 Power of Attorney (included on signature page hereto)31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adoptedpursuant to § 302 of the Sarbanes-Oxley Act of 2002*31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as adoptedpursuant to § 302 of the Sarbanes-Oxley Act of 2002*32.1 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to § 906 of theSarbanes-Oxley Act of 2002**Filed herewith. †Indicates a management contract or compensating plan or arrangement. (1)Incorporated by reference to Willdan Group, Inc.'s Registration Statement on Form S-1, filed with the Securities and Exchange Commission onAugust 9, 2006, as amended (File No. 333-136444). (2)Incorporated by reference to Willdan Group, Inc.'s Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 22,2007. (3)Incorporated by reference to Willdan Group, Inc.'s Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 12,2007. (4)Incorporated by reference to Willdan Group, Inc.'s Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 27,2007. (5)Incorporated by reference to Willdan Group, Inc.'s Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 2,2008. (6)Incorporated by reference to Willdan Group, Inc.'s Current Report on Form 10-K, filed with the Securities and Exchange Commission on March 27,2007. (7)Incorporated by reference to Willdan Group, Inc.'s Current Report on Form 8-K, filed with the Securities and Exchange Commission on April 3, 2007. (8)Incorporated by reference to Willdan Group, Inc.'s Current Report on Form 8-K, filed with the Securities and Exchange Commission on July 26, 2007.42 SIGNATURES AND CERTIFICATIONS Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to besigned on its behalf by the undersigned, thereunto duly authorized, in the City of Anaheim, State of California, on March 26, 2008. WILLDAN GROUP, INC. /s/ KIMBERLY D. GANT Kimberly D. GantChief Financial Officer and Senior Vice PresidentDate: March 26, 2008 KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears below constitutes and appoints Tracy Lenocker and MalloryMcCamant his/her attorneys-in-fact, each with the power of substitution, for him/her in any and all capacities, to sign any amendments to this Report onForm 10-K and to file the same, with Exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, herebyratifying and confirming all that each of said attorneys-in-fact, or substitute or substitutes may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant andin the capacities and on the dates indicated.Signature Title Date /s/ THOMAS D. BRISBIN Thomas D. Brisbin Director, President and Chief Executive Officer March 26, 2008/s/ KIMBERLY D. GANT Kimberly D. Gant Chief Financial Officer and Senior Vice President March 26, 2008/s/ WIN WESTFALL Win Westfall Director March 26, 2008/s/ LINDA L. HEIL Linda L. Heil Director March 26, 2008/s/ W. TRACY LENOCKER W. Tracy Lenocker Director March 26, 2008/s/ KEITH W. RENKEN Keith W. Renken Director March 26, 2008/s/ CHELL SMITH Chell Smith Director March 26, 2008/s/ JOHN M. TOUPS John M. Toups Director March 26, 200843 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of DirectorsWilldan Group, Inc. We have audited the accompanying consolidated balance sheets of Willdan Group, Inc. and subsidiaries as of December 28, 2007 and December 29,2006, and the related consolidated statements of operations, redeemable common stock and stockholders' equity, and cash flows for each of the fiscal years inthe three-year period ended December 28, 2007. These consolidated financial statements are the responsibility of the Company's management. Ourresponsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were notengaged to perform an audit of the Company's internal control over financial reporting. Our audit included consideration of internal control over financialreporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company's internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates madeby management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position ofWilldan Group, Inc. and subsidiaries at December 28, 2007 and December 29, 2006, and the results of their operations and their cash flows for each of thefiscal years in the three-year period ended December 28, 2007, in conformity with U.S. generally accepted accounting principles./s/ KPMG LLPMarch 25, 2008Los Angeles, CaliforniaF-1 WILLDAN GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 28, 2007 December 29, 2006Assets Current assets: Cash and cash equivalents $15,511,000 $20,633,000 Liquid investments 1,300,000 — Cash, cash equivalents and liquid investments 16,811,000 20,633,000 Accounts receivable, net of allowance for doubtful accounts of $372,000 and $492,000 atDecember 28, 2007 and December 29, 2006, respectively 15,090,000 14,270,000 Costs and estimated earnings in excess of billings on uncompleted contracts 7,336,000 7,960,000 Other receivables 157,000 4,505,000 Prepaid expenses and other current assets 2,067,000 1,858,000 Total current assets 41,461,000 49,226,000 Equipment and leasehold improvements, net 3,354,000 4,372,000 Goodwill 2,911,000 2,911,000 Other assets 500,000 599,000 Total assets $48,226,000 $57,108,000 Liabilities and Stockholders' Equity Current liabilities: Excess of outstanding checks over bank balance $633,000 $257,000 Accounts payable 1,136,000 1,270,000 Accrued liabilities 5,314,000 14,106,000 Billings in excess of costs and estimated earnings on uncompleted contracts 941,000 1,222,000 Accrued final distribution payable to holders of redeemable common stock. — 3,150,000 Current portion of notes payable 1,088,000 993,000 Current portion of notes payable to related parties — 75,000 Current portion of capital lease obligations 176,000 170,000 Current portion of deferred income taxes 2,002,000 1,262,000 Total current liabilities 11,290,000 22,505,000Notes payable to related parties — 46,000Capital lease obligations, less current portion 283,000 348,000Deferred lease obligations 606,000 547,000Deferred income taxes, net of current portion 395,000 398,000 Total liabilities 12,574,000 23,844,000 Commitments and contingencies Stockholders' equity: Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued and outstanding — — Common stock, $0.01 par value, 40,000,000 shares authorized; 7,150,000 and 7,148,000 sharesissued and outstanding at December 28, 2007 and December 29, 2006, respectively 71,000 71,000 Additional paid-in capital 32,796,000 32,552,000 Retained earnings 2,785,000 641,000 Total stockholders' equity 35,652,000 33,264,000 Total liabilities and stockholders' equity $48,226,000 $57,108,000 See accompanying notes to consolidated financial statements.F-2 WILLDAN GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Fiscal Year 2007 2006 2005 Contract revenue $78,798,000 $78,339,000 $67,263,000 Direct costs of contract revenue: Salaries and wages 25,769,000 24,602,000 20,918,000 Production expenses 1,568,000 1,496,000 1,529,000 Subconsultant services 4,600,000 4,168,000 4,745,000 Total direct costs of contract revenue 31,937,000 30,266,000 27,192,000 General and administrative expenses: Salaries and wages, payroll taxes and employee benefits 25,061,000 26,051,000 22,720,000 Facilities 4,546,000 4,046,000 3,481,000 Stock-based compensation 209,000 38,000 2,737,000 Depreciation and amortization 1,747,000 1,584,000 1,257,000 Litigation accrual (reversal) 1,049,000 (1,049,000) 2,686,000 Other 11,727,000 10,359,000 7,935,000 Total general and administrative expenses 44,339,000 41,029,000 40,816,000 Income (loss) from operations 2,522,000 7,044,000 (745,000) Other income (expense): Interest 499,000 (773,000) (630,000) Other, net 666,000 2,470,000 11,000 Total other income (expenses) 1,165,000 1,697,000 (619,000) Income (loss) before income tax expense 3,687,000 8,741,000 (1,364,000)Income tax expense 1,543,000 2,021,000 17,000 Net income (loss) $2,144,000 $6,720,000 $(1,381,000) Earnings (loss) per share: Basic and diluted $0.30 $1.37 $(0.35) Weighted-average shares outstanding: Basic 7,149,000 4,900,000 3,994,000 Diluted 7,150,000 4,900,000 3,994,000 Pro Forma Data (unaudited): Pro forma provision for income taxes $2,596,000 $549,000 Pro forma net income (loss) $6,145,000 $(1,913,000)Pro forma earnings per common share, basic and diluted $1.25 $(0.48)See accompanying notes to consolidated financial statements.F-3 WILLDAN GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF REDEEMABLE COMMON STOCKAND STOCKHOLDERS' EQUITY Common Stock Additional Paid-inCapital Receivable fromStockholders Retained Earnings Shares Amount Total Balances for redeemable common stock at December 31, 2004 3,760,000 $5,209,000 $— $(16,000)$6,284,000 $11,477,000 Shares of redeemable common stock purchased and canceledin connection with buy/sell stock plan (6,000) (9,000) — — (16,000) (25,000)Shares of redeemable common stock issued in connectionwith buy/sell stock plan 954,000 3,594,000 — (38,000) — 3,556,,000 Stock-based compensation — 2,737,000 — — — 2,737,,000 Receipt of stockholder receivable — — — 16,000 — 16,000 Decrease in the difference between the aggregate redemptionamount and the carrying amount for redeemable commonstock — (390,000) — — 390,000 — Distributions — — — — (1,720,000) (1,720,000)Net loss — — — — (1,381,000) (1,381,000) Balances for redeemable common stock at December 30, 2005 4,708,000 11,141,000 — (38,000) 3,557,000 14,660,000 Shares of redeemable common issued in connection withbuy/sell stock plan 5,000 18,,000 — — — 18,000 Receipt of stockholder receivable — — — 38,000 — 38,000 Reclassification from common stock to additional paid-incapital — (11,112,000) 11,112,,000 — — — Decrease in the difference between the aggregate redemptionamount and the carrying amount for redeemable commonstock — — (264,000) — 264,000 — Distributions to holders of redeemable common stock — — — — (8,634,000) (8,634,000)Reclassification of remaining undistributed retained earningsupon conversion from S Corporation to C Corporation — — 1,266,000 — (1,266,000) — Shares of common stock issued in connection with initialpublic offering, net of offering costs 2,435,000 24,000 20,400,000 — — 20,424,000 Stock-based compensation — — 38,000 — — 38,000 Net income — — — — 6,720,000 6,720,000 Balances for stockholders' equity at December 29, 2006 7,148,000 71,000 32,552,000 — 641,000 33,264,,000 Shares of common stock issued in connection with employeestock purchase plan 2,000 — 25,000 — — 25,000 Reduction of offering costs in connection with initial publicoffering. — — 10,000 — — 10,000 Stock-based compensation — — 209,000 — — 209,000 Net income — — — — 2,144,000 2,144,000 Balances for stockholders' equity at December 28, 2007 7,150,000 $71,000 $32,796,000 $— $2,785,000 $35,652,000 See accompanying notes to consolidated financial statements.F-4 WILLDAN GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal Year 2007 2006 2005 Cash flows from operating activities: Net income (loss) $2,144,000 $6,720,000 $(1,381,000) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 1,755,000 1,584,000 1,274,000 Loss (gain) on sale of equipment 28,000 (13,000) 24,000 Allowance for doubtful accounts 212,000 481,000 321,000 Stock-based compensation 209,000 38,000 2,737,000 Changes in operating assets and liabilities: Accounts receivable (1,032,000) (3,071,000) (2,508,000) Costs and estimated earnings in excess of billings on uncompleted contracts 624,000 (731,000) (45,000) Other receivables 4,348,000 (1,090,000) (3,184,000) Prepaid expenses and other current assets (209,000) (535,000) (458,000) Other assets 69,000 (8,000) (115,000) Accounts payable (134,000) 226,000 (90,000) Accrued liabilities (8,792,000) 1,026,000 7,356,000 Billings in excess of costs and estimated earnings on uncompleted contracts (281,000) (134,000) 396,000 Deferred income taxes 737,000 1,602,000 (38,000) Deferred lease obligations 59,000 178,000 276,000 Net cash provided by (used in) operating activities (263,000) 6,273,000 4,565,000 Cash flows from investing activities: Purchase of equipment and leasehold improvements (654,000) (2,822,000) (1,885,000) Proceeds from sale of equipment 35,000 5,000 28,000 Purchase of other assets — (100,000) (15,000) Purchase of liquid investments (22,800,000) — — Proceeds from sale of liquid investments 21,500,000 — — Net cash used in investing activities (1,919,000) (2,917,000) (1,872,000) Cash flows from financing activities: Changes in excess of outstanding checks over bank balance 376,000 (115,000) 176,000 Payments on notes payable (1,210,000) (1,482,000) (1,964,000) Proceeds from notes payable 1,184,000 973,000 2,134,000 Borrowings under line of credit 418,000 11,700,000 29,390,000 Repayments of line of credit (418,000) (11,700,000) (31,053,000) Principal payments on capital leases (175,000) (158,000) (148,000) Payments on liabilities to stockholders — (3,000) (255,000) Proceeds from stockholder receivables — 38,000 16,000 Proceeds from issuance of redeemable common stock — 18,000 3,556,000 Proceeds from issuance of common stock in the initial public offering — 22,646,000 — Proceeds from sales of common stock under employee stock purchase plan 25,000 — — Distributions to holders of redeemable common stock (3,150,000) (5,484,000) (1,720,000) Payments to acquire retired stock — — (25,000) Refund (payment) of offering costs 10,000 (2,222,000) — Net cash provided by (used in) financing activities (2,940,000) 14,211,000 107,000 Net increase (decrease) in cash and cash equivalents (5,122,000) 17,567,000 2,800,000 Cash and cash equivalents at beginning of the year 20,633,000 3,066,000 266,000 Cash and cash equivalents at end of the year $15,511,000 $20,633,000 $3,066,000 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $84,000 $143,000 $239,000 Income taxes 902,000 72,000 79,000 Supplemental disclosures of noncash investing and financing activities: Equipment acquired under capital leases $147,000 $386,000 $211,000 Amounts receivable from issuance of redeemable common stock — — 38,000 Note payable issued in connection with acquisition of assets — 150,000 — Accrued final distributions to holders of redeemable common stock — 3,150,000 — See accompanying notes to consolidated financial statementsF-5 WILLDAN GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fiscal Years 2007, 2006 and 2005 1. ORGANIZATION AND OPERATIONS OF THE COMPANYNature of Business Willdan Group, Inc. and subsidiaries (the Company) is a provider of outsourced services to small and mid-sized public agencies in California and otherwestern states. Outsourcing enables these agencies to provide a wide range of specialized services, without having to incur and maintain the overheadnecessary to develop staffing in-house. The Company provides a broad range of services to public agencies including civil engineering, building and safetyservices, geotechnical engineering, financial and economic consulting, and disaster preparedness and homeland security. Clients primarily consist of cities,counties, redevelopment agencies, water districts, school districts and universities, state agencies, federal agencies, a variety of other special districts andagencies, and tribal governments. Willdan Group, Inc., a Delaware corporation, is the successor to The Willdan Group of Companies, a California corporation. Willdan Group, Inc. wasformed during fiscal year 2006, as a subsidiary of The Willdan Group of Companies, and on June 30, 2006, the assets and liabilities of The Willdan Group ofCompanies were transferred to Willdan Group, Inc. Willdan Group, Inc. had no operations prior to this transfer of assets and liabilities. Since the transactionoccurred between entities under common control, the transfer was recorded at historical carrying values in a manner similar to the pooling of interests methodof accounting. This resulted in a reclassification of $11.1 million from common stock to additional paid-in capital since the Willdan Group, Inc. commonstock has a par value of $0.01 per share and The Willdan Group of Companies common stock had no par value. Hereinafter, Willdan Group refers to bothWilldan Group, Inc. and its predecessor, The Willdan Group of Companies. On November 27, 2006, Willdan Group completed its initial public offering (IPO). The IPO resulted in the sale by Willdan Group of 2,000,000 shares ofcommon stock at an initial offering price per share of $10.00, generating gross proceeds to Willdan Group of $20.0 million. A selling shareholder also sold900,000 shares of common stock in the IPO. The aggregate proceeds to Willdan Group, net of underwriter's discounts and other offering costs, wereapproximately $16.4 million. On December 20, 2006, Willdan Group sold an additional 435,000 shares of common stock at $10.00 per share as a result of theunderwriter exercising its over-allotment option. This resulted in additional net proceeds of approximately $4.0 million to Willdan Group. Willdan Groupissued stock warrants in connection with the IPO to the underwriter for the right to purchase 290,000 common shares at 120% of the IPO share price, or$12.00 per share. The warrants became exercisable on November 20, 2007 and expire on November 20, 2011. Effective as of the completion of the IPO, the Company's book value stock purchase plan for Willdan Group's redeemable common stock was terminatedand all of the outstanding shares of Willdan Group's common stock previously subject to the terms of this plan are no longer redeemable by Willdan Group.This resulted in a reclassification of the Company's equity to permanent equity as of the completion of the IPO. Prior to completion of the IPO, Willdan Group was owned by its employees, board members and a service provider. With the consent of its stockholders,Willdan Group had elected to be treated as an S Corporation for purposes of federal and state income taxes. Effective as of the first day of trading of WilldanGroup's common stock, November 21, 2006, the S Corporation status terminated and thereafter the Company has been subject to federal and state incometaxes as a C Corporation.F-6 WILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2007, 2006 and 20052. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESPrinciples of Consolidation The consolidated financial statements include the accounts of Willdan Group Inc. and its wholly owned subsidiaries, Willdan, MuniFinancial, ArroyoGeotechnical, American Homeland Solutions, Willdan Resource Solutions and Public Agency Resources. Willdan Resource Solutions was formed and beganoperations in fiscal year 2007. All significant intercompany balances and transactions have been eliminated in consolidation.Fiscal Years The Company operates and reports financial results on a fiscal year of 52 or 53 weeks ending on the Friday closest to December 31. Fiscal years 2007,2006 and 2005 were 52-week years. All references to years in the notes to consolidated financial statements represent fiscal years.Cash, Cash Equivalents and Liquid Investments All highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents. Cash and cashequivalents include money market funds and various deposit accounts. As of December 28, 2007, cash equivalents include $0.5 million invested in the Orange County Business Bank Money Market Fund and $14.2 millioninvested in Lehman Brothers National Muni Money Fund Reserve Class. The $1.3 million in liquid investments is invested in various auction rate securities.Outstanding checks in excess of cash on deposit have been reclassified to current liabilities. The Company from time to time may be exposed to credit risk with its bank deposits in excess of the FDIC insurance limits and with uninsured moneymarket investments. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash andcash equivalents.Fair Value of Financial Instruments As of December 28, 2007 and December 29, 2006, the carrying amounts of the Company's cash, cash equivalents, liquid investments, accountsreceivable, costs and estimated earnings in excess of billings on uncompleted contracts, other receivables, prepaid expenses and other current assets, excessof outstanding checks over bank balance, accounts payable, accrued liabilities, billings in excess of costs and estimated earnings on uncompleted contracts,and accrued final distribution payable to holders of redeemable common stock approximate their fair values because of the relatively short period of timebetween the origination of these instruments and their expected realization. The carrying amounts of notes payable to stockholders and other notes payableapproximate their fair values since the terms are comparable to terms currently offered by local lending institutions for loans of similar terms to companieswith comparable credit risk.Segment Information Willdan Group is a holding company with six subsidiary companies. The Company presents segment information externally consistent with the mannerin which the Company's chief operatingF-7 WILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2007, 2006 and 20052. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)decision maker reviews information to assess performance and allocate resources. Willdan Group, Inc., the holding company, performs all administrativefunctions on behalf of the subsidiary companies, such as treasury, legal, accounting, information systems and human resources, and earns revenue that is onlyincidental to the activities of the enterprise. As a result, Willdan Group, Inc. does not meet the definition of an operating segment. Four of the six subsidiarycompanies are aggregated into one segment since they have similar characteristics including the nature of services, the methods used to provide services andthe type of customer. The remaining two subsidiary companies each comprise an operating segment.Off-Balance Sheet Financings and Liabilities Other than lease commitments, legal contingencies incurred in the normal course of business, and employment contracts, the Company does not haveany off-balance sheet financing arrangements or liabilities. In addition, the Company's policy is not to enter into derivative instruments, futures or forwardcontracts. Finally, the Company does not have any majority-owned subsidiaries or any interests in, or relationships with, any special-purpose entities that arenot included in the consolidated financial statements.Accounting for Contracts The Company enters into contracts with its clients that contain three principal types of pricing provisions: fixed fee, time-and-materials, and unit-based.Revenue on fixed fee contracts is recognized on the percentage-of-completion method based generally on the ratio of direct costs incurred to date toestimated total direct costs at completion. Revenue on time-and-materials and unit-based contracts are recognized as the work is performed in accordancewith specific terms of the contract. Revenue for amounts that have been billed but not earned is deferred and such deferred revenue is referred to as billings inexcess of costs and estimated earnings on uncompleted contracts in the accompanying consolidated balance sheets. Adjustments to contract cost estimates are made in the periods in which the facts requiring such revisions become known. When the revised estimateindicates a loss, such loss is provided for currently in its entirety. Claims revenue is recognized only upon resolution of the claim. Change orders in disputeare evaluated as claims. Costs related to unpriced change orders are expensed when incurred and recognition of the related contract revenue is based on anevaluation of the probability of recovery of the costs. Estimated profit is recognized for unpriced change orders if realization of the expected price of thechange order is assured beyond a reasonable doubt. Applying the percentage-of-completion method of recognizing revenue requires the Company to estimate the indicated outcome of its long-termcontracts. The Company forecasts such outcomes to the best of its knowledge and belief of current and expected conditions and its expected course of action.Differences between the Company's estimates and actual results often occur resulting in changes to reported revenue and earnings. Such changes could have amaterial effect on future consolidated financial statements. Direct costs of contract revenue consist primarily of that portion of technical and nontechnical salaries and wages that has been incurred in connectionwith revenue producing projects. Direct costsF-8 WILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2007, 2006 and 20052. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)of contract revenue also include production expenses, subconsultant services and other expenses that are incurred in connection with revenue producingprojects. Direct costs of contract revenue exclude that portion of technical and nontechnical salaries and wages related to marketing efforts, vacations, holidaysand other time not spent directly generating revenue under existing contracts. Such costs are included in general and administrative expenses. Additionally,payroll taxes, bonuses and employee benefit costs for all Company personnel are included in general and administrative expenses in the accompanyingconsolidated statements of operations since no allocation of these costs is made to direct costs of contract revenue. No allocation of facilities costs is made todirect costs of contract revenue nor is depreciation and amortization allocated to direct costs. Other companies may classify as direct costs of contract revenuesome of the costs that the Company classifies as general and administrative costs. The Company expenses direct costs of contract revenue when incurred. Accounts receivable are carried at original invoice amount less an estimate made for doubtful accounts based upon a review of all outstanding amountson a monthly basis. Management determines the allowance for doubtful accounts by identifying troubled accounts and by using historical experienceapplied to an aging of accounts. Credit risk is minimal with governmental entities. Accounts receivables are written off when deemed uncollectible.Recoveries of accounts receivables previously written off are recorded when received. The value of retainage is included in accounts receivable in the accompanying consolidated financial statements. Retainage represents the billed amountthat is retained by the customer, in accordance with the terms of the contract, generally until performance is substantially complete. At December 28, 2007and December 29, 2006, the Company had retained accounts receivable of approximately $46,000 and $54,000, respectively.Leases All of the Company's office leases are classified as operating leases and rent expense is included in facilities expense in the accompanying consolidatedstatements of operations. Some of the lease terms include rent concessions and rent escalation clauses, all of which are taken into account in computingminimum lease payments. Minimum lease payments are recognized on a straight-line basis over the minimum lease term. The excess of rents recognized overthe amounts contractually due pursuant to the underlying leases is reflected as a liability in the accompanying consolidated balance sheets. The cost ofimprovements that the Company makes to the leased office space is capitalized as leasehold improvements.Equipment and Leasehold Improvements Equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. Equipment under capital leases is stated at thepresent value of the minimum lease payments. Depreciation and amortization on equipment are calculated using the straight-line method over estimateduseful lives of two to five years. Leasehold improvements and assets under capital leases are amortized using the straight-line method over the shorter ofestimated useful lives or the term of the related lease.F-9 WILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2007, 2006 and 20052. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Following are the estimated useful lives used to calculate depreciation and amortization:Category Estimated Useful LifeFurniture and fixtures 5 yearsComputer hardware 2 yearsComputer software 3 yearsAutomobiles and trucks 3 yearsField equipment 5 years Equipment and leasehold improvements are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount ofan asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimatedundiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, animpairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.Goodwill Goodwill represents the excess of costs over fair value of the assets acquired. The goodwill, which has an indefinite useful life, is not amortized, butinstead tested for impairment at least annually or more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss isrecognized to the extent that the carrying amount exceeds the asset's fair value.Accounting for Claims Against the Company The Company records liabilities to claimants for probable and estimable claims on its consolidated balance sheet, which is included in accruedliabilities, and records a corresponding receivable from the insurance company for the portion of the claim that is probable of being covered by insurance,which is included in other receivables. The estimated claim amount net of the amount estimated to be recoverable from the insurance company is included ingeneral and administrative expense.Stock Options The Company accounts for compensation related to stock options using the fair value method of accounting. The estimated fair value of the fully vestedstock options granted upon completion of the IPO was expensed and the fair value of the unvested stock options granted is being amortized over the vestingperiod of these stock options.Redeemable Common Stock Prior to fiscal year 2005, the Company recognized no compensation expense related to shares issued under its book value stock purchase plan based onchanges in the formula price during the employment period since the employees made a substantive investment that would be at risk for a reasonable periodof time.F-10 WILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2007, 2006 and 20052. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Book value shares granted under the purchase plan during fiscal year 2005 were considered to have been granted in contemplation of the IPO, and,accordingly, compensation cost was recorded for the difference between the formula value and the estimated fair value of those shares. In the evaluation of the fair value of the stock considered to be issued in contemplation of the IPO, the Company considered the proximity of theissuance to the offering, intervening events, market conditions, transfer restrictions and exercise dates, and profitability and financial condition of theCompany.Income Taxes Prior to November 21, 2006, for federal income tax purposes, the Company filed as an S Corporation wherein the Company elected and the stockholdersconsented to be taxed in a manner similar to partners in a general partnership. Since federal income taxes on S Corporation income are the responsibility ofthe individual stockholders, no federal tax provision is included in the accompanying consolidated financial statements for periods prior to November 21,2006. Effective January 1, 2002, the Company elected to be treated as an S Corporation for state tax purposes and has provided for state income taxes at theapplicable S Corporation statutory rate from January 1, 2002 through November 21, 2006. Effective upon the first day of trading of the Company's common stock as a result of the IPO, the S Corporation status was terminated and thereafter theCompany has been subject to federal and state income taxes as a C Corporation. The effect of recognizing the Company's deferred tax liability using CCorporation federal and state tax rates instead of S Corporation state tax rates is included in the fiscal year 2006 tax provision in the accompanyingconsolidated statement of operations. The Company has revised its calculation of the deferred tax liability recognized upon termination of the Company's SCorporation status and the effects of the resulting revisions to the Company's previously reported consolidated financial statements for the fiscal year 2006are immaterial. The effects are as follows: As Reported Revision RevisedIncome tax expense $2,452,000 $(431,000)$2,021,000Net income 6,289,000 431,000 6,720,000Earning per share 1.28 0.09 1.37Current portion of deferred income taxes 1,693,000 (431,000) 1,262,000Total current liabilities 22,936,000 (431,000) 22,505,000Retained earnings 210,000 431,000 641,000Total stockholders' equity 32,833,000 431,000 33,264,000 Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences oftemporary differences between the financial reporting basis and tax basis of the Company's assets and liabilities. Deferred tax assets and liabilities aremeasured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered orsettled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.F-11 WILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2007, 2006 and 20052. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)Operating Cycle In accordance with industry practice, amounts realizable and payable under contracts, which may extend beyond one year, are included in current assetsand liabilities.Use of Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the U.S. requires management tomake estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of theconsolidated financial statements. Estimates also affect the reported amounts of revenue and expenses during the reporting period. Actual results could differfrom those estimates.New Accounting Pronouncements In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes"(FIN 48), an interpretation of FASB Statement of Financial Accounting Stands (SFAS) No. 109, which clarifies the accounting for uncertainty in income taxesrecognized in an enterprise's financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes (SFAS 109)". SFAS 109 does not prescribea recognition threshold or measurement attribute for the financial statement recognition and measurement of a tax position taken in a tax return. Diversity inpractice existed in the accounting for income taxes. To address that diversity, FIN 48 clarifies the application of SFAS 109 by defining a criterion that anindividual tax position must meet for any part of the benefit of that position to be recognized in an enterprise's financial statements. Additionally, FIN 48provides guidance on measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 iseffective for fiscal years beginning after December 15, 2006. Our adoption of FIN 48 did not have a material effect on our consolidated financial statements. SFAS No. 157, "Fair Value Measurements" (SFAS 157), defines fair value, establishes a framework for measuring fair value in accordance with generallyaccepted accounting principles, and expands disclosures about fair value measurements. We adopted the provisions of SFAS 157 effective as of thebeginning of fiscal year 2008. We do not expect SFAS 157 to have a material impact on our results of operations, financial position, or cash flows. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" (SFAS 159) which permitsentities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value.SFAS 159 will be effective as of the beginning of fiscal year 2008. The provisions of SFAS 159 are elective, and we have not determined whether and to whatextent we may implement its provisions or how if implemented, it might affect our financial statements.F-12 WILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2007, 2006 and 20053. EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements consist of the following: December 28, 2007 December 29, 2006 Furniture and fixtures $4,917,000 $4,825,000 Computer hardware and software 4,518,000 4,184,000 Leasehold improvements 900,000 880,000 Equipment under capital leases 787,000 757,000 Automobiles, trucks, and field equipment 412,000 401,000 Total 11,534,000 11,047,000 Accumulated depreciation and amortization (8,180,000) (6,675,000) Equipment and Leasehold Improvements, net $3,354,000 $4,372,000 Included in accumulated depreciation and amortization is $189,000 and $181,000 of amortization related to equipment held under capital leases infiscal years 2007 and 2006, respectively.4. ACCRUED LIABILITIES Accrued liabilities consist of the following: December 28, 2007 December 29, 2006Accrued bonuses $202,000 $2,150,000Paid leave bank 1,746,000 1,861,000Compensation and payroll taxes 1,495,000 1,556,000Accrued legal 92,000 41,000Accrued workers' compensation insurance 19,000 50,000Litigation accrual 235,000 5,951,000Accrued interest 52,000 1,006,000Income taxes payable 425,000 429,000Other 1,048,000 1,062,000 Total accrued liabilities $5,314,000 $14,106,000 5. STOCK OPTIONS As of December 28, 2007, the Company has two share-based compensation plans, which are described below. The compensation cost that has beencharged against income for stock options issued under these plans was $209,000 and $38,000 for fiscal years 2007 and 2006, respectively. Prior to fiscal year2006, the Company did not issue stock options. 2006 STOCK INCENTIVE PLAN In June 2006, the Company's board of directors adopted the 2006 Stock Incentive Plan ("2006 Plan") and it received stockholder approval. TheCompany re-submited the 2006 Plan to its stockholders for post-IPO approval at the 2007 annual stockholders' meeting and it was approved. The 2006 Planwill terminate ten years after the board of directors approved it. The 2006 Plan has 300,000F-13 WILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2007, 2006 and 20055. STOCK OPTIONS (Continued)shares of common stock reserved for issuance to the Company's directors, executives, officers, employees, consultants and advisors. No participant may begranted an option to purchase more than 100,000 shares in any fiscal year. Options may be granted with exercise prices at no less than fair market value atdate of grant, with vesting provisions and contractual terms determined by the compensation committee of the board of directors on a grant-by-grant basis.Options granted under the 2006 Plan may be "non-statutory stock options" which expire no more than ten years from the date of grant or "incentive stockoptions" as defined in Section 422 of the Internal Revenue Code of 1986, as amended. Upon exercise of non-statutory stock options, the Company isgenerally entitled to a tax deduction on the exercise of the option for an amount equal to the excess over the exercise price of the fair market value of theshares at the date of exercise. The Company is generally not entitled to any tax deduction on the exercise of an incentive stock option. Option awardsprovide for accelerated vesting if there is a change in control (as defined in the 2006 Plan). Through December 28, 2007, options granted under the 2006 Planconsist of 210,000 shares and 23,000 shares for incentive stock options and non-statutory stock options, respectively. The fair value of each option is calculated using the Black-Scholes option valuation model that uses the assumptions noted in the following table.Expected volatility is based upon historical volatility of "guideline companies" since the length of time the Company's shares have been publicly traded isshorter than the expected or contractual term of the options. The expected term of the option, taking into account both the contractual term of the option andthe effects of employees' expected exercise and expected post-vesting termination behavior is estimated based upon the "shortcut" approach. Under thisapproach, the expected term is presumed to be the mid-point between the vesting date and the end of the contractual term. The risk-free rate for periods withinthe contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The assumptions are as follows: 2007 2006Expected volatility 31%-34% 31%-36%Expected dividends 0% 0%Expected term (in years) 5.00-6.00 1.00-5.25Risk-free rate 4.34%-5.26% 4.54%-4.71% A summary of option activity under the 2006 Plan as of December 28, 2007 and December 29, 2006, and changes during the fiscal years then ended ispresented below. The intrinsic value of the options is $0, based on the Company's closing stock price of $7.11 on December 28, 2007. Options Weighted-Average ExercisePrice Weighted-AverageRemainingContractual Term(Years)Outstanding at December 29, 2006 28,000 $10.19 4.2Granted 205,000 9.40 9.4Exercised — — —Forfeited or expired — — — Outstanding at December 28, 2007 233,000 $9.50 8.6 Vested at December 28, 2007 33,000 $10.22 4.2 Exercisable at December 28, 2007 33,000 $10.22 4.2 F-14 WILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2007, 2006 and 20055. STOCK OPTIONS (Continued) Options Weighted-Average ExercisePrice Weighted-AverageRemainingContractualTerm (Years)Outstanding at December 30, 2005 — $— —Granted 28,000 10.19 4.2Exercised — — —Forfeited or expired — — — Outstanding at December 29, 2006 28,000 $10.19 4.2 Vested at December 29, 2006 20,000 $10.00 1.9 Exercisable at December 29, 2006 20,000 $10.00 1.9 A summary of the status of the Company's nonvested options as of December 28, 2007, and changes during the fiscal year ended December 28, 2007 andDecember 29, 2006, is presented below:Nonvested Options Options Weighted-Average Grant-DateFair ValueNonvested at December 29, 2006 8,000 $3.91Granted 205,000 3.76Vested (13,000) 3.95Forfeited — — Nonvested at December 28, 2007 200,000 3.76 Nonvested at December 30, 2005 — $—Granted 28,000 2.29Vested (20,000) 1.64Forfeited — — Nonvested at December 29, 2006 8,000 3.91 As of December 28, 2007, there was $589,000 of total unrecognized compensation cost related to nonvested stock options. That cost is expected to berecognized over a weighted-average period of 2.4 years. The total fair value of vested options granted during the fiscal years ended December 28, 2007 andDecember 29, 2006 was $20,000 and $33,000, respectively. AMENDED AND RESTATED 2006 EMPLOYEE STOCK PURCHASE PLAN The Company adopted its Amended and Restated 2006 Employee Stock Purchase Plan to allow eligible employees the right to purchase shares ofcommon stock, at semi-annual intervals, with their accumulated payroll deductions. The plan received stockholder approval in June 2006. The Company re-submited the plan to its stockholders for post-IPO approval at the 2007 annual stockholders' meeting and obtained approval. A total of 300,000 shares of theCompany's common stock have been reserved for issuance under the plan, with no more than 100,000 shares being issuable in any one calendar year.F-15 WILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2007, 2006 and 20055. STOCK OPTIONS (Continued)The plan has semi-annual periods beginning on each January 1 and ending on each June 30 and beginning on each July 1 and ending on each December 31.The first offering period commenced on February 10, 2007 and ended on June 30, 2007. Participants make contributions under the plan only by means of payroll deductions each payroll period. The accumulated contributions will be appliedto the purchase of shares. Shares will be purchased under the plan on or as soon as practicable after, the last day of the offering period. The purchase price pershare will equal 95% of the fair market value of a share on the last day of such offering period. The Company's Amended and Restated 2006 Employee Stock Purchase Plan is a non-compensatory plan. As a result, stock-based compensation expensewill not be recognized in relation to this plan.6. NOTES PAYABLE AND LINE OF CREDIT Notes payable, excluding amounts due to related parties, consist of the following: 2007 2006Unsecured notes payable to insurance companies to financeinsurance premiums, interest at 5.63% for the notes outstanding as ofDecember 28, 2007 and 5.97% for the notes outstanding as ofDecember 29, 2006, payable in monthly principal and interestinstallments of $111,000 through September 2008 $1,088,000 $990,000Note payable for automobile, 48-month term, bearing interest at7.20%, payable in monthly principal and interest installments of$1,000 through July 2007, secured by a Company vehicle — 3,000 Notes payable, excluding amount due to related parties, all current $1,088,000 $993,000 The Company has a credit agreement and a related revolving line of credit note and security agreement (collectively with the credit agreement and thenote, the "agreements") with Wells Fargo Bank, National Association. Under the terms of the credit agreement, the Company can borrow up to $10.0 million from time to time up to and until January 1, 2010. Loans madeunder the revolving line of credit will accrue interest at either (i) the floating rate of 0.50% below the Prime Rate in effect from time to time or (ii) the fixedrate of 1.25% above LIBOR, at the election of the Company. The interest rate is subject to adjustment based on changes in the Company's ratio of totalfunded debt to EBITDA (as defined in the credit agreement). Upon a default, the interest rate will be increased by a default rate margin of 4.00%. Upon theoccurrence of an event of default under the credit agreement, Wells Fargo has the option to make all indebtedness then owed by the Company under theagreements immediately due and payable. The revolving line of credit matures on January 31, 2010.F-16 WILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2007, 2006 and 20056. NOTES PAYABLE AND LINE OF CREDIT (Continued) Borrowings under the credit agreement are secured by all accounts receivable and other rights to payment, general intangibles, inventory and equipmentof the Company and its subsidiaries. Each subsidiary of the Company (except Public Agency Resources) has signed an unconditional guaranty of theCompany's obligations under the agreements. The credit agreement also contains customary representations and affirmative covenants, including covenantsto maintain a minimum tangible net worth, a minimum net income, a minimum asset coverage ratio and a maximum ratio of total funded debt to EBITDA(each ratio as specifically defined in the credit agreement). The credit agreement also includes customary negative covenants, including a covenant thatprohibits the incurrence of additional indebtedness by the Company or its subsidiaries other than purchase money indebtedness not to exceed $2.0 millionand indebtedness existing on the date of the credit agreement, and a covenant that prohibits payment of dividends on the Company's stock. In addition, thecredit agreement includes customary defaults for a credit facility. There were no outstanding borrowings under this agreement as of December 28, 2007. The Company terminated its business loan agreement, promissory note and commercial security agreement (the "prior agreement") with Orange CountyBusiness Bank on December 31, 2007. The Company terminated the prior agreement in connection with its entering into the new revolving credit facilitywith Wells Fargo. The Company paid no fees or penalties as a result of terminating the prior agreement with Orange County Business Bank. In connection with the June 2006 acquisition of the assets of an entity that developed and delivered training courses, the Company entered into a$150,000 note payable to the seller for a portion of the purchase price. The seller was hired as a Company employee in connection with this acquisition. Thisrelated party note, which was repaid during fiscal year 2007, bore interest at 6% had an outstanding balance of $121,000 as of December 29, 2006.7. BOOK VALUE STOCK PURCHASE PLAN Prior to the completion of the IPO, the Company had a program whereby selected employees, contract employees, officers and directors of the Companycould purchase redeemable shares of the Company's stock. The purpose of the program was to provide for continuity of management by establishing a planunder which the stock of the Company would remain in the hands of those individuals who were or would be actively responsible for the continued successof the Company and who desired to own such stock. The existing stockholders approved additional sales of stock and the Company's board of directorsdetermined which individuals and how many shares each of these individuals could purchase. Company employees and directors owned most of theCompany's stock and every share of the Company's stock was covered by the stock buy/sell agreement (the Agreement). The stockholders could not transfer ownership of the stock other than to hold title to the stock in a trust for the benefit of the stockholder and/or his orher spouse, children or estate. Stockholders who wished to sell the stock had to tender an offer of the stock to the Company or to another Companystockholder. Termination of employment with the Company did not trigger a requirement to sell the stock back to the Company. However, the Company hadthe right to repurchase any of the stock at any time from any stockholder.F-17 WILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2007, 2006 and 20057. BOOK VALUE STOCK PURCHASE PLAN (Continued) All purchases and repurchases of stock were priced based on the same formula and there was no vesting period. The Company had various options withrespect to repurchasing the stock tendered by the stockholders as specified in the Agreement. If the repurchase of stock was involuntary (i.e., the Companydemands the repurchase), then the Company was required to immediately pay cash for 100% of the shares. During fiscal year 2005, individuals purchased 954,000 shares of the Company's redeemable common stock at $3.77 per share pursuant to awards ofstock purchase rights granted by the Company's board of directors. At the time of the stock sales, the Company was considering becoming a public companyin addition to other forms of financing that would not have resulted in the Company becoming publicly traded. During the Company's year-end close processin February 2006, the Company determined it was possible the Company could be within one year of an IPO. Accordingly, the fiscal year 2005 sales ofcommon stock were considered to be in contemplation of the Company's proposed IPO and the difference between the aggregate estimated fair value of theshares and the aggregate formula-based price was recorded as an expense in fiscal year 2005. The expense totaled $2.7 million and is included as stock basedcompensation within general and administrative expenses. In the evaluation of the fair value of the stock considered to be issued in contemplation of the IPO, the Company considered the profitability andfinancial condition of the Company, the proximity of the issuance to the offering, intervening events, transfer restrictions and exercise dates. As discussed in Note 1, upon completion of the IPO, the Agreement was terminated and the Company's stock is no longer redeemable by the Company.8. COMMITMENTSLeases The Company is obligated under capital leases for certain furniture and office equipment that expire at various dates through the year 2011. The Company also leases certain office facilities under noncancelable operating leases that expire at various dates through the year 2014 and iscommitted under noncancelable operating leases for the lease of computer equipment and automobiles through the year 2009.F-18 WILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2007, 2006 and 20058. COMMITMENTS (Continued) Future minimum rental payments under capital and noncancelable operating leases are summarized as follows: Capital OperatingFiscal year: 2008 $278,000 $4,060,000 2009 228,000 3,051,000 2010 121,000 2,689,000 2011 48,000 2,437,000 2012 — 1,848,000 Thereafter — 1,846,000 Total future minimum lease payments $675,000 $15,931,000 Amount representing maintenance (160,000) Amount representing interest (at rates ranging from 4.75% to 10.0%) (56,000) Present value of net minimum lease payments under capitalleases 459,000 Less current portion 176,000 $283,000 Rent expense and related charges for common area maintenance for all facility operating leases for 2007, 2006 and 2005 was approximately $3,337,000,$2,957,000 and $2,483,000, respectively.Employee Benefit Plans The Company has a qualified profit sharing plan (the Plan) pursuant to Code Section 401(a) and qualified cash or deferred arrangement pursuant to CodeSection 401(k) covering substantially all employees. Employees may elect to contribute up to 50% of compensation limited to the amount allowed by taxlaws. Company contributions are made solely at the discretion of the Company's Board of Directors. The Company made matching contributions ofapproximately $237,000, $277,000 and $231,000 during fiscal years 2007, 2006 and 2005 respectively. The Company has a discretionary bonus plan for regional managers, division managers and others as determined by the Company president. Bonuses areawarded if certain financial goals are achieved. The financial goals are not stated in the plan; rather they are judgmentally determined each year. In addition,the Board of Directors may declare discretionary bonuses to key employees and all employees are eligible for what the Company refers to as the "hot hand"bonus program, which pays awards for outstanding performance. Bonus expense for fiscal years 2007, 2006 and 2005 totaled approximately $202,000,$2,687,000, and $3,322,000 respectively, of which approximately $202,000 and $2,150,000 is included in accrued liabilities at December 28, 2007 andDecember 29, 2006, respectively.F-19 WILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2007, 2006 and 20058. COMMITMENTS (Continued)Post employment health benefits In May 2006, the Company's board of directors approved providing lifetime health insurance coverage for the Company's chief executive officer and hisspouse as of that date and for the widow of the Company's former chief executive officer, Mrs. Heil, who is also a Company board member. Additionally, theboard approved health insurance coverage for Mrs. Heil's two dependents until they reach the maximum age for dependent coverage under the Company'shealth insurance policy. During fiscal year 2006, the Company recorded general and administrative expense equal to the present value of the expected payments for healthinsurance coverage for Mrs. Heil and her dependents. As of December 28, 2007, $134,000 is included in accrued liabilities in the accompanying consolidatedbalance sheet related to this obligation. The Company also began to amortize, to general and administrative expense, the present value of the expectedpayments for post employment health coverage for the Company's chief executive officer and his spouse over the period from approval of the benefit to theestimated date of retirement. During fiscal year 2007, this chief executive officer communicated his intent to retire and the Company prospectively adjustedthe amortization and as of December 28, 2007 the entire amount related to this executive has been amortized.9. INCOME TAXES The provision (benefit) for income taxes is comprised of: Fiscal Year 2007 2006 2005 Current federal taxes $650,000 $200,000 $— Current state taxes 156,000 219,000 55,000 Deferred federal taxes 570,000 1,282,000 — Deferred state taxes 167,000 320,000 (38,000) Total $1,543,000 $2,021,000 $17,000 The provision for income taxes for fiscal year 2005, due to the lack of federal income taxes resulting from the Company's S Corporation election and dueto state taxes, differs from the amountF-20 WILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2007, 2006 and 20059. INCOME TAXES (Continued)computed by applying the statutory federal income tax rate to income before provision for income taxes. The sources and tax effects of the differences forfiscal year 2007 and 2006 are as follows: 2007 2006 Computed "expected" federal income tax expense $1,253,000 $2,972,000 Permanent difference—federal income tax effect of non-taxablelife insurance proceeds — (765,000)Other permanent differences 81,000 87,000 Current and deferred state income tax expense (benefit), net offederal benefit 217,000 145,000 Tax effect of earnings not subject to federal income tax due to SCorporation election — (1,931,000)Federal and state tax effect of S to C Corporation conversion — 1,543,000 Other (8,000) (30,000) Total $1,543,000 $2,021,000 The tax effects of temporary differences that give rise to significant portions of the net deferred tax liabilities are as follows: December 28, 2007 December 29, 2006 Current deferred tax assets: Accrued litigation judgment $127,000 $2,517,000 Accounts receivable allowance 206,000 268,000 Other accrued liabilities 643,000 882,000 976,000 3,667,000 Current deferred tax liabilities: Deferred revenue (2,978,000) (3,242,000) Litigation receivable — (1,687,000) (2,978,000) (4,929,000) Net current deferred tax assets (liability) $(2,002,000)$(1,262,000) Deferred tax assets, net of current portion: Equipment and leasehold improvement depreciation $162,000 $94,000 Stock options 23,000 — 185,000 94,000 Deferred tax liabilities, net of current portion: Goodwill amortization (580,000) (492,000) Net deferred tax liability, net of current portion $(395,000)$(398,000) F-21 WILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2007, 2006 and 20059. INCOME TAXES (Continued) Management believes it is more likely than not that the Company will realize the benefit of the deferred tax assets existing at December 28, 2007 andDecember 29, 2006.. Further, management believes the existing net deductible temporary differences will reverse during periods in which the Companygenerates net taxable income. There can be no assurance, however, that the Company will generate taxable earnings or any specific level of continuingearnings in the future.10. SEGMENT INFORMATION The Company has three segments: Engineering Services, Public Finance Services and Homeland Security Services. The Engineering Services segmentincludes Willdan, Arroyo Geotechnical, Public Agency Resources and Willdan Resource Solutions. The Engineering Eervices segment performs services fora broad range of public agency clients and offers a full complement of engineering, building and safety, construction management, and municipal planningservices to clients throughout the western United States. The Public Finance Services segment, which consists of MuniFinancial, provides expertise andsupport for the various financing techniques employed by public agencies to finance their operations and infrastructure along with the mandated reportingand other requirements associated with these financings. The Homeland Security Services segment, which consists of American Homeland Solutions,provides homeland security and public safety consulting services to cities, counties and related municipal service agencies. The accounting policies applied to determine the segment information are the same as those described in the summary of significant accounting policies.There were no intersegment sales for any of the fiscal years in the three-year period ended December 28, 2007. Management evaluates the performance ofeach segment based upon income or loss before year-end performance bonuses and income taxes. Certain segment asset information including expendituresfor long-lived assets has not been presented as it is not reported to or reviewed by the chief operating decision maker. In addition, enterprise-wide service linecontract revenue is not included as it is impracticable to report this information for each group of similar services.F-22 WILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2007, 2006 and 200510. SEGMENT INFORMATION (Continued) Financial information with respect to the reportable segments and reconciliation to the amounts reported in the Company's consolidated financialstatements follows: Engineering Services Public FinanceServices HomelandSecurity Services UnallocatedCorporate Intersegment Consolidated Total Fiscal Year 2007: Contract revenue $64,372,000 $12,684,000 $1,742,000 $— $— $78,798,000 Depreciation and Amortization 1,352,000 336,000 59,000 — — 1,747,000 Interest expense (income) (494,000) (26,000) 21,000 — — (499,000) Segment profit before bonuses and income tax expense 2,076,000 1,765,000 (68,000) (86,000) — 3,687,000 Annual bonuses — — — — — — Income tax expense 875,000 727,000 (25,000) (34,000) — 1,543,000 Net income (loss) 1,200,000 1,038,000 (42,000) (52,000)(1) — 2,144,000 Segment assets 26,852,000 10,658,000 1,048,000 29,040,000 (2) (19,372,000) 48,226,000 Fiscal Year 2006: Contract revenue 65,887,000 11,495,000 957,000 — — 78,339,000 Depreciation and amortization 1,215,000 333,000 36,000 — — 1,584,000 Interest expense 732,000 12,000 29,000 — — 773,000 Segment profit (loss) before bonuses and income taxexpense 8,213,000 1,554,000 (322,000) 1,446,000 — 10,891,000 Annual bonuses 1,531,000 337,000 34,000 248,000 — 2,150,000 Income tax expense 2,093,000 460,000 (134,000) (398,000) — 2,021,000 Net income (loss) 4,589,000 757,000 (222,000) 1,596,000 (1) — 6,720,000 Segment assets 36,926,000 10,158,000 480,000 29,639,000 (2) (20,095,000) 57,108,000 Fiscal Year 2005: Contract revenue 56,908,000 10,265,000 90,000 — — 67,263,000 Depreciation and amortization 969,000 283,000 5,000 — — 1,257,000 Interest expense 578,000 40,000 12,000 — — 630,000 Segment profit (loss) before bonuses and income taxexpense 3,583,000 1,118,000 (352,000) (2,779,000) — 1,570,000 Annual bonuses 1,967,000 340,000 20,000 607,000 — 2,934,000 Income tax expense 3,000 1,000 1,000 12,000 — 17,000 Net income (loss) 1,613,000 777,000 (373,000) (3,398,000)(1) — (1,381,000) Segment assets 29,757,000 9,013,000 97,000 13,385,000 (19,455,000) 32,797,000 (1)The following sets forth the amounts included in the net income (loss) that was Unallocated Corporate for fiscal years 2007, 2006 and 2005: 2007 2006 2005 Unallocated net income (loss): Annual bonuses $— $(248,000)$(607,000) Special bonuses — (104,000) (42,000) Salaries and wages, payroll taxes and employee benefits — (366,000) — Life insurance proceeds — 2,250,000 — Post employment health benefits — (162,000) — Stock-based compensation — (38,000) (2,737,000) Income tax (expense) benefit 34,000 398,000 (12,000) Other (86,000) (134,000) — Total $(52,000)$1,596,000 $(3,398,000) Most types of overhead costs incurred by Willdan Group, Inc. are allocated to the Company's segments. However, because management makes operating decisions and assesses performance of theCompany's segments based on financial information before bonuses, the bonuses for Willdan Group, Inc. employees were not allocated to the segments. The stock compensation expense incurred during fiscalyear 2005 recorded in anticipation of the IPO and the income from life insurance proceeds received during fiscal year 2006 were not allocated for a similar reason.F-23 WILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2007, 2006 and 200510. SEGMENT INFORMATION (Continued)(2)The following sets forth the assets that are included in Unallocated Corporate as of December 28, 2007 and December 29, 2006. 2007 2006Assets: Cash and cash equivalents $15,299,000 $20,331,000 Liquid investments 1,300,000 — Prepaid expenses 1,524,000 1,406,000 Intercompany receivables 4,352,000 955,000 Other receivables 69,000 130,000 Equipment and leasehold improvements, net 952,000 1,227,000 Investments in subsidiaries 5,354,000 5,354,000 Other assets 190,000 236,000 Total $29,040,000 $29,639,000 11. OTHER RELATED PARTY TRANSACTIONS Included in subconsultant services expenses in the accompanying consolidated statements of operations are expenses for services provided to theCompany by an affiliate of a member of the Company's board of directors totaling $23,000 for the period during fiscal year 2006 and $68,000 for fiscal year2005 in which this individual served as a board member. Included in other general and administrative expenses in the accompanying consolidated statements of operations are expenses for services provided tothe Company by an affiliate of a former member of the Company's board of directors totaling $32,000 for the period during 2006 and $42,000 for fiscal year2005 in which this individual served as a board member.12. PRO FORMA INCOME TAXES (UNAUDITED) Upon completion of the IPO (as more fully described in Note 1), the Company ceased to qualify as an S corporation. Thus, the Company is taxed atregular corporate rates. For informational purposes, the Company's consolidated statements of operations include pro forma adjustments for income taxes at a40% rate that would have been recorded if the Company were a C Corporation for fiscal years 2006 and 2005. The pro forma tax provision for fiscal year2006 reflects the nontaxability of life insurance proceeds and the pro forma tax provision for fiscal year 2005 reflects the non-deductibility of stock basedcompensation expense recorded in anticipation of the IPO.13. LIFE INSURANCE PROCEEDS On May 15, 2006, the Company's co-founder and chief executive officer, Dan W. Heil, passed away. The Company carried two life insurance policies onMr. Heil totaling $2.3 million in coverage. The $2.3 million was received in fiscal year 2007 and is included in other, net under other income (expense) in theaccompanying consolidated statement of operations for the fiscal year ended December 29, 2006.F-24 WILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2007, 2006 and 200514. CONTINGENCIESClaims and Lawsuits The Company is subject from time to time to various claims and lawsuits, including those alleging professional errors or omissions, that arise in theordinary course of business against firms that operate in the engineering and consulting professions. The Company carries professional liability insurance,subject to certain deductibles and policy limits, for such claims as they arise and may from time to time establish reserves for litigation that is consideredprobable of loss. The Company was involved in a dispute with the City of West Hollywood, California over a project in 2002. This matter concerned a constructionproject in the City of West Hollywood, for the improvement of Santa Monica Boulevard. The project required the reconstruction of approximately three milesof roadway. The city and the general contractor claimed that the design the Company prepared was inadequate for the volume and type of traffic on SantaMonica Boulevard. The city also claimed that the Company failed to control the costs of the project due to contractor claims for extra costs. In the fourth quarter of 2005, following a trial in the Los Angeles County Superior Court, the jury rendered a verdict against the Company and awardeddamages to the city in the amount of $6.3 million, including attorney's fees, interest and costs. The Company's insurance company posted bonds and filed anappeal with respect to this matter. During the appeal process, interest accrued on the outstanding judgment at the rate of 10% per annum. As of December 30,2005, the Company believed that approximately $3.2 million of the damages was covered by our professional liability insurance policy. Therefore, in fiscalyear 2005, we expensed $2.7 million of this judgment, and recorded related interest expense of $0.4 million related to the West Hollywood case. In the third quarter of 2006, the Company obtained a court ruling with respect to an unrelated claim that also arose in fiscal year 2002 awarding theCompany approximately $1.0 million on a claim for indemnity, recovering the settlement amount and interest thereon and attorney fees and costs. At thattime, the Company reflected an additional receivable of approximately $1.0 million from the Company's insurance company because the Company was ableto replenish our insurance coverage by approximately $1.0 million for the 2002 policy year since the Company's insurance carrier had previously paid thesettlement amount. In the Company's consolidated balance sheet as of December 29, 2006, the Company therefore reflected a total liability of $6.9 millionand related receivables of $4.2 from the insurance company. The Company entered into a settlement agreement, effective March 6, 2007, with the City of West Hollywood relating to the Santa Monica Boulevardmatter. Pursuant to the settlement agreement, both parties agreed to a full mutual release of all claims related to the lawsuit and appeal, subject to dismissal ofthe appeal. Neither party admitted any fault or liability related to the claims in the lawsuit. Under the terms of the settlement agreement, the Company agreedto pay $6.2 million in cash to the city. Our insurance company paid $3.2 million of the settlement amount and the Company paid $3 million. The Companyalso agreed to provide an $85,000 credit to the city for future services. The future services are to be provided at the Company's then prevailing rates and canbe chosen in the city's sole discretion from services provided by us to our municipal clients. The city must use the credit before December 31, 2012. As ofDecember 28, 2007, the city has used $21,133, leaving a balance of $63,867.F-25 WILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2007, 2006 and 200514. CONTINGENCIES (Continued) In February 2008, the ruling for the unrelated $1.0 million indemnity claim was appealed by the cross-defendant and overturned by the court. Becausethe ruling was overturned, the Company reversed the receivable the Company recorded in fiscal year 2006 and reflected an expense of $1.0 million in thefourth quarter of fiscal year 2007.Rescission Offer The Company's redeemable common stock issued during fiscal year 2005 may not have been exempt from registration or qualification under federal andstate securities laws and the Company may not have obtained the required registrations or qualifications. Accordingly, the Company made rescission offers tothe holders of these shares during July 2006 as permitted under California securities law. Each of the holders who purchased shares during fiscal year 2005irrevocably rejected the Company's rescission offer. Prior to the rescission offer, management believed there was only a remote likelihood that a rescissionoffer would be accepted by any of the affected stockholders and prior to issuing the fiscal year 2005 consolidated financial statements, all of the holders ofthese shares had rejected the rescission offer, which further substantiated management's belief that the likelihood of rescission was remote. Further,management believes that the 2005 stock offering satisfied the Section 4(2) exemption of the Securities Act of 1933, as amended, based on the limited natureof the offering, the level of knowledge and relationships of the purchasers and the information provided by the Company to the purchasers.15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The tables below reflect selected quarterly information for the fiscal years ended December 28, 2007 and December 29, 2006. Fiscal Three Months Ended March 30, 2007 June 29, 2007 September 28, 2007 December 28, 2007 (in thousands except per share amounts) Contract revenue $19,268 $21,180 $19,687 $18,663 Income (loss) from operations (1,107) 1,688 1,657(3) 284(1)Income tax (benefit) expense (103) 754 778 114 Net income (loss) (250) 1,058 1,053 283 Earnings (loss) per share: basic and diluted $(0.03)$0.15 $0.15 $0.04 Weighted-average shares outstanding: Basic 7,148 7,148 7,150 7,150 Diluted 7,148 7,151 7,161 7,151 F-26 WILLDAN GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Fiscal Years 2007, 2006 and 200515. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (Continued) Fiscal Three Months Ended March 31, 2006 June 30, 2006 September 29, 2006 December 29, 2006 (in thousands except per share amounts) Contract revenue $17,821 $20,272 $20,954 $19,292 Income (loss) from operations 1,013 1,846 2,912(3) 1,273 Income tax (benefit) expense 13 25 41 1,942(4)Net income (loss) 886 3,879(2) 2,699 (744) Earning (loss) per share: basic and diluted $0.19 $0.82 $0.57 $(0.14) Weighted-average shares outstanding: basic and diluted 4,711 4,713 4,713 5,464 Pro forma data Pro forma provision for income taxes 360 662 1,096 478 Pro forma net income (loss) 539 3,242 1,644 720 Pro forma earnings per common share, basic and diluted $0.11 $0.69 $0.35 $0.13 (1)On February 25, 2008, the appeals court set aside the court's favorable ruling for the $1.0 million claim. This subsequent event resulted in theCompany concluding that the $1.0 million receivable was no longer considered to be probable of collection. Accordingly, the Company reversed thereceivable and increased litigation expense in its fiscal year 2007 consolidated financial statements. (2)Net income for the fiscal three months ended June 30, 2006 includes $2.3 million in life insurance proceeds related to the death of our co-founder andformer chief executive officer in May 2006 (as more fully described in Note 13). (3)Income from operations for the fiscal three months ended September 29, 2006 includes a reduction in litigation accrual expense of $1.0 millionrelated to a court ruling awarding the Company approximately $1.0 million on a claim for indemnity in connection with a claim that arose in fiscalyear 2002 (as more fully described in Note 14). (4)The income tax provision for the fiscal three months ended December 29, 2006 includes approximately $1.5 million related to the Company'sconversion from an S Corporation to a C Corporation. Effective upon the first day of trading of the Company's common stock as a result of its IPO, theCompany's S Corporation status was terminated and thereafter the Company is subject to federal and state income taxes as a C Corporation.Approximately $1.5 million of the income tax provision is the effect of recognizing the Company's deferred tax liability using C Corporation federaland state tax rates instead of S Corporation state tax rates. The Company's policy for accounting for income taxes is described in Note 2. TheCompany's presentation of pro forma income tax data is described in Note 12.F-27 EXHIBIT INDEX Exhibit Number Exhibit Description3.1 Articles of Incorporation of Willdan Group, Inc., including amendments thereto(1)3.2 Bylaws of Willdan Group, Inc.(1)4.1 Specimen Stock Certificate for shares of the Registrant's Common Stock(1)4.2 The Company agrees to furnish to the Securities and Exchange Commission upon request a copy of each instrument with respect toissues of long-term debt of Willdan Group, Inc. and its subsidiaries, the authorized principal amount of which does not exceed 10% ofthe consolidated assets of Willdan Group, Inc. and its subsidiaries.10.1 Credit Agreement for $10,000,000 Revolving Line of Credit, dated December 28, 2007, between Willdan Group, Inc. and Wells FargoBank, National Association, relating to the Credit Note in 10.2(5)10.2 Revolving Line of Credit Note for $10,000,000, dated December 28, 2007, by Willdan Group, Inc. in favor of Wells Fargo Bank,National Association(5)10.3 Security Agreement, dated December 28, 2007, between Willdan Group, Inc. and Wells Fargo Bank, National Association, relating to theCredit Note in 10.2(5)10.4 Continuing Security Agreement: Rights to Payment and Inventory, dated December 28, 2007, between Willdan Group, Inc. and WellsFargo Bank, National Association, relating to the Revolving Line of Credit Note in 10.2(5)10.5† Willdan Associates Incentive Bonus Plan, effective May 1, 1996(1)10.6† MuniFinancial 2005 Bonus Plan(1)10.7 Form of Tax Agreement Relating to S Corporation Distributions by the Registrant and its shareholders(1)10.8† Willdan Group, Inc. 2006 Stock Incentive Plan(1)10.9† Form of Incentive Stock Option Agreement(1)10.10† Form of Non-Qualified Stock Option Agreement(1)10.11† Amended and Restated Willdan Group, Inc. 2006 Employee Stock Purchase Plan(6)10.12† Form of Indemnification Agreement between Willdan Group, Inc. and its Directors and Officers(1)10.13 Office Lease by and between Spectrum Waples Street, LLC, a California limited liability company, Spectrum Lambert Plaza, LLC, aCalifornia limited liability company and The Willdan Group of Companies dated October 15, 2004 for the principal office located at2401 East Katella Avenue, Anaheim, California(1)10.14 First Amendment to Lease by and between 2401 Katella, LLC and The Willdan Group of Companies, dated February 27, 2006 for theprincipal office located at 2401 Katella Avenue, Anaheim, California(1)10.15 Second Amendment to Lease by and between 2401 Katella, LLC and The Willdan Group of Companies dated March 6, 2006 for theprincipal office located at 2401 Katella Avenue, Anaheim, California(1)10.16 Warrant Agreement between Willdan Group, Inc. and Wedbush Morgan Securities Inc.(1)10.17† Indemnification Agreement between Willdan Group, Inc. and Linda Heil(1)10.18† Agreement and General Release between Willdan Group, Inc. and Richard Kopecky effective February 20, 2007(2)10.19 Settlement Agreement among the City of West Hollywood, Willdan and Willdan Group, Inc., effective March 6, 2007(3)10.20† Employment Agreement between Willdan Group, Inc. and Thomas D. Brisbin dated April 2, 2007(7)10.21† Employment Agreement between Willdan Group, Inc. and Mallory McCamant dated July 23, 2007(8)10.22† Employment Agreement between Willdan Group, Inc. and Kimberly D. Gant dated July 23, 2007(8)14.1 Code of Ethical Conduct of Willdan Group, Inc.(6) 21.1 Subsidiaries of Willdan Group, Inc.(1)23.1 Consent of Independent Registered Public Accounting Firm*24.1 Power of Attorney (included on signature page hereto)31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adoptedpursuant to § 302 of the Sarbanes-Oxley Act of 2002*31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as adoptedpursuant to § 302 of the Sarbanes-Oxley Act of 2002*32.1 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to § 906 of theSarbanes-Oxley Act of 2002**Filed herewith. †Indicates a management contract or compensating plan or arrangement. (1)Incorporated by reference to Willdan Group, Inc.'s Registration Statement on Form S-1, filed with the Securities and Exchange Commission onAugust 9, 2006, as amended (File No. 333-136444). (2)Incorporated by reference to Willdan Group, Inc.'s Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 22,2007. (3)Incorporated by reference to Willdan Group, Inc.'s Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 12,2007. (4)Incorporated by reference to Willdan Group, Inc.'s Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 27,2007. (5)Incorporated by reference to Willdan Group, Inc.'s Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 2,2008. (6)Incorporated by reference to Willdan Group, Inc.'s Current Report on Form 10-K, filed with the Securities and Exchange Commission on March 27,2007. (7)Incorporated by reference to Willdan Group, Inc.'s Current Report on Form 8-K, filed with the Securities and Exchange Commission on April 3, 2007. (8)Incorporated by reference to Willdan Group, Inc.'s Current Report on Form 8-K, filed with the Securities and Exchange Commission on July 26, 2007. QuickLinksTABLE OF CONTENTSPART IITEM 1. BUSINESSITEM 1A. RISK FACTORSRisks Relating to Our Business and IndustryITEM 1B. UNRESOLVED STAFF COMMENTSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIESITEM 6. SELECTED FINANCIAL DATAITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAIndex to Consolidated Financial StatementsITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A. CONTROLS AND PROCEDURESITEM 9B. OTHER INFORMATIONPART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERSITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESPART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULESSIGNATURES AND CERTIFICATIONSREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWILLDAN GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETSWILLDAN GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONSWILLDAN GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF REDEEMABLE COMMON STOCK AND STOCKHOLDERS' EQUITYWILLDAN GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWSWILLDAN GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fiscal Years 2007, 2006 and 20052006 STOCK INCENTIVE PLANAMENDED AND RESTATED 2006 EMPLOYEE STOCK PURCHASE PLANEXHIBIT INDEX QuickLinks -- Click here to rapidly navigate through this document Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of DirectorsWilldan Group, Inc.: We consent to the incorporation by reference in the registration statement (No. 333-139127) on Form S-8 of Willdan Group, Inc. of our report datedMarch 25, 2008, with respect to the consolidated balance sheets of Willdan Group, Inc. as of December 28, 2007 and December 29, 2006, and the relatedconsolidated statements of operations, redeemable common stock and stockholders' equity, and cash flows for each of the fiscal years in the three-year periodended December 28, 2007, which report appears in the December 28, 2007 annual report on Form 10-K of Willdan Group, Inc. /s/ KPMG LLPLos Angeles, CaliforniaMarch 25, 2008 QuickLinksExhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM QuickLinks -- Click here to rapidly navigate through this document Exhibit 31.1 SECTION 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Thomas D. Brisbin, Chief Executive Officer of Willdan Group, Inc., certify that:1.I have reviewed this annual report on Form 10-K of Willdan Group, Inc.; 2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periodcovered by this annual report; 3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all materialrespects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f)) for the registrant and have: a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which this annual report is being prepared; b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed underour supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generally accepted accounting principles; c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusionsabout the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based onsuch evaluation; and d)Disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during theregistrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, oris reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably 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 internalcontrol over financial reporting.Date: March 26, 2008 By:/s/ THOMAS D. BRISBIN Thomas D. BrisbinPresident and Chief Executive Officer QuickLinksExhibit 31.1SECTION 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER QuickLinks -- Click here to rapidly navigate through this document Exhibit 31.2 SECTION 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Kimberly D. Gant, Chief Financial Officer of Willdan Group, Inc., certify that:1.I have reviewed this annual report on Form 10-K of Willdan Group, Inc.; 2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periodcovered by this annual report; 3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all materialrespects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f)) for the registrant and have: a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which this annual report is being prepared; b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed underour supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generally accepted accounting principles; c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusionsabout the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based onsuch evaluation; and d)Disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during theregistrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, oris reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably 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 internalcontrol over financial reporting.Date: March 26, 2008 By:/s/ KIMBERLY D. GANT Kimberly D. GantChief Financial Officer and Senior Vice President QuickLinksExhibit 31.2SECTION 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER QuickLinks -- Click here to rapidly navigate through this document Exhibit 32.1 Certification of Chief Financial Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350,as Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of 2002 In connection with the Annual Report on Form 10-K of Willdan Group, Inc. (the "Company") for the annual period ended December 28, 2007, as filedwith the Securities and Exchange Commission on the date hereof (the "Report"), Thomas D. Brisbin, as President and Chief Executive Officer of theCompany, and Kimberly D. Gant, as Chief Financial Officer and Senior Vice President of the Company, each hereby certifies, pursuant to 18 U.S.C. § 1350, asadopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his or her knowledge:(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany. By:/s/ THOMAS D. BRISBIN Thomas D. BrisbinPresident and Chief Executive OfficerMarch 26, 2008 By:/s/ KIMBERLY D. GANT Kimberly D. GantChief Financial Officer and Senior Vice PresidentMarch 26, 2008 This certification accompanies the Report pursuant to § 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by theSarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of § 18 of the Securities Exchange Act of 1934, as amended. A signed original ofthis written statement required by § 906 has been provided to the Company and will be retained by the Company and furnished to the Securities andExchange Commission or its staff upon request. QuickLinksExhibit 32.1Certification of Chief Financial Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of2002
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