In 1997, the Office of Inspector General began and annual effort to identify whay it considers to be the most significant management and performance challenges facing the Department of Energy. Now codified as prt of the Reports Consolidation Act of 2000, this effort highlights those programs and operations that are, in our judgment, inherently the most difficult to manage and those with demonstrated performance problems. We reach these judgments based on an assessment of the agency's progress in addressing previously identified challenges and relevant work performed by the Office of Inspector General. We also consider emerging issues facing the Department. the process is continually refined, and in 2004 we began to categorize management challenges as either mission-related or internal control oriented. We also developed as watch list that reflects operational or programmatic functions that, in our view, need to be closely monitored by Department management.