SHAW GROUP INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

[X] Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

FOR THE FISCAL YEAR ENDED AUGUST 31, 2001

or

[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

Commission File Number 0-22992

THE SHAW GROUP INC.
(Exact name of registrant as specified in its charter)

LOUISIANA 72-1106167
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

8545 UNITED PLAZA BOULEVARD
BATON ROUGE, LOUISIANA 70809
(Address of principal executive offices) (zip code)

(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. [ ]

The aggregate market value of the 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 November 21, 2001 was approximately $1.1 billion.

The number of shares of the Registrant's Common Stock outstanding at November
21, 2001 was 40,807,866.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive proxy statement to be prepared for use
in connection with the Registrant's 2002 Annual Meeting of Shareholders to be
held in January 2002 will be incorporated by reference into Part III of this
Form 10-K.

PART I

ITEM 1. BUSINESS

GENERAL

The Shaw Group Inc. ("Shaw" or the "Company") is the world's only
vertically-integrated provider of complete piping systems and comprehensive
engineering, procurement and construction services to the power generation
industry. Shaw is the largest supplier of fabricated piping systems in the
United States and a leading supplier worldwide, having installed piping systems
in over 375 power plants with an aggregate generation capacity in excess of
200,000 megawatts. While approximately 79% of the Company's backlog at August
31, 2001 was attributable to the power generation industry, the Company also
provides services to the process industries (including petrochemical, chemical
and refining industries), and the environmental and infrastructure industries.

Effective July 14, 2000, the Company purchased most of the operating assets of
Stone & Webster, Incorporated ("Stone & Webster"), a leading global provider of
engineering, procurement and consultation services to the power, process,
environmental and infrastructure markets. Stone & Webster, which was founded in
1889, has focused on the power generation industry for much of its existence.
The acquisition of Stone & Webster has more than doubled the size of the
Company, increasing significantly the Company's engineering, procurement and
construction ("EPC") businesses and has significantly impacted its operations
and working capital requirements. For additional information concerning the
Stone & Webster acquisition, see Note 3 of Notes to Consolidated Financial
Statements.

In addition to the Stone & Webster acquisition, the Company has taken a number
of important steps over the last several years to capitalize on the growing
demand for new power generation capacity. These include:

o contracting with a leading manufacturer of gas turbines to
supply at least 90% of the pipe fabrication requirements
related to its gas turbine sales through the year 2004; the
Company has provided piping systems for over 450 turbines
since inception of this agreement in 1999; and

o partnering with Entergy Corporation to create EntergyShaw,
L.L.C. ("EntergyShaw"), an equally-owned and equally-managed
company that has developed cost-effective, combined-cycle
power plants for Entergy Corporation and other customers in
the unregulated power market using standard design concepts,
where possible.

The Company was founded in 1987 and has expanded rapidly through internal growth
and the completion and integration of a series of strategic acquisitions. The
Company's fiscal 2001 revenues were approximately $1.5 billion and its backlog
at August 31, 2001 was approximately $4.5 billion. The Company currently has
offices and operations in North America, South America, Europe, the Middle East
and Asia-Pacific and has approximately 11,000 employees.

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 the Company or Shaw or its management "believes,"
"expects," "anticipates," "plans," or other similar expressions) are
forward-looking statements. These forward-looking statements are based on the
Company's current expectations and beliefs concerning future developments and
their potential effects on the Company. There can be no assurance that future
developments affecting the Company will be those anticipated by the Company.
These forward-looking statements involve significant risks and uncertainties
(some of which are beyond the control of the Company) and assumptions. They are
subject to change based upon various factors, including but not limited to the
following risks and uncertainties: changes in the demand for and market
acceptance of the Company's products and services; changes in general economic
conditions, and, specifically, changes in the rate of economic growth in the
United States and other major international economies; the presence of
competitors with greater financial resources and the impact of competitive
products, services and pricing; the cyclical nature of the individual markets in
which the Company's customers operate; changes in investment by the energy,
power and environmental industries; the availability of qualified engineers and
other professional staff needed to execute contracts; the uncertain timing of
awards and contracts; cost overruns on fixed, maximum or unit priced contracts;
cost overruns which negatively affect fees to be earned or cost variances to be
shared on cost plus contracts; changes in trade, monetary and fiscal

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policies worldwide; currency fluctuations; the effect of the Company's policies,
including but not limited to the amount and rate of growth of Company expenses;
the continued availability to the Company of adequate funding sources; delays or
difficulties in the production, delivery or installation of products and the
provision of services; the ability of the Company to successfully integrate
acquisitions; the protection and validity of patents and other intellectual
property; and various legal, regulatory and litigation risks. Should one or more
of these risks or uncertainties materialize, or should any of the Company's
assumptions prove incorrect, actual results may vary in material respects from
those projected in the forward-looking statements. The Company undertakes 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 detailed
discussion of some of the foregoing risks and uncertainties, see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -Risk Factors" and the Company's reports and registration statements
filed with the Securities and Exchange Commission including its Form 10-K and
Form 10-Q reports and on the Company's web site under the heading "Forward
Looking Statement." These documents are also available from the Securities and
Exchange Commission or from the Investor Relations Department of Shaw. For more
information on the Company and announcements it makes from time to time on a
regional basis, visit its web site at www.shawgrp.com.

SUBSEQUENT EVENTS

On September 14, 2001, the Company announced that its Board of Directors had
authorized the Company to repurchase shares of its no par value common stock
("Common Stock"), depending on market conditions, up to a limit of $100 million.
As of November 19, 2001, the Company had purchased a total of 333,000 shares at
a cost of approximately $10.1 million.

FISCAL 2001 DEVELOPMENTS

Issuance of Rights. On July 9, 2001, the Company's Board of Directors adopted a
stockholder rights plan and declared a dividend distribution of one Preferred
Share Purchase Right (a "Right") for each outstanding share of the Company's
Common Stock on July 31, 2001. The Rights are intended to enable all Company
shareholders to realize the long-term value of their investment in the Company
in the event of a takeover of the Company. The Rights will not prevent a
takeover, but should encourage anyone seeking to acquire the Company to
negotiate with the Board of Directors prior to attempting a takeover. The Rights
are governed by a Rights Agreement between the Company and First Union National
Bank, as Rights Agent.

Issuance and Sale of LYONs. Effective May 1, 2001, the Company issued and sold
$790 million (including $200 million to cover over allotments) aggregate
principal amount at maturity of its 20-year, zero-coupon, unsecured, convertible
Liquid Yield Option (TM) Notes (the "LYONs") due 2021. The LYONs were issued on
an original discount basis of $639.23 per LYON, providing the holders with a
yield-to-maturity of 2.25%. The LYONs are convertible by the holders into shares
of the Company's Common Stock at a fixed ratio of 8.2988 shares per $1,000 face
value of the LYONs, or an effective conversion price of $77.03 per share at
issuance. The Company realized net proceeds, after expenses (including
underwriting discounts), from the issuance of the LYONs of approximately $490
million.

The holders of the debt have the right to require the Company to repurchase the
debt on the third, fifth, tenth, and fifteenth anniversaries at the accreted
value. The Company has the right to fund such repurchases with shares of its
Common Stock, cash, or a combination of Common Stock and cash. The debt holders
also have the right to require the Company to repurchase the debt for cash, at
the accreted value, if there is a change in control of the Company, as defined,
occurring on or before May 1, 2006. The Company may redeem all or a portion of
the debt at the accreted value, through cash payments, at any time after May 1,
2006 (see Note 7 of Notes to Consolidated Financial Statements).

Nanjing, China Ethylene Plant Project. On February 6, 2001, the Company and
BASF-YPC Company Ltd. signed a contract for the engineering, procurement and
construction of a 600,000 tons-per-year ethylene plant to be built in Nanjing,
PR China. BASF-YPC Company Ltd. is a joint venture between BASF
Aktiengesellschaft and China Petroleum & Chemical Corporation. Pursuant to the
contract, the Company will be responsible for engineering, procurement and
construction services. In addition, certain plant equipment and materials
acquired by the Company in the Stone & Webster acquisition will be utilized in
connection with the project.

Two-for-one Common Stock Split. On November 10, 2000, the Company's Board of
Directors declared a two-for-one Common Stock split that was distributed on
December 15, 2000 to all shareholders of record on December 1, 2000.

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Stock Offering. In October 2000, the Company completed the sale of 4,837,338
shares (including 1,200,000 shares to cover over-allotments) of its Common Stock
in an underwritten public offering at a price of $31.75 per share, less
underwriting discounts and commissions. The net proceeds to the Company, less
underwriting discounts and commissions and other offering expenses, totaled
approximately $144.8 million and were used to pay amounts outstanding under the
Company's primary revolving line of credit facility. The Company's primary
revolving line of credit facility has been used to provide working capital and
to fund fixed asset purchases and subsidiary acquisitions. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

EntergyShaw. On September 18, 2000, the Company executed a definitive agreement
with Entergy Corporation ("Entergy") governing the parties' relationship with
respect to EntergyShaw, the equally-owned and equally-managed company formed by
the parties on August 30, 2000. Subsequent to the execution of the letter of
intent relating to this joint venture on June 2, 2000, Entergy and FPL Group,
Inc., the parent of Florida Power & Light, announced a merger, but on August 2,
2001, these parties announced that they were abandoning their merger plans.
EntergyShaw's initial focus is the construction of power plants in North America
and Europe for Entergy's unregulated wholesale operations relating to the
installation of turbines that Entergy has previously ordered for these plants.
While the Company believes that EntergyShaw will manage the construction of most
of such power plants, the Company can provide no assurances regarding the number
of future power plant construction projects that Entergy will actually commence,
or the number of turbines (specifically those previously ordered by Entergy)
that Entergy will actually dedicate to any such future projects. During fiscal
2001, EntergyShaw and the Company began work on two projects for Entergy which
will have a total of six turbines. The Company expects to provide the
engineering, procurement, construction and pipe fabrication services for
substantially all of EntergyShaw's power generation projects. Under the terms of
the joint venture, the Company must offer EntergyShaw a right of first refusal
on opportunities to provide fully bundled engineering, procurement and
construction opportunities that it receives after December 31, 2000.

BUSINESS STRATEGY

The Company's business strategy is to increase shareholder value by capitalizing
on the significant opportunities in the high-growth power sector and other
select markets. The Company intends to achieve this goal by:

Capitalizing on the complementary strengths Stone & Webster brings to
Shaw. As a result of the Stone & Webster acquisition, the Company is
uniquely positioned as the world's only vertically-integrated provider
of complete piping systems and comprehensive engineering, procurement
and construction services to the power generation industry. The Company
believes that this combination of abilities reduces lead times and
costs to its customers.

Utilizing disciplined project acquisition and management. The Company
focuses its activities on cost reimbursable and negotiated lump-sum
work with well-established clients. The Company believes these types of
contracts reduce its exposure to unanticipated and unrecoverable cost
overruns. Negotiated lump-sum contracts are obtained by direct
negotiation rather than by competitive bid. In instances where the
Company enters into fixed-price, lump-sum contracts, Shaw will rely on
its management team's long history of executing erection and
installation projects on time and within budget coupled with
disciplined bidding practices to limit its exposure. In addition, the
Company employs rigorous contract management controls to identify and
reduce the risk of cost overruns.

Leveraging Shaw's technology and intellectual property advantage. The
Company will continue to employ its technology and intellectual
property to further reduce costs and to better serve Shaw's customers.
The Company's technologies include:

o Induction pipe bending technology. The Company believes its
induction pipe bending technology is the most sophisticated,
efficient technology available. Induction bending is a
technique that 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, Shaw's technology provides a more uniform
and cost-effective product that is generally considered to be
stronger and less prone to structural fatigue.

o Proprietary ethylene technology. The Company believes it has a
leading position in technology associated with the process
design of plants that produce ethylene. The Company has
supplied process technology for approximately 35%

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of the world's ethylene capacity constructed since 1995.

o Reference plant design. The Company is developing a
standardized design or "reference plant" for use by
EntergyShaw in power plants. This standardized design can be
used on multiple installations and should produce significant
cost savings to customers.

o Proprietary customer-focused computer software. The Company
has developed proprietary computer software to aid in project
and process management and the analysis of power delivery.
This software includes:

o proprietary SHAW-MAN(TM) and other software programs
which enhance a customer's ability to plan, schedule
and track projects and reduce installation costs and
cycle times; and

o proprietary computer software products which aid in
the effective analysis of the electric power delivery
business.

Pursuing strategic relationships and maintaining a diverse customer
base. The Company intends to continue to enter into alliance agreements
and strategic partnerships with current and future customers. Shaw's
piping alliance partners include Aalborg Industries, Air Products and
Chemicals, Inc., BASF AG, Bechtel Corporation, The Dow Chemical
Company, Hitachi, and J. Ray McDermott. Because many of Shaw's
customers are active in more than one of the industries the Company
serves, they have historically remained significant purchasers of its
piping systems and engineering, procurement and construction services
despite fluctuations in activity within any one particular industry.
Shaw's alliance and partnership agreements enhance its ability to
obtain contracts for individual projects by eliminating formal bid
preparation. These agreements have tended to provide Shaw with a steady
source of projects, minimize the impact of short-term pricing
volatility and enable the Company to anticipate a larger portion of
future revenues. The EntergyShaw joint venture and the Company's
contract to provide piping fabrication services to a major manufacturer
of gas turbines are examples of strategic relationships which the
Company believes will provide significant future revenues and new
business opportunities.

Pursuing selective acquisitions. The Company intends to continue to
pursue selective acquisitions of businesses or assets that will expand
or complement Shaw's current portfolio of products and services. The
Company has established a successful track record of quickly and
efficiently integrating its acquisitions. Shaw typically establishes
integration teams led by its senior executives early in the acquisition
process.

VERTICALLY-INTEGRATED PRODUCTS AND SERVICES

The Company has segregated its business into two segments: the integrated EPC
services segment (previously called pipe services) and the manufacturing and
distribution segment. The integrated EPC services segment provides piping system
fabrication and a range of design and construction related services, including
design, engineering, construction, procurement, maintenance, and consulting
services. The manufacturing and distribution segment manufactures and
distributes specialty stainless, alloy and carbon steel pipe fittings. These
fittings include elbows, tees, reducers and stub ends.

INTEGRATED EPC SERVICES

Piping Systems Fabrication

The Company provides integrated piping systems and services for new
construction, site expansion and retrofit projects. Piping system integration
can account for as much as 40% of the total man-hours associated with
constructing a power generation or materials processing facility. Shaw provides
fabrication of complex piping systems from raw materials including carbon steel,
stainless steel and other alloys, nickel, titanium and aluminum. The Company
fabricates pipe by cutting it to length, welding fittings on the pipe and
bending the pipe, each to precise customer specifications. The Company currently
operates pipe fabrication facilities in Louisiana, Oklahoma, South Carolina,
Texas, Utah, Virginia, the United Kingdom, Venezuela and Bahrain, where Shaw has
a 49% interest in a joint venture. The Company's 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. Shaw can fabricate pipe
assemblies up to 100 feet in length and weighing up to 45 tons.

A significant portion of the Company's work consists of the fabrication of
piping systems for use in high pressure, high

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temperature or corrosive applications, including systems designed to withstand
pressures of up to 2,700 pounds per square inch and temperatures of up to 1,020
degrees Fahrenheit. In order to ensure that Shaw's products can withstand these
types of extreme conditions, the Company has set rigid quality control standards
for all of its products. In addition to visual inspection, the Company uses
technologically advanced methods to confirm that its products meet
specifications, including radiography, hydro-testing, dye penetration and
ultrasonic flaw detection.

In fiscal 1994, the Company began purchasing sophisticated induction pipe
bending equipment, which significantly increased its capacity to fabricate
piping systems in both volume and complexity. In addition, this equipment
enables Shaw to substitute pipe bending for the more traditional cutting and
welding techniques on certain projects, resulting in labor, time and raw
material savings and product strengthening. In January 1998, the Company
acquired Cojafex B.V. of Rotterdam, including the technology for certain
induction pipe bending machines used for bending pipe and other carbon steel and
alloy items for industrial, commercial and architectural applications.

Primarily because of the significant reductions in labor, time and material
costs associated with pipe bending techniques, the market for pipe fabrication
is increasingly moving in the direction of bending according to customer
specifications. The Company believes that its technology is the most advanced of
its kind in the world and gives Shaw a technological advantage in this growing
segment of the pipe fabrication market.

The Company currently has eight induction pipe bending machines in operation
capable of bending pipe up to 66 inches in diameter with wall thicknesses of up
to five inches. The machine model numbers, locations and pipe bending
capabilities are presented in the following table:

Geographical sourcing requirements, local labor rates and transportation
considerations may make it difficult for the Company to use its domestic
fabrication facilities to compete on many international projects. Accordingly,
the Company has established fabrication facilities abroad to allow Shaw to bid
more competitively for international projects. The Company currently operates
fabrication facilities in Venezuela, the United Kingdom and Bahrain. In November
1993, the Company entered into a joint-venture agreement to construct and
operate a fabrication facility in Bahrain. Shaw's Bahrainian joint-venture
facility is one of the first modern pipe fabrication facilities in the Middle
East.

Engineering and Design

Shaw's professionals provide a broad range of engineering, design and
design-related services. The Company's engineering capabilities include civil,
structural, mechanical, electrical, environmental and water resources. For each
project, Shaw identifies the project requirements and then integrates and
coordinates the various design elements. Other critical tasks in the design
process may include value analysis and the assessment of construction and
maintenance requirements.

The Company has proprietary software SHAW-MAN(TM), which utilizes bar code
technology to efficiently manage and control the movement of materials through
each stage of the fabrication process. This program enhances a customer's
planning and scheduling, reducing total installed costs and project cycle times.

Construction, Procurement and Maintenance

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The Company provides construction and construction management services. Shaw
often manages the procurement of materials, subcontractors and craft labor. The
Company believes it has significant expertise in effectively and efficiently
managing this process. Depending on the project, Shaw may function as the
primary contractor or as a subcontractor to another firm. On some projects, the
Company functions as a construction manager, engaged by the customer to oversee
another contractor's compliance with design specifications and contracting
terms. Under operations and maintenance contracts, Shaw conducts repair,
renovation, predictive and preventative services to customer facilities
worldwide.

Consulting

The Company provides technical and economic analysis and recommendations to
owners, investors, developers, operators and governments in the global power
generation industry. Shaw's services include, among others, competitive market
valuations, asset valuations, assessment of stranded costs, plant technical
descriptions and energy demand modeling. The Company has particular expertise in
the electronic simulation and analysis of power transmission and distribution
systems. Shaw has also developed software, educational programs and customized
hardware solutions to the electric power industry. The Company's activities in
this area have grown substantially over the past several years in response to
deregulation of the power industry domestically and privatization and
deregulation initiatives abroad.

MANUFACTURING AND DISTRIBUTION

The Company manufactures specialty stainless, alloy and carbon steel pipe
fittings for use in pipe fabrication. These pipe fittings include stainless and
other alloy elbows, tees, reducers and stub ends ranging in size from 1/2 inch
to 48 inches and heavy wall carbon and chrome elbows, tees, caps and reducers
with wall thicknesses of up to 3 1/2 inches. Shaw operates a manufacturing
facility in Shreveport, Louisiana, which distributes its fittings to Shaw's
integrated EPC services operations and to third parties. The Company also
operates several distribution centers in the U.S., which distribute its products
and products manufactured by third parties. Manufacturing pipe fittings enables
Shaw to realize greater efficiencies in the purchase of raw materials, reduces
overall lead times and lowers total installed costs. The manufacturing and
distribution segment distributes its products to other Shaw companies, as well
as to third parties.

SEGMENT FINANCIAL DATA AND EXPORT SALE INFORMATION

See Note 13 of Notes to Consolidated Financial Statements for detailed financial
information regarding each business segment and export sale information.

MARKETS SERVED

Power Generation

Industry Overview. According to the Department of Energy, demand for domestic
electricity generation has increased substantially since 1990 while capacity has
remained relatively flat. This imbalance, coupled with deregulation of the power
industry and decommissioning of nuclear plants, has resulted in a surge in
domestic construction of power plants. The Energy Information Administration
("EIA") has projected that more than 1,000 new plants with a total of more than
300 gigawatts of capacity will be needed by 2020 to meet growing demand and to
offset retirements of nuclear and fossil fuel plants. Approximately 90% of new
capacity is projected to be combined-cycle or combustion turbine technology
fueled by natural gas or both oil and gas. The Company's backlog has increased
significantly as a result of this demand. In addition to significant capacity
demand, much of the U.S. is in the process of deregulating the production and
sale of electricity. As of September 2001, 24 states and the District of
Columbia have adopted legislation or regulations to deregulate and an additional
18 states are considering such actions. Independent power producers and merchant
power plants have and continue to develop additional generation capacity,
typically new plants, which compete directly with existing utilities, in
response to the opportunity presented by deregulation. Deregulation also creates
demand for Shaw from existing utilities that must upgrade or develop new power
plants to remain competitive. The Company expects many existing plants to be
"repowered" or substantially upgraded by replacing all or most of the plant with
more efficient systems that can profitably sell power into competitive markets.

The decommissioning and decontamination of nuclear power plants is another
business in which the Company participates. This business consists of shutting
down and safely removing a facility from service while reducing the residual
radioactivity

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to a level that permits release of the property for unrestricted use and
termination of the license. The recent trend appears to be toward either
extension of licenses or shutdown. The EIA estimates that of the 98 gigawatts of
domestic nuclear capacity available in 2001, 10 gigawatts are projected to be
retired by 2020, and no new plants are expected to be constructed. Stone &
Webster is currently performing decommissioning on one of the three major
nuclear power plant decommissioning projects. Stone & Webster is also active in
both the upgrade and restart market areas and is currently working on power
upgrades and assisting plant owners in evaluating facility restarts.

Shaw's Services. Approximately $3.5 billion, or 79%, of the Company's backlog as
of August 31, 2001, consists of work in the power generation industry. The
Company is the largest supplier of fabricated piping systems for power
generation facilities in the U.S. and a leading supplier worldwide, having
installed piping systems in over 375 power plants with an aggregate generation
capacity in excess of 200,000 megawatts. Piping system integration can account
for as much as 40% of the total man-hours associated with constructing a power
generation or materials processing facility. As a result of the Company's
acquisition in fiscal 2000 of Stone & Webster (a company which has concentrated
on the power sector since its formation in 1889), Shaw is also able to provide a
full range of engineering, procurement and construction services to power
projects on a global basis. In addition, the Company provides 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. The Company attempts to concentrate on
more complicated, non-commodity type projects where its technology, historical
know-how and project management skills can add value to the project.

The Company has a leading position in the decommissioning and decontamination
business for nuclear power plants. The Company is particularly well positioned
to participate in this market given its expertise in the nuclear arena. Stone &
Webster built 17 nuclear facilities in the 1970s and 1980s and has performed
work in 99 of the 104 nuclear power plants located in the U.S. The Company has
performed decommissioning and decontamination services for the Maine Yankee
Power Plant, Connecticut Yankee Haddam Neck Station, Dresden No. 1, Yankee Rowe,
Shoreham Nuclear, U.S. Army Materials Laboratory Research Reactor and various
facilities at the Savannah River Site.

Process

Industry Overview. The Company's 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 a downturn in the
Asian economy. To the extent the outlook for this sector improves, the Company
expects to see increased activity in its processing work. In the petrochemical
field, the Company has particular expertise in the construction of ethylene
plants which convert gas and/or liquid hydrocarbon feedstocks into ethylene, the
source of many higher-value chemical products, including packaging, pipes,
polyester, antifreeze, electronics, tires and tubes. The demand for Shaw's
services in the refining industry has been driven by refiners' need to process a
broader spectrum of crude and to produce a greater number of products. While the
refining process is largely a commodity activity, the configuration of each
refinery depends on the grade of crude feedstock available, desired mix of end
products and trade-offs between capital costs and operating costs. In addition,
increasingly stringent environmental regulations, including significantly
reduced emissions allowances required by the Clean Air Act, have increased
retrofit activity. Present demand for the Company's process services in the U.S.
consists primarily of maintenance and retrofit work, with the possibility for
new construction as demand increases.

Shaw's Services. Approximately $666 million, or 15%, of the Company's backlog at
August 31, 2001, consisted of work for chemical, petrochemical and refining
customers. In process facilities, piping systems are the critical path through
which raw or feedstock materials travel to be converted from one form of matter
to another. The Company fabricates fully-integrated piping systems and provides
a full range of engineering, procurement and construction services for process
customers around the world. Shaw's chemical customers include BASF, Air Products
& Chemicals, Albemarle, Bayer and Dow Chemical. The Company's primary work in
the petrochemical industry involves the construction of plants that produce
ethylene. Through the Company's acquisition of Stone & Webster, Shaw is one of
the leading companies in the ethylene segment of the petrochemical processing
industry and has supplied process technology for approximately 35% of the
world's ethylene capacity constructed since 1991. While a number of the
Company's competitors in the refining sector own competitive process
technologies, Shaw's strength is in proprietary technologies that convert
low-value, heavy crude into greater value added products. The Company's
technology has been used in over 80 refineries around the world. The Company
also undertakes related work in the gas processing field, including propane
dehydrogenation facilities, gas treatment facilities, liquified natural gas
plants and cryogenic processes.

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Environmental and Infrastructure

Industry Overview. Federal, state and local governmental entities are the
primary customers for Shaw's engineering, procurement and construction services
in the environmental and infrastructure industries. Within these sectors, the
Company performs environmental remediation services and work on transportation
and water and wastewater facility projects. Demand for the Company's
environmental remediation services is driven by federal, state and local laws
and regulations and enforcement activity. Similarly, demand for Shaw's services
in the water and wastewater business is driven largely by local government
spending to maintain, upgrade and expand water and wastewater processing
capacity.

Demand in the transportation infrastructure sector is driven by governmental
appropriation programs, which are typically multi-year in scope. For example,
the Transportation Equity Act for the 21st Century is an infrastructure
investment appropriations bill enacted by the U.S. Congress that earmarks $162
billion for highway construction and $36 billion for transit spending over the
fiscal 1998-2003 period. In addition, Congress passed the Aviation Investment
and Reform Act for the 21st Century, which provides construction spending to
support the Federal Aviation Administration's Airport Improvement Program.

Shaw's Services. Approximately $232 million, or 5%, of the Company's backlog at
August 31, 2001, consisted of projects in the environmental and infrastructure
industries. Shaw's environmental services have been provided largely to
governmental customers. Typical projects include work for the U.S. Department of
Energy ("DOE") and Department of Defense ("DOD"). For the DOE, the Company is
presently working on several former nuclear-weapons production facilities where
Shaw provides engineering, construction and construction management for nuclear
activities. For the DOD, the Company is involved in projects at several
superfund sites and several FUSRAP (Formerly Utilized Sites Remedial Action
Program) sites managed by the U.S. Army Corps of Engineers. For the Department
of the Army, the Company is working on the chemical demilitarization program at
several sites.

In the infrastructure industry, the Company's work consists of transportation
and water projects. The Company has particular expertise in rail transit
systems, including subways. The Company also participates in selected tunnel,
bridge, airport and highway projects. In the water sector, the Company provides
engineering and construction management services to local government agencies,
often through alliances with other firms. Recent projects include: construction
management for the Metro West Water Supply Tunnel in Massachusetts; construction
management for a leachate migration system at the Fresh Kills landfill in New
York; and engineering and construction for a membrane water treatment plant in
Florida.

Sales by Industry and Geographic Region

The Company's sales by industry in its two most recent fiscal years approximated
the following amounts:

Process industries include chemical and petrochemical processing and crude oil
refining sales. Other industries include oil and gas exploration and production
sales.

9

The major industries in which Shaw operates are cyclical. Because Shaw's
customers participate in a broad portfolio of industries, the Company's
experience has been that downturns in one of its sectors may be mitigated by
opportunities in another sector due to upturns in other industries.

The Company's sales by geographic region in its two most recent fiscal years
approximated the following amounts:

Prior to February 1994, the Company conducted its international business
exclusively from its plants in the United States. Critical or high pressure
piping systems are typically fabricated in industrialized nations that tend to
have greater capacity for manufacturing piping that satisfies stringent
tolerance and consistency requirements. Domestic pipe fabricators have generally
fabricated these systems more efficiently than their Western European and
Japanese competitors due to lower labor costs and greater availability of raw
materials. However, geographical sourcing requirements, local labor rates and
transportation considerations make it difficult for Shaw's domestic facilities
to compete on many international projects, particularly those involving
non-critical piping systems. Therefore, the Company has established facilities
abroad to allow Shaw to bid more competitively for international projects. The
Company currently performs the majority of its international fabrication work
from its facilities in Venezuela, the United Kingdom, Canada, Australia and
Bahrain.

In November 1993, the Company entered into a joint-venture agreement to
construct and operate a fabrication facility in Bahrain. Shaw's joint venture
partner is Abdulla Ahmed Nass, a Bahrainian industrialist. The Company's
Bahrainian joint-venture facility is one of the first modern pipe fabrication
facilities in the Middle East and has received the Gulf States Certification
from the Gulf Cooperation Council. The Gulf States Certification enables the
joint venture to export products to other Arab countries without paying
additional tariffs. In fiscal 2001, the joint venture had sales of approximately
$14 million, and the Company's share of the joint venture's net income was
approximately $0.3 million.

In the future, the Company's pursuit of joint-venture relationships to conduct
foreign operations will be determined on a case-by-case basis depending on
market, operational, legal and other relevant factors.

BACKLOG

The Company defines its backlog as a "working backlog" that includes projects
for which Shaw has received a commitment from its 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 the
Company needs to make available for a customer's anticipated project. In certain
instances the engagement is for a particular product or project for which the
Company estimates anticipated revenue, often based on engineering and design
specifications that have not been finalized and may be revised over time. Shaw's
backlog for maintenance work is derived from maintenance contracts and Shaw's
customers' historic maintenance requirements. The Company estimates that its
backlog was approximately $4.5 billion at August 31, 2001. The Company estimates
that approximately 42% of its backlog at August 31, 2001 will be completed in
fiscal 2002.

The Company has signed memoranda of understanding and/or contracts with PG&E
National Energy Group ("NEG"), an indirect subsidiary of PG&E Corporation
("PG&E"), for the construction of 4,400 megawatts of new power generation
capacity at four separate sites. The Company has started work on two of the
projects and these two projects are included in backlog as of August 31, 2001.
Because the Company understands that NEG is reviewing the scope and timing of
its final awards of the

10

other two projects, the Company, consistent with its past practice for certain
other major contract awards, will add these other NEG projects as backlog when
the Company commences the project. Further, Pacific Gas & Electric Company
("Pacific Gas"), another subsidiary of PG&E, has filed for reorganization under
Chapter 11 of the Bankruptcy Code. NEG has stated that it is a "bankruptcy
remote" special purpose entity whose operations are unlikely to be adversely
affected by Pacific Gas. While no assurances can be given, it is the Company's
belief that the payment and performance provisions of its agreements with NEG
adequately protect the Company in the event that NEG is negatively impacted by
Pacific Gas.

Many of the contracts in the Company's backlog provide for cancellation fees in
the event the customer were to cancel projects. These cancellation fees usually
provide for reimbursement of Shaw's out-of-pocket costs, revenue associated with
work performed to date and a varying percentage of the profits the Company would
have realized had the contract been completed. In addition to cancellation
risks, projects may remain in Shaw's backlog for extended periods of time.

The following table breaks out the Company's backlog in the following industry
sectors and geographic regions for the periods indicated.

(1) Leased facility.
(2) The Company will vacate this office building and move to another leased
facility in Baton Rouge, Louisiana in 2002.

The Bahrain joint venture leases a 94,000 square foot pipe fabrication facility
in Manama, Bahrain.

In addition to the foregoing, the Company occupies other owned and leased
facilities in various cities, but such facilities are not considered principal
properties. The Company considers each of its current facilities to be in good
operating condition and adequate for its present use.

14

ITEM 3. LEGAL PROCEEDINGS

The Company has 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 which occur in connection with
services performed relating to project or construction sites. Such contractual
disputes normally involve claims relating to the performance of equipment,
design or other engineering services and project construction services provided
by the Company's subsidiaries and affiliates. Although the outcome of lawsuits
cannot be predicted, management believes that, based upon information currently
available, none of the now pending lawsuits, if adversely determined, would have
a material adverse effect on the Company's financial position or results of
operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company did not submit any matters to a vote of security holders during the
fourth quarter of fiscal 2001.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

The Company's common stock, no par value, (the "Common Stock"), is traded on the
New York Stock Exchange (the "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 the Company's two
most recent fiscal years and for the current fiscal year to date.

The high and low sales prices for the fiscal year ended August 31, 2000 and the
first and second quarters of the fiscal year ended August 31, 2001 have been
restated to give effect to the December 2000 two-for-one stock split.

The closing sale price of the Common Stock on November 21, 2001, as reported on
the NYSE, was $28.85 per share. As of November 21, 2001, the Company had 132
shareholders of record.

The Company has not paid any cash dividends on the Common Stock and currently
anticipates that, for the foreseeable future, any earnings will be retained for
the development of the Company's business. Accordingly, no dividends are
expected to be declared or paid on the Common Stock for the foreseeable future.
The declaration of dividends is at the discretion of the Company's Board of
Directors. The Company's dividend policy will be reviewed by the Board of
Directors as may be appropriate in light of relevant factors at the time. The
Company is, however, subject to certain prohibitions on the payment of dividends
under the terms of existing credit facilities.

15

Effective March 23, 2001, the Company acquired the assets of Scott, Sevin &
Schaffer, Inc. and Technicomp, Inc. (collectively "SS&S"). Subsequent to the
effective date of the acquisition and in order to satisfy the Company's Common
Stock price protection provisions under the acquisition agreement, the Company
issued an additional 12,973 shares of Common Stock. The Common Stock was issued
to the former shareholders of SS&S pursuant to Regulation D under the Securities
Act of 1933, as amended.

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 of the Company on a
consolidated basis. The selected historical consolidated financial data for each
of the three fiscal years in the period ended August 31, 2001 presented below
has been derived from the Company's audited consolidated financial statements.
Such data should be read in conjunction with the Consolidated Financial
Statements of the Company 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."

16

(1) Earnings per share amounts for 1997 have been restated for the adoption
of Statement of Financial Standards No. 128, "Earnings per Share."
Additionally, earnings per share for fiscal 2000, 1999, 1998, and 1997
have been restated to reflect the effect of the December 2000
two-for-one stock split of the Company's Common Stock.

(2) Includes the acquisition of certain assets of Scott, Sevin & Schaffer,
Inc. and Technicomp, Inc. in fiscal 2001. See Note 3 of Notes to
Consolidated Financial Statements.

(3) Includes the acquisitions of certain assets of Stone & Webster and PPM
Contractors, Inc. in fiscal 2000. See Note 3 of Notes to Consolidated
Financial Statements.

(4) Includes the acquisitions of certain assets of Prospect Industries plc,
Lancas, C.A., Cojafex B.V. and Bagwell Brothers, Inc. in fiscal 1998.

(5) Includes the acquisitions of Pipe Shields Incorporated and United
Crafts, Inc. and certain assets of MERIT Industrial Constructors, Inc.
in fiscal 1997.

(6) Fiscal 1997 was restated to exclude the discontinued operations
disposed of in fiscal 1998.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

The following analysis of the financial condition and results of operations of
the Company should be read in conjunction with the Company's Consolidated
Financial Statements, including the notes thereto.

GENERAL

The Company is the world's only vertically-integrated provider of complete
piping systems and comprehensive engineering, procurement and construction
services to the power generation industry. While approximately 79% of Shaw's
backlog at August 31, 2001 was attributable to the power generation industry,
the Company also does work in the process industries and the environmental and
infrastructure industries. The Company's financial performance is impacted by
the broader economic trends affecting its customers. All of the major industries
in which Shaw operates are cyclical. Because Shaw's customers participate in a
broad portfolio of industries, the Company's experience has been that downturns
in one of its sectors may be mitigated by opportunities in others.

The acquisition by the Company of Stone & Webster in July 2000 more than doubled
the size of the Company. This acquisition has significantly increased the
Company's size and scope of its engineering, procurement and construction
businesses and the Company's overall operations. For additional information
regarding the Stone & Webster acquisition, see "--Recent Acquisitions,"
"--Liquidity and Capital Resources" and Note 3 of Notes to Consolidated
Financial Statements.

As of August 31, 2001, the Company's backlog was approximately $4.5 billion, of
which 79% was attributable to power generation, 15% was attributable to process
industries, 5% was attributable to its environmental and infrastructure work,
and 1% was attributable to other industries. See "--Backlog" and "--Risk
Factors."

RECENT ACQUISITIONS

Stone & Webster Acquisition

On July 14, 2000, the Company purchased substantially all of the operating
assets of Stone & Webster pursuant to a Chapter 11 bankruptcy proceeding for
Stone & Webster. The purchase price included the following: (i) $14.9 million in
cash (net of $22.8 million of funds returned from escrow), (ii) 4,463,546 shares
of its no par value common stock ("Common Stock") (valued at approximately $105
million at closing), and (iii) the assumption of approximately $740 million of
liabilities. For further information regarding the assumed liabilities, see Note
3 of Notes to Consolidated Financial Statements. The Company also incurred
approximately $12 million of acquisition costs. Stone & Webster is a leading
global provider of engineering, procurement, construction, consulting and
environmental services to the power, process, environmental and infrastructure

17

markets. Stone & Webster was formed in 1889 and has focused on the power
generation industry for most of its existence. Stone & Webster's capabilities
complement and enhance Shaw's traditional strengths in project execution and
pipe fabrication and enable the Company to deliver a more complete,
cost-effective package of products and services to its power and process
customers. Goodwill of approximately $351 million was recorded for this
acquisition, and for the years ended August 31, 2001 and 2000, this goodwill was
amortized on a straight line basis based on a 20 year estimated life. See Note 1
of Notes to Consolidated Financial Statements with respect to the impact of the
Company's adoption of SFAS No. 142 - "Goodwill and Other Intangibles" in fiscal
2002. This acquisition has more than doubled the size of the Company, increasing
significantly the Company's engineering, procurement and construction
businesses, and has significantly impacted operations and working capital
requirements.

Other Acquisitions

In March 2001, the Company acquired the assets and certain liabilities of Scott,
Sevin & Schaffer, Inc. and Technicomp, Inc. (collectively "SS&S"). As of August
31, 2001, the Company had issued 170,683 shares (including purchase price
protection reduced by purchase price adjustment settlements) of its Common Stock
(valued at approximately $6.3 million) as consideration for the transaction and
13,800 of the issued shares were escrowed to secure certain indemnities provided
by the seller. The Company also incurred approximately $0.2 million of
acquisition costs. This acquisition was completed on March 23, 2001, and was
accounted for under the purchase method of accounting. Approximately $4.3
million of goodwill was recorded with respect to this acquisition. For the year
ended August 31, 2001, goodwill for this acquisition was amortized on a straight
line basis based on a 20 year estimated life. See Note 1 of Notes to
Consolidated Financial Statements with respect to the impact of the Company's
adoption of SFAS No. 142 - "Goodwill and Other Intangibles" in fiscal 2002.
SS&S's primary business is structural steel, vessel and tank fabrication. The
operating results of SS&S have been included in the Consolidated Statements of
Income from the date of acquisition.

On July 12, 2000, the Company completed the acquisition of certain assets and
liabilities of PPM Contractors, Inc. ("PPM"). Total consideration included
86,890 shares of the Company's Common Stock valued at approximately $2 million
at the closing and the assumption of certain liabilities. Acquisition costs were
not material. The purchase method was used to account for the acquisition.
Goodwill was approximately $2.1 million with respect to this acquisition. For
the years ended August 31, 2001 and 2000, goodwill for this acquisition was
amortized on a straight line basis based on a 20 year estimated life. See Note 1
of Notes to Consolidated Financial Statements with respect to the impact of the
Company's adoption of SFAS No. 142 - "Goodwill and Other Intangibles" in fiscal
2002. PPM's primary business is providing sandblasting and painting services to
industrial customers. The operating results of PPM have been included in the
Consolidated Statements of Income from the date of acquisition.

See Note 3 of Notes to Consolidated Financial Statements for further discussion
regarding these acquisitions.

Historically, the Company has used acquisitions to pursue market opportunities
and to augment or increase existing capabilities and plans to continue to do so.
Any of the following comments concerning the Company's expectations for future
sales and operating results are based on the Company's forecasts for its
existing operations.

18

RESULTS OF OPERATIONS

The following table presents certain income and expense items as a percentage of
sales for the years ended August 31, 2001, 2000 and 1999:

FISCAL 2001 COMPARED TO FISCAL 2000

Revenues increased 102% to $1,538.9 million in fiscal 2001 from $762.7 million
in fiscal 2000. Revenues from both of the Company's business segments increased
in fiscal year 2001, when compared to fiscal 2000, with the integrated EPC
services segment increasing by $761.1 million or 108% over the prior fiscal
year. This revenue increase was attributable to revenue from Stone & Webster
businesses, which were acquired in July 2000 (see Note 3 of Notes to
Consolidated Financial Statements). Revenues from the manufacturing and
distribution segment increased $15.1 million, or 25%, from fiscal 2000 levels to
$76.1 million for fiscal 2001. Gross profit increased 94% to $246.6 million in
fiscal 2001 from $127.1 million in fiscal 2000 due to increased revenues.

The Company's sales to customers in the following geographic regions
approximated the following amounts and percentages:

Revenues from domestic projects increased $693.6 million, or 117%, from $591.8
million for fiscal 2000 to $1,285.4 million for fiscal 2001. The power
generation market continues to be robust in the U.S., accounting for
approximately $550.1 million (79%) of the increase in domestic sales for fiscal
2001. These increases were made possible primarily by the Stone & Webster
acquisition. Further, as a result of the acquisition of Stone & Webster, the
Company now conducts business in the environmental and infrastructure industry
sector. Domestic sales to this industry sector increased by $163.4 million for
the year ended August 31, 2001. The increases in the domestic power generation
and environmental and infrastructure domestic sectors were partially offset by
decreases in domestic process work. Domestic process industries sector sales
decreased $52.8 million primarily due to decreases of sales to the refining
industry. The Company's domestic power generation customers continue to express
interest in new orders for gas power plants and also for coal and nuclear
projects. No significant increases are expected in the process markets in fiscal
2002 due to reduced capital expenditures by the Company's customers in these
markets.

Sales for international projects increased $82.6 million, or 48%, to $253.5
million from fiscal 2000 to fiscal 2001. Sales in the Asia/Pacific Rim Region
and Europe increased from prior year's levels primarily due to work performed by
the acquired Stone & Webster businesses. Additionally, in fiscal 2001, the
Company finalized an agreement for the construction of a 600,000 metric
tons-per-year ethylene plant in China, which will significantly impact sales in
this area through fiscal 2004. Even though sales for South America and the
Middle East regions have remained sluggish, the Company continues to believe
that these markets present long-term opportunities to the Company.

19

The Company's sales to customers in the following industries approximated the
following amounts and percentages:

Revenues from both domestic and international power generation projects
increased by a total of $585.9 million in fiscal 2001 from fiscal 2000. Demand
in the United States for power generation projects remained high, and was
responsible for 94% of the power generation revenue increase. The acquisition of
Stone & Webster has enabled the Company to capitalize on the increase in demand
to construct power generation plants. The decrease in process industries sales
in fiscal 2001 from fiscal 2000 resulted primarily from reductions in domestic
refining work. Additionally, the Stone & Webster acquisition resulted in the
addition of the environmental and infrastructure industry sector to the
Company's capabilities.

Gross profit increased 94%, or $119.5 million, to $246.6 million in fiscal 2001
from $127.1 million in fiscal 2000 due to the growth in revenue volume during
the year. The Company's gross profit in fiscal 2001 was increased (cost of sales
decreased) by approximately $99.3 million by the utilization of reserves which
were established to record the fair value of (primarily) fixed price contracts
acquired in the Stone & Webster acquisition (see Note 3 of Notes to Consolidated
Financial Statements).

In fiscal 2001, the Company increased the gross margin reserve and its reserve
for contract losses for contracts acquired from Stone & Webster by $38.1 million
and $5.4 million, respectively. These increases were made to finalize the
Company's purchase accounting fair value assessment of the related acquired
contracts in progress and primarily reflected a customer's decision to
recommence a large foreign nuclear project which had been suspended and to
adjust the reserves of certain other contracts based on a current evaluation of
their status as of the acquisition date. These reserve adjustments increased
goodwill recorded for the acquisition.

The gross profit margin percentage for the year ended August 31, 2001 decreased
to 16.0% from 16.7% from the prior year. The Company is involved in numerous
projects, and, as a result, the Company's consolidated gross profit margin can
be affected by many factors. These include matters, such as product mix (e.g.,
engineering and consulting versus construction and procurement), pricing
strategies, foreign versus domestic work (profit margins differ, sometimes
substantially, depending on the location of the work) and adjustments to project
profit estimates during the project term.

During fiscal 2001, Stone & Webster's operating results were included in the
Company's consolidated financial statements for the entire year as compared to
only one and one-half months in fiscal 2000. EPC contracts, such as those that
Stone & Webster worked on during fiscal 2001, typically have lower gross profit
margin percentages than the Company's historical gross profit margin
percentages. These contracts were a contributing factor to the lower gross
profit margin percentage in fiscal 2001 as compared with fiscal 2000.

Additionally, during fiscal 2001, as compared with prior periods, the Company
entered into more cost reimbursable contracts as opposed to fixed price
projects. Cost reimbursable contracts generally allow the Company to recover any
cost overruns. Accordingly, cost reimbursable contracts are frequently priced
with lower gross margins than fixed price contracts, because fixed priced
contracts are usually bid with higher margins to compensate for cost overrun
risks. The Company expects that a substantial portion of its work in fiscal 2002
and fiscal 2003 will be performed pursuant to cost reimbursable contracts.

The Company expects that gross profit margin percentages will be lower in fiscal
2002, compared with fiscal 2001, due, in large part, to the following factors:
(a) increase in engineering, procurement and construction work, which carries
lower margin percentages than pipe fabrication work; (b) additional EPC
contracts requiring the procurement of large pieces of equipment; and (c)
increase in the amount of work to be performed pursuant to cost reimbursable
contracts, which contracts generally carry lower margins than fixed price
contracts (such as some of the contracts assumed in the Stone & Webster
acquisition).

In fiscal 2001, general and administrative expenses, which include goodwill
amortization, increased to $139.7 million from $74.3 million in fiscal 2000. The
increase in fiscal 2001 general and administrative expenses resulted primarily
from (i) expenses associated with the Stone & Webster businesses and (ii) an
approximate $15.8 million increase in goodwill amortization, also resulting
primarily from the Stone & Webster acquisition. However, as a result of
economies realized with the integration of Stone & Webster into Shaw, general
and administrative expenses in fiscal 2001 decreased as a percentage

20

of sales to 9.1% from 9.8% compared with fiscal 2000. The Company expects
general and administrative expenses, excluding goodwill amortization, to
increase in fiscal 2002, but at a substantially lesser rate than its percentage
growth in revenues. Additionally, the Company adopted SFAS No. 142 ("Goodwill
and Other Intangible Assets") effective at September 1, 2001 (see Note 1 of
Notes to the Consolidated Financial Statements), and will cease amortizing
goodwill for fiscal 2002 and future periods as required by this new accounting
standard. The Company's goodwill amortization for fiscal 2001 was approximately
$18.9 million.

In May 2001, the Company realized approximately $490 million net proceeds (after
offering expenses) from the issuance and sale of $790 million of 20-year,
zero-coupon, unsecured, convertible debt Liquid Yield Option (TM) Notes (the
"LYONs") due 2021. The LYONs were issued on an original discount basis of
$639.23 per LYON, providing the holders with a yield-to-maturity of 2.25% (see
Note 7 of Notes to Consolidated Financial Statements). The Company used these
proceeds to retire the majority of its outstanding borrowings and to invest
surplus funds in investments with yields higher than the interest on the debt.
Interest expense for the year increased to $15.7 million from $8.0 million in
fiscal year 2000. This increase was largely attributable to higher borrowing
levels and higher interest rates on the Company's primary revolving line of
credit facility during fiscal 2001 prior to the sale of the LYONs in May 2001.
Interest expense was favorably impacted in fiscal 2001 and 2000 by excluding
approximately $2.4 million and $1 million, respectively, of interest expense
attributable to the operations of a cold storage operation reported as an asset
held for sale. The Company's interest expense for fiscal 2001, and for future
periods, includes the amortization of loan origination costs for both its
revolving credit facility and its LYONs debt, and therefore, its reported
interest expense is and will be higher than expected, based on its borrowing
levels.

Other income was $8.6 million for fiscal 2001 compared with $.8 million for
fiscal 2000. This increase is primarily attributable to interest income realized
from investments in high quality, short-term debt instruments. The funds for
these investments were primarily provided from the net proceeds (after retiring
other outstanding debt) from the sale of the Company's convertible debt
instruments in May 2001(see Note 7 of Notes to Consolidated Financial
Statements). During fiscal 2001, the yields from these investments were greater
than the interest costs associated with the convertible debt.

The Company's interest expense will increase in fiscal 2002 from fiscal 2001 as
a result of having convertible debt outstanding for the full fiscal year.
Interest income should increase in fiscal 2002 over fiscal 2001 levels due to
the Company's investment of a substantial portion of the funds received from the
sale of its convertible debt. However, the Company anticipates that, based on
its current cash flow and yield projections, interest income will be less than
its interest expense in fiscal 2002.

The Company's effective tax rates for the years ended August 31, 2001 and 2000
were 38.4% and 35.9%, respectively. The Company's tax rates for each period
during each year represent the Company's estimate of its effective tax rates for
each entire year based primarily on the Company's estimate of pretax income for
the year and the mix of domestic and foreign sourced (including foreign export
sales) income. The Company updates its effective tax rate each quarter based on
actual results to date and revised budgeted amounts for the remainder of the
year. The increase in the tax rates in fiscal 2001 versus fiscal 2000 is due
primarily to the increase in domestic sales and an increase in nondeductible
expenses, such as a portion of the goodwill recognized from the Stone & Webster
acquisition. However, because the Company has adopted SFAS No. 142 in fiscal
2002 (see Note 1 of Notes to Consolidated Financial Statements), it will cease
to amortize goodwill. Accordingly, the Company anticipates that its effective
tax rate will decrease in fiscal 2002 because it will no longer recognize
goodwill amortization expense (which is only partially deductible for tax
purposes) in its financial statements. This decrease is expected to be partially
offset by increased domestic income in fiscal 2002 that has a higher tax rate
than most foreign income.

FISCAL 2000 COMPARED TO FISCAL 1999

Revenues increased 54.4% to $762.7 million in fiscal 2000 from $494.0 million in
fiscal 1999. Fiscal 2000 revenues from both of the Company's business segments
increased from fiscal 1999 levels with the integrated EPC services (formerly
named pipe services) segment reflecting a $255.0 million increase or 57%.
Approximately $111 million of the revenue increase was provided from the newly
acquired Stone & Webster businesses (see Note 3 of Notes to Consolidated
Financial Statements). Revenues in fiscal 2000 from the manufacturing and
distribution segment increased $13.6 million or a 29% increase over prior year
levels. Gross profit increased 35.4% to $127.1 million in fiscal 2000 from $93.8
million in fiscal 1999 due to the growth in revenue volume during the year.

21

The Company's sales to customers in the following geographic regions
approximated the following amounts and percentages:

Revenues from domestic projects increased $225.6 million, or 62%, from $366.2
million for fiscal 1999 to $591.8 million for fiscal 2000. Increases were
experienced in all domestic industry sectors, with power generation sales
accounting for the majority of the increase. Revenues from international
projects increased $43.1 million, or 34%, from $127.8 million for fiscal 1999 to
$170.9 million for fiscal 2000. All international industry sectors reflected
sales increases over fiscal 1999 amounts, with the primary increases being in
crude oil refining revenues (part of the process industries sector) and the
power generation sector. For the year ended August 31, 2000, virtually all
European sector sales were to the United Kingdom. Sales increased in the
Asia/Pacific Rim region due to work performed by the acquired Stone & Webster
businesses. Additionally, in August 2000, the Company executed a letter of
intent for the construction of a 600,000 metric ton-per-year ethylene plant in
China.

The Company's sales to customers in the following industries approximated the
following amounts and percentages:

Process industries sector sales include revenues from the chemical and
petrochemical and crude oil refining industries, which in prior years were
reported separately. Other industries sales include revenues from the oil and
gas exploration and production industry, which in prior years was reported
separately.

Revenues from power generation projects increased both domestically and
internationally. Sales related to domestic power projects increased due to
additional work performed for United States customers, including a $300 million,
five-year contract with a major manufacturer of gas turbines. International
power generation revenue increases resulted from work performed by the newly
acquired Stone & Webster businesses. Process industries sector sales also
increased both domestically and internationally over 1999 revenues, principally
due to sales to the crude oil refining industry. Environmental and
infrastructure sales were primarily domestic and were generated by the newly
acquired Stone & Webster businesses.

The gross profit margin for the year ended August 31, 2000, decreased to 16.7%
from 19.0% for the same period the prior year. The Company is involved in
numerous projects, all of which affect gross profit in various ways, such as
product mix, pricing strategies, foreign versus domestic work (profit margins
differ, sometimes substantially, depending on where the work is performed), and
constant monitoring of percentage of completion calculations. The Company's
gross profit margin has been declining due to the Company's increase in revenues
related to its erection and maintenance services and the inclusion of Stone &
Webster's procurement and construction activities, which generally carry lower
margins than fabrication work.

General and administrative expenses were $74.3 million for fiscal 2000, up 24%
from $60.1 million for fiscal 1999. Approximately $5.3 million of the increase
resulted from Stone & Webster activity since the acquisition. The remaining
increase resulted primarily from higher sales levels and other normal business
expenses. As a percentage of sales, however, general and administrative expenses
decreased to 9.8% for the year ended August 31, 2000 from 12.2% for the year
ended August 31, 1999.

Interest expense for the year ended August 31, 2000 was $8.0 million, compared
to $8.6 million for the prior fiscal year. Interest expense varies from year to
year due to the level of borrowings and interest rate fluctuations on variable
rate loans. Prior to the Stone & Webster acquisition and a new primary credit
facility obtained in July 2000 (see Note 8 of Notes to

22

Consolidated Financial Statements), interest expense on the Company's previous
line of credit had decreased approximately $1.3 million in fiscal year 2000,
compared to the same period in fiscal 1999, due to lower borrowings partially
offset by higher interest rates. Borrowings after the Stone & Webster
acquisition on the new credit facility added approximately $1.1 million of
additional interest costs in fiscal 2000. The remaining $0.4 million decrease
relates to paydowns of debt, offset by interest on assumed Stone & Webster debt.

The Company's effective tax rates for the years ended August 31, 2000 and 1999
were 35.9% and 33.1%, respectively. The increase in the tax rates was primarily
a result of the change in the mix of foreign (including foreign export sales)
versus domestic work.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operations was $11.4 million in fiscal 2001, compared to
net cash used in operations of $69.9 million in fiscal 2000. For fiscal 2001,
net cash provided by operations was favorably impacted primarily by: (i) net
income of $61 million, (ii) an increase in advanced billings and billings in
excess of cost and estimated earnings on uncompleted contracts of $66.8 million,
(iii) depreciation and amortization of $39.7 million, and (iv) deferred taxes of
$37.7 million. Offsetting these positive influences were decreases of $62.9
million in accrued liabilities, $42.4 million in accounts payable, and $99.3
million in accrued contract losses and reserves.

The increase in advanced billings and billings in excess of cost and estimated
earnings on uncompleted contracts resulted from accelerated or advanced billing
provisions in more contracts, increased revenue and construction activity. The
increase in depreciation and amortization over fiscal 2000 levels resulted
primarily from the amortization of goodwill and other intangibles related to the
Stone & Webster acquisition. The increase in deferred taxes over fiscal 2000
levels was substantially attributable to timing differences for certain assumed
obligations associated with the Stone & Webster acquisition. The decreases in
accrued liabilities and accounts payable were primarily the result of payment of
liabilities assumed in the Stone & Webster acquisition.

Additionally, the Company acquired a large number of contracts in the Stone &
Webster acquisition with either inherent losses or lower than market rate
margins due to the effect of the financial difficulties experienced by Stone &
Webster on negotiating and executing contracts prior to the acquisition. These
contracts were adjusted to their fair value at acquisition date by establishing
a gross margin reserve that reduces costs of sales for contracts as they are
completed. Costs of sales was reduced by approximately $70.1 million during
fiscal 2001 through the utilization of this reserve, which is a non-cash
component of income. Costs of sales was also reduced by approximately $29.2
million due to the utilization of the reserve which represents net cash losses
on contracts acquired in the Stone & Webster acquisition. The utilization of
these reserves resulted in a corresponding increase in gross profit during
fiscal 2001. See Note 3 of Notes to Consolidated Financial Statements.

Net cash provided by investing activities was $54.3 million in fiscal 2001,
compared with net cash used in investing activities of $15.8 million for fiscal
2000. Asset sales provided approximately $120.9 million in net cash, comprised
primarily of proceeds from the sale of assets acquired in the Stone & Webster
acquisition for $112.5 million, and the sale of other property and equipment for
$8.4 million. Additionally, $22.8 million of escrow funds that had been
deposited as retainer for the Stone & Webster acquisition in fiscal 2000 were
returned to the Company. The Company invested approximately $45.6 million of the
proceeds received from the sale of its LYONs in high quality short-term
marketable debt securities being held to maturity. The Company purchased $38.1
million of property and equipment during fiscal 2001, an increase of
approximately $15 million to $20 million over the Company's historical levels;
this increase was largely attributable to upgrading various corporate
information systems which have assisted in the integration of the Stone &
Webster acquisition. During fiscal 2001, the Company also invested approximately
$2 million in its EntergyShaw joint venture, $1.9 million in an unconsolidated
cold storage and frozen food handling operation and made additional advances of
$.3 million to its Shaw-Nass joint venture (see Note 5 of Notes to Consolidated
Financial Statements). The Company also made an investment of $1.2 million in
securities held for sale and paid $0.2 million of acquisition costs related to
the acquisition of the assets of Scott, Sevin & Schaffer, Inc. and Technicomp,
Inc. (see Note 3 of Notes to Consolidated Financial Statements).

Net cash provided by financing activities totaled approximately $356.7 million
for the fiscal year ended August 31, 2001, as compared with $101.2 million in
the prior year. On May 1, 2001, the Company realized net proceeds (after
offering expenses) of approximately $490 million from the sale of $790 million
face value LYONs debt (see Note 7 of Notes to Consolidated Financial
Statements). Approximately $67 million of the proceeds from the sale of the
LYONs were used to pay off existing

23

debt, including approximately $58 million on the Company's primary credit
facility ("Credit Facility"). The remaining amount of approximately $423 million
was invested in short term, high quality cash equivalents and debt securities
all with maturities of less than four months. The Company also had other normal
course of business borrowings of approximately $3 million.

The holders of the LYONs have the right to require the Company to repurchase the
debt on the third, fifth, tenth, and fifteenth anniversaries at the accreted
value. The Company has the right to fund such repurchases with shares of its
Common Stock, cash, or a combination of Common Stock and cash. The LYONs holders
also have the right to require the Company to repurchase the debt for cash, at
the accreted value, if there is a change in control of the Company, as defined,
occurring on or before May 1, 2006. The Company may redeem all or a portion of
the LYONs at the accreted value, through cash payments, at any time after May 1,
2006.

In October 2000, the Company completed the sale of 4,837,338 shares (including
1,200,000 shares for over-allotments) of its common stock, no par value per
share (the "Common Stock"), in an underwritten public offering at a price of
$31.75 per share, less underwriting discounts and commissions. The net proceeds
to the Company, less underwriting discounts and commissions and other offering
expenses, totaled approximately $144.8 million. The Company also received
approximately $3.3 million from employees upon the exercise of stock options
during fiscal 2001. In fiscal 2000, the Company realized approximately $69.7
million in proceeds from the sale of its Common Stock.

During the course of fiscal 2001, the Company utilized the funds obtained from
the sales of the Company's Common Stock, LYONs and assets acquired in the Stone
& Webster acquisition to pay off the Credit Facility, which had a balance of
approximately $235 million as of August 31, 2001. Although the Company had no
borrowings outstanding under the Credit Facility as of August 31, 2001, the
Credit Facility is still fully available to the Company. As of August 31, 2001,
the Credit Facility was being used to provide letters of credit of approximately
$61.5 million to satisfy various project guarantee requirements (see Note 8 of
Notes to Consolidated Financial Statements). The Company has also used this
Credit Facility to provide working capital and to fund fixed asset purchases and
subsidiary acquisitions, including the acquisition of substantially all of the
operating assets of Stone & Webster and continues to be available for these
purposes.

In fiscal 2001, the Company's repayment of debt and leases of $49.2 million
(excluding payments on the Company's Credit Facility balances) included $23.9
million related to the sale of certain Stone & Webster assets and the Company's
corporate headquarters office building in Baton Rouge, Louisiana; $23.3 million
of other debt and leases (most of which were secured by facilities or
equipment); and the prepayment of a $2 million debt related to the acquisition
of a subsidiary in 1998, which resulted in an extraordinary loss after taxes of
approximately $0.2 million.

On August 30, 2000, the Company and Entergy Corporation ("Entergy") formed
EntergyShaw, L.L.C. ("EntergyShaw"), an equally-owned and equally-managed
company (see Note 5 of Notes to Consolidated Financial Statements). During
fiscal 2001, the Company invested $2 million in EntergyShaw, as required under
the terms of the agreement with EntergyShaw. The Company does not believe that
work performed for EntergyShaw will require a significant working capital
investment due to the terms of its agreement with EntergyShaw. At August 31,
2001, EntergyShaw had begun construction on two projects for Entergy, involving
a total of six turbines.

The Company's primary credit facility is a three-year term, $300 million credit
facility ("Credit Facility") dated July 14, 2000 that permits both revolving
credit loans and letters of credit, which letters of credit cannot exceed an
aggregate of $150 million. The Company has the option to increase the Credit
Facility under existing terms to $400 million, if certain conditions are
satisfied, including the successful solicitation of additional lenders or
increased participation of existing lenders. The Credit Facility allows the
Company to borrow at interest rates in a range of 1.50% to 2.75% over the London
Interbank Offered Rate ("LIBOR") or from the prime rate to 1.25% over the prime
rate. The Company selects the interest rate index and the spread over the index
is dependent upon certain financial ratios of the Company. The Credit Facility
is secured by, among other things: (i) guarantees by the Company's domestic
subsidiaries; (ii) a pledge of all of the capital stock in the Company's
domestic subsidiaries and 66% of the capital stock in certain of the Company's
foreign subsidiaries; and (iii) a security interest in all property of the
Company and its domestic subsidiaries (except real estate and equipment). The
Credit Facility also contains restrictive covenants, including ratios, minimum
capital levels, limits on other borrowings and other restrictions. As of August
31, 2001, the Company was in compliance with these covenants or had obtained the
necessary waivers, had no outstanding revolving credit loans, and had letters of
credit of approximately $61.5 million outstanding under the Credit Facility. The
Company's total availability under the Credit Facility at August 31, 2001, was
approximately $238.5 million, which includes availability for additional letters
of credit of approximately $88.5 million.

24

In September 2001, the Company announced that its Board of Directors had
authorized the Company to repurchase shares of its Common Stock, depending on
market conditions, up to a limit of $100 million. As of November 19, 2001, the
Company had purchased a total of 333,000 shares at a cost of approximately $10.1
million.

The Company's working capital balance was approximately $521 million at August
31, 2001. The Company's future requirements for working capital are likely to
fluctuate due to such factors as the timing and negotiated payment terms of its
projects. The Company believes that its working capital position and its
availability of funds under its Credit Facility are sufficient to fund the
working capital needs of its business, its fixed asset expenditures and its
normal operations for the next twelve months.

BACKLOG

The Company defines its backlog as a "working backlog" that includes projects
for which Shaw has received a commitment from its 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 the
Company needs to make available for a customer's anticipated project. In certain
instances the engagement is for a particular product or project for which the
Company estimates anticipated revenue, often based on engineering and design
specifications that have not been finalized and may be revised over time. Shaw's
backlog for maintenance work is derived from maintenance contracts and Shaw's
customers' historic maintenance requirements. The Company estimates that its
backlog was approximately $4.5 billion at August 31, 2001. The Company estimates
that approximately 42% of its backlog at August 31, 2001 will be completed in
fiscal 2002.

The following table breaks out the Company's backlog in the following industry
sectors and geographic regions for the periods indicated.

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

EFFECTS OF INFLATION

The Company has determined it will focus its operations on cost-reimbursable or
negotiated lump sum contracts. To the extent that a significant portion of the
Company's revenues are earned under cost-reimbursable type contracts, the
effects of inflation on the Company's financial condition and results of
operations should generally be low. However, if the Company expands its business
into markets and geographical areas where fixed-price and lump-sum work is more
prevalent, inflation may begin to have a larger impact on the Company's results
of operations. To the extent permitted by competition, the Company intends to
continue to emphasize contracts which are either cost-reimbursable or negotiated
fixed-price. For contracts the Company accepts with fixed-price or lump-sum
terms, the Company monitors closely the actual costs on the project as they
compare to the budget estimates. On these projects, the Company also attempts to
secure fixed-price commitments from key subcontractors and vendors. However, due
to the competitive nature of the Company's industry, combined with the
fluctuating demands and prices associated with personnel, equipment and
materials the Company traditionally needs in order to perform

25

on its contracts, there can be no guarantee that inflation will not effect the
Company's results of operations in the future.

RECENT ACCOUNTING PRONOUNCEMENTS

In early 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities" ("SOP"). The SOP is effective for fiscal years beginning after
December 15, 1998, and requires costs of start-up activities and organization
costs to be expensed as incurred. Any such unamortized costs on the date of
adoption this SOP were to be written off and reflected as a cumulative effect of
a change in accounting principle. The Company adopted this new SOP in fiscal
2000, and in accordance therewith, on September 1, 1999, the Company wrote off
deferred organizational costs of approximately $0.3 million, net of taxes.

In fiscal 2000, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 which establishes guidance in applying generally accepted
accounting principles to revenue recognition in financial statements and is
effective for fiscal 2001. The Company has determined that its existing revenue
recognition practices comply with the guidance in the bulletin.

Effective September 1, 2000, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133 - "Accounting for Derivative Instruments
and Hedging Activities" which requires that all derivative instruments be
recorded on the balance sheet at fair value. On the date derivative contracts
are executed, the Company designates the derivative as one of the following: (i)
the hedge of the fair value of a recognized asset or liability or of an
unrecognized firm commitment (fair value hedge), (ii) the hedge of a forecasted
transaction or of the variability of cash flows to be received or paid related
to a recognized asset or liability (cash flow hedge), or (iii) the hedge of a
net investment in a foreign operation (net investment hedge).

Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether the derivative is
designated as part of a hedge transaction and, if it is, depending on the type
of hedge transaction. For fair value hedge transactions, changes in fair value
of the derivative instrument are generally offset in the income statement by
changes in the fair value of the item being hedged. For cash flow hedge
transactions, changes in the fair value of the derivative instrument are
reported in other comprehensive income. For net investment hedge transactions,
changes in the fair value are recorded as a component of the foreign currency
translation account that is also included in other comprehensive income. The
gains and losses on cash flow hedge transactions that are reported in other
comprehensive income are reclassified to earnings in the periods in which
earnings are effected by the variability of the cash flows of the hedged item.
The ineffective portions of all hedges are recognized in current period
earnings.

The Company utilizes forward foreign exchange contracts to reduce its risk from
foreign currency price fluctuations related to firm and anticipated commitments
to purchase or sell equipment, materials and/or services. These investments are
designated as cash flow hedging instruments. The Company normally does not use
any other type of derivative instrument or participate in any other hedging
activities.

Upon initial application of SFAS No. 133, the Company recorded the fair value of
the existing hedge contracts on the balance sheet and a corresponding
unrecognized loss of $23,000 as a cumulative effect adjustment of accumulated
other comprehensive income, which was transferred to earnings during fiscal
2001.

In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141- "Business Combinations," and SFAS No. 142 -"Goodwill and Other Intangible
Assets." The standards significantly changed the Company's prior practices by:
(i) terminating the use of the pooling-of-interests method of accounting for
future business combinations, (ii) ceasing goodwill amortization, and (iii)
requiring impairment testing of goodwill based on a fair value concept. SFAS No.
142 requires that impairment testing of the opening goodwill balances be
performed within six months from the start of the fiscal year in which the
standard is adopted and that any impairment be written off and reported as a
cumulative effect of a change in accounting principle. It also requires that
another impairment test be performed during the fiscal year of adoption of the
standard and that impairment tests be performed at least annually thereafter,
with interim testing required if circumstances warrant. The standards must be
implemented for fiscal years beginning after December 31, 2001, but early
adoption is permitted. The Company has decided to adopt the new standards for
its fiscal year beginning September 1, 2001. Accordingly, the Company will cease
to amortize goodwill in fiscal 2002. Goodwill amortization was approximately
$18.9 million, $3.1 million and $1.8 million for the years ended August 31,
2001, 2000 and 1999, respectively. The Company has not completed its initial
evaluation of goodwill impairment that is required with the adoption of the SFAS
No. 142. However, based on the preliminary

26

evaluation procedures it has performed, the Company does not believe that its
existing goodwill balances will be impaired under the new standards however, no
assurances can be given. The initial transition evaluation is required to be and
will be completed by February 28, 2002 which is within the six month transition
period allowed by the new standard upon adoption.

The FASB also recently issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This statement, which is first effective in 2003, covers the
accounting for closure or removal-type costs that are incurred with respect to
long-lived assets. The nature of the Company's business and long-lived assets is
such that adoption of this new standard should have no significant impact on the
Company's financial position or results of operations.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." The new statement also supersedes certain aspects of APB 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," with regard to reporting the effects of a disposal of a segment
of a business and will require expected future operating losses from
discontinued operations to be reported in discontinued operations in the period
incurred rather than as of the measurement date as presently required by APB 30.
Additionally, certain dispositions may now qualify for discontinued operations
treatment. The provisions of the statement are required to be applied for fiscal
years beginning after December 15, 2001 and interim periods within those fiscal
years. The Company has not yet determined what effect this statement will have
on its financial statements.

RISK FACTORS

Investing in the Company's Common Stock will provide an investor with an equity
ownership interest in the Company. Shareholders will be subject to risks
inherent in the Company's business. The performance of Shaw's shares will
reflect the performance of the Company's business relative to, among other
things, general economic and industry conditions, market conditions and
competition. The value of the investment in the Company may increase or decrease
and could result in a loss. An investor should carefully consider the following
factors as well as other information contained in this Form 10-K before deciding
to invest in shares of the Company's Common Stock.

This Form 10-K also contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in the forward-looking statements as a result of many factors,
including the risk factors described below and the other factors described
elsewhere in this Form 10-K.

DEMAND FOR THE COMPANY'S PRODUCTS AND SERVICES IS CYCLICAL AND VULNERABLE TO
DOWNTURNS IN THE POWER GENERATION AND OTHER INDUSTRIES TO WHICH THE COMPANY
MARKETS ITS PRODUCTS AND SERVICES.

The demand for Shaw's products and services depends on the existence of
engineering, construction and maintenance projects, particularly in the power
generation industry which accounted for 79% of the Company's backlog as of
August 31, 2001. The Company also depends, to a lesser extent, on conditions in
the petrochemical, chemical, environmental, infrastructure and refining
industries. These industries historically have been, and will likely continue to
be, cyclical in nature and vulnerable to general downturns in the domestic and
international economies. The Company's results of operations have varied and may
continue to vary depending on the demand for future projects from these
industries.

THE DOLLAR AMOUNT OF THE COMPANY'S BACKLOG, AS STATED AT ANY GIVEN TIME, IS NOT
NECESSARILY INDICATIVE OF ITS FUTURE EARNINGS.

Shaw cannot provide assurance that the revenues projected in its backlog will be
realized, or if realized, will result in profits. To the extent that Shaw
experiences significant terminations, suspensions or adjustments in the scope of
its projects as reflected in its backlog contracts, the Company could be
materially adversely affected.

The Company defines its backlog as a "working backlog" which includes projects
for which Shaw has received a commitment from its customers. This commitment may
be in the form of a written contract for a specific project, a purchase order or
an indication of the amount of time or material Shaw needs to make available for
a customer's anticipated project. In certain instances, the engagement is for a
particular product or project for which Shaw estimates anticipated revenue,
often based on engineering and design specifications that have not been
finalized and may be revised over time. The Company's backlog for

27

maintenance work is derived from maintenance contracts and customers' historic
maintenance requirements.

The Company also includes in backlog commitments from certain individual
customers who have committed to more than one significant EPC project and other
customers who have committed to multi-year orders for piping or maintenance
services. The Company cannot be assured that the customers will complete all of
these projects or that the projects will be performed in the currently
anticipated time-frame.

On occasion, customers will cancel or delay projects for reasons beyond the
Company's control. In the event of project cancellation, Shaw may be reimbursed
for certain costs but typically has no contractual right to the total revenues
reflected in the Company's backlog. In addition, projects may remain in the
Company's backlog for extended periods of time. If Shaw were to experience
significant cancellations or delays of projects in its backlog, the Company's
financial condition would be significantly adversely affected.

DIFFICULTIES INTEGRATING ACQUISITIONS COULD ADVERSELY AFFECT SHAW.

The Company has and may continue to acquire new businesses. As a result, the
Company may encounter difficulties integrating acquisitions and successfully
managing the growth the Company expects to experience from the acquisitions. To
the extent the Company encounters problems in integrating one or more
acquisitions, the Company could be materially adversely affected. The Company
plans to pursue select acquisitions in the future. Because the Company may
pursue acquisitions around the world and may actively pursue a number of
opportunities simultaneously, the Company may encounter unforeseen expenses,
complications and delays, including difficulties in employing sufficient staff
and operational and management oversight.

THE COMPANY MAY NOT RECEIVE THE ECONOMIC BENEFITS EXPECTED FROM ENTERGYSHAW.

On September 18, 2000, the Company executed a definitive agreement with Entergy
Corporation ("Entergy") governing the parties' relationship with respect to
EntergyShaw, the equally-owned and equally-managed company formed by the parties
on August 30, 2000. Subsequent to the execution of the letter of intent relating
to this joint venture on June 2, 2000, Entergy and FPL Group, Inc., the parent
of Florida Power & Light, announced a merger, but on August 2, 2001, these
parties announced that they were abandoning their merger plans. EntergyShaw's
initial focus is the construction of power plants in North America and Europe
for Entergy's unregulated wholesale operations relating to the installation of
turbines that Entergy has previously ordered for these plants. While the Company
believes that EntergyShaw will manage the construction of most of such power
plants, the Company can provide no assurances regarding the number of future
power plant construction projects that Entergy will actually commence, or the
number of turbines (specifically those previously ordered by Entergy) that
Entergy will actually dedicate to any such future projects. During fiscal 2001,
EntergyShaw and the Company began work on two projects for Entergy which will
have a total of six turbines. The Company expects to provide the engineering,
procurement, construction and pipe fabrication services for substantially all of
EntergyShaw's power generation projects. Under the terms of the joint venture,
the Company must offer EntergyShaw a right of first refusal on opportunities to
provide fully bundled engineering, procurement and construction opportunities
that it receives after December 31, 2000.

THE NATURE OF SHAW'S CONTRACTS COULD ADVERSELY AFFECT THE COMPANY.

Shaw enters into fixed price, lump-sum or unit price contracts on a significant
number of domestic piping contracts and substantially all international piping
projects. In addition, a number of the contracts the Company assumed in the
Stone & Webster acquisition were fixed price or lump-sum contracts and the
Company may continue to enter into these types of contracts in the future. Under
fixed, maximum or unit price contracts, the Company agrees to perform the
contract for a fixed price, and as a result, benefits from costs savings, but is
unable to recover any cost overruns. Under fixed price incentive contracts, the
Company shares with the customer any savings up to a negotiated or target
ceiling. When costs exceed the negotiated ceiling price, the Company may be
required to reduce its fee or to absorb some or all of the cost overruns.
Contract prices are established based in part on cost estimates that are subject
to a number of assumptions, including assumptions regarding future economic
conditions. If these estimates prove inaccurate or circumstances change, cost
overruns having a material adverse effect on the Company's business and results
of its operations could occur. Shaw's profit for these projects could decrease
or the Company could experience losses, if the Company is unable to secure fixed
pricing commitments from its suppliers at the time the contracts are entered
into or if the Company experiences cost increases for material or labor during
the performance of the contracts.

28

Shaw enters into contractual agreements with customers for many of its
engineering, procurement and construction services based on agreed upon
reimbursable costs and labor rates. Some of these contracts provide for the
customer's review of the Company's accounting and cost control systems to verify
the completeness and accuracy of the reimbursable costs invoiced. These reviews
could result in proposed reductions in reimbursable costs and labor rates
previously billed to the customer.

In addition, the Company has several significant projects for agencies of the
U.S. Government. Generally, U.S. Government contracts are subject to oversight
audits by government representatives, profit and cost controls and limitations
and provisions permitting modification or termination, in whole or in part,
without prior notice, at the government's convenience and with payment of
compensation only for work done and commitments made at the time of termination.
In the event of termination, the Company generally receives some allowance for
profit on the work performed. In some cases, government contracts are subject to
the uncertainties surrounding congressional appropriations or agency funding.
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.

ACTUAL RESULTS COULD DIFFER FROM THE ESTIMATES AND ASSUMPTIONS USED TO PREPARE
THE COMPANY'S FINANCIAL STATEMENTS.

In order to prepare financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
as of the date of the financial statements which affect the reported values of
assets and liabilities and revenues and expenses, and disclosures of contingent
assets and liabilities. Areas requiring significant estimates by the Company's
management, include (i) contract expenses and profits and application of
percentage of completion accounting; (ii) recoverability of inventory and
application of lower of cost or market accounting; (iii) provisions for
uncollectable receivables and customer claims; (iv) provisions for income taxes
and related valuation allowances; (v) recoverability of net goodwill; (vi)
recoverability of other intangibles and related amortization; and (vii) accruals
for estimated liabilities, including litigation and insurance reserves. Actual
results could differ from those estimates.

THE COMPANY'S RESULTS OF OPERATIONS DEPEND ON SHAW'S ABILITY TO OBTAIN FUTURE
CONTRACTS.

In the case of large-scale domestic and international projects where timing is
often uncertain, it is particularly difficult to predict whether and when Shaw
will receive a contract award. In addition, timing of receipt of revenues from
the Company's projects can be affected by a number of factors beyond the
Company's control, including unavoidable delays from weather conditions,
unavailability of material and equipment from vendors, changes in the scope of
services requested by clients, or labor disruptions. The uncertainty of the
Company's contract award timing can also present difficulties in matching
workforce size with contract needs. In some cases, Shaw maintains and bears the
cost of a ready workforce that is larger than called for under existing
contracts in anticipation of future workforce needs under expected contract
awards. If an expected contract award is delayed or not received, the Company
would incur costs that could have a material adverse effect on it.

Projects in the industries in which the Company provides products and services
frequently involve a lengthy and complex bidding and selection process. Because
a significant portion of the Company's sales are generated from large projects,
the Company's results of operations can fluctuate from quarter to quarter.
Shaw's significant customers vary between years. The loss of any one or more of
the Company's key customers could have a material adverse impact on it.

POLITICAL AND ECONOMIC CONDITIONS IN FOREIGN COUNTRIES IN WHICH SHAW OPERATES
COULD ADVERSELY AFFECT THE COMPANY.

A significant portion of the Company's sales is attributable to projects in
international markets. Shaw expects international sales and operations to
continue to contribute materially to the Company's growth and earnings for the
foreseeable future. International contracts, operations and expansion expose the
Company to risks inherent in doing business outside the United States,
including:

o uncertain economic conditions in the foreign countries in
which Shaw makes capital investments, operates and sells
products and services;

o the lack of well-developed legal systems in some countries in
which Shaw operates and sells products and services, which
could make it difficult for it to enforce the Company's
contractual rights;

o expropriation of property;

29

o restrictions on the right to convert or repatriate currency;
and

o political risks, including risks of loss due to civil strife,
acts of war, guerrilla activities and insurrection.

FOREIGN EXCHANGE RISKS MAY AFFECT THE COMPANY'S ABILITY TO REALIZE A PROFIT FROM
CERTAIN PROJECTS.

While Shaw attempts to denominate its contracts in United States dollars, from
time to time the Company enters into contracts denominated in a foreign currency
without escalation provisions. This practice subjects the Company to foreign
exchange risks. In addition, to the extent contract revenues are denominated in
a currency different than the contract costs, the Company increases its foreign
exchange risks. The Company attempts to minimize its exposure from foreign
exchange risks by obtaining escalation provisions or matching the contract
revenue currency with the contract costs currency. Foreign exchange controls may
also adversely affect the Company. For instance, prior to the lifting of foreign
exchange controls in Venezuela in November 1995, foreign exchange controls
adversely affected the Company's ability to repatriate profits from Shaw's
Venezuelan subsidiary or otherwise convert local currency into United States
dollars. Shaw generally does not obtain insurance for or hedge against foreign
exchange risks for a material portion of its contracts. In addition, the
Company's ability to obtain international contracts is impacted by the relative
strength or weakness of the United States dollar relative to foreign currencies.

FAILURE TO MEET SCHEDULE OR PERFORMANCE REQUIREMENTS OF SHAW'S CONTRACTS COULD
ADVERSELY AFFECT THE COMPANY.

In certain circumstances, the Company guarantees facility completion by a
scheduled acceptance date or achievement of certain acceptance and performance
testing levels. Failure to meet any such schedule or performance requirements
could result in additional costs and the amount of such additional costs could
exceed project profit margins. Performance problems for existing and future
contracts, whether fixed, maximum or unit priced, could cause actual results of
operations to differ materially from those anticipated by the Company.

A DEPENDENCE ON ONE OR A FEW CLIENTS COULD ADVERSELY AFFECT THE COMPANY.

Due to the size of many engineering and construction projects, one or a few
clients have in the past and may in the future contribute a substantial portion
of the Company's consolidated revenues in any one year, or over a period of
several consecutive years. For example, the Company's backlog frequently
reflects multi-projects for individual clients and therefore, one major customer
may comprise a significant percentage of backlog at a point in time.

The Company has a contract with a major manufacturer of gas turbines to
fabricate at least 90% of the pipe necessary to install the combined-cycle gas
turbines to be built by this manufacturer domestically through 2004, and the
relationship with the turbine manufacturer has assisted the Company in obtaining
other work scopes, such as engineering, procurement, or construction associated
with the projects for which the turbines are being manufactured.

Additionally, the Company has long-standing relationships with many significant
customers, including customers with whom the Company has alliance agreements,
that have preferred pricing arrangements; however, the Company's contracts with
them are on a project by project basis and they may unilaterally reduce or
discontinue their purchases at any time.

The loss of business from any one of such customers could have a material
adverse effect on the Company's business or results of operations.

SHAW'S DEPENDENCE ON A FEW SUPPLIERS AND SUBCONTRACTORS COULD ADVERSELY AFFECT
THE COMPANY.

The principal raw materials in the Company's piping systems business are carbon
steel, stainless steel and other alloy piping, which Shaw obtains from a number
of domestic and foreign primary steel producers. In the Company's engineering,
procurement and construction services Shaw relies on third-party equipment
manufacturers or materials suppliers as well as third-party sub-contractors, to
complete its projects. To the extent that the Company cannot engage
sub-contractors or acquire equipment or materials, Shaw's ability to complete a
project in a timely fashion or at a profit may be impaired. To the extent the
amount the Company is required to pay for these goods and services exceeds the
amount the Company has estimated in bidding for lump-sum work, Shaw could
experience losses in the performance of these contracts. In addition, if a
manufacturer is unable to deliver the materials according to the negotiated
terms, the Company may be required to purchase the materials from another source
at a higher price. This may reduce the profit to be realized or result in a loss
on a project for which the materials were needed.

30

THE COMPANY'S PROJECTS EXPOSE IT TO POTENTIAL PROFESSIONAL LIABILITY, PRODUCT
LIABILITY, OR WARRANTY AND OTHER CLAIMS.

Shaw engineers and constructs (and the Company's products typically are
installed in) large industrial facilities in which system failures can be
disastrous. Any catastrophic occurrences in excess of insurance limits at
locations engineered or constructed by the Company or where Shaw's products are
installed could result in significant professional liability, product liability
or warranty and other claims against it. In addition, under some of the
Company's contracts, Shaw must use new metals or processes for producing or
fabricating pipe for its customers. The failure of any of these metals or
processes could result in warranty claims against the Company for significant
replacement or reworking costs.

Further, the engineering and construction projects Shaw is performing expose it
to additional risks including cost overruns, equipment failures, personal
injuries, property damage, shortages of materials and labor, work stoppages,
labor disputes, weather problems and unforeseen engineering, architectural,
environmental and geological problems. In addition, once the Company's
construction is complete, Shaw may face claims with respect to the performance
of these facilities.

THE INDEMNIFICATION PROVISIONS OF THE COMPANY'S ACQUISITION AGREEMENTS MAY NOT
FULLY PROTECT IT AND MAY RESULT IN UNEXPECTED LIABILITIES.

Some of the former owners of companies Shaw has acquired are contractually
required to indemnify the Company against liabilities related to the operation
of their companies before Shaw acquired them and for misrepresentations made by
them in connection with the acquisitions. In some cases, these former owners may
not have the financial ability to meet their indemnification responsibilities.
If this occurs, the Company may incur unexpected liabilities.

THE COMPANY'S COMPETITORS MAY HAVE GREATER RESOURCES AND EXPERIENCE THAN SHAW
DOES.

In the Company's engineering, procurement and construction business, Shaw has
numerous regional, national, and international competitors, many of which have
greater financial and other resources than Shaw does. The Company's competitors
include well-established, well-financed concerns, both privately and publicly
held, including many major power equipment manufacturers and engineering and
construction companies, some engineering companies, internal engineering
departments at utilities and certain of its customers. Because the Company is
primarily a service organization, Shaw competes by providing services of the
highest quality. The markets that Shaw serves require substantial resources and
particularly highly skilled and experienced technical personnel.

In pipe engineering and fabrication, competition on a domestic and international
level is substantial. In the United States, there are a number of smaller pipe
fabricators. Internationally, the Company's principal competitors are divisions
of large industrial firms. Some of the Company's competitors, primarily in the
international sector, have greater financial and other resources than Shaw does.

A FAILURE TO ATTRACT AND RETAIN QUALIFIED PERSONNEL COULD HAVE AN ADVERSE EFFECT
ON THE COMPANY.

The Company's ability to attract and retain qualified engineers, scientists and
other professional personnel, either through direct hiring or acquisition of
other firms employing such professionals, will be an important factor in
determining the Company's future success. The market for these professionals is
competitive, and there can be no assurance that the Company will be successful
in its efforts to attract and retain such professionals. In addition, Shaw's
ability to be successful depends in part on its ability to attract and retain
skilled laborers in its pipe fabrication business. Demand for these workers can
at times be high and the supply extremely limited.

TERRORISTS' ACTIONS HAVE AND COULD NEGATIVELY IMPACT THE U.S. ECONOMY AND THE
COMPANY'S MARKETS.

Terrorist attacks, such as those that occurred on September 11, 2001, have
contributed to economic instability in the United States and further acts of
terrorism, violence or war could affect the markets in which the Company
operates, its business operations, and expectations, and other forward-looking
statements in this Form 10-K.

The terrorist attacks on September 11, 2001 have also caused instability in the
world's markets. There can be no assurance that the current armed hostilities
will not increase or that these terrorist attacks, or responses from the United
States, will not

31

lead to further acts of terrorism and civil disturbances in the United States or
elsewhere, which may further contribute to economic instability in the United
States. These attacks or armed conflicts may directly impact the Company's
physical facilities or those of its suppliers or customers and could impact the
Company's domestic or international sales, its supply chain, its production
capability, and its ability to deliver its products and services to its
customers. Political and economic instability in some regions of the world may
also result and could negatively impact the Company's business.

ENVIRONMENTAL FACTORS AND CHANGES IN LAWS AND REGULATIONS COULD INCREASE THE
COMPANY'S COSTS AND LIABILITIES.

The Company is subject to environmental laws and regulations, including those
concerning:

o emissions into the air;

o discharges into waterways;

o generation, storage, handling, treatment and disposal of waste
materials; and

o health and safety.

The Company's projects often involve nuclear, hazardous and other highly
regulated materials, the improper characterization, handling or disposal of
which could constitute violations of federal, state or local statutes, and
result in criminal and/or civil liabilities. Environmental laws and regulations
generally impose limitations and standards for certain pollutants or waste
materials and require Shaw to obtain a permit and comply with various other
requirements. Governmental authorities may seek to impose fines and penalties on
the Company, or revoke or deny the issuance or renewal of operating permits, for
failure to comply with applicable laws and regulations.

In addition, under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 ("CERCLA"), as amended and comparable state laws, the
Company may be required to investigate and remediate hazardous substances.
CERCLA and these comparable state laws typically impose liability without regard
to whether a company knew of or caused the release, and liability has been
interpreted to be joint and several unless the harm is divisible and there is a
reasonable basis of allocation. The principal federal environmental legislation
affecting the Company's environmental/infrastructure division of its principal
engineering subsidiary and its clients include: the National Environmental
Policy Act of 1969 ("NEPA"), the Resource Conservation and Recovery Act of 1976
("RCRA"), the Clean Air Act, the Federal Water Pollution Control Act and the
Superfund Amendments and Reauthorization Act of 1986 ("SARA"). The Company's
foreign operations are also subject to various requirements governing
environmental protection.

The environmental health and safety laws and regulations to which Shaw is
subject are constantly changing, and it is impossible to predict the effect of
such laws and regulations on the Company in the future. Shaw has not conducted
environmental audits of many of its properties, including the assets the Company
acquired from Stone & Webster. The Company cannot give any assurance that its
operations will continue to comply with future laws and regulations or that
these laws and regulations will not significantly adversely affect the Company.

IF SHAW HAS TO WRITE-OFF A SIGNIFICANT AMOUNT OF INTANGIBLE ASSETS, THE
COMPANY'S EARNINGS WILL BE NEGATIVELY IMPACTED.

Because the Company has grown in part through acquisitions, goodwill and other
acquired intangible assets represent a substantial portion of its assets.
Goodwill was approximately $369 million as of August 31, 2001. If the Company
makes additional acquisitions, it is likely that additional intangible assets
will be recorded on its books. A determination that a significant impairment in
value of the Company's unamortized intangible assets has occurred would require
the Company to write-off a substantial portion of its assets. This write-off
would negatively affect the Company's earnings. See Note 1 of Notes to
Consolidated Financial Statements.

THE COMPANY IS AND WILL CONTINUE TO BE INVOLVED IN LITIGATION.

The Company has 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 and contractual disputes
or claims for personal injury or property damage which occur in connection with
services performed relating to project or construction sites. Such contractual
disputes normally involve claims relating to the performance of equipment design
or other engineering services or project construction services provided by the
Company's subsidiaries.

32

While the Company did not assume possible liabilities relating to environmental
pollution in connection with Stone & Webster's acquisition, a federal, state or
local governmental authority may seek redress from Shaw or its subsidiaries and
the Company may be named as a Potentially Responsible Party in an action by such
governmental authority. While the Company would vigorously contest any attempt
to make the Company responsible for unassumed environmental liabilities, there
can be no assurance that the Company would not be held liable in connection with
such matters in amounts that would have a material adverse effect on its
business and results of operations.

ADVERSE EVENTS COULD NEGATIVELY AFFECT THE COMPANY'S LIQUIDITY POSITION.

The Company operates in an environment in which the Company could be required to
utilize large sums of working capital, sometimes on short notice and sometimes
without the ability to recover the expenditures (as has been the experience of
certain of the Company's competitors). Circumstances or events which could
create large cash outflows include loss contracts, environmental liabilities,
litigation risks, unexpected costs or losses resulting from acquisitions,
contract initiation or completion delays, political conditions, customer payment
problems, foreign exchange risks, professional and product liability claims,
cash repurchases of the LYONs, etc. Although the Company attempts to mitigate
its risks, it cannot provide assurance that it will have sufficient liquidity or
the credit capacity to meet all its cash needs if it encounters significant
unforeseen working capital requirements which could result from these or other
factors.

Insufficient liquidity could have important consequences to the Company. For
example, the Company could

o experience difficulty in financing future acquisitions and/or
its continuing operations;

o be required to dedicate a substantial portion of its cash
flows from operations to the repayment of its debt and the
interest associated with its debt;

o have less operating flexibility due to restrictions which
could be imposed by its creditors, including restrictions on
incurring additional debt, creating liens on its properties
and paying dividends;

o have less success in obtaining new work if its sureties and/or
its lenders were to limit its ability to provide new
performance bonds or letters of credit for its projects; and

o incur increased lending fees, costs and interest rates.

All or any of these matters could place the Company at a competitive
disadvantage compared with competitors with more liquidity and could have a
negative impact upon the Company's financial condition and results of
operations.

WORK STOPPAGES AND OTHER LABOR PROBLEMS COULD ADVERSELY AFFECT THE COMPANY.

Some of the Company's employees in the United States and abroad may be
represented by labor unions. Shaw experienced a strike, without material impact
on pipe production, by union members in February 1997 relating to the
termination of collective bargaining agreements covering its pipe facilities in
Walker and Prairieville, Louisiana. A lengthy strike or other work stoppage at
any of the Company's facilities could have a material adverse effect on the
Company. From time to time Shaw has also experienced attempts to unionize the
Company's non-union shops. While these efforts have achieved limited success to
date, the Company cannot give any assurance that it will not experience
additional union activity in the future.

CHANGES IN TECHNOLOGY COULD ADVERSELY AFFECT THE COMPANY AND ITS COMPETITORS MAY
DEVELOP OR OTHERWISE ACQUIRE EQUIVALENT OR SUPERIOR TECHNOLOGY.

The Company believes its Stone & Webster subsidiary has a leading position in
technologies for the design and construction of ethelyne plants. The Company
protects it position through patent registrations, license restrictions, and a
research and development program; however, it is possible that others may
develop competing processes which could negatively affect the Company's market
position.

Additionally, the Company has developed construction and power generation
software, which it feels provide competitive advantages. The advantages
currently provided by this software could be at risk if competitors were to
develop superior or comparable technologies.

The Company's induction pipe bending technology and capabilities favorably
influence the Company's ability to compete

33

successfully. Currently this technology and its proprietary software are not
patented. While the Company has some legal protections against the dissemination
of this know-how, (including non-disclosure and confidentiality agreements), the
Company's efforts to prevent others from using its technology could be
time-consuming, expensive and ultimately may be unsuccessful or only partially
successful. Finally, there is nothing to prevent the Company's competitors from
independently attempting to develop or obtain access to technologies that are
similar or superior to Shaw's technology.

THE COMPANY'S SUCCESS DEPENDS ON KEY MEMBERS OF ITS MANAGEMENT, INCLUDING J. M.
BERNHARD, JR.

The Company's success is dependent upon the continued services of J. M.
Bernhard, Jr., its founder, Chairman, President and Chief Executive Officer, and
other key officers. The loss of Mr. Bernhard or other key officers could
adversely affect the Company. The Company does not maintain key employee
insurance on any of its executive officers.

MARKET PRICES OF THE COMPANY'S EQUITY SECURITIES COULD CHANGE SIGNIFICANTLY.

The market prices of the Company's Common Stock may change significantly in
response to various factors and events, including the following:

o the other risk factors described in this Form 10-K, including changing
demand for its products and services;

o a shortfall in operating revenue or net income from that expected by
securities analysts and investors;

o changes in securities analysts' estimates of the financial performance
of Shaw or its competitors or the financial performance of companies in
its industry generally;

o general conditions in its industry;

o general conditions in the securities markets;

o issuance of a significant number of shares upon exercise of employee
stock options or upon conversion of the LYONs; and

o issuance of shares of Common Stock to fund repurchases by the Company
of the LYONs.

Many of these factors are beyond the Company's control.

PROVISIONS IN THE COMPANY'S CHARTER DOCUMENTS AND RIGHTS AGREEMENT COULD MAKE IT
MORE DIFFICULT TO ACQUIRE THE COMPANY AND MAY REDUCE THE MARKET PRICE OF THE
COMMON STOCK.

The Company's articles of incorporation and by-laws contain certain provisions,
such as a provision establishing a classified board of directors (in the event
the entire board of directors is increased to twelve or more members),
provisions entitling holders of shares of Common Stock that have been
beneficially owned for four years or more to five votes per share, a provision
prohibiting shareholders from calling special meetings, a provision requiring
super majority voting (75% of the outstanding voting power) to approve certain
business combinations and provisions authorizing the Board of Directors to issue
up to 20 million shares of preferred stock without approval of the Company's
shareholders. Also, the Company has adopted a rights plan which limits the
ability of any person to acquire more than 15% of the Company's Common Stock.
These provisions could have the effect of delaying or preventing a change in
control of the Company or the removal of management, of deterring potential
acquirers from making an offer to the Company's shareholders and of limiting any
opportunity to realize premiums over prevailing market prices for the Common
Stock. Provisions of the Company's shareholder rights agreement could also have
the effect of deterring changes of control of the Company.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK

The Company is exposed to interest rate risk due to changes in interest rates,
primarily in the United States. The Company's policy is to manage interest rates
through the use of a combination of fixed and floating rate debt and short-term
fixed rate investments. The Company currently does not use any derivative
financial instruments to manage its exposure to interest rate risk. The table
below provides information about the Company's future maturities of principal
for outstanding debt instruments and fair value at August 31, 2001.

34

As discussed in Note 7 of Notes to Consolidated Financial Statements, on May 1,
2001, the Company issued $790 million (face value), 20-year, 2.25% zero coupon
unsecured convertible debt Liquid Yield Option (TM) Notes (the "LYONs") for
which it received net proceeds of approximately $490 million. After paying off
approximately $67 million of outstanding debt, the remaining proceeds were
invested in high quality short-term cash equivalents and marketable securities
held to maturity. During fiscal 2001, the income realized from these investments
was greater than the interest costs associated with the LYONs debt. However, the
Company anticipates that based on its current cash flow and yield projections
that interest income will be less than its interest expense in fiscal 2002.

The holders of the LYONs have the right to require the Company to repurchase the
debt on the third, fifth, tenth, and fifteenth anniversaries at the accreted
value. Therefore, the debt is presented above as maturing on the third
anniversary date because of the potential for repurchase requests by the debt
holders at that time.

Also during fiscal 2001, the Company used the proceeds from the sales of the
LYONs, the Company's Common Stock (see Note 2 of Notes to Consolidated Financial
Statements) and various assets to pay off its borrowings under its primary
Credit Facility ($235.2 million at August 31, 2000). At August 31, 2001, the
interest rate on this line of credit was either 6.5% (if the prime rate index
had been chosen) or 5.26% (if the LIBOR rate index had been chosen) with an
availability of $238.5 million. See Note 8 of Notes to Consolidated Financial
Statements for further discussion of this line of credit.

The estimated fair value of long-term debt as of August 31, 2001 and 2000 was
approximately $422 million and $46.7 million, respectively. The fair value of
the convertible debt as of August 31, 2001 was based on recent sales of such
debt as of August 31, 2001. The fair value of the Company's other long-term debt
at August 31, 2001 and August 31, 2000 were based on borrowing rates currently
available to the Company for notes with similar terms and average maturities.

FOREIGN CURRENCY RISKS

The majority of the Company's transactions are in U.S. dollars; however, certain
of the Company's subsidiaries conduct their operations in various foreign
currencies. Currently, the Company, when considered appropriate, uses hedging
instruments to manage its risks associated with its operating activities when an
operation enters into a transaction in a currency that is different from its
local currency. In these circumstances, the Company will frequently utilize
forward exchange contracts to hedge the anticipated purchases and/or sales. The
Company attempts to minimize its exposure to foreign currency fluctuations by
matching its revenues and expenses in the same currency for its contracts. As of
August 31, 2001, the Company had a minimal number of forward exchange contracts
outstanding that were hedges of certain commitments of foreign subsidiaries. The
exposure from the commitments is not material to the Company's results of
operations or financial position. See Notes 1 and 17 of Notes to Consolidated
Financial Statements.

35

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

36

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders
of The Shaw Group Inc.:

We have audited the accompanying consolidated balance sheets of The Shaw Group
Inc. (a Louisiana corporation) and subsidiaries as of August 31, 2001 and 2000,
and the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended August 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Shaw Group Inc. and
subsidiaries as of August 31, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended August 31,
2001, in conformity with accounting principles generally accepted in the United
States.

/s/ Arthur Andersen LLP
- --------------------------
Arthur Andersen LLP
New Orleans, Louisiana

October 5, 2001

37

THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF AUGUST 31, 2001 AND 2000
(DOLLARS IN THOUSANDS)

ASSETS

(Continued)

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

38

THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF AUGUST 31, 2001 AND 2000
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

LIABILITIES AND SHAREHOLDERS' EQUITY

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

39

THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED AUGUST 31, 2001, 2000 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

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

40

THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

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

41

THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31, 2001, 2000 AND 1999
(DOLLARS IN THOUSANDS)

(Continued)
The accompanying notes are an integral part of these consolidated statements.

42

THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)

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

43

THE SHAW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of The Shaw Group
Inc. (a Louisiana corporation) and its wholly-owned subsidiaries (collectively,
the "Company"). All material intercompany accounts and transactions have been
eliminated in these financial statements.

In order to prepare financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
as of the date of the financial statements which affect the reported values of
assets and liabilities and revenues and expenses, and disclosures of contingent
assets and liabilities. Areas requiring significant estimates by the Company's
management, include (i) contract expenses and profits and application of
percentage of completion accounting; (ii) recoverability of inventory and
application of lower of cost or market accounting; (iii) provisions for
uncollectable receivables and customer claims; (iv) provisions for income taxes
and related valuation allowances; (v) recoverability of net goodwill; (vi)
recoverability of other intangibles and related amortization; and (vii) accruals
for estimated liabilities, including litigation and insurance reserves. Actual
results could differ from those estimates.

Nature of Operations

The Company is a vertically-integrated provider of comprehensive engineering,
procurement and construction services and complete piping services. The Company
operates primarily in the United States, the Asia/Pacific Rim, Europe, South
America and the Middle East for customers in the power generation, process
(including petrochemical, chemical and refining) and other industries as well as
the environmental and infrastructure sector. The Company's services and products
include consulting, project design, engineering and procurement, piping system
fabrication, industrial construction and maintenance, manufacture and
distribution of specialty pipe fittings and design and fabrication of pipe
support systems. The Company's operations are conducted primarily through
wholly-owned subsidiaries and joint ventures.

Cash and Cash Equivalents

Highly liquid investments are classified as cash equivalents if they mature
within three months of the purchase date. At August 31, 2000, the Company
included in cash and cash equivalents approximately $1,300,000 which resulted
from industrial development bond financing. The Company was required to invest
these funds, which were released in fiscal 2001 in AAA rated, short-term
marketable securities until used for other capital improvements.

Accounts Receivable and Credit Risk

The Company's principal customers are major multi-national industrial
corporations, independent and merchant power providers, governmental agencies
and equipment manufacturers. Work is performed under contract and the Company
believes that in most cases its credit risk is minimal. The Company grants
short-term credit to its customers.

At August 31, 2001, the Company had an outstanding receivable from one customer
totaling approximately 33% of total accounts receivable. Approximately 95% of
that outstanding receivable balance represented billings in excess of costs.

Allowance for Uncollectable Receivables and Contract Adjustments

The allowance for uncollectable receivables and contract adjustments was
approximately $12,650,000 and $5,850,000 at August 31, 2001 and 2000. The
Company estimates the amount of uncollectable receivables based on historical
experience and management's understanding of the financial condition of its
customers. Contract adjustment allowances represent management's estimates of
the net amounts to be realized with respect to matters disputed or questioned by
customers. Increases to the allowance for the year ended August 31, 2001 were
approximately $10,600,000 and total reductions were approximately $3,800,000.
The net increase to this allowance was approximately $100,000 in fiscal 2000.
The Company increases or reduces sales for contract adjustments.

44

At August 31, 2001 and 2000, accounts receivable included approximately
$14,200,000 and $17,900,000, respectively, of receivables and claims, recorded
at net realizable value, due under contracts which are subject to contract
renegotiations or legal proceedings. At August 31, 2001, contracts with 16
customers made up the $14,200,000 balance discussed above. Management believes
that the ultimate resolution of these disputes will not have a significant
impact on future results of operations.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out ("FIFO") or weighted-average cost methods.

Property and Equipment

Property and equipment are recorded at cost. Additions and improvements
(including interest costs for construction of certain long-lived assets) are
capitalized. Maintenance and repair expenses are charged to income as incurred.
The cost of property and equipment sold or otherwise disposed of and the
accumulated depreciation thereon, are eliminated from the property and related
accumulated depreciation accounts, and any gain or loss is credited or charged
to income.

For financial reporting purposes, depreciation is provided by utilizing the
straight-line method over the following estimated useful service lives:

Transportation equipment 5-15 Years
Furniture and fixtures 3-7 Years
Machinery and equipment 3-18 Years
Buildings and improvements 8-40 Years

During the year ended August 31, 2001, interest costs of approximately $363,000
were capitalized.

Income Taxes

The Company provides for deferred taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109 - "Accounting for Income Taxes,"
which requires an asset and liability approach for measuring deferred tax assets
and liabilities due to temporary differences existing at year end using
currently enacted tax rates.

Revenues

For project management, engineering, procurement, and construction services, the
Company recognizes revenues under the percentage of completion method measured
primarily on contract costs incurred to date, excluding the costs of any
purchased but uninstalled materials, compared with total estimated contract
costs. Revenues from cost-plus-fee contracts are recognized on the basis of
costs incurred during the period plus the fee earned. Profit incentives are
included in revenues when their realization is reasonably assured.

For unit-priced pipe fabrication contracts, the Company recognizes revenues upon
completion of individual spools of production. A spool consists of piping
materials and associated shop labor to form a prefabricated unit according to
contract specifications. Spools are generally shipped to job site locations when
complete. During the fabrication process, all direct and indirect costs related
to the fabrication process are capitalized as work in progress. For lump-sum
fabrication contracts, the Company recognizes revenues based on the percentage
of completion method, measured primarily by the cost of materials for which
production is complete compared with the total estimated material costs of the
contract.

Revenue is recognized from consulting services as the work is performed.

The Company recognizes revenues for pipe fittings, manufacturing operations and
other services primarily at the time of shipment or upon completion of the
services.

Provisions for estimated losses for uncompleted contracts are made in the period
in which such losses are identified. The cumulative effect of other changes,
including those arising from contract penalty provisions, final contract
settlements and

45

reviews 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, the Company 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. An
amount equal to the costs attributable to unapproved change orders and claims is
included in the total estimated revenue when realization is probable. Profit
from unapproved change orders and claims is recorded in the year such amounts
are resolved.

Goodwill and Other Intangibles

Goodwill represents the excess of the purchase price of acquisitions over the
fair value of the net assets acquired. The Company's practice has been to
amortize goodwill and most other intangibles over a twenty-year period on a
straight line basis. However, effective fiscal 2002, the Company will cease to
amortize goodwill pursuant to SFAS No. 142 issued in July 2001 (see New
Accounting Standards below).

The Company also has recorded in other assets intangible assets with respect to
various licenses, patents, technology and related processes pertaining to the
design and construction of ethelyne plants (see Note 3 of Notes to Consolidated
Financial Statements) which are being amortized over a fifteen-year period on a
straight-line basis.

Goodwill represents the excess of the purchase price of acquisitions over the
fair value of the net assets acquired. Such excess costs and intangible assets
of various licenses, patents, technology and related processes pertaining to the
design and construction of plants which produce ethelyne (see Note 3) are being
amortized on a straight-line basis over a twenty-year period. The Company
periodically assesses the recoverability of the unamortized balance based on
expected future profitability and undiscounted future cash flows of the
acquisitions and their contribution to the overall operation of the Company.
Should the review indicate that the carrying value is not recoverable, the
excess of the carrying value over the undiscounted cash flows would be
recognized as an impairment loss.

Through August 31, 2001, the Company has historically conducted impairment
reviews of its goodwill and other intangibles, however, to date the Company has
not identified any impairment losses. The review of goodwill assessed the
recoverability of the unamortized balance based on expected future
profitability, undiscounted future cash flows of the acquisitions and their
contribution to the overall operation of the Company. An impairment loss would
have been recognized for the amount identified in the review by which the
goodwill balance exceeded the recoverable goodwill balance. Subsequent to August
31, 2001, the Company will perform impairment reviews in accordance with SFAS
No. 142 (see New Accounting Standards below).

Financial Instruments, Forward Contracts - Non-Trading Activities

The majority of the Company's transactions are in U.S. dollars; however, certain
of the Company's foreign subsidiaries conduct their operations in their local
currency. Accordingly, there are situations when the Company believes it is
appropriate to use off-balance sheet financial hedging instruments (generally
foreign currency forward contracts) to manage foreign currency risks when it
enters into a transaction denominated in a currency other than its local
currency.

Prior to September 1, 2000, at the inception of a hedging contract, the Company
designated a contract as a hedge if there was a direct relationship to the price
risk associated with the Company's future sales and purchases. Recognition of
the gains and losses on the early termination or maturity of forward contracts
designated as hedges were deferred until the period the hedged transaction was
recorded. However, gains or losses on the hedge transaction were recognized when
the direct relationship between the hedge and the Company's price risk ceased to
exist. Future changes in the fair value of the forward contracts were then
recognized as gains or losses in revenues or expenses in the period of change.

Effective September 1, 2000, the Company adopted SFAS No. 133 - "Accounting for
Derivative Instruments and Hedging Activities," which requires that all
derivative instruments be recorded on the balance sheet at fair value. The
Company designates each derivative contract as one of the following on the day
the contract is executed: (a) hedge of the fair value of a recognized asset or
liability or of an unrecognized firm commitment (fair value hedge), (b) hedge of
a forecasted transaction or of the variability of cash flows to be received or
paid related to a recognized asset or liability (cash flow hedge), or (c) hedge
of a net investment in a foreign operation (net investment hedge). Changes in
the fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether the derivative is designated as
part of a hedge transaction and, if so, depending on the type of hedge
transaction. For fair value hedge transactions, changes in fair value of

46

the derivative instrument are generally offset in the income statement by
changes in the fair value of the item being hedged. For cash flow hedge
transactions, changes in the fair value of the derivative instrument are
reported in other comprehensive income. For net investment hedge transactions,
changes in the fair value are recorded as a component of the foreign currency
translation account that is also included in other comprehensive income. The
gains and losses on cash flow hedge transactions that are reported in other
comprehensive income are reclassified to earnings in the periods in which
earnings are effected by the variability of the cash flows of the hedged item.
The ineffective portions of all hedges are recognized in current period
earnings. Upon initial application of SFAS No. 133, the Company recorded the
fair value of the existing hedge contracts on the balance sheet and a
corresponding unrecognized loss of $23,000 as a cumulative effect adjustment of
accumulated other comprehensive income, which was transferred to earnings during
fiscal 2001. The Company's hedging activities during fiscal 2001 were not
material.

The Company utilizes forward foreign exchange contracts to reduce its risk from
foreign currency price fluctuations related to firm or anticipated commitments
to purchase or sell equipment, materials and or services. These investments are
designated as cash flow hedging instruments. The Company normally does not use
any other type of derivative instrument or participate in any other hedging
activities.

Comprehensive Income

In the first quarter of fiscal 1999, the Company adopted SFAS No. 130 -
"Reporting Comprehensive Income," which establishes standards for the reporting
and display of comprehensive income as part of a full set of financial
statements. Comprehensive income for a period encompasses net income and all
other changes in a company's equity other than from transactions with the
company's owners.

The foreign currency translation adjustments relate to the varying strength of
the U.S. dollar in relation to the British pound, Australian and Canadian dollar
and Dutch guilder. The Company's statement of comprehensive income is included
in the Consolidated Statements of Shareholders' Equity.

Reclassifications

Certain reclassifications have been made to the prior years' financial
statements in order to conform to the current year's presentation.

Stock Based Compensation

Stock based compensation is accounted for using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and related interpretations. It is the Company's general
practice to issue stock options at the market value of the underlying stock; and
therefore, no compensation expense is recorded for these stock options.

New Accounting Standards

In early 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities" ("SOP") which became effective for fiscal years beginning after
December 15, 1998. The SOP requires that costs of start-up activities and
organization costs be expensed as incurred and that upon adoption of the SOP
that any previously unamortized costs be written off and reported as a
cumulative effect of a change in accounting principle. Accordingly, the Company
wrote off deferred organizational costs of approximately $320,000, net of taxes,
at the start of fiscal 2000 (September 1999).

In July 2001, the Financial Accounting Standards Board (FASB) issued two new
accounting standards SFAS No. 141 -"Business Combinations," and SFAS No. 142
- -"Goodwill and Other Intangible Assets." The new standards have significantly
changed prior practices by: (i) terminating the use of the pooling-of-interests
method of accounting for future business combinations, (ii) ceasing goodwill
amortization, and (iii) requiring impairment testing of goodwill based on a fair
value concept. SFAS No. 142 requires that impairment testing of the opening
goodwill balances be performed within six months from the start of the fiscal
year in which the standard is adopted and that any impairment be written off and
reported as a cumulative effect of a change in accounting principle. It also
requires that another impairment test be performed during the fiscal year of
adoption of the standard and, that impairment tests should be performed at least
annually thereafter, with interim

47

testing required if circumstances warrant. The standards must be implemented for
fiscal years beginning after December 31, 2001, but early adoption is permitted.
The Company has decided to adopt the new standards for its fiscal year beginning
September 1, 2001. Accordingly, the Company will cease to amortize goodwill in
fiscal 2002. Goodwill amortization was approximately $18,859,000, $3,099,000 and
$1,846,000 for the years ended August 31, 2001, 2000 and 1999, respectively. The
Company has not completed its initial evaluation of goodwill impairment that is
required with the adoption of the SFAS No. 142. However, based on the
preliminary evaluation procedures it has performed, the Company does not believe
that its existing goodwill balances will be impaired under the new standards
however, no assurances can be given. The initial transition evaluation is
required to be and will be completed by February 28, 2002 which is within the
six month transition period allowed by the new standard upon adoption.

The FASB also recently issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This statement, which is first effective in 2003, covers the
accounting for closure or removal-type costs that are incurred with respect to
long-lived assets. The nature of the Company's business and long-lived assets is
such that adoption of this new standard should have no significant impact on the
Company's financial position or results of operations.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which supersedes FASB No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." The new statement also supersedes certain aspects of APB 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," with regard to reporting the effects of a disposal of a segment
of a business and will require expected future operating losses from
discontinued operations to be reported in discontinued operations in the period
incurred rather than as of the measurement date as presently required by APB 30.
Additionally, certain dispositions may now qualify for discontinued operations
treatment. The provisions of the statement are required to be applied for fiscal
years beginning after December 15, 2001 and interim periods within those fiscal
years. The Company has not yet determined what effect this statement will have
on its financial statements.

NOTE 2--CAPITAL STOCK TRANSACTIONS

In September 2001, the Company announced that its Board of Directors had
authorized the Company to repurchase shares of its Common Stock, depending on
market conditions, up to a limit of $100,000,000. As of October 5, 2001 the
Company had purchased 203,000 shares at a cost of approximately $5,900,000 under
this program.

On July 31, 2001, the Company issued a dividend distribution of one Preferred
Share Purchase Right (a "Right") for each outstanding share of the Company's
Common Stock (see Note 10 of Notes to Consolidated Financial Statements).

Effective May 1, 2001, the Company issued and sold $790,000,000 (including
$200,000,000 to cover over-allotments) of 20-year, zero-coupon, unsecured,
convertible debt, Liquid Yield Option(TM) Notes ("LYONs", "debt" or "the
securities"). The debt was issued at an original discount price of $639.23 per
$1,000 maturity value and has a yield to maturity of 2.25%. The debt is senior
unsecured obligations of the Company and is convertible into the Company's
Common Stock at a fixed ratio of 8.2988 per $1,000 maturity value or an
effective conversion price of $77.03 at the date of issuance. Under the terms of
the issue, the conversion rate may be adjusted for certain reasons, but will not
be adjusted for accrued original issue discount.

In January 2001, the Company's shareholders approved increases in (i) the number
of the Company's authorized Common Stock from 50,000,000 shares to 200,000,000
shares and (ii) the number of shares of the Company's authorized no par value
preferred stock from 5,000,000 shares to 20,000,000 shares.

The Company effected a two-for-one stock split of its Common Stock on December
15, 2000. Unless otherwise indicated, all references to the number of shares and
to per-share information in the financial statements and related notes have been
adjusted to reflect this stock split on a retroactive basis.

In October 2000, the Company completed the sale of 4,837,338 shares (including
1,200,000 shares to cover over-allotments) of its Common Stock in an
underwritten public offering at a price of $31.75 per share, less underwriting
discounts and commissions. The net proceeds to the Company, less underwriting
discounts and commissions and other offering expenses, totaled approximately
$144,800,000 and were used to pay amounts outstanding under the Company's
primary revolving line of credit facility. The Company's primary revolving line
of credit facility has been used to provide working capital and to fund

48

fixed asset purchases and subsidiary acquisitions, including the Stone & Webster
Incorporated ("Stone & Webster") acquisition (see Note 3 of Notes to
Consolidated Financial Statements).

In September 2000, the Company retired 16,404,916 shares of treasury stock
recorded at $22,043,000.

In November 1999, the Company sold 6,900,000 shares (including over-allotments)
of its common stock, no par value (the "Common Stock"), in an underwritten
public offering at a price of $10.50 per share, less underwriting discounts and
commissions. The net proceeds to the Company, less underwriting discounts and
commissions and other expenses of the offering, totaled approximately
$67,500,000 and were used to pay down amounts outstanding under the Company's
primary revolving line of credit facility and certain other long-term debt.

NOTE 3--ACQUISITIONS

Acquisitions completed by the Company and discussed below have been accounted
for under the purchase method of accounting. Under the purchase method, the cost
of each acquired operation is allocated to the assets acquired and liabilities
assumed based on their estimated fair values. These estimates are revised during
the allocation period as necessary when, and if, information becomes available
to further define and quantify the value of the assets acquired and liabilities
assumed. The allocation period does not exceed beyond one year from the date of
the acquisition. To the extent additional information to refine the original
allocation becomes available during the allocation period, the allocation of the
purchase price is adjusted. Likewise, to the extent such information becomes
available after the allocation period, such items are included in the Company's
operating results in the period that the settlement occurs or information is
available to adjust the original allocation to a better estimate. These future
adjustments, if any, that may arise from these acquisitions may materially
impact the Company's future consolidated financial position or results of
operations.

In connection with potential acquisitions the Company incurs and capitalizes
certain transaction costs, which include legal, accounting, consulting and other
direct costs. When an acquisition is completed these costs are capitalized as
part of the acquisition price. The Company routinely evaluates capitalized
transaction costs and expenses those costs related to acquisitions that are not
likely to occur. Indirect acquisition costs, such as salaries, corporate
overhead and other corporate services are expensed as incurred.

The operating results of the acquisitions accounted for as a purchase are
included in the Company's consolidated financial statements from the applicable
date of the transaction.

Stone & Webster Acquisition

On July 14, 2000, the Company purchased substantially all of the operating
assets of Stone & Webster, a global provider of engineering, procurement,
construction, consulting and environmental services to the power, process,
environmental and infrastructure markets. The Company funded this acquisition
with $14,850,000 in cash (net of $22,750,000 of funds returned from escrow) and
4,463,546 shares of Common Stock (valued at approximately $105,000,000 at
closing). The Company also assumed approximately $740,000,000 of liabilities.
The Company incurred approximately $12,000,000 of acquisition costs. The
purchase price was subject to various adjustments, and the final allocation is
discussed below. Any future adjustments will be reflected in operating results.

The excess of the initial aggregate purchase price over the estimated fair
market value of net tangible assets acquired was approximately $300,000,000.
During the allocation period following the acquisition, changes in the initial
estimated purchase price allocation were appropriately adjusted through
goodwill. The more significant changes in estimates are discussed below. The
final allocation of cost resulted in an excess of the aggregate adjusted
purchase price over the estimated fair market value of net tangible assets
acquired of approximately $381,000,000 (recorded as patents, licenses, other
tangibles and goodwill). The following reflects the final allocation of the
purchase price to the acquired assets and liabilities (in thousands):

Accounts receivable $150,720
Cost and estimated earnings in excess of billings on uncompleted contracts 37,406
Inventories 11,480
Assets held for sale 112,652
Patents, licenses and other intangible assets 28,600
Property and equipment 19,606
Deferred income taxes 87,451
Other assets 28,935
Goodwill 352,557
Accounts payable and accrued liabilities (326,456)
Billings in excess of cost and estimated earnings on uncompleted contracts (143,612)
Accrued contract losses and adjustments (163,515)
Debt and bank loans (92,497)
Other liabilities (13,498)
-------
Purchase price (net of cash received of $42,194) $89,829
=======

49

For the year ended August 31, 2001 and 2000, goodwill amortization was
approximately $16,800,000 and $1,800,000, respectively, and was amortized on a
straight line basis based on a 20 year estimated life. See Note 1 of Notes to
Consolidated Financial Statements with respect to the impact of the Company's
adoption of SFAS No. 142 - "Goodwill and Other Intangibles" for the year ending
August 31, 2002.

The acquisition was concluded as part of a proceeding under Chapter 11 of the U.
S. Bankruptcy Code for Stone & Webster, Inc. In December 2000, the parties
entered into an amendment to the initial acquisition agreement that: (i)
returned approximately $22,750,000 to the Company from escrow, (ii) waived the
purchase price adjustment provision of the agreement, (iii) excluded four
completed contracts from the transaction, and (iv) required the Company to
assume three previously excluded items. This amendment was approved by the
bankruptcy court and decreased the Company's purchase price and goodwill.

The Company believes that, pursuant to the terms of the acquisition agreement,
it assumed only certain specified liabilities. The Company believes that
liabilities excluded from this acquisition include liabilities associated with
certain contracts in progress, completed contracts, claims or litigation that
relate to acts or events occurring prior to the acquisition date, and certain
employee benefit obligations, including Stone & Webster's U.S. defined benefit
plan (collectively, the excluded items). The Company, however, cannot provide
assurance that it has no exposure with respect to the excluded items because,
among other things, the bankruptcy court has not finalized its validation of
claims filed with the court. The final amount of assumed liabilities may change
as a result of the validation of claims process; however, the Company believes,
based on its review of claims filed, that any such adjustment to the assumed
liabilities will not be material.

The Company acquired a large number of contracts with either inherent losses or
lower than market rate margins primarily because Stone & Webster's previous
financial difficulties had negatively affected the negotiation and execution of
the contracts. These contracts were adjusted to their estimated fair value at
acquisition date (July 14, 2000) and a liability (gross margin reserve) of
$121,815,000 was established, including adjustments of $38,118,000 recorded
during the one-year allocation period. The adjustment during the allocation
period resulted from a more accurate determination of the actual contract status
at acquisition date. The amount of the accrued future cash losses on assumed
contracts with inherent losses (contract loss reserve) was estimated to be
approximately $41,700,000 (including adjustments totaling approximately
$5,400,000 recorded during the allocation period), and a liability of such
amount was established. Both reserves are reduced as work is performed on the
contracts and such reduction in the reserves results in a reduction in cost of
sales and a corresponding increase in gross profit. Goodwill and deferred tax
assets for the Stone & Webster acquisition were adjusted by $43,518,000 due to
the revisions to the original reserve estimates identified during the allocation
period. These reserves and adjustments during the allocation period, as well as
the decreases in the cost of sales for the periods indicated, are as follows (in
thousands):

50

The Company acquired several contracts under which Stone & Webster was
contractually obligated to pay liquidated damages or for which the scheduled
project completion date was beyond the contract completion date agreed to with
the customer, which would require the Company to pay liquidated damages upon
completion of the project. In addition, several acquired contracts contain
warranty provisions requiring achievement of acceptance and performance testing
levels or payment of filed liens or claims on the project. The Company recorded
reserves of approximately $42,000,000 at acquisition date related to these
contracts. No payments have been made on these amounts as the contracts are
still in progress. Payments are anticipated upon completion of the contract or
during the warranty periods. The ultimate amount of these payments may vary
depending upon the actual completion date compared to the current scheduled
completion date, the amount needed to resolve the performance requirements, and
final negotiations with the customers or lien holders. To the extent the final
settlement or payment amount is different than the reserve established, the
difference will be reflected in results of operations in the period the
difference is known.

Property and equipment acquired in the Stone & Webster acquisition included
software and other assets that required a reassessment of their fair value.
During the one-year allocation period, this assessment was completed and the
purchase price allocated to property and equipment was reduced from Stone &
Webster's net book value of $48,779,000 to $19,606,000. A corresponding
adjustment was made that increased goodwill by $29,173,000.

The Company also acquired various licenses, patents, technology and related
processes pertaining to the design and construction of ethelyne plants. The
Company assigned an estimated value of $50,000,000 in its preliminary allocation
as of the date of acquisition pending completion of an appraisal of these
assets. During the allocation period the appraisal was completed which valued
these assets at $28,600,000 based on estimates of the discounted cash flows to
be generated from the existing acquired technology. An adjustment has been made
to increase goodwill by $21,400,000, representing the difference between the
original estimated value of the technology at the time of the Stone & Webster
acquisition and the above appraised value. The estimated useful lives of these
intangible assets are 15 years.

The Company also assumed certain liabilities pursuant to severance and change in
control agreements for certain former Stone & Webster executives, and the
Company recorded an acquisition liability of approximately $22,400,000 for
amounts due to executives who were not retained. During the year ended August
31, 2001, the Company settled all of the Stone & Webster executive severance
liabilities and reduced this reserve by approximately $5,000,000. Goodwill and
deferred taxes were adjusted to reflect the difference between the Company's
initial estimated liability for executive severance payments and its final
payment requirements.

Included in this acquisition was a cold storage and frozen food handling
operation which Stone & Webster had previously reported as a discontinued
operation. The Company classified the operation as assets held for sale until
the Company sold all of these assets (other than cash) for $69,364,000 (net of
various purchase price adjustments) in December 2000. Losses, net of taxes, of
approximately $1,397,000 and $332,000 from this operation's results, which
includes allocated interest expense of approximately $2,387,000 and $1,000,000,
have been excluded from the Company's Statements of Income for the years ended
August 31, 2001 and 2000, respectively. These losses were included in the
Company's allocation of purchase price to the acquired assets and liabilities.
In connection with the sale of these assets, the Company also acquired an
approximate 19.5% equity interest in the purchaser of the assets for an
investment of $1,930,000, which is accounted for under the cost method.
Additionally, in December 2000, the Company completed the sale of an office
building located in Houston, Texas which was acquired in the Stone & Webster
acquisition and realized net proceeds of approximately $21,100,000 after paying
off the mortgage of approximately $19,700,000. The proceeds from these asset
disposals were used to pay down the Company's primary credit facility.

The following summarized unaudited proforma income statement data reflects the
impact the Stone & Webster acquisition would have had on fiscal 2000, had the
acquisition taken place at the beginning of the fiscal year (in thousands,
except per share data):

51

The unaudited proforma results for the year ended August 31, 2000 has been
prepared for comparative purposes only and does not purport to be indicative of
the amounts which actually would have resulted had the acquisition occurred on
September 1, 1999, or which may result in the future.

Other Acquisitions

In March 2001, the Company acquired the assets and certain liabilities of Scott,
Sevin & Schaffer, Inc. and Technicomp, Inc. (collectively "SS&S"). As of August
31, 2001, the Company had issued 170,683 shares (including purchase price
protection reduced by purchase price adjustment settlements) of its Common Stock
(valued at approximately $6,300,000) as consideration for the transaction and
13,800 of the issued shares were escrowed to secure certain indemnities provided
by the seller. The Company also incurred approximately $160,000 of acquisition
costs. This acquisition was accounted for under the purchase method of
accounting and approximately $4,300,000 of goodwill was recorded. For the year
ended August 31, 2001, goodwill for this acquisition was amortized on a straight
line basis based on a 20 year estimated life. See Note 1 of Notes to
Consolidated Financial Statements with respect to the impact of the Company's
adoption of SFAS No. 142 - "Goodwill and Other Intangibles" on September 1,
2001. SS&S's primary business is structural steel, vessel, and tank fabrication.

On July 12, 2000, the Company completed the acquisition of certain assets and
assumption of liabilities of PPM Contractors, Inc. ("PPM"). Total consideration
paid was 86,890 shares of the Company's Common Stock valued at $2,012,000 and
the assumption of certain liabilities. Acquisition costs were not material. The
purchase method was used to account for the acquisition and goodwill of
approximately $2,100,000 was recorded. For the years ended August 31, 2001 and
2000, goodwill for this acquisition was amortized on a straight line basis based
on a 20 year estimated life. See Note 1 of Notes to Consolidated Financial
Statements with respect to the impact of the Company's adoption of SFAS No. 142
- - "Goodwill and Other Intangibles" on September 1, 2001. PPM's primary business
is providing sandblasting and painting services to industrial customers.

The proforma effects of these other acquisitions as though they had occurred as
of the beginning of the immediate proceeding fiscal year is not material to the
operations of the Company.

NOTE 4--INVENTORIES

The major components of inventories consist of the following (in thousands):

52

NOTE 5--INVESTMENT IN UNCONSOLIDATED ENTITIES

The Company owns 49% of Shaw-Nass Middle East, W.L.L, a joint venture in Bahrain
("Shaw-Nass") which is accounted for on the equity basis. During the years ended
August 31, 2001, 2000, and 1999, the Company recognized earnings of $250,000,
$1,194,000, and $681,000, respectively, from Shaw-Nass. No distributions have
been made through August 31, 2001 by Shaw-Nass. At August 31, 2001,
undistributed earnings of Shaw-Nass included in the consolidated retained
earnings of the Company amounted to approximately $2,419,000. As of August 31,
2001 and 2000, the Company's investment in Shaw Nass was approximately
$6,090,000 and $5,840,000, respectively and the Company had outstanding
receivables from Shaw-Nass totaling $6,178,000 and $5,871,000, respectively.
These receivables relate primarily to inventory and equipment sold and net
advances and are recorded as long-term advances to Shaw-Nass. The Company did
not make any equity contributions during the fiscal years ended August 31, 2001
and 2000.

During the years ended August 31, 2001, 2000 and 1999, revenues of $230,000,
$19,000, and $1,188,000, were recognized on sales of products from the Company
to Shaw-Nass. The Company's 49% share of profit on these sales was eliminated.

In fiscal 2001, the Company and Entergy Corporation ("Entergy") formed
EntergyShaw, L.L.C. ("EntergyShaw"), an equally-owned and equally-managed
company. EntergyShaw's initial focus is the construction of power plants in
North America and Europe for Entergy's wholesale operations. The Company
believes that EntergyShaw, subject to the approval of its joint-management
committee, will manage the construction of most of these power plants.
Additionally, under the terms of the arrangement, the Company will offer
EntergyShaw a right of first refusal to contract for bundled engineering,
procurement, and construction ("EPC") services. This right of first refusal does
not apply to project inquiries related to services other than fully bundled EPC
projects. In any event, the Company expects to provide EPC services and pipe
fabrication for substantially all of EntergyShaw's power generation projects.

During the year ended August 31, 2001, the Company made an initial investment in
EntergyShaw of $2,000,000. The Company has recognized losses of $566,000 (net of
a tax benefit of $354,000) from EntergyShaw during the year ended August 31,
2001. During fiscal 2001, the Company had sales to EntergyShaw of approximately
$17,080,000. In addition, as of August 31, 2001, the Company's investment in
EntergyShaw was $1,080,000 and it had outstanding trade accounts receivable from
EntergyShaw totaling approximately $4,848,000. Other than its initial $2,000,000
investment, the Company has no further capital contribution commitments to
EntergyShaw.

In connection with the December 2000 sale of a cold storage and frozen food
handling operation that was included in the Stone & Webster acquisition, the
Company acquired an approximate 19.5% equity interest in the purchaser of the
assets for an investment of $1,930,000. Since this equity interest is less than
20% and the Company does not exert any significant influence over the management
of the operations, the Company will not recognize any income from this operation
other than cash distributions. No such distributions have been made since its
acquisition.

As is common in the engineering, procurement and construction industries, the
Company executed certain contracts jointly with third parties through joint
ventures, limited partnerships and limited liability companies. The investments
are included on the accompanying consolidated balance sheet as of August 31,
2001 and 2000 are $10,966,000 and $8,650,000, respectively, which generally
represents the Company's cash contributions and earnings from these investments.

NOTE 6--INVESTMENT IN SECURITIES AVAILABLE FOR SALE

In December 1998, the Company participated in a customer's project financing by
acquiring $12,500,000 of 15% Senior Secured Notes due December 1, 2003 (the "15%
Notes"), and preferred stock related thereto issued by the customer for the face
value of the notes. The 15% Notes were originally secured by a first priority
security interest in certain assets of the customer's Norco, Louisiana refinery
where the Company provided construction services.

In November 1999, the Company exchanged its 15% Notes for (i) $14,294,535
(representing the principal and accrued interest on the Company's 15% Notes) of
10% Senior Secured Notes due November 15, 2004 (the "New Notes"), and (ii)
shares of the customer's Class A Convertible Preferred Stock. This exchange was
made pursuant to an offer initiated by the customer to all holders of the 15%
Notes (aggregating approximately $254,000,000 in principal and interest). The
10% interest rate on the New Notes will increase to 14% on November 16, 2003
until maturity. Through November 15, 2003, the Company expects to receive
additional New Notes in lieu of interest payments. The New Notes have little
market liquidity.

53

The Company participated in the New Notes exchange offer because, upon receipt
of the requisite approval by the holders of the 15% Notes, the collateral
securing the 15% Notes would be released. All holders of the 15% Notes
participated in the New Notes exchange offer.

Prior to the exchange offer, the Company's customer issued additional common
stock, raising $50,000,000 in additional equity, and obtained additional secured
indebtedness of approximately $150,000,000, which ranked senior to both the 15%
Notes and the New Notes. As such, the security interest in the refinery assets
securing the New Notes is subordinate to the security interest securing such
additional indebtedness.

During fiscal 2001, the Company used $7,000,000 of the New Notes to satisfy
certain liabilities related to the acquisition of Stone & Webster. The Company
has classified the New Notes as available for sale and, therefore, the New Notes
are measured at fair value, which the Company believes approximates the face
value of the New Notes. The New Notes had an aggregate value of $9,079,000 and
$15,236,000 at August 31, 2001 and 2000, respectively. The financing arrangement
was related to construction services that were completed prior to the end of the
first quarter of fiscal 2001. Accordingly, during the years ended August 31,
2001, 2000 and 1999, interest income of approximately $312,000, $1,406,000 and
$1,330,000, respectively, from these securities were included in sales, and
imputed interest costs associated with carrying the securities of approximately
$381,000, $1,106,000 and $621,000, respectively, were included in cost of sales.
The remaining interest income earned during fiscal 2001 from these securities,
amounting to $531,000, is included in other income. The interest cost was
calculated at the Company's effective borrowing rate, which approximated 9.8%
for the three month period ended November 30, 2000, and 7.6% and 7.0% for the
twelve months ended August 31, 2000 and 1999, respectively.

In November 1999, the Company also exchanged the related preferred stock for
shares of new Class C Convertible Preferred Stock, the amount and value of which
are not material.

The Company also had equity securities available for sale aggregating $1,411,000
and $1,125,000 at August 31, 2001 and 2000, respectively. At August 31, 2001,
the Company reflected a $12,000 unrealized loss ($7,000, net of related taxes)
on certain of these securities as a component of other comprehensive income in
stockholders' equity. The unrealized loss relates to a temporary decrease in the
value of these securities from their historical cost. The Company also
reclassified a loss of $942,000 ($576,000, net of related taxes) to net income
during the year ended August 31, 2001, due to an impairment loss on securities
acquired in the Stone & Webster acquisition. As of August 31, 2000, no
unrealized or realized gains or losses had been recorded on the securities held
for sale.

54

NOTE 7--LONG-TERM DEBT

Annual maturities of long-term debt during each year ending August 31 are as
follows (in thousands):

Effective May 1, 2001, the Company issued and sold $790,000,000 (including
$200,000,000 to cover over-allotments) of 20-year, zero-coupon, unsecured,
convertible debt, Liquid Yield Option(TM) Notes ("LYONs", "debt" or "the
securities"). The debt was issued at an original discount price of $639.23 per
$1,000 maturity value and has a yield to maturity of 2.25%. The debt is senior
unsecured obligations of the Company and is convertible into the Company's
Common Stock at a fixed ratio of 8.2988 per $1,000 maturity value or an
effective conversion price of $77.03 at the date of issuance. Under the terms of
the issue, the conversion rate may be adjusted for certain factors as defined in
the agreement including but not limited to dividends or distributions payable on
Common Stock, but will not be adjusted for accrued original issue discount. The
Company realized net proceeds, after expenses, from the issuance of these
securities of approximately $490,000,000. The Company used these proceeds to
retire outstanding indebtedness and for general corporate purposes, including
investment in AAA rated, short-term marketable securities held until maturity
and cash equivalents.

The holders of the debt have the right to require the Company to repurchase the
debt on the third, fifth, tenth, and fifteenth anniversaries at the then
accreted value. The debt is reflected in the preceding maturity table as
maturing at the first repurchase date. The Company has the right to fund such
repurchases with shares of its Common Stock, cash, or a combination of Common
Stock, at the current market value, and cash. The debt holders also have the
right to require the Company to repurchase the debt for cash, at the accreted
value, if there is a change in control of the Company, as defined, occurring on
or before May 1, 2006. The Company may redeem all or a portion of the debt at
the accreted value, through cash payments, at any time after May 1, 2006.

The estimated fair value of long-term debt as of August 31, 2001 and 2000 was
approximately $422,000,000 and $46,700,000, respectively. The fair value of the
convertible debt as of August 31, 2001 was based on recent sales of such debt as
of August 31, 2001. The fair value of the Company's other long-term debt at
August 31, 2001 and August 31, 2000 were based on borrowing rates currently
available to the Company for notes with similar terms and average maturities.

During fiscal 2001 and 2000, the Company recognized, as interest expense,
$5,808,000 and $411,000, respectively, of costs associated with the amortization
of financing fees which were incurred with respect to initiation of the
Company's LYONs and Credit Facility. The LYONs costs are being amortized to the
first repurchase date of the debt. As of August 31, 2001 and 2000, unamortized
deferred financing fees of the Company's LYONs debt and Credit Facility were
approximately $20,923,000 and $10,112,000, respectively.

56

NOTE 8--REVOLVING LINES OF CREDIT

The Company's primary credit facility is a three year term, $300,000,000 credit
facility ("Credit Facility") dated July 2000 that permits both revolving credit
loans and letters of credit, which letters of credit cannot exceed $150,000,000.
The Company has the option to increase the Credit Facility under existing terms
to $400,000,000, if certain conditions are satisfied, including the successful
solicitation of additional lenders or increased participation of existing
lenders. The Credit Facility allows the Company to borrow either at interest
rates in a range of 1.50% to 2.75% over the London Interbank Offered Rate
("LIBOR") or from the prime rate to 1.25% over the prime rate. The Company
selects the interest rate index and the spread over the index is dependent upon
certain financial ratios of the Company. The Credit Facility is secured by,
among other things, (i) guarantees by the Company's domestic subsidiaries; (ii)
a pledge of all of the capital stock in the Company's domestic subsidiaries and
66% of the capital stock in certain of the Company's foreign subsidiaries; and
(iii) a security interest in all property of the Company and its domestic
subsidiaries (except real estate and equipment). The Credit Facility also
contains restrictive covenants, which include ratios, minimum capital levels,
limits on other borrowings and other restrictions. As of August 31, 2001, the
Company was in compliance with these covenants or had obtained the necessary
waivers, had no outstanding revolving credit loans, and letters of credit of
approximately $61,500,000 were outstanding under the Credit Facility. The
Company's total availability under the Credit Facility at August 31, 2001 was
approximately $238,500,000, which included availability for letters of credit of
approximately $88,500,000. At August 31, 2001, the interest rate on this line of
credit was either 6.5% (if the prime rate index had been chosen) or 5.26% (if
the LIBOR rate index had been chosen).

As of August 31, 2001, the Company's foreign subsidiaries had short-term
revolving lines of credit permitting borrowings totaling approximately
$16,200,000. These subsidiaries had outstanding borrowings under these lines of
approximately $3,900,000 at a weighted average interest rate of 6.0% at August
31, 2001.

NOTE 9--INCOME TAXES

The significant components of deferred tax assets and liabilities are as follows
(in thousands):

Income (loss) before provision for income taxes for the years ended August 31
was as follows (in thousands):

57

The provision for income taxes for the years ended August 31 was as follows (in
thousands):

A reconciliation of Federal statutory and effective income tax rates for the
years ended August 31 was as follows:

As of August 31, 2001, for Federal income tax return purposes, the Company had
approximately $66,657,000 of U.S. net operating loss carryforwards available to
offset future taxable income. The carryforwards expire beginning in 2011 through
2020. As of August 31, 2001, the Company's United Kingdom ("U.K.") operations
had net operating loss carryforwards of approximately L.1,066,000 ($1,554,000),
which can be used to reduce future taxable income in the U.K. As of August 31,
2001, a benefit of $466,200 had been given to these losses in the accompanying
financial statements.

Unremitted foreign earnings reinvested abroad upon which deferred income taxes
have not been provided aggregated approximately $6,296,000 at August 31, 2001.
Due to the timing and circumstances of repatriation of such earnings, if any, it
is not practicable to determine the unrecognized deferred tax liability relating
to such amounts. Withholding taxes, if any, upon repatriation would not be
significant.

NOTE 10--COMMON STOCK

The Company has one class of Common Stock. Each outstanding share of Common
Stock, which has been held for four consecutive years without an intervening
change in beneficial ownership, entitles its holder to five votes on each matter
properly submitted to the Company's shareholders for their vote, waiver, release
or other action. Each outstanding share of Common Stock which has been held for
less than four consecutive years entitles its holder to only one vote.

On July 31, 2001, the Company distributed a dividend distribution of one
Preferred Share Purchase Right (a ""Right") for each outstanding share of the
Company's Common Stock outstanding on that date. The Rights, which expire on
July 9, 2011, will not prevent a takeover, but are designed to deter coercive or
unfair takeover tactics, and are, therefore, intended to enable all Company
shareholders to realize the long-term value of their investment in the Company.
It is anticipated that the Rights will encourage anyone seeking to acquire the
Company to negotiate with the Board of Directors prior to attempting a takeover.

The Rights, which are governed by a Rights Agreement dated July 9, 2001, between
the Company and First Union National Bank, as Rights Agent, should not interfere
with a merger or other business combination approved by the Company's Board of
Directors.

The Rights are attached to the Company's Common Stock and are exercisable only
if a person or group (an "Acquiring Person") either (i) acquires 15% or more of
the Company's Common Stock or (ii) commences a tender offer, the consummation of
which would result in ownership by the Acquiring Person of 15% or more of the
Common Stock. The Board of Directors is authorized to reduce the 15% threshold
to not less than 10% of the Common Stock.

In the event the Rights become exercisable, each Right will entitle shareholders
(other than the Acquiring Person) to buy one

58

one-hundredth of a share of a new series of junior participating preferred stock
("Preferred Shares") at an exercise price of $170.00 (the "Exercise Price"). The
Exercise Price is subject to certain anti-dilution adjustments. Each one
one-hundredth of a Preferred Share will give the stockholder approximately the
same dividend, voting and liquidation rights as would one share of Common Stock.

In lieu of Preferred Shares, each Right holder (other than the Acquiring Person)
will be entitled to purchase from the Company at the Right's then-current
Exercise Price, shares of the Company's Common Stock having a market value of
twice such Exercise Price. In addition, if the Company is acquired in a merger
or other business combination transaction after a person has acquired 15% or
more of the Company's outstanding Common Stock, each Right will entitle its
holder to purchase at the Right's then-current Exercise Price, a number of the
acquiring company's common shares having a market value of twice such Exercise
Price, in lieu of acquiring Preferred Shares.

Further, after a group or person becomes an Acquiring Person, but prior to
acquisition by such person of 50% or more of the Company's Common Stock, the
Board of Directors may exchange all or part of the Rights (other than the Rights
held by the Acquiring Person) for shares of Common Stock at an exchange ratio of
one share of Common Stock for each Right.

Prior to the acquisition by an Acquiring Person of 15% or more of the Company's
Common Stock, the Rights are redeemable for $0.01 per Right at the option of the
Board of Directors.

NOTE 11--LEASES

Capital leases - The Company leases furniture and fixtures and transportation
equipment under various non-cancelable lease agreements. Minimum lease rentals
have been capitalized and the related assets and obligations recorded utilizing
various interest rates. The assets are amortized using the straight-line method
over either the estimated useful lives of the assets or the lease terms, and
interest expense is accrued on the basis of the outstanding lease obligations.

Assets acquired under capital leases - net of accumulated amortization are as
follows (in thousands):

The following is a summary of future obligations under capital leases (in
thousands).

59

The Company leases certain offices, fabrication shops, warehouse facilities,
office equipment and machinery under non-cancelable operating lease agreements
which expire at various times and which require various minimum rentals. The
non-cancelable operating leases that were in effect as of August 31, 2001
require the Company to make the following estimated future minimum lease
payments:

For the year ending August 31 (in thousands):
2002 $ 27,595
2003 30,200
2004 28,435
2005 25,889
2006 23,747
2007 and thereafter 106,176
--------
Total future minimum lease payments $242,042
========

The Company has included in the table above the estimated lease payments on the
Company's new corporate facilities. The final rental amounts, classification as
operating or capital lease and certain other terms of the lease are not
finalized; therefore, certain adjustments to the rental amounts may be made upon
completion of the facilities which is expected to be finalized during the third
quarter of fiscal 2002.

The Company enters into short-term lease agreements for equipment needed to
fulfill the requirements of specific jobs. Any payments owed or committed under
these lease arrangements as of August 31, 2001 are not included as part of total
minimum lease payments. Rent expense for the fiscal years ended August 31, 2001,
2000, and 1999 was $35,579,000, $16,391,000, and $8,297,000, respectively.

NOTE 12--COMMITMENTS AND CONTINGENCIES

In the normal course of business activities, the Company enters into contractual
agreements with customers for certain construction services to be performed
based on agreed upon reimbursable costs and labor rates. In some instances, the
terms of these contracts provide for the customer's review of the accounting and
cost control systems to verify the completeness and accuracy of the reimbursable
costs invoiced. These reviews could result in proposed reductions in
reimbursable costs and labor rates previously billed to the customer.
Additionally, the Company performs work for the U.S. Government that is subject
to continuing financial and operating reviews by governmental agencies. The
Company does not believe that any such reviews will result in a material change
to the Company's financial position or results of operations.

The Company is self-insured for workers' compensation claims for individual
claims up to $250,000 and maintains insurance coverage for the excess. The
Company has accrued a liability for its estimated workers' compensation claims
totaling approximately $1,200,000 and $1,040,000 at August 31, 2001 and 2000,
respectively. Additionally, the Company self-insures its employee health
coverage up to certain annual individual and plan limits and maintains insurance
coverage for the excess. The Company has accrued a liability of $3,982,000 and
$1,381,000 at August 31, 2001 and 2000, respectively, for outstanding and
incurred, but not reported, health claims.

In the normal course of its business, the Company becomes involved in various
litigation matters including, claims by third parties for alleged property
damages, personal injuries, and other matters. The Company has estimated it's
potential exposure, net of insurance coverage, and has recorded reserves in its
financial statements as appropriate. The Company does not anticipate that the
differences between its estimated outcome of these claims and future actual
settlements could have a material effect on the Company's financial position or
results of operations. See Note 3 of Notes to Consolidated Financial Statements
with respect to certain contingencies relating to the Stone & Webster
acquisition.

60

NOTE 13--BUSINESS SEGMENTS, OPERATIONS BY GEOGRAPHIC REGION AND MAJOR CUSTOMERS

Business Segments

The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," as of August 31, 1999. SFAS No. 131 establishes
standards for the way public business enterprises report information about
operating segments in annual financial statements and requires those enterprises
to report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 defined operating segments as components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and in
assessing performance. The Company has aggregated its business activities into
two operating segments: the integrated EPC services segment and the
manufacturing and distribution segment.

The integrated EPC services segment is a vertically integrated provider of
piping systems and comprehensive engineering, procurement, and construction
services to the power generation, process, and environmental and infrastructure
industries. These services include piping systems fabrication, engineering and
design, construction, procurement and maintenance, and consulting.

The manufacturing and distribution segment manufactures and distributes
specialty stainless, alloy and carbon steel pipe fittings. These fittings
include elbows, tees, reducers and stub ends. The Company has one manufacturing
facility that provides products for the Company's pipe services operations, as
well as to third parties. The Company also has several distribution centers in
the United States, which distribute its products primarily to third parties.

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Business Segment Data

The following table presents information about segment profit and assets (in
thousands):

62

Operations by Geographic Region

The following tables present geographic sales and long-lived assets (in
thousands):

Sales are attributed to geographic regions based on location of the project or
the ultimate destination of the product sold. Long-lived assets include all
long-term assets, except those specifically excluded under SFAS No. 131, such as
deferred income taxes and securities available for sale.

Information about Major Customers

The Company's customers are principally major multi-national industrial
corporations, independent and merchant power providers, governmental agencies
and equipment manufacturers. For the year ended August 31, 2001, sales to U.S.
Government agencies or corporations owned by the U.S government totaled
approximately $183,000,000, or 12% of sales. For the year ended August 31, 2000,
sales to a customer were $85,000,000, or 11% of sales. Additionally, for the
years ended August 31, 2000 and 1999, sales to a different customer amounted to
$83,400,000 (11% of sales) and $67,700,000 (14% of sales), respectively.

Export Sales

For the years ended August 31, 2001, 2000, and 1999, the Company has included as
part of its international sales approximately $167,000,000, $49,000,000, and
$58,000,000, respectively, of exports from its domestic facilities.

63

NOTE 14--EARNINGS PER COMMON SHARE

The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data).

At August 31, 2001, approximately 2,209,000 incremental shares related to
convertible debt were excluded from the calculation of diluted income per share
because they were antidilutive. Additionally, the Company had approximately
7,500, 12,000, and 53,000 of stock options at August 31, 2001, 2000, and 1999,
respectively, which were excluded from the calculation of diluted income per
share because they were antidilutive.

NOTE 15--EMPLOYEE BENEFIT PLANS

The Company has a 1993 Employee Stock Option Plan ("1993 Plan") under which both
qualified and non-qualified options and restricted stock may be granted. As of
August 31, 2001, approximately 3,844,000 shares of Common Stock were authorized
for issuance under the 1993 Plan. The 1993 Plan is administered by a committee
of the Board of Directors (the "Board"), which selects persons eligible to
receive options and determines the number of shares subject to each option, the

64

vesting schedule, the exercise price, and the duration of the option. Generally,
the exercise price of any option granted under the 1993 Plan cannot be less than
100% of the fair market value on the date of grant and its duration cannot
exceed 10 years. Both qualified options and non-qualified options have been
granted under the 1993 Plan. The options awarded vest in 25% annual increments
beginning one year from the date of award.

Shares of restricted stock are subject to risk of forfeiture during the vesting
period. Restrictions related to these shares and the restriction terms are
determined by the committee. Holders of restricted stock have the right to vote
the shares. At August 31, 2000, there were 30,000 shares of restricted stock
outstanding. During the fiscal year 2001, the stock restrictions were released
or shares were forfeited. At August 31, 2001, there were no restricted shares of
stock.

In conjunction with the Stone & Webster acquisition (see Note 3 of Notes to
Consolidated Financial Statements), the Company established the Stone & Webster
Acquisition Stock Option Plan ("Stone & Webster Plan"). The purpose of this plan
was to award options to Company employees who were not officers of the Company,
as defined in the plan documents, and who were either (a) employed by the
Company as a result of the Stone & Webster acquisition or (b) instrumental to
the Stone & Webster acquisition. At August 31, 2001, 1,071,000 shares of Common
Stock were authorized for issuance under this plan. The Stone & Webster Plan is
administered by a committee of the Board, which selects persons eligible to
receive options and determines the number of shares subject to each option, the
vesting schedule, the exercise price, and the duration of the option. The
exercise price of any option granted under the Stone & Webster Plan cannot be
less than 100% of the fair market value on the date of grant and its duration
cannot exceed 10 years. Only non-qualified options have been granted under the
Stone & Webster Plan. The options awarded vest in 25% annual increments
beginning one year from the date of award.

During fiscal 2001, the Company established the 2001 Employee Incentive
Compensation ("2001 Plan") under which both qualified and non-qualified stock
options, stock appreciation rights and restricted stock may be granted. As of
August 31, 2001, approximately 2,000,000 shares of Common Stock were authorized
for issuance under the 2001 Plan. The 2001 Plan is administered by a committee
of the Board, which selects persons eligible to receive options and determines
the number of shares subject to each option, the vesting schedule, the exercise
price, and the duration of the option. The exercise price of any option granted
under the 2001 Plan cannot be less than 100% of the fair market value on the
date of grant and its duration cannot exceed 10 years. Both qualified options
and non-qualified options have been granted under the 2001 Plan. The options
awarded vest in 25% annual increments beginning one year from the date of award.

All options and other grants issued under the Stone & Webster Plan and the 2001
Plan become fully exercisable upon a change in control of the Company.

In fiscal 1997, the Company adopted a Non-Employee Director Stock Option Plan
("Directors' Plan"). Members of the Board who are not or were not an officer or
employee of the Company during the one year period preceding the date the
director is first elected to the Board are eligible to participate in the
Directors' Plan. A committee of two or more members of the Board who are not
eligible to receive grants under the Directors' Plan administer this plan. Upon
adoption, options to acquire an aggregate of 40,000 shares of Common Stock were
issued. These options vested in 25% annual increments beginning one year from
the date of award. Additionally, each eligible director is granted an option to
acquire 1,500 shares of Common Stock on an annual basis upon his election or
re-election to the Board. These options vest one year after the date of award. A
total of 150,000 shares of Common Stock have been authorized for issuance under
the Directors' Plan.

In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which is effective for the Company's
fiscal year beginning September 1, 1996. Under SFAS No. 123, companies can
either record expense based on the fair value of stock-based compensation upon
issuance or elect to remain under the APB 25 method whereby no compensation cost
is recognized upon grant if certain requirements are met. The Company has
elected to continue to account for its stock-based compensation under APB 25.
However, proforma disclosures, as if the Company adopted the cost recognition
requirements under SFAS No. 123, are presented below.

Had compensation cost been determined based on the fair value at the grant date
consistent with the provisions of SFAS No. 123, the Company's net income and
earnings per common share would have approximated the proforma amounts below:

65

The proforma effect on net earnings for fiscal 1999 is not representative of the
proforma effect on net earnings in future years because it does not take into
consideration proforma compensation expense related to grants prior to September
1, 1995.

The following table summarizes the activity in the Company's stock option plans:

As of August 31, 2001, 2000, and 1999, the number of shares relating to options
exercisable under the stock option plans was 883,373; 450,986; and 525,500;
respectively, and the weighted average exercise price of those options was
$13.648, $5.703, and $4.662, respectively.

The weighted average fair value at date of grant for options granted during the
years ended August 31, 2001, 2000, and 1999 was $21.40, $12.02, and $2.62 per
share, respectively. The fair value of options granted is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions for the years ended August 31, 2001, 2000, and
1999, respectively: (a) dividend yield of 0.00%, 0.00% and 0.00%; (b) expected
volatility of 60%, 60% and 65%; (c) risk-free interest rate of 5.3%, 6.2% and
5.1%; and (d) expected life of 5 years, 5 years and 5 years.

66

The following table summarizes information about stock options outstanding as of
August 31, 2001:

During 1994, the Company adopted a voluntary 401(k) profit sharing plan for
substantially all employees who are not subject to collective bargaining
agreements. The plan provides for the eligible employee to contribute from 1% to
15% of annual compensation, subject to an annual limit as determined under
federal law, with the Company matching 50% of the employee's eligible
contribution up to 6% of the employee's annual compensation. The Company's
expense for this plan for the years ended August 31, 2001, 2000, and 1999 was
approximately $5,664,000, $1,704,000, and $1,278,000, respectively. The year
ended August 31, 2000 total includes approximately $195,000 related to the Stone
& Webster subsidiary's 401(k) plan covering the period of July 14, 2000 to
August 31, 2000. The Stone and Webster plan required the Company to contribute
25% of the employees' elective deferral to the plan, up to 5% of eligible
employees' annual compensation. The Stone and Webster plan was terminated as of
August 31, 2000 and Stone & Webster employees were offered the opportunity to
participate in the Company's 401(k) plan for the year ended August 31, 2001.

The Company has other defined contribution plans at certain of its domestic and
foreign locations. These plans allow the employees to contribute a portion of
their earnings with the Company matching a percentage of the employee's
contributions. The amounts contributed by the Company and employee vary by plan.
The Company's expense for these plans was approximately $702,000, $323,000, and
$178,000 for the years ended August 31, 2001, 2000, and 1999, respectively.

The Company's subsidiaries in the U.K. and Canada have defined benefit plans
covering their employees. The first U.K. plan was acquired November 14, 1997
through an acquisition. It is a salary-related plan for certain employees and
admittance to this plan is now closed. The employees in this plan contribute 7%
of their salary. The Company contribution depends on length of service, the
employee's salary at retirement, and the earnings of the fund investments. If
the plan's earnings are sufficient, the Company makes no contributions. The
Canadian plan and second U.K. plan were acquired July 14, 2000 in conjunction
with the Stone & Webster acquisition. The Canadian plan is noncontributory and
the benefits are based primarily on years of service and employees' career
average pay; admittance to this plan is now closed. The Company's policy is to
make contributions equal to the current year cost plus amortization of prior
service cost. The second U.K. plan is contributory and the benefits are based
primarily on years of service and employees' average pay during their last ten
years of service. For the years ended August 31, 2001, 2000, and 1999, the
Company recognized income of approximately $533,000, $145,000, and $18,000,
respectively, for these plans.

Included in the amounts for the year ended August 31, 2001 and 2000 are the two
pension plans assumed by the Company in the Stone & Webster acquisition. The
projected benefit obligation of these two plans at the date of the acquisition
of $59,821,000 and the fair value of the assets at the date of acquisition of
$63,419,000 are included in the table below at the start of the 2000 fiscal
year.

The following table sets forth the pension cost for the first U.K. plan and the
two pension plans assumed by the Company in the Stone & Webster acquisition
(from the date of acquisition to August 31, 2001), and the plans' funded status
as of August 31, 2001, 2000, and 1999 in accordance with the provisions of SFAS
No. 132 - "Employers' Disclosure about Pensions and Other Postretirement
Benefits" (in thousands):

67

The Company has a defined benefit pension plan for employees of its Connex
subsidiary. Effective January 1, 1994, no new participants were admitted to the
plan. The pension plan's benefit formulas generally base payments to retired
employees upon their length of service. The pension plan's assets are invested
in fixed income assets, equity based mutual funds, and money market funds. At
August 31, 2001 and 2000, the fair market value of the plan assets was
$1,355,000 and $1,646,000, respectively, which exceeded the estimated projected
benefit obligation.

NOTE 16--RELATED PARTY TRANSACTIONS

The Company has entered into employment agreements with its Chief Executive
Officer, Chief Operating Officer and Chief Financial Officer. Under the terms of
the agreements, the executives are entitled to receive their base salaries,
bonuses and other employee benefit plans and programs for the periods of time
specified therein. In the event of termination of employment as a result of
certain reasons (including a change in control of the Company), the executives
will be entitled to receive their base salaries and certain other benefits for
the remaining term of their agreement and all options and similar awards shall
become fully vested. Additionally, in the event of an executive's death, his
estate is entitled to certain payments and benefits.

68

In 2001, the Company's employment agreement with its Chief Executive Officer was
amended to provide for a non-compete clause upon the Chief Executive Officer's
separation from the Company. The amount of the non-compete payment will be
$15,000,0000 and was based upon an outside study of the fair value of the
non-compete provisions. The Company agreed to set aside $5,000,000 of Company
funds in 2001 (which is included in other long-term assets in the accompanying
consolidated balance sheet) and over the next two years to fund the remaining
portion of the $15,000,0000 payment upon the Chief Executive Officer's
separation from the Company, or upon change in control. Upon separation from the
Company, the Company will amortize the payment over the non-compete period.

The Company has entered into several loan agreements with certain members of
senior management, some of which were non-interest bearing. The impact of
discounting such loans to record interest income is not significant. The balance
of the senior management loan receivables as of August 31, 2001, 2000, and 1999
was approximately $789,000, $272,000, and $1,415,000, respectively. In the
ordinary course of business, the Company has made other loans to other
employees. These balances are included in other assets.

During fiscal 1996, the Company entered into a non-competition agreement with a
key employee of an acquired business. A related asset totaling approximately
$502,000 (net of accumulated amortization of $1,465,000) is included in other
assets and is being amortized over eight years using the straight-line method. A
note payable to the executive for this agreement is included in long-term debt
as further discussed in Note 7 of Notes to Consolidated Financial Statements.

A director of the Company was a managing director of the investment banking firm
that was an underwriter and acted as one of the representatives of the
underwriters for the November 1999 public offering of 6,000,000 shares of Common
Stock discussed in Note 2 of Notes to Consolidated Financial Statements. The
Company also granted to the underwriters an option to purchase up to an
additional 900,000 shares of Common Stock pursuant to such terms to cover
over-allotments, which over-allotment option was exercised. The closing of such
public offering was completed in November 1999, at a price of $10.50 per share,
less the underwriting discounts and commissions of approximately $4,313,000.
Approximately $150,000 of these commissions were earned by the director's
investment banking firm. The same investment banking firm handled the repurchase
of some of the shares of the Company's Common Stock which began in fiscal 1999,
earning approximately $74,000 in commissions.

A director of the Company is an owner of construction companies that have been
used primarily as sub-contractors by the Company. During fiscal 2001, the
Company made payments of approximately $266,000 to one of these companies and in
2000 and 1999, payments to these construction companies were not material.

NOTE 17--FOREIGN CURRENCY TRANSACTIONS

The Company's wholly-owned subsidiaries in Venezuela had total assets of
approximately $17,200,000 and $15,100,000 denominated in Venezuelan Bolivars as
of August 31, 2001 and 2000, respectively. In accordance with SFAS No. 52,
"Foreign Currency Translation," the U.S. dollar is used as the functional
reporting currency for Venezuelan operations since the Venezuelan economy is
defined as highly inflationary. Therefore, these assets and liabilities are
translated into U.S. dollars using a combination of current and historical
exchange rates.

During fiscal 1996, the Venezuelan government lifted its foreign exchange
controls. Subsequent to this action, the Bolivar devalued from 690 to 736 (as of
August 31, 2001) to the U.S. dollar. During the years ending August 31, 2001,
2000, and 1999, the Company recorded losses of approximately $673,000,
$1,756,000, and $652,000, respectively, in translating the assets and
liabilities of its Venezuelan subsidiaries into U.S. dollars. These translation
losses are reported as reductions to sales because they were partially offset by
inflationary billing provisions in certain of the Company's contracts.

Other foreign subsidiaries maintain their accounting records in their local
currency (primarily British pounds, Australian and Canadian dollars, and Dutch
guilders). The currencies are converted to U.S. dollars with the effect of the
foreign currency translation reflected in "accumulated other comprehensive
income," a component of shareholders' equity, in accordance with SFAS No. 52 and
SFAS No 130--"Reporting Comprehensive Income." Foreign currency transaction
gains or losses are credited or charged to income. At August 31, 2001 and 2000,
cumulative foreign currency translation adjustments related to these
subsidiaries reflected as a reduction to shareholders' equity amounted to
$6,308,000 and $5,209,000, respectively; transaction gains (losses) reflected in
income amounted to $625,000 and ($48,000) in the years ended August 31, 2001 and
2000, respectively.

69

NOTE 18--UNBILLED RECEIVABLES, RETAINAGE RECEIVABLES AND COSTS AND ESTIMATED
EARNINGS ON UNCOMPLETED CONTRACTS

In accordance with normal practice in the construction industry, the Company
includes in current assets and current liabilities amounts related to
construction contracts realizable and payable over a period in excess of one
year. Costs and estimated earnings in excess of billings on uncompleted
contracts represents the excess of contract costs and profits recognized to date
on the percentage of completion accounting method over billings to date on
certain contracts. Billings in excess of costs and estimated earnings on
uncompleted contracts represents the excess of billings to date over the amount
of contract costs and profits recognized to date on the percentage of completion
accounting method on the remaining contracts.

Included in accounts receivable is $42,664,000 and $17,465,000 at August 31,
2001 and 2000, respectively, related to unbilled receivables. Advanced billings
on contracts as of August 31, 2001 and 2000 was $17,712,000 and $15,992,000,
respectively. Balances under retainage provisions totaled $17,623,000 and
$32,449,000 at August 31, 2001 and 2000, respectively, and are also included in
accounts receivable in the accompanying consolidated balance sheets.

The table below shows the components of costs and estimated earnings in excess
of billings and billings in excess of costs and estimated earnings on the
Company's uncompleted contracts as of August 31, 2001 and 2000 and does not
include advanced billings on contracts as of August 31, 2001 and 2000 of
$17,712,000 and $15,992,000, respectively. Contracts assumed in the Stone &
Webster acquisition include cumulative balances from the origination of these
contracts and, therefore, include amounts that were earned prior to the
acquisition by the Company. In addition, the amounts below do not include
accrued contract losses and gross margin reserves as of August 31, 2001 and
2000. The amounts presented below are (in thousands).

70

NOTE 19--QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share data)

71

ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

A Current Report on Form 8-K was filed on September 22, 1999, to announce a
change in the Company's independent public accountants. The Company engaged
Arthur Andersen LLP ("AA"), New Orleans, Louisiana, as its sole independent
auditor for the fiscal year ended August 31, 1999. Previously, the Company
engaged both Hannis T. Bourgeois, LLP ("HTB") and AA as its independent
auditors. The single jointly signed audit report by HTB and AA was considered to
be the equivalent of two separately signed auditors' reports. Thus, previously
each firm represented that it had complied with generally accepted auditing
standards and was in a position that would justify it being the only signatory
of the report. Given Shaw's expansion of its overseas operations, HTB believed
it would be unable to continue to make this representation after fiscal 1998.
Therefore, HTB decided to resign as one of Shaw's independent auditors effective
September 22, 1999.

During the period from September 1, 1998, through the date hereof, there have
been no disagreements on accounting principles or practices, financial statement
disclosure or auditing scope or procedure between the Company and AA or HTB.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

Information regarding directors and executive officers of the Company is to be
included in the Company's definitive proxy statement prepared in connection with
the 2002 Annual Meeting of Shareholders to be held in January 2002 and is
incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

Information regarding executive compensation is to be included in the Company's
definitive proxy statement prepared in connection with the 2002 Annual Meeting
of Shareholders to be held in January 2002 and is incorporated herein by
reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information regarding security ownership of certain beneficial owners and
management is to be included in the Company's definitive proxy statement
prepared in connection with the 2002 Annual Meeting of Shareholders to be held
in January 2002 and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information regarding certain relationships and related transactions is to be
included in the Company's definitive proxy statement prepared in connection with
the 2002 Annual Meeting of Shareholders to be held in January 2002 and is
incorporated herein by reference.

72

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) 1. Financial Statements.

See Item 8 of Part II of this report.

2. Financial Statement Schedules.

All schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of
the schedule, or because the information required is included in the
consolidated financial statements and notes thereto.

3. Exhibits.

3.1 Composite of the Restatement of the Articles of Incorporation
of The Shaw Group Inc. (the "Company"), as amended by (i)
Articles of Amendment dated January 22, 2001 and (ii) Articles
of Amendment dated July 31, 2001 (filed herewith).

3.2 Articles of Amendment of the Restatement of the Articles of
Incorporation of the Company dated January 22, 2001
(incorporated by reference to the designated Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended
February 28, 2001).

3.3 Articles of Amendment to Restatement of the Articles of
Incorporation of the Company dated July 31, 2001 (incorporated
by reference to the designated Exhibit to the Company's
Registration Statement on Form 8-A filed on July 30, 2001).

3.4 Amended and Restated By-Laws of the Company dated December 8,
1993 (incorporated by reference to the designated Exhibit to
the Company's Annual Report on Form 10-K for the fiscal year
ended August 31, 1994, as amended).

4.1 Specimen Common Stock Certificate (incorporated by reference
to the designated Exhibit to the Company's Registration
Statement on Form S-1 filed on October 22, 1993, as amended
(No. 33-70722)).

4.2 Indenture dated as of May 1, 2001, between the Company and
United States Trust Company of New York including Form of
Liquid Yield Option(TM) Note due 2021 (Zero Coupon-Senior)
(Exhibits A-1 and A-2) (incorporated herein by reference to
the designated Exhibit to the Company's Current Report on Form
8-K filed on May 11, 2001).

4.3 Rights Agreement, dated as of July 9, 2001, between the
Company and First Union National Bank, as Rights Agent,
including the Form of Articles of Amendment to the Restatement
of the Articles of Incorporation of the Company as Exhibit A,
the form of Rights Certificate as Exhibit B and the form of
the Summary of Rights to Purchase Preferred Shares as Exhibit
C (incorporated by reference to the designated Exhibit to the
Company's Registration Statement on Form 8-A filed on July 30,
2001).

10.1 The Shaw Group Inc. 1993 Employee Stock Option Plan, amended
and restated through October 8, 2001 (filed herewith).

10.2 The Shaw Group Inc. 1996 Non-Employee Director Stock Option
Plan, amended and restated through October 8, 2001 (filed
herewith).

10.3 The Shaw Group Inc. 2001 Employee Incentive Compensation Plan,
amended and restated through October 8, 2001 (filed herewith).

73

10.4 Amended and Restated Credit Agreement dated as of November 30,
2000, among the Company, Bank One, NA, Firstar Bank, N.A.,
Credit Lyonnais New York Branch and Union Planters Bank, N.A.
(incorporated by reference to the designated Exhibit of the
Company's Quarterly Report on Form 10-Q for the quarter ended
November 30, 2000).

10.5 Amendment to Amended and Restated Credit Agreement dated as of
April 30, 2001 (filed herewith).

10.6 Amendment and Restatement to Credit Agreement dated as of May
1, 2001 (filed herewith).

10.7 Employment Agreement dated as of April 10, 2001, by and
between the Company and J.M. Bernhard, Jr. (filed herewith).

10.8 Employment Agreement dated as of May 5, 2000, by and between
the Company and Richard F. Gill and amended January 10,
2001 (filed herewith).

10.9 Employment Agreement dated as of May 1, 2000, by and between
the Company and Robert L. Belk (incorporated by reference to
the designated Exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended August 31, 2000).

10.10 Asset Purchase Agreement, dated as of July 14, 2000, among
Stone & Webster, Incorporated, certain subsidiaries of Stone &
Webster, Incorporated and The Shaw Group Inc. (incorporated by
reference to the designated Exhibit to the Company's Current
Report on Form 8-K filed on July 28, 2000).

21.1 Subsidiaries of the Company (filed herewith).

23.1 Consent of Arthur Andersen LLP (filed herewith).

24.1 Powers of Attorney (filed herewith).

(b) Reports on Form 8-K

On July 30, 2001, the Company filed a Current Report on Form 8-K
announcing the adoption by the Company of a shareholder rights plan,
and in connection therewith, the declaration by the Company's Board of
Directors of a dividend of one preferred share purchase right for each
outstanding share of the Company's common stock, no par value per
share.

74

SIGNATURES

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

THE SHAW GROUP INC.

/s/ J. M. BERNHARD, JR.
-------------------------------------
By: J. M. Bernhard, Jr.
President and Chief Executive Officer
Date: November 29, 2001

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.

75

EXHIBIT INDEX

3.1 Composite of the Restatement of the Articles of Incorporation
of The Shaw Group Inc. (the "Company"), as amended by (i)
Articles of Amendment dated January 22, 2001 and (ii) Articles
of Amendment dated July 31, 2001 (filed herewith).

3.2 Articles of Amendment of the Restatement of the Articles of
Incorporation of the Company dated January 22, 2001
(incorporated by reference to the designated Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended
February 28, 2001).

3.3 Articles of Amendment to Restatement of the Articles of
Incorporation of the Company dated July 31, 2001 (incorporated
by reference to the designated Exhibit to the Company's
Registration Statement on Form 8-A filed on July 30, 2001).

3.4 Amended and Restated By-Laws of the Company dated December 8,
1993 (incorporated by reference to the designated Exhibit to
the Company's Annual Report on Form 10-K for the fiscal year
ended August 31, 1994, as amended).

4.1 Specimen Common Stock Certificate (incorporated by reference
to the designated Exhibit to the Company's Registration
Statement on Form S-1 filed on October 22, 1993, as amended
(No. 33-70722)).

4.2 Indenture dated as of May 1, 2001, between the Company and
United States Trust Company of New York including Form of
Liquid Yield Option(TM) Note due 2021 (Zero Coupon-Senior)
(Exhibits A-1 and A-2) (incorporated herein by reference to
the designated Exhibit to the Company's Current Report on Form
8-K filed on May 11, 2001).

4.3 Rights Agreement, dated as of July 9, 2001, between the
Company and First Union National Bank, as Rights Agent,
including the Form of Articles of Amendment to the Restatement
of the Articles of Incorporation of the Company as Exhibit A,
the form of Rights Certificate as Exhibit B and the form of
the Summary of Rights to Purchase Preferred Shares as Exhibit
C (incorporated by reference to the designated Exhibit to the
Company's Registration Statement on Form 8-A filed on July 30,
2001).

10.1 The Shaw Group Inc. 1993 Employee Stock Option Plan, amended
and restated through October 8, 2001 (filed herewith).

10.2 The Shaw Group Inc. 1996 Non-Employee Director Stock Option
Plan, amended and restated through October 8, 2001 (filed
herewith).

10.3 The Shaw Group Inc. 2001 Employee Incentive Compensation Plan,
amended and restated through October 8, 2001 (filed herewith).

10.4 Amended and Restated Credit Agreement dated as of November 30,
2000, among the Company, Bank One, NA, Firstar Bank, N.A.,
Credit Lyonnais New York Branch and Union Planters Bank, N.A.
(incorporated by reference to the designated Exhibit of the
Company's Quarterly Report on Form 10-Q for the quarter ended
November 30, 2000).

10.5 Amendment to Amended and Restated Credit Agreement dated as of
April 30, 2001 (filed herewith).

10.6 Amendment and Restatement to Credit Agreement dated as of May
1, 2001 (filed herewith).

10.7 Employment Agreement dated as of April 10, 2001, by and
between the Company and J.M. Bernhard, Jr. (filed herewith).

10.8 Employment Agreement dated as of May 5, 2000, by and between
the Company and Richard F. Gill and amended January 10,
2001 (filed herewith).

10.9 Employment Agreement dated as of May 1, 2000, by and between
the Company and Robert L. Belk (incorporated by reference to
the designated Exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended August 31, 2000).

10.10 Asset Purchase Agreement, dated as of July 14, 2000, among
Stone & Webster, Incorporated, certain subsidiaries of Stone &
Webster, Incorporated and The Shaw Group Inc. (incorporated by
reference to the designated Exhibit to the Company's Current
Report on Form 8-K filed on July 28, 2000).

21.1 Subsidiaries of the Company (filed herewith).

23.1 Consent of Arthur Andersen LLP (filed herewith).

24.1 Powers of Attorney (filed herewith).