FRIEDE GOLDMAN HALTER INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2001

OR

[_] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 0-22595

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Friede Goldman Halter, Inc.
(as Debtor in Possession)
(Exact name of registrant as specified in its charter)

Mississippi 72-1362492
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

13085 Seaway Road 39503
Gulfport, Mississippi (Zip Code)
(Address of principal executive
offices)

(228) 896-0029
(Registrant's telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act: Common Stock,
$.01, par value

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes. [X] No. [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S) 229.405 under the Securities Exchange Act of 1934)
is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. Yes. [X] No. [_]

As of March 28, 2002 there were 48,710,579 shares of Common Stock, $.01 par
value, of Friede Goldman Halter, Inc. issued and outstanding, 37,539,840 of
which shares having an aggregate market value of approximately $2.3 million,
were held by non-affiliates of the registrant (affiliates being, for these
purposes only, directors, executive officers and holders of more than 5% of
the registrant's Common Stock).

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TABLE OF CONTENTS

PART I

Page
----

Item 1. Business...................................................... 4
Risk Factors.................................................. 21
Item 2. Properties.................................................... 25
Item 3. Legal Proceedings............................................. 27
Item 4. Submission of Matters to a Vote of Security Holders........... 27
Executive Officers of the Registrant.......................... 28

PART II

Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters........................................... 29
Item 6. Selected Financial Data....................................... 30
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 32
Item 7a. Quantitative and Qualitative Disclosures about Market Risk.... 47
Item 8. Financial Statements and Supplementary Data................... 47
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 47

PART III

Item 10. Directors and Executive Officers of the Registrant............ 48
Item 11. Executive Compensation........................................ 50
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................... 54
Item 13. Certain Relationships and Related Transactions................ 55

PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-
K............................................................. 56

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FORWARD-LOOKING STATEMENTS

This Report on Form 10-K contains "forward-looking statements" within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended. All
statements, other than statements of historical facts, included in this Form
10-K, are forward-looking statements. Such forward-looking statements are
subject to certain risks, uncertainties and assumptions, including (i) risks
related to our ability to meet our financial obligations when due and generate
sufficient cash flow from operating or financing activities to sustain
projected operating levels, and (ii) risks related to uncertainties caused by
our Chapter 11 filing, (iii) risks of reduced levels of demand for our
products and services resulting from reduced levels of capital expenditures of
oil and gas companies relating to offshore drilling and exploration activity
and reduced levels of capital expenditures of offshore drilling contractors,
which levels of capital expenditures may be affected by prevailing oil and
natural gas prices, expectations about future oil and natural gas prices, the
cost of exploring for, producing and delivering oil and gas, the sale and
expiration dates of offshore leases in the United States and overseas, the
discovery rate of new oil and gas reserves in offshore areas, local and
international political and economic conditions, the ability of oil and gas
companies to access or generate capital sufficient to fund capital
expenditures for offshore exploration, development and production activities,
and other factors, (iv) risks related to expansion of operations, either at
our shipyards or one or more other locations, (v) operating risks relating to
conversion, retrofit and repair of drilling rigs, new construction of drilling
rigs and production units and the design of new drilling rigs, new
construction and repair of vessels and the design of new vessels (vi) contract
bidding risks, (vii) risks related to dependence on and performance by
significant customers, (viii) risks related to the failure to realize the
level of estimated backlog due to determinations by one or more customers to
change or terminate all or portions of projects included in such estimation of
backlog, (ix) risks related to regulatory and environmental matters, (x) risks
related to future government funding for certain vessel contracts and
prospects, (xi) risks related to the completion of contracts to construct
offshore drilling rigs and vessels at costs not in excess of those currently
estimated and prior to the contractual delivery dates, (xii) risks of untimely
performance by companies which provide services to us as subcontractors under
construction contracts, and (xiii) risks related to our ability to retain a
highly skilled and motivated workforce and attract additional personnel to
perform under our existing and anticipated contracts. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions
prove incorrect, actual results may vary materially from those anticipated,
estimated or projected. Although we believe that the expectations reflected in
such forward-looking statements are reasonable, no assurance can be given that
such expectations will prove to have been correct.

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ITEM 1. Business

General

Friede Goldman Halter, Inc. ("FGH") is a world leader in the design and
construction of equipment for the maritime and offshore energy industries.
Formerly Friede Goldman International, Inc. ("FGI"), our name was changed to
FGH effective with the merger with Halter Marine Group, Inc. ("HMG") on
November 3, 1999. FGH is a holding company which conducts substantially all of
its operations through its subsidiaries.

We incurred substantial operating losses during 2000 and the first quarter
of 2001 and had a working capital deficit of $140.4 million and $343.9 million
at December 31, 2000 and March 31, 2001, respectively. On April 13, 2001, we
received a Notice of Continuing Events of Default and Demand for Payment (the
"Notice") from Foothill Capital Corporation, as agent for itself and another
lender under the Restated Credit Agreement, which demanded the immediate
payment of $85.7 million plus interest and various other costs, within five
days of the Notice. Further, we did not pay the $4.2 million interest payment
due on March 15, 2001, on our outstanding 4 1/2% convertible subordinated
notes (the "Subordinated Notes") in the principal amount of $185.0 million
which resulted in the entire principal amount becoming immediately callable.
Our inability to meet the obligations under the Restated Credit Agreement and
the Subordinated Notes, the working capital deficit, and the expectation of
continued operating losses in the short term generated substantial uncertainty
regarding our ability to meet our obligations in the ordinary course of
business. As a result, on April 19 and 20, 2001, we, including 31 of our
subsidiaries, elected to file separate petitions for relief under Chapter 11
of the United States Bankruptcy Code which allows for the reorganization of
our debts. The petitions were filed in the U.S. Bankruptcy Court for the
Southern District of Mississippi and are being jointly administered under Case
No. 01-52173 SEG. Since the date of the petition, we have maintained
possession of our property, and have continued to remain in control of our
ongoing business affairs as a Debtor in Possession. We also received approval
from the bankruptcy court to pay or otherwise honor certain of our pre-
petition obligations, including the authority to pay employee wages and to
maintain employee benefit programs. We are continuing operations in Chapter
11. The financial statements do not include all adjustments that might result
from uncertainties arising as a result of the implementation of our plan of
reorganization.

Under Chapter 11, certain claims against us in existence prior to the
filing of the petitions for relief under the federal bankruptcy laws are
stayed while we continue business operations as Debtor in Possession. These
claims are reflected in the December 31, 2001 balance sheet as "liabilities
subject to compromise." Additional claims (liabilities subject to compromise)
have arisen subsequent to the filing date resulting from rejection of
executory contracts, including leases, and from the determination by the court
(or agreed to by parties in interest) of allowed claims for contingencies and
other disputed amounts. Claims secured against our assets ("secured claims")
also are stayed, although the holders of such claims have the right to move
the court for relief from the stay. Secured claims are secured primarily by
liens on our property, plant, and equipment.

We have retained the investment banking firm Houlihan, Lokey, Howard &
Zukin and restructuring advisor Glass and Associates to assist in the
preparation of a plan of reorganization. These advisors are assisting us and
our Board of Directors and the Official Unsecured Creditors' Committee ("UCC")
in evaluating all possible alternatives including, but not limited to, the
selling of certain of our business unit(s), infusion of capital, debt
restructuring and any combinations of these options.

Plan of Reorganization and Disposition of Assets

On March 22, 2002, we filed a Plan of Reorganization with the United States
Bankruptcy Court, which is subject to the approval of the Court. The Plan of
Reorganization includes the reorganization of substantially all of our
Offshore and Vessels segments and the disposition of our Engineered

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Products segment as well as the disposition through sale, or otherwise, of our
other subsidiaries and assets as described below. In connection with the
development of the Plan of Reorganization, we reviewed our expected future
cash flows related to our operating segments to determine the recoverability
of the carrying value of our long-lived assets, including goodwill. This
review indicated an impairment related to the carrying value of goodwill;
accordingly, we recorded an impairment charge of $201.6 million for the year
ended December 31, 2001.

The Plan of Reorganization is subject to the review and approval of the
United States Bankruptcy Court. There can be no assurance that the Plan will
be approved or that the Company will continue to operate in some form. It is
not possible to assess the outcome of the Company's bankruptcy proceeding or
whether the Company will operate in accordance with the Plan, if approved. The
outcome of these uncertainties raises substantial doubt about the Company's
ability to continue as a going concern. The consolidated financial statements
do not reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of these uncertainties.

Disposition of Engineered Products Segment

In May 2001, we completed the sale of our French subsidiaries, Brissoneau
et Lotz Marine, S.A., in Nantes, France, and BOPP S.A., in Brest, France to
Hydralift A.S.A. of Kristiansand, Norway for cash consideration of $33.5
million, before expenses. Pursuant to an order of the Bankruptcy Court, we
agreed to escrow funds from the sale. Disbursement of such funds is subject to
the review and approval of legal counsel representing the Official Committee
of Unsecured Creditors and/or an order of the Bankruptcy Court. The funds held
in escrow are presented as restricted cash and cash equivalents in the
accompanying balance sheet as of December 31, 2001. We recorded a gain of
approximately $16.0 million related to this transaction in the second quarter
of 2001 and have reflected this gain as a component of loss on disposal of our
Engineered Products segment for the year ended December 31, 2001.

In the fourth quarter of 2001, we received bids for Amclyde Engineered
Products ("Amclyde") to complete the disposition of our Engineered Products
segment. Pursuant to the terms of an Asset Sale Agreement dated February 15,
2002, we will receive $36.0 million in cash consideration for the sale of
Amclyde subject to certain net working capital adjustments. The ultimate
disposition is subject to possible competitive bids and the approval of the
Bankruptcy Court. We recorded a loss of approximately $42.0 million related to
this transaction in the second quarter of 2001 and have reflected this loss as
a component of loss on disposal of our Engineered Products segment for the
year ended December 31, 2001.

In addition, we have reported the operating results of our Engineered
Products segment separately in our consolidated statements of operations as a
component of discontinued operations. For the years ended December 31, 2001,
2000 and 1999 we recorded income from discontinued operations of approximately
$7.4 million, $11.0 million and $28,000, respectively. At December 31, 2001,
our financial statements include current assets of $17.5 million and current
liabilities of $6.4 million related to the Engineered Product segment.
Property, plant and equipment held for disposition include $6.3 million
related to the Engineered Products Segment.

Sale of the Assets of Friede Goldman Newfoundland, Limited

In connection with our reorganization plan, we entered into an agreement on
March 27, 2002 to sell the assets of our wholly owned subsidiary, Friede
Goldman Newfoundland Limited, ("FGN"). Under the sale agreement, we will
receive approximately $5.0 million in cash consideration for FGN which
represents primarily re-payment of intercompany debt. In addition, the
Province of Newfoundland has agreed to waive certain liquidated damages
related to noncompliance with minimum employment

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levels at our Canadian shipyards during 1999 and 2000. In the fourth quarter
of 2001, we wrote down the assets of this subsidiary to their net realizable
value and recorded a loss of approximately $4.9 million. The property, plant
and equipment of FGN is included in property, plant and equipment including
goodwill held for disposition at December 31, 2001.

Disposition of FGO East Facility

As of December 31, 2001, we had approximately $19.9 million in outstanding
principal related to our bonds that are guaranteed by the U. S. Maritime
Administration ("MARAD"). The bonds were issued in December 1997, under Title
XI, to partially finance construction of our FGO East Facility. Our plan of
reorganization filed on March 22, 2002 contemplates abandoning this facility
to MARAD in full satisfaction of their claims. As a result, we recorded a loss
on assets held for disposition of approximately $17.1 million in the fourth
quarter of 2001 which represents the excess of the carrying value of our FGO
East Facility's fixed assets over the outstanding principal amount of the
MARAD bonds. The property, plant and equipment of the FGO East Facility is
included in property, plant and equipment including goodwill held for
disposition at December 31, 2001.

Sale of Friede & Goldman, Ltd.

In an Asset Purchase Agreement entered into on March 14, 2002, we agreed to
sell substantially all the assets of Friede & Goldman, Ltd. ("FGL") for cash
consideration of approximately $8.0 million subject to certain net working
capital adjustments. The ultimate disposition is subject to possible
competitive bids and the approval of the Bankruptcy Court. We anticipate that
we will record a gain related to this transaction when it is consummated. The
property, plant and equipment of FGL is included in property, plant and
equipment including goodwill held for disposition at December 31, 2001.

Sale of Vessel Repair Operation

During August 2000, we sold certain of our shipyards engaged primarily in
the repair of marine vessels to Bollinger Shipyards, Inc. ("BSI") for
approximately $80.0 million subject to adjustment for the working capital of
the shipyards at the transaction date. Subsequent arbitration proceedings
regarding the working capital calculation resulted in a liability due to BSI
of $8.2 million. The working capital portion of the transaction escrow ($4.7
million) was distributed to BSI in August 2001. The remaining liability is
included in liabilities subject to compromise in the accompanying balance
sheet at December 31, 2001. There was no gain or loss recognized on this sale.

Sale of Yacht Operation

During April 2000, we completed the sale of our Trinity Yachts division to
a group led by John Dane III, our former chief operating officer and former
board member. The division was sold for $5.7 million in an all-cash
transaction. There was no gain or loss recognized on this sale.

Industry Conditions

The level of demand for our services is affected by the level of demand for
the services of offshore drilling contractors, including the demand for
specific types of offshore drilling rigs having required drilling capabilities
or technical specifications. This, in turn, is dependent upon the condition of
the oil and gas industry and, in particular, the level of capital expenditures
of oil and gas companies with respect to offshore drilling activities and the
ability of oil and gas companies to access or generate capital sufficient to
fund capital expenditures for offshore exploration, development, and
production activities. These capital expenditures are influenced by prevailing
oil and natural gas prices, expectations about future prices, the level of
activity in offshore oil and gas exploration, development and production, the
cost of exploring for, producing and delivering oil and gas, the sale and
expiration dates of offshore leases in the United States and overseas, the
discovery rate of new oil and gas

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reserves in offshore areas, local and international political and economic
conditions, and the ability of oil and gas companies to access or generate
capital sufficient to fund capital expenditures for offshore exploration,
development and production activities.

During 2001, the demand for our services related to the construction,
conversion and repair of offshore drilling rigs and construction of offshore
service vessels was weak due to declines in oil and natural gas prices, the
general weakening in the domestic and international economy and uncertainties
related to our Chapter 11 filing. The price for oil generally remained above
$25 per barrel in 2001; however, natural gas prices declined dramatically from
a high on the spot market of almost $10/mcf to around $2/mcf at the end of the
year. Natural gas prices began to weaken during June 2001 as a result of
increasing inventory levels. Natural gas prices experienced further declines
as warmer than normal weather and economic slowdowns in the U.S. and
internationally reduced demands for natural gas. These economic events caused
exploration and production companies in the U.S. Gulf of Mexico to limit their
capital investments and contributed to a collapse in domestic drilling
activity during the second half of 2001. The U.S. Gulf of Mexico is the
primary market for our services related to the conversion and repair of
offshore drilling rigs and the construction of offshore service vessels. As
the demand for offshore drilling rigs in the Gulf of Mexico softened, our
operating results were negatively impacted because of our dependence on
customers that operate drilling rigs and provide other offshore energy
services in this market.

Our business, including the types of projects we undertake, will also be
affected by other factors affecting offshore drilling contractors, including
such factors as: (i) the condition and drilling capabilities of the existing
offshore drilling rigs operated by offshore drilling contractors, (ii) the
relative costs of building new offshore drilling rigs with advanced
capabilities versus the costs of retrofitting or converting existing rigs to
provide similar capabilities and (iii) new competition from offshore operator
owned construction yards.

Segments

We conduct our operations in three primary segments: Offshore, Vessels, and
Engineered Products. With the sale of the BLM Companies in May 2001 and the
expected sale of Amclyde in the second quarter of 2002, we will no longer have
an Engineered Products segment. In addition, we will no longer provide design
and engineering services of offshore drilling and production units with the
expected sale of Friede & Goldman, Ltd.

Offshore Segment

Services provided by our Offshore segment include the conversion, retrofit
and repair of existing offshore drilling rigs and the design and construction
of new offshore drilling rigs and other vessels and structures employed in the
offshore industry. Our Offshore segment customers consist primarily of
drilling contractors that drill offshore exploratory and development wells for
oil and gas companies throughout the world, particularly in the Gulf of
Mexico, the North Sea, eastern Canada, West Africa, South America, other
offshore areas of the world, and other parties who intend to lease newly
constructed rigs to drilling contractors.

Vessels Segment

Our Vessels segment is one of the largest builders of small to medium-sized
ocean-going vessels in the United States. Services provided by the Vessels
segment include the design, new construction and conversion of ocean-going
vessels including offshore service vessels ("OSVs"), cargo ships, double hull
tank barges, oceanographic research and survey ships, high speed patrol boats,
ferries, tug boats, tow boats and all types and sizes of barges. Customers of
the Vessels segment consist of offshore energy service companies, marine
transportation companies, domestic and foreign governments and other
commercial enterprises.

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Engineered Products Segment

Our Engineered Products segment services include the design and manufacture
of marine cranes, mooring systems, deck equipment, jacking systems, specialty
mechanical systems, and a comprehensive aftermarket repair and retrofitting
operation. The primary customers of our Engineered Products segment, in
addition to the customers of our Offshore and Vessels segments, include
offshore construction contractors, shipyards, commercial cruise-liner
operators, general merchant marine, the fishing industry, on-land general
construction contractors and the U.S. Government.

Overview of Products and Services

Offshore Segment

Primary customers of our Offshore segment are drilling contractors with
operations offshore in the Gulf of Mexico, the North Sea, West Africa, eastern
Canada and South America and other offshore areas of the world. These drilling
contractors generally own and operate offshore drilling rigs and provide
drilling services to oil and gas companies. In addition, we have contracted
for the construction of rigs with customers who do not operate the equipment
but intend to charter the rigs to drilling contractors.

Several factors determine the type of rig most suitable for a particular
project, the more significant of which are the marine environment, water depth
and seabed conditions at the proposed drilling location, whether the drilling
is to be done over a production platform or other fixed structure, the
intended well depth, and variable deck load and well control requirements. A
brief description of the types of offshore drilling rigs and production units
currently serviced by our Offshore segment is set forth below.

Semi-submersibles. Semi-submersible rigs consist of an upper working and
living deck resting on vertical columns connected to lower hull members. Such
rigs operate in a "semi-submerged" position, remaining afloat, in a position
which places the water-line approximately half way between the top of the
lower hulls and bottom of the deck. Such rigs are typically anchored in
position to remain stable for drilling in the semi-submerged floating
position.

There have been five generations of semi-submersible drilling rigs, with
each successive generation incorporating improvements that enable the rigs to
drill more efficiently and in increasingly harsh marine environments. Fourth
generation semi-submersibles are typically capable of operating in water
depths of up to 5,000 feet and, in some cases, greater depths. Fifth
generation semi-submersibles are the newest generation of rigs in operation
and are capable of operating in water depths of up to 10,000 feet. Certain
fourth and fifth generation semi-submersibles are equipped with computer-
controlled thrusters to allow for dynamic positioning, which allows the rig to
remain on location over a drill site in deep waters without the use of anchors
and mooring lines.

A major portion of our work to date has involved the retrofit, repair and
conversion of earlier generation semi-submersibles, which generally operate in
maximum water depths of between 1,000 to 2,000 feet, into deepwater semi-
submersibles. The design of many of these earlier generation semi-submersible
rigs, including long fatigue-life and advantageous stress characteristics,
together with increasing demand for deepwater drilling capabilities have made
them well-suited for retrofitting.

Jackups. Jackup rigs are mobile, self-elevating drilling platforms equipped
with legs that are lowered to the ocean floor until a foundation is
established to support the drilling platform. The rig hull includes the
drilling rig, jacking system, crew quarters, loading and unloading facilities,
storage areas for bulk and liquid materials, heliport and other related
equipment. Jackups are used extensively for drilling in water depths from 20
feet to 500 feet. Some jackup rigs have a lower hull (mat) attached to the
bottom of the rig legs, while others have independent legs.

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Jackup rigs can be generally characterized by their design as either slot
jackups or cantilevered jackups. Slot jackups are generally of an older
vintage and are configured for drilling operations to take place through a
slot at the aft of the hull. A slot design is generally appropriate for
drilling exploratory wells in the absence of any existing permanent structure,
such as a production platform. A cantilevered jackup can extend its drill
floor and derrick and either drill exploratory wells or drill over an
existing, fixed structure, thereby permitting the rig to drill new wells or
work over existing wells through such a structure. We have converted many
slot-design rigs into cantilever configurations.

Drillships. Drillships, which typically have a self-propelled ship-shape
hull, are positioned over a drill site through the use of either a mooring
system or a computer-controlled dynamic positioning system similar to those
used on certain fourth- and fifth- generation semi-submersible rigs.
Drillships are capable of operating in water depths ranging from 200 feet to
10,000 feet.

Floating Production Facilities. A floating production facility (FPF)
consists of a ship or semi-submersible vessel upon which production equipment
is mounted. In many cases, the hull is a converted tanker (often referred to
as a floating, production, storage and offloading, or FPSO, unit). In
addition, semi-submersible drilling units have been converted into floating
production units. In a few cases, a new hull has been purpose-built as an FPF.
For harsh-weather locations, FPFs are designed with a mooring system that
provides weathervaning capability so that the FPF can be rotated on location
to minimize the effects of wave, wind and current actions. The production
risers in these FPFs are connected to the hull through a swivel system that
also accommodates the mooring system. The hull of an FPF is typically used for
on-board oil storage, which is an important feature for remote locations where
export pipelines are not available and fixed oil storage availability is
limited or nonexistent.

Design and Engineering Services. Through our FGL subsidiary, we perform
design and engineering of offshore drilling and production units, including
jackups, semi-submersibles, drillships and floating production, storage and
offloading vessels. FGL has a long history of successful designs with 50 F&G
Ltd. designed semi-submersible drilling, pipelaying, and accommodation units
in service worldwide, and over 30 jackup drilling units of FGL design
operating worldwide.

Vessels Segment

Primary customers of our Vessels segment are offshore energy service
companies, marine transportation companies, domestic and foreign governments
and other commercial enterprises. Services provided by the Vessels segment
include the design, new construction, and conversion of ocean-going vessels
including OSVs for energy service companies, cargo ships, oceanographic
research and survey ships, high speed patrol boats and ferries for domestic
and foreign governments, and double-hull tank barges; tugboats, towboats and
other types of barges for other commercial enterprises. A brief description of
the products offered by our Vessels segment follows.

Offshore Service Vessels. We build OSVs including supply boats, anchor
handling tug supply boats and anchor handling tugs which serve oil and gas
drilling and production facilities and support offshore construction and
maintenance work. Our OSVs range from 200 feet to 300 feet in length and
generally range in price from $7.0 million to $50.0 million. In addition to
transporting deck cargo, such as pipe or drummed materials, supply boats
transport liquid mud, potable water, diesel fuel, dry bulk cement and dry bulk
mud. Supply boats we build range from standard supply boats to multi-purpose
sophisticated ships with high horsepower and bollard pull, automated controls,
dynamic positioning, controllable pitch propellers, articulated rudders, kort
nozzles and any type of auxiliary, deck or towing equipment. Anchor handling
tugs and anchor handling tug supply boats constitute a separate class of
offshore support vessels. These vessels have more powerful engines and deck
mounted winches and are capable of towing and positioning mobile offshore rigs
and their anchors as well as providing supply vessel services.

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Tugs and Ocean-going Barges. We build a variety of ocean-going tugs and
barges for the energy marine transportation market, primarily ocean-going
double-hull tank barges. Contract prices for such tug-barge combinations range
from $7.0 million to $35.0 million. These barges are primarily used by
operators to carry petroleum products; but also carry dry bulk cargoes such as
grain, cement, iron ore, and coal; and general cargoes such as containers and
trailers. They range from 400 feet to 600 feet in length with as many cargo
tanks, decks and support systems as necessary.

Oceanographic Research and Survey Ships, High Speed Patrol Boats and
Ferries. The largest customer of the Vessels segment has historically been the
U.S. Government, for which we construct several types of vessels, including
logistics craft, oceanographic survey and research ships and patrol boats.
Oceanographic survey and research ships range in length from 200 feet to 350
feet and range in price from $40.0 million to $70.0 million. In addition to
the U. S. Government, we build vessels for foreign governments, primarily fast
patrol craft. We have also built passenger/vehicle ferries for governmental
operators on all three U.S. Coasts. These vessels range in length from 90 feet
to 400 feet and range in price from $1.0 million to $75.0 million.

Other Commercial Vessels. We build several other types of vessels for the
commercial marine market, including tugboats, inland tow boats, inland barges
and ocean-going cargo ships. Tug boats are used for towing and pushing, port
management operations, shipping, piloting, fire fighting and salvage. Tug
boats are built with two or three engines, standard propellers, controllable
pitch propellers, azimuthing Z-drives, cycloidal propulsion, and with or
without steerable or fixed nozzles. Inland tow boats are used by waterway
operators to push inland barges. We build a full line of tow or push boats.
Tug and tow boats range from 70 feet to 120 feet in length and generally range
in price from $1.5 million to $7.0 million. Inland barges are smaller and
simpler than ocean-going barges and are employed on the Inland River system.

Our cargo ship production includes a variety of sizes and types of vessels
up to about 600 feet in length for RoRo, tankship, and bulk service. Contract
prices for such ships range from approximately $35.0 million to $100.0
million.

Engineered Products Segment

Primary customers of our Engineered Products segment, in addition to the
customers of our Offshore and Vessels segments, include offshore construction
contractors, shipyards, commercial cruise-liner ship-owners, general merchant
marine operators, the fishing industry, on-land general construction
contractors and the U.S. Government. The Engineered Products segment services
include the design and manufacture of the world's largest cranes, mooring
systems, marine deck equipment, jacking systems, specialty mechanical systems,
and a comprehensive aftermarket repair and retrofitting operation.

Cranes, Mooring Systems, Drilling and Marine Deck Equipment.

AmClyde represents the following brand names: AmClyde (marine cranes,
shipyard gantry cranes, stevedoring cranes, stiffleg derricks, mooring
systems, winches, windlasses and specialty mechanical systems; Unit Mariner
(pedestal cranes); Lucker (linear winches and jacking systems); Hepburn
(winches and mooring systems); Fritz Culver (winches, deck equipment and
related machinery); McElroy (winches and deck equipment); Norson Engineering
(pipelay and cable lay equipment and systems); Sauerman (material handling
machinery, bucket and components); and J & B (drilling rig machinery and
related equipment).

Prior to its sale in May 2001, Friede Goldman France was a holding company
with two operating subsidiaries: Brissoneau & Lotz Marine S.A. ("BLM") and
BOPP S.A. ("BOPP"). These entities are collectively referred to herein as the
"BLM Companies." The BLM Companies represented the

10

following brand names: BLM (deck equipment, including mooring, anchoring and
cargo handling equipment such as deck cranes, provision cranes and hose
handling cranes for general marine and merchant vessels); BLM Offshore (rack
and pinion jacking systems used on offshore drilling jack-up rigs, mooring
systems used on semi-submersible drilling rigs, and pedestal cranes used on
drilling rigs), and BOPP (fishing winches for tuna seiners and related
equipment). BOPP also included the brand name Kerdranvant (steering gear for
marine vessels).

Drilling equipment typically consists of items such as derricks, rotary
tables, top drive units, blow out preventers, pipe handling equipment and mud
pumps required to conduct drilling operations. Marine deck equipment typically
consists of mooring, anchoring, cargo handling equipment, pedestal cranes,
skidding equipment and rig jacking equipment (on jackup rigs). In connection
with most major retrofit, conversion or new build projects, the owner of the
drilling unit contracts directly with the suppliers of drilling and marine
deck equipment for the purchase of such equipment for the rig. Typically such
equipment will be installed by the shipyard, and is often referred to as Owner
Furnished Equipment or "OFE." Our Engineered Products segment has the
capability to supply a wide variety of marine deck equipment to its offshore
drilling unit customers and to participate in the market for the marine deck
equipment on drilling units being modified or constructed by other shipyards.
The combined companies of our Engineered Products segment are also involved in
the design and manufacturing of marine equipment for marine shipyards
throughout the world (for fitting on cruise liners, bulk carriers, cargo
vessels, tankers and LNG carriers) and are the leading provider of large
marine cranes for the world's offshore construction contractors.

After-Market Sales and Service. The Engineered Products segment also sells
parts and provides service to support its products once they are delivered. It
has a service team who performs repair services worldwide and it maintains an
inventory of spare parts to support its products.

Description of Operations

Offshore Segment

Operations of our Offshore segment during 2001 consisted of several
conversion, retrofit and repair projects for offshore drilling contractors as
well as work on the completion of one new construction semi-submersible
offshore drilling unit and the continuing new construction of three semi-
submersible offshore drilling units. Significant conversion or retrofit
projects generally take eight to fourteen months to complete, whereas certain
repair projects may require only one to three months to complete. New rig
construction projects can require from 18 to 30 months to complete.

New Construction and Completion. Our FGO East yard was designed
specifically for the efficient construction and completion of offshore
drilling rigs. Moreover, the combined capacity of our FGO East yard and our
FGO West yard allows us to work on new build completion and construction
projects without any significant loss in our capacity to perform conversion,
retrofit and repair projects. In addition, our Orange facility located in
Texas is ideally suited for the construction of semi-submersible rigs. During
2001 we were working on the completion of one new semi-submersible hull and
the construction of three new build semi-submersible drilling rigs. A new
build completion involves performing the addition of decks, quarters,
equipment installation and final outfitting of an existing bare deck hull,
while the construction of new build semi-submersibles involves the above
activities as well as building the hull.

Conversions. Conversions consist generally of the conversion of one type of
drilling rig into a different type, such as the conversion of a slot jackup to
a cantilevered jackup, the conversion of a submersible rig to a semi-
submersible rig, or the conversion of a drilling rig or tanker into an FPF.
FPF conversions typically require the destruction and removal of all drilling
equipment and substructure (including the derrick system, rotary system,
tubulars, mud treating and pumping units and well control

11

systems) and the reconfiguration of the decks to accommodate heavy skid
mounted processing modules, production risers and handling equipment. This
production equipment is then interconnected through the installation of
piping, electrical wiring and walkways. Because production, processing and
storage facility additions typically increase a rig's variable deck load, we
are typically required to complete hull reinforcements and buoyancy and
stability enhancements. We did not complete any conversions in 2001.

Retrofits. Retrofits consist generally of improvements to the technical
capabilities, tolerances and systems of drilling and production equipment.
Retrofits performed on semi-submersible rigs include buoyancy and stability
enhancements (typically pontoon extensions and additional column sponsons) and
the addition or improvement of self-propulsion systems, positioning thrusters
and self-contained mooring systems. Jackup retrofits include strengthening and
extending the rig legs and reinforcing the spud cans on the existing legs. We
are also capable of upgrading living quarters and facilities to accommodate
harsh environment drilling conditions and to meet North Sea regulatory
requirements, improving ventilation systems and strengthening or replacing
heliports to accommodate larger aircraft. During 2001 we did not complete the
retrofitting of any semi-submersible drilling units.

Repairs. We perform a broad range of inspection and repair work for our
customers. Necessary repairs are identified both in connection with retrofit
and conversion projects as well as in connection with periodic inspections
performed at the shipyard which are required by the U.S. Coast Guard and by
vessel classification societies such as the American Bureau of Shipping. Rigs
are typically inspected for systems operability and structural integrity, with
ultrasonic thickness gauge readings employed to detect structural fatigue or
aberrations. Repair work may include the repair or renewal of piping, spud
cans, electrical and drilling systems, removal and replacement of deteriorated
or pitted steel and blasting, coating and painting of exterior surfaces. Our
repair work has also included the refurbishment of drilling systems as well as
the overhaul of generators, boilers, condensers, ballast and cargo valves, rig
cranes and production compressors.

Design and Engineering Services. Through our FGL subsidiary, we perform
design and engineering of offshore drilling and production units, including
jackups, semi-submersibles, drillships and floating production, storage and
offloading vessels.

Vessels Segment

In our Vessels segment, 2001 operations included the design, new
construction, and conversion of ocean-going vessels, including OSVs, cargo
ships, oceanographic research and survey ships, high speed patrol boats,
ferries, tug boats, tow boats and ocean-going barges. The Vessels segment also
provides a wide variety of conversion services for vessels and barges employed
by the offshore energy and commercial marine markets.

Design and New Construction. Our Vessels segment conducts new construction
and conversion operations at six shipyards. These shipyards employ advanced
manufacturing techniques including modular construction methods, advanced
welding techniques, panel line fabrication, computerized plasma arc metal
cutting and automated sandblasting and painting. We conduct our design
activities at our engineering facility located near the corporate
headquarters. At December 31, 2001, we had ten vessels under construction or
conversion.

Conversions. We perform a broad range of conversion work for vessels and
barges employed in the offshore energy, commercial marine and governmental
markets. Conversion activities include the conversion of single-hull tank
barges to double-hull tank barges.

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Engineered Products Segment

With the sale of the BLM Companies in May 2001 and the expected closing of
the Amclyde sale in April 2002, we will no longer have an Engineered Products
segment.

Through our Engineered Products segment, 2001 operations included the
design, manufacture, and servicing of cranes, mooring, anchoring, rack-and-
pinion jacking systems, pipe/cable lay equipment, cargo handling equipment,
deck machinery and equipment. We have the capability to outfit rigs for
existing customers and to supply other offshore rig manufacturers with rig
kits consisting of legs, jacking systems, anchoring winches and offshore
handling cranes and other marine deck equipment, including spare parts and
after sale services.

Cranes, Mooring Systems, and Marine Deck Equipment. As of December 31,
2001, our Engineered Products segment was performing work on several major new
equipment and after-market upgrades in the course of the segment's normal
business. The design, procurement and project management functions are
performed in our U.S. facilities for AmClyde projects. These functions were
also performed at the BLM facility in Nantes, France, prior to the sale of the
French Subsidiaries in May 2001. Primary manufacturing is performed at our
Gulf Coast Division in Louisiana through a cadre of subcontracts.
Manufacturing was also performed at BLM in France prior to the sale of the
French subsidiaries in May 2001.

The Engineered Products Group has been involved in manufacturing several
major projects during 2001: a mooring line deployment winch and an umbilical
carousel loading system, a specialty "J-Lay" pipelaying system, 3800 ton
marine crane and 12 point mooring system, a 150-metric ton floating crane, two
50-ton pedestal cranes, upgrading a very large marine crane, one shipset of a
deepwater mooring system for a semi-submersible drilling rig, one rig-set of
jacking units for a jack-up drilling rig, and general marine anchor windlasses
and mooring equipment.

Marine deck equipment is typically manufactured to individual customer
specifications based on the planned application of the equipment. Manufacture
of the equipment required to complete a customer's order may require from a
few weeks to several months.

After-Market Sales and Service. The Engineered Products segment also sells
parts and services to support its products once they are delivered. It has a
service team that performs repair services worldwide and it maintains an
inventory of spare parts to support its products.

Customers and Marketing

Offshore Segment

Our Offshore segment customers include offshore drilling contractors, many
of whom have been our customers for more than 15 years. In addition, we have
contracted for the construction of rigs with customers who do not operate the
equipment but rather, intend to charter the rigs to drilling contractors.

We believe we have developed strong relationships with this segment of our
customer base. Our marketing efforts are conducted from our sales offices in
Houston and target drilling contractors located worldwide.

Vessels Segment

Our Vessels segment customers are primarily offshore energy service
companies, domestic and foreign governments, and commercial marine
transportation companies, many of whom have been our customers for decades.
Marketing efforts for our Vessels segment are coordinated at our headquarters
in Gulfport, Mississippi.

13

Engineered Products Segment

Our Engineered Products segment customers include offshore drilling
contractors, offshore marine construction contractors, oil companies and
operators in the offshore oil production sector, other shipyards, cruise
lines, shipping companies, on-land construction contractors, general merchant
marine operators, the fishing industry, and the U.S. Government. Marketing
efforts of this segment are conducted through offices in St. Paul, Minnesota
with satellite offices in Houston, Texas; Slidell, Louisiana; and Covington,
Louisiana and in concert with other of our domestic marketing efforts. Our
Engineered Products segment also has sales representatives in various
locations in Europe, China and Asia.

Significant Customers

A large portion of our revenue has historically been generated by a few
customers although not necessarily the same customers from year-to-year. For
example, our largest customers (those which individually accounted for more
than 10% of revenue in a particular year) collectively accounted for 68%, 29%
and 42% of revenue for 1999, 2000, and 2001, respectively. For 2001, Ocean
Rig, Petrodrill and Vessels Management Services individually accounted for
more than 10% of our revenue. Because the level of new construction,
conversion, retrofit or repair work that we may provide to any particular
customer depends on the size of that customer's capital expenditure budget
devoted to such projects in a particular year, customers that account for a
significant portion of revenue in one fiscal year may represent an immaterial
portion of revenue in subsequent years.

Contract Structure and Pricing

We generally perform conversion, retrofit and repair work pursuant to
contracts that can provide for a portion of the work to be performed on a
fixed-price basis and a portion of the work to be performed on a cost-plus
basis. New construction projects typically involve a greater portion of the
work performed on a fixed-price basis. In many cases, we commence work with
respect to certain portions of a drilling rig or vessel conversion, retrofit
or repair project on a cost-plus arrangement as soon as the drilling rig or
vessel arrives in our shipyard, and, thereafter, the scope and pricing
arrangements with respect to other aspects of the project are negotiated. In
the interest of expediting the completion of a conversion, retrofit or repair
project, a drilling rig or vessel may arrive in our shipyard before the design
work for such project is finished or before all necessary budgetary approval
for such project has been reviewed at the appropriate level of management of
the customer. In these cases, the portion of the project which does not have
complete design work will not be given firm pricing arrangements at the time
the drilling rig or vessel arrives at our shipyard. In these cases, the cost-
plus arrangement ultimately becomes a significant portion of the overall
project. In addition, the scope of the services to be performed with respect
to a particular drilling rig or vessel often increases as the project
progresses due to additional retrofits or modifications requested by the
customer or additional repair work necessary to meet the safety, environmental
or construction standards established by the U.S. Coast Guard or other
regulatory or vessel classification authorities.

With respect to the fixed-price contracts or the fixed-price portions of a
project, we receive the price fixed in the contract for such aspect of the
project, subject to adjustment only for change orders placed by the customer
or as required by regulatory bodies. In our Offshore segment, we may receive a
significant number of change orders on our fixed-price projects as to which we
negotiate with our customer a separate charge. With respect to fixed-price
contracts, we generally retain the ability to capture cost savings and must
absorb cost over-runs. Under cost-plus arrangements, we receive specified
amounts in excess of our direct labor and materials cost and so are protected
against cost overruns but we do not benefit directly from cost savings. We
generally price materials at a mark-up under our contracts. In recent years,
we have realized a majority of our revenue under fixed-price contracts,
although historically the percentages of revenue we have derived from fixed-
price contracts

14

and cost-plus contracts have fluctuated significantly from project to project
and from period to period based on the nature of the projects involved, the
type of pricing arrangements preferred by our customers, the timing of the
commencement of work on a project in relation to the timing of the completion
of the negotiation and contracting process, and other factors.

New construction of vessels, cranes, mooring systems, and marine deck
equipment are generally sold pursuant to fixed-price contracts.

Competition

We believe our reputation for quality and reliability, our long-standing
relationships with most of the large drilling contractors, energy service
companies, domestic and foreign governments and other commercial enterprises,
our experienced management team, our existing skilled labor force and our
extensive fabrication experience with drilling rigs and vessels are our key
advantages in competing for projects; however, our bankruptcy filing has
negatively impacted our ability to compete against other companies.

Our Offshore segment competes in a local market against other companies
based on the Gulf Coast for repair projects for drilling rigs that operate in
the Gulf of Mexico. The market for smaller retrofit and conversion projects is
also primarily local, but the market for larger retrofit and conversion
projects includes international competitors. We believe we compete favorably
against companies located in Europe or the Far East for retrofit and
conversion projects relating to drilling rigs operating in the Gulf of Mexico
and, to a lesser extent, rigs operating offshore West Africa and South America
due to, among other things, high European labor costs and our favorable
geographical location.

In our Vessels segment, the number and identity of competitors on
particular projects varies greatly, depending upon the type of vessel and the
size of the project. There are several domestic shipyards that compete with us
for domestic shipbuilding contracts depending upon the nature of the project.
Most of our domestic competitors are smaller than us. In pursuing
international contracts, we also compete with many foreign shipyards, some of
which are subsidized by their governments.

We compete in a global market in the design and manufacture of deck
equipment, although several competitors are domestically based. Our Engineered
Products segment competes with several domestic and foreign manufacturers in
the market for offshore marine cranes and shipyard gantry cranes, mooring
systems, jacking systems and pipe/cable lay equipment.

We believe certain barriers exist that prevent new companies from competing
with us for new rig and vessel construction, conversion, retrofit and repair
activities including the investment required to establish an adequate
facility, the difficulty of locating a facility adjacent to an adequate
waterway due to environmental and wetland regulations, and the limited
availability of experienced supervisory and management personnel. Although new
companies can enter the market for repair projects and small retrofit and
conversion projects more easily, we believe these factors will likely limit
the increase in domestic competition for larger projects, especially major
conversions and retrofits and new rig construction.

Backlog

As of December 31, 2001 our backlog from continuing operations by segment
was: Offshore, $37.7 million and Vessels $94.1 million. Of the total $131.8
million backlog at December 31, 2001, approximately 84.1% is expected to be
performed within the 12 months ending December 31, 2002. Additionally, the
total backlog of $131.8 million at December 31, 2001 includes FGL's backlog in
the amount of $6.9 million. We entered into an agreement to sell this division
in March 2002.

15

Our backlog is based on our estimate of future revenue attributable to (i)
the remaining amounts to be invoiced with respect to those projects, or
portions of projects, as to which a customer has authorized us to begin work
or purchase materials and (ii) projects, or portions of projects, that have
been awarded to us as to which we have not commenced work. Management's
estimates are often based on incomplete engineering and design specifications
and as engineering and design plans are finalized or changes to existing plans
are made, management revises the estimate of total revenue through negotiated
fixed price or cost-plus changes. In addition, many projects currently
included in our backlog are subject to termination at the option of the
customer, although the customer in that case is generally required to pay us
for work performed and materials purchased.

Materials

The principal materials used in our business are steel shapes, steel plate,
pipe, welding wire and gases, fuel oil, gasoline and paint. Other materials
used in large quantities include aluminum, electrical cable and fittings.
Similar materials are used in the manufacture of cranes, moorings, and marine
deck equipment. In addition, electric motor components, steel forgings and
castings are used. We believe that such materials are available in adequate
supply from many sources. In certain cases, however, the specifications of a
particular project may require materials which may be available from a limited
number or a single supplier or source. We have not engaged, and do not
presently intend to engage in hedging transactions with respect to our
purchase requirements for materials.

Safety and Quality Assurance

Management is concerned with the safety and health of our employees and
maintains a stringent safety assurance program to reduce the possibility of
accidents. Our safety department establishes guidelines to ensure compliance
with all applicable foreign, federal and state safety regulations. We provide
training and safety education through orientations for new employees and
subcontractors, weekly crew safety meetings and first aid and CPR training. We
also employ emergency medical technicians and/or registered nurses as in-house
medics. We have a comprehensive drug program and conduct periodic employee
health screenings. A safety committee, whose members consist of management
representatives and field supervisors, meets monthly to discuss safety
concerns and suggestions that could prevent future accidents. From time to
time we contract with third party safety consultants to provide training.
Similar practices are in place at our foreign facilities. We believe that our
safety program and commitment to quality are vital to attracting and retaining
customers and employees.

Many of our facilities construct according to the standards of certain
regulatory and quality control organizations including: the American Bureau of
Shipping, Lloyd's Register of Shipping, Bureau Veritas, Det Norske Veritas,
American Petroleum Institute, the American Welding Society, the American
Society of Mechanical Engineers and customer specifications. Our international
operations fabricate according to certain of the above standards and their own
national standards. All of our welding and fabrication procedures are
performed in accordance with the latest technology and industry requirements.
Our Engineered Products businesses are quality certified ISO 9001 by Det
Norske Veritas. We also maintain training programs at each of our facilities
to train skilled personnel and to maintain high quality standards. Management
believes that these programs enhance the quality of our products.

Government and Environmental Regulation

Overview. Many aspects of our operations and properties are materially
affected by foreign, federal, state and local regulation, as well as certain
international conventions and private industry organizations. These
regulations govern worker health and safety and the manning, construction and

16

operation of vessels. For example, we are subject to the jurisdiction of the
U.S. Coast Guard, the National Transportation Safety Board, the U.S. Customs
Service and the Maritime Administration of the U.S. Department of
Transportation, as well as private industry organizations such as the American
Bureau of Shipping. These organizations establish safety criteria and are
authorized to investigate vessel accidents and recommend improved safety
standards. In addition, the exploration and development of oil and gas
properties located on the outer continental shelf of the United States is
regulated primarily by the Minerals Management Service ("MMS"). The MMS has
promulgated federal regulations under the Outer Continental Shelf Lands Act
requiring the construction of offshore platforms located on the outer
continental shelf to meet stringent engineering and construction
specifications. Violations of these regulations and related laws can result in
substantial civil and criminal penalties as well as injunctions curtailing
operations. We believe that our operations are in compliance with these and
all other regulations affecting the fabrication of platforms for delivery to
the outer continental shelf of the United States.

In addition, we depend on the demand for our services from the oil and gas
industry and, therefore, are affected by changing taxes, price controls and
other laws and regulations relating to the oil and gas industry. For example,
the U.S. Coast Guard regulates and enforces various aspects of marine offshore
vessel operations, such as certification, routes, drydocking intervals,
manning requirements, tonnage requirements and restrictions, hull and shafting
requirements and vessel documentation. U.S. Coast Guard regulations require
that all drilling and production vessels are drydocked for inspection at least
once within a five-year period, and such inspections and resulting repair
requirements have constituted a significant portion of our revenues in some
prior years. While we are not aware of any proposals to reduce the frequency
or scope of such inspections, any such reduction could adversely affect our
results of operations. In addition, offshore construction and drilling in
certain areas have been opposed by environmental groups and, in certain areas,
has been restricted. To the extent laws are enacted or other governmental
actions are taken that prohibit or restrict offshore construction and drilling
or impose environmental protection requirements that result in increased costs
to the oil and gas industry in general and the offshore construction industry
in particular, our business and prospects could be adversely affected. We
cannot determine to what extent our future operations and earnings may be
affected by new legislation, new regulations or changes in existing
regulations.

Environmental. Our operations and properties are subject to a wide variety
of increasingly complex and stringent foreign, federal, state and local
environmental laws and regulations, including those governing discharges into
the air and water, the handling and disposal of solid and hazardous wastes,
the remediation of soil and groundwater contaminated by hazardous substances
and the health and safety of employees. These laws may provide for "strict
liability" for damages to natural resources and threats to public health and
safety, rendering a party liable for the environmental damage without regard
to negligence or fault on the part of such party. Sanctions for noncompliance
may include revocation of permits, corrective action orders, administrative or
civil penalties and criminal prosecution. Certain environmental laws provide
for strict, joint and several liability for remediation of spills and other
releases of hazardous substances, as well as damage to natural resources. In
addition, we may be subject to claims alleging personal injury or property
damage as a result of alleged exposure to hazardous substances. Such laws and
regulations may also expose us to liability for the conduct of or conditions
caused by others, or for our acts that were in compliance with all applicable
laws at the time such acts were performed.

The Comprehensive Environmental Response, Compensation, and Liability Act
of 1980, as amended, and similar laws provide for responses to and liability
for releases of hazardous substances into the environment. Additionally, the
Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery
Act, the Safe Drinking Water Act, the Emergency Planning and Community Right
to Know Act, each as amended, and similar foreign, state or local counterparts
to these federal laws,

17

regulate air emissions, water discharges, hazardous substances and wastes, and
require public disclosure related to the use of various hazardous substances.
For example, our paint operations must comply with a number of environmental
regulations. All blasting and painting is done in accordance with the
requirements of our air discharge permit and disposal of paint waste is made
in accordance with the federal Resource Conservation and Recovery Act
("RCRA"). In the event of lead-based paint, the disposal is handled in a
manner based on local, state and federal regulations. Our policy requires that
existing coating be sampled and tested prior to blasting operations to
eliminate the possibility of lead contamination and to assure that lead-based
paint is appropriately treated. We have been classified as a "large quantity
hazardous waste generator" and are registered with the State of Mississippi
Department of Environmental Quality, Texas National Resource Conservation
Commission, Louisiana Department of Environmental Quality, as such. Compliance
with these and other environmental laws and regulations may require the
acquisition of permits or other authorizations for certain activities and
compliance with various standards or procedural requirements. We believe our
facilities are in substantial compliance with current regulatory standards.

The RCRA and similar state laws regulate the generation, treatment,
storage, disposal, and other handling of solid wastes, with the most stringent
regulations applying to solid wastes that are considered hazardous wastes.
RCRA also may impose stringent requirements on the closure, and the post-
closure care, of facilities where hazardous waste was treated, disposed of or
stored. We generate solid waste, including hazardous and non-hazardous waste,
in connection with our routine operations. We believe that our waste is
handled properly under RCRA.

Amendments to the federal Clean Air Act in 1990 resulted in numerous
changes which the Environmental Protection Agency and similar state agencies
fully implemented by regulations. We do not expect these Clean Air Act
amendments to result in material expenses at our properties, but the amount of
increased expenses, if any, resulting from such amendments is not presently
determinable.

In connection with our purchase of the Marystown Facilities, the
Newfoundland provincial government agreed to carry out and pay for a complete
environmental assessment and remediation program. The Phase I investigation
identified several issues surrounding possible subsurface contamination on
site at one of the Marystown Facilities. As a result of Phase I findings,
remediation work was completed in 2000. Remediation efforts included the
removal of underground oil storage tanks, removal and proper disposal of
contaminated soils and re-installation of new oil storage tanks at the
shipyard facility. The Phase II investigation has been completed and
additional environmental issues were identified. Additional remediation
efforts were required for asbestos and lead paint abatement. Remediation work
was substantially completed in 2001. The Newfoundland Provincial Government
funded the cost of remediation procedures associated with the Marystown
Facilities as agreed upon at the time the facility was purchased. In addition,
the Newfoundland Provincial Government will indemnify us against any
environmental liabilities associated therewith. The asset sale agreement
executed in March 2002 continues this indemnification.

Our compliance with environmental laws and regulations has entailed certain
additional expenses and changes in operating procedures. We believe that
compliance with these laws and regulations will not have a material adverse
effect on our business or financial condition for the foreseeable future.
However, future events, such as changes in existing laws and regulations or
their interpretation, more vigorous enforcement policies of regulatory
agencies, or stricter or different interpretations of existing laws and
regulations, may require additional expenditures on our part, which
expenditures may be material.

Health and Safety Matters. Our facilities and operations are governed by
laws and regulations, including the federal Occupational Safety and Health
Act, relating to worker health and workplace safety. We believe appropriate
precautions are taken to protect employees and others from workplace injuries
and harmful exposure to materials handled and managed at our facilities. While
it is not

18

anticipated that we will be required in the near future to expend material
amounts by reason of such health and safety laws and regulations, we are
unable to predict the ultimate cost of compliance with these changing
regulations.

Jones Act. The Jones Act requires that all vessels transporting products
between U.S. ports must be constructed in U.S. shipyards, owned and crewed by
U.S. citizens and registered under U.S. law, thereby eliminating competition
from foreign shipbuilders with respect to vessels to be constructed for the
U.S. coastwise trade. Many customers elect to have vessels constructed at U.S.
shipyards, even if such vessels are intended for international use, in order
to maintain flexibility to use such vessels in the U.S. coastwise trade in the
future. In 1996 a legislative bill seeking to substantially modify the
provisions of the Jones Act mandating the use of ships constructed in the
United States for U.S. coastwise trade was introduced in Congress; however, it
did not pass. Similar bills seeking to rescind or substantially modify the
Jones Act and eliminate or adversely affect the competitive advantages it
affords to U.S. shipbuilders have been introduced in Congress from time to
time and are expected to be introduced in the future. Any recission or
material modification of the Jones Act could adversely affect our future
prospects because many foreign shipyards with which we compete are heavily
subsidized by their governments.

OPA '90. Demand for double-hull tankers and tank barges has been created by
the Oil Pollution Act of 1990 ("OPA '90"), which generally requires U.S. and
foreign vessels carrying oil and certain other hazardous cargoes and entering
U.S. ports to have double hulls by 2015. OPA '90 established a phase-out
schedule that began January 1, 1995 for all existing single hull vessels based
on the vessel's age and gross tonnage. We estimate that there are still 37
product carriers and 90 tank barges that must be replaced of which 10 and 65,
respectively, must be replaced by January 1, 2005. Because of the requirements
of the Jones Act, any replacement vessels must be built in U.S. shipyards.

Title XI Loan Guarantee Amendments and OECD Accord. In late 1993, Congress
amended the loan guarantee program under Title XI of the Merchant Marine Act
of 1936 ("MARAD"), to permit MARAD to guarantee loan obligations of foreign
vessel owners who construct new vessels in the United States. As a result of
these amendments, MARAD was authorized to guarantee loan obligations of
foreign owners for foreign-flagged vessels that are built in U.S. shipyards on
terms generally more advantageous than available under guarantee or subsidy
programs of foreign countries. Under the OECD Accord, which was negotiated in
December 1994, among the United States, the European Union, Finland, Japan,
Korea, Norway and Sweden (which collectively control over 75% of the market
share for worldwide vessel construction), the Title XI guarantee program will
be required to be amended, once the OECD Accord is ratified by the United
States, to eliminate the competitive advantages provided by the 1993
amendments to Title XI. In December 1995, a subcommittee of the Ways and Means
Committee of the U.S. House of Representatives passed a bill providing for the
implementation of the OECD Accord and elimination of the competitive
advantages provided by the 1993 amendments to Title XI. To date, such bill has
not been approved by either the U.S. House of Representatives or the U.S.
Senate. If the OECD Accord is ratified by the U.S. (the only remaining party
to the OECD Accord that has not yet ratified the OECD Accord), the OECD Accord
would virtually eliminate all direct and indirect governmental shipbuilding
subsidies by the party nations. Management does not expect that the U.S. will
ratify the OECD Accord and that Title XI will continue, but there can be no
assurance of this.

Insurance

We maintain a property and casualty insurance program protecting us against
damage caused by fire, flood, explosion and similar catastrophic events. We
also maintain commercial general liability insurance including coverage for
products and completed operations. We have in place both builder's risk and
ship repairer's construction risk programs. We maintain a workers'
compensation and employers' liability insurance program with respect to our
operations that satisfies the Federal and

19

State Workers' Compensation Acts and includes the U.S. Longshore and Harbor
Workers Act and maritime and outer continental shelf endorsements. We
currently maintain limits we deem are proper and necessary in the course of
our business. Although management believes that our insurance is adequate with
respect to all of our domestic and international operations there can be no
assurance that we will be able to maintain adequate insurance at rates which
management considers commercially reasonable, nor can there be any assurance
such coverage will be adequate to cover all claims that may arise.

In the past we have arranged to provide performance bonds or other
performance related security when required under the terms of the contracts.
We have not been able to obtain performance bonds or other performance related
security since our filing for reorganization under Chapter 11 of the U.S.
Bankruptcy code. We are expecting this situation to improve as the
reorganization plan is further developed, approved and implemented. Inability
to provide such bonds or alternative forms of security could have a material
effect on our ability to obtain new construction contracts.

Prior to March 1, 2000, our wholly-owned subsidiary, Offshore Marine
Indemnity Company ("OMIC") acted as a fronted re-insurance captive company for
our workers' compensation program. Our workers' compensation program included
both specific and aggregate loss retention amounts which limit the exposure of
OMIC. OMIC is not involved in any other business or any other lines of
coverage.

Employees

Our workforce varies based on the level of ongoing fabrication activity at
any particular time. As of December 31, 2001, we had approximately 2,596
employees, including 2,529 in the United States, 46 in Canada, and 21 in
Scotland. Total workforce included contract labor of approximately 152
employees at December 31, 2001.

None of the our United States employees is employed pursuant to a
collective bargaining agreement. We entered into a five-year collective
bargaining agreement with three Canadian unions in connection with the
acquisition of the Marystown Facilities. We believe that our relationship with
our employees is good.

20

RISK FACTORS

Due to the Chapter 11 Filing, It Is Unlikely That There Will Be Any Recovery
for Our Equity Security Holders . There is Also No Assurance That Our Plan of
Reorganization Will Ultimately Be Approved by the Bankruptcy Court.

On April 19 and 20, 2001, we, including 31 of our subsidiaries, elected to
file separate petitions for relief under Chapter 11 of the United States
Bankruptcy Code. At this time, we are focusing on maximizing the recoveries
for the creditors. Under our current plan of reorganization, equity holders
would not receive any recovery. In addition, there can be no assurance that
our plan of reorganization will ultimately be approved by the bankruptcy
court.

Our Business and Operations Depend Principally Upon Conditions Prevailing in
the Offshore Drilling Industry; Changes in that Industry Could Materially
Adversely Affect Friede Goldman Halter's Operating Results.

The level of demand for Friede Goldman Halter's services is affected by the
level of demand for the services of offshore drilling contractors, including
the demand for specific types of offshore drilling rigs having required
drilling capabilities or technical specifications. This, in turn, is dependent
upon the condition of the oil and gas industry and, in particular, the level
of capital expenditures of oil and gas companies with respect to offshore
drilling activities and the ability of oil and gas companies to access or
generate capital sufficient to fund capital expenditures for offshore
exploration, development, and production activities. These capital
expenditures are influenced by prevailing oil and natural gas prices,
expectations about future prices, the level of activity in offshore oil and
gas exploration, development and production, the cost of exploring for,
producing and delivering oil and gas, the sale and expiration dates of
offshore leases in the United States and overseas, the discovery rate of new
oil and gas reserves in offshore areas, local and international political and
economic conditions, and the ability of oil and gas companies to access or
generate capital sufficient to fund capital expenditures for offshore
exploration, development and production activities.

Over the past several years, oil and natural gas prices and the level of
offshore drilling activity have fluctuated substantially. A significant or
prolonged reduction in oil and natural gas prices or the expectation that
prices will be lower in the future would likely depress offshore drilling and
development activity which would reduce demand for our services and could
result in a material adverse effect on our operating results. Higher than
normal day rates available to drilling contractors for existing equipment may
delay decisions by contractors to bring their equipment into the shipyard for
conversion, retrofit or repair projects. Our business, including the types of
projects we undertake, will also be affected by other factors affecting
offshore drilling contractors, including factors such as:

. The condition and drilling capabilities of the existing offshore
drilling rigs operated by offshore drilling contractors; and

. the relative costs of building a new offshore drilling rig with advanced
capabilities versus the costs of retrofitting or converting an existing
offshore drilling rig to provide similar capabilities.

During 2001 the demand for our services related to the construction,
conversion and repair of offshore drilling rigs and construction of offshore
service vessels was weak due to declines in oil and natural gas prices, the
general weakening in the domestic and international economy and uncertainties
related to our Chapter 11 filing. The price for oil generally remained above
$25 per barrel in 2001; however, natural gas prices declined dramatically from
a high on the spot market of almost $10/mcf to around $2/mcf at the end of the
year. Natural gas prices began to weaken during June 2001 as a result of
increasing inventory levels. Natural gas prices experienced further declines
as warmer than normal weather and economic slowdowns in the U.S. and
internationally reduced demands for natural gas. These economic events caused
exploration and production companies in the U.S. Gulf of Mexico to

21

limit their capital investments and contributed to a collapse in domestic
drilling activity during the second half of 2001. The U.S. Gulf of Mexico is
the primary market for our services related to the conversion and repair of
offshore drilling rigs and the construction of offshore service vessels. As
the demand for offshore drilling rigs in the Gulf of Mexico softened, our
operating results were negatively impacted because of our dependence on
customers that operate drilling rigs and provide other offshore energy
services in this market.

In addition, as a result of our filing Chapter 11, many of our conversion,
retrofit, repair, and new build customers have elected not to use our shipyard
but instead have sought the services of one or more of our competitors.

Our Business Involves Significant Operating Risks; Our Insurance Protection
Could Be Insufficient or Ineffective.

Our activities involve the fabrication, refurbishment and repair of large
steel structures, including drilling rigs, vessels, cranes and production
units. These activities have inherent risks associated with them that could
result in significant injury and loss of life, severe damage and destruction
of property and suspension of operations. These risks include:

. operating hazards, including the operation of cranes and other heavy
machinery;

. the structural failure of a drilling rig, crane, vessel or other
equipment;

. liabilities associated with a defect in design or a failure or
malfunction of a product developed or manufactured by us;

. marine accidents, including collisions with other vessels and sinkings;
and

. physical damage of our facilities caused by hurricanes or flooding.

Litigation arising from any of these occurrences may result in Friede
Goldman Halter being named as a defendant in lawsuits asserting large claims.
Although we maintain and will continue to maintain insurance that we consider
to be economically prudent, it cannot be assured that this insurance will be
sufficient or effective under the circumstances. A successful claim for which
we are not fully insured could have a material adverse effect on Friede
Goldman Halter.

Although we maintain such insurance protection as we consider economically
prudent, there can be no assurance that any such insurance will be sufficient
or effective under all circumstances or against all hazards to which we may be
subject. A successful claim for which we are not fully insured could have a
material adverse effect on us. Moreover, no assurance can be given that we
will be able to maintain adequate insurance in the future at rates that we
consider economical. In addition, we may be unsuccessful in collecting amounts
due under our reinsurance agreements related to our workers' compensation
program.

We Have Incurred and Could Incur Additional Financial Losses in Connection
with Contracts Structured on a Fixed-Price Basis or Contracts Containing
Liquidated Damages Provisions.

A significant portion of our existing contracts is on a fixed-price basis.
We could be liable for the full amount of any cost overruns under these fixed-
price contracts. We generally attempt to cover anticipated cost increases
through an estimation of these increases in the original price of the
contract. However, revenue, cost and gross profit realized on a fixed-price
contract will often vary from the estimated amounts because of many factors,
including changes in job conditions and variations in labor and equipment
productivity over the term of the contract. The results of operations and
financial condition of Friede Goldman Halter could be materially adversely
affected if significant contracts are under priced or revenue and gross
profits on large projects are different from those originally estimated.

22

The construction of offshore drilling rigs, vessels and other equipment
frequently involves complex design and engineering and equipment and supply
delivery coordination throughout construction periods that may extend from
several months to two years. It is not unusual in such circumstances to
encounter design, engineering, equipment delivery schedule changes and other
factors that impact the builder's ability to complete construction of the
project in accordance with the original contractual delivery schedule. Our
construction contracts generally require the customer to compensate us for
additional work as well as reassessed delivery dates or expenses incurred due
to customer requested change orders or failure of the customer to provide us
with design or engineering information or equipment, if specified in the
contract for the customer to provide these items. Under these circumstances,
we generally negotiate with the customer with respect to the amount of
compensation to be paid to us following the time at which the change order was
requested or the customer failed to provide us with items required by the
contract to be provided by the customer to us. We are subject to the risk that
we are unable to obtain, through negotiation, arbitration, litigation or
otherwise, adequate amounts to compensate us for the additional work or
expenses incurred by us due to customer requested change orders or failure by
the customer to timely provide items required to be provided by the customer.
A failure to obtain adequate compensation for these matters could require us
to record an adjustment to amounts of revenue and gross profit recognized
under the percentage of completion accounting method.

Many of our existing contracts, and contracts that we expect to execute in
the future, contain or will contain provisions requiring the payment by us of
liquidated damages if we fail to meet specified performance deadlines. We
cannot assure you that we will not be required to make payments under these
liquidated damages provisions or that the requirement to make such payments
will not have a material adverse effect on our operating results. In certain
circumstances, delivery delay beyond a specified period could entitle the
customer to terminate the contract and to elect various remedies, including
return of the purchase price.

Use of Percentage-of-Completion Accounting by Friede Goldman Halter Could
Result in Material Charges Against Our Earnings.

For accounting purposes, we earn most of our revenue on a percentage-of-
completion basis based generally on the ratio of hours incurred to the
estimated hours at completion. Accordingly, we review contract price and cost
estimates periodically as the work progresses, and reflect adjustments to
income proportionate to the percentage of completion in the period when such
estimates are revised. To the extent that these adjustments result in a
reduction or elimination of previously reported profits, we would have to
recognize a charge against current earnings, which could be significant
depending on the size of the project or the adjustment.

Our Business Depends on a Few Significant Customers.

We expect a significant portion of our revenues in any year will be derived
from a few customers due to the relatively large size of many of the projects
we have historically undertaken and to the relatively small number of
potential customers for projects related to the offshore oil and gas industry.
The loss of a significant customer could result in a substantial loss of
Friede Goldman Halter's revenue and could have a material adverse effect on
us. (See "Business--Customers and Marketing")

Incorrect Estimates of Expected Revenue Resulting from Friede Goldman Halter's
Backlog of Projects May Have a Material Adverse Effect on Our Company.

Our backlog is based on management's estimate of future revenue to be
earned under projects as to which a customer has authorized us to begin work
or purchase materials; and projects that have been awarded to us as to which
we have not commenced work. Some of the projects in our backlog are subject to
change or termination by the customer, which could substantially reduce the
amount of

23

backlog currently reported and could have a material adverse effect on our
revenue, net income and cash flows.

In the case of a termination, the customer is required to pay us for work
performed and materials purchased through the date of termination; however,
due to the large dollar amounts of backlog estimated for each of a small
number of projects, amounts included in our backlog could decrease
substantially if one or more of these projects were to be terminated by one or
more of our customers. In particular, three projects with an estimated
contract value in excess of $82.5 million constitute approximately 69.6% of
our backlog as of February 28, 2002. Approximately 58.7% of our backlog as of
December 31, 2001 was attributable to three projects with three different
customers. A termination of one or more of these large projects or the loss of
a significant customer could have a material adverse effect on our revenue,
net income and cash flows for 2002.

Friede Goldman Halter Could Be Materially Adversely Affected By Government
Regulations.

Our business and operations are subject to and affected by various types of
governmental regulation, including numerous federal, state and local
environmental protection laws and regulations. Compliance with these laws is
increasingly complex and expensive. We could be held strictly liable for
damages to natural resources or threats to public health and safety, without
regard to our negligence or fault. We could also be held liable for the
conduct of or conditions caused by others or for our actions that were in
compliance with all applicable laws at the time the acts were performed.
Sanctions for noncompliance may include revocation of permits, corrective
action orders, administrative and civil penalties and criminal prosecution.

We depend on the demand for certain of our services from the oil and gas
industry; therefore, industry factors such as changing taxes, price controls
and other laws and regulations which affect the oil and gas industry in
general could impact our combined operations. The adoption of laws and
regulations curtailing exploration and development drilling would adversely
affect our operations by limiting demand for our services. We cannot determine
to what extent our operations and earnings may be affected by new legislation,
new regulations or changes in existing regulations.

Loss of Key Personnel May Have a Material Adverse Impact on Our Operations.

Our operations are dependent on the continued efforts of our executive
officers. Although certain of our executive officers have entered into an
employment agreement with Friede Goldman Halter, we cannot assure you that any
individual will continue in such capacity for any particular period of time.
The loss of key personnel, or the inability to hire and retain qualified
employees, could have an adverse effect on our business, financial condition
and results of operations. Friede Goldman Halter does not carry key-person
life insurance on any of its employees.

Competition and Excess Capacity Could Put Downward Pressure on Our Pricing and
Profit Margins.

The shipbuilding and offshore rig construction and conversion industries
are highly competitive. For the past decade, the U.S. shipbuilding industry
has been characterized by substantial excess capacity because of the
significant decline in U.S. Navy shipbuilding spending, the difficulties
experienced by U.S. shipbuilders in competing successfully for international
commercial projects against foreign shipyards, many of which are heavily
subsidized by their governments, and the decline in the construction of
vessels utilized in the offshore energy industry. As a result of these
factors, competition by U.S. shipbuilders for domestic commercial projects has
increased significantly and has resulted in downward pressure on pricing and
profit margins and may continue to do so in the future. In addition, when
demand increases for fabrication services involving the offshore oil and gas
industry, it is possible that land or facilities with water access to the Gulf
of Mexico not previously used in the

24

fabrication business could be converted to use for this purpose. Any of these
events could increase the amount of competition experienced by Friede Goldman
Halter, which could have a material adverse effect on our revenue and profit.

We face competitive pressures at every level of the offshore rig
construction, conversion, retrofitting and repair markets. We compete in a
global market for new rig construction projects against domestic, European and
Asian new rig construction firms. This market is highly competitive because,
among other factors, some of our foreign competitors receive substantial
subsidies from their governments and are able to take advantage of lower labor
costs. Similarly, for larger rig conversion and retrofit projects, we face
intense competition from both domestic and foreign firms. For smaller rig
conversion, retrofit and repair projects, we compete against numerous
companies based principally on the Gulf Coast. In addition, shipyards and
other companies not previously engaged in the business can enter the market
for these smaller conversion, retrofitting and repair projects quickly and at
relatively low cost.

Business and Geographic Segments

Financial information about our business and geographic segments may be
found in Item 14-- Note 20 of the Notes to Consolidated Financial Statements.

ITEM 2. Properties

Corporate Headquarters

Our corporate headquarters is located in Gulfport, Mississippi at the same
site as our Gulfport shipyard in two buildings that, together, occupy
approximately 54,600 square feet of office space.

Offshore Segment

Our Offshore segment is headquartered in Pascagoula, Mississippi. The
Offshore segment operates nine shipyards where it performs the conversion,
retrofit, repair and modification of existing offshore drilling rigs and the
construction of new offshore drilling rigs.

The principal shipyards dedicated to the Offshore segment are summarized in
the following table.

Drydock Features
--------------------------------------------------------
Offshore-Conversion and
Repair Maximum Maximum
Lifting Vessel Own
Property Name and Number Capacity Width or Expiration
Location Acres Drydocks (Tons) (Feet) Lease Date
----------------------- --------- -------- ---------- ------- ----- ------------

FGO West (see note 1)
Pascagoula,
Mississippi............ 13 -- -- -- Lease 2005
FGO East (see notes 2 2017
and 6) (see note 3)
Pascagoula,
Mississippi............ 90 1 30,000 203 Lease
TDI-Halter Orange
Facility
Orange, Texas.......... 77 -- -- -- Own --
FGOT-Halter North Yard
Port Arthur, Texas (see
note 4)................ 17 -- -- -- Own --
FGOT-Halter Dock Yard
Port Arthur, Texas--
Ship Mode.............. 100 1 64,000 122 Lease 2009
Or Rig Mode............ 363
FGOT-Halter Central Yard
Sabine Pass, Texas (see
note 4)................ 32 -- -- -- Own --
FGOT-Halter South Yard
Sabine Pass, Texas(see
note 4)................ 21 -- -- -- Own --
Marystown Facilities
Marystown,
Newfoundland, Canada
(2 yards) (see note
5)..................... 60 Meters 1 3,000 tons 64 Own --

25

- --------
(1) We lease this facility from the Jackson County Port Authority pursuant to
a long-term lease which expires in May 2005 with two additional ten-year
options for renewal.
(2) The North End Yard is used jointly by the Offshore and Vessels segments
for new construction activities.
(3) We lease the FGO East Yard from Jackson County, Mississippi pursuant to a
long-term lease which expires in June 2017 with three additional
extensions of ten years each.
(4) Facility is temporarily closed until demand warrants reopening.
(5) We own the Marystown Facilities in fee simple. We also assumed five water
lot leases with the Canadian government which run through 2015 covering
the water area next to each of the Marystown Facilities. Effective March
27, 2002, we sold this facility.
(6) Our plan of reorganization filed March 22, 2002 contemplates abandoning
this facility to MARAD in full satisfaction of their claims.

Vessels Segment

Our Vessels segment is headquartered within the corporate headquarters in
Gulfport, Mississippi. Our engineering headquarters for the Vessels segment is
located one-half mile from the corporate headquarters and contains
approximately 33,600 square feet of office space, including a separate secure
space for classified work. Our Vessels segment operates six shipyards
principally dedicated to the new construction of marine vessels, although
several of these facilities also can perform work for our Offshore and
Engineered Products segments.

The principal shipyards dedicated to new construction within our Vessels
segment are summarized in the table below.

Vessels--New Construction Covered
Fabrication Area Own
Property Name and Location (Square Footage) or Lease
-------------------------- ---------------- --------

Halter Pascagoula Shipyard
Pascagoula, Mississippi........................... 220,000 Own
Halter Moss Point Shipyard
Moss Point, Mississippi........................... 121,665 Own
Own Lockport Shipyard
Lockport, Louisiana............................... 97,000 Own
Moss Point Marine Shipyard
Escatawpa, Mississippi............................ 75,000 Own
Gulfport Shipyards (3 facilities)
Gulfport, Mississippi............................. 554,500 Own
Port Bienville Shipyard
Pearlington, Mississippi.......................... 15,000 Own

Engineered Products Segment

Our Engineered Products segment headquarters is located in St. Paul,
Minnesota in three buildings that, together, occupy 60,000 square feet. This
is a lease facility and will be assumed by purchaser. This segment also
operates small satellite sales offices in Houston, Texas; Slidell, Louisiana;
and Covington, Louisiana. The segment also leases a facility for its Norson
Engineering operation in Glasgow, Scotland.

26

Our Engineered Products segment utilizes two plants to manufacture its
products. These manufacturing plants are summarized in the table below.

Covered Own
Fabrication Area Or
Property Name and Location (Square Footage) Lease
-------------------------- ---------------- -----

Gulf Coast Manufacturing Division (2 locations)
Slidell, Louisiana................................... 155,000 Own
Covington Manufacturing Division
Covington, Louisiana................................. 46,000 Own
meters

In February 2002, we signed an agreement to dispose of our remaining
operations within the Engineered Products segment. This sale is subject to
possible overbidding and the required court approval under Chapter 11 of the
United States Bankruptcy Code.

Other Properties.

We also lease office space in Houston, Texas which is associated with FGL.
In March 2002, we executed a purchase agreement to sell FGL and this lease
will be assumed by the purchaser.

ITEM 3. Legal Proceedings

We are involved in various claims and legal actions arising in the ordinary
course of business. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a description of these matters. See
Item 14--Notes 17 and 18 to the Consolidated Financial Statements for more
information on legal and contractual matters in which we are involved.

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

None.

27

EXECUTIVE OFFICERS OF THE REGISTRANT

Our Executive Officers are elected annually to serve for the ensuing year
or until their successors have been elected. The following table sets forth
certain information with respect to the executive officers:

Name Age Position
---- --- --------

John F. Alford.............. 43 President and Chief Executive Officer
Anil Raj.................... 51 Executive Vice President and Chief Operating
Officer
Robert Shepherd............. 44 Executive Vice President and Chief
Administrative Officer & CEO Friede Goldman
Newfoundland
Ronald W. Schnoor........... 48 Group President, Friede Goldman Offshore
Richard T. McCreary......... 47 Group President, Halter Marine
Richard J. Juelich.......... 51 Group President, Engineered Products Group

Set forth below are descriptions of the backgrounds of our executive
officers and directors and their principal occupations for the past five
years:

John F. Alford served as President and Chief Executive Officer from August
7, 2000 to April 2, 2002, the effective date of his resignation. Prior to this
he served as President and Chief Operating Officer since March 23, 2000. He
served as Executive Vice President of the Company from December 1997 to March
2000. He served as Senior Vice President and Chief Financial Officer of the
Company from May 1997 to December 1997. Mr. Alford joined FGO in 1996.

Anil Raj has served as Executive Vice President and Chief Operating Officer
since his appointment on March 29, 2001. Mr. Raj was previously our Senior
Vice President, Government Projects. He joined Halter Marine in 1987 as
Director of Engineering, and had previously been employed by Brown & Root,
Inc. and by Gulf Fleet Marine Corporation. He holds a BSE degree in naval
architecture and marine engineering from the University of Michigan.

Robert Shepherd has served as Executive Vice President and Chief
Administrative Officer since his appointment on September 26, 2001. Prior to
this Mr. Shepherd was President of Friede Goldman Offshore since January 2000.
He joined the Company's Canadian Operation in April 1998 as President and
Chief Executive Officer of Friede Goldman Newfoundland (FGN). He continues to
hold the position of Chief Executive Officer of FGN today. Prior to joining
FGN, Mr.Shepherd was employed as General Manager of a major Canadian shipyard
from 1994-1998.

Ronald W. Schnoor has served as Group President of Friede Goldman Offshore
since November 1998. He served as President of FGO from April 1997 and as the
Vice President, Manager of Operations of FGO since 1992. Mr. Schnoor joined
FGO in 1984 and previously served as both Senior Project Engineer and as a
Project Manager.

Richard T. McCreary has served as Group President, Halter Marine, since
March 23, 2000. Prior to this, he served as Senior Vice President,
Administration and Repair since November 3, 1999. Mr. McCreary joined HMG in
April 1997 and was serving as Senior Vice President, Administration and Repair
at the time of the merger between HMG and FGI. From April 1995 to 1997, Mr.
McCreary served as President Gulf Division, Maritrans Operating Partners. From
1990 to 1995, Mr. McCreary served as Vice President Operations, Canal Barge
Company, Inc.

Richard J. Juelich has served as Group President, Engineered Products Group
since November 3, 1999. Mr. Juelich joined HMG in November 1997 and was
serving as Group President, Engineered Products Group at the time of the
merger between HMG and FGI. From 1995 to 1997, Mr. Juelich served as President
of AmClyde Engineered Products, which was acquired by the Company in 1997. Mr.
Juelich has served as Chief Operating Officer of AmClyde Engineered Products
since 1992.

28

PART II

ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters

Our Common Stock is listed for trading on the Over the Counter Bulletin
Board under the symbol "FGHLQ" due to our Chapter 11 bankruptcy filing on
April 20, 2001. Prior to filing bankruptcy, our stock was listed on the New
York Stock Exchange under the symbol "FGH". The following table sets forth the
high and low sales price per share of the Common Stock, as reported on the New
York Stock Exchange composite tape from January 1, 2000 through April 20, 2001
and on the Over the Counter Bulletin Board from April 23, 2001 through
December 31, 2001, for the periods indicated:

2001
-----------
Quarter High Low
------- ----- -----

First............................................................ $6.60 $1.24
Second........................................................... 2.45 0.18
Third............................................................ 0.85 0.40
Fourth........................................................... 0.53 0.18

2000
-----------
Quarter High Low
------- ----- -----

First............................................................ $8.13 $4.88
Second........................................................... 9.31 5.31
Third............................................................ 9.00 5.13
Fourth........................................................... 7.38 3.56

We will not be paying any cash dividends. In addition, under our current
plan of reorganization, equity holders would not receive any recovery.

29

ITEM 6. Selected Financial Data

The following table sets forth selected historical financial data as of the
dates and for the periods indicated. The historical financial data set forth
below are derived from the audited consolidated financial statements of Friede
Goldman Halter, Inc. ("FGH") and its predecessor companies, F&G Ltd. and HAM
Marine (collectively, the "Predecessors"). The consolidated financial
statements include the accounts of FGH and its wholly-owned subsidiaries,
including, among others, Friede Goldman Offshore, Inc. ("FGO"), Friede &
Goldman, Ltd. ("FGL"), Friede Goldman Newfoundland Limited ("FGN"), Friede
Goldman France S.A.S. ("FGF"), and Halter Marine Group, Inc. ("Halter"). On
May 23, 2001, we sold FGF; therefore, the selected financial data includes FGF
for periods from February 6, 1998 through May 22, 2001. Additionally, the
selected financial data includes the accounts of FGN for all periods
subsequent to January 1, 1998, Halter for all periods subsequent to
November 3, 1999, and all other subsidiaries for all periods presented. All
significant intercompany accounts and transactions have been eliminated. The
following data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the historical
financial statements and the related notes thereto.

Years Ended December 31,
--------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- -------- -------- --------
(in thousands, except per share data)

Statement of operations
data:
Contract revenue earned..... $ 246,066 $ 580,985 $439,440 $382,913 $113,172
Cost of revenue earned...... 265,909 628,113 441,655 293,712 75,236
--------- --------- -------- -------- --------
Gross profit (loss)....... (19,843) (47,128) (2,215) 89,201 37,936
Selling, general and
administrative expenses.... 29,495 46,087 34,963 32,365 11,963
Goodwill amortization....... 11,153 7,524 1,576 334 134
Goodwill impairment......... 201,622 -- -- -- --
--------- --------- -------- -------- --------
Operating income (loss)... (262,113) (100,739) (38,754) 56,502 25,839
Other income (expense):
Interest expense, net
(contractual interest:
$24,727 in 2001)........... (19,052) (33,814) (9,173) (201) 673
Discount on convertible
subordinated note.......... (54,878) -- -- -- --
Gain (loss) on asset sales.. 145 -- (8) (374) 3,922
Other....................... 78 (79) (60) 38 776
--------- --------- -------- -------- --------
Income (loss) before
reorganization items,
income taxes,
discontinued operations
and extraordinary item... (335,820) (134,632) (47,995) 55,965 31,210
Reorganization items:
Professional fees......... 11,691 -- -- -- --
Loss on investment in
unconsolidated
subsidiary............... 1,371 -- -- -- --
Write-off of deferred
financing costs.......... 2,618 -- -- -- --
Loss on assets held for
disposition.............. 21,951 -- -- -- --
--------- --------- -------- -------- --------
Total reorganization
items................... 37,631 -- -- -- --
--------- --------- -------- -------- --------
Income (loss) before
discontinued operations,
income taxes and
extraordinary item......... (373,451) (134,632) (47,995) 55,965 31,210
Income tax expense
(benefit).................. 9,510 (21,042) (17,141) 20,679 7,941
--------- --------- -------- -------- --------
Income (loss) before
discontinued operations and
extraordinary item......... (382,961) (113,590) (30,854) 35,286 23,269
Discontinued operations:
Income from operation of
Engineered Products
segment.................. 7,337 11,072 28 -- --
Loss on sale of Engineered
Products segment......... (25,983) -- -- -- --
--------- --------- -------- -------- --------
Total discontinued
operations.............. (18,646) 11,072 28 -- --
Income (loss) before
extraordinary item....... (401,607) (102,518) (30,826) 35,286 23,269
Extraordinary loss.......... -- 3,853 -- -- --
--------- --------- -------- -------- --------
Net income (loss)...... $(401,607) $(106,371) $(30,826) $ 35,286 $ 23,269
========= ========= ======== ======== ========

30

Years Ended December 31,
---------------------------------------------------
2001 2000 1999 1998 1997
-------- --------- ---------- -------- --------
(in thousands, except per share data)

Net income (loss) per
share, basic:
Net income (loss) before
discontinued operations
and extraordinary
item................... $ (7.86) $ (2.55) $ (1.18) $ 1.46 $ 1.10
Discontinued
operations............. (0.38) 0.25 -- -- --
Extraordinary loss...... -- (0.09) -- -- --
-------- --------- ---------- -------- --------
Net income (loss).... $ (8.24) $ (2.39) $ (1.18) $ 1.46 $ 1.10
======== ========= ========== ======== ========
Net income (loss) per
share, diluted:
Net income (loss) before
discontinued operations
and extraordinary
item................... $ (7.86) $ (2.55) $ (1.18) $ 1.43 $ 1.09
Discontinued
operations............. (0.38) 0.25 -- -- --
Extraordinary loss...... -- (0.09) -- -- --
-------- --------- ---------- -------- --------
Net income (loss).... $ (8.24) $ (2.39) $ (1.18) $ 1.43 $ 1.09
======== ========= ========== ======== ========
Pro forma net income:
Net income as reported
above.................. $ 23,269
Pro forma income taxes
(1).................... (3,980)
--------
Pro forma net
income.............. $ 19,289
========
Pro forma net income per
share:
Basic.................. $ 0.92
Diluted................ 0.91
Weighted average shares
outstanding
Basic.................. 48,711 44,562 26,148 24,211 21,065
Diluted................ 48,711 44,562 26,148 24,599 21,297
Statement of Cash Flows
Data:
Cash provided by (used in)
operating activities..... $(33,267) $ (53,767) $ (61,061) $ 21,088 $ 52,122
Cash provided by (used) in
investing activities..... 6,824 95,813 (4,747) (77,299) (26,541)
Cash provided by (used in)
financing activities..... 21,949 (31,739) 39,558 41,156 29,947
Other Financial Data:
Depreciation and
amortization, including
goodwill impairment of
$201,622 in 2001 232,762 37,476 10,987 5,875 1,608
Capital expenditures...... 4,039 5,578 7,502 60,738 26,595
EBITDA (2)................ (31,647) (74,880) (27,184) 62,155 28,464
Balance Sheet Data:
Working capital
(deficit)................ $(39,450) $(140,423) $ 83,819 $ 5,859 $ 45,522
Net property, plant and
equipment................ 155,458 261,337 334,642 139,078 11,817
Total assets.............. 366,621 822,014 1,010,491 314,560 142,555
Long-term debt, less
current portion and
amounts in default....... -- 147,397 299,075 45,863 25,767
Stockholders' equity
(deficit)................ (193,346) 209,793 248,121 85,290 63,805

- --------
(1) The pro forma provision for income taxes gives pro forma effect to the
application of federal and state income taxes to Friede Goldman Halter as
if it had been a C Corporation for tax purposes for all periods presented.
Prior to June 1997, Friede Goldman Halter and its predecessors operated as
S Corporations for federal and state income tax purposes. In June 1997,
stockholders of Friede Goldman Halter and its predecessors made elections
terminating the S Corporation status. As a result, we became subject to
corporate level income taxation following the termination of such
elections.
(2) EBITDA represents operating income plus depreciation, amortization,
goodwill impairment and non-cash compensation expense related to the
issuance of stock and stock options to employees. EBITDA is not a measure
of cash flow, operating results or liquidity as determined by generally
accepted accounting principles. We have included information concerning
EBITDA as supplemental disclosure because we believe that EBITDA is
commonly accepted as providing useful information regarding a company's
historical ability to incur and service debt. We believe that factors
which should be considered by investors in evaluating EBITDA include, but
are not limited to trends in EBITDA as compared to: 1) cash flow from
operations, 2) debt service requirements, and 3) capital expenditures.
EBITDA as we define and measure it, may not be comparable to similarly
titled measures of other companies. Further, EBITDA should not be
considered in isolation or as an alternative to, or more meaningful than,
net income or cash flow provided by operations as determined in accordance
with generally accepted accounting principles as an indicator of our
profitability or liquidity.

31

ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations

Introduction

Overview

On March 22, 2002, we filed a Plan of Reorganization with the United States
Bankruptcy Court, which is subject to the approval of the Court. The Plan of
Reorganization includes the reorganization of substantially all of our
Offshore and Vessels segments and the disposition of our Engineered Products
segment as well as the disposition through sale, or otherwise, of our other
subsidiaries and assets as described below. In connection with the development
of the Plan of Reorganization, we reviewed our expected future cash flows
related to our operating segments to determine the recoverability of the
carrying value of our long-lived assets, including goodwill, in accordance
with SFAS 121. This review indicated an impairment related to the carrying
value of goodwill; accordingly, we recorded an impairment charge of $201.6
million for the year ended December 31, 2001.

Industry Conditions

The level of demand for our services is affected by the level of demand for
the services of offshore drilling contractors, including the demand for
specific types of offshore drilling rigs having required drilling capabilities
or technical specifications. This, in turn, is dependent upon the condition of
the oil and gas industry and, in particular, the level of capital expenditures
of oil and gas companies with respect to offshore drilling activities and the
ability of oil and gas companies to access or generate capital sufficient to
fund capital expenditures for offshore exploration, development, and
production activities. These capital expenditures are influenced by prevailing
oil and natural gas prices, expectations about future prices, the level of
activity in offshore oil and gas exploration, development and production, the
cost of exploring for, producing and delivering oil and gas, the sale and
expiration dates of offshore leases in the United States and overseas, the
discovery rate of new oil and gas reserves in offshore areas, local and
international political and economic conditions, and the ability of oil and
gas companies to access or generate capital sufficient to fund capital
expenditures for offshore exploration, development and production activities.

During 2001, the demand for our services related to the construction,
conversion and repair of offshore drilling rigs and construction of offshore
service vessels was weak due to declines in oil and natural gas prices, the
general weakening in the domestic and international economy and uncertainties
related to our Chapter 11 filing. The price for oil generally remained above
$25 per barrel in 2001; however, natural gas prices declined dramatically from
a high on the spot market of almost $10/mcf to around $2/mcf at the end of the
year. Natural gas prices began to weaken during June 2001 as a result of
increasing inventory levels. Natural gas prices experienced further declines
as warmer than normal weather and economic slowdowns in the U.S. and
internationally reduced demands for natural gas. These economic events caused
exploration and production companies in the U.S. Gulf of Mexico to limit their
capital investments and contributed to a collapse in domestic drilling
activity during the second half of 2001. The U.S. Gulf of Mexico is the
primary market for our services related to the conversion and repair of
offshore drilling rigs and the construction of offshore service vessels. As
the demand for offshore drilling rigs in the Gulf of Mexico softened, our
operating results were negatively impacted because of our dependence on
customers that operate drilling rigs and provide other offshore energy
services in this market.

Our business, including the types of projects we undertake, will also be
affected by other factors affecting offshore drilling contractors, including
such factors as: (i) the condition and drilling capabilities of the existing
offshore drilling rigs operated by offshore drilling contractors, (ii) the
relative costs of building new offshore drilling rigs with advanced
capabilities versus the costs of retrofitting or converting existing rigs to
provide similar capabilities and (iii) new competition from offshore operator
owned construction yards.

32

Backlog

At December 31, 2001 and February 28, 2002, the most recent date for which
such information is available prior to issuance of this report, our backlog
from continuing operations was approximately $131.8 million and $118.5
million, respectively. Our backlog is based on management's estimate of future
revenue attributable to (i) the remaining amounts to be invoiced with respect
to those projects, or portions of projects, as to which a customer has
authorized us to begin work or purchase materials and (ii) projects, or
portions of projects, that have been awarded to us as to which we have not
commenced work. For further information regarding management's estimates of
backlog, refer to Item 1--"Backlog" earlier in this document.

The following is a summary of additional information about our backlog from
continuing operations as of the dates indicated.

December 31,
February 28, --------------------
As of: (in millions) 2002 2001 2000 1999
-------------------- ------------ ------ ------ ------

Offshore:
New build................................ $ 9.7 $ 11.4 $ 97.9 $305.6
Conversion and repair.................... 30.9 26.3 2.2 99.0
------ ------ ------ ------
40.6 37.7 100.1 404.6
Vessels:
Energy................................... 11.3 15.4 19.8 34.9
Government............................... 58.4 61.0 30.4 86.5
Other commercial......................... 8.2 17.7 122.6 57.9
------ ------ ------ ------
77.9 94.1 172.8 179.3
------ ------ ------ ------
$118.5 $131.8 $272.9 $583.9
====== ====== ====== ======

The total backlog from continuing operations of $131.8 million at December
31, 2001 includes FGL's backlog in the amount of $6.9 million. In March 2002,
we entered into an agreement to sell this subsidiary.

Our backlog at February 28, 2002 excluded two contracts totaling $423.0
million that have been awarded to us. Some new contracts included in backlog
are subject to cancellation by the customers for various reasons. Certain
contracts have been excluded from our backlog because customer financing is
conditional upon our ability to provide bonding. We also have bids outstanding
on a significant number of additional projects which we believe have a high
probability of being awarded. Management is aggressively pursuing
opportunities to add significant contracts to our backlog.

Critical Accounting Policies

Our discussion and analysis of financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates,
including those related to contract revenue and costs, property, plant and
equipment including related goodwill, income taxes, and contingencies. We base
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.

33

We believe the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our
consolidated financial statements.

Revenue Recognition--Long-Term Contracts. We recognize revenue and profit
as work on long-term contracts progresses using the percentage of completion
method of accounting, which relies on estimates of total expected contract
revenues and costs. We follow this method since reasonably dependable
estimates of the revenue and costs applicable to various stages of a contract
can be made. Since the financial reporting of these contracts depends on
estimates, which are assessed continually during the term of the contract,
recognized revenues and profit are subject to revisions as the contract
progresses to completion. Revisions in profit estimates are reflected in the
period in which the facts that give rise to the revision become known.
Accordingly, favorable changes in estimates result in additional profit
recognition, and unfavorable changes in estimates result in the reversal of
previously recognized revenue and profits. When estimates indicate a loss
under a contract, cost of revenue is charged with a provision for such loss.
As work progresses under a loss contract, revenue continues to be recognized,
and a portion of the contract costs incurred in each period is charged to the
contract loss reserve.

Property, Plant, & Equipment including Goodwill--Impairments Exist. We have
determined that the carrying value of our goodwill related to the Vessels and
Offshore segments is no longer recoverable based on estimates of future
operating results of these segments. As a result, we recognized an impairment
charge of approximately $201.6 million in the fourth quarter of 2001.
Estimates of future cash flows used to test the asset for recoverability were
based on current operating projections of the Vessels and Offshore segments.
Such projected cash flows supported the carrying value of each segment's
property, plant and equipment; however, the projected cash flows indicated
goodwill was completely impaired.

Property, Plant, & Equipment Held for Disposition. We evaluated our
property, plant, and equipment, including goodwill held for disposition for
impairment based on asset purchase agreements entered into during the first
quarter of 2002 and completion of our plan of reorganization. As a result, we
recognized a loss on assets held for sale of $22.0 million related to our
planned disposition of Friede Goldman Newfoundland and on the FGO East
Facility. We also recognized a loss of $26.0 million related to the disposal
of our Engineered Products segment. These amounts are subject to change if the
asset purchase agreements or plan of reorganization are not approved by the
bankruptcy court.

Litigation and Tax Contingencies. We have been notified that proofs of
claims filed with the bankruptcy court related to our Chapter 11 filing
significantly exceed the liabilities we have recorded. As discussed in the
notes to our consolidated financial statements, as of December 31, 2001, we
have accrued our best estimate of the probable liability for the resolution of
these claims. This estimate has been developed in consultation with outside
counsel that is handling our bankruptcy and defense in these matters. To the
extent additional information arises or the bankruptcy court approves the
proofs of claims as filed, it is possible that our best estimate of our
probable liability in these matters may change. We believe any change to our
estimate will increase the balance of our liabilities subject to compromise.

Income Taxes. We recognize deferred tax assets and liabilities based on the
differences between the financial statement carrying amounts and the tax bases
of assets and liabilities. We regularly review our deferred tax assets for
recoverability and establish a valuation allowance based upon historical
losses, projected future taxable income and the expected timing of the
reversals of existing temporary differences. As a result of this review, we
have established a full valuation allowance against our deferred tax assets.

34

Contracts

A significant portion of our existing contracts is on a fixed-price basis.
We could be liable for the full amount of any cost overruns under these fixed-
price contracts. We generally attempt to cover anticipated cost increases
through an estimation of these increases in the original price of the
contract. However, revenue, cost and gross profit realized on a fixed-price
contract will often vary from the estimated amounts because of many factors,
including changes in job conditions and variations in labor and equipment
productivity over the term of the contract. The results of operations and
financial condition of Friede Goldman Halter could be materially adversely
affected if significant contracts are under priced or revenue and gross
profits on large projects are different from those originally estimated.

Many of our existing contracts, and contracts that we expect to execute in
the future, contain or will contain provisions requiring us to pay liquidated
damages in the event that we fail to meet specified performance deadlines. We
cannot assure you that we will not be required to make payments under these
liquidated damages provisions or that the requirement to make such payments
will not have a material adverse effect on our operating results. In certain
circumstances, delivery delay beyond a specified period could entitle the
customer to terminate the contract and to elect various remedies, including
return of the purchase price.

The construction of offshore drilling rigs, vessels and other equipment
frequently involves complex design and engineering and equipment and supply
delivery coordination throughout construction periods that may extend from
several months to two years. It is not unusual in such circumstances to
encounter design, engineering, equipment delivery schedule changes and other
factors that impact the builder's ability to complete construction of the
project in accordance with the original contractual delivery schedule. Our
construction contracts generally require the customer to compensate us for
additional work as well as reassessed delivery dates or expenses incurred due
to customer requested change orders or failure of the customer to provide us
with design or engineering information or equipment, if specified in the
contract for the customer to provide these items. Under these circumstances,
we generally negotiate with the customer with respect to the amount of
compensation to be paid to us following the time at which the change order was
requested or the customer failed to provide us with items required by the
contract to be provided by the customer to us. We are subject to the risk that
we are unable to obtain, through negotiation, arbitration, litigation or
otherwise, adequate amounts to compensate us for the additional work or
expenses we incurred due to customer requested change orders or failure by the
customer to timely provide items required to be provided by the customer. A
failure to obtain adequate compensation for these matters could require us to
record an adjustment to amounts of revenue and gross profit recognized under
the percentage of completion accounting method.

Fluctuations in operating results

Our results of operations are subject to significant variations from
quarter to quarter and year to year. Fluctuations in the demand for our
services, the limited number of projects in process, the timing of the
awarding of new projects, the significant lead time between award date and
start of significant construction activities, and the variability of estimates
used in percentage of completion accounting for construction contracts, are
among the factors that contribute to such variations. In addition, we schedule
projects based on the timing of available capacity to perform the services
requested and, to the extent that there are delays in the arrival of a vessel,
drilling rig or production unit into the shipyard, we generally are not able
to utilize the excess capacity created by such delays. Although we may be able
to partially offset the effect of such delays through adjustments to the size
of our skilled labor force on a temporary basis, such delays may adversely
affect the profitability of the project and affect our results of operations
in any period in which such delays occur. Our ability to schedule projects
efficiently is also impacted by the availability of raw materials and
services, which is being adversely impacted by the liquidity problems we
experienced during the past year.

35

The Ocean Rig, Petrodrill, Pasha and CNOOC Contracts

Our results of operations for 2001, 2000 and 1999 and our current financial
condition have been materially and adversely impacted by contracts for the
construction of four semi-submersible drilling rigs (Ocean Rig and Petrodrill
contracts), one vehicle car carrier (Pasha contract) and one heavy derrick-lay
barge (CNOOC contract).

Ocean Rig

In December 1997 and June 1998, we entered into contracts to construct two
semi-submersible drilling rigs for Ocean Rig ASA, a Norwegian company. We
commenced construction of one rig in June 1998 and the other in January 1999.

Since January 2000, when we entered into a Confidential Settlement
Agreement with Ocean Rig to resolve disputes with respect to these contracts,
we continued to experience significant cost overruns and delays in the
construction of these rigs. As a result, we recorded provisions for contract
losses during the second, third and fourth quarters of 2000 of approximately
$24.6 million, $7.0 million and $38.2 million, respectively, related to this
project. Losses for the fourth quarter include a provision for all costs we
incurred through the date of the March 9, 2001 amendment to the contract, at
which time the contract was converted to reimburse us on a "time and
materials" basis. The significant events which occurred during 2000 and 2001
related to this project are discussed below.

Delays and cost increases related to additional design changes initiated by
Ocean Rig and the late delivery by Ocean Rig of information and equipment
continued after the Settlement Agreement. Ocean Rig denied responsibility for
these delays and cost increases. This Post-Settlement Agreement dispute was
resolved pursuant to a negotiated Co-operation Agreement dated November 30,
2000 (the "Co-operation Agreement") which provided for additional compensation
to us from Ocean Rig and revised delivery dates of March 2001 and June 2001
and imposition of liquidated damages thereafter at the rate and subject to the
maximum amount stated in the Settlement Agreement.

Despite our best efforts to progress the project consistent with the terms
of the Co-operation Agreement, we continued to experience additional cost
overruns and delays which had a significant adverse impact on our financial
results in the fourth quarter 2000 and our current financial condition. On
March 1, 2001, we stopped work on the Ocean Rig project and Ocean Rig
commenced an arbitration proceeding in London. Further, on March 2, 2001,
Ocean Rig commenced proceedings before the United States District Court for
the Southern District of Mississippi seeking possession of the rigs. On March
9, 2001, we entered into a Remuneration Agreement with Ocean Rig ASA in order
to resolve the disputes which had arisen; to amend certain provisions of the
completion contracts to construct two Bingo design semi-submersible offshore
drilling rigs and previous settlement agreements; and to ensure the successful
and timely completion of the rigs to the mutual benefit of both parties. In
accordance with the Remuneration Agreement, Ocean Rig ASA was granted control
over the rig projects and paid us a contractually established rate for
equipment, personnel and labor provided by us to cover the costs of completing
the projects. As a further result of the agreement, Ocean Rig withdrew the
arbitration and other legal proceedings. We also agreed to issue 2.0 million
warrants to Ocean Rig ASA to purchase our common stock at a strike price of
$5.00 per share; however, these warrants were not issued due to our bankruptcy
filing. Shipyard construction of the first rig was completed in May 2001 and
that rig left our facility to undergo final outfitting, including the
installation of the dynamic positioning thruster system. This rig has
completed final sea trial commissioning and is in operation. The second rig
left our facility in July 2001 and construction will be completed at a
Canadian shipyard.

On December 10, 2001, we entered into a Delivery and Close--Out Agreement
with Ocean Rig under which both parties waived and released all claims each
had against the other except certain

36

limited claims reserved in the Agreement. The Agreement is subject to the
approval of the Bankruptcy Court. The Court's approval of the Delivery and
Close--Out Agreement was not received prior to the deadline for filing proofs
of claim in the bankruptcy court. In order to preserve its rights, Ocean Rig
filed unquantified proofs of claim for both rigs. The proofs of claim will be
cancelled by Ocean Rig upon approval of the Delivery and Close--Out Agreement
by the Bankruptcy Court.

Petrodrill

In April 1998, Friede Goldman Offshore--Texas ("FGOT"), a subsidiary of
ours (and a former subsidiary of HMG), entered into contracts to construct two
semi-submersible drilling rigs for two newly formed entities, Petrodrill IV,
Ltd. and Petrodrill V, Ltd. ("Petrodrill"). After the commencement of
construction, FGOT began to experience delays in the production schedule and
increased costs due, in whole or part, to delays caused by Petrodrill and by
subcontractors nominated by Petrodrill. In addition, FGOT had to perform as
the lead yard as opposed to a follow-on yard as initially anticipated by the
contracting parties.

In April 1999, and in connection with a transaction whereby the Federal
Maritime Administration ("MARAD") agreed to finance the Petrodrill rigs, FGOT
and Petrodrill entered into an amendment to the contracts that provided, among
other things, for extensions to the delivery dates of approximately six months
for each rig. Thereafter, production delays continued. Under the contracts,
FGOT is entitled to extensions of the delivery dates for permissible delay as
defined in the contracts ("Permissible Delay") and for delays caused by
Petrodrill breaches of contract. FGOT notified Petrodrill that, as a result of
such delays, it was entitled to additional extension of the delivery dates and
to additional compensation. Petrodrill refused to acknowledge FGOT's right to
extension of the delivery dates. Petrodrill was also advised that the rigs
could not be completed by their respective existing delivery dates.

In January 2000, FGOT notified Petrodrill that it was mitigating its and
Petrodrill's damages by deferring certain fabrication efforts until
engineering work could be completed so that FGOT could determine the ultimate
cost of the project and permit construction to go forward in an efficient
manner. FGOT also notified Petrodrill that it believed it was entitled to
additional monetary compensation from Petrodrill as a result of delay,
disruption, inefficiencies and other direct and indirect costs caused by,
among other things, delays by Petrodrill and its nominated subcontractors and
by FGOT being required to perform as the lead yard. Consequently, we and
Petrodrill filed a series of actions against one another in the United States
federal court and in a court in London, England. In May 2000, FGOT and
Petrodrill finalized an agreement to amend the construction contract and
dismiss the litigation previously filed against each other. The amendment
extended delivery dates, capped liquidated damages and increased our contract
value.

On February 28, 2001, we announced an agreement in principle with Fireman's
Fund, the surety company which wrote the performance bonds of $87.0 million
per rig on the Petrodrill project, pursuant to which the surety company had
agreed to provide certain funding for the completion of construction of the
two semi-submersible drilling rigs. The agreement provided that the surety
company would contract with FGOT for FGOT's completion of the project on a
"time and materials" basis, including payment of all direct labor and fringe
benefit costs, materials, subcontractor and other costs and an allocation for
overhead and general and administrative expenses. The terms of the final
agreement were not successfully negotiated resulting in the surety ceasing to
provide funding.

On May 4, 2001, we announced that we filed with the Bankruptcy Court a
motion to reject the contracts related to the Petrodrill project. This motion
was approved by the Bankruptcy Court in June 2001 and finalized in July 2001.
Work on the projects was discontinued effective May 4, 2001. Construction on
the projects has been resumed pursuant to a Bankruptcy Court motion effective
September 6, 2001. This motion provides for us to work as authorized by the
customer and surety

37

company for a 120-day period on Rig I and a 150-day period on Rig II. These
periods began on September 6, 2001. The construction is to be performed at
specified labor, equipment and material billing rates. In December 2001, we,
Petrodrill and Fireman's Fund jointly moved for and were granted an extension
of time to April 4, 2002 for the removal of the first rig in our Pascagoula,
Mississippi shipyard and to May 9, 2002 for the removal of the second rig in
our shipyard in Orange, Texas. We continue to discuss the possibility of
completing the work on both rigs with Petrodrill in our Texas facilities;
however, we have been advised that there is a strong possibility that the work
to complete these rigs may be performed elsewhere.

At December 31, 2001, we had a reserve for estimated costs to complete the
contract of $25.7 million, which represents our estimate of the remaining cost
of completion in excess of future billings at the time work on the project was
suspended. Our estimate was based on an uninterrupted work plan we developed
during the first quarter of 2001. At December 31, 2001, we also have recorded
a liability of $15.9 million related to costs funded to date by the surety. We
believe our liability related to the project is limited to the sum of these
two liabilities, approximately $41.6 million. This amount is included in
liabilities subject to compromise in our balance sheet.

Petrodrill has submitted proofs of claim totaling $477.0 million based on
estimated costs to complete the rigs and lost revenues. Fireman's Fund has
submitted proofs of claim which are unquantified at this time. We believe
Petrodrill's claim substantially exceeds our reserve of $41.6 million due to
delays caused by the customer/surety and the customer's/surety's inaction on
resolving the strategy to complete construction of the rigs. We are not
privileged to the customer's/surety's final strategy for completion of these
projects and do not have information as to the estimated final cost to
complete under the customer's/surety's strategy and their claims. We believe
the claims made by Petrodrill and the surety, if substantiated, would be a
liability subject to compromise. There is no assurance that management's
position regarding the value of the claims of Petrodrill and Fireman's Fund
will be upheld by applicable courts and additional liabilities will not result
in excess of the reserve recorded at December 31, 2001.

PASHA

On December 28, 1999, we signed a contract for the construction of a 4,000
car-carrier vessel for transport of vehicles between the west coast and the
Hawaiian islands. On May 1, 2001 we gave notice to the customer that we were
not financially capable of completing this contract without further funding to
ensure a cash flow positive contract from the date of filing Chapter 11
reorganization on April 20, 2001. This additional funding was anticipated to
come from the surety company which wrote the performance bond for the project.
The surety company provided additional funding for the project under court
order until July 27, 2001 when it informed us that it would not fund
completion of the vessel. Construction on the project was suspended when this
funding ceased. We maintain with the customer that this is a violation of the
terms of the performance bond. The customer has sued the surety in U.S.
District Court. The United States Department of Justice ("USDOJ"), which
represents the United States Maritime Administration ("MARAD") (the provider
of customer financing) and the customer have also sued the surety in the State
Court of Mississippi. The suits are seeking specific performance of the surety
under the terms of the performance bond and are pending. The customer has
signed a letter of intent with us to complete the project with or without the
surety's participation subject to our financial status as we emerge from
Chapter 11.

At December 31, 2001, we have recorded a reserve for estimated costs to
complete the contract of $4.9 million, which represents our estimate of the
cost of completion in excess of future billings at the time work on the
project was suspended. This amount is included in liabilities subject to
compromise in our balance sheet. The customer has submitted proofs of claim
totaling $906.0 million and the surety has submitted proofs of claim which are
unquantified at this time. We believe the claims made by the customer and the
surety, if substantial, would be a liability subject to compromise. There

38

is no assurance that management's position regarding the value of the claims
of the customer and the surety will be upheld by applicable courts and
additional liabilities will not result in excess of the reserve recorded at
December 31, 2001.

CNOOC

We filed a motion with the Bankruptcy Court to reject the contract with
China National Offshore Oil Company (CNOOC) for the construction of a heavy
derrick-lay barge. Liberty Mutual, the surety company which underwrote the
contract performance bank guarantee, opposed the contract rejection. After we
filed for bankruptcy, CNOOC received $10.9 million in funding from Liberty
Mutual under the performance bank guarantee for costs it incurred to complete
the project. We have co-operated with the surety in its assessment of the
claim made by CNOOC against the guarantee. At December 31, 2001, we have
recorded additional contract costs and a related liability of $10.9 million
based on the funding provided by the surety. This liability is included in
liabilities subject to compromise in our balance sheet. Liberty Mutual has
submitted proofs of claim which are unquantified at this time. We believe any
claim made by the customer and/or the surety would be a liability subject to
compromise and no loss exposure exists in excess of the liability recorded.

Results of Operations

Our consolidated financial statements include the accounts of FGH, Inc. and
its wholly-owned subsidiaries, including, among others, Friede Goldman
Offshore, Inc. ("FGO"), Friede & Goldman, Ltd. ("FGL"), Friede Goldman
Newfoundland Limited ("FGN"), Friede Goldman France S.A.S. ("FGF"), and Halter
Marine, Inc. ("Halter") (collectively referred to as the "Company"). These
consolidated statements include the accounts of FGF for all periods prior to
May 23, 2001, the date of sale of this subsidiary, and Halter for all periods
subsequent to November 3, 1999. All significant intercompany accounts and
transactions have been eliminated.

Contract Revenue

The table below summarizes our revenue from continuing operations by
segment for the years noted:

For the years ended December 31,
----------------------------------------
2001 % 2000 % 1999 %
------ ----- ------ ----- ------ -----
($ in millions)

Offshore:
New build....................... $ 85.9 34.9% $223.7 38.5% $189.8 43.1%
Conversion, repair and other.... 34.3 13.9 142.1 24.5 210.7 48.0
------ ----- ------ ----- ------ -----
120.2 48.8 365.8 63.0 400.5 91.1
Vessels:
Energy.......................... 4.0 1.6 30.3 5.2 6.8 1.5
Government...................... 30.3 12.3 65.8 11.3 13.2 3.0
Repair.......................... ---- ---- 49.7 8.6 11.9 2.7
Other........................... 91.6 37.3 69.4 11.9 7.0 1.7
------ ----- ------ ----- ------ -----
125.9 51.2 215.2 37.0 38.9 8.9
------ ----- ------ ----- ------ -----
$246.1 100.0% $581.0 100.0% $439.4 100.0%
====== ===== ====== ===== ====== =====

39

During the year ended December 31, 2001, we generated revenue of $246.1
million from continuing operations, a decrease of 57.6% compared to the $581.0
million generated from continuing operations for the year ended December 31,
2000. The overall decrease was attributable to the following:

. Vessels segment revenues decreased $89.3 million or 41.5% in 2001
primarily due to the completion of one government vessel and three
energy vessels in 2000 that were not replaced in 2001 and the ongoing
construction of one government vessel was completed during the fourth
quarter of 2001. Additionally, the yachts and vessel repair businesses
were sold in April and August, 2000, respectively, causing a $53.2
million decrease in revenue in 2001 compared to 2000.

. Offshore segment revenue decreased by $245.6 million or 67.1% in 2001
primarily due to the completion of one new build and two conversions of
semi-submersible drilling rigs in 2000 that have not been replaced in
2001 and the ongoing construction of four new build semi-submersible
drilling rigs. Construction was ended on two of these rigs during the
third quarter of 2001. In addition, construction on the two other new
build semi-submersible drilling rigs was suspended on May 4, 2001 for
approximately four months.

During the year ended December 31, 2000, we generated revenue of $581.0
million from continuing operations, an increase of 32.2%, compared to the
$439.4 million generated by continuing operations for the year ended December
31, 1999. The overall increase was attributable to the following:

. Vessels segment revenues increased $176.3 million in 2000 as 1999
included only two months of revenues.

. Offshore segment revenue decreased by $34.7 million or 8.7% in 2000
primarily due to:

--a decrease of approximately $49.0 million in revenues attributable to
the ongoing construction of the two Ocean Rig semi-submersible
drilling rigs which were nearing completion, and a $123.0 million
decline related to the completion and outfitting of five conversions
in 1999 and a portion of 2000 which were not replaced in 2000 due to a
decrease in demand for conversion projects. The remainder of the
decrease was due to the decreased demand for miscellaneous smaller
projects. These decreases were offset by:

--an increase in revenues of approximately $149.7 million generated by
offshore entities acquired in the HMG merger; including an increase in
revenues of approximately $89.8 million attributable to the ongoing
construction of the two Petrodrill semi-submersible drilling rigs and
a derrick barge.

40

Gross Loss

The following table summarizes our gross loss from continuing operations by
segment for the periods noted:

For the years ended December 31,
---------------------------------------------
2001 % 2000 % 1999 %
------ ----- ------ ----- ------ -----
($ in millions)

Offshore:
New build................ $ (3.3) (3.8)% $(66.3) (29.6)% $(36.2) (19.1)%
Conversion, repair and
other................... (8.0) (23.3) (1.4) (1.0) 28.0 13.3
------ ------ ------
(11.3) (9.4) (67.7) (18.5) (8.2) (2.0)
Vessels:
Energy................... 0.1 2.5 3.1 10.2 0.6 8.8
Government............... 9.0 29.7 14.1 21.4 2.3 17.4
Repair................... -- -- 4.7 9.5 2.6 21.8
Other.................... (17.6) (19.2) (1.3) (1.9) 0.5 7.1
------ ------ ------
(8.5) (6.8) 20.6 9.6 6.0 15.4
------ ------ ------
$(19.8) (8.0)% $(47.1) (8.1)% $ (2.2) (0.5)%
====== ====== ======

Cost of revenue was $265.9 million from continuing operations for the year
ended December 31, 2001, compared to $628.1 million from continuing operations
for the year ended December 31, 2000. Gross profit increased from a loss of
$47.1 million from continuing operations, or a negative margin of 8.1% of
revenue, in 2000 to a loss of $19.8 million, or a negative margin of 8.0% of
revenue from continuing operations in 2001. The overall change was
attributable to the following:

. Gross profit for the Vessels segment decreased to a loss of $8.5
million, or a negative 6.8% of revenue, for the year ended December 31,
2001 compared to a profit of $20.6 million, or 9.6% of revenue, for the
year ended December 31, 2000. The decrease in margin is primarily the
result of the sale of the higher margin repair business in August 2000,
overhead inefficiencies due to lower sales volume, losses incurred on a
contract to build a car carrier vessel and losses incurred on the
construction of an ocean going barge. The losses on these contracts were
primarily attributable to delays and disruption caused by our working
capital deficit prior to filing Chapter 11.

. Gross profit for the Offshore segment increased from a loss of $67.7
million, or a negative 18.5% of revenue, in 2000 to a loss of $11.3
million, or a negative 9.4% of revenue, in 2001. This increase in margin
is primarily due to $69.6 million in losses recorded in 2000, including
a provision for future losses of $21.1 million, on a contract to
construct two semi-submersible drilling rigs for Ocean Rig ASA requiring
increased estimated man-hours to complete this project. The gross profit
margin was also impacted by an increase in the reserve for obsolete
inventories of $10.5 million and the recording of the performance bank
guarantee liability on the heavy derrick-lay barge contract in 2001.

Cost of revenue was $628.1 million from continuing operations for the year
ended December 31, 2000 compared to $441.7 million from continuing operations
for the year ended December 31, 1999. Gross profit decreased from a loss of
$2.2 million from continuing operations, or a negative 0.5% of revenue, in
1999 to a loss of $47.1 million from continuing operations or a negative
margin of 8.1% of revenue, in 2000. The loss in 2000 is principally the result
of several factors including a lower than expected level of revenues in all of
our operating segments and significant losses in the Offshore segment mainly
due to losses on the Ocean Rig projects. Significant factors are as follows:

. Gross profit for the Vessels segment acquired in November 1999 was $20.6
million or 9.6% for the year ended December 31, 2000 compared to $6.0
million with a margin of 15.4% for

41

1999. The increase in gross profit compared to 1999 is due to the
inclusion of Halter for the full year of 2000 compared to two months in
1999. The gross profit percentage was adversely impacted by the sale of
the repair division during the third fiscal quarter of 2000.

. Gross loss for the Offshore segment increased from a loss of $8.2
million, or a negative 2.0%, in 1999 to a loss of $67.7 million, or
negative 18.5%, in 2000. This decrease was primarily due to the loss
recorded on the two Ocean Rig contracts in the amount of $69.6 million,
including a provision for future losses of $21.1 million.

Selling, general and administrative expenses

Selling, general and administrative expenses ("SG&A expenses") were $29.5
million from continuing operations for the year ended December 31, 2001, or
12.0% of gross revenue, compared to $46.1 million from continuing operations,
or 7.9% of gross revenue, for the year ended December 31, 2000. The decrease
in SG&A expenses is due to personnel reductions and other cost-saving measures
we implemented.

Selling, general and administrative expenses ("SG&A expenses") were $46.1
million from continuing operations for the year ended December 31, 2000, or
7.9% of gross revenue, compared to $35.0 million from continuing operations,
or 8.0% of gross revenue, for the year ended December 31, 1999. The increase
in SG&A expenses in 2000 primarily reflects the increase in sales and
administrative workforce and facilities due to overall growth of our business
resulting from the Halter merger. SG&A expenses include Halter for the full
year in 2000 versus two months in 1999. SG&A expenses for 2000 include non-
recurring charges of $1.1 million related to a proposed debt offering
undertaken during the third quarter which we expensed when the offering was
withdrawn.

Amortization of Goodwill

Amortization of goodwill increased $3.6 million from continuing operations
for the year ended December 31, 2001 compared to the year ended December 31,
2000 as a result of adjustments to goodwill in 2000.

Amortization of goodwill increased $5.9 million from continuing operations
for the year ended December 31, 2000 compared to the year ended December 31,
1999 as a result of the Halter merger in late 1999.

Impairment of Goodwill

We have completed an evaluation of the impairment in carrying values of our
long-lived assets, including goodwill, in conjunction with the development of
our plan of reorganization. We recorded a goodwill impairment charge of $201.6
million for the year ended December 31, 2001 related to our vessel and
offshore segments. This charge was estimated based on our projection of cash
flow that will be generated from the operation of these segments in future
periods. This adjustment relates to an analysis performed by comparing the
total book value of property, plant, equipment and goodwill to the total
undiscounted cash flows for a period of five years as it relates to the assets
we acquired in the merger with Halter Marine Group in November 1999. The
adjustment was based on the amount by which the carrying amount of the long-
lived assets, including goodwill, exceeded the estimated fair market value.

Net interest expense

Net interest expense (interest expense less interest income) increased to
$73.9 million from continuing operations for the year ended December 31, 2001
from $33.8 million from continuing operations for the year ended December 31,
2000, primarily as a result of the recognition of interest expense during the
first two quarters of 2001 for the unaccreted discount totaling $54.8 million
on the

42

4 1/2% convertible subordinated notes assumed in connection with the HMG
merger. This was offset by $5.7 million in contractual interest expense on the
4 1/2% convertible subordinated notes which was not recorded in 2001 due to
the Chapter 11 filing.

Net interest expense (interest expense less interest income) increased to
$33.8 million from continuing operations for the year ended December 31, 2000
from $9.2 million from continuing operations for the year ended December 31,
1999, primarily as a result of:

. interest expense in the amount of $19.1 million, including $10.8 million
of discount accretion on the $185.0 million 4 1/2% Convertible
Subordinated Notes assumed in connection with the HMG merger;

. additional interest expense of $6.0 million as a result of additional
debt and higher interest rates in 2000. An average balance on this debt
of approximately $106.7 million at an average interest rate of 8.9% was
outstanding for two months of 1999 compared to an average balance
outstanding of approximately $70.1 million at an average rate of 10.9%
for 12 months of 2000.

Other income and expense

The changes in other income (expense) from 2000 to 2001 and from 1999 to
2000 were attributable to miscellaneous items, none of which were individually
material.

Reorganization items

We incurred professional fees of $11.7 million related to the bankruptcy
proceeding and reorganization in 2001. We also wrote off $2.6 million of debt
issuance costs related to the 4 1/2% subordinated convertible notes due to the
notes being reclassified as a liability subject to compromise.

Additionally, we recorded a loss on assets held for disposition in the
amount of $22.0 million for the year ended December 31, 2001. This loss
relates to the write-down of $17.1 million on certain assets of the Offshore
division to an amount equal to the debt owed to its secured lenders since we
intend to satisfy this debt by relinquishing control of the assets to our
lender. We also recorded a write-down of $4.9 million on the asset value of
FGN based on the estimated net proceeds that we will receive from the sale of
this facility.

Income from Discontinued Operations

We recorded income from discontinued operations of our Engineered Products
segment of $7.3 million for the year ended December 31, 2001 as compared to
$11.1 million from discontinued operations recorded for the year ended
December 31, 2000 primarily due to higher sales volumes in 2000.

We recorded income from discontinued operations of our Engineered Products
division of $11.1 million for the year ended December 31, 2000 compared to a
income of $28,000 for the year ended December 31, 1999 primarily due to higher
sales volume in 2000. Lower sales volume in 1999 is due to the inclusion of
the AmClyde operating results beginning in November 1999 as a result of our
merger with Halter Marine Group.

Loss on Disposition of Engineered Products Segment

We recorded a net loss of $26.0 million relating to the disposition of our
Engineered Products segment for the year ended December 31, 2001. We recorded
a gain of $16.0 million on the sale of the BLM division in May 2001. This gain
was offset by the loss recorded on the sale of the AmClyde division of $42.0
million.

43

Income taxes

We had income tax expense of $9.5 million in 2001 compared to an income tax
benefit of $21.0 million in 2000. As a result of losses recorded during the
fourth quarter of 2000 and during the year ended December 31, 2001, the
benefits available for financial reporting purposes were limited
significantly. We have recorded a valuation allowance which offsets
substantially all of the deferred tax assets arising from contract reserves
and net operating loss carry-forwards generated through the current period.
The income tax expense recorded during the year ended December 31, 2001 is
related to income generated by BLM and an increase in the valuation allowance
on deferred tax assets.

We recognized an income tax benefit of $21.0 million in 2000, at an
effective rate of 17.0% for the year. As a result of the losses recorded in
the fourth quarter, principally due to losses recognized on our uncompleted
contracts with Ocean Rig, the benefits available for financial reporting
purposes were limited significantly. We have recorded a valuation allowance
which offsets substantially all of the deferred tax assets arising from the
contract reserves and net operating loss carryforwards generated in the
current year. An analysis of our effective tax rates and composition of our
deferred tax assets and liabilities is included in the Notes to the
Consolidated Financial Statements.

Extraordinary Item

During 2000, we recorded an extraordinary loss of $3.9 million related to
the write-offs of deferred loan costs associated with the portion of deferred
loan fees related to the previous credit facility which were written off when
the agreement was re-negotiated and restated in October 2000.

Liquidity and Capital Resources

Overview

As further described in the introduction section of Management's Discussion
and Analysis, Item 7, we filed a petition for relief under Chapter 11 of the
United States Bankruptcy Code in April 2001.

Cash flow summary

During the year ended December 31, 2001, we financed our business
activities through funds generated from cash balances, including those
generated through collections of accounts receivable, borrowings under the
Restated Credit Agreement and proceeds from the sale of our French
Subsidiaries.

Net cash used in operating activities during 2001 was approximately $33.3
million including a net loss of $401.6 million for the twelve months ended
December 31, 2001 offset by non-cash depreciation. and amortization of $32.3
million and goodwill impairment of $201.6 million. Funds generated through
operating activities include a $42.3 million decrease in contract and other
receivables and a $18.2 million increase in accounts payable and accrued
liabilities. Funds used by operating activities included a $17.0 million
decrease in billings related to costs and estimated earnings on uncompleted
contracts and a $36.4 million decrease in the reserve for uncompleted
contracts. Additionally, loss on disposal of the Engineered Products segment,
discount on convertible notes, and loss on assets held for sale were recorded
in 2001 in the amounts of $26.0 million, $55.9 million, and $22.0 million,
respectively.

Net cash provided by investing activities during 2001 was $6.8 million. We
generated cash of $26.6 million from the sale of our French Subsidiaries;
however, use of these funds is restricted and subject to the approval of the
unsecured creditor's committee and/or an order of the bankruptcy court. These
funds were used to pay the professional fees and other administrative costs
related to our bankruptcy filing. During the year 2001, we incurred
approximately $4.0 million in capital expenditures.

44

Net cash provided by financing activities during 2001 was $22.0 million.
Sources of cash included net borrowings under our line of credit of $22.8
million, borrowings under other debt facilities of $8.9 million, and
repayments of borrowings on other debt facilities of $9.7 million.

During 2000, net cash used in operations was $53.8 million which included
non-cash depreciation and amortization expense of $39.6 million and provision
for losses of $74.4 million. Net cash provided by investing activities was
$95.8 million which included $93.8 million in net proceeds from the sale of
certain assets and business units including $77.8 million from the sale of our
vessel repair units, $13.0 million from the sale of our ownership interest in
the Illion LLC, and $3.0 million from the sale of our yacht division.
Additionally, we incurred $5.6 million in capital expenditures. Net cash used
in financing activities was $31.7 million and was primarily associated with
$62.0 million in net repayments under our line of credit and we repaid $30.0
million in borrowings from our Mississippi Business Finance Corporation
Taxable Revenue Bonds, Series 1998 and $20.3 million in miscellaneous debt.
Sources of cash from financing activities primarily included $69.5 million in
net proceeds generated through the sale of 8.8 million shares of our common
stock .

Restated Credit Agreement

Effective October 24, 2000, we entered into a $110.0 million amended and
restated credit agreement, comprised of a $70.0 million line of credit and a
$40.0 million term loan (collectively, the "Restated Credit Agreement"). The
Restated Credit Agreement has a three-year term. The line of credit is secured
by substantially all of our otherwise unencumbered assets, including accounts
receivable, inventory, equipment, real property and all of the stock of our
domestic subsidiaries and 67% of the stock of our Canadian subsidiary. The
term loan is secured by a subordinated security interest in the line of credit
collateral.

As stated above, on April 13, 2001, we received the Notice from Foothill
Capital Corporation, as agent for itself and other lenders under the Restated
Credit Agreement, which demanded the immediate payment of $85.7 million plus
interest and various other costs, within five days of the Notice. As a result,
we are unable to make any further borrowings under this facility.

Under the original terms of the Restated Credit Agreement, we were allowed
to borrow up to $70.0 million under a senior secured revolving line of credit
facility. Availability under the line of credit was based on specified
percentages of our receivables, inventories, equipment and real property. The
interest rate on the line of credit is based on LIBOR or the base rate (as
defined), with a floor of 7.5%. During the first year of the line of credit
the spread is fixed at 3.75% over LIBOR and 1.75% over the base rate;
thereafter the LIBOR option ranges from 3.25% to 4.25% over LIBOR and the base
rate option ranges from 1.25% to 2.25% over the base rate, (as defined). The
default rate bears interest on the daily balance at a per annum rate equal to
2 percentage points above the per annum rate otherwise applicable under the
loan agreement. We are also obligated to pay certain fees, including a
commitment fee equal to (i) during year one of the facility, 0.50% of the
unused portion of the line of credit and (ii) thereafter, a range of 0.25% to
0.50% of the unused portion of the line of credit, an annual facility fee of
$87,500 and an agency fee of $10,000 per month.

The term loan is a $40.0 million interest-only three-year facility with a
stated maturity of October 2003. The term loan bears interest at the base rate
(as defined) plus 5.5% with a floor of 13%. At our option, we have the ability
to capitalize 1.5% of the current interest charge through maturity. Interest
is payable monthly. The default rate bears interest on the daily balance at a
per annum rate equal to 2 percentage points above the per annum rate,
otherwise, applicable under the loan agreement. We are also obligated to pay
certain fees including an annual fee of $200,000 and a monthly servicing fee
of $5,000.

The Restated Credit Agreement requires that we comply with certain
financial and operating covenants, including limitations on additional
borrowings and capital expenditures, utilization of cash

45

management accounts, maintenance of certain minimum debt coverage ratios,
minimum EBITDA, net worth and other requirements. Substantially as a result of
the losses we incurred during the fourth quarter of 2000 continuing into the
first quarter of 2001 and difficulties encountered in resolving other
requirements related to collateral, we became non-compliant with all of the
requirements included in the covenants. Our failure to comply with the
covenants in the Agreement constituted an Event of Default, as defined, and
provided the lenders with various remedies, including declaring all
obligations immediately due and payable, which they did in the Notice dated
April 13, 2001.

On, February 15, 2002, we entered into our Third Amended Cash Collateral
Agreement with Foothill Capital Corporation, as agent for itself and another
lender. This agreement extended our continued use of our operating cash until
April 15, 2002. We also agreed to comply with certain requirements relating to
cash receipts and disbursements and agreed to make weekly adequate protection
payments of $200,000. The Agreement also stipulates our consent for Foothill
to accrue interest on all indebtedness whether incurred pre-petition or post-
petition at the contractual default rate of interest set forth in the Pre-
Petition Loan Documents. At December 31, 2001, the weighted average
contractual default rate was 11.6%.

Total balances outstanding under the Restated Credit Agreement at December
31, 2001 were $87.0 million including $15.4 million in letters of credit.
Included in the letter of credit amount is a $5.7 million letter of credit
which is being used to fund worker's compensation claims payable by the our
unconsolidated captive insurance subsidiary.

4 1/2% Convertible Subordinated Notes

We failed to pay the $4.2 million interest payment due on March 15, 2001 on
our outstanding Subordinated Notes due in 2004 resulting in the entire $185.0
million principal amount becoming immediately callable. We have reclassified
the debt as a liability subject to compromise at December 31, 2001. Further,
we recognized interest expense during the first six months of 2001 for the
unaccreted discount totaling $54.8 million on the notes.

MARAD Financing Agreement

As of December 31, 2001, we had approximately $19.9 million in outstanding
principal related to our bonds that are guaranteed by the U. S. Maritime
Administration ("MARAD"). The bonds were issued in December 1997, under Title
XI, to partially finance construction of our FGO East Facility. Our plan of
reorganization, filed on March 22, 2002, contemplates abandoning this facility
to MARAD in full satisfaction of their claims.

Recently Issued Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations", and No. 142,
"Goodwill and Other Intangible Assets", effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill will no longer be
amortized but will be subject to annual impairment tests in accordance with
the Statements. Other intangible assets will continue to be amortized over
their useful lives. We began applying the new rules on accounting for goodwill
and other intangible assets in the first quarter of 2002. As a result of the
impairment charge and the planned disposition of the Company's Engineered
Products segment, we do not expect application of the non-amortization
provision of the Statement to have a material effect on our financial position
or results of operations.

In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (FAS 144), which addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
to

46

be Disposed Of", and the accounting and reporting provisions of APB Opinion
No. 30, "Reporting the Results of Operations" for a disposal of a segment of a
business. FAS 144 is effective for fiscal years beginning after December 15,
2001 with earlier application encouraged. We will adopt FAS 144 as of January
1, 2002 and do not expect that the adoption of the Statement will have a
significant impact on our financial position or results of operations.

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to interest rate risk due to changes in interest rates,
primarily in the United States. Our policy is to manage interest rates through
the use of a combination of fixed and floating rate debt. We currently do not
use any derivative financial instruments to manage our exposure to interest
rate risk.

The table below provides information about future maturities of principal
for our outstanding debt instruments and fair value at December 31, 2001. All
instruments described are non-trading instruments ($ in thousands).

2002
-------

Long-term debt:
Fixed rate........................................................ $28,744
Average interest rate............................................. 7.3%
Short-term debt
Variable rate:.................................................... $71,630
Average interest rate............................................. LIBOR
plus

Foreign Currency Risks

Although the majority of our transactions are in U.S. dollars, two of our
subsidiaries, one of which was sold during May 2001, have conducted some of
their operations in various foreign currencies. We currently do not use any
off balance sheet hedging instruments to manage risks associated with our
operating activities conducted in foreign currencies unless that particular
operation enters into a contract in a foreign currency which is different than
the local currency of the particular operation. In limited circumstances and
when considered appropriate, we will utilize forward exchange contracts to
hedge the anticipated purchases and/or sales. We have historically used these
instruments primarily in the manufacturing and selling of certain marine deck
equipment. We attempt to minimize our exposure to foreign currency
fluctuations by matching our revenues and expenses in the same currency for
our contracts. As of December 31, 2001, we do not have any outstanding forward
exchange contracts.

ITEM 8. Financial Statements and Supplementary Data

The information required by this Item 8 is contained in a separate section
of this report. See Consolidated Financial Statements in Item 14 of this
report.

ITEM 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure

None

47

PART III

ITEM 10. Directors and Executive Officers of the Registrant

The following individuals were elected at the annual meeting of
shareholders held on May 16, 2000 to serve as directors of our Company until
the annual meeting of stockholders in the year 2002 and until their respective
successors are duly elected and qualified. As a result of the cancellation of
such annual meeting until such future time as may be appropriate, no election
of directors of our Company will occur at this time.

INFORMATION ABOUT THE DIRECTORS

ALAN A. BAKER, age 70. Director since 1997. Mr. Baker is the retired
Chairman of Halliburton Energy Services, a position he held from 1992 to 1995.
He also served as the Chief Executive Officer of Halliburton Energy Services
Group from 1992 to 1993. Mr. Baker has served as a consultant to Halliburton
Company, a director of Noble Affiliates, Inc., a worldwide oil and gas
exploration and production company, Crestar Energy, an oil and gas exploration
and production company and Nova Technology, a deepwater oil and gas service
company.

T. JAY COLLINS, age 55. Director since 1997. He is currently the President
of Oceaneering International, Inc., a position he has held since November
1998. From May 1995 to November 1998, he served as Executive Vice President of
Oilfield Marine Service at Oceaneering International, Inc. From 1993 to 1996,
Mr. Collins served as Senior Vice President and Chief Financial Officer of
Oceaneering International, Inc. Prior to joining Oceaneering International,
Inc., Mr. Collins spent six years at Teleco Oilfield Services, Inc., most
recently as Executive Vice President, Finance and Administration. Mr. Collins
received a B.A. and M.E. from Rice University and an M.B.A. from Harvard
University.

ANGUS R. COOPER, II, age 60. Director since November 3, 1999. Mr. Cooper
served as a Director of Halter Marine Group, Inc. from April 1997 through the
time of the merger. Mr. Cooper is Chairman of the Board and Chief Executive
Officer of Cooper/T. Smith Corporation. He currently serves as a Director of
Whitney National Bank. He also serves on the Board of Trustees of the
University of Alabama.

BARRY J. GALT, age 68. Director since November 3, 1999. Mr. Galt was a
director of Halter Marine Group, Inc. since November 1997. Mr. Galt is a
director, and prior to his retirement on March 30, 1999, served since 1983 as
Chairman and Chief Executive Officer of Ocean Energy, Inc., formerly named
Seagull Energy Corporation, a diversified energy company engaged in oil and
gas exploration and development. He is also a director of Trinity Industries,
Inc., a director of StanCorp Financial Corp., Inc., an insurance company, and
a Houston area advisory director of J.P. Morgan/Chase Bank of Texas.

JEROME L. GOLDMAN age 77. Director since 1997. Mr. Goldman is currently the
Chairman and sole owner of J. L. Goldman Associates, Inc., naval architects
and marine engineers. Mr. Goldman previously served as Chairman of Friede &
Goldman, Ltd. since co-founding the Company in 1949. Mr. Goldman resigned as a
director of the Company on March 1, 2002.

J.L. HOLLOWAY, age 57. Chairman of the Board of Directors since April 1997.
Mr. Holloway served as the Chief Executive Officer and President of Friede
Goldman Offshore, Inc. (formerly HAM Marine, Inc.) from its formation in 1982
until April 1997. Mr. Holloway serves as a director of the Delta Health Group,
a company that operates and manages health care facilities in the South and as

48

President of State Street Properties, Inc., a commercial real estate
development firm headquartered in Mississippi.

GARY L. KOTT, age 60. Director since March 1999. Mr. Kott has served has a
consultant in the private sector since July 1998. From April 1997 through June
1998, Mr. Kott served as Senior Vice President and Chief Financial Officer of
Global Marine, Inc. From October 1979 through April 1997, Mr. Kott served as
President and Chief Operating Officer of Global Marine Drilling Company, the
principal operating subsidiary of Global Marine, Inc. Mr. Kott also is a
director of Tesco Corporation, a drilling technology company based in Calgary,
Canada, NS Group, Inc., a manufacturer of oilfield tubulars.

RAYMOND E. MABUS, age 53. Director since 1997. Mr. Mabus has served as
President of Frontline Global Resources since October 1998 and as Of Counsel
to the law firm of Baker, Donelson, Bearman & Caldwell since October 1996.
From July 1994 through May 1996, Mr. Mabus served as Ambassador to the Kingdom
of Saudi Arabia. From February 1992 through June 1994, Mr. Mabus served as
Chairman of the Committee on the Future of the South and as a consultant in
the private sector. From January 1988 through January 1992, Mr. Mabus served
as Governor of the State of Mississippi. Mr. Mabus also serves as a director
of the Kroll-O'Gara Company, a publicly-traded risk mitigation company and
Foamex, Inc, a publicly traded maker of foam.

See also "Executive Officers of the Registrant" included in this form 10-K.

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers, directors and persons who own more than ten percent (10%)
of the Company's Common Stock to file initial reports of ownership and changes
in ownership with the Securities and Exchange Commission ("SEC"). These
reports are also filed with the New York Stock Exchange and a copy of each
report is required to be furnished to the Company.

Additionally, SEC regulations require that the Company identify any
individuals for whom one of the referenced reports was not filed on a timely
basis during the most recent fiscal year. To the Company's knowledge, based
solely on review of reports furnished to it and written representations that
no other reports were required during and with respect to the year ended
December 31, 2001, each individual who was required to file such reports
during the year complied with the applicable filing requirements.

49

ITEM 11. Executive Compensation

Cash Compensation

The following table sets forth certain summary information for the prior
three years concerning the compensation earned by the Company's President and
Chief Executive Officer (Mr. Alford), and the four other most highly
compensated executive officers who earned in excess of $100,000 in 2001
(Messrs. Schnoor, Juelich, McCreary and Shepherd).

Summary Compensation Table

Annual Long-Term
Compensation Compensation
---------------- ------------
Stock Option
Awards All Other
Name and Principal Position Year Salary Bonus (Shares) Compensation(1)
- --------------------------- ---- ------ ------- ------------ ---------------

John Alford................ 2001 $366,667 -- -- $ 5,128
President and Chief 2000 $399,449 -- 250,000 $48,770
Executive Officer(2) 1999 $258,031 -- 515,000 $ 534

Ronald W. Schnoor.......... 2001 $210,664 -- -- $ 4,573
Group President--Offshore 2000 $255,626 -- -- $ 7,665
1999 $255,002 -- 25,000 $ 534

Richard J. Juelich......... 2001 $204,218 -- -- $13,690
Group President-- 2000 $252,915 -- -- $20,667
Engineered Products Group 1999 $ 42,152 -- 50,000 $ 3,749

Richard T. McCreary........ 2001 $165,000 -- -- $12,024
Group President--Vessels 2000 $190,000 -- 10,000 $15,750
1999 $ 31,667 $20,000 50,000 $ 2,307

Robert Shepherd............ 2001 $191,543 -- -- $31,502
Executive Vice-President 2000 -- -- --
1999 -- -- --

- --------
(1) All Other Compensation consists principally of the Company's matching
contributions to 401(k) Retirement Plan accounts, term life insurance
premiums paid by the Company, automobile allowances and relocation
expenses.
(2) Effective April 2, 2002, Mr. Alford resigned as the Company's President
and Chief Executive Officer. On April 4, 2002, the Board of Directors
elected Mr. Jack R. Stone, Jr. as the Company's new President and CEO.

50

INCENTIVE AND OTHER EMPLOYEE BENEFIT PLANS

Stock Options

No stock options with respect to fiscal 2001 were granted to the executives
named in the Summary Compensation Table.

The following table sets forth information concerning each exercise of
stock options by each of the named executive officers during the most recently
completed fiscal year and the number of exercisable and unexercisable stock
options held by them and the fiscal year-end value of the exercisable and
unexercisable options.

Aggregated Option Exercises In Last Fiscal Year And Fiscal Year-End Option
Values

Value of
Number of Unexercised
Unexercised in-the-Money
Shares Options at Options at
Acquired Value Fiscal Fiscal
Name On Exercise Realized Year-End Year-End (2)
---- ----------- -------- ------------- -------------
Exercisable/ Exercisable/
Unexercisable Unexercisable
------------- -------------

John F. Alford.............. -- -- 626,667 $0
208,333 $0
J.L. Holloway............... -- -- 873,333 $0
216,667 $0
Ronald W. Schnoor........... -- -- 25,000 $0
-- $0
Richard J. Juelich.......... -- -- 33,333 $0
16,667 $0
Richard T. McCreary......... -- -- 40,000 $0
20,000 $0
Robert Shepherd............. -- -- 33,652 $0
5,000 $0

Employment Agreements

J. L. Holloway. Mr. Holloway's employment agreement, as amended on August
7, 2000, has a two year term ending August 7, 2002. The employment agreement
provides for an annual base salary of at least $250,000, subject to increases
at the discretion of the board of directors. The employment agreement provides
that Mr. Holloway will participate in Friede Goldman Halter's annual bonus
plan and will be eligible to earn an annual bonus in an amount up to twice his
annual base salary (as determined by the compensation committee of the board
of directors of Friede Goldman Halter). The agreement also provides that
during the term of the employment agreement, Friede Goldman Halter will
contribute an amount equal to 10% of his base salary and his annual bonus to a
deferred compensation plan. Mr. Holloway also received options to purchase
325,000 shares of the Company's common stock which options shall vest ratably
over the next four years. In addition, Mr. Holloway will be eligible to
receive incentive compensation awards on a year-to-year basis.

Mr. Holloway's employment agreement may be terminated at any time by
resignation or by termination by Friede Goldman Halter. Whether voluntary or
involuntary termination or resignation, Mr. Holloway would be entitled to the
following severance benefits: (i) his base salary that was earned but unpaid
as of the date of termination; (ii) his annual bonus for the fiscal years
ended prior to the year of termination or resignation that was earned but
unpaid as of the date of termination; (iii) accelerated vesting or the lapse
of all restrictions on any compensation previously deferred on the behalf of
Mr.

51

Holloway and the payment of a lump sum amount equal to the value of the
deferred compensation; (iv) continued participation in Friede Goldman Halter's
health and welfare benefit plans for a period commencing on the date of his
termination and ending on the third anniversary of the date of his
termination; provided that any benefits received under the Friede Goldman
Halter health and welfare plans will be reduced to the extent comparable
benefits are received by him from other sources; and (v) accelerated vesting
of outstanding stock options granted under the employment agreement which are
not yet vested on the date of termination.

Under his employment agreement, Mr. Holloway has non-solicitation and non-
competition obligations toward Friede Goldman Halter for a period of one year
following any termination of his employment.

The employment agreement also provides that in the event any payments
received by Mr. Holloway under the employment agreement or under any other
plan of Friede Goldman Halter should be subject to any excise tax imposed
under Section 4999 of the Internal Revenue Code of 1986 or any other similar
tax or assessment, Friede Goldman Halter will pay Mr. Holloway the amount
necessary to fully reimburse him for these excise taxes or assessments.

John F. Alford. Mr. Alford resigned as our President and CEO effective
April 4, 2002. The following paragraphs describe his employment agreement as
it existed prior to his resignation. No payment has been made to Mr. Alford
under his employment agreement for reason of his resignation.

Mr. Alford resigned as the Company's President and Chief Executive Officer
effective April 2, 2002. The following paragraphs describe his employment
agreement as it existed prior to his resignation. No payment has been made to
Mr. Alford under his employment agreement for reason of his resignation.

Mr. Alford's employment agreement, as amended on August 7, 2000, has a
three-year term ending August 7, 2003 and is subject to automatic annual
renewal beginning on the second anniversary of the effective date of the
agreement; provided that either Friede Goldman Halter or Mr. Alford, as the
case may be, may elect to terminate the agreement by providing the other party
with at least 90 days' written notice prior to any year, beginning with the
second anniversary of the effective date of the agreement.

Mr. Alford will receive an annual base salary of at least $500,000 and will
be eligible to participate in the annual bonus plan and earn an annual bonus
in an amount up to 150% of his annual base salary (as determined by the
compensation committee of the board of directors of Friede Goldman Halter).
Mr. Alford also received options to purchase 250,000 shares of the Company's
common stock, 100,000 of which vested immediately with the remaining 150,000
options vesting ratably over the next three years. In addition, Mr. Alford
will be eligible to receive incentive compensation awards on a year-to-year
basis.

The failure of Friede Goldman Halter to extend the term of Mr. Alford's
employment agreement will result in a severance payment. If Mr. Alford's
employment is terminated by Friede Goldman Halter without "cause" or Mr.
Alford resigns for "good reason," Mr. Alford will be entitled to the same
severance benefits as provided to Mr. Holloway; provided, however, that Mr.
Alford will be entitled to a lump sum cash payment of $750,000 and an
additional lump sum payment of up to $750,000 based on the fair market value
of his options at the date his employment terminates.

For purposes of determining "good reason" in Mr. Alford's employment
agreement, "good reason" generally consists of: (i) a material breach by
Friede Goldman Halter of the employment agreement; (ii) a diminution of his
responsibilities or title; (iii) a reduction in his base salary, annual bonus
opportunity, welfare plan benefits, fringe benefits or incentive plan
benefits; (iv) the failure of Friede

52

Goldman Halter to pay any compensation to him when due; (v) a substantial
increase in his travel obligations; (vi) a relocation of his workplace without
accommodation by Friede Goldman Halter; (vi) failure by Friede Goldman Halter
to obtain a satisfactory agreement from a successor company to assume the
obligations under his employment agreements; and (vii) termination of his
employment without providing a notice of non-renewal of the employment
agreement.

Under his employment agreement, Mr. Alford has non-solicitation and non-
competition obligations toward Friede Goldman Halter for a period of two years
following the effective date of the merger.

The employment agreement for Mr. Alford also provides that in the event any
payments received by him under his employment agreement or under any other
plan of Friede Goldman Halter should be subject to any excise tax imposed
under Section 4999 of the Internal Revenue Code of 1986 or any other similar
tax or assessment, Friede Goldman Halter will pay Mr. Alford the amount
necessary to fully reimburse him for these excise taxes or assessments.

Ronald W. Schnoor. Mr. Schnoor's employment agreement has a term of three
years provided that on the second anniversary of the completion of the merger
and on each anniversary of this date, the term of the agreement will be
automatically extended for one year. Either Friede Goldman Halter or Mr.
Schnoor may elect to terminate the agreement by providing the other party with
at least six months' written notice prior to each anniversary of the
completion of the merger.

The employment agreement provides for an annual base salary of $256,000,
subject to increases in the discretion of the compensation committee. Mr.
Schnoor's employment agreement may be terminated at any time by Friede Goldman
Halter for "cause" ten days after written notice is provided to Mr. Schnoor.
Upon termination, Mr. Schnoor will not be entitled to severance compensation.
"Cause" is defined to include a material and irreparable breach of the
agreement, gross negligence or a willful failure by Mr. Schnoor in performing
his material duties under the employment agreement, acts of dishonesty or
misconduct which have an adverse effect on Friede Goldman Halter, a conviction
of or plea of nolo contendere to a felony crime involving moral turpitude, or
chronic alcohol abuse or illegal drug abuse.

If Mr. Schnoor's employment is terminated by Friede Goldman Halter without
"cause" or he resigns for "good reason" (as defined below), he will be
entitled to receive a lump-sum payment equal to one year's base salary at the
rate in effect at that time. If Mr. Schnoor resigns his employment without
"good reason," he will receive no severance compensation. Upon termination for
any reason, Mr. Schnoor will be entitled to receive all compensation earned
and all vested benefits and reimbursements through the effective date of his
termination.

"Good Reason" is defined in Mr. Schnoor's employment agreement to consist
of a material breach by Friede Goldman Halter of the employment agreement
occurring during the 30-day period preceding the date written notice of
termination for good reason is provided to Friede Goldman Halter which is not
remedied by Friede Goldman Halter within 30 days after receipt of the notice.

Under his employment agreement, Mr. Schnoor has non-solicitation and non-
competition obligations toward Friede Goldman Halter for a period of one year
following any termination of his employment.

Change in Control Agreements

Prior to its merger with and into the Company, Halter Marine Group, Inc.
(HMG) entered into two Executive Severance Agreements (the "Change in Control
Agreements") with certain of its officers ("the former HMG officers"), who are
now officers of the Company, which provides certain severance benefits in the
event of a change in control (as defined in the Change in Control Agreements)
of HMG.

53

As a result of the merger, the Company absolutely and unconditionally assumed,
and is obligated under, each of the Change in Control Agreements. In
connection with the merger, a change in control of HMG (as defined in the
Change in Control Agreements) occurred. In the event of termination of
employment of an affected former HMG officer by the Company, other than as a
result of the officer's death, disability, or retirement, or for cause (as
defined in the Change in Control Agreements), or if the officer terminates his
employment for good reason (as defined in the Change in Control Agreements),
the Company is obligated to pay the officer a lump sum equal to 2.99 times the
amount of the officer's base salary and bonus paid to the officer during the
twelve (12) months prior to the termination or, if higher, prior to the change
in control. The severance benefits provided by the Change in Control
Agreements also include the obligation to provide certain fringe benefits that
the officer would have been entitled to if the officer had remained employed
by the Company and certain other supplemental benefits. The Change in Control
Agreements further provide that, if any payment to which an officer is
entitled would be subject to excise tax imposed by Section 4999 of the
Internal Revenue Code, then the Company will pay to the officer an additional
amount so that the net amount retained by the officer is equal to the amount
that otherwise would have been payable to the officer if no such excise tax
had been imposed.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management

The following table shows the number of shares of Common Stock beneficially
owned by each director; by the Company's Chief Executive Officer; by each
executive officer of the Company named in the "Summary Compensation Table" set
forth below under "Executive Compensation and Other Matters"; by all directors
and executive officers (14 persons) as a group; and by such persons known to
the Company to own beneficially more than five (5%) of the outstanding Common
Stock of the Company.

The information set forth in the following table, except where indicated,
is as of the Record Date and, is based upon information supplied or confirmed
by the named individuals:

Number of
Shares
Beneficially Percent
Name Owned(1) of Class
---- ------------ --------

J.L. Holloway........... 9,099,471(3) 18.7%
Alan A. Baker........... 17,667(3) *
T. J. Collins........... 18,667(3) *
Angus R. Cooper II ..... 151,669(3) *
Barry J. Galt .......... 12,001(3) *
Jerome L. Goldman....... 115,669(3) *
Gary L. Kott............ 9,667(3) *
Raymond E. Mabus........ 15,667(3) *
John F. Alford.......... 718,717(3) 1.5%
Richard J. Juelich...... 119,734(3) *
Richard T. McCreary..... 40,853(2)(3) *
Anil Raj................ 21,022(3) *
Ronald W. Schnoor....... 610,262(3) 1.3%
Robert Shepherd......... 33,652(3) *
Directors and Executive
Officers as a Group.... 10,984,746(2)(3) 22.6%

- --------
* Less than one percent (1%).

Unless otherwise noted, all shares are owned directly and the owner has the
right to vote the shares.

Includes shares held beneficially under the Company's 401(k) plan as of
March 12, 2002 by Mr. McCreary (852 shares) and Directors and Executive
Officers as a Group (852 shares).

54

Includes shares which the individual has the right to acquire within sixty
(60) days of April 1, 2002 pursuant to exercise of options granted under the
Stock Option Plan for Mr. Holloway (873,333 shares), Mr. Baker (14,667
shares), Mr. Collins (14,667 shares), Mr. Cooper (6,667 shares), Mr. Galt
(6,667 shares), Mr. Goldman (15,667 shares), Mr. Kott (7,667 shares), Mr.
Mabus (15,667 shares), Mr. Alford (626,667 shares), Mr. Schnoor (25,000
shares), Mr. McCreary (40,000 shares), Mr. Juelich (33,333 shares), Mr.
Shepherd (33,652 shares), Mr. Raj (20,000 shares), and Directors and Executive
Officers as a Group (1,733,654 shares).

ITEM 13. Certain Relationships and Related Transactions

With T. Jay Collins

Mr. Collins, a director of the Company, serves as President of Oceaneering
International, Inc. (OII), a company which, from time to time, contracts with
the Company in the ordinary course of each company's business. In November
1999, the Company acquired a jack-up barge, the Zeus, from OII in
consideration of 90,000 shares of the common stock of the Company. During
1999, OII contracted with a subsidiary of the Company for the refurbishment
and upgrade of a mobile offshore drilling unit (MODU), the Marine 7. Payments
to the subsidiary of the Company under the contract will exceed $30.2 million.

With J.L. Holloway

In December 1998, the Company entered into an agreement with a company
owned by Mr. Holloway pursuant to which the Company agreed to lease a British
Aerospace corporate jet from such company for a monthly payment of $85,000. In
June 2000, the Company terminated its lease of the corporate jet and began
leasing a King Air airplane from Mr. Holloway's company, thereby decreasing
the monthly payments to $38,000. Under the terms of the agreements, the
Company agreed to maintain the aircraft in good working condition, to pay all
operating expenses related to the aircraft and to maintain insurance on the
aircraft. The Company believes that the terms of such agreements are no less
favorable than the Company could have received from an unrelated party. This
lease was cancelled in March 2001.

Appointment of Independent Auditors

The Board of Directors, with the approval of the United States Bankruptcy
Court, appointed Ernst & Young LLP as independent auditors to audit the
consolidated financial statements of the Company for the year ended December
31, 2001. Ernst & Young LLP was also appointed as tax advisors to the Company.
Fees for the 2001 audit were approximately $540,000 and all other fees were
approximately $2.3 million, including audit related services of $108,000 and
nonaudit services of $2.2 million. Nonaudit services primarily related to tax
return preparation, assistance with Internal Revenue Service examinations and
assistance related to the Company's bankruptcy proceeding.

55

PART IV

ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)(1) Financial Statements

The Consolidated Financial Statements listed by the Registrant on the
accompanying Index to Consolidated Financial Statements are filed as part of
this Annual Report. (See page 59).

(a)(2) Financial Statement Schedules

The required information is included in the Consolidated Financial
Statements or Notes thereto.

(a)(3) Exhibits

Exhibits

Exhibit
No. Description
------- -----------

*10.2 --Amendment No. 2, dated March 28, 2000 to Credit Agreement, among
Friede Goldman Halter, Inc. and Wells Fargo Bank (Texas) National
Association, as administrative agent and co-arranger, Banc One
Capital Markets, Inc., as co-arranger and syndication agent, and the
lenders party thereto.

*10.3 --Amendment No. 3, dated June 9, 2000, to Credit Agreement, among
Friede Goldman Halter, Inc. and Wells Fargo Bank (Texas) National
Association, as administrative agent and co-arranger, Bank One
Capital Markets, Inc. as co-arranger and syndication agent, and the
lenders party thereto.

*10.4 --Amendment No. 4, dated July 31, 2000 to Credit Agreement, among
Friede Goldman Halter, Inc. and Wells Fargo Bank (Texas) National
Association, as administrative agent and co-arranger, Banc One
Capital Markets, Inc. as co-arranger and syndication agent, and the
lenders party thereto.

*10.5 --Amended and Restated Loan and Security Agreement, dated October 24,
2000 by and among Friede Goldman Halter, Inc. and each of its
subsidiaries as signatories thereto and Foothill Capital Corporation,
as arranger and administrative agent.

*10.6 --Amendment No. 4 to Title XI Reserve Fund and Financial Agreement,
dated October 27, 2000, between Friede Goldman Offshore, Inc. and the
United States of America, represented by the Secretary of
Transportation acting by and through the Maritime Administrator
pursuant to the provisions of Title XI of the Merchant Marine Act,
1936, as amended.

*10.7 --Amendment No. 4 to Security Agreement, dated October 27, 2000,
between Friede Goldman Offshore, Inc. and the United States of
America, represented by the Secretary of Transportation acting by and
through the Maritime Administrator pursuant to the provisions of
Title XI of the Merchant Marine Act, 1936, as amended.

*10.8 --Employment Agreement, dated November 13, 2000, between Friede
Goldman Halter, Inc. and Robert L. Champagne.

**10.9 --Asset Purchase Agreement, dated February 15, 2002, between Friede
Goldman Halter, Inc. and Hydralift ASA

**10.10 --Amendment No. 1 to Asset Purchase Agreement, dated March 14, 2002,
between Friede Goldman Halter, Inc. and Hydralift ASA

**10.11 --Asset Purchase Agreement, dated March 14, 2002, between Friede
Goldman Halter, Inc. and FGL Acquisitions, LLC

**21.1 --Subsidiaries of Friede Goldman Halter, Inc.
**23.0 --Consent of Ernst & Young LLP

- --------
* Previously filed.
** Filed herewith.

56

(b) Reports on 8-K

None.

57

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Friede Goldman Halter, Inc.

We have audited the accompanying consolidated balance sheets of Friede
Goldman Halter, Inc. and Subsidiaries as of December 31, 2001 and 2000, and
the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Friede
Goldman Halter, Inc. and Subsidiaries at December 31, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001 ended in conformity with
accounting principles generally accepted in the United States.

The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As more fully described
in Note 2 to the consolidated financial statements, the Company had
substantial losses in 2000 and 2001 and had a deficiency in assets at December
31, 2001. Further, on April 19, 2001, the Company elected to file a voluntary
petition for reorganization under Chapter 11 of the United States Bankruptcy
Code. On March 22, 2002, the Company filed a Plan of Reorganization (the Plan)
with the United States Bankruptcy Court (the Court). The Plan is subject to
the review and approval of the Court. There can be no assurance that the Plan
will be approved by the Court, or that the Company will continue to operate in
some form. It is not possible to assess the outcome of the Company's
bankruptcy proceeding or whether the Company will operate in accordance with
the Plan, if approved. The outcome of these uncertainties raises substantial
doubt about the Company's ability to continue as a going concern. The
consolidated financial statements do not reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of these
uncertainties.

ERNST & YOUNG LLP

New Orleans, Louisiana
March 22, 2002

58

FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands)

December 31,
------------------
2001 2000
-------- --------

ASSETS
Current assets:
Cash and cash equivalents................................. $ 20,403 $ 25,244
Restricted cash........................................... 17,998 --
Receivables, net:
Contract receivables..................................... 23,705 46,270
Other receivables........................................ 526 10,225
Income tax receivable..................................... 206 591
Inventories, net.......................................... 17,580 41,234
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................... 16,557 73,224
Prepaid expenses and other................................ 11,625 12,827
Deferred income tax asset................................. 25,353 30,997
-------- --------
Total current assets.................................... 133,953 240,612
Reinsurance receivables.................................... 5,000 14,975
Property, plant and equipment, net of accumulated
depreciation.............................................. 155,458 261,337
Property, plant and equipment including goodwill of $23,479
held for
disposition............................................... 56,930 --
Goodwill, net of accumulated amortization.................. -- 285,641
Other assets............................................... 15,280 19,449
-------- --------
Total assets............................................ $366,621 $822,014
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
Accounts payable.......................................... $ 13,948 $ 93,885
Accrued liabilities....................................... 28,976 77,879
Reserve for losses on uncompleted contracts............... -- 101,997
Billings in excess of costs and estimated earnings on
uncompleted
contracts................................................ 15,124 32,397
Current portion of long-term debt, including debt in
default.................................................. 115,355 74,877
-------- --------
Total current liabilities............................... 173,403 381,035
Long-term debt, less current portion and debt in default... -- 147,397
Liabilities subject to compromise.......................... 360,697 --
Non-current liabilities.................................... -- 29,498
Deferred income tax liability.............................. 25,867 24,405
Deferred government subsidy, net of accumulated
amortization.............................................. -- 29,886
Stockholders' equity (deficit):
Preferred stock, $0.01 par value; 5,000,000 shares
authorized; no shares issued and outstanding............. -- --
Common stock, $0.01 par value; 125,000,000 shares
authorized; 48,710,579 and 48,708,979 shares issued and
outstanding at December 31, 2001 and 2000, respectively.. 487 487
Additional paid-in capital................................ 299,357 299,350
Retained deficit.......................................... (489,458) (87,851)
Accumulated other comprehensive loss...................... (3,732) (2,193)
-------- --------
Total stockholders' equity (deficit).................... (193,346) 209,793
-------- --------
Total liabilities and stockholders' equity (deficit).... $366,621 $822,014
======== ========

The accompanying notes are an integral part of these financial statements.

59

FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

For the Years Ended December
31,
------------------------------
2001 2000 1999
--------- --------- --------

Contract revenue earned....................... $ 246,066 $ 580,985 $439,440
Cost of revenue earned........................ 265,909 628,113 441,655
--------- --------- --------
Gross loss ................................... (19,843) (47,128) (2,215)
Selling, general and administrative expenses.. 29,495 46,087 34,963
Goodwill amortization......................... 11,153 7,524 1,576
Goodwill impairment........................... 201,622 -- --
--------- --------- --------
Operating loss................................ (262,113) (100,739) (38,754)
--------- --------- --------
Other expense (income):
Interest expense, net (contractual interest
of $24,727 for 2001)....................... 19,052 33,814 9,173
Discount on convertible subordinated notes.. 54,878 -- --
(Gain) loss on sale of assets............... (145) -- 8
Other....................................... (78) 79 60
--------- --------- --------
Total other expense....................... 73,707 33,893 9,241
--------- --------- --------
Loss before reorganization items, discontinued
operations income taxes and extraordinary
item (335,820) (134,632) (47,995)
Reorganization items:
Professional fees........................... 11,691 -- --
Loss on investment in unconsolidated
subsidiary................................. 1,371 -- --
Write-off of deferred financing costs....... 2,618 -- --
Loss on assets held for disposition......... 21,951 -- --
--------- --------- --------
Total reorganization items................ 37,631 -- --
--------- --------- --------
Loss before discontinued operations, income
taxes and
extraordinary item .......................... (373,451) (134,632) (47,995)
Income tax expense (benefit).................. 9,510 (21,042) (17,141)
--------- --------- --------
Loss before discontinued operations and
extraordinary item........................... (382,961) (113,590) (30,854)
Discontinued operations:
Income from operations of Engineered
Products segment........................... 7,337 11,072 28
Loss on disposal of Engineered Products
segment.................................... (25,983) -- --
--------- --------- --------
Total discontinued operations............. (18,646) 11,072 28
--------- --------- --------
Net loss before extraordinary item............ (401,607) (102,518) (30,826)
Extraordinary loss............................ -- (3,853) --
--------- --------- --------
Net loss...................................... $(401,607) $(106,371) $(30,826)
========= ========= ========
Net loss per share, basic and diluted:
Net loss before discontinued operations and
extraordinary item......................... $ (7.86) $ (2.55) $ (1.18)
Discontinued operations..................... (0.38) 0.25 --
Extraordinary loss.......................... -- (0.09) --
--------- --------- --------
Net loss.................................... $ (8.24) $ (2.39) $ (1.18)
========= ========= ========
Weighted average shares outstanding:
Basic....................................... 48,711 44,562 26,148
Diluted..................................... 48,711 44,562 26,148

The accompanying notes are an integral part of these financial statements.

60

FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

(in thousands)

Accumulated
Common Stock Additional Retained Other
-------------- Paid-In Earnings Treasury Comprehensive
Number Amount Capital (Deficit) Stock Income (Loss) Total
------ ------ ---------- --------- -------- ------------- ---------

Balance, December 31,
1998................... 24,535 $245 $ 50,928 $ 49,346 $(15,827) $ 598 $ 85,290
Comprehensive loss:
Net loss............... -- -- -- (30,826) -- -- (30,826)
Other comprehensive
loss:
Net change in foreign
currency translation
adjustment............ -- -- -- -- -- (1,563) (1,563)
---------
Total comprehensive
loss................... (32,389)
Stock options granted... -- -- 178 -- -- -- 178
Stock options
exercised.............. 86 1 901 -- -- -- 902
Stock issuances......... 90 1 848 -- -- -- 849
Stock issuance--HMG
Merger................. 16,450 164 193,127 -- -- -- 193,291
Retirement of treasury
stock.................. (1,188) (11) (15,816) -- 15,827 -- --
------ ---- -------- --------- -------- ------- ---------
Balance, December 31,
1999................... 39,973 400 230,166 18,520 -- ( 965) 248,121
Comprehensive loss:
Net loss............... -- -- -- (106,371) -- -- (106,371)
Other comprehensive
loss :
Net change in foreign
currency translation
adjustment............ -- -- -- -- -- (1,228) (1,228)
---------
Total comprehensive
loss................... (107,599)
Stock options
exercised.............. 3 -- 5 -- -- -- 5
Stock issuance.......... 8,750 87 69,378 -- -- -- 69,465
Purchase of treasury
stock.................. -- -- -- -- (199) -- (199)
Retirement of treasury
stock.................. (17) -- (199) -- 199 -- --
------ ---- -------- --------- -------- ------- ---------
Balance, December 31,
2000................... 48,709 487 299,350 (87,851) -- (2,193) 209,793
Net loss............... -- -- -- (401,607) -- -- (401,607)
Other comprehensive
loss :
Net change in foreign
currency translation
adjustment............ -- -- -- -- -- (1,539) (1,539)
---------
Total comprehensive
loss................... -- -- -- -- -- (403,146)
Stock options
exercised.............. 2 -- -- -- -- -- --
Stock issuance.......... -- -- 7 -- -- -- 7
------ ---- -------- --------- -------- ------- ---------
Balance, December 31,
2001................... 48,711 $487 $299,357 $(489,458) $ -- $(3,732) $(193,346)
====== ==== ======== ========= ======== ======= =========

The accompanying notes are an integral part of these financial statements.

61

FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

For the Years Ended December
31,
------------------------------
2001 2000 1999
--------- --------- --------

Cash flows from operating activities:
Net loss...................................... $(401,607) $(106,371) $(30,826)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 32,349 39,578 13,127
Goodwill impairment........................... 201,622 -- --
Extraordinary loss............................ -- 3,853 --
Provision for losses.......................... 25 74,364 17,371
Loss on investment in unconsolidated
subsidiary................................... 1,371 -- --
Write-off of deferred financing costs......... 2,618 -- --
Loss on disposal of Engineered Products
segment...................................... 25,982 -- --
Discount on convertible notes................. 55,883 -- --
Loss on assets held for sale.................. 21,951 -- --
(Gain) loss on sale of assets................. (145) -- 8
Other non-cash changes........................ 28 221 178
Deferred income taxes......................... 10,373 (17,962) 6,536
Changes in operating assets and liabilities:
Decrease in contract and other receivables... 42,344 56,584 35,823
(Increase) decrease in income tax
receivable.................................. 385 38,066 (38,657)
(Increase) decrease in inventories........... 10,866 (3,357) 3,121
Net increase (decrease) in billings related
to costs and estimated earnings on
uncompleted contracts....................... (17,049) 50,184 (13,119)
Increase in other assets..................... (2,015) (6,322) (7,822)
Increase in reinsurance receivables.......... (5,000) (5,376) --
Increase in non-current liabilities.......... -- 19,376 --
Increase (decrease) in accounts payable and
accrued liabilities......................... 23,168 (101,103) (46,801)
Decrease in reserve for losses on
uncompleted contracts....................... (36,416) (95,502) --
--------- --------- --------
Net cash used in operating activities....... (33,267) (53,767) (61,061)
--------- --------- --------
Investing activities:
Capital expenditures for plant and equipment.. (4,039) (5,578) (7,502)
Cash acquired in Halter Marine merger......... -- -- 2,501
Proceeds from sale of business units.......... 26,559 80,755 --
Proceeds from sale of unconsolidated
subsidiary................................... -- 13,035 --
Proceeds from sale of property, plant and
equipment.................................... 2,302 7,601 463
Investment in unconsolidated subsidiary....... -- -- (209)
Restricted cash............................... (17,998) -- --
--------- --------- --------
Net cash provided by (used in) investing
activities................................. 6,824 95,813 (4,747)
--------- --------- --------
Financing activities:
Proceeds from sale and issuance of stock...... -- 69,470 1,751
Repayments on borrowings under debt
facilities................................... (9,713) (50,267) (11,985)
Net borrowings (repayments) under line of
credit....................................... 22,781 (61,987) 36,615
Proceeds from borrowings under debt
facilities................................... 8,881 11,244 13,177
Purchase of treasury stock.................... -- (199) --
--------- --------- --------
Net cash provided by (used in) financing
activities................................. 21,949 (31,739) 39,558
--------- --------- --------
Effect of exchange rate changes on cash....... (347) (187) (1,422)
--------- --------- --------
Net increase (decrease) in cash and cash
equivalents.................................. 4,841 10,120 (27,672)
Cash and cash equivalents at beginning of
year......................................... 25,244 15,124 42,796
--------- --------- --------
Cash and cash equivalents at end of year...... $ 20,403 $ 25,244 $ 15,124
========= ========= ========
Supplemental disclosures:
Cash paid for interest........................ $ 12,305 $ 23,511 $ 4,667
Cash refunds received for income taxes........ $ 271 $ 42,344 $ --
Cash paid for income taxes.................... $ 385 $ 1,446 $ 13,059
Cash flows from operating activities before
reorganization items:
Cash receipts from customers.................. $ 73,628 -- --
Cash payments to vendors, suppliers and
employees.................................... $ 69,149 -- --
Non-cash investing activities:
Acquisitions:
Fair value of assets acquired and subsequent
adjustments.................................. $ -- $ (4,139) $495,868
Fair value of liabilities assumed and
subsequent adjustments....................... $ -- $ 93,930 $490,322

The accompanying notes are an integral part of these financial statements.

62

FRIEDE GOLDMAN HALTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization

On November 3, 1999, Friede Goldman International, Inc. ("FGI") merged with
Halter Marine Group, Inc. ("HMG") with FGI continuing as the surviving
corporation. Effective with the merger, the corporate name was changed to
Friede Goldman Halter, Inc. ("FGH"). FGH is incorporated under the laws of the
State of Mississippi. The consolidated financial statements include the
accounts of FGH, Inc. and its wholly-owned subsidiaries, including, among
others, Friede Goldman Offshore, Inc. ("FGO"), Friede & Goldman, Ltd. ("FGL"),
Friede Goldman Newfoundland Limited ("FGN"), Friede Goldman France S.A.S.
("FGF"), and Halter Marine, Inc. ("Halter")(collectively referred to as the
"Company"). These consolidated financial statements include the accounts of
FGF for all periods through May 23, 2001 and HMG for all periods subsequent to
November 3, 1999. All significant intercompany accounts and transactions have
been eliminated.

2. Voluntary Filing under Chapter 11 of the United States Bankruptcy Code

The Company incurred substantial operating losses during 2000 and the first
quarter of 2001 and had a working capital deficit of $140.4 million and $343.9
million at December 31, 2000 and March 31, 2001, respectively. On April 13,
2001, the Company received a Notice of Continuing Events of Default and Demand
for Payment (the "Notice") from Foothill Capital Corporation, as agent for
itself and another lender under the Restated Credit Agreement, which demanded
the immediate payment of $85.7 million plus interest and various other costs,
within five days of the Notice. Further, the Company did not pay the $4.2
million interest payment due on March 15, 2001, on the Company's outstanding 4
1/2% convertible subordinated notes due in 2004 (the "Subordinated Notes") in
the principal amount of $185.0 million which resulted in the entire principal
amount becoming immediately callable. The Company's inability to meet the
obligations under the Restated Credit Agreement and the Subordinated Notes,
the working capital deficit, and the expectation of continued operating losses
in the short term had generated substantial uncertainty regarding the
Company"s ability to meet its obligations in the ordinary course of business.
As a result, on April 19 and 20, 2001, the Company, including 31 of its
subsidiaries, elected to file separate petitions for relief under Chapter 11
of the United States Bankruptcy Code which allows for the reorganization of
the Company's debts. The petitions were filed in the U.S. Bankruptcy Court for
the Southern District of Mississippi and are being jointly administered under
Case No. 01-52173 SEG. Since the date of the petition, the Company has
maintained possession of its property, and has continued to remain in control
of its ongoing business affairs as a Debtor in Possession.

Under Chapter 11, certain claims against the Company in existence prior to
the filing of the petitions for relief under the federal bankruptcy laws are
stayed while the Company continues business operations as Debtor in
Possession. These claims are reflected in the December 31, 2001 balance sheet
as "liabilities subject to compromise." Claims secured against the Company's
assets ("secured claims") also are stayed, although the holders of such claims
have the right to move the court for relief from the stay. Secured claims are
secured primarily by liens on the Company's property, plant, and equipment.
Additional claims (liabilities subject to compromise) have arisen subsequent
to the filing date resulting from rejection of executory contracts, including
leases, and from the determination by the court (or agreed to by parties in
interest) of allowed claims for contingencies and other disputed amounts.

The Company retained the investment banking firm Houlihan, Lokey, Howard &
Zukin and restructuring advisor Glass and Associates to assist in the
preparation of a plan of reorganization. These advisors are assisting
management and the Company's Board of Directors in evaluating various

63

FRIEDE GOLDMAN HALTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

alternatives including, but not limited to, sales of assets and certain of the
Company's business unit(s), infusion of capital, debt restructuring and any
combinations of these options.

As further described in Note 5, on March 22, 2002, the Company filed a Plan
of Reorganization with the United States Bankruptcy Court. This plan will
likely result in little, if any, recovery for current equity interests. The
amount of any recovery will depend on, but will not be limited to the
following factors: (a) the ultimate value of pre-petition claims, (b) the
ability and dollar value(s) obtained from possible sale(s) of business
unit(s), (c) the ability and dollar amount realized from possible capital
infusions and debt restructuring and (d) the dollar amount of claims
associated with the administration of this case. Note 5 also contains
information regarding asset sales and dispositions.

The Plan of Reorganization is subject to the review and approval of the
United States Bankruptcy Court. There can be no assurance that the Plan will
be approved or that the Company will continue to operate in some form. It is
not possible to assess the outcome of the Company's bankruptcy proceeding or
whether the Company will operate in accordance with the Plan, if approved. The
outcome of these uncertainties raises substantial doubt about the Company's
ability to continue as a going concern. The consolidated financial statements
do not reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of these uncertainties.

3. Summary of Significant Accounting Policies

The consolidated financial statements reflect accounting principles and
practices set forth in the American Institute of Certified Public Accountants
Statement of Position ("SOP") 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code," which provides guidance for
financial reporting by entities that have filed voluntary petitions for relief
under the Bankruptcy Code.

Construction Contracts

The Company's revenue is earned on the percentage-of-completion method.
Under the percentage-of-completion method used in its Offshore and Vessels
segments, revenues from construction contracts are measured by the percentage
of labor hours incurred to date to estimated total labor hours for each
contract. Under the percentage of completion method used in its Engineered
Products segment, substantially all of the revenues from construction
contracts are measured based upon the percentage that incurred costs to date
bear to total estimated costs. Contract price and cost estimates are reviewed
periodically as the work progresses, and adjustments proportionate to the
percentage of completion are reflected in the accounting period in which the
facts that require such adjustments become known.

Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are identified. Other changes, including those
arising from contract penalty provisions and final contract settlements, are
recognized in the period in which the revisions are determined. To the extent
that these adjustments result in a reduction or elimination of previously
reported profits, the Company would report such a change by recognizing a
charge against current earnings, which might be significant. Cost of revenue
earned includes costs associated with the fabrication process and can be
further broken down between direct costs allocated to specific projects (such
as direct labor costs and raw materials) and indirect costs (such as
supervisory labor, utilities, supplies, equipment costs, and depreciation)
that are associated with production but are not directly related to a specific
project. Selling, general and administrative costs are charged to expense as
incurred.

The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts," represents billings in excess of revenues recognized.

64

FRIEDE GOLDMAN HALTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Cash Equivalents

The Company considers all short-term cash investments with an original
maturity of less than three months to be cash equivalents.

Restricted Cash

Restricted cash represents non-disbursed cash from the sale of the
Company's French subsidiaries. Disbursement of these funds is subject to
approval by the Bankruptcy Court and is primarily reserved for payment of
administrative expenses related to the Company's bankruptcy filing.

Receivables

The Company provides for allowances for receivables, which are deemed to be
uncollectible. Provision for such losses is made in the period in which the
loss is probable and subject to reasonable estimation. The Company had
allowances for doubtful accounts of $1.2 million and $3.3 million as of
December 31, 2001 and 2000, respectively.

Inventories

Inventories are valued at the lower of cost or market. Inventory cost is
determined principally on the specific identification method. Market is net
realizable value.

Property, Plant and Equipment

Property, plant and equipment is stated at cost less accumulated
depreciation. Property, plant and equipment held for disposition is stated at
the estimated sales price or disposal value less the selling or disposal
costs. Ordinary maintenance and repairs that do not extend the physical or
economic lives of the assets are charged to expense as incurred. Depreciation
is computed on the straight-line basis over the estimated useful lives of the
assets.

Useful lives utilized in the calculation of depreciation for each class of
property, plant and equipment are as follows:

Class Life
----- ------------

Buildings and improvements................................... 15--40 years
Leasehold improvements....................................... 10--40 years
Machinery and equipment...................................... 3--20 years
Other........................................................ 3--7 years

Goodwill

Goodwill is recognized for the excess of the purchase price over the fair
value of identifiable net assets acquired. Goodwill is being amortized over a
25-year period. Accumulated amortization was $20.6 and $9.4 million as of
December 31, 2001 and 2000, respectively. During 2001, the Company recognized
a goodwill impairment charge of $201.6 million and recorded this amount as a
permanent write-down of goodwill. The Company also recognized a write-down of
goodwill totaling $42.0 million related to the disposition of its Engineered
Products segment. This amount is included in the loss or disposal of
Engineered Products segment in the accompanying statements of operations.

Long-Lived Assets

The Company periodically evaluates the carrying value of long-lived assets
to be held and used, including goodwill, in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed"

65

FRIEDE GOLDMAN HALTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(SFAS 121). SFAS 121 requires impairment losses to be recorded on long-lived
assets used in operations, including goodwill, when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amounts. In that event, a loss is
recognized based on the amount by which the carrying amount exceeds the fair
market value of the long-lived asset. Losses on long-lived assets to be
disposed of is determined in a similar manner, except that fair market values
are reduced for the cost of disposal.

Stock-Based Compensation

The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock.

Segment Information

Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131) establishes
standards for public companies relating to the reporting of financial and
descriptive information about operating segments in financial statements. SFAS
131 requires that financial information be reported on the same basis that is
reported internally for evaluating segment performance and allocating revenue
to segments. The Company classifies its business into three segments: Vessels,
Offshore and Engineered Products. See Note 5 for discussion of discontinued
operations of Engineered Products segment.

Income Taxes

The Company follows the asset and liability method of accounting for
deferred income taxes prescribed by Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Under this
method, deferred tax assets and liabilities are recorded for temporary
differences that occur between the financial reporting and tax bases of assets
and liabilities based on enacted tax rates and laws that will be in effect
when the differences are expected to reverse.

Reorganization Items

In accordance with SOP 90-7, costs, losses and other items incurred
directly related to the bankruptcy proceeding are classified as Reorganization
Items in the accompanying statements of operations.

Use of Estimates

These financial statements have been prepared in conformity with accounting
principles generally accepted in the United States. Such preparation requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities
as of the dates of the balance sheets and the reported amounts of revenues and
expenses for the years presented. Actual results could differ materially from
those estimates. Areas requiring significant estimates to be made by
management include the application of the percentage-of-completion accounting
method; allowance for doubtful accounts; recoverability of inventories,
property, plant, equipment and goodwill; depreciation and amortization; income
taxes; and accruals for certain estimated liabilities, including liabilities
subject to compromise and loss contingencies.

Fair Value of Financial Instruments

The carrying amounts of the Company's cash, cash equivalents and investment
in unconsolidated subsidiary approximate fair value. The fair values of the
Company's debt are based on quoted market prices, if available, or discounted
cash flows.

66

FRIEDE GOLDMAN HALTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Environmental Liability

The Company provides for liabilities for environmental exposure pursuant to
the requirements of SOP 96-1, "Environmental Remediation Liabilities." At
December 31, 2001 and 2000, the Company had accrued $6.0 million and $6.6
million, respectively, related to remediation of certain contaminated sites
which it estimates will be paid over approximately 20 years. This liability is
included in liabilities subject to compromise at December 31, 2001 and non-
current liabilities at December 31, 2000 in the accompanying balance sheet.

Insurance

The Company maintains a workers' compensation insurance program. Prior to
March 1, 2000, Offshore Marine Indemnity Company ("OMIC"), a wholly-owned
subsidiary of the Company, acted as a fronting reinsurance captive company in
the program. The Company deconsolidated this subsidiary during 2001. The
program includes certain individual claims and aggregate retention amounts. At
December 31, 2001 and 2000, the Company provided reserves for estimated losses
from the program totaling $10.7 million and $30.0 million, respectively. At
December 31, 2001, these reserves are included in accrued liabilities. At
December 31, 2000, reserves of $27.0 million were included in non-current
liabilities and the remaining amount was included in accrued liabilities.
Related receivables from the Company's reinsurance carriers totaled $5.0
million and $15.0 million at December 31, 2001 and 2000, respectively. See
Note 10 for additional information regarding OMIC and the reinsurance
receivable.

Net Loss Per Share

Basic net loss per share is calculated based on the weighted average number
of shares of common stock outstanding for the periods presented. Diluted net
loss per share is based on the weighted average number of shares of common
stock outstanding for the periods, including potential dilutive common shares.

Foreign Currency Translation

The financial statements of foreign subsidiaries, FGN and FGF, are measured
using the local currency as the functional currency. Assets and liabilities of
these subsidiaries are translated at the rates of exchange at the balance
sheet dates. The resulting translation adjustments are included as a separate
component of stockholders' equity. Income and expense items are translated at
average monthly rates of exchange during the period.

Reclassifications

Certain reclassifications have been made in the prior financial statements
to conform to the classifications used in the current year.

Derivatives

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and

67

FRIEDE GOLDMAN HALTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

losses to offset related results on the hedged item in the income statement,
and requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. The Company
adopted SFAS 133 beginning January 1, 2001. As the Company does not use any of
these types of instruments, there was no impact on its financial statements
for the year ended December 31, 2001.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations," and No. 142,
"Goodwill and Other Intangible Assets," effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill will no longer be
amortized but will be subject to annual impairment tests in accordance with
the Statements. Other intangible assets will continue to be amortized over
their useful lives. The Company will apply the new rules on accounting for
goodwill and other intangible assets in the first quarter of 2002. As a result
of the impairment charge and the planned disposition of the Company's
Engineered Products segment, the Company does not expect application of the
non-amortization provision of the Statements to have a material impact on its
financial position or results of operations.

In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (FAS 144), which addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations" for a
disposal of a segment of a business. FAS 144 is effective for fiscal years
beginning after December 15, 2001, with earlier application encouraged. The
Company will adopt FAS 144 as of January 1, 2002 and does not expect that the
adoption of the Statement will have a significant impact on its financial
position or results of operations.

4. Merger

On November 3, 1999, a merger was consummated between FGI and HMG. With
stockholders of HMG receiving 0.57 of a share of the Company's common stock in
exchange for each share of HMG common stock, a total of 16,450,292 shares was
issued for a total value of approximately $193.3 million. The merger has been
accounted for as a purchase business combination and the operating activities
of HMG have been included in the accompanying financial statements for periods
subsequent to November 3, 1999. The net assets acquired have been recorded at
their fair values and, at the acquisition date, included adjustments to
increase fixed assets by $37.6 million, to record reserves and a deferred
credit reflecting the fair value of the construction contracts that were in
progress at the date of acquisition in the amount of $36.2 million, and to
decrease long-term debt by $70.3 million. Goodwill was recorded for the excess
of the purchase price over the fair value of identifiable net assets required.
In 2000 goodwill increased primarily as a result of revisions in the Company's
estimate of losses on acquired contracts in progress at the date of the HMG
merger.

5. Plan of Reorganization and Disposition of Assets

On March 22, 2002, the Company filed a Plan of Reorganization with the
United States Bankruptcy Court, which is subject to the approval of the Court.
The Plan of Reorganization includes the reorganization of substantially all of
the Company's Offshore and Vessels segments and the disposition of its
Engineered Products segment as well as the disposition through sale, or
otherwise,

68

FRIEDE GOLDMAN HALTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

of other of the Company's subsidiaries and assets as described below. In
connection with the development of the Plan of Reorganization, the Company
reviewed its expected future cash flows related to its operating segments to
determine the recoverability of the carrying value of its long-lived assets,
including goodwill. This review indicated an impairment related to the
carrying value of goodwill; accordingly, the Company recorded an impairment
charge of $201.6 million for the year ended December 31, 2001.

Disposition of Engineered Products Segment

In May 2001, the Company completed the sale of its French subsidiaries,
Brissoneau et Lotz Marine, S.A., in Nantes, France, and BOPP S.A., in Brest,
France to Hydralift A.S.A. of Kristiansand, Norway for cash consideration of
$33.5 million, before expenses. Pursuant to an order of the Bankruptcy Court,
the Company agreed to escrow funds from the sale. Disbursement of such funds
is subject to the review and approval of legal counsel representing the
Official Committee of Unsecured Creditors and/or an order of the Bankruptcy
Court. The funds held in escrow are presented as restricted cash and cash
equivalents in the accompanying balance sheet as of December 31, 2001. The
Company recorded a gain of approximately $16.0 million related to this
transaction in the second quarter of 2001 and has reflected this gain as a
component of loss on disposal of its Engineered Products segment for the year
ended December 31, 2001.

In the fourth quarter of 2001, the Company received bids for Amclyde
Engineered Products ("Amclyde") to complete the disposition of its Engineered
Products segment. Pursuant to the terms of an Asset Sale Agreement dated
February 15, 2002, the Company will receive $36.0 million in cash
consideration for the sale of Amclyde subject to certain net working capital
adjustments. The ultimate disposition is subject to possible competitive bids
and approval by the Bankruptcy Court. The Company recorded a loss of
approximately $42.0 million related to this transaction in the fourth quarter
of 2001 and has reflected this loss as a component of loss on disposal of its
Engineered Products segment for the year ended December 31, 2001.

In addition, the Company has reported the operating results of its
Engineered Products segment separately in its consolidated statements of
operations as a component of discontinued operations. For the years ended
December 31, 2001 and 2000, the Company recorded income from discontinued
operations of approximately $7.4 million and $11.0 million, respectively, and
a loss from discontinued operations of approximately $28,000 for the year
ended December 31, 1999. At December 31, 2001, the Company's financial
statements include current assets of $17.5 million and current liabilities of
$6.4 million related to the Engineered Products segment. Property, plant and
equipment held for disposition include $6.3 related to the Engineered Products
segment.

Sale of Friede Goldman Newfoundland, Limited

In connection with its reorganization plan, the Company entered into an
agreement on March 27, 2002 to sell the assets of its wholly-owned subsidiary,
Friede Goldman Newfoundland Limited ("FGN"). Under the terms of the sale
agreement, the Company will receive approximately $5.0 million in cash
consideration for FGN which represents primarily repayment of intercompany
debt. In addition, the Province of Newfoundland has agreed to waive certain
liquidated damages related to the noncompliance with minimum employment levels
at its Canadian shipyards during 1999 and 2000. In the fourth quarter of 2001,
the Company wrote down the assets of this subsidiary to their net realizable
value and recorded a loss of approximately $4.9 million. The property, plant
and equipment of FGN is included in property, plant and equipment including
goodwill held for disposition at December 31, 2001.

69

FRIEDE GOLDMAN HALTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Disposition of FGO East Facility

As of December 31, 2001, the Company had approximately $19.9 million in
outstanding principal related to its bonds that are guaranteed by the U. S.
Maritime Administration ("MARAD"). The bonds were issued in December 1997,
under Title XI, to partially finance construction of the Company's FGO East
Facility. The Company's plan of reorganization filed March 22, 2002
contemplates abandoning this facility to MARAD in full satisfaction of their
claims. As a result, the Company recorded a loss on assets held for
disposition of approximately $17.1 million in the fourth quarter of 2001,
which represents the excess of the carrying value of the Company's FGO East
Facility's fixed assets over the outstanding principal amount of the MARAD
bonds. The property, plant and equipment of the FGO East Facility is included
in property, plant and equipment including goodwill held for disposition at
December 31, 2001.

Sale of Friede & Goldman, Ltd.

In an Asset Purchase Agreement entered into on March 14, 2002, the Company
agreed to sell substantially all the assets of Friede & Goldman, Ltd. ("FGL")
for cash consideration of approximately $8.0 million subject to certain net
working capital adjustments. The ultimate disposition is subject to possible
competitive bids and approval by the Bankruptcy Court. The Company anticipates
that it will record a gain related to this transaction when it is consummated.
The property, plant and equipment of FGL is included in property, plant and
equipment, including goodwill held for disposition at December 31, 2001.

Sale of Vessel Repair Operation

During August 2000, the Company sold certain of its shipyards engaged
primarily in the repair of marine vessels to Bollinger Shipyards, Inc. ("BSI")
for approximately $80.0 million subject to adjustment for the working capital
of the shipyards at the transaction date. Subsequently, arbitration
proceedings regarding the working capital calculation resulted in a liability
due to BSI of $8.2 million. The working capital portion of the transaction
escrow account ($4.7 million) was distributed to BSI in August 2001. The
remaining liability is included in liabilities subject to compromise in the
accompanying balance sheet at December 31, 2001. There was no gain or loss
recognized on this sale.

Sale of Yacht Operation

During April 2000, the Company completed the sale of its Trinity Yachts
division to a group led by John Dane III, the Company's former chief operating
officer and former board member. The division was sold for $5.7 million in an
all-cash transaction. There was no gain or loss recognized on this sale.

6. Significant Customers

The nature of the construction projects undertaken by the Company can
result in an individual contract comprising a large percentage of a fiscal
year's contract revenue. The schedule below reflects the portions of revenue
attributable to significant customers for the years ended December 31, 2001,
2000 and 1999.

Years Ended
December 31,
----------------
Customer 2001 2000 1999
-------- ---- ---- ----

A............................................................. 17% 18% 33%
B............................................................. 14 11 24
C............................................................. 11 -- 11
--- --- ---
Total....................................................... 42 % 29% 68%
=== === ===

70

FRIEDE GOLDMAN HALTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

7. Inventories

At December 31, 2001 and 2000, inventories consisted of the following:

December 31,
---------------
2001 2000
------- -------
(in thousands)

Jack-up rig components...................................... $15,381 $19,727
Steel and other raw materials............................... 14,487 15,362
Other....................................................... 3,704 14,397
------- -------
33,572 49,486
Less reserve for obsolete inventories....................... 15,992 8,252
------- -------
$17,580 $41,234
======= =======

8. Costs and Estimated Earnings on Uncompleted Contracts

The Company's contracts in progress at December 31, 2001 and 2000, consist
of the following components:

December 31,
---------------------
2001 2000
--------- ----------
(in thousands)

Costs incurred on uncompleted contracts.................. $ 754,719 $1,388,776
Estimated losses......................................... (284,468) (224,836)
--------- ----------
470,251 1,163,940
Less billings to date.................................... 510,323 1,225,110
--------- ----------
$ (40,072) $ (61,170)
========= ==========
Included in the following balance sheet captions:
Costs and estimated earnings in excess of billings on
uncompleted contracts $ 16,557 $ 73,224
Billings in excess of costs and estimated earnings on
uncompleted contracts................................. (15,124) (32,397)
Reserve for losses on uncompleted contracts (included
in liabilities subject to compromise for 2001)........ (41,505) (101,997)
--------- ----------
$ (40,072) $ (61,170)
========= ==========

9. Property, Plant and Equipment

December 31,
-----------------
2001 2000
-------- --------
(in thousands)

Land......................................................... $ 24,640 $ 30,857
Buildings and improvements................................... 73,309 135,472
Machinery and equipment...................................... 93,449 132,791
Construction in progress..................................... 129 3,298
-------- --------
Total property, plant and equipment........................ 191,527 302,418
Less accumulated depreciation................................ 36,069 41,081
-------- --------
Total property, plant and equipment, net................... $155,458 $261,337
======== ========

71

FRIEDE GOLDMAN HALTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Depreciation expense was $18.0 million, $20.1 million and $11.6 million for
the years ended December 31, 2001, 2000 and 1999, respectively.

Substantially all of the assets of the Company have been pledged as
collateral under various debt arrangements entered into by the Company.

In addition to property, plant and equipment held for use, the Company had
included approximately $33.5 million as of December 31, 2001.

10. Captive Insurance Company

Prior to March 1, 2000, Offshore Marine Indemnity Company ("OMIC"), a
wholly-owned subsidiary of the Company domiciled in Vermont, acted as a
fronting reinsurance captive company for the Company workers' compensation
insurance program. On June 7, 2001, the Commissioner of the Vermont Department
of Banking, Insurance, Securities and Healthcare Administration was ordered by
the Washington County Superior Court in the State of Vermont to take
possession and control of all or part of the property, books and accounts,
documents and other records of OMIC. OMIC and its officers, managers, agents,
employees and other persons were also enjoined from disposing of its property
and from transacting its business except with the written consent of the
Commissioner. Based on the court order, the Company does not exercise control
over OMIC. Accordingly, the subsidiary was deconsolidated and the Company
eliminated the insurance reserves and reinsurance receivables from its balance
sheet and wrote off its investment in OMIC totaling $1.4 million during 2001.
At December 31, 2001, the Company had amounts due to OMIC of approximately
$5.2 million. This liability is included in accrued liabilities in the
accompanying balance sheet.

OMIC assumed certain risks from Reliance Insurance Company (Reliance) under
a reinsurance agreement from March 1997 to March 2000. OMIC assumed risk for
the first $250,000 on individual workers' compensation losses written through
Reliance for the Company. Pursuant to the terms of the reinsurance agreement
with Reliance, amounts due from OMIC to Reliance are secured by a letter of
credit issued in favor of Reliance. At December 31, 2001, the remaining
balance of this letter of credit was $5.7 million. Reliance has notified the
Company that it believes the letter of credit was issued for the benefit of
all of Reliance's policyholders. The Company has filed suit against Reliance
to prevent any draws on the letter of credit that would fund claim payments
other than payments related to OMIC. The outcome of this suit is uncertain.

Prior to its deconsolidation, OMIC had a reinsurance receivable from
Reliance of approximately $11.0 million. On October 3, 2001, Reliance was
placed into liquidation by the Pennsylvania Insurance Commissioner. The
Company, in consultation with legal counsel, believes the liquidation of
Reliance triggers relevant state guaranty association statues and the guaranty
associations become obligated, to the extent of each state's statutory
coverage, for payment of the claims of Reliance's insureds and claimants. As a
result management believes that amounts due from Reliance to OMIC or the
Company and its claimants will be paid by the applicable state guaranty
association. However, the state guaranty associations may assert claims
against OMIC and the Company for payments made to claimants of Reliance. There
is no assurance that the Company's position will be upheld by applicable
courts and that additional liabilities will not result.

11. Other Assets

At December 31, 2001 and 2000, other assets included restricted cash of
$8.6 million and $7.3 million, respectively, that have been pledged to secure
bonds relating to construction contracts.

72

FRIEDE GOLDMAN HALTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Other assets also included net debt issuance costs of $4.1 million and $8.2
million at December 31, 2001 and 2000, respectively. Accumulated amortization
of debt issuance costs was $5.6 million and $3.3 million at December 31, 2001
and 2000, respectively.

12. Debt

Liabilities not subject to compromise include liabilities incurred
subsequent to the bankruptcy filing date, certain liabilities on contracts
assumed by the Company and long-term debt and related interest which are
secured by certain assets, primarily property and equipment. Long-term debt
not subject to compromise was as follows:

December 31,
-----------------
2001 2000
-------- --------
(in thousands)

Borrowings under the Restated Credit Agreement:
Line of credit........................................... $ 28,346 $ 4,662
Term loan................................................ 43,284 40,058
Notes payable to financial institutions and others bearing
interest at rates ranging from 6.25% to 12.00%, payable in
monthly installments, maturing at dates ranging from
December 2001 to March 2013 and secured by equipment, a
lease and real property................................... 4,237 7,837
Bonds payable to MARAD bearing interest at 6.35% maturing
June 2013 payable in semi-annual installments commencing
July 1, 1999, secured by equipment........................ 19,854 21,509
Bonds payable, bearing interest at 7.99% payable in monthly
installments commencing January 1999, maturing December
2008, secured by equipment................................ 14,982 15,447
Capital lease obligations bearing interest at rates ranging
from 6.86% to 16.84% maturing at dates ranging from June
2002 through September 2004............................... 2,152 3,115
Note payable, bearing interest at 7.05%, payable in
quarterly installments commencing April 1998, maturing
March 2002, secured by equipment.......................... 2,500 2,500
-------- --------
115,355 95,128
Less: Current portion of long-term debt including debt in
default of $91.5 million and $66.2 million at December 31,
2001 and 2000, respectively............................... 115,355 74,877
-------- --------
Long-term debt less current portion........................ $ -- $20,251
======== ========

Accrued interest on a long-term debt not subject to compromise of $2.4
million was included in accrued liabilities at December 31, 2001.

Restated Credit Agreement

Effective October 24, 2000, the Company entered into a $110.0 million
amended and restated credit agreement, comprised of a $70.0 million line of
credit and a $40.0 million term loan (collectively, the "Restated Credit
Agreement"). The Restated Credit Agreement has a three-year term. The line of
credit is secured by substantially all of the Company's otherwise unencumbered
assets, including accounts receivable, inventory, equipment, real property and
all of the stock of its domestic subsidiaries and 67% of the stock of its
Canadian subsidiary. The term loan is secured by a subordinated security
interest in the line of credit collateral.

73

FRIEDE GOLDMAN HALTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Under the original terms of the Restated Credit Agreement, the Company may
borrow up to $70.0 million under a senior secured revolving line of credit
facility. Availability under the line of credit is based on specified
percentages of the Company's receivables, inventories, equipment and real
property. The interest rate on the line of credit is based on LIBOR or the
base rate (as defined) with a floor of 7.5%. During the first year of the line
of credit, the spread is fixed at 3.75% over LIBOR and 1.75% over the base
rate; thereafter the LIBOR option ranges from 3.25% to 4.25% over LIBOR and
the base rate option ranges from 1.25% to 2.25% over the base rate, (as
defined). The Company is also obligated to pay certain fees, including a
commitment fee equal to (i) during year one of the facility, 0.50% of the
unused portion of the line of credit and (ii) thereafter, a range of 0.25% to
0.50% of the unused portion of the line of credit.

The term loan is a $40.0 million interest-only three-year facility with a
stated maturity of October 2003. The term loan bears interest at the base rate
(as defined) plus 5.5% with a floor of 13%. The Company, at its option, has
the ability to capitalize 1.5% of the current interest charge through
maturity. Interest is payable monthly. Proceeds for the term loan were used to
repay the 1999 Credit Facility in its entirety. In connection with the payoff
of the 1999 Credit Facility, the Company recognized an extraordinary loss of
$3.9 million as a result of the write-off of the deferred financing costs
associated with the 1999 Credit Facility.

The Restated Credit Agreement requires that the Company comply with certain
financial and operating covenants, including limitations on additional
borrowings and capital expenditures, utilization of cash management accounts,
maintenance of certain minimum debt coverage ratios, minimum EBITDA, net worth
and other requirements. The Company was not in compliance with these covenants
during 2001 and 2000.

On February 15, 2002, the Company entered into its third Amended Cash
Collateral Agreement with Foothill Capital Corporation, as agent for itself
and another lender. This agreement extended the Company's continued use of its
operating cash until April 15, 2002. The Company also agreed to comply with
certain requirements relating to cash receipts and disbursements and agreed to
make weekly adequate protection payments of $200,000.00. The Agreement also
stipulates the Company's consent for Foothill to accrue interest on all
indebtedness whether incurred pre or post petition at the contractual default
rate of interest set for the in the Pre-Petition Loan Documents. At December
31, 2001, the weighted average contractual default rate was 11.6%.

Total balances outstanding under the Restated Credit Agreement at December
31, 2001 were $87.0 million including $15.4 million in letters of credit.
Included in the letter of credit amount is a $5.7 million letter of credit
which is being used to fund worker's compensation claims payable by the
Company's unconsolidated captive insurance subsidiary.

MARAD Financing Agreement

As of December 31, 2001, the Company had approximately $19.9 million in
outstanding principal related to its bonds that are guaranteed by the U. S.
Maritime Administration ("MARAD"). The bonds were issued in December 1997,
under Title XI, to partially finance construction of our FGO East Facility.
The Company's plan of reorganization filed on March 22, 2002 contemplates
abandoning this facility to MARAD in full satisfaction of its claims.

74

FRIEDE GOLDMAN HALTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Convertible Subordinated Notes

The 4 1/2% Convertible Subordinated Notes (the "Notes") were issued by HMG
on September 15, 1997 and mature on September 15, 2004. The Notes were issued
under an Indenture Agreement (the "Indenture") that provides that the Notes are
convertible at the option of the holder into shares of common stock of the
Company at a conversion price of $55.26 per share. As a result of the
November 3, 1999 merger, the recorded book value of the Notes was adjusted to
reflect the fair market value on the date of the merger. Accordingly, a
discount of $70.3 million was recorded. Interest on the Notes is payable
semiannually, in arrears, on March 15 and September 15 of each year, with
principal due at maturity. The Company has included the outstanding principal
balance of $185 million in liabilities subject to compromise as of December 31,
2001, and approximately $127.1 million (which includes approximately $57.9
million in unaccreted discount) in long-term debt as of December 31, 2000,
related to these Notes. Pursuant to the requirements of Statement of Position
90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code," the Company ceased accruing interest related to these Notes beginning
April 19, 2001.

Fair Value of Debt

The fair value of the Company's long-term debt, including the debt under the
Restated Credit Facility, was approximately its carrying value at December 31,
2001. The fair value of the Company's 4 1/2% Convertible Subordinated Notes as
of December 31, 2001 was not estimable because of the uncertainties related to
the Company's plan of reorganization and the recoveries that unsecured
creditors will receive.

The Company recognized interest expense in 2001 for the unaccreted discount
on the convertible subordinated notes totaling $54.8 million.

13. Liabilities Subject to Compromise

At December 31, 2001, liabilities subject to compromise included the
following (in thousands):

Convertible subordinated notes..................................... $185,000
Accounts payable................................................... 86,739
Contract liabilities............................................... 63,542
Accrued interest................................................... 5,338
Other accrued liabilities.......................................... 20,078
--------
$360,697
========

14. Employee Benefit Plans

Pension Plan

In conjunction with the HMG merger, the Company assumed responsibility for
HMG's pension plan which had been frozen effective March 31, 1998. The plan
provides income and death benefits for eligible employees who were members of
the plan at the time of curtailment. The Company's policy is to fund retirement
costs accrued but only to the extent such amounts are deductible for income tax
purposes. Plan assets include cash, short-term debt securities, and other
investments. Benefits are based on years of credited service and compensation.

75

FRIEDE GOLDMAN HALTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Under Statement of Financial Accounting Standard No. 132, "Employer's
Disclosures about Pension and Other Post-retirement Benefits," the following
disclosures about pension and other post-retirement benefit plans are
required.

December 31,
---------------
2001 2000
------- ------

Change in benefit obligation:
Benefit obligation at beginning of period................. $ 9,057 $8,306
Interest cost............................................. 672 648
Actuarial losses.......................................... 652 337
Benefits paid............................................. (115) (234)
------- ------
Benefit obligation at end of year......................... 10,266 9,057
------- ------
Change in plan assets:
Fair value of plan assets at beginning of period.......... 9,334 9,793
Actual return on plan assets.............................. 490 (224)
Benefits paid............................................. (115) (234)
------- ------
Fair value of plan assets at end of year.................. 9,709 9,335
------- ------
Funded status of the plan................................. (557) 278
Unrecognized net actuarial losses......................... 2,286 1,305
------- ------
Prepaid benefit cost...................................... $ 1,729 $1,583
======= ======
Weighted-average assumptions as of December 31:
Discount rate............................................. 7.00% 7.50%
Expected return on plan assets............................ 9.00% 9.00%
Rate of compensation increase............................. 4.75% 4.75%

Deferred Compensation Plan

The Company sponsored a deferred compensation plan for the benefit of
certain management personnel which was primarily funded by life insurance
policies. The plan was terminated and the life insurance policies were
liquidated during 2001. The cash proceeds received from the liquidation of the
life insurance policies and the related liabilities are included in current
assets and liabilities subject to compromise, respectively, in the
accompanying balance sheet. The cost of this plan was not material.

401(k) Plan

The Company has a contributory 401(k) plan in which employees of the
Company may participate. Under the plan, eligible employees are allowed to
make voluntary pretax contributions which are matched, up to certain limits,
by the Company. Employer contributions to the plan are subject to approval by
the Board of Directors and were $0.5 million, $2.7 million and $1.5 million
during the years ended December 31, 2001, 2000 and 1999, respectively. In
March 2001, the Company suspended its matching contributions to the 401(k)
plan.

Incentive Compensation Plan

The Company has an Incentive Compensation Plan (the Plan) under which both
qualified and non-qualified options, and restricted stock and other forms of
incentive compensation may be granted. As of December 31, 2001, 17,599,611
shares of common stock were reserved for issuance under the Plan. The Plan is
administered by a committee of the Board, which selects persons eligible to
receive

76

FRIEDE GOLDMAN HALTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

options and determines the number of shares subject to each option, the
vesting schedule, the exercise price and the duration of the option. The
exercise price of any option granted under the Plan cannot be less than 100%
of the fair market value of the Company's common stock on the date of grant
and its duration cannot exceed 10 years.

Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation," (SFAS 123), allows companies to record expense based on
the fair value of stock-based compensation upon issuance or elect to remain
under the current Accounting Principles Board Opinion No. 25 ("APB 25") method
whereby no compensation cost is recognized upon grant if certain requirements
are met. The Company accounts for its stock-based compensation under APB 25.
However, pro forma disclosures as if the Company adopted the cost recognition
requirements under SFAS 123 are presented below.

If the compensation cost for the Company's 2001, 2000, and 1999 grants for
stock-based compensation plans had been determined consistent with SFAS 123,
the Company's net loss per common share for the years ended December 31, 2001,
2000 and 1999 would have approximated the pro forma amounts in the following
table.

2001 2000 1999
-------------------- -------------------- ------------------
As As As
Reported Proforma Reported Proforma Reported Proforma
--------- --------- --------- --------- -------- --------
(in thousands, except per share data)

Net loss................ $(401,607) $(407,607) $(106,371) $(110,837) $(30,826) $(34,558)
Net loss per share:
Basic................. $ (8.24) $ (8.37) $ (2.39) $ (2.49) $ (1.18) $ (1.32)
Diluted............... $ (8.24) $ (8.37) $ (2.39) $ (2.49) $ (1.18) $ (1.32)

There we no options granted during the year ended December 31, 2001.

The weighted average grant date fair value of options granted during the
year ended December 31, 2000 was $5.95. The fair value of options was
estimated using the Black-Scholes option-pricing model with the following
assumptions: (a) dividend yield of 0%; (b) expected volatility of 1.04% (c)
risk-free interest rate ranging from 5.00% to 5.27%; and (d) average expected
life of 7 years.

Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing model does not necessarily
provide a reliable single measure of the fair value of its employee stock
options.

77

FRIEDE GOLDMAN HALTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

A summary of the Company's stock options as of December 31, 2001, 2000 and
1999 and changes during the years then ended is presented below:

2001 2000 1999
-------------------- --------------------- --------------------
Wgt. Avg. Wgt. Avg. Wgt. Avg.
Number Of Exer. Number Of Exer. Number Of Exer.
Options Price Options Price Options Price
--------- --------- ---------- --------- --------- ---------

Outstanding at beginning
of year................ 4,118,959 $9.12 4,880,893 $10.45 1,054,110 $13.44
Granted................. -- -- 782,650 6.44 3,914,500 9.65
Forfeited............... (447,121) 8.09 (1,541,584) 11.48 (5,333) 10.66
Exercised............... (1,600) 0.50 (3,000) 0.50 (82,384) 7.35
--------- ---------- ---------
Outstanding at end of
year................... 3,670,238 $9.25 4,118,959 $ 9.12 4,880,893 $10.45
========= ===== ========== ====== ========= ======
Options exercisable at
year-end............... 2,796,658 $9.51 2,192,350 $ 9.65 1,552,478 $10.36
Options vesting in
future years........... 873,580 8.40 1,926,609 8.51 3,328,415 10.49
--------- ---------- ---------
Options outstanding at
year-end............... 3,670,238 $9.25 4,118,959 $ 9.12 4,880,893 $10.45
========= ===== ========== ====== ========= ======

The following table summarizes information about stock options outstanding
at December 31, 2001:

Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Number Life Exercise Number Exercise
Range of Exercise Prices Outstanding (Years) Price Exercisable Price
------------------------ ----------- ----------- -------- ----------- --------

$0.500-3.560............. 80,400 6.0 $0.880 66,320 $0.960
$5.563-6.313............. 114,550 9.0 5.740 38,183 5.740
$6.500-7.875............. 395,000 9.0 6.990 131,667 6.990
$8.500................... 376,636 6.0 8.500 375,836 8.500
$8.750................... 259,000 8.0 8.750 172,667 8.750
$9.625................... 2,134,000 8.0 9.625 1,772,666 9.625
$11.375.................. 213,000 8.0 11.375 142,000 11.375
$13.688-19.750........... 74,000 8.0 15.350 73,667 15.360
$36.625-46.500........... 23,652 6.9 36.992 23,652 36.990

15. Leases

The Company leases certain land, office space, drydocks, and machinery and
equipment under non-cancelable operating leases which expire at various dates
through the year 2037.

Future minimum lease payments for long-term non-cancelable lease
arrangements are as follows:

Years Ending December 31, Amount
------------------------- --------------
(In thousands)

2002....................................................... 3,995
2003....................................................... 3,637
2004....................................................... 3,324
2005....................................................... 2,930
2006....................................................... 1,988
Thereafter................................................. 4,401

78

FRIEDE GOLDMAN HALTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Lease expense on long-term lease arrangements was $4.0 million, $6.8
million and $1.8 million for the years-ended December 31, 2001, 2000, and 1999
respectively. The Company enters into short-term lease arrangements for
equipment needed to fulfill the requirements of specific jobs. Any payments
owed or committed under these lease arrangements as of December 31, 2001 are
not included as part of total minimum lease payments. Rent expense for these
arrangements was $1.8 million, $5.4 million and $5.2 million for the years
ended December 31, 2001, 2000 and 1999, respectively.

16. Related Party Transactions

During 2001 and 2000, the Company maintained cash deposits in a financial
institution on whose board of directors the Company's Chairman served as a
member until April 2001. Deposits in this bank totaled $13.1 million at
December 31, 2000.

The Company had a cancelable lease arrangement on an aircraft with
Equipment Management Systems, a company primarily owned by the Company's
Chairman. Pursuant to the lease agreement, the Company paid $0.2 million, $0.7
million and $0.9 million to this company in the years ended December 31, 2001,
2000 and 1999.

17. Contingencies

Bankruptcy Claims

As a result of certain of the contractual matters described in Note 18 and
other claims asserted by secured and unsecured creditors, the Company has been
notified that proofs of claims filed with the Bankruptcy Court related to its
Chapter 11 filing significantly exceed the liabilities the Company has
recorded. At December 31, 2001, the Company accrued its best estimate of the
liability for the resolution of these claims. This estimate has been developed
in consultation with outside counsel that is handling the bankruptcy and
defense of these matters. To the extent additional information arises or the
Bankruptcy Court approves the proofs of claims as filed, it is possible that
the Company's estimate of its liability in these matters may change.
Management believes any change to the Company's estimate will increase the
balance of its liabilities subject to compromise.

Economic Incentive Program

In connection with the construction of the FGO East Facility, the County of
Jackson, Mississippi, agreed to dredge the ship channel and build roads and
other infrastructure under an economic incentive program. The terms of the
economic incentive program require that the Company maintain a minimum
employment level of 400 jobs through the FGO East Facility during the primary
term of the FGO East Facility's 20-year lease. If the Company fails to
maintain the minimum employment level, the Company could be required to pay
interest to the county based upon the labor shortfall or pay the remaining
balance of the $6.0 million loan incurred by the county to finance such
improvements. The Company was in compliance with this provision at December
31, 2001.

Liberty Mutual and Wausau

On December 5, 2000, the Company reached a settlement agreement with a
former workers' compensation provider. In conjunction with this agreement, the
Company was to pay approximately $3.0 million as its share of the settlement
of all claims arising from this case. As of the bankruptcy filing date, the
Company had paid approximately $1.75 million of the settlement. The Bankruptcy
Court on

79

FRIEDE GOLDMAN HALTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

October 2, 2001 denied the Company and another co-defendant permission to pay
the remaining $1.25 million of the settlement. As a result of this ruling, the
insurer may file a claim for an amount substantially greater than the
remaining installment. The Company has recorded a reserve in the amount of the
remaining installment in its liabilities subject to compromise. The Company
believes that any additional amounts, which may be approved by the Bankruptcy
Court, will also be a liability subject to compromise.

General Exposure to Industry Conditions

The nature of the Company's activities relating to the conversion, retrofit
and repair of drilling rigs subjects its property and employees, along with
the property and employees of its customers and others, to hazards which can
cause personal injury or damage or destruction of property. Although the
Company maintains such insurance protection as it considers economically
prudent, there can be no assurance that any such insurance will be sufficient
or effective under all circumstances or against all hazards to which the
Company may be subject. In particular, due to the cost of errors and omissions
policies related to the design of drilling rigs and production units, the
Company does not carry insurance covering claims for personal injury, loss of
life or property damage relating to such design activity. A successful claim
for which the Company is not fully insured could have a material adverse
effect on the Company's financial position and results of operations.

Other

The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position or results of operations.

18. Contractual Matters

The Company's results of operations for 2001, 2000 and 1999 and its current
financial condition have been materially and adversely impacted by contracts
for the construction of four semi-submersible drilling rigs (Ocean Rig and
Petrodrill contracts), one vehicle car carrier (Pasha contract) and one heavy
derrick-lay barge (CNOOC contract), as further described below.

Ocean Rig

In December 1997 and June 1998, the Company entered into contracts to
construct two semi-submersible drilling rigs for Ocean Rig ASA, a Norwegian
company. The Company commenced construction of one rig in June 1998 ant the
other in January 1999. Since January 2000, when the Company entered into a
Confidential Settlement Agreement with Ocean Rig to resolve disputes with
respect to these contracts, the Company continued to experience significant
continuing cost overruns and delays in the construction of these rigs. As a
result, the Company recorded provisions for contract losses during the second,
third and fourth quarters of 2000 of approximately $24.6 million, $7.0 million
and $38.2 million, respectively, related to this project. Losses for the
fourth quarter include a provision for all costs the Company incurred through
the date of the March 9, 2001 amendment to the contract, at which time the
contract was converted to a "time and materials" basis. The significant events
which occurred during 2000 and 2001 related to this project are discussed
below.

Delays and cost increases related to additional design changes initiated by
Ocean Rig and the late delivery by Ocean Rig of information and equipment the
Company was required to provide continued after the Settlement Agreement.
Ocean Rig denied responsibility for these delays and cost increases.

80

FRIEDE GOLDMAN HALTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

This Post-Settlement Agreement dispute was resolved pursuant to a negotiated
Co-operation Agreement dated November 30, 2000 (the "Co-operation Agreement")
which provided for additional compensation to the Company from Ocean Rig and
revised delivery dates of March 2001 and June 2001 and imposition of
liquidated damages thereafter at the rate and subject to the maximum amount
stated in the Settlement Agreement.

Despite the Company's best efforts to progress the project consistent with
the terms of the Co-operation Agreement, it continued to experience additional
cost overruns and delays which have had a significant adverse impact on its
financial results in the fourth quarter 2000 and its current financial
condition. On March 1, 2001, the Company stopped work on the Ocean Rig project
and Ocean Rig commenced an arbitration proceeding in London. Further, on March
2, 2001, Ocean Rig commenced proceedings before the United States District
Court for the Southern District of Mississippi seeking possession of the rigs.
On March 9, 2001, the Company entered into a Remuneration Agreement with Ocean
Rig ASA in order to resolve the disputes which had arisen; to amend certain
provisions of the completion contracts to construct two Bingo design semi-
submersible offshore drilling rigs and previous settlement agreements; and to
ensure the successful and timely completion of the rigs to the mutual benefit
of both parties. In accordance with the Remuneration Agreement, Ocean Rig ASA
was granted control over the rig projects and paid the Company a contractually
established rate for equipment, personnel and labor provided by the Company to
cover the costs of completing the projects. As a further result of the
agreement, Ocean Rig withdrew the arbitration and other legal proceedings. The
Company also agreed to issue 2.0 million warrants to Ocean Rig ASA to purchase
its common stock at a strike price of $5.00 per share, but these warrants were
not issued due to the Company's bankruptcy filing. Shipyard construction of
the first rig was completed in May 2001 and that rig left the Company's
facility to undergo final outfitting, including the installation of the
dynamic positioning thruster system. This rig has completed final sea trial
commissioning and is in operation. The second rig left the Company's facility
in July 2001 and construction will be completed at a Canadian shipyard.

On December 10, 2001, the Company entered into a Delivery and Close--Out
Agreement with Ocean Rig under which both parties waived and released all
claims each had against the other except certain limited claims reserved in
the Agreement. The Agreement is subject to the approval of the Bankruptcy
Court. The Court's approval of the Delivery and Close--Out Agreement was not
received prior to the deadline for filing proofs of claim in the Bankruptcy
Court. In order to preserve its rights, Ocean Rig filed unquantified proofs of
claim for both rigs. The proofs of claim will be cancelled by Ocean Rig upon
approval of the Delivery and Close--Out Agreement by the Bankruptcy Court.

Petrodrill

In April 1998, one of the Company's subsidiaries Friede Goldman Offshore-
Texas ("FGOT") (and a former subsidiary of HMG) entered into contracts to
construct two semi-submersible drilling rigs for two newly formed entities,
Petrodrill IV, Ltd. and Petrodrill V, Ltd. ("Petrodrill"). After the
commencement of construction, FGOT began to experience delays in the
production schedule and increased costs due, in whole or part, to delays
caused by Petrodrill and by subcontractors nominated by Petrodrill. In
addition, FGOT had to perform as the lead yard as opposed to a follow-on yard
as initially anticipated by the contracting parties.

In April 1999, and in connection with a transaction whereby the Federal
Maritime Administration ("MARAD") agreed to finance the Petrodrill rigs, FGOT
and Petrodrill entered into an amendment to the contracts that provided, among
other things, for extensions to the delivery dates of approximately six months
for each rig. Thereafter, production delays continued. Under the contracts,
FGOT is entitled

81

FRIEDE GOLDMAN HALTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

to extensions of the delivery dates for permissible delay as defined in the
contracts ("Permissible Delay") and for delays caused by Petrodrill breaches
of contract. FGOT notified Petrodrill that, as a result of such delays, it was
entitled to additional extension of the delivery dates and to additional
compensation. Petrodrill refused to acknowledge FGOT's right to extension of
the delivery dates. Petrodrill was also advised that the rigs could not be
completed by their respective existing delivery dates.

In January 2000, FGOT notified Petrodrill that it was mitigating FGOT's and
Petrodrill's damages by deferring certain fabrication efforts until
engineering work could be completed so that the Company could determine the
ultimate cost of the project and permit construction to go forward in an
efficient manner. FGOT also notified Petrodrill that it believed it was
entitled to additional monetary compensation from Petrodrill as a result of
delay, disruption, inefficiencies and other direct and indirect costs caused
by, among other things, delays by Petrodrill and its nominated subcontractors
and by FGOT being required to perform as the lead yard. Consequently,
Petrodrill and the Company filed a series of actions against one another in
the United States federal court and in a court in London, England. In May
2000, FGOT and Petrodrill finalized an agreement to amend the construction
contract and dismiss the litigation previously filed against each other. The
amendment extended delivery dates, capped liquidated damages and increased the
Company's contract value.

On February 28, 2001, the Company announced an agreement in principle with
Fireman's Fund, the surety company which wrote the performance bonds of $87.0
million per rig on the Petrodrill project, pursuant to which the surety
company had agreed to provide certain funding for the completion of
construction of the two semi-submersible drilling rigs. The agreement provided
that the surety company would contract with FGOT for FGOT's completion of the
project on a "time and materials" basis, including payment of all direct labor
and fringe benefit costs, materials, subcontractor and other costs and an
allocation for overhead and general and administrative expenses. The terms of
the final agreement were not successfully negotiated resulting in the surety
ceasing to provide funding.

On May 4, 2001, the Company announced that it filed with the Bankruptcy
Court a motion to reject the contracts related to the Petrodrill project. This
motion was approved by the Bankruptcy Court in June 2001 and finalized in July
2001. Work on the projects was discontinued effective May 4, 2001.
Construction on the projects has been resumed pursuant to a Bankruptcy Court
motion effective September 6, 2001. This motion provides for the Company to
work as authorized by the customer and surety company for a 120-day period on
Rig I and a 150-day period on Rig II. These periods began on September 6,
2001. The construction is to be performed at specified labor, equipment and
material billing rates. In December 2001, the Company, Petrodrill and
Fireman's Fund jointly moved for and were granted an extension of time to
April 4, 2002 for the removal of the first rig from the Company's Pascagoula,
Mississippi shipyard and to May 9, 2002 for the removal of the second rig from
the Company's shipyard in Orange, Texas. The Company continues to discuss the
possibility of completing the work on both rigs with Petrodrill at its Texas
facilities; however, the Company has been advised that there is a strong
possibility that the work to complete these rigs may be performed elsewhere.

At December 31, 2001, the Company had a reserve for estimated costs to
complete the contract of $25.7 million, which represents its estimate of the
remaining cost of completion in excess of future billings at the time work on
the project was suspended. The Company's estimate was based on an
uninterrupted work plan the Company developed during the first quarter of
2001. At December 31, 2001, the Company also has recorded a liability of $15.9
million related to costs funded to date by the surety. The Company believes
its liability related to the project is limited to the sum of these two
liabilities, approximately $41.6 million. This amount is included in
liabilities subject to compromise in the Company's balance sheet.

82

FRIEDE GOLDMAN HALTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Petrodrill has submitted proofs of claim totaling $477.0 million based on
estimated costs to complete the rigs and lost revenues. Fireman's Fund has
submitted proofs of claim which are unquantified at this time. The Company
believes Petrodrill's claim substantially exceeds its reserve of $41.6 million
due to delays caused by the customer/surety and the customer's/surety's
inaction on resolving the strategy to complete construction of the rigs. The
Company is not privileged to the customer's/surety's final strategy for
completion of these projects and their claims and does not have information as
to the estimated final cost to complete under the customer's/surety's
strategy. The Company believes the claims made by Petrodrill and the surety,
if substantiated, would be a liability subject to compromise. There is no
assurance that management's position regarding the value of the claims of
Petrodrill and Fireman's Fund will be upheld by applicable courts and
additional liabilities will not result in excess of the reserve recorded at
December 31, 2001.

PASHA

On December 28, 1999, the Company signed a contract for the construction of
a 4,000 car-carrier vessel for transport of vehicles between the West Coast
and the Hawaiian Islands. On May 1, 2001 the Company gave notice to the
customer that it was not financially capable of completing this contract
without further funding to ensure a cash flow positive contract from the date
of filing Chapter 11 reorganization on April 20, 2001. This additional funding
was anticipated to come from the surety company which wrote the performance
bond for the project. The surety company provided additional funding for the
project under court order until July 27, 2001 when it informed the Company
that it would not fund completion of the vessel. Construction on the project
was suspended when this funding ceased. The Company and the customer maintain
that this is a violation of the terms of the performance bond. The customer
has sued the surety in U.S. District Court. The United States Department of
Justice ("USDOJ"), which represents the United States Maritime Administration
("MARAD") (the provider of customer financing) and the customer have also sued
the surety in the state court of Mississippi. The suits are seeking specific
performance of the surety under the terms of the performance bond and are
pending. The customer has signed a letter of intent with the Company to
complete the project with or without the surety's participation subject to the
Company's financial status as the Company emerges from Chapter 11.

At December 31, 2001, the Company has recorded a reserve for estimated
costs to complete the contract of $4.9 million, which represents its estimate
of the cost of completion in excess of future billings at the time work on the
project was suspended. This amount is included in liabilities subject to
compromise in the Company's balance sheet. The customer has submitted proofs
of claim totaling $906.0 million and the surety has submitted proofs of claim
which are unquantified at this time. The Company believes the claims made by
the customer and the surety, if substantiated, would be a liability subject to
compromise. There is no assurance that management's position regarding the
value of the claims of the customer and the surety will be upheld by
applicable courts and additional liabilities will not result in excess of the
reserve recorded at December 31, 2001.

CNOOC

The Company filed a motion with the Bankruptcy Court to reject the contract
with China National Offshore Oil Company (CNOOC) for the construction of a
heavy derrick-lay barge. Liberty Mutual, the surety company which underwrote
the contract performance bank guarantee, opposed the contract rejection. After
the Company filed for bankruptcy, CNOOC received $10.9 million in funding from
Liberty Mutual under the performance bank guarantee for costs it incurred to
complete the project. The Company has co-operated with the surety in its
assessment of the claims against the guarantee. At

83

FRIEDE GOLDMAN HALTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 2001, the Company recorded additional contract costs and a
related liability of $10.9 million based on the funding provided by the
surety. This liability is included in liabilities subject to compromise in the
Company's balance sheet. Liberty Mutual has submitted proofs of claim which
are unquantified at this time. The Company believes any claim made by the
customer and/or the surety would be a liability subject to compromise and no
loss exposure exists in excess of the liability recorded.

19. Stockholder Rights Plan

The Company adopted a stockholder rights plan on December 4, 1998, designed
to assure that its stockholders receive free and equal treatment in the event
of a takeover of the Company and to guard against partial tender offers,
squeeze-outs, open market accumulations, and other abusive tactics to gain
control without paying all stockholders a fair price. The rights plan was not
adopted in response to any specific takeover proposal. Under the rights plan,
the Company's stockholders were issued a Preferred Stock Purchase Right on
each share of the Company's common stock. Each right entitles its holder to
purchase one one-thousandth of a share of a new series of Junior Preferred
Stock, par value, $0.01 per share, for $75 per share. The Purchase Right grant
was made on December 21, 1998, to stockholders of record at that date. The
rights will expire on February 26, 2006.

20. Business Segments

The Company classifies its business into three segments: Vessels, Offshore,
and Engineered Products. Operations within the Vessels segment include the new
construction of a wide variety of vessels for the government, offshore energy
and commercial markets. Products in this segment include offshore support
vessels and offshore double hull tank barges for energy markets; offshore and
inland tug boats, ocean-going barges and oil spill recovery vessels for
commercial markets; and, oceanographic survey and research ships, high-speed
patrol boats and ferries for government markets. Operations within the
Offshore segment include the new construction, conversion and repair of mobile
offshore drilling rigs and production platforms. The Company evaluates the
performance of its segments based upon income before interest and income taxes
as these expenses are not allocated to the segments.

During 2001, the Company entered into an agreement to sell its French
subsidiaries and developed a plan to sell Amclyde Engineered Products. These
events resulted in the complete disposition of the Company's Engineered
Products segment. The Engineered Products segment is excluded from the segment
information set forth below for all years presented.

Year ended December 31, 2001
----------------------------------------------------
Vessels Offshore Corporate Eliminations Total
-------- -------- --------- ------------ --------

Revenues................ $125,895 $120,171 $ -- $ -- $246,066
Cost of revenues........ 134,400 131,510 -- -- 265,910
Operating income
(loss)................. (13,207) (17,895) (231,011) -- (262,113)
Capital expenditures.... 1,989 2,036 11 -- 4,036
Total assets............ 137,710 115,222 441,771 (389,676) 305,027

Year ended December 31, 2000
----------------------------------------------------
Vessels Offshore Corporate Eliminations Total
-------- -------- --------- ------------ --------

Revenues................ $215,239 $365,746 $ -- $ -- $580,985
Cost of revenues........ 194,637 433,476 -- -- 628,113
Operating income
(loss)................. 14,548 (83,198) (32,089) -- (100,739)
Capital expenditures.... 1,101 2,955 189 -- 4,245
Total assets............ 128,953 281,733 682,293 (370,800) 722,179

84

FRIEDE GOLDMAN HALTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Year ended December 31, 1999
---------------------------------------------------
Vessels Offshore Corporate Eliminations Total
-------- -------- --------- ------------ --------

Revenues.................. $ 38,920 $400,520 $ -- $ -- $439,440
Cost of revenues.......... 32,971 408,684 -- -- 441,655
Operating income (loss)... 4,225 (24,634) (18,345) -- (38,754)
Capital expenditures...... 401 6,527 264 -- 7,192
Total assets.............. 256,803 318,561 492,789 (140,288) 927,865

The following table reconciles the Company's segment assets to total assets
reflected in the accompanying Consolidated Balance Sheet for the years ended
December 31, 2001 and 2000:

Years Ended
December 31,
-----------------
2001 2000
-------- --------
(in thousands)

Segment Assets............................................ $305,027 $722,179
Engineered Products Assets................................ 61,594 99,835
-------- --------
Total Assets............................................ $366,621 $822,014
======== ========

The following table reconciles segment capital expenditures to total
capital expenditures reflected in the accompanying Consolidated Statements of
Cash Flows for the years ended December 31, 2001 and 2000:

Years Ended
December 31,
-------------
2001 2000
------ ------
(in
thousands)

Segment Capital Expenditures.................................. $4,036 $4,245
Engineered Products Capital Expenditures...................... 3 1,333
------ ------
Total Capital Expenditures.................................. $4,039 $5,578
====== ======

The Company's revenues attributable to the country of domicile and to
foreign countries based on the location of the customer are as follows:

Years Ended December 31,
--------------------------
2001 2000 1999
-------- -------- --------
(in thousands)

United States..................................... $188,887 $409,216 $239,848
China............................................. 7,512 51,982 --
Norway............................................ 42,972 106,113 151,775
Netherlands....................................... -- 18 --
Canada............................................ 3,946 11,507 17,547
France............................................ -- 47 --
Bahamas........................................... -- 621 23,695
Other............................................. 2,749 1,481 6,575
-------- -------- --------
$246,066 $580,985 $439,440
======== ======== ========

At December 31, 2001, the Company had $5.0 million in long-lived assets
which were held in Canada and are included in property, plant and equipment
including goodwill held for disposition in

85

FRIEDE GOLDMAN HALTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

the accompanying balance sheet. At December 31, 2000, the Company had $57.1
million in long-lived assets which were held in foreign countries with amounts
of $41.5 million and $15.6 million in Canada and France, respectively.
Included in the long-lived assets held in France at December 31, 2000 were
$7.4 million in net intangible assets.

21. Income Taxes

Loss before income taxes for the years ended December 31, 2001, 2000 and
1999 was comprised of the following:

Years Ended December 31,
------------------------------
2001 2000 1999
--------- --------- --------
(in thousands)

Domestic..................................... $(390,127) $(131,368) $(51,573)
Foreign...................................... (1,970) 3,955 3,606
--------- --------- --------
Total...................................... $(392,097) $(127,413) $(47,967)
========= ========= ========

Income tax expense (benefit) included in the statements of operations for
the years ended December 31, 2001, 2000 and 1999 was as follows:

Years Ended December 31,
----------------------------
2001 2000 1999
-------- -------- --------
(in thousands)

Current:
Domestic.................................... $ -- $ (3,080) $(24,360)
Foreign..................................... 1,255 -- 683
-------- -------- --------
1,255 (3,080) (23,677)
-------- -------- --------
Deferred:
Domestic.................................... (80,479) (48,203) 5,716
Foreign..................................... (670) 1,730 820
Change in valuation allowance............... 89,404 28,511 --
-------- -------- --------
8,255 (17,962) 6,536
-------- -------- --------
Total..................................... $ 9,510 $(21,042) $(17,141)
======== ======== ========

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FRIEDE GOLDMAN HALTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Income tax expense (benefit) for the years ended December 31, 2001, 2000 and
1999 differs from the amount computed by applying the statutory federal income
tax rate to income (loss) before income taxes as a result of the following:

December 31,
-------------------------------------------------------
2001 2000 1999
----------------- ---------------- ----------------
% of % of
Pretax Pretax % of
Income Income Pretax
Tax (Loss) Tax (Loss) Tax Income
--------- ------ -------- ------ -------- ------
(in thousands)

Federal income tax
expense (benefit)
computed on loss before
taxes.................. $(136,604) (35.0)% $(44,595) (35.0)% $(16,788) (35.0)%
Amortization and
impairment of
goodwill............. 73,609 18.9 1,910 1.5 612 1.3
Domestic tax credits.. -- -- (2,231) (1.8) -- --
State income tax...... (12,880) (3.3) (4,205) (3.3) (1,678) (3.5)
Change in valuation
allowance............ 90,270 23.1 28,511 22.4 -- --
Other................. (4,885) (1.3) (432) (0.3) 713 1.4
--------- ----- -------- ----- -------- -----
Income tax expense
(benefit).............. $ 9,510 2.4% $(21,042) (16.5)% $(17,141) (35.8)%
========= ===== ======== ===== ======== =====

Temporary differences between the financial statement carrying amounts and
the tax bases of assets and liabilities gave rise to the following deferred
income taxes at December 31, 2001 and 2000:

December 31,
-----------------------------------------------
2001 2000
----------------------- -----------------------
Non- Non-
Current Current Current Current
Asset Asset Asset Asset
(Liability) (Liability) (Liability) (Liability)
----------- ----------- ----------- -----------
(in thousands)

Fixed assets.................. $ -- $(23,965) $ -- $(42,135)
Deferred government subsidy... -- 9,902 -- 11,130
Foreign tax credit............ -- 2,276 -- 2,276
Accounts receivable
valuation.................... 600 -- 1,254 --
Inventories valuation......... 1,657 -- 3,136 --
Accrued liabilities........... 4,389 3,169 9,957 3,688
Contact reserves.............. 13,483 -- 38,759 --
Fair value adjustment for
contracts in progress at
Acquisition 3,405 4,370 --
Long-term contracts........... 1,819 -- (24,754) --
Other......................... (1,725) (36)
Debt discount................. -- 2,974 -- (18,087)
AMT carryforward.............. -- 2,231 -- 2,231
NOL carryforward.............. -- 134,354 -- 83,932
Valuation allowance........... -- (156,808) -- (67,404)
------- -------- ------- --------
Deferred income tax asset
(liability).................. $25,353 $(25,867) $30,997 $(24,405)
======= ======== ======= ========

At December 31, 2001, the Company had net operating loss carryforwards
(NOLs) of $347.6 million and $4.7 million available to offset future U.S. and
Canadian taxable income, respectively. The U.S. NOLs expire in 2014 through
2016 and the Canadian NOLs expire in 2007.

87

FRIEDE GOLDMAN HALTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Management assesses the realizability of the net deferred tax asset based
on future reversals of existing temporary differences, recoverable taxes
previously paid and tax planning strategies. A deferred tax valuation
allowance is established, if needed, to limit the net deferred tax asset to
its realizable value. The valuation allowance at December 31, 2001 and 2000
was primarily established for the deferred tax assets related to the Company's
U.S. NOLs and the tax effects of differences between the financial reporting
values and tax bases of certain assets acquired and liabilities assumed in the
HMG merger. The total valuation allowance of $67.4 million includes a
valuation allowance of $36.8 million related to the deferred tax assets
recorded in the HMG merger.

At December 31, 2001, the Internal Revenue Service (IRS) was in the process
of examining income tax returns filed by the Company or its predecessors for
various periods. The IRS has filed proofs of claim totaling $36 million with
the Bankruptcy Court pending completion of its examination of the tax returns.
Management has evaluated its exposure to various filing positions taken in the
returns under examination and does not believe any material loss exposure
exists.

Prior to the merger between FGI and HMG, HMG filed various tax returns that
claimed income tax credits of approximately $9.0 million, excluding interest,
for qualified research and development expenditures. The IRS has examined
these tax returns and has disallowed the income tax credits. The Company has
filed a protest letter with the IRS to object to the disallowance of the
credits. The IRS responded to the protest letter and the matter has been
referred to the Appellate Division of the IRS. The Company has not recorded
any benefit related to these income tax credits in its financial statements
due to the uncertainties associated with the appellate process.

22. Reconciliation of Net Loss Per Share

The following table sets forth the computation of basic and diluted net
loss per share:

Years Ended December 31,
------------------------------
2001 2000 1999
--------- --------- --------
(in thousands, except per
share data)

Numerator:
Net loss before discontinued operations and
extraordinary item, basic and diluted....... $(382,961) $(113,590) $(30,854)
========= ========= ========
Denominator:
Weighted average shares outstanding.......... 48,711 44,562 26,148
Effect of dilutive securities:
Stock options.............................. -- -- --
--------- --------- --------
Denominator for net loss before discontinued
operations
and extraordinary item per share, basic and
diluted..................................... 48,711 44,562 26,148
========= ========= ========
Net loss per share, basic and diluted.......... $ (7.86) $ (2.55) $ (1.18)
========= ========= ========

The effect on net loss per share, diluted, would be anti-dilutive if the
stock options and the conversion of the 4 1/2% Convertible Subordinated Notes
had been assumed in the computation for 2000 and 1999.

88

FRIEDE GOLDMAN HALTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

23. Unaudited Quarterly Financial Data

Quarter Ended
--------------------------------------------
2001 March 31 June 30 September 30 December 31
- ---- -------- -------- ------------ -----------
(in thousands)

Contract revenue................. $ 85,720 $ 59,416 $ 46,974 $ 53,956
Gross profit (loss).............. 1,895 (5,812) 4,537 (20,463)
Operating loss................... (10,040) (15,560) (4,496) (232,016)
Loss before taxes................ (74,663) 19,462 (12,070) (306,180)
Net loss......................... (73,204) (9,236) (10,821) (324,386)
Net loss per share, basic and
diluted......................... (1.50) (0.19) (0.22) (6.66)

2000 March 31 June 30 September 30 December 31
- ---- -------- -------- ------------ -----------
(in thousands)

Contract revenue................. $185,442 $163,872 $129,551 $ 102,120
Gross profit (loss).............. 15,436 (10,936) 4,511 (56,141)
Operating income (loss).......... 2,522 (24,662) (9,438) (69,161)
Loss before taxes and
extraordinary loss.............. (5,965) (34,295) (16,713) (202,000)
Extraordinary loss............... -- -- -- (3,853)
Net loss......................... (5,139) (18,862) (11,206) (77,658)
Net loss per share, basic and
diluted......................... (0.13) (0.46) (0.23) (1.70)

Results of operations for the fourth quarter of 2001 include a goodwill
impairment charge of $201.6 million, a loss on assets held for disposition of
$22.0 million and a loss on disposal of the Engineered Products segment of
$26.0 million. In addition, contract revenue, gross profit (loss) and
operating loss have been restated to exclude the operating results of the
Engineered Products segment, which was discontinued in the fourth quarter of
2001.

Results of operations for the second and fourth quarter of 2000 include
downward negative adjustments in revenues and gross profit as a result of a
change in estimate to complete the Ocean Rig projects. In addition, the
Company did not provide a tax benefit in the fourth quarter of 2000.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on April 15, 2002.

FRIEDE GOLDMAN HALTER, INC.

/s/ Jack R. Stone, Jr.
By: _________________________________
Jack R. Stone, Jr.
President and Chief Executive
Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf of the registrant
and in the capacities indicated on April 15, 2002.

Signature Title
--------- -----

/s/ Jack R. Stone, Jr. President and Chief Executive Officer
______________________________________
Jack R. Stone, Jr.

/s/ John J. Siben, II Senior Vice President and Chief Accounting Officer
______________________________________
John J. Siben, II

/s/ J.L. Holloway Chairman of the Board
______________________________________
J.L. Holloway

/s/ Alan A. Baker Director
______________________________________
Alan A. Baker

/s/ T. Jay Collins Director
______________________________________
T. Jay Collins

/s/ Angus R. Cooper II Director
______________________________________
Angus R. Cooper II

/s/ Barry J. Galt Director
______________________________________
Barry J. Galt

/s/ Gary L. Kott Director
______________________________________
Gary L. Kott

/s/ Raymond E. Mabus Director
______________________________________
Raymond E. Mabus

90