UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

FOR THE FISCAL YEAR ENDED AUGUST 31, 2004

or

Commission File Number 1-12227

THE SHAW GROUP INC.

(225) 932-2500
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, no par value, registered on the New York Stock Exchange.

Preferred Stock Purchase Rights with respect to Common Stock, no par value, registered on the New York Stock Exchange.

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 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. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [ ]

The aggregate market value of the common stock held by non-affiliates (affiliates being directors, officers and holders of more than 5% of the Company’s common stock) of the Registrant at February 29, 2004 was approximately $483 million.

The number of shares of the Registrant’s common stock outstanding at October 29, 2004 was 64,056,088.

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DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive proxy statement to be prepared for use in connection with the Registrant’s 2004 Annual Meeting of Shareholders to be held in January 2005 will be incorporated by reference into Part III of this Form 10-K.

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TABLE OF CONTENTS

PART I

Item 1. Business

General

We are a leading global provider of comprehensive services to the environmental and infrastructure, power and process industries. We provide services to the environmental, infrastructure and homeland security markets, including consulting, engineering, construction, remediation and facilities management services to governmental and commercial customers. We are also a vertically-integrated provider of comprehensive engineering, procurement, pipe fabrication, construction and maintenance services to the power and process industries.

Founded in 1987, we have expanded rapidly through internal growth and the completion and integration of a series of strategic acquisitions since fiscal 2000. Our fiscal 2004 revenues were approximately $3.1 billion and our backlog at August 31, 2004 was approximately $5.8 billion. We are headquartered in Baton Rouge, Louisiana with offices and operations worldwide, and we employ approximately 17,200 people.

In July 2000, we acquired substantially all of the operating assets and assumed certain liabilities of Stone & Webster, Incorporated (“Stone & Webster”). Stone & Webster, a leading global provider of engineering, procurement, construction and consulting services to the power, process and environmental and infrastructure markets, was founded in 1889.

In May 2002, we acquired substantially all of the operating assets and assumed certain liabilities of The IT Group, Inc. (“IT Group”) and its subsidiaries. IT Group was a leading provider of diversified environmental consulting, engineering, construction, remediation and facilities management services. We have combined the operations of the acquired IT Group and our existing environmental and infrastructure operations into a newly formed wholly-owned subsidiary, Shaw Environmental & Infrastructure, Inc. (“Shaw E&I”).

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We segregate our business activities into three operating segments: Environmental and Infrastructure (E&I) segment, Engineering, Construction & Maintenance (ECM) segment, and Fabrication, Manufacturing and Distribution segment.

Environmental & Infrastructure

The E&I segment provides services which include the identification of contaminants in soil, air and water and the subsequent design and execution of remedial solutions. This segment also provides project and facilities management and other related services to non-environmental construction, watershed restoration and outsourcing of privatization markets.

Engineering, Construction & Maintenance

The ECM segment provides a range of project-related services, including design, engineering, construction, procurement, maintenance, technology and consulting services, primarily to the power generation and process industries.

Fabrication, Manufacturing and Distribution

The Fabrication, Manufacturing and Distribution segment provides integrated piping systems and services for new construction, site expansion and retrofit projects for industrial plants. On August 31, 2004, we sold our hanger engineering and pipe support businesses which manufactured and distributed specialty stainless, alloy and carbon steel pipe fittings for approximately $1.3 million. The results of operations for the hanger engineering and pipe support businesses are classified as discontinued operations for the three year period ended August 31, 2004.

Forward-Looking Statements And Associated Risks

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements. The statements contained in this Annual Report on Form 10-K that are not historical facts (including without limitation statements to the effect that we “believe,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” or other similar expressions) are forward-looking statements. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those anticipated by us. All comments concerning our expectations for future revenue and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. These forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions. They are subject to change based upon various factors, including but not limited to the risks and uncertainties mentioned in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Factors” and those factors summarized below:

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cyclical changes in demand for our products and services;

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cyclical nature of the individual markets in which our customers operate;

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the dollar amount of our backlog, as stated at any given time, is not indicative of our future earnings;

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delays or difficulties related to our significant Engineering, Procurement and Construction projects including additional costs, reductions in revenues or the payment of liquidated damages;

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the effect of our percentage-of-completion accounting policies;

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changes in the estimates and assumptions we use to prepare our financial statements;

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any non-compliance with the covenants in our Credit Facility, indenture relating to our Senior Notes and indemnity agreements with our sureties and our ability to obtain waivers and/or amendments;

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our ability to obtain surety bonds or other means of credit support for projects;

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our ability to collateralize letters of credit upon non-compliance with covenants in our Credit Facility;

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covenants in our Credit Facility and indenture relating to our Senior Notes and bond indemnity agreements that restrict our ability to pursue our business strategies;

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our indebtedness could adversely affect our financial condition and impair our ability to fulfill our obligations under our Senior Notes and Credit Facility;

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the outcome of a pending informal inquiry by the SEC;

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various legal, regulatory and litigation risks including but not limited to, class action lawsuits;

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the possibility of a downgrade of our debt securities by rating agencies;

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the nature of our contracts, particularly fixed-price contracts;

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risks associated with being a government contractor;

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the failure to meet schedule or performance requirements of our contracts;

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our dependence on subcontractors and equipment manufacturers;

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possible cost escalations associated with our fixed-price contracts;

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our ability to obtain new contracts for large-scale domestic and international projects and the timing of the performance of these contracts;

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potential contractual and operational costs related to our environmental and infrastructure operations;

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risks associated with our integrated environmental solutions businesses;

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limitation or expiration of the Price-Anderson Act’s nuclear contractor indemnification authority;

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changes in environmental laws and regulations;

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risks associated with our military housing privatizations;

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reputation and financial exposure due to the failure of our partners to perform their contractual obligations;

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our dependence on one or a few significant customers;

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delays and/or defaults in customer payments;

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potential professional liability, product liability, warranty and other potential claims;

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the presence of competitors with greater financial resources and the impact of competitive products, services and pricing;

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changes in the political and economic conditions of the countries in which we operate;

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work stoppages and other labor problems;

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our liquidity position;

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currency fluctuations;

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liabilities associated with various acquisitions, including the Stone & Webster and IT Group acquisitions;

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a determination to write-off a significant amount of intangible assets acquired through acquisitions or long-lived assets;

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our ability to successfully identify, integrate and complete acquisitions;

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our failure to attract and retain qualified personnel;

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our ability to retain key members of our management;

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our competitors’ ability to develop or otherwise acquire equivalent or superior technology;

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general economic conditions;

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future changes in accounting standards or interpretations;

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provisions in articles of incorporation and by-laws and rights agreement could make it more difficult to acquire us and may reduce the market price of our common stock.

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changes in the U.S. economy and global markets as a result of terrorists’ actions;

Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in the forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. For a more detail discussion of some of the foregoing risk and uncertainties, see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Factors” and our reports and registration statements at www.shawgrp.com filed by us with the Securities and Exchange Commission (the “SEC”) and under “Forward Looking Statements” on our website. These documents are available from the SEC or from our Investor Relations department. All of our annual, quarterly, and current reports, and amendments thereto, filed with the SEC are available on our website under “Investor Relations.” For more information about us and the announcements we make from time to time, visit our website at www.shawgrp.com.

Corporate Information

We are a Louisiana corporation. Our executive offices are located at 4171 Essen Lane, Baton Rouge, Louisiana 70809. Our telephone number is 1-225-932-2500. All of our periodic report filings with the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are made available, free of charge, through our website located at http://www.shawgrp.com, including our Annual Report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and any amendments to these reports. These reports are available through our website as soon as reasonably practicable after we electronically file with or furnish such material to the SEC. In addition, the public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, D.C. 20549 or on their Internet website located at http://www.sec.gov. The public may obtain information on the operation of the Public Reference Room and the SEC’s Internet website by calling the SEC at 1-800-SEC-0330.

Business Strategy

Our core business strategy is to utilize our unique skills and capabilities as a vertically integrated firm to capitalize on significant business opportunities in diverse market segments and geographic regions, including all facets of the

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power, process, environmental and infrastructure industries. We intend to execute this strategy by aggressively pursuing the following opportunities:

Pursue Growth Opportunities for Our Environmental Business

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Environmental Liability Solutions - Traditionally, owners of contaminated property have been liable for the clean up of the properties and other damages under environmental and tort law. Recently, innovative contracting practices and environmental insurance products have allowed property owners to outsource environmental management and transfer certain liabilities to contractors and insurers. These clients can reduce administrative expense and time through such outsourcing, and can obtain cost certainty through guaranteed fixed-price (GFP) contracts. Growing trends exist for these kinds of contracts in both our commercial and federal markets. During fiscal 2004, we were awarded several indefinite delivery/indefinite quantity (IDIQ) contracts by the U.S. Department of Defense (DOD) that were primarily Fixed-price Remediation with Insurance (FPRI) type contracts. We have been awarded three projects totaling approximately $16.6 million, and we continue to see new projects from these FPRI contracts. In addition, we have approximately $114 million in backlog related to two IDIQ projects as of August 31, 2004. We also had four other contracts where FPRI scopes were included in the contract award. We are seeing more of the DOD agencies moving in this direction for project delivery, and this may represent a significant opportunity for us and we believe we can minimize our exposure for loss through appropriate contract negotiation and insurance coverage. We have created the “Shaw Insured Environmental Liability Distribution” or “SHIELD”(SM) program, a proprietary structured transaction tool that insures and distributes environmental liabilities for parties desiring to substantially reduce contingent environmental liabilities. We believe our experience in managing environmental liabilities and environmental-related insurance products will enhance margins and improve our win-rates in our core environmental contracting business for both the federal and commercial sectors.

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Department of Energy (DOE) – The opportunity in the DOE market remains large with a budget increasing from approximately $23 billion in fiscal 2004 to approximately $24 billion in fiscal 2005. However, we have experienced changes in the DOE acquisition strategies to address environmental cleanup of the nuclear weapons complex and changes in their approach for addressing future energy needs. At the same time the existing prime DOE contractors have changed their subcontracting strategies and their view of us as a serious competitor. We are seeing fewer opportunities and those we do see often have higher business risk and more restrictive terms and conditions. In general, project revenues from our historical sources, the DOE prime contractors, have declined over the last two years. We anticipate this trend to continue into the future. Revenue in this market increased from $86.4 million in fiscal 2003 to $94.6 million in fiscal 2004. We made significant changes in fiscal 2004 to our strategic approach for capturing an increased DOE prime contract market share over the next three to five years. Our general approach to bidding future work to the DOE prime contractors is to selectively target those sites that offer us a more favorable bidding environment. For the DOE Environmental work, we have experienced a push to significantly increase small business subcontracting direct to DOE; a focus on incentive-based site closure and accelerated clean-up; and the carving out of the cleanup scope at sites across the complex. Our approach to this DOE environmental market is to participate in the Small Business initiatives with our SBA approved 8(a) Joint Venture company created with Portage Environmental, and to bid on other full and open site closure projects as a prime contractor or significant member of a business team. The business risk on these DOE cost plus incentive fee contracts remains low with the biggest risk to us resulting from investment of relatively large bid and proposal efforts, typically costing more than $1 million for a major procurement. In fiscal 2004, we focused on five major DOE procurements, three of which were large contract value small business set asides, one major closure contract, and one DOE national laboratory management contract. The potential value of these five contracts to us is $2.5 billion over the next five years, but competition is significant. We will continue to pursue projects within the DOE Environmental Management segment, as well as build off of our nuclear engineering, construction and maintenance capabilities to support the evolving nuclear energy and non-proliferation missions of the DOE.

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Unexploded Ordnance and Explosives, or UXO - The DOD’s fiscal requirements for Conventional Ordnance and Explosives clean-up on closed ranges will exceed current government funding, which we estimate to be $250 million annually. Several congressional advocates continue to push for increased

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funding for UXO removal projects along with developing an enhanced Military Munitions Response Program. We have encountered opportunities through our existing contracts for projects involving UXO as well as indications that there will be new contracts for UXO in the near future. We intend to pursue opportunities related to the UXO removal projects. In addition, we had revenue of $25.4 million and $18.0 million from these removal projects, respectively. During fiscal 2004, we were awarded $140 million in UXO type IDIQ contracts. We expect this growth trend to continue as the DOD addresses operational and non-operational ranges under the Military Munitions Response Program.

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Coastal and Natural Resource Restoration - We have performed wetland-related work in the Everglades, Chesapeake Bay area, and other areas throughout the United States, and we maintain the expertise and resources to continue to benefit from this expanding segment. New opportunities are present in both the federal and commercial markets for these types of projects. For example, the Coastal Wetlands Planning Protection and Restoration Act provides federal funds to conserve, restore and create coastal wetlands and barrier islands. We believe our E&I segment is well positioned to capitalize on upcoming wetlands and coastal restoration work in Louisiana and other locations throughout the United States.

Pursue Growth Opportunities for Our Infrastructure Business

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Privatization – For the past couple of years, the Department of Defense (DOD) has moved to privatization of military housing and utility systems consisting of more than 270,000 family housing units owned by the DOD, of which approximately 60% need to be renovated or replaced. Since fiscal 2003, we have been awarded two contracts by the DOD to privatize military family housing for approximately 2,500 military family housing units with our joint venture partner, C.E.I. Investment Corp. (CEI). The total estimated development cost for these two contracts is approximately $284 million. We have also been notified that we have been awarded five additional contracts to privatize military family housing; however, these contracts had not yet closed as of August 31, 2004. These contracts have estimated development costs of approximately $1 billion for the privatization of approximately 7,800 military family housing units. We believe that several factors, including (i) our federal government business platform, (ii) prior DOD facilities management and Job Order Contracting and other governmental contracting experience, and (iii) expertise in construction at military installations, contributed to these contracts being awarded to us.

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Homeland Security - Federal, state and local homeland security needs continue to provide initial and value-added opportunities for our E&I segment to capitalize on growing experience in disaster-related preparedness, incident response, mitigation design and installation and chemical and biological weapons demilitarization. We provide our customers valuable security related products and services in assessments of threat, vulnerability and risk; electronic security design and installation; force protection design and construction; security program development and integration; and technology assessment. Our expanding capability to assess security and reliability of critical energy infrastructure and develop mitigation designs makes us a leader in the industry. The full-spectrum of homeland security services includes continuity of operations, risk assessment, and consequence management planning and training to the federal, state and local governments and private industry customers nationwide. Our Homeland Security Team provides total security solutions and integrated services for consulting, engineering/design, procurement and construction services.

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Transportation and Water Infrastructure – State and local critical infrastructure upgrade requirements, provides growth opportunities for our E&I Segment. We have targeted specific regions to expand our participation in this segment in order to most effectively deploy our technical and project management resources.

Pursue Growth in the Federal Market Place Through Diversification of Service Offering

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The Federal Government ranks as one of the largest buyers of technical service in the the world. Shaw’s breadth of technical expertise and experience, along with Shaw E&I’s years of government contracting experience, offers the platform to expand our participation within this vast market.

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Pursue Growth Opportunities for the Power Market

Shaw provides a broad portfolio of services to all segments of the power market and we are currently taking advantage of domestic and international opportunities. Our experience and diversity of capabilities allows us to participate in all power segments and reduces the impact on our operations from the cyclical nature of certain sectors of the power industry. Opportunities for our services in the power market include Engineering, Procurement and Construction (EPC), Maintenance, and Fabrication & Manufacturing opportunities.

Engineering, Procurement & Construction

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Nuclear – The United States has approximately 100 operating nuclear plants that continue to require engineering and maintenance services to support operations and improve performance. In addition to supporting operations and improving performance, plant restarts and new plant construction provide opportunities for further expansion. Plant restarts are currently taking place in the U.S. and Canada while new plant construction is ongoing in certain foreign countries and should occur in the U.S. in the future. This market is estimated at $250 million per year. During fiscal 2004, we were awarded contracts totaling more than $50 million. Our subsidiary, Stone & Webster is well known for its strengths in the design of new nuclear facilities and the related technical services.

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Flue Gas Desulphurization (FGD) – Environmental regulations and the rising price of natural gas have fueled the need to retrofit existing coal-fired power plants. During fiscal 2004, we were awarded engineering contracts on projects totaling more than $200 million. We believe we are well positioned and qualified to perform the EPC on these and other FGD projects. The FGD retrofit market is roughly a $10 to $12 billion market that will continue to grow through 2011, assuming the EPA will pass clean air regulation. We will continue to seek new opportunities in this area and believe our unique and recent experience in engineering and managing these projects will make us an early industry leader in this market.

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Coal – The sharp rise in oil prices has prompted regulated power companies in the United States to focus on coal-fired plants. While the number of new plants in the future is an uncertainty, the general consensus is that some awards of coal plants will be made in fiscal 2005. Our Stone & Webster subsidiaries have the experience and expertise related to these coal plants which should position us for a share of this market.

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Gas-Fired Generating Capacity – Expansion of new gas generation capacity will be limited in the United States market, but the international market, including Canada, is expected to become increasingly active. Some growth in the United States is expected to be driven by distribution rather than capacity as evidenced by two generating plants awarded to us during fiscal 2004 totaling more than $700 million in contract value which are currently under construction. Select opportunities to potentially complete construction on existing and partially-completed combined-cycle plants throughout the United States exist in the market. Additionally, general proposals are in preparation for international projects in fiscal 2005. Our integrated capabilities and recent experience bodes well for success in what will be a competitive market.

Maintenance

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Shaw Maintenance – Shaw Maintenance is well positioned to assist the power industry by providing capabilities that compliment our EPC services. We are a diverse, worldwide business group able to provide our clients with Reliability services, Turnarounds & Outages, Small Project Capital Construction Services, Tank Design Construction & Maintenance, Insulation, Painting, Scaffolding, and Water and Wastewater Operation and Maintenance (O&M). Our Plant and Reliability Engineering, as well as our Maintenance expertise, combine to assist our clients in the improvement of power production and compliance with federal environmental requirements. Nuclear, FGD, Coal and Gas-fired generation opportunities in the market will provide the best power growth opportunities for our maintenance services in fiscal year 2005.

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Nuclear Plant Maintenance and Modifications - We are currently providing nuclear maintenance services in 33 of the 103 operating nuclear plants in the United States and decommissioning services at two plants. Potential opportunities include expansion to other U.S. plants and the expansion of our services within the existing plants. This market is estimated at $500 million per year. During fiscal 2004, we were awarded

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contracts totaling more than $250 million. Our subsidiary, Stone & Webster has performed nuclear plant maintenance modification services for over 25 years and has the largest market share in the United States.

Fabrication & Manufacturing

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Piping – Nuclear maintenance, FGD projects, new coal plants and retrofits, new gas plants, and general plant maintenance all require pipe fabrication which our group can provide. A typical new power plant will result in multiple subcontracts which all include pipe fabrication. The Fabrication and Manufacturing Group generally participates in some way on each new plant being built in the U. S. market and many being built internationally. The participation is not limited to Shaw business units. We expect the most growth opportunities in the power market for piping to occur domestically in the coal market, both new coal plants and retrofits.

Pursue Growth Opportunities for the Process Market

Shaw provides a variety of services to process industries and we are focusing on efforts in both domestic and international opportunities. Opportunities for our services in the processes industries market include Engineering, Procurement and Construction (EPC), Maintenance, and Fabrication & Manufacturing opportunities.

Engineering, Procurement & Construction

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Proprietary Technologies within the Process Industries. We offer world-class proprietary technologies to the refining and petrochemical industries. Our fiscal 2003 acquisition of Badger Technologies demonstrates our commitment to expand our technology portfolio and maintain a leadership position in process technologies. The acquisition of Badger complements our core competency in conversion technologies (steam cracking and fluid catalytic cracking) by enabling us to offer several key olefin derivative technologies. In particular, we are now able to license world leading technologies to produce ethyl benzene and cumene through Badger Licensing LLC, a joint venture of Stone & Webster and ExxonMobil Chemical. We are also able to offer Badger styrene monomer technology in cooperation with Atofina. By providing world-class proprietary technologies, we are able to capitalize on the combined strengths of Shaw and our partners to offer our clients an optimum business solution. We expect to continue to expand our technology portfolio through key alliance partners and research and development efforts.

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Clean Fuels – We were awarded approximately $200 million of clean fuel emissions work in fiscal 2004 and approximately $50 million in early fiscal 2005. We currently have five active clean fuels projects. We believe this market will continue to expand for us into fiscal 2006 as we have demonstrated the ability to win and execute work in this area.

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Ethylene – The demand for ethylene is growing at a rate of 4 to 5% per year (1.4 times GDP growth). Approximately 70% of ethylene is produced from petroleum derived naphtha but this is changing due to the availability of low cost ethane feedstock in the Middle East region. This feedstock cost advantage has seriously impacted the economic viability of gas feed steam crackers in North America where feedstock price is controlled by natural gas pricing. New facilities will mainly be gas feed crackers based on ethane extracted from nature gas. The expansion in ethylene demand is being driven by the increased demand for polyethylene, polyesters, polystyrene and PVC, mainly from China. We anticipate this increase to continue into fiscal 2006. We are currently bidding on ten major ethylene projects in the Middle East and China with additional projects in the planning stage. With our estimated 35% of the all ready existing market share and only four ethylene technology licensor competitors, our Stone & Webster subsidiaries are well positioned to seize these opportunities.

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Petrochemical Refinery – The refining industry is searching for new value-added projects that can be produced from petroleum, and are investigating integration into petrochemical facilities. We have an exclusive agreement with RIPP/Sinopec to license a key technology that encourages the refiner’s entry into the petrochemical arena. This technology is a high olefin yield, fluid catalytic cracker derived process called Deep Catalytic Cracking (DCC). This technology is of increasing interest because of its ability to produce propylene, a base chemical that is in short supply and whose demand is growing faster than that of ethylene. The petrochemical industry is concerned about the future supply of propylene. This is due to the predominant increase in ethane crackers which produce ethylene and minimal amounts of propylene which

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leads to the increased interest in DCC. We have just licensed a large DCC unit to a confidential client and are in discussions with several other potential clients. We believe growth opportunities in the process market for petrochemical refineries exist in retrofit projects domestically and new construction and expansion projects internationally.

Maintenance

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Process Maintenance – Shaw Maintenance began as primarily a process focused business and has diversified into all phases of the industrial market. We strive to be safety-driven with proactive programs and world-class results. Shaw Maintenance holds diverse capabilities to service our client’s needs. We perform design, repair, renovation, and preventative services to customer facilities worldwide. Shaw Maintenance is positioned to assist the Process industry by providing capabilities in conjunction with our EPC services. Petrochemical, Ethylene and Clean Fuels markets will provide the best Process growth opportunities for our Maintenance services in fiscal year 2005.

Fabrication & Manufacturing

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Piping – Shaw Fabrication and Manufacturing has completed a substantial portion of the pipe fabrication for the clean fuels initiatives taking place in the U.S. market. Alliances with major refinery owners as well as alliances with many of the EPC companies involved in clean fuels projects have resulted in extensive work experience and backlog for our group. Shaw’s inventory levels, fabrication expertise and capacity, and innovative material supply programs have led to the bulk of these bookings. The material market is the most challenging it has been in recent history due to the explosive expansion of the Asian market. Not only has the fabrication portion of our business benefited, but our manufacturing arm has seen tremendous benefits from this market. In addition to clean fuels, new plants utilizing proprietary technologies provide tremendous fabrication opportunities. We expect our growth opportunities for the process market in piping to occur internationally as ethylene and petrochemical refinery opportunities occur.

Maintain A Diversified Revenue Base. We intend to continue to maintain our diversity in markets served, services offered, contracting arrangements and customer base. This diversity has helped us to minimize our dependence on any particular market segment or individual customer, minimize the impact of short-term market volatility and has enabled us to more accurately anticipate future revenues. Our presence across numerous markets allows us to focus our resources on those areas experiencing growth. In addition, our presence allows us to allocate our resources efficiently within and across our segments. With the IT Group acquisition in fiscal 2002, we further diversified our business mix which provided a recurring revenue base. Many of our environmental and infrastructure businesses, along with our existing ECM maintenance services, tend to provide recurring revenues due to established customer-contracts. However, a significant portion of our revenue is generated from services provided to various U.S. Government agencies under separate contracts. For the years ended August 31, 2004, 2003 and 2002, revenues from these U.S. Government agencies were $1,170.0 million, $948.9 million and $363.0 million, respectively.

Maintain Focus On Cost-Reimbursable and Negotiated Fixed-Price Contract Structures. Our strategy is to perform most of our engineering, procurement and construction projects pursuant to cost-reimbursable contracts in which our contractual loss exposure is limited to our gross profit. These contracts often contain incentive/sharing/penalty provisions for performance, cost control, and delivery of products and services. We intend to continue our contracting practices to minimize our risk of contractual losses while providing incentives for us and our customers to work cooperatively. As of August 31, 2004, approximately 78% of our contracts included in our backlog are cost-reimbursable contracts, 20% are fixed-price contracts and 2% are unit-price contracts.

In the current domestic power market and our expanded environmental and infrastructure services to various U.S. Government agencies, our customers are increasingly requesting fixed-price contracts. We prefer to selectively pursue such fixed-price contracts whenever possible on a negotiated basis in situations where we believe we can control our cost and minimize our risks. For example, in September 2003, we signed and announced an EPC contract to build a combined-cycle power plant in Queens, New York, which is a $565 million fixed-price contract. Generally, fixed-priced contracts are priced with a higher margin than cost-reimbursable contracts in order to compensate for cost overrun risk.

Continue To Form Strategic Alliances. We intend to continue to capitalize upon and enter into strategic partnerships and alliances with our customers. Our alliance and partnership agreements enhance our ability to obtain

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contracts for individual projects by eliminating or reducing formal bid preparation. We continue to pursue these strategic partnerships and alliances in an attempt to increase our market share within our existing markets and assist us in entering into new markets. We will also continue to look to expand our operations where we see the potential for attractive and profitable business opportunities and can leverage the local knowledge of an alliance or joint venture partner. For example, Shaw E&I has a partnership with CEI related to seven military housing privatization projects. CEI’s experience in property management along with our engineering and construction management experience has allowed us to obtain a portion of this market share. Additionally, within our facilities management activities, we continue to pursue strategic alliances like our partnership with Computer Sciences Corporation to provide facilities management services to NASA’s Stennis Space Center.

Capitalize On Opportunities For Cross-Selling. We have several complementary areas of expertise we will leverage to deliver increased value to our customers. Our engineering, design and construction expertise allows us to provide retrofitting and construction services to our facilities maintenance customers such as the Tennessee Valley Authority, or TVA. In addition, we expect the capabilities of our E&I segment to allow us to offer specialized environmental remediation, facilities management and maintenance services to our clients in the power and process industries. As a result, our combined business now enables us to offer complete service offerings, from design through construction to ongoing maintenance and management, across a variety of industries.

Pursue Selective Acquisitions. We intend to continue to pursue selective acquisitions of businesses or assets that will expand, complement or further diversify our current portfolio of products and services. Upon execution of our effective and thorough due diligence procedures led by our senior executives who became involved early in the acquisition process, we believe we have efficiently enhanced our existing services through our successful strategic acquisitions. For example, effective December 31, 2003, we acquired all of the common stock of Energy Delivery Services, Inc. (Shaw EDS) from Duke Energy Global Markets, Inc. which provides a full line of vertical services to utility companies seeking to upgrade, install and maintain their power grids and is vertically integrated in our ECM segment. From time to time, we may also consider dispositions of non-strategic assets.

Utilize Technology And Intellectual Property. We intend to continue to employ our technology and intellectual property to reduce costs and to better serve our customers. Our technologies include:

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Induction Pipe Bending Technology. We believe our induction pipe bending technology is one of the most advanced, sophisticated, and efficient technologies available. Induction bending utilizes simultaneous super-heating and compression of pipe to produce tight-radius bends to a customer’s specifications. When compared to the traditional cut and weld method, our induction bending technology provides a lower cost and more uniform product, generally considered stronger and less prone to structural fatigue.

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Proprietary Ethylene and Downstream Petrochemical Technologies. We believe we have a leading position in technologies associated with the process design of plants that produce ethylene. We estimate we have supplied process technology for approximately 35% of the world’s ethylene capacity constructed since 1990.

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Technology Partnerships. We have been awarded 24 of the last 36 residual feed fluid catalytic cracking projects and have combined the best elements of fluid catalytic cracking technology from different developers into a single source that is among the best in the industry. Our partners include Total, Axens, Spraying Systems, BP and RIPP. We also offer the only commercially demonstrated high olefin production catalytic cracking technology through our exclusive licensing agreement with RIPP/Sinopec.

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Proprietary Customer-focused Computer Software. We have developed proprietary computer software to aid in project and process management. This software includes:

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SHAW-MAN™ and other software programs which enhance a customer’s ability to plan, schedule and track projects and reduce installation costs and cycle times.

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SHAWTRAC™ which is a web-based, proprietary earned value application that enables us to

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continually enhance the way we manage and integrate the many phases of a capital project, from estimating to engineering through construction and start-up. Users from around the world consistently access SHAWTRAC™ through the public networks in order to update and understand the real-time financial position of respective projects.

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Technology Solutions for the Electric Power Industry. Power Technologies, Inc., or PTI, one of our subsidiaries, provides software for the electric power industry. PTI’s licensed software includes, programs for analyzing and optimizing electric power system performance and evaluating transfer capability, transaction impacts and contingency analysis for transmission systems. In addition, we have programs for transmission reliability studies and for planning, designing and analyzing distributions systems.

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Line Rating Monitor. PTI’s patented real-time monitoring system enables electric transmission and distribution lines to transfer more power while maintaining high reliability and safety. This new technology has recently completed beta testing and is ready for commercial application.

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Proprietary Biological Treatment Technologies — We believe we have a leading position in the application of biotechnology for the destruction of recalcitrant contaminants in the environment. Our distinctions include:

	—		Identifying and optimizing the degradative activity of naturally-occurring microorganisms with distinctive capabilities for degrading targeted contaminants. Such contaminants include MTBE, TBA, ammonium perchlorate, PCBs, TCE, PAHs, HCFCs, nitroaromatics and chlorinated solvents. We possess microorganisms with exceptional capabilities for each of these, and patent positions related to the degradation of several of these contaminants; and
	—		Developing and applying high-performance, biologically based process systems for the destruction of contaminants in air, water and soils. These include both in situ technologies for in-ground remediation of soils and groundwater, and above-ground systems for groundwater, wastewater and drinking water treatment. We hold a number of patents related to enhancing the performance of bioreactor systems. These systems, many using our proprietary microbes or microbial activity enhancement approaches, are in use in such diverse applications as high-concentration ammonium perchlorate in groundwater, high-strength wastewater treatment in the food-and-beverage industry, volatile organic compound, and odors treatment from tobacco plant air streams, and solvent destruction in pharmaceutical wastewaters.

Business Segments

Environmental & Infrastructure Segment

Our E&I segment provides services that include the identification of contaminants in soil, air and water and the subsequent design and execution of remedial solutions. The segment also provides project and facilities management capabilities and other related services to non-environmental civil construction, watershed restoration and the outsourcing privatization markets. Federal, state and local governmental entities and commercial industrial companies are the primary customers for our E&I segment.

Federal

     Core Services: The core service of our federal business is the delivery of environmental restoration and regulatory compliance services to U.S. government agencies, such as the DOD, the Department of Energy (“DOE”), the Environmental Protection Agency (“EPA”), and the Government Services Administration (“GSA”). Environmental restoration activities are centered on engineering and construction services to support customer compliance with the requirements of the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”), and the Resource Conservation and Recovery Act of 1976 (“RCRA”). Regulatory compliance activities are centered on providing professional services to meet the requirements of the Clean Water

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Act, Clean Air Act, Toxic Substances Control Act, and RCRA. For the DOE, we are presently working on several former nuclear-weapons production facilities where we provide engineering, construction and construction management for nuclear activities. For the DOD, we are involved in projects at several Superfund sites and several Formerly Utilized Sites Remedial Action program (FUSRAP) sites managed by the U.S. Army Corps of Engineers. For the Department of the Army, we are working on the chemical demilitarization program at several sites. The DOD is increasingly using performance based contract vehicles, including guaranteed fixed-price contracts, wherein we assume responsibility for cleanup and regulatory closure of contaminated sites for a firm fixed-price. We purchase environmental insurance to provide protection from unanticipated cost growth due to unknown site conditions, changes in regulatory requirements and other project risks.

     Homeland Security: As a part of our homeland security programs, we have provided emergency support services to numerous federal agencies (and private-sector clients) in response to anthrax contamination at a number of high profile sites. The services we provide for anthrax and other biological agent contamination include sampling, analyzing samples, providing other laboratory services, decontaminating and cleaning buildings and equipment, air monitoring and modeling, and disposing of contaminated waste. Our services also include providing risk assessment and engineering and logistical support, as well as playing a leading role in investigating, developing and testing innovative decontamination techniques to help minimize and eliminate such contamination.

     Nuclear Services: A significant portion of future DOD and DOE environmental expenditures will be directed to cleaning up hundreds of domestic and international military bases and to restoring former nuclear weapons facilities. The DOD has stated there is a need to ensure that the hazardous wastes present at these sites, often located near population centers, do not pose a threat to the surrounding population. Further, in connection with the closure of many military bases, there are economic incentives and benefits resulting from environmental restoration that enable these sites to be developed commercially by the private sector. The DOE has long recognized the need to stabilize and safely store nuclear weapons materials and to clean up areas contaminated with hazardous and radioactive waste. We continue to provide engineering and project leadership support to other DOE nuclear programs such as Mixed Oxide Fuel and Yucca Mountain.

     Environmental Liability Solutions: The DOD has stated its intent to increase the use of performance based contracts, including guaranteed fixed-price with environmental insurance vehicles. During fiscal 2004, we were awarded several IDIQ contracts by the DOD that were primarily FPRI type contracts. We have been awarded three projects totaling approximately $16.6 million and we continue to see new projects from these FPRI contracts. In addition, we have approximately $114 million in backlog related to two IDIQ projects as of August 31, 2004. We have also created the “Shaw Insured Environmental Liability Distribution” or “SHIELD”™ program, a proprietary structured transaction tool that insures and distributes environmental liabilities for parties desiring to substantially reduce contingent environmental liabilities.

     Facilities Management – Mission Support Services: The Facilities Management – Mission Support Services business line provides integrated management services to federal customers. These services traditionally include operating logistics facilities and equipment, providing public works maintenance services, operating large utilities systems, managing engineering organizations, supervising construction, operating and maintaining housing, and maintaining public safety services including police, fire and emergency services. Customers include the DOE, NASA, the Army, the Air Force, and the Navy.

     Specifically, our subsidiary, Shaw Beneco, provides construction management, design/build and general contracting for military housing, commercial and industrial facilities for the federal government and other clients. Shaw Beneco’s operations are organized by project delivery and contract type: Maintenance, Renovation and Repair (MRR) programs and Construction Projects. MRR programs include Job Order Contracts and the U.S. Air Force’s Simplified Acquisition of Base Engineering Requirements contracting methods, along with various forms of IDIQ contracts. Construction projects include stand-alone construction projects, design/build and multiple award construction contracts.

Commercial, State and Local

Commercial, State and Local services provide environmental consulting, engineering and construction services to

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private-sector and state and local government customers. Core services of the Commercial Consulting and Engineering and Construction Groups include engineering, consulting and turnkey management services. These services include complete life cycle management, construction management, O&M services, and environmental services including emergency response and high hazard and toxic waste cleanups and on-site remedial activities. Commercial, state and local services provides full service capability, including site selection, permitting, design, build, operation, decontamination, demolition, remediation and redevelopment. Our services range from initial studies to designing and constructing in-water remediation projects, marine terminals and navigation improvements.

Through our solid waste service line, we provide turnkey services, including engineering, permitting, design/build construction, equipment fabrication, landfill products, sampling, monitoring, and facility and system operation and maintenance, principally to the owners and operators of municipal solid waste landfills. Shaw E&I offers complete life cycle management of solid waste, employing capabilities that range from site investigation through landfill design and construction to post-closure operations and maintenance or redevelopment.

Additionally, our Science and Technology Group utilizes technology to solve environmental problems and these efforts are supported by three Company-owned laboratories. We also utilize bioreactor systems technology and have expertise in the treatment of contaminated groundwater and wastewater. Specific applications include contaminants such as perchlorate, MTBE, and high strength waste streams from food, beverage, and pharmaceutical industries.

Housing Privatization

The Housing Privatization business line provides integrated services for the DOD’s Military Housing Privatization Initiative, including property ownership; project financing; development; design/construction; and daily property management and maintenance services. This is a relatively new market that has developed in recent years as a result of the DOD’s need to retain personnel by providing quality housing to service members and their families.

Traditionally, the DOD has maintained most of its own facilities and support systems, but in recent years it has transferred many of these responsibilities to private contractors and private owners. A privatization market has been created by the government’s sales of assets or revenue streams, such as military housing, electric, water and wastewater utilities on a military base, to private companies, which are then responsible for maintenance and operation of site activities currently conducted by government personnel. Additionally, the Office of Management and Budget has an initiative to force agencies to follow the DOD’s lead and begin to streamline their operations.

As a result, during fiscal 2004, we have been awarded two contracts to privatize military family housing for approximately 2,500 military family housing units with our joint venture partner, CEI. The total estimated development costs for these two contracts is approximately $284 million. Additionally, we have been notified that we have been awarded five additional contracts to privatize military family housing; however, these contracts had not yet closed as of August 31, 2004. These contracts have estimated development costs of approximately $1 billion for the privatization of approximately 7,800 military family housing units. We believe several factors, including (i) our federal government business platform, (ii) prior DOD facilities management and Job Order Contracting and other governmental contracting experience, and (iii) expertise in construction at military installations contributed to these contracts being awarded to us.

Engineering, Construction & Maintenance Segment

The ECM segment provides a range of project-related services, including design, engineering, construction, procurement, maintenance, technology and consulting services, primarily to the power generation and process industries.

Industry Overview

Power Generation Industry

We provide a full range of engineering, procurement and construction services to power projects on a global basis. During fiscal 2001, our backlog increased significantly as a result of demand for new power plants, primarily

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combined-cycle and combustion turbine technology fueled by natural gas or both oil and gas. This new capacity demand was primarily created by orders from independent power producers and merchant power plants to develop additional generation capacity. Typically, new plants from independent and merchant power producers compete directly with existing utilities in deregulated sectors. Deregulation also created opportunities for us from existing utilities that needed to upgrade or develop new power plants to remain competitive. Although demand for new power plants decreased significantly in fiscal 2002 and fiscal 2003, we expect that in the coming years many existing plants will need to be “re-powered” or substantially upgraded by replacing all or most of the existing equipment with more efficient systems. During fiscal 2004, we were awarded two contracts for new construction gas-fired power generation projects for a combined contract price of approximately $735 million.

We also provide system-wide maintenance and modification services to existing power plants. These projects can include upgrading emission control systems and redesigning facilities to allow for the use of alternative fuels. We concentrate on more complicated, non-commodity type projects where our technology, historical know-how and project management skills can add value to the project. We believe we have a leading position in the decommissioning and decontamination business for nuclear power plants. This business consists of shutting down and safely removing a facility from service while reducing the residual radioactivity to a level that permits release of the property for unrestricted use and termination of the nuclear power plant license.

Process Industry

Our process work includes work for customers primarily in the chemical, petrochemical and refining industries. Demand in processing industries has declined in recent years as a result of decreased spending by chemical, petrochemical and refining companies and, more recently, due to an overall downturn in the worldwide economy. However, we are encouraged by an increase in inquiry activity in the petrochemical and refining industries, especially in the overseas markets. Key drivers include an increased demand for ethylene and downstream petrochemical products as well as waste-to-energy opportunities. We believe there will be increased capital expenditures by the major oil and petrochemical companies in calendar 2005. Internationally, China continues to significantly expand its petrochemical capabilities. Critical to this expansion is additional ethylene capacity which is one of our core competencies. We also expect new petrochemical opportunities in the oil producing regions due to the higher than expected crude oil prices and the availability of lower priced natural gas in the Middle East. This is particularly true in the Kingdom of Saudi Arabia where the oil refining industry is beginning to expand into petrochemicals.

We expect that actions by the major oil and petrochemical companies to integrate refining and petrochemical facilities in order to improve margins will provide opportunities for us. In the petrochemical field, we have particular expertise in the construction of ethylene plants which convert gas and/or liquid hydrocarbon feed stocks into ethylene, the source of many higher-value chemical products, including packaging, pipes, polyester, antifreeze, electronics, tires and tubes. The demand for our services in the refining industry has been driven by refiners’ needs to process a broader spectrum of crude and to produce a greater number of products. In addition, current refining activity is being driven by demand for clean fuels and clean air legislation. While the refining process is largely a commodity activity, the configuration of each refinery depends primarily on the grade of crude feedstock available, desired mix of end-products and considerations of capital and operating costs. We also undertake related work in the gas-processing field, including propane dehydrogenation facilities, gas treatment facilities, liquefied natural gas plants and cryogenic processes.

Services Offered

Engineering and Design

We provide a broad range of engineering, design and design-related services to our customers. Our engineering capabilities include civil, structural, mechanical, and electrical. For each project, we identify the project requirements and then integrate and coordinate the various design elements. Other critical tasks in the design process may include value analysis and the assessment of construction and maintenance requirements.

Construction, Procurement and Maintenance

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We provide construction and construction management services. We often manage the procurement of materials, subcontractors and craft labor. We believe we have significant expertise in effectively and efficiently managing these activities, vendors and labor. Depending on the project, we may function as the primary contractor or as a subcontractor to another firm or as a construction manager, engaged by the customer to oversee another contractor’s compliance with design specifications and contracting terms. Under operation and maintenance contracts, we perform repair, renovation, predictive and preventative services to customers in their facilities worldwide.

Consulting

We provide technical and economic analysis and recommendations to owners, investors, developers, operators and governments, primarily in the global power generation industry. Our services include competitive market valuations, asset valuations, assessment of stranded costs, plant technical descriptions and energy demand modeling. We have particular expertise in the electronic simulation and analysis of power transmission and distribution systems.

Technology

Our world-class proprietary olefin and refinery technologies, coupled with the Badger alliances, allow us to offer clients an integrated refinery and petrochemicals solution. The combined Stone & Webster/Badger team, in conjunction with key alliance partners, offers leading technology in many sectors of the refining and petrochemical industry.

Fabrication, Manufacturing And Distribution Segment

The Fabrication, Manufacturing and Distribution segment provides integrated piping systems and services for new construction, site expansion and retrofit projects for industrial plants and manufactures. We believe we are the largest supplier of fabricated piping systems for power generation facilities in the United States and a leading supplier worldwide. In process facilities, piping systems are the critical path to convert raw or feedstock materials to products. We fabricate fully integrated piping systems and provide a full range of engineering, procurement and construction services for process customers around the world.

Piping system integration accounts for a significant portion of the total man-hours associated with constructing a power generation or a materials processing facility. We provide fabrication of complex piping systems from raw materials including carbon steel, stainless steel and other alloys, such as nickel, titanium and aluminum. We fabricate pipe by cutting it to length, welding fittings on the pipe and bending the pipe, each to precise customer specifications. We currently operate pipe fabrication facilities in Louisiana, South Carolina, Utah, Oklahoma (where operations have been substantially reduced as a result of decreased demand), the United Kingdom, Venezuela (our pipe fabrication facility was closed due to political unrest during 2003), and two joint ventures: Bahrain and China. Our fabrication facilities are capable of fabricating pipe ranging in diameter from 1/2 inch to 72 inches, with overall wall thicknesses from 1/8 inch to 7 inches. We can fabricate pipe assemblies up to 100 feet in length and weighing up to 45 tons.

We believe our induction pipe bending technology is one of the most advanced, sophisticated, and efficient technologies available, and we utilize this technology and related equipment to bend pipe and other carbon steel and alloy items for industrial, commercial and architectural applications. Pipe bending can provide significant savings in labor, time and material costs, as well as product strengthening. In addition, we have commenced a robotics program which we believe will result in productivity and quality levels not previously attained in this industry. As of August 31, 2004, the robotics program is currently being tested in production.

We operate a manufacturing facility in Shreveport, Louisiana, which sells its products to our ECM segment’s operations and to third parties. Manufacturing our own pipe fittings enables Shaw to realize greater efficiencies in the purchase of raw materials, reduces overall lead times and lowers total installed costs.

We also operate several distribution centers in the U.S., which distribute our products and products manufactured by third parties. Demand for the segment’s products is typically dependent upon capital projects in the Power Generation and process industries.

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Segment Financial Data And Export Sale Information

See Note 15 of the notes to our consolidated financial statements for detailed financial information regarding each business segment and export sales information.

Revenues By Industry And Geographic Region

Our revenues by industry in our three most recent fiscal years approximated the following amounts:

Process industries include chemical and petrochemical processing and crude oil refining sales. Other industries includes the oil and gas exploration and production industry as well as various fabrication distribution customers.

The major industries in which we operate are cyclical. Because our customers typically participate in a broad portfolio of industries, our experience has been that downturns in one industry sector may be mitigated, in part, by opportunities in another sector.

Our revenues by geographic region in our three most recent fiscal years approximated the following amounts:

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Backlog

The following table breaks out backlog in the following industry sectors, geographic regions and business segments for the periods indicated.

We estimate that approximately 43% of our backlog at August 31, 2004 will be completed in fiscal 2005.

Our backlog is largely a reflection of the broader economic trends being experienced by our customers and is important to us in anticipating our operational needs. Backlog is not a measure defined in generally accepted accounting principles and our methodology for determining backlog may not be comparable to the methodology used by other companies in determining their backlog. We cannot assure you that revenues projected in our backlog will be realized, or if realized, will result in profits. see Item 7. - “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors.”

E&I Segment - Our E&I segment’s backlog includes the value of awarded contracts and the estimated value of unfunded work of our consolidated subsidiaries and our proportionately consolidated joint venture entities. The unfunded backlog generally represents various government (federal, state and local) project awards for which the project funding has been at least partially authorized or awarded by the relevant government authorities (e.g., authorization or an award has been provided for only the initial year or two of a multi-year project). Because of appropriation limitations in the governmental budget processes, firm funding is usually made for only one year at a time, and, in some cases, for periods less than one year, with the remainder of the years under the contract expressed as a series of one-year options. Amounts included in backlog are based on the contract’s total awarded value and our estimates regarding the amount of the award that will ultimately result in the recognition of revenue. These estimates are based on our experience with similar awards and similar customers and average approximately 75% of the total unfunded awards. Estimates are reviewed periodically and appropriate adjustments are made to the amounts included in backlog and in unexercised contract options. Our backlog does not include any awards (funded or unfunded) for work expected to be performed more than five years after the date of our financial statements. The amount of future actual awards may be more or less than our estimates.

ECM Segment - We define our backlog in the ECM segment to include projects for which we have received a commitment from our customers of our consolidated subsidiaries and proportionately consolidated joint venture entities. This commitment typically takes the form of a written contract for a specific project, a purchase order, or a specific indication of the amount of time or material we need to make available for a customer’s anticipated project. Certain backlog engagements are for particular products or projects for which we estimate anticipated revenue, often based on engineering and design specifications that have not been finalized and may be revised over time. Our backlog for maintenance work is derived from maintenance contracts and our customers’ historic maintenance requirements.

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Fabrication, Manufacturing & Distribution - We define our backlog in this segment to include projects for which we have received a commitment from our customers. This commitment typically takes the form of a written contract for a specific project, a purchase order, or a specific indication of the amount of time or material we need to make available for a customer’s anticipated project.

Many of the contracts in backlog provide for cancellation fees in the event customers cancel projects. These cancellation fees usually provide for reimbursement of our out-of-pocket costs, revenue associated with work performed prior to cancellation and a varying percentage of the profits we would have realized had the contract been completed.

Types Of Contracts

Our work is performed under fixed-price contracts, cost-reimbursable contracts, and fixed-price and cost-reimbursable contracts modified by incentive and penalty provisions. Each of our contracts may contain components of more than one of the contract types discussed below. During the term of a project, the contract or components of the contract may be renegotiated to a different contract type. We focus our engineering, procurement and construction activities on cost-reimbursable, as defined below, and negotiated fixed-price work. We believe these types of contracts reduce our exposure to unanticipated and unrecoverable cost overruns. Fixed-price contracts are generally obtained by direct negotiation rather than by competitive bid. We have entered into fixed-price or unit-price contracts on a significant number of our domestic piping contracts and substantially all of our international piping projects. At August 31, 2004, approximately 78% of our backlog was comprised of cost-reimbursable contracts, 20% were fixed-price contracts and 2% were unit-price contracts.

Our fixed-price contracts include the following:

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Firm fixed-price contract - A contract in which the price is not subject to any adjustment by reason of our cost experience or our performance under the contract. As a result, we benefit from costs savings while generally being unable to recover any cost overruns on these contracts. However, these contract prices may be adjusted for changes in scope of work, new or changing laws and regulations and other events negotiated. These fixed-price contracts usually require that we use our best efforts to accomplish the scope of the work within a specified time; otherwise, we could be assessed damages which in some cases are limited to agreed-upon liquidated damages.

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Maximum price contract - A contract which provides at the outset for an initial target cost, an initial target profit, and a price ceiling. The price is subject to adjustment by reason of our cost experience, but the adjustment would generally not exceed the price ceiling established in the contract. In addition, these contracts usually include provisions whereby we share cost savings with our clients. As a result, we partially benefit from cost savings while we generally are unable to recover any cost overruns in excess of the ceiling price.

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Unit-price contract - A contract under which we are paid a specified amount for every unit of work performed. A unit-price contract is essentially a firm fixed-price contract with the only variable being units of work performed. Variations in unit-price contracts include the same type of variations as firm fixed-price contracts. We are normally awarded these contracts on the basis of a total price that is the sum of the product of the specified units and unit prices.

Our cost-reimbursable contracts include the following:

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Cost-plus contract - A contract under which we are reimbursed for allowable or otherwise defined costs incurred plus a fee or mark-up. These contracts usually require that we use our best efforts to accomplish the scope of the work within a specified time; otherwise, we could be held liable for damages which in some cases are limited to agreed upon liquidated damages. The contracts may also include incentives for various performance criteria including areas as quality, timeliness, ingenuity, safety and cost-effectiveness. In addition, our costs are generally subject to review by our customers and such reviews could result in costs being disputed as not reimbursable under the terms of the contract.

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Target-price contract - A contract under which we are reimbursed for costs plus a fee consisting of two parts: (i) a fixed amount which does not vary with performance and (ii) an award amount based on the

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performance and cost-effectiveness of the project. As a result, we are generally able to recover any cost overruns on these contracts; however, we can be assessed liquidated or actual damages for late delivery or the failure to meet certain performance criteria. Target-price contracts also generally provide for sharing of costs in excess of or below the target. In some contracts, we may agree to share cost overruns in excess of our fee which could result in a loss on the project.

U.S. Government contracts are typically awarded through competitive bidding or negotiations pursuant to federal acquisition regulations and may involve several bidders or offerors. Government contracts also typically have annual funding limitations and are limited by public sector budgeting constraints. Government contracts may be terminated at the discretion of the government agency with payment of compensation only for work performed and commitments made at the time of termination. In the event of termination, we generally receive some allowance for profit on the work performed. Many of these contracts are multi-year Indefinite Delivery Order agreements. These programs provide estimates of a maximum amount the agency expects to spend. Our program management and technical staffs work closely with the client to define the scope and amount of work required. Although these contracts do not initially provide us with any specific amount of work, as projects are defined, the work may be awarded to us without further competitive bidding.

Although we generally serve as the prime contractor on our federal government contracts, or as part of a joint venture which is the prime contractor, we also serve as a subcontractor to other prime contractors. With respect to bidding on large, complex environmental contracts, we have entered into and may continue to enter into joint venture or teaming arrangements with competitors.

Also, U.S. Government contracts generally are subject to oversight audits by government representatives, to profit and cost controls and limitations, and to provisions permitting modification or termination, in whole or in part, without prior notice, at the government’s convenience. Government contracts are subject to specific procurement regulations and a variety of socio-economic and other requirements. Failure to comply with such regulations and requirements could lead to suspension or debarment, for cause, from future government contracting or subcontracting for a period of time. Among the causes for debarment are violations of various statutes, including those related to employment practices, the protection of the environment, the accuracy of records and the recording of costs.

Our continuing service agreements with customers expedite individual project contract negotiations through means other than the formal bidding process. These agreements typically contain a standardized set of purchasing terms and pre-negotiated pricing provisions and often provide for periodic price adjustments. Service agreements allow our customers to achieve greater cost efficiencies and reduced cycle times in the design and fabrication of complex piping systems for power, chemical and refinery projects. In addition, while these agreements do not typically contain committed volumes, we believe that these agreements provide us with a steady source of new projects and help minimize the impact of short-term pricing volatility.

Customers And Marketing

Our customers are principally major multi-national industrial corporations, regulated utilities, independent and merchant power providers, governmental agencies and equipment manufacturers.

For the year ended August 31, 2004, we had revenues from seven customers of approximately $814.2 million, which represented approximately 52% of our ECM segment’s revenues and 27% of our total revenues. We also had total revenues from U.S. Government agencies or entities owned by the U.S. Government of approximately $1,170.0 million (38% of our total revenues) that included E&I segment revenues totaling approximately $908.6 million (68% of E&I segment revenues).

Additionally, as of August 31, 2004, approximately 54% of our total backlog, and approximately 93% of the E&I segment’s backlog is with U.S Government agencies or entities owned by the U.S. Government. Contracts with seven separate commercial customers of the ECM segment represent approximately 31% of total backlog and 63% of ECM backlog at August 31, 2004.

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For the year ended August 31, 2003, we had revenues from entities owned or controlled by PG&E National Energy Group, Inc. of approximately $435.9 million, which represented approximately 24% of our ECM segment’s revenues and 13% of our total revenues. Also, we had total revenues from U.S. Government agencies or entities owned by the U.S. Government of approximately $948.9 million (29% of our total revenues) that included E&I segment revenues totaling approximately $815.0 million (68% of E&I segment revenues).

We conduct our marketing efforts principally with an in-house sales force. In addition, we engage independent contractors as agents to market to certain customers and territories. We pay our sales force a base salary plus, when applicable, an annual bonus. We pay our independent contractors on a commission basis which may also include a monthly retainer.

Raw Materials And Suppliers

For our engineering, procurement and construction services, we often rely on third party equipment manufacturers and subcontractors to complete our projects. We are not substantially dependent on any individual third party to support these operations; however, we are subject to possible cost escalations based on inflation and other market price fluctuations.

Our principal raw materials for our pipe fabrication operations are carbon steel, stainless steel and other alloy piping, which we obtain from a number of domestic and foreign primary steel producers. The market for most raw materials is extremely competitive, and our relationships with suppliers are strong. Certain types of raw materials, however, are available from only one or a few specialized suppliers. Our inability to obtain materials from these suppliers could jeopardize our ability to timely complete a project or realize a profit.

We purchase directly from manufacturers, or manufacture, a majority of our pipe fittings. These arrangements generally lower our pipe fabrication costs because we are often able to negotiate advantageous purchase prices as a result of the volumes of our purchases. If a manufacturer is unable to deliver the materials according to the negotiated terms, we may be required to purchase the materials from another source at a higher price. We keep items in stock at each of our facilities and transport items between our facilities as required. We obtain more specialized materials from suppliers when required for a project.

Industry Certifications

In order to perform fabrication and repairs of coded piping systems, our domestic construction operations and fabrication facilities, as well as our subsidiaries in Derby, U.K. and Maracaibo, Venezuela, maintain the required American Society of Mechanical Engineers (“ASME”) certification (U & PP stamps). The majority of our fabrication facilities, as well as our subsidiaries, in Derby, U.K. and Maracaibo, Venezuela have also obtained the required ASME certification (S stamp) and the National Board certification (R stamp).

Our domestic subsidiary engineering and construction operations in Stoughton, Massachusetts also maintain the required ASME certification (S stamp) and the National Board repair certification (R stamp) in addition to the ASME certifications (A, PP, & U stamps) and the National Board registration certification (NB stamp) for S, A, PP, and U stamped items.

In order to perform nuclear construction, fabrication, and installation activities of ASME III Code items such as vessels, piping systems, supports, and spent fuel canister/storage containments at nuclear plant sites, our domestic subsidiary engineering and construction operations in Stoughton, Massachusetts maintain the required American Society of Mechanical Engineers (“ASME”) certifications (N, N3, NPT, & NA stamps)(NS Cert). These ASME certifications also authorize our Stoughton location to serve as a material organization for the supply of ferrous and nonferrous material. Stoughton, Massachusetts also maintains the National Board nuclear repair certification (NR stamp) and National Board registration certification (NB stamp) for N & N3 stamped nuclear components.

The Laurens, South Carolina facility also maintains a nuclear piping ASME certification (NPT stamp) and is authorized to fabricate piping for nuclear power plants and to serve as a material organization to manufacture and supply ferrous and nonferrous material. This facility is also registered by the International Organization of Standards (ISO 9002). Substantially all of our North American engineering operations, as well as our UK operations, are also

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registered by the International Organization of Standards (ISO 9001).

Patents, Trademarks And Licenses And Other Intellectual Property

We have several items that we believe constitute valuable intellectual property. We consider our computerized project control system, SHAW-MAN™, to be a proprietary asset. We believe that our Stone & Webster subsidiary has a leading position in technology associated with the design and construction of plants that produce ethylene, which we protect and develop with license restrictions and a research and development program. Our Power Technologies Inc. (PTI) subsidiary is the owner of a recently issued patent for a line rating monitor, sold as the ThermalRate® System. The ThermalRate® System allows transmission and distribution lines to carry more power while maintaining high reliability and safety. For lines that thermally limit power flow, the ThermalRate® System is a cost-effective solution which can avoid physical modifications of the lines.

Through the acquisition of the Badger® technologies, we have obtained several technology partnerships. In the key area of zeolite catalysis, the association with ExxonMobil Chemical has resulted in the successful development of what we believe to be the world’s leading technologies to produce ethyl benzene and cumene, which are available for license through Badger Licensing LLC, our joint venture with ExxonMobil Chemical. Complementing this relationship in alkylation is the licensing of the Fina/Badger Styrene Monomer Technology, a relationship that has spanned 40 years. In the area of gas to liquids, we are the exclusive provider of front end/basic engineering for Sasol’s Fischer-Tropsch technologies.

Through our acquisition of the assets of the IT Group, we have acquired certain patents that are useful in environmental remediation and related technologies. The technologies include the Biofast® in-situ remediation method, a vacuum extraction method for treating contaminated formations, and a method for soil treatment which uses ozone. The IT Group acquisition also included the acquisition of proprietary software programs that are used in the management and control of hazardous wastes and the management and oversight of remediation projects.

In fiscal 2003, we acquired Envirogen, Inc. which had certain patents and trademarks. Envirogen’s patented technologies include processes for the control of biomass in Fluidized Bed Reactors which processes enhance overall system degradative performance and operating costs, biodegradation of MTBE and other compounds utilizing specialized bacteria and degradative techniques, and designs for Membrane Biological Reactors reducing operating costs and downtime associated with membrane cleaning for water treatment.

Competition

The markets served by both our ECM and E&I segments are highly competitive and for the most part require substantial resources and highly skilled and experienced technical personnel. A large number of regional, national and international companies are competing in the markets we serve, and certain of these competitors have greater financial and other resources. Further, we are a recent entrant into certain areas of these businesses, and certain competitors possess substantially greater experience, market knowledge and customer relationships.

In pursuing piping, engineering and fabrication projects, we experience significant competition in both international and domestic markets. In the United States, there are a number of smaller pipe fabricators; while internationally, our principal competitors are divisions of large industrial firms. Some of our competitors, primarily in the international sector, have greater financial and other resources than us.

Employees

At August 31, 2004, we employed approximately 17,200 employees, and approximately 600 of these employees were represented by labor unions pursuant to collective bargaining agreements. We also employ union labor from time to time on a project-specific basis. We believe current relationships with our employees (including those represented by unions) are satisfactory. We are not aware of any circumstances that are likely to result in a work stoppage at any of our facilities.

At August 31, 2004, approximately 950 of our employees work in our wholly-owned subsidiaries in Canada and 180 in the United Kingdom.

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Environmental Laws And Regulations

We are subject to environmental laws and regulations, including those concerning emissions into the air, discharges into waterways, generation, storage, handling, treatment and disposal of hazardous materials and wastes and health and safety.

The environmental, health and safety laws and regulations to which we are subject are constantly changing, and it is impossible to predict the effect of such laws and regulations on us in the future. We believe we are in substantial compliance with all applicable environmental, health and safety laws and regulations. To date, our costs with respect to environmental compliance have not been material, and we have not incurred any material environmental liability. However, we cannot assure you that we will not incur material environmental costs or liabilities in the future. For more information on the impact of environment regulation upon our businesses, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Factors.”

Item 2. Properties

Our principal properties at August 31, 2004 are as follows:

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In addition to these locations, we occupy other owned and leased facilities in various cities that are not considered principal properties. Portions of certain of the office buildings described above are currently being subleased for various terms. The square footage above is not reduced to reflect subleased space. We consider each of our current facilities to be in good operating condition and adequate for its present use.

Item 3. Legal Proceedings

NEG — Covert & Harquahala

Early in fiscal 2002, we entered into two target-price contracts with a customer, PG&E National Energy Group, Inc. (NEG), and its project entities, to provide EPC services for two gas-fired combined-cycle power plants in Covert, Michigan and Harquahala Valley, Arizona. In October 2002, the parent company of NEG, PG&E Corp. (PG&E) announced that NEG had notified its lenders that it did not intend to make further equity contributions required under the credit facility to fund the Covert and Harquahala projects. We believed this notice raised doubt about whether we would continue to be paid for the work we performed under these target-price contracts.

In May 2003, after extensive negotiations with NEG’s project entities, NEG, and their lenders, we reached a definitive settlement agreement for settlement of claims existing as of that date related to the Covert and Harquahala projects. The settlement provided for fixed-price EPC contracts which increased the original target-price for both projects by a total of $65.0 million; termination of the target-priced components of the original agreements which provided for recovery of costs in excess of the fixed-price contracts; dismissal of pending legal proceedings, our release of claims based on existing change orders and the incurrence of additional costs, and the extension of the schedule for completion of the projects. The revised schedule provided for us to complete the Harquahala project in September 2003 and the Covert project in December 2003. NEG paid us $32.5 million in May 2003 as a result of this settlement agreement and required us to post a letter of credit in its favor for the same amount which was assigned by them to its lenders.

During fiscal 2003, we recognized a loss of $42.8 million (which includes a $30.0 million loss recorded in the second quarter of 2003) on these two projects, $33.1 million of which was reversal of profit recognized prior to fiscal 2003.

During the first quarter of fiscal 2004, we recorded an additional loss on these two projects of $39.3 million ($4.8 million of which was reversal of profit recognized prior to fiscal 2004). Approximately $34.5 million represents actual and estimated increased costs to complete the Covert project primarily due to the failure of installed equipment, required rework and vendor and subcontractor delays. The $39.3 million loss was net of additional expected claims of approximately $1.2 million. During the third quarter of 2004, we recorded a reduction in the gross profit on the Harquahala project resulting from a $2.2 million reduction in our estimated claims recovery and an increase of $2.2 million in estimated cost of completion related primarily to the duration of our involvement in start-up and warranty related activities.

During the first quarter of fiscal 2004, we notified the owner of substantial completion on two of the three power island units on Covert and communicated that the remaining unit would achieve substantial completion in January

25

2004. We also communicated that the total facility would achieve substantial completion in February 2004. We notified the owner of substantial completion on the Harquahala facility on December 24, 2003.

While we previously demonstrated substantial completion on all six units at the two plants, the owners did not accept our various unit and facility completion dates and continued to assess liquidated damages. The owners accepted substantial completion of the Covert units in January 2004 and the Harquahala units in March 2004. The owners have not accepted facility completion on either project, in part because they believe we must post letters of credit on two projects totaling $43.0 million as security for warranty work in order to achieve facility completion. We firmly disagree with this position, and until all outstanding disputes are resolved, we do not intend to post additional letters of credit. In the meantime, we intend to comply with our warranty obligations.

As of August 31, 2004, the owners have withheld $55.4 million from milestone payments due us as an offset to liquidated damages they have claimed. In addition, in August 2004, the owners drew $18.8 million under an outstanding letter of credit for liquidated damages they have claimed due. As of August 31, 2004, the owners have indicated that they may claim as much as $89 million in liquidated damages. The ultimate assessment could be higher as the owners are claiming that they can assess daily liquidated damages until facility completion is accepted ($70,000 per day at Covert and $63,000 per day at Harquahala) up to a maximum of approximately $130 million for both projects. On March 29, 2004, we filed liens against both projects and have initiated binding arbitration regarding our claims. Arbitration with the owners is not expected to occur until the summer of calendar year 2005 at the earliest.

On February 20, 2004, we were notified by the lenders of the Harquahala project of their intention to draw $18.7 million under the existing $32.5 million letter of credit for assessed liquidated damages. We sought an injunction in the Supreme Court of the State of New York to preclude the lenders from drawing under the letter of credit until arbitration with the owners on the underlying claims is resolved. A temporary restraining order was granted prohibiting the lenders from drawing under the $32.5 million letter of credit but was lifted in August 2004 at which time the lenders drew $18.8 million under the outstanding letter of credit. As of August 31, 2004, a $13.7 million letter of credit remains outstanding for these projects.

Based on our evaluation and advice of legal counsel, we believe we have defenses to the owners’ claims of liquidated damages. We intend to vigorously contest the assessment. Additionally, we believe a substantial portion of the delays were caused by our vendors, subcontractors and equipment manufacturers from whom we may collect delay and related damages, and we are pursuing these actions. For these reasons, our revenue and cost estimates reflect our expectation that we will not incur liquidated damages in excess of amounts we believe would be recoverable from others. However, there can be no absolute assurance that delay damages will not have to be paid. If we are required to pay the owners delay damages that we cannot recover from subcontractors, vendors, or equipment manufacturers, that amount will be recorded as a loss.

Unrelated to the claims for delay damages discussed above, we have recorded approximately $26.5 million in claims receivable from the owners, vendors, subcontractors, equipment manufacturers, and insurance. Based on our evaluation of the contractual terms, our claims documentation, and the advice of legal counsel, we believe we have a strong basis for these claims (including claims against vendors based on their delivery of incomplete and/or defective equipment and claims against various subcontractors for their delays in providing services) in excess of the recorded amounts; but we have only recorded a claim receivable for the portion that we estimate will ultimately be collected. Recovery of the claims is dependent upon our negotiations, arbitration and litigation with the owners and their lenders, several subcontractors, vendors and equipment manufacturers. Due to the uncertainties surrounding litigation or arbitration of this nature, we cannot provide absolute assurance to you as to the outcome of these claims or their collectibility.

If we collect amounts different than the amounts that we have recorded as claims receivable of $26.5 million, that difference will be recognized as income or loss. Timing of collection is uncertain at this time, but is not expected in the next twelve months unless a settlement occurs or the disputes are resolved through the dispute resolution process pursuant to the contract.

The following table summarizes contract amounts due from the owners and claims recorded on these projects, excluding claims related to liquidated damages as of August 31, 2004 (in millions):

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(1)

Amounts collected under this letter of credit draw are for both liquidated damages and for other claims against the turbine manufacturer.

The above amounts are recorded in costs and estimated earnings in excess of billings on uncompleted contracts including claims on the consolidated balance sheet at August 31, 2004.

In March 2004, we drew the entire amount available under a letter of credit posted by the turbine manufacturer on the Covert project for $25.6 million. The turbine manufacturer disputes the draw under the letter of credit and arbitration is currently scheduled for March 2005. We believe we will prevail in this matter and believe the draw under the letter of credit is in accordance with the terms of the letter of credit. The turbine manufacturer has also filed a demand for arbitration against us for approximately $3.6 million in alleged unpaid technical assistance services which has been considered in our overall claims position with the turbine manufacturer.

Although NEG, the parent of the project entities, filed for Chapter 11 bankruptcy in July 2003, the project entities that own these two projects are not included in the bankruptcy proceedings, and we do not believe NEG’s current financial position will negatively impact future payments to us related to these projects.

Based on our evaluation and the advice of legal counsel, we believe it is probable we will recover at least the recorded amount of claims in the arbitration process. We believe we have a strong basis for claims and backcharges in excess of the recorded amounts; however, recovery of the claims and other amounts is dependent upon negotiations with the applicable parties, which are ongoing, and the results of arbitration. We cannot provide absolute assurance to you as to the timing or outcome of these negotiations or results of arbitration. In addition, we hold liens against the projects in connection with our claims under the contract. We cannot provide assurances to you of the value of such liens or our ability to execute on such liens in a timely manner.

AES — Wolf Hollow Project

On March 8, 2002, AES Frontier, L.P. and AES Wolf Hollow, L.P. (collectively “AES”) entered into a series of contracts (collectively the “EPC contract”) with us to complete the engineering, design, procurement, and construction of a gas-fired, combined-cycle power plant in Texas for an aggregate contract amount of $99.0 million. AES represented and warranted at the time of contracting with us that the project was 67% complete and that engineering was 99.8% complete, and we relied upon this stage of completion in contracting with AES.

At the time we entered into the EPC contract, the project’s provisional acceptance was scheduled for October 15, 2002; however, acceptance of this project was delayed. We believe the delay from October 15, 2002 was primarily due to (i) the significant overstatement of the percentage completion by AES and Parsons (the engineers on the project) at the time we entered into the contract; (ii) a fire that occurred in June of 2002 at the project site; and (iii) failure of a turbine during start-up testing in May 2003. We believe the project reached provisional acceptance on July 24, 2003, although AES did not agree to provisional acceptance until August 8, 2003. The contract terms include liquidated damages in the event of late completion of $120,000 per day from October 15, 2002 through June

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1, 2003 and $185,000 per day thereafter until provisional acceptance occurs, for which AES has billed us $40.0 million in aggregate.

We were unable to resolve our claims with AES through the dispute resolution process called for in the contract with respect to a force majeure claim we made resulting from the fire and other change orders. On November 5, 2002, we filed suit against AES in the District Court of Hood County, Texas for breach of contract. On May 9, 2003, we added Parsons as a defendant and expanded the complaint to include claims related to misrepresentation. In June 2003, the AES Corporation was also added as a defendant.

In addition, we initiated an arbitration action in September 2003 against the heavy equipment supplier to recover $38 million in costs and liquidated damages incurred as a result of defects in their equipment. Discovery is underway in that proceeding, and a hearing is set to begin on January 31, 2005.

Discovery is currently underway in the AES litigation, and the case is scheduled for a jury trial in March 2005. Unless we reach a settlement prior to the trial date, we would not expect recovery of disputed amounts due from AES before 2005. As of August 31, 2004, there have been no significant changes with regard to this project and related disputes when compared to August 31, 2003. During fiscal 2004, we have continued to incur additional project costs related to punch list and warranty items which have been considered in our total estimate of claims against the owners, subcontractors and vendors due.

In excess of the original $99.0 million contract price, we have recorded claims receivable from AES of $17.9 million for additional costs incurred due to the fire, misrepresentation of the percentage-of-completion, disputed change orders and other claims. In addition, we have claims of approximately $7.3 million that we expect to recover from insurance proceeds related to the fire and backcharges from subcontractors and vendors. Of the $7.3 million, we have collected $1.5 million through a draw on a letter of credit posted by Parsons. Parsons disputes our claims and has filed a counterclaim alleging payments due of $1.9 million and the return of the $1.5 million letter of credit draw.

Of the original $99.0 million contract price, AES has not paid $22.0 million of billed milestones and $7.1 million of retention. In addition, $3.0 million of milestones remain unbilled related to final completion and acceptance, which we expect to occur in early fiscal 2005. Under the terms of the EPC contract, AES, at its option, may pay up to $27.7 million of the contract price in subordinated notes or cash. The subordinated notes, $24.8 million of which we consider issued as of August 31, 2004 for payment of billed milestones, bear interest at prime plus 4% and mature in October 2009. If any amounts under the notes are unpaid eight months following final acceptance of the project, the unpaid notes, plus a cash payment of the amounts, if any, paid on the notes through the conversion date, is convertible, at our option, into a 49.9% equity interest in the project.

Further, at the initiation of the project, we secured our obligations under the contract by providing letters of credit totaling $28.0 million. In August and September 2003, AES drew the full amount of the letters of credit in two draws of $13.9 million and $14.1 million, respectively. We have recorded an additional receivable of $28.0 million from AES for reimbursement of these draws which remained outstanding as of August 31, 2004. We recorded revenue of $43.1 million and a loss of $2.3 million from this contract for the year ended August 31, 2003. For the year ended August 31, 2004, no gross margin has been recorded on this contract.

The following table summarizes contract amounts due from AES and claims recorded on the project (in millions):

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(1)

Of the total milestones unbilled at August 31, 2004, $2.9 million could be paid by AES in Subordinated Notes.

(2)

Amounts collected under this letter of credit draw are for both liquidated damages and for other claims against the turbine manufacturer.

The above amounts are recorded in costs and estimated earnings in excess of billings on uncompleted contracts including claims on the consolidated balance sheet at August 31, 2004.

If we collect amounts different than the amounts that we have recorded as receivables from AES of $96.2 million or if we collect amounts different than the amounts receivable from subcontractors and others of $8.0 million, the difference would be recognized as income or loss.

AES has assessed and billed us approximately $40.0 million in liquidated damages due to the late completion of the project. While we dispute or expect to recover the liquidated damages because late delivery was primarily due to the fire, misrepresentation of the percentage-of-completion and other delays caused by AES, subcontractors and vendors, we recognized a reduction of revenue of approximately $6.6 million of liquidated damages. Of the remaining $34.8 million of liquidated damages, we have excluded $15.4 million from our cost estimates and we have recorded recoveries of approximately $18.0 million from subcontractors and vendors, including the turbine manufacturer. In the first quarter of fiscal 2004, we drew down $15.0 million from a letter of credit posted by the turbine manufacturer. The turbine manufacturer disputes the letter of credit draw and has initiated arbitration through a counterclaim for the return of the $15.0 million letter of credit draw and has asserted additional claims of $12.7 million for equipment, parts and services allegedly provided.

The following table summarizes how we have accounted for the liquidated damages that AES has assessed on the project (in millions):

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If we are required to pay liquidated damages to AES of more than the $6.6 million and are unable to recover that excess amount from our subcontractors or vendors, then that difference would be recognized as a loss.

Based on our evaluation and the advice of legal counsel, we believe it is probable we will recover at least the recorded amount of claims and that we will not pay AES any liquidated damages in excess of the amounts recorded. We believe we have a strong basis for claims and backcharges in excess of the recorded amounts. However, recovery of the claims and other amounts is dependent upon negotiations with the applicable parties, which are ongoing, and the results of litigation. We cannot provide absolute assurance to you as to the timing or outcome of these negotiations or results of litigation. We hold a mortgage on the project assets, second to the lenders, to secure AES obligations under the subordinated notes. We also filed a lien against the project in connection with our claims under the contract. We cannot provide absolute assurance to you of the value of such mortgage or lien or our ability to execute on either in a timely manner.

FPLE — Marcus Hook

Our EPC project with FPL-Energy (“FPLE”) for a combined-cycle cogeneration plant and auxiliary boiler facility in Marcus Hook, Pennsylvania, has been delayed for various reasons. Each party commenced legal proceedings against the other for various claims. Shortly thereafter, the parties withdrew their lawsuits. The parties are continuing attempts to resolve these issues.

Additionally, two of our subcontractors on the project have filed claims against us alleging total damages of approximately $20 million related to claims for extra costs incurred. We have asserted a counterclaim of approximately $8.3 million for costs associated with us obtaining another subcontractor to perform the work after one initial subcontractor failed to complete the project. Mediation with these subcontractors has not been successful to date. We believe any amounts that we incur related to this project, including legal costs to pursue these issues with subcontractors, are recoverable from FPLE under the terms of the EPC contract. However, FPLE has disputed whether these costs are fully reimbursable.

We cannot provide absolute assurance as to the timing or outcome of the mediation or results of the litigation, or disputes with FPLE, or with the subcontractors.

SEC Inquiry

On June 1, 2004, we were notified by the staff of the Securities and Exchange Commission (SEC) that the staff is conducting an informal inquiry relating to us. The SEC has not advised us as to either the reason for the inquiry or its scope. The staff’s notice states that it should not be construed as an indication of any improper or unlawful conduct by us. We are cooperating fully with the staff’s informal inquiry; however, if the inquiry elevates to a formal investigation, the resolution could have a material adverse effect on us.

Securities Litigation

We and certain of our current officers have been named as defendants in purported shareholder class action lawsuits alleging violations of federal securities laws. These types of class action lawsuits are not uncommon when there has been a notification of even an informal inquiry by the SEC. The first filed lawsuit is styled Earl Thompson v. The Shaw Group Inc. et al and was filed on June 16, 2004 in the United States District Court for the Eastern District of Louisiana, Case No. 04-1685. The complaint filed in the Thompson action alleges claims under Sections 10(b) and Rule 10(b-5) promulgated thereunder and 20(a) of the Securities Exchange Act of 1934 on behalf of a class of purchasers of our common stock during the period from October 19, 2000 to June 10, 2004. The complaint alleges, among other things, that (i) certain of our press releases and SEC filings contained material misstatements and omissions, (ii) that the manner in which we accounted for certain acquisitions was improper and (iii) that we improperly recorded revenue on certain projects, and as a result, our financial statements were materially misstated at all relevant times. The complaint does not specify the amount of damages sought. Since the filing of the Thompson lawsuit, ten additional purported shareholder class action lawsuits have been filed and other actions may also be commenced. Each of the additional lawsuits includes the same defendants, and essentially alleges the same statutory violations based on the same or similar alleged misstatements and omissions. Ten of these actions have been consolidated under the Thompson caption in the Eastern District of Louisiana.

In addition, two shareholder derivative actions, styled as Jonathan Nelson v. J.M. Bernhard, Jr., et al. and Larry F. Reusche v. Tim Barfield, Jr., et al., have been filed based on essentially the same allegations as the purported class actions. The derivative actions, which the plaintiffs purport to be bringing on behalf of the Company, name certain of our directors and current and former officers as defendants, and name the Company as a nominal defendant. The derivative suits collectively make claims of breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment based on allegations that the named defendants committed, condoned or failed to identify and disclose the alleged misconduct alleged in the purported class actions, and that certain defendants sold company stock while in possession of knowledge of the alleged misconduct. The complaints do not specify the amount of damages sought.

Both the purported shareholder class action lawsuits and the derivative lawsuits are in the early stages of litigation. We believe our financial statements were prepared in accordance with GAAP and that none of our press releases or public filings contained misrepresentations or omissions. Accordingly, we intend to defend the Company and our directors and officers vigorously against each of these actions. Although it is not possible at this early stage to predict the likely outcome of these actions, an adverse result in any of these lawsuits could have a material adverse effect on us.

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Other

We have been and may from time to time be named as a defendant in legal actions claiming damages in connection with engineering and construction projects and other matters. These are typically actions that arise in the normal course of business, including employment-related claims, contractual disputes and claims for personal injury or property damage that occur in connection with our business. Such contractual disputes normally involve claims against us relating to the performance of equipment, design or other engineering services and project construction services. Although the outcome of such legal proceedings cannot be predicted and no assurances can be provided, we believe that, based upon information currently available, the likelihood of an adverse determination in the now pending legal proceedings is remote, and are not expected to have a material adverse effect on our financial position or results of operations either individually or in the aggregate. However, we cannot guarantee such a result.

See also Note 20 of the notes to our consolidated financial statements.

Item 4. Submission Of Matters To A Vote Of Security Holders

We did not submit any matters to a vote of security holders during the fourth quarter of fiscal 2004.

PART II

Item 5. Market For The Registrant’s Common Equity And Related Stockholder Matters

Our common stock, no par value, is traded on the New York Stock Exchange (NYSE) under the symbol “SGR”. The following table sets forth, for the quarterly periods indicated, the high and low sale prices per share for the common stock as reported by the NYSE, for our two most recent fiscal years and for the current fiscal year to date.

The closing sales price of the common stock on October 29, 2004, as reported on the NYSE, was $12.19 per share. As of October 29, 2004, we had 350 shareholders of record.

We have not paid any cash dividends on the common stock and currently anticipate that, for the foreseeable future, any earnings will be retained for the development of our business. Accordingly, no dividends are expected to be declared or paid on the common stock at the present. The declaration of dividends is at the discretion of our Board of Directors. Our dividend policy will be reviewed by the Board of Directors as may be appropriate in light of relevant factors at the time. We are, however, subject to certain prohibitions on the payment of dividends under the terms of existing credit facilities and our indenture relating to our senior notes.

See Item 12. “Security Ownership of Certain Beneficial Owners and Management” with respect to information to be incorporated by reference regarding equity compensation plans.

Item 6. Selected Consolidated Financial Data

The following table presents, for the periods and as of the dates indicated, selected statement of income data and balance sheet data on a consolidated basis. The selected historical consolidated financial data for each of the five fiscal years in the period ended August 31, 2004 presented below has been derived from our audited consolidated financial statements. Ernst & Young LLP audited our consolidated financial statements for each of the three fiscal

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years in the three-year period ended August 31, 2004. Arthur Andersen LLP audited our consolidated financial statements for each of the two fiscal years in the two-year period ended August 31, 2001. Such data should be read in conjunction with the Consolidated Financial Statements and related notes thereto included elsewhere in this Annual Report on Form 10-K and Item 7. - “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

(1)

Includes the acquisition of certain assets of Energy Delivery Services, Inc., Coastal Engineering and Environmental Consultants Inc. and LFG&E International, Inc. in fiscal 2004 (see Note 4 of the notes to our consolidated financial statements).

(2)

Includes the acquisition of certain assets of Badger Technologies, Envirogen, Inc., and LFG&E International, Inc. in fiscal 2003 (see Note 4 of the notes to our consolidated financial statements).

(3)

Includes the acquisition of certain assets of the IT Group and PsyCor Inc. in fiscal 2002 (see Note 4 of the notes to our consolidated financial statements).

(4)

Includes the acquisition of certain assets of Scott, Sevin & Schaffer, Inc. and Technicomp, Inc. in fiscal 2001 and amortization of goodwill, net of tax, of $13.3 million ($0.33 per basic share and $0.32 per diluted share).

(5)

Includes the acquisition of certain assets of Stone & Webster and PPM Contractors, Inc. in fiscal 2000 and amortization of goodwill, net of tax, of $1.2 million ($0.06 per basic share and $0.06 per diluted share).

(6)

Earnings per share for fiscal 2000 has been restated to reflect the effect of the December 2000 two-for-one stock split of our common stock.

(7)

Fiscal 2003 excludes $260.0 million of current maturities of long-term debt consisting primarily of the LYONs convertible debt of $251.5 million.

(8)

Restated to reflect discontinued operations (see Note 21 of the notes to our consolidated financial statements).

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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The following analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements, including the notes thereto. The following analysis contains forward-looking statements about our future revenues, operating results and expectations. See “Forward-Looking Statements and Associated Risks” for a discussion of the risks, assumptions and uncertainties affecting these statements as well as “Risk Factors.”

Critical Accounting Policies and Related Estimates That Have a Material Effect on Our Consolidated Financial Statements

Set forth below is a discussion of the accounting policies and related estimates that we believe are the most critical to understanding our consolidated financial statements, financial condition, and results of operations and which require complex management judgments and estimates, or involve uncertainties. Information regarding our other accounting policies is included in the notes to our consolidated financial statements.

Engineering, Procurement and Construction Contract and Environmental and Infrastructure Revenue Recognition and Profit and Loss Estimates Including Claims

A substantial portion of our revenue from both the ECM and E&I segments is derived from engineering, procurement and construction contracts. The contracts may be performed as stand-alone engineering, procurement or construction contracts or as combined contracts (i.e. one contract that covers engineering, procurement and construction or a combination thereof). We use accounting principles set forth in American Institute of Certified Public Accountants, or AICPA, Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts,” and other applicable accounting standards to account for our contracts. We recognize revenue for these contracts on the percentage-of-completion method, primarily based on costs incurred to date compared with total estimated contract costs. Revenues from reimbursable or cost-reimbursable contracts are recognized on the basis of costs incurred during the period plus the fee earned. Performance incentives are included in our estimates of revenues using the percentage-of-completion method when their realization is reasonably assured. Cancellation fees are recognized when received.

Provisions for estimated losses on uncompleted contracts are made in the period in which the losses are identified. The cumulative effect of changes to estimated contract profit and loss, including those arising from contract penalty provisions such as liquidated damages, final contract settlements, warranty claims and reviews of our costs performed by customers, are recognized in the period in which the revisions are identified. To the extent that these adjustments result in a reduction or elimination of previously reported profits, we would report such a change by recognizing a charge against current earnings, which might be significant depending on the size of the project or the adjustment. The costs attributable to change orders and claims being negotiated or disputed with customers, vendors or subcontractors or subject to litigation are included in our estimates of revenue when it is probable they will result in additional contract revenue and the amount can be reasonably estimated. Profit from such change orders and claims is recorded in the period such amounts are settled or approved.

It is possible there will be future and currently unforeseeable significant adjustments to our estimated contract revenues, costs and gross margins for contracts currently in process, particularly in the later stages of the contracts. These adjustments are common in the construction industry and inherent in the nature of our contracts. These adjustments could, depending on the magnitude of the adjustments and/or the number of contracts being completed, materially, positively or negatively, affect our operating results in an annual or quarterly reporting period. These adjustments are, in our opinion, most likely to occur as a result of, or be affected by, the following factors in the application of the percentage-of-completion accounting method discussed above for our contracts.

A.

Revenues and gross margins from cost-reimbursable, long-term contracts can be significantly affected by contract incentives/penalties that may not be known or finalized until the later stages of the contracts. Substantially all of our revenues from cost-reimbursable contracts are based on costs incurred plus the fee earned. Applying our revenue recognition practices to these types of contracts usually results in revenues being recognized as work is performed and costs are incurred and generally results in a reasonably consistent gross margin during most of the contract term.

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Our cost-reimbursable contracts are sometimes structured as target-price contracts. Target-price contracts contain an incentive/penalty arrangement which results in our fee being adjusted, within certain limits, for cost underruns/overruns to an established target-price, representing our estimated cost and fee for the project. In addition, certain target-price contracts require that we share in cost overruns in excess of our fee which would result in a loss on the contract should such a level of cost overruns occur. Cost-reimbursable contracts generally provide for reimbursement of all of our costs, but generally limit our fee to a fixed percentage of costs or to a certain specified amount and often specify costs that are not reimbursable. Usually, target-price contracts are priced with higher fees than cost-reimbursable contracts because of the uncertainties relating to an adjustable fee arrangement or for the sharing of potential cost overruns in excess of the fee. Additionally, both the target cost and cost-reimbursable contracts frequently have other incentive and penalty provisions for such matters as schedule, testing and performance results.

Generally, the penalty provisions for our cost-reimbursable contracts are “capped” to limit our monetary exposure to a portion of the contract gross margin. Although we believe it is unlikely that we could incur losses or lose all of our gross margin on our cost-reimbursable contracts, it is possible for penalties to reduce or eliminate previously recorded profits. The incentive/penalty provisions are usually finalized as contract change orders either subsequent to negotiation with, or verification by, our customers.

Therefore, while cost-reimbursable, target-price and other “cost-reimbursable” contracts generally limit our risks on the related projects, we can and do incur losses on these contracts.

In most situations, the amount and impact of incentives/penalties are not, or cannot be, finalized until the completion stages of the contract, at which time we will record the adjustment amounts on a cumulative, catch-up basis.

B.

The accuracy of gross margins from fixed-price contracts is dependent on the accuracy of cost estimates and other factors. We have a number of fixed-price contracts, most of which were entered into on a negotiated basis. We also have fixed-price contracts awarded based on competitive bids.

		The accuracy of the gross margins we report for fixed-price contracts is dependent upon the judgments we make with respect to our contract performance, our cost estimates, and our ability to recover additional contract costs through change orders, claims or backcharges to the customer, subcontractors and vendors. Many of these contracts also have incentive/penalty provisions. Increases in cost estimates, unless recoverable from claims, will result in a reduction in margin equivalent to the cost increase.
C.		Revenues and gross margin on contracts can be significantly affected by change orders and claims that may not be ultimately negotiated until the later stages of a contract or subsequent to the date a contract is completed. During the course of our work on a contract, disputes with other parties involved in the contract can and often do occur. These disputes are generally the result of one party incurring costs or damages caused by another party during execution of the project. We may incur additional costs or be damaged and we may cause additional costs or damage other parties. The other parties include our customer on the contract, subcontractors and vendors we have contracted with to execute portions of the project and others. We may claim damages against others and others may claim damages against us. Collectively, we refer to disputes related to collection of these damages as “claims.” Claims include amounts in excess of the agreed contract price (or amounts not included in the original contract price) that we seek to collect from our customers for delays, errors in specifications and designs, contract terminations, change orders in dispute or unapproved as to both scope and price, or other causes of unanticipated additional costs. These claims against customers are included in our revenue estimates as additional contract revenue to the extent that contract costs have been incurred when the recovery of such amounts is probable. Backcharges and claims against and from our customers, vendors, subcontractors and others are included in our cost estimates as a reduction or increase in total estimated costs when recovery or payment of the amounts are probable and the costs can be reasonably estimated.
		When estimating the amount of total gross margin or loss on a contract, we include claims related to our customers as adjustments to revenue and claims related to vendors, subcontractors and others as adjustments to cost of revenues when the collection is deemed probable and the amounts can be reasonably estimated. Including claims in this calculation increases the gross margin (or reduces the loss) that would otherwise be recorded

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without consideration of the claims. Our claims against others are recorded to the extent of costs incurred and include no profit. In most cases, the claims included in determining contract gross margin are less than the actual claim that will be or has been presented.

		Claims are included in costs and estimated earnings in excess of billings on the balance sheet.
		Claims at August 31, 2004 and 2003 relate primarily to three major contracts, all of which are complete or substantially complete. We are actively engaged in claims negotiation with the other parties or have commenced legal proceedings.

See Note 20 of the notes to our consolidated financial statements for further discussion of our significant claims.

Other Revenue Recognition and Profit and Loss Estimates

The revenue recognition policies related to our fabrication contracts, consulting services, and manufacturing operations are described in the accompanying notes to our consolidated financial statements. Because of the nature of the contracts and related work, estimates and judgments are usually not as significant in the determination of revenue and profit and loss for these services as they are for the engineering, procurement and construction contracts.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts related to estimated losses that could result from the inability of certain of our customers to make required payments. We record to expense additions to the allowance for doubtful accounts based on management’s assessment of a specific customer’s inability to meet its financial obligations, and the balance of the allowance for doubtful accounts for the specific customer reduces the recognized receivable to the net amount we believe will be ultimately collected. If the financial condition of our customers were to deteriorate resulting in an impairment of their ability to make payments, further additions to the allowance for doubtful accounts, which would reduce our earnings, may be required. These increases to the allowance for doubtful accounts could be significant, depending upon (i) the size of certain of our EPC contracts and (ii) the potential for us to perform a substantial amount of unreimbursed work on significant projects prior to customers notifying us of their intent not to pay the amounts due (see Note 1 of the notes to our consolidated financial statements).

Income Taxes

Deferred income taxes are provided on a liability method whereby deferred tax assets/liabilities are established for the difference between the financial reporting and income tax basis of assets and liabilities, as well as operating loss and tax credit carryforwards and other tax credits. Deferred tax assets are reduced by a valuation allowance when, in our opinion, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. We also consider the reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment of such realization. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. As of August 31, 2004, we had gross deferred tax assets of $115.2 million including $85.8 million related to net operating losses and tax credit carryforwards. As of August 31, 2004, we had a deferred tax asset valuation allowance of $9.8 million.

Acquisitions — Fair Value Accounting and Goodwill Impairment

Goodwill represents the excess of the cost of acquired businesses over the fair value of their identifiable net assets. Our goodwill balance as of August 31, 2004 was approximately $522.8 million, most of which related to the Stone & Webster acquisition in fiscal 2000 and the IT Group acquisition in fiscal 2002 (see Notes 4 and 8 of the notes to our consolidated financial statements).

We completed our annual impairment test during the third quarter of fiscal 2004 in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” and determined that goodwill was not impaired. We test goodwill for

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impairment at our operating segment level. In evaluating whether an impairment of goodwill exists, we calculate the estimated fair value of each of our three segments based on projected discounted cash flows as of the date we perform the impairment tests. We then compare the resulting fair values by segment to the respective net book values, including goodwill. If the net book value of a segment exceeds its fair value, we measure the amount of the impairment loss by comparing the implied fair value (which is a reasonable estimate of the value of goodwill for the purpose of measuring an impairment loss) of the segment’s goodwill to the carrying amount of that goodwill. To the extent that the carrying amount of a segment’s goodwill exceeds its implied fair value, we recognize a goodwill impairment loss at that time. In evaluating whether there was an impairment of goodwill, we also take into consideration changes in our business mix and changes in our projected discounted cash flows, in addition to our stock price and market value of interest-bearing obligations. We do not believe any events have occurred since our annual impairment test that would cause an impairment of goodwill. However, our businesses are cyclical and subject to competitive pressures. Therefore, it is possible that the goodwill values of our businesses could be adversely impacted in the future by these or other factors and that a significant impairment adjustment, which would reduce earnings and affect various debt covenants, could be required in such circumstances. Our next required annual impairment test will be conducted in the third quarter of fiscal 2005 unless indicators of impairment occur prior to that time.

Our estimates of the fair values of the tangible and intangible assets and liabilities we acquire in acquisitions are determined by reference to various internal and external data and judgments, including the use of third party experts. These estimates can and do differ from the basis or value (generally representing the acquired entity’s actual or amortized cost) previously recorded by the acquired entity for its assets and liabilities. Accordingly, our post-acquisition financial statements are materially impacted by and dependent on the accuracy of management’s fair value estimates and adjustments. Our experience has been that the most significant of these estimates are the values assigned to construction contracts, production backlog, customer relationships, licenses and technology. These estimates can also have a positive or negative material effect on future reported operating results. Further, our future operating results may also be positively or negatively materially impacted if the final values for the assets acquired or liabilities assumed in our acquisitions are materially different from the fair value estimates which we recorded for the acquisition.

Long-Lived Assets

We periodically assess the recoverability of the unamortized balance of our intangible assets, including licenses, patents, technology and related processes, based on expected future profitability and undiscounted expected cash flows and their contribution to our overall operations. Should the review indicate that the carrying value is not fully recoverable, the excess of the carrying value over the fair value of the other intangible assets would be recognized as an impairment loss.

Litigation, Commitments and Contingencies

We are subject to various claims, lawsuits, environmental matters and administrative proceedings that arise in the ordinary course of business. Estimating liabilities and costs associated with these matters requires judgment and assessment based on professional knowledge and experience of our management and legal counsel. In accordance with SFAS No. 5, “Accounting for Contingencies,” amounts are recorded as charges to earnings when we determine that it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The ultimate resolution of any such exposure may vary from earlier estimates as further facts and circumstances become known.

Retirement Benefits

Assumptions used in determining projected benefit obligations and the fair value of plan assets for our pension plans are regularly evaluated by management in consultation with outside actuaries who are relied upon as experts. In the event that we determine that changes are warranted in the assumptions used, such as the discount rate, expected long-term rate of return on investments, or future salary costs, our future pension benefit expenses could increase or decrease. As of August 31, 2004, we had a minimum pension liability recorded of $20.9 million. This liability will likely require us to increase our future cash contributions to the plans.

General

We segregate our business activities into three operating segments: Environmental and Infrastructure (E&I)

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segment, Engineering, Construction & Maintenance (ECM) segment, and Fabrication, Manufacturing and Distribution segment.

Environmental & Infrastructure

The E&I segment provides services which include the identification of contaminants in soil, air and water and the subsequent design and execution of remedial solutions. This segment also provides project and facilities management and other related services to non-environmental construction, watershed restoration and outsourcing privatization markets.

Engineering, Construction & Maintenance

The ECM segment provides a range of project-related services, including design, engineering, construction, procurement, maintenance, technology and consulting services, primarily to the power generation and process industries.

Fabrication, Manufacturing and Distribution

The Fabrication, Manufacturing and Distribution segment provides integrated piping systems and services for new construction, site expansion and retrofit projects for industrial plants. On August 31, 2004, we sold our hanger engineering and pipe support businesses for approximately $1.3 million. These businesses designed, engineered and fabricated pipe hangers, mechanical scrubbers, and specialty stainless, alloy and carbon steel pipe fittings. The results of operations for the hanger engineering and pipe support businesses are presented as discontinued operations in the statements of operations for the years ended August 31, 2004, 2003 and 2002.

Comments Regarding Future Operations

Historically, we have used acquisitions to pursue market opportunities and to augment or increase existing capabilities and plan to continue to do so. However, all comments concerning our expectations for future revenue and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions.

Results Of Operations

A substantial portion of our revenue and profit, particularly for our ECM and E&I segments, is derived from EPC projects. Some of these projects may span several years from start to finish. We recognize revenue and margin for these contracts on the percentage-of-completion method which requires estimates of the total revenue and total costs at completion, as well as the progress towards completion. These estimates are dependent upon judgments including material costs and quantities, labor productivity, subcontractor performance and other factors. In addition, disputes on our projects can and sometimes do occur with our customers, subcontractors and equipment vendors that require significant judgment as to the ultimate resolution and may take an extended period of time to resolve. The percentage-of-completion method requires that adjustments to estimated revenues and costs, including estimated claim recoveries, be recognized on a cumulative basis, when the adjustments are identified. When adjustments are identified, the impact of the change in estimate would be recognized as a change in the margin on the contract in that period. This can result in a material impact on our results for a single reporting period. Therefore, our discussion of results includes descriptions of significant changes in major projects and their impact on our results.

The following table presents, for the periods indicated, summary revenues, gross profit and gross profit percentages (in millions, except for percentages):

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Our revenues by industry sector were as follows (in millions, except for percentages):

The following tables present our revenues by geographic region (in millions, except for percentages):

Backlog by segment is as follows (in millions, except for percentages):

Backlog by industry sector is as follows (in millions, except for percentages):

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Executive Summary

During fiscal 2004, we experienced increasing activity in our ECM and E&I segments as reflected in our backlog, with new power generation projects in New York and Utah, increasing activity in the process maintenance and process technology sectors, and new awards in the Middle East. However, fiscal 2004 revenue was negatively impacted by a reduction in the number of domestic new construction power projects offset by higher revenue from the transmission and distribution sector through our EDS acquisition in December 2003, and E&I service contracts supporting U.S. Government projects in Iraq.

The major factors contributing to the decrease in our ECM segment gross profit percentages for fiscal 2004 as compared to fiscal 2003 were:

•

charges related to the Covert and Harquahala projects; and

•

decrease in overall activity of domestic new construction power plants.

During the third quarter of fiscal 2004, we determined that our hanger engineering and pipe support businesses which are included in our Fabrication, Manufacturing and Distribution segment should no longer be part of our core business plan, and therefore began actively marketing these businesses. Placing these businesses as available for sale resulted in an impairment charge and restatement to reflect these businesses as discontinued operations. The primary assets of these operations were sold on August 31, 2004.

Our backlog increased significantly in fiscal 2004 with new project awards including two EPC contracts in New York and Utah, desulphurization contracts for two customers, new contracts related to clean fuels emissions projects as well as increased awards on U.S. Government contracts in the Middle East.

Backlog is largely a reflection of the broader positive economic trends being experienced by our customers and is important in anticipating operational needs. Backlog is not a measure defined in generally accepted accounting principles, and our methodology in determining backlog may not be comparable to the methodology used by other companies in determining their backlog. We cannot provide any assurance that revenues projected in our backlog will be realized, or if realized, will result in profits. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Backlog” for further discussion of our methodology in determining backlog.

We have continued to use cash in support of our operations, capital expenditures and acquisitions, specifically, our acquisition of Energy Delivery Services, Inc. in December 2003 and capital contributions to our military housing privatization joint venture entities. Our financing activities have been a source of cash for us with two equity issuances in October 2003 and May 2004 which allowed us to pay down our LYONs debt.

The following presents a comparison of our operating results (and certain other information) for fiscal 2004 as compared with fiscal 2003 for our three business segments.

Fiscal 2004 Compared to Fiscal 2003

E&I Segment

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Revenues — E&I Segment

The increase in revenues of $125.6 million or 10.4% for fiscal 2004 as compared to fiscal 2003 is primarily attributable to:

•

project services supporting the U.S. Government customers in Iraq of $119.1 million;

•

public works and logistic support services for the U.S. Army of $45.1 million; and

•

offset by a decrease in domestic federal remediation work of approximately $64.3 million.

During fiscal 2004, we have incurred bid and proposal, business development, start-up expenses, and other contract support costs of $8.1 million associated with pursuing new opportunities for international projects in the Middle East for our federal customers and others. To date, we have won federal contract awards for unfunded projects in Iraq of approximately $1.5 billion. As of August 31, 2004, we have approximately $273 million in unfunded backlog based on task orders received and our estimate of backlog utilization based on the current political and infrastructure developments in Iraq.

Gross Profit and Gross Profit Percentage — E&I Segment

The increase in gross profit and gross profit percentage for fiscal 2004 as compared to fiscal 2003 is due primarily to:

•

a reduction in the estimated cost to complete a major fixed-price contract impacting gross profit by $12.0 million in 2004;

•

a favorable contract settlement on a completed project of $5.0 million in 2004;

•

favorable completion activities on a major time and materials project and revisions to cost estimates based on revised scope activities yielded an additional $4.4 million gross profit in 2004;

•

a reduction in a warranty liability of approximately $2.2 million in 2004; and

•

an increase of $1.5 million for a one-time reduction in an employee benefits accrual relating to a change in an employee benefits policy in 2004.

Gross profit and gross profit percentage for fiscal 2004 and fiscal 2003 reflect an increase (decrease in cost of revenues) of $8.2 million and $19.3 million, respectively, for amortization of contract asset/liability adjustments related to contracts acquired in the IT Group acquisition, and $9.0 million and $12.2 million for fiscal 2004 and 2003, respectively, for the recognition of accrued loss reserves related to contracts acquired in the IT Group acquisition.

Backlog — E&I Segment

Backlog for the E&I segment was $2.9 billion as of August 31, 2004 compared to $2.8 billion as of August 31, 2003. The increase in backlog is primarily attributable to increased awards for services to U.S. Government customers in Iraq of approximately $273 million, the award of a world wide contract with backlog of approximately $165 million along with steady backlog derived from our commercial customers domestically. These increases were offset by scheduled work and completed projects during fiscal 2004. We believe E&I segment revenues will remain consistent in fiscal 2005, but increase over the next several years as a result of a combination of factors, including market opportunities in various environmental clean-up, homeland security and both domestic and international infrastructure markets, including the Middle East.

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We anticipate fiscal 2005 revenues to be generally consistent with fiscal 2004; however, we expect our gross profit to decrease in fiscal 2005 due to a change in the mix of work, with the completion of some of our large projects in fiscal 2004 with the expectation of new work based on a more competitive environment in this industry sector.

ECM Segment

The following table presents ECM revenues from customers in the following industry sectors:

Revenues — ECM Segment

The decrease of $273.1 million or 14.8% in segment revenue for fiscal 2004 compared to fiscal 2003 is due to several contributing factors including:

•

the completion and winding-down of several domestic new construction power plants that commenced prior to fiscal 2003, specifically the completion of gas-fired power generation projects and related power engineering and construction activity in fiscal 2003, with minimal activity for new construction gas-fired power generation projects during fiscal 2003 and early fiscal 2004 due to a weakened power market;

•

the decrease was offset by an increase in revenues from engineering and procurement activities on the combined-cycle power plants in Queens, New York and Mona, Utah and services to other customers related to the process industries, nuclear restart project and engineering services related to our proprietary technologies; an increase from maintenance services related to multi-location service contracts signed with several customers during fiscal 2003; and an increase in revenues of $111.0 million for fiscal 2004 generated by our EDS operations acquired in the second quarter of fiscal 2004.

Gross Profit and Gross Profit Percentages — ECM Segment

The decrease in gross profit and gross profit percentage for fiscal 2004 compared to fiscal 2003 is due primarily to:

•

a $39.3 million charge related to the Covert and Harquahala projects (the NEG projects) in fiscal 2004 and a reduction in our estimated claims recovery and an increase in estimated cost at completion related to the Harquahala project for costs related primarily to the duration of our involvement in start-up and on warranty related activities compared to a $30.0 million charge related to the NEG projects in fiscal 2003. (see Note 20 to our consolidated financial statements for additional discussion of the NEG projects);

•

a negative impact of $5.5 million related to a reduction of our incentive fee on a target-price contract to build a combined-cycle cogeneration facility near Philadelphia, Pennsylvania;

•

a reduction in our estimated claims recovery in the fourth quarter of fiscal 2004 of approximately $4.0 million on a UK construction project that was substantially complete in 2003;

•

pass-through equipment and other costs primarily on the power plant project in Queens, New York; and

•

a decrease in activity in our UK construction operations.

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Our margins for fiscal 2003 were positively impacted by approximately $28.0 million in gross profit recognition on certain projects that were substantially complete prior to fiscal 2003 due to favorable resolution of remaining estimated costs and exposures on such projects.

The decrease in gross profit and gross profit percentage for fiscal 2004 as compared to fiscal 2003 was partially offset by:

•

an increase in gross profit due to the increase in activity as we ramp up progress on two combined-cycle power plants in Queens, New York and Mona, Utah;

•

an increase in margin related to sales of our proprietary technology from our Badger joint venture which we acquired in the third quarter of fiscal 2003;

•

an increase in activity on the TVA nuclear restart project beginning in the first quarter of fiscal 2004; and

•

the positive impact on gross profit from the acquisition of EDS which occurred in the second quarter of fiscal 2004.

Gross profit and gross profit percentage for fiscal 2004 and 2003 reflect an increase (decrease in cost of revenues) of $5.2 million and $7.6 million for amortization of contract liability adjustments related to contracts acquired in the fiscal 2000 Stone & Webster acquisition.

As major projects are completed and their project costs finalized, the ECM segment’s margins have been, and we expect will continue to be, positively or negatively impacted by contract completion negotiations with customers, subcontractors and vendors on such projects as well as the outcome of litigation and settlement discussions.

Backlog — ECM Segment

Segment backlog at August 31, 2004 was approximately $2.8 billion, compared with approximately $1.9 billion at August 31, 2003, and was comprised of the following:

ECM segment’s backlog has increased $925.5 million or 49.5% from August 31, 2003 primarily due to growth in our fossil fuel EPC backlog. Our fossil fuel EPC backlog includes the uncompleted portions of a $565 million fixed-priced EPC contract and a $170 million target-priced EPC contract to build gas-fired combined-cycle power plants. Additionally, backlog has increased due to a new customer contract for cleaner air emissions on four power plants as well as the expansion of EPC services to an existing customer related to cleaner air emissions. Backlog has also been increased for the expansion of nuclear and process maintenance services to both new and existing customers.

Given recent new project awards in fiscal 2004 for domestic gas-fired power plants as well as an increase in demand for services in the power and process industries, we expect revenues to increase in fiscal 2005 as compared to fiscal 2004 with improved gross profit percentages in fiscal 2005.

Fabrication, Manufacturing and Distribution Segment

Revenues — Fabrication, Manufacturing and Distribution Segment

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The decrease in revenue of $68.4 million or 27.5% in fiscal 2004 as compared to fiscal 2003 is attributable to reduced domestic demand, primarily from power generation customers, without material offsetting increases in other industry sectors. The process industry (chemical, petro-chemical and refinery) comprises the majority of our fiscal 2004 revenues. Revenue in fiscal 2004 also includes $5.1 million in revenue from Shaw-Nass Middle East, W.L.L. and our China joint venture which were consolidated effective May 31, 2004 in accordance with FIN 46(R). The China joint venture was subsequently deconsolidated effective August 27, 2004.

Gross Profit and Gross Profit Percentage — Fabrication, Manufacturing and Distribution Segment

The reduced demand for the segment’s products and the increase in overall market competitiveness has had a negative impact on pricing which has impacted gross profit and gross profit percentage for fiscal 2004; however, we continue to experience an increase in activity into early fiscal 2005. This lower gross profit and gross profit percentage in fiscal 2004 was slightly offset by ceasing production at certain smaller facilities, consolidating operations, and implementing other cost savings programs for this segment.

During the third quarter of fiscal 2004, we began marketing for sale our hanger engineering and pipe support businesses. In connection with this asset disposal plan, we recognized a $3.0 million (net of tax of $2.0 million) impairment charge for fiscal 2004 (see Note 21 to our consolidated financial statements). The operating results of Fabrication, Manufacturing and Distribution have been restated to reflect these businesses as discontinued operations. On August 31, 2004, we sold these businesses for $1.3 million in cash.

Backlog — Fabrication, Manufacturing and Distribution Segment

Backlog for this segment has increased from $99.1 million at August 31, 2003 to $115.8 million at August 31, 2004. The increase in backlog reflects new contracts to process industry customers and the addition of $3.4 million in backlog from Shaw-Nass Middle East, W.L.L., a non-wholly owned entity that was consolidated effective May 31, 2004 in accordance with FIN 46(R). The increase in backlog was partially offset by work performed under existing contracts during fiscal 2004.

Based on our market outlook, we expect revenues and gross profit levels to slightly increase for the first two quarters of fiscal 2005 with further improvement in revenues and gross profit for the remainder of fiscal 2005 given the recent increased demand.

Unconsolidated Entities

During fiscal 2004, we recognized earnings of $2.6 million (net of tax of $2.9 million) as compared to a loss of $3.0 million (net of a tax benefit of $1.6 million) for fiscal 2003 from operations of unconsolidated entities, including joint ventures, which are accounted for using the equity method. Included in the earnings of fiscal 2004 is $2.7 million related to the operations of Space Gateway, LLC, an unconsolidated joint venture acquired in the IT Group acquisition. In August 2004, we sold our interest for cash proceeds of $9.0 million and realized a gain on the sale of $0.8 million. The loss in fiscal 2003 includes a loss related to the winding down of operations for EntergyShaw (see Note 6 to our consolidated financial statements).

General and Administrative Expenses, Interest Expense and Income, Other Income (Expense), Income Taxes, and Other Comprehensive Income

General and administrative expenses were approximately $215.8 million in fiscal 2004 compared with approximately $197.7 million in fiscal 2003. Our general and administrative expenses for fiscal 2004 included amortization expense of $29.4 million related to the acceleration of amortization of certain software assets in the first quarter of fiscal 2004 as a result of a successful implementation of software systems (see Note 8 to our consolidated financial statements). The $29.4 million of accelerated depreciation includes $10.2 million of amortization that would have been recorded on these assets in fiscal 2004 had we not accelerated the amortization resulting in a net increase of general and administrative expenses of $19.2 million for fiscal 2004 over fiscal 2003. The remaining increase is due primarily to the inclusion of the results of Badger Technologies, which we acquired in April 2003, for a full year in 2004, the inclusion of the operating results of Shaw EDS which we acquired in

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December 2003 and the impact of the consolidation of several variable interest entities as required by FIN 46(R) which were previously reported on an unconsolidated basis.

For fiscal 2004, general and administrative expenses were 7.0% of revenues as compared to 6.0% for fiscal 2003. Without the additional amortization of $19.2 million, general and administrative expenses as a percentage of revenues were relatively consistent with fiscal 2003.

Interest expense was approximately $38.4 million for fiscal 2004, compared to approximately $32.0 million for fiscal 2003. The increase over prior year is primarily due to the issuance on March 17, 2003 of approximately $253.0 million, 10.75% Senior Notes, partially offset by a reduction in interest expense related to LYONs repurchases with a total amortized value of approximately $530.6 million in late fiscal 2003 and throughout fiscal 2004 (see Note 9 to our consolidated financial statements). Our interest costs also include the amortization of loan fees associated with the Senior Notes, the LYONs and the Credit Facility, as well as unused line of credit and letter of credit fees, and therefore, our interest expense is higher than would be expected based on our borrowing levels and the stated interest rates.

Interest income for fiscal 2004 decreased to approximately $1.7 million as compared to $5.4 million for fiscal 2003, as a result of lower levels of invested funds due to use of working capital, acquisitions and cash paid for the repurchase of a portion of the LYONs.

The LYONs repurchases in fiscal 2004 resulted in a loss of approximately $1.3 million which included expenses and the write-off of unamortized debt issuance costs (see Note 9 to our consolidated financial statements). We recognized a gain of $2.7 million on LYON repurchases in fiscal 2003.

We also recorded foreign currency transaction losses of $2.7 million in fiscal 2004, as compared to a gain of $0.1 million in fiscal 2003. These foreign currency transaction losses are primarily due to U.S. dollar denominated cash accounts held by our foreign subsidiaries whose functional currency strengthened compared to the U.S. dollar in fiscal 2004 and fiscal 2003. Although these foreign currency transaction gains (losses) are reflected in the statements of operations, substantially all of these gains (losses) did not directly impact our cash position on a consolidated basis.

Our effective tax rate was 33% for both fiscal 2004 and 2003. Our tax rate is significantly impacted by the mix of foreign (including foreign export revenues) versus domestic work. We did not pay any federal income taxes in fiscal 2004 primarily because of a projected taxable loss for fiscal 2004 and the availability of operating losses resulting from the IT Group and Stone & Webster acquisitions. In fiscal 2004 and 2003, we recorded a valuation allowance of $6.4 million and $2.4 million, respectively, against certain foreign net operating loss carryforwards. The valuation allowance reflects our judgment that it is more likely than not that a portion of the deferred tax assets will not be realized. We believe that the remaining deferred tax assets at August 31, 2004 amounting to $105.4 million, are realizable through future reversals of existing taxable temporary differences and future taxable income and the timing of future reversals of existing taxable temporary differences. Uncertainties that affect the ultimate realization of deferred tax assets include the risk of not having future taxable income. These factors have been considered in determining the valuation allowances. As of August 31, 2004, we have classified $53.5 million of deferred tax assets net of valuation allowances, related to net operating loss carryforwards, research and development credits and foreign tax credits as non-current as we do not anticipate realization of these amounts in the next twelve months. The long-term deferred tax assets have been offset by long-term deferred tax liabilities resulting in a $20.6 million net long-term deferred tax asset as of August 31, 2004.

The loss from discontinued operations of $4.7 million (net of tax of $3.1 million), in fiscal 2004 includes a $3.0 million (net of a tax benefit of $2.0 million) impairment charge related to an asset disposal plan of our hanger engineering and pipe support businesses within our Fabrication, Manufacturing and Distribution segment which are classified as discontinued operations (see Note 21 to the consolidated financial statements). On August 31, 2004, the assets of these discontinued operations were sold for $1.3 million in net cash proceeds.

Fiscal 2003 Compared to Fiscal 2002

General

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Our revenues by industry sector were as follows:

The increase in total revenue from 2002 to 2003 was primarily attributable to an increase in revenue from our E&I segment, partially reduced by the extended weakness in the domestic power market, which has had a pervasive negative impact on our ECM and Fabrication, Manufacturing and Distribution segment revenues. Revenue from the power generation sector was approximately $681.6 million less in fiscal 2003 than in fiscal 2002, as revenue from several large gas-fired power generation projects, which commenced in fiscal 2001 and early fiscal 2002, declined upon completion of those projects. The decrease in power industry revenue was offset by a $713.8 million increase in environmental and infrastructure revenue from fiscal 2002 to fiscal 2003, due primarily to the acquisition of the IT Group in May 2002 (see Note 4 of the notes to our consolidated financial statements), and a $182.0 million increase in process revenue, due primarily to a 600,000 tons-per-year ethylene plant project in China.

The following tables present our revenues by geographic region:

Revenues for projects in the United States increased $63.6 million for the year ended August 31, 2003 due primarily to growth in environmental and infrastructure revenues, partially offset by the previously mentioned decline in power generation revenues.

Revenues from international projects increased to $491.9 million for the year ended August 31, 2003 from $411.8 million for the year ended August 31, 2002. The revenue increase in the Asia Pacific Rim region was primarily due to the result of the work performed on the ethylene plant in China. The increase in revenue in Canada was due primarily to an environmental consulting unit acquired through the IT Group acquisition.

Backlog by industry sector is as follows:

The decrease in backlog of $853.4 million from August 31, 2002 is attributable to reduction in demand for gas-fired power generation services, which resulted in a decrease in new orders for our services. Since August 31, 2002, the decline in power generation awards has been partially offset by increases in awards for environmental and infrastructure services, services to the process industry, and nuclear maintenance services. Approximately 91% of

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the backlog relates to domestic projects and approximately 36% of the backlog relates to work projected at the time to be completed during the twelve months following August 31, 2003. Power generation backlog at August 31, 2003 does not include our $565 million fixed-price EPC contract (signed and announced in September 2003) to build a combined-cycle power plant in Queens, New York. We included this project in our backlog when financing for the project was completed in 2004.

Backlog is largely a reflection of the broader economic trends being experienced by our customers and is important in anticipating operational needs. Backlog is not a measure defined in generally accepted accounting principles, and our methodology in determining backlog may not be comparable to the methodology used by other companies in determining their backlog. We cannot provide any assurance that revenues projected in our backlog will be realized, or if realized, will result in profits.

The following presents a comparison of our operating results (and certain other information) for the year ended August 31, 2003 as compared with the year ended August 31, 2002 for our three business segments. We have conformed our prior year segment financial information to be consistent with our current year presentation of our reorganized segments.

E&I Segment

The increase in revenues is primarily attributable to our acquisition of the IT Group assets and operations in May 2002, as twelve months of revenues are included in fiscal 2003 as compared to four months in fiscal 2002. (see Note 4 of the notes to our consolidated financial statements).

The increase in gross profit was primarily attributable to our acquisition of the IT Group assets and operations in May 2002. Gross profit was increased (cost of revenues decreased) by approximately $19.3 million in fiscal 2003 and $2.8 million in fiscal 2002 for the amortization of asset/liability adjustments to the fair value of contracts acquired in the IT Group acquisition. In addition, gross profit was increased (cost of revenues decreased) by approximately $12.2 million in fiscal 2003 and $2.8 million in fiscal 2002 for the usage of accrued loss reserves related to contracts acquired in the IT Group acquisition (see Note 4 and Note 8 of the notes to our consolidated financial statements).

The reduction in the gross profit percentage in fiscal 2003 compared to fiscal 2002 was attributable to lower margin contracts associated with the businesses acquired in the IT Group acquisition. The difference in the gross profit percentages between our pre-IT Group environmental and infrastructure operations (primarily infrastructure and hazardous material clean up and disposal) and those acquired in the IT Group acquisition (environmental clean-up, landfills and facilities management) is primarily attributable to differences in customers, competition and mix of services.

Backlog for the E&I segment increased to approximately $2.8 billion as of August 31, 2003 from approximately $2.3 billion as of August 31, 2002.

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ECM Segment

The following tables present ECM revenues from customers in the following industry sectors:

The decrease in total segment revenue from fiscal 2002 to fiscal 2003 was due to the downturn in the domestic power market, specifically the decline in gas-fired power generation projects and power engineering and consulting activity which reduced new orders for our ECM services, partially offset by an increase in revenue from process projects and nuclear maintenance and restart projects. Process industry revenues increased primarily due to work on the ethylene plant project in China that is scheduled to continue into fiscal 2005.

Gross profit for the ECM segment for fiscal 2003 decreased from fiscal 2002, due primarily to the reduction of estimated margins on certain contracts for the construction of new gas-fired power plants, offset by increases in margin on nuclear maintenance and restart projects and the ethylene plant project in China. The ethylene plant in China contributed significantly more to gross margin in the fourth quarter of 2003 than in each of the first three quarters due to a reduction in the estimated cost at completion. The impact of the reduction in the estimated cost positively impacted gross profit in the fourth quarter of 2003 by $6.1 million. Gross margin for the third and fourth quarters of 2003 also was positively impacted by increasing activity on the TVA nuclear restart project and recognition of components of project incentives earned based on our performance to-date on this project. Further, in the fourth quarter of 2003, we recorded $5.0 million in revenue that we earned as a fee for providing a letter of credit to an independent power producer (IPP) to secure the IPP’s power purchase agreement.

As EPC projects that began in fiscal 2001 and early fiscal 2002 are completed and their project costs finalized, the ECM segment’s margins have been, and we expect will continue to be, positively or negatively impacted by contract completion negotiations with customers and vendors on such projects. We recognized $33.6 million in margin in 2003 as a result of the favorable resolution of various contingencies, contract claims and backcharges related to projects that were substantially complete at August 31, 2002. During fiscal 2003, we also recognized $4.3 million in margin as a result of the favorable resolution of estimated project obligations which were recorded when we acquired Stone & Webster in fiscal 2000.

Gross profit percentage was negatively impacted by the Covert and Harquahala projects (the NEG projects), on which we recorded revenues of $433.4 million during 2003 and a $42.8 million charge ($33.1 million of which resulted from reversal of gross profit recorded prior to fiscal 2003) related to the NEG projects that negatively impacted the ECM segment’s gross profit by 4.6% for fiscal 2003. This charge was a result of increased estimated costs to complete these projects combined with an agreement with the owners of these projects and their lenders that increased the contract prices by a total of $65.0 million and converted the contracts from target-price to fixed-price (see Note 20 of the notes to our consolidated financial statements for a discussion of claims related to major ECM projects, including additional discussion of the Covert and Harquahala projects). Of the $42.8 million loss recorded during 2003 on the NEG projects, $4.9 million was recorded in the fourth quarter reflecting a $19.2 million increase in estimated cost at completion of the projects, offset by an increase in expected recovery of claims from NEG and backcharges and liquidated damages expected from vendors and subcontractors totaling $14.3 million.

Gross profit percentage was negatively impacted by the AES Wolf Hollow project, on which we recorded revenues of $43.1 million during 2003 with a reversal of previously recorded profit of $2.3 million. On this project, we recorded claims receivable from our customer, AES, of $25.4 million and claims, backcharges and other cost recovery receivables from subcontractors, vendors and others of $7.2 million (see Note 20 of the notes to our consolidated financial statements for additional discussion of the Wolf Hollow project) in 2003.

We reversed previously recorded profit of $4.3 million in the fourth quarter of 2003 resulting from the settlement with our customer of disputed change orders and other items on our target-price EPC contract to build a combined-cycle cogeneration facility near Philadelphia, Pennsylvania. The settlement agreement eliminates our exposure to

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schedule risk and related liquidated damages, maintains our guaranteed minimum fee and provides for incentives that allow us to earn profit in excess of the minimum fee.

In October 2003, we entered into a settlement agreement with a customer for which we executed three separate projects prior to fiscal 2003. Under the settlement agreement, we received $9.6 million representing the return of amounts our customer had drawn on our letter of credit and payment for costs incurred which were previously in dispute. We will record no gain or loss on the settlement because the settlement proceeds are equal to the net assets recorded.

Gross profit for the year ended August 31, 2003 was increased (cost of revenues decreased) by approximately $7.9 million in fiscal 2003 and $32.0 million in fiscal 2002 for the amortization of contract liability adjustments related to contracts acquired in the Stone & Webster acquisition in 2000 (see Note 8 of the notes to our consolidated financial statements).

For the year ended August 31, 2003, less ECM segment revenues were derived from large equipment purchases. Such revenues were approximately $159.0 million for the year ended August 31, 2003, compared to approximately $540.0 million for the year ended August 31, 2002.

Segment backlog at August 31, 2003 was approximately $1.9 billion, compared with approximately $3.0 billion at August 31, 2002, and was comprised of the following:

The ECM segment’s backlog declined from August 31, 2002 because the amount of work performed on power generation contracts was not fully replaced with new orders due to the downturn in demand for power generation services. Our fossil fuel EPC backlog does not include our $565 million fixed-price EPC contract (signed and announced in September 2003) to build a combined-cycle power plant in Queens, New York.

Fabrication, Manufacturing and Distribution Segment

The decreases in revenues and gross profit percentages in fiscal 2003 versus fiscal 2002 were attributable to reduced domestic demand, primarily from power generation customers, without offsetting increases in other industry sectors. The reduced demand for the segment’s products has had a negative impact on pricing and gross profit. Backlog for this segment has decreased from $274.0 million at August 31, 2002 to $99.1 million at August 31, 2003. This decrease includes a $75.5 reduction of backlog from one customer in the power industry.

As a result of the current market situation, we have decided to significantly reduce or cease production at certain smaller facilities, consolidate certain operations, and implement certain other cost savings programs for this segment. Further, we have suspended operations at our facility in Venezuela due to the political situation in that

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country.

Unconsolidated Subsidiaries

During fiscal 2003, we recognized a loss of $3.0 million (net of taxes of $1.6 million) from operations of unconsolidated subsidiaries, including joint ventures, which are accounted for using the equity method. These losses were primarily attributable to three joint ventures including our Entergy/Shaw, Shaw-Nass and Shaw YPC Piping (Nanjing) Co. LTD joint venture. The Entergy/Shaw joint venture has no active projects as of August 31, 2003. As of August 31, 2003, we have a negative investment balance of $2.2 million, and we expect to continue to fund the joint venture until it is dissolved as all projects were completed as of August 31, 2003. The loss in the Shaw-Nass joint venture was due to weaker sales of fabricated pipe in the Middle East in fiscal 2003 as compared to 2002 while the loss in the China joint venture reflects costs incurred in the early stages of the joint venture until its facility is running at full capacity which is scheduled for early calendar year 2004. In fiscal 2002, we realized income of approximately $2.9 million (net of taxes of $1.6 million) from the Entergy/Shaw joint venture and losses of $0.7 million (net of taxes of $0.4 million) from Shaw-Nass net of taxes due to the operations of these unconsolidated subsidiaries and joint ventures.

General and Administrative Expenses, Interest Expense and Income, Other Income (Expense), Income Taxes, and Other Comprehensive Income

General and administrative expenses increased to approximately $197.7 million in fiscal 2003, compared with approximately $157.8 million in fiscal 2002. As a percentage of revenues, general and administrative expenses increased to 6.0% in fiscal 2003 compared to 5.0% in fiscal 2002. A substantial portion of the approximate $39.9 million increase in general and administrative costs are attributable to the operations of the E&I segment (comprised largely of the IT Group operations which we acquired during the third quarter of fiscal 2002). We also incurred increased depreciation and facilities costs in fiscal 2003 resulting from capital projects and the move into our new corporate facility in Baton Rouge, Louisiana completed in the latter part of fiscal 2002. General and administrative costs for the fourth quarter and the fiscal year 2003 were reduced by $3.4 million resulting from the favorable resolution of estimated obligations recorded in the acquisition of Stone & Webster in fiscal 2000.

Interest expense was approximately $32.0 million in fiscal 2003, compared to approximately $23.0 million in fiscal 2002. The increase over prior year is primarily due to the issuance on March 17, 2003 of approximately $253 million principal amount of 7-year, 10.75% Senior Notes, partially offset by a reduction in interest expense related to the LYONs repurchase with an amortized value of approximately $256.7 million in March 2003 (see Note 9 of the notes to our consolidated financial statements). Our interest costs also include the amortization of loan fees associated with the Senior Notes, the LYONs and the Credit Facility, as well as unused line of credit and letter of credit fees, and therefore, our interest expense is higher than would be expected based on our borrowing levels and the stated interest rates. A significant portion of our interest expense (accretion of zero-coupon discount interest and amortization of loan fees) represents non-cash charges.

Interest income in fiscal 2003 decreased to approximately $5.4 million from $11.5 million in fiscal 2002 as a result of lower levels of invested funds due to use of working capital, cash paid for the repurchase of a portion of the LYONs, and the purchase of treasury stock.

For fiscal 2003, other income (expense) included a charge of approximately $12.4 million for the write-off of (i) investments in securities available for sale of Orion of approximately $6.6 million, (ii) accounts and claims receivable due from Orion of approximately $5.0 million, and (iii) other accounts receivable of approximately $0.8 million. Also included in other income (expense) for fiscal 2003 were gains of approximately $2.0 million and $0.8 million, net of expenses and the write-off of unamortized debt issuance costs, related to the March 2003 and August 2003, respectively, repurchases of portions of the LYONs (see Note 9 of the notes to our consolidated financial statements).

Our effective tax rate was 33% for fiscal 2003 compared to 36% for fiscal 2002. Our tax rate is significantly impacted by the mix of foreign (including foreign export revenues) versus domestic work. The decrease in the tax rate in fiscal 2003 versus fiscal 2002 is due primarily to the decrease in income before taxes, and the related increase in the ratio of favorable permanent differences to income before taxes. Additionally, the increased foreign income in

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fiscal 2003 had a lower overall rate of tax than domestic income. We did not pay any federal income taxes in fiscal 2003 primarily because of a taxable loss for the fiscal 2003 year and the utilization of operating losses resulting from the IT Group and Stone & Webster acquisitions. In fiscal 2003, we established a valuation allowance against the deferred tax asset for the Venezuelan net operating losses and in fiscal 2002, we established a valuation allowance against the deferred tax asset for the Australian net operating losses. The valuation allowance reflects our judgment that it is more likely than not that a portion of the deferred tax assets will not be realized. We believe that the remaining deferred tax assets at August 31, 2003, amounting to $95.9 million, are realizable through future reversals of existing taxable temporary differences and future taxable income. Uncertainties that affect the ultimate realization of deferred tax assets include the risk of not having future taxable income. This factor has been considered in determining the valuation allowance.

During fiscal 2003, the accumulated benefit obligations exceeded the fair value of plan assets for two of our United Kingdom (U.K.) defined benefit retirement plans and our Canadian defined benefit retirement plan, and a liability of $14.9 million, net of tax was recorded (see Note 17 of the notes to our consolidated financial statements). In accordance with SFAS No. 87, “Employers Accounting for Pensions,” the increase in the minimum liability is recorded through a direct charge to stockholders’ equity and is reflected, net of tax, as a component of accumulated other comprehensive income (loss) on the consolidated balance sheet as of August 31, 2003. This liability will likely require us to increase our future cash contributions to the plan.

Liquidity and Capital Resources

Credit Facilities

As of August 31, 2004, we had a $300 million Credit Facility that provides for both revolving credit loans and letters of credit within the $300 million limit. We primarily use this Credit Facility for the issuance of letters of credit which relate to our projects and are issued in the normal course of business. From time to time, we also use the Credit Facility for working capital needs and to fund fixed asset purchases and acquisitions. On August 31, 2004, we did not have outstanding borrowings under the Credit Facility but had outstanding letters of credit of approximately $215.6 million.

Effective August 31, 2004, we received approval from our bank lenders for a fourth amendment to our Credit Facility (Fourth Amendment) to amend various financial covenants and certain other terms in our Credit Facility. In particular, the Fourth Amendment (i) maintained the maximum leverage ratio at 3.5x, (ii) expanded the definition of EBITDA, as defined by the Credit Facility, to exclude charges related to certain potential divestiture and restructuring charges in fiscal 2005, (iii) provided for the ability to offset proceeds from the sale of assets against capital expenditures in calculating the fixed charge coverage ratio and maximum capital expenditure covenant and (iv) clarified the treatment of restricted cash in calculating the minimum working capital covenant.

The Credit Facility provides for a first lien on certain property, including equipment and real estate as collateral. We also have the ability to obtain unsecured performance letters of credit outside of the Credit Facility of up to $150 million. The Fourth Amendment did not otherwise change the interest rates or the total capacity to borrow or obtain letters of credit under the Credit Facility.

The Credit Facility, as amended, contains certain financial covenants, including:

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a maximum leverage ratio of 3.5x through May 31, 2005 and 3.0x thereafter;

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a minimum fixed charge coverage ratio of 2.0x;