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, 2002
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 incorporation or organization) (I.R.S. Employer
Identification Number)
4171 ESSEN LANE
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. [X ]

The aggregate market value of the common stock held by non-affiliates
(affiliates being directors, officers and holders of more than 5% of the
Company's common stock) of the Registrant at November 21, 2002 was approximately
$543 million.

The number of shares of the Registrant's common stock outstanding at November
21, 2002 was 37,708,522.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement to be prepared for use
in connection with the Registrant's 2003 Annual Meeting of Shareholders to be
held in January 2003 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 a leading global provider of
comprehensive services to the power, process, and environmental and
infrastructure industries. Shaw is a vertically-integrated provider of
comprehensive engineering, procurement, pipe fabrication, construction and
maintenance services to the power and process industries. Shaw is also a leader
in the environmental, infrastructure and homeland defense markets providing
consulting, engineering, construction, remediation and facilities management
services to governmental and commercial customers.

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 2002 revenues were approximately $3.2 billion and its backlog
at August 31, 2002 was approximately $5.6 billion. The Company is headquartered
in Baton Rouge, Louisiana with offices and operations in North America, South
America, Europe, the Middle East and the Asia-Pacific region and employs
approximately 17,000 people.

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

During fiscal 2002, the Company acquired substantially all of the operating
assets and assumed certain liabilities of The IT Group, Inc. ("IT Group") and
its subsidiaries. IT Group was a leading provider of diversified environmental
consulting, engineering, construction, remediation and facilities management
services. The Company purchased the IT Group to diversify and expand the
Company's revenue base and to pursue additional opportunities in the
environmental, infrastructure, and homeland defense markets. The Company has
combined the operations of the acquired IT Group and the Company's existing
environmental and infrastructure operations into a newly formed wholly-owned
subsidiary, Shaw Environmental & Infrastructure, Inc. ("Shaw E&I").

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements. The statements contained in this Annual
Report on Form 10-K that are not historical facts (including without limitation
statements to the effect that the Company or Shaw or its management "believes,"
"expects," "anticipates," "plans," "implies," "intends," "foresees," 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 risks and uncertainties mentioned in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Risk Factors" and the following: 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 and infrastructure industries; the availability of
qualified engineers and other professional staff needed to execute contracts;
the uncertain timing of awards and contracts; funding of backlog, including
government budget constraints, cost overruns on fixed, maximum or unit priced
contracts; cost overruns which negatively affect fees to be earned or cost
variances to shared on cost plus contracts; changes in laws and regulations and
in trade, monetary and fiscal 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, including in the ability
to recover for changed conditions; the ability of the Company to successfully
integrate acquisitions; the protection and validity of patents

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and other intellectual property; and various other 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. The information on the Company's website is not part of
this document.

BUSINESS STRATEGY

The Company's business strategy is to increase shareholder value by capitalizing
on significant opportunities in diverse market segments and geographic regions,
including all facets of the power, process, environmental and infrastructure
industries. The Company intends to execute this strategy by pursuing the
following opportunities:

OPPORTUNITIES IN DIVERSE SEGMENTS OF THE POWER MARKET - The Company is
positioned to provide a broad portfolio of comprehensive services to all
facets of the power market. Shaw is currently capitalizing on opportunities
in nuclear, geothermal, emissions reduction and control, hydroelectric,
plant modifications, re-powering, and consulting services; both
domestically and internationally. Further, as opportunities arise, Shaw
will continue to participate in the greenfield, fossil-fuel power market.
The services the Company may provide on a power project extend from
preliminary studies through detail engineering, design, construction
management, and maintenance. This diversity in experience and breadth of
capability allows the Company to participate in all segments of the power
industry and reduce the impact on its operations from the cyclical nature
of certain sectors of the power industry.

OPPORTUNITIES IN ENVIRONMENTAL AND INFRASTRUCTURE INDUSTRIES

o Homeland Security/Homeland Defense Business - Shaw E&I's disaster
related preparedness, incident response and chemical and
biological weapons demilitarization experience provides its
customers valuable security related products and services. Shaw
E&I provides threat, vulnerability and risk assessments and
consequence management planning and training to the federal
government, state and local governments and private industry
customers. The assessments are expected to identify design and
physical changes to facilities, processes and critical
infrastructures around the nation. The Company expects it will
not only perform assessments for its customers, but will also
provide consulting, engineering/design, procurement and
construction services to this market.

o Coastal Restoration - The Company has performed wetland-related
work in the Everglades, Chesapeake Bay area, and other areas
throughout the United States. The Company maintains the expertise
and resources to continue to build in this expanding segment. The
Coastal Wetlands Planning Protection and Restoration Act
("CWPPRA" or "Breaux Act") provides federal funds to conserve,
restore and create coastal wetlands and barrier islands in
Louisiana and other wetlands areas. The Company believes its
Environmental & Infrastructure segment is in a position to
capitalize on upcoming wetlands and coastal restoration work in
Louisiana and other locations.

o Federal Government Privatization - U. S. Department of Defense
("DOD") is attempting to privatize both family housing and
utility systems at military installations. The Company expects to
submit a number of proposals in calendar year 2003 with respect
to contracts to privatize military family housing . The Company
believes that several factors, to include, i) its federal
government business platform, ii) prior DOD facilities management
and Job Order Contracting experience, and iii) expertise in
construction at military installations indicate the Company may
have opportunities in this market.

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o Unexploded Ordnance and Explosives ("UXO") - The DOD's fiscal
requirements for Conventional Ordnance and Explosives clean up on
closed ranges are estimated by government sources minimally at
$100 billion. This far exceeds the current funding of $250
million per year. Several congressional advocates continue to
push for increased funding for UXO removal projects along with
developing an enhanced Military Munitions Response Program. The
Company intends to pursue opportunities for its services related
to the UXO removal projects.

o Environmental Liability Solutions - Traditionally, environmental
laws and tort liability have resulted in contractual terms that
maintained environmental risks with the owner of the contaminated
property. Recently, innovative environmental insurance products
have permitted liability distribution that can reduce an owner's
contingent environmental liabilities. Shaw's LandBank Group, Inc.
subsidiary specializes in repositioning brownfield real estate
that has been environmentally contaminated or stigmatized. The
Company has recently created the "Shaw Insured Environmental
Liability Distribution" or "SHIELD"TM program, a proprietary
structured transaction that insures and distributes environmental
liabilities for parties desiring to substantially reduce
contingent environmental liabilities. The Company believes its
experience in managing and negotiating blended finite risk, stop
loss, and other environmental related insurance products, will
enhance margins and improve its win-rates in its core
environmental contracting business through the utilization of
this program.

TECHNOLOGY AND INTELLECTUAL PROPERTY - The Company employs its technology
and intellectual property to reduce costs and to better serve its
customers. The Company's technologies include:

o Induction Pipe Bending Technology. The Company believes its
induction pipe bending technology is one of the most advanced,
sophisticated, and efficient technologies available. Induction
bending utilizes simultaneous super-heating and compression of
pipe to produce tight-radius bends to a customer's
specifications. When compared with the traditional cut and weld
method, Shaw's induction bending technology provides a lower cost
and more uniform 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 estimates it has
supplied process technology for approximately 35% of the world's
ethylene capacity constructed since 1995.

o Proprietary Customer-focused Computer Software. The Company has
developed proprietary computer software to aid in project and
process management. This software includes:

o 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.

o SHAW-TRAC is a web-based, proprietary earned value
application that enables the Company to effectively
manage and integrate the many phases of a capital
project, from estimating to engineering through
construction and start-up. Users from around the world
consistently access Shaw-Trac through the public
networks in order to update and understand the
real-time financial position of respective projects.

o Technology Solutions to the Electric Power Industry. Power
Technologies, Inc. ("PTI"), a subsidiary of the Company, provides
software for the electric energy industry. Its licensed software
includes: PSS/E programs for analyzing and optimizing electric
power system performance; MUST program with a versatile EXCEL
interface used in evaluating transfer capability, transaction
impacts and contingency analysis for transmission systems: TPLAN
for transmission reliability studies; PSS/E ADEPT for planning,
designing and analyzing distributions systems; and PSS/VIPER in
use throughout the world by power utilities to design and plan
their electrical power transmission systems. PTI has also
developed easy-to-use interfaces (ODMS) and network simulation
libraries (PSS/E Engines) that helps users meet the fast-paced,
wide-ranging challenges posed by today's electric power industry.

o Line Rating Monitor. PTI recently received a patent for
a real-time monitoring system that enables electric
transmission and distribution lines to transfer more
power while maintaining high reliability and safety.
Test installations of this system are currently being
installed.

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A DIVERSE CUSTOMER BASE AND STRATEGIC ALLIANCES - The Company intends to
continue to capitalize upon and enter into strategic partnerships and
alliances with current and future customers. Shaw's recent expansion of its
Environmental & Infrastructure segments' businesses significantly broadened
the Company's customer base, particularly within the government sector.
Shaw's alliance and partnership agreements enhance its ability to obtain
contracts for individual projects by eliminating or reducing formal bid
preparation. These agreements have historically tended to provide Shaw with
a steady source of projects, minimize the impact of short-term market
volatility and enable the Company to anticipate a larger portion of future
revenues.

CROSS-SELLING OPPORTUNITIES - Shaw's recent expansion into the
environmental and infrastructure industries has significantly broadened the
Company's service offerings. As a result the Company believes it has new
opportunities and a broader customer base of established relationships to
offer its array of products and services.

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
believes it has established a successful track record of quickly,
efficiently, and effectively integrating its acquisitions through
integration teams led by its senior executives who become involved early in
the acquisition process.

COST-REIMBURSABLE CONTRACTS - The Company's philosophy is to perform most
of its engineering, procurement and construction projects pursuant to
cost-reimbursable contracts in which the Company's loss exposure is limited
to a percentage of gross margin. These contracts also usually contain
incentive/sharing/penalty provisions that reward performance and cost
control and penalize late delivery of products and services. The Company
believes its contracting philosophy minimizes its risks for contractual
losses while providing incentives for the Company and its customers to work
cooperatively.

FISCAL 2002 DEVELOPMENTS

IT Group Acquisition. During the fiscal year ended 2002, the Company acquired
substantially all of the operating assets and assumed certain liabilities of the
IT Group and its subsidiaries. IT Group was a leading provider of diversified
environmental consulting, engineering, construction, remediation and facilities
management services. The Company has combined the operations of the acquired IT
Group businesses with the Company's existing environmental and infrastructure
operations.

Changes in the Power Generation Market - Reduced Demand for New Power Plants.
The Company's backlog from the power industry decreased by approximately $850
million during fiscal 2002. This decline was primarily because the demand for
the construction of new domestic power plants fell dramatically due to questions
about future economic growth rates and whether the United States had excess
power generation capacity. Further, certain of the Company's independent and
merchant power producer customers ("IPPs") experienced severe liquidity
problems as financing was reduced to these companies and their projects. As a
result of these conditions, during the fourth quarter of fiscal 2002, three
customers cancelled or suspended their projects, resulting in a reduction of the
Company's backlog by approximately $300 million. The Company was paid current
sums due on two of the projects pursuant to their contractual terms and has
continued to provide services to close down one of those two projects. However,
the Company has not been paid on the third project and is attempting to collect
the amounts due through a combination of negotiations and/or legal actions. The
Company is also concerned that another customer may not be able to provide
funding to complete two other projects that are presently included in the
Company's backlog (at a value of approximately $372 million) as of August 31,
2002. (See Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Results of Operations- Fiscal 2002 Compared to
Fiscal 2001- Integrated EPC Services Segment" for a complete discussion of the
impact of these changes).

The Company anticipates that it will continue to derive significant revenues
from the power industry (including both fossil fuel and nuclear). The Company
recognized revenue of approximately $1.5 billion and $250 million in fiscal 2002
and 2001, respectively, from contracts for the construction of new gas-fired
power plants. However, because of the problems experienced by independent and
merchant power producers, the Company believes that it will not derive as much
revenue in future periods

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from the construction of new gas-fired power plants as it did in fiscal year
2002 (as indicated by the approximate $1.3 billion decrease in backlog for the
construction of new EPC fossil fuel contracts in fiscal 2002). Although the
number of projects the Company obtains may be less than in prior years, the
Company anticipates that it will continue to design and construct new power
plants - primarily for regulated utilities or for cogeneration.

The Company expects to increase its revenues from other sectors of the domestic
power industry through, for example, contracts to re-power, refurbish or
maintain existing power plants, and to provide and install emission control
equipment. For example, on July 24, 2002, the Company signed an agreement to
provide maintenance modifications services for the restart of Tennessee Valley
Authority ("TVA") nuclear facility, Browns Ferry - Unit 1. Construction started
immediately with completion anticipated in 2007. Under the terms of this
agreement, the Company will also continue to provide supplemental maintenance
and modification services for all TVA Nuclear locations, with services to be
provided immediately at Browns Ferry, Sequoyah, and Watts Bar nuclear plants.
The Company will provide maintenance and modification services for TVA under a
renewed six-year contract, with an option for extension up to four additional
years. The total contract value is expected to exceed $800 million.

Stock Repurchase Program. In September 2001, the Company's Board of Directors
authorized the Company to repurchase shares of its Common Stock, depending on
market conditions, up to a limit of $100 million. As of October 11, 2002, the
Company completed its purchases under this program, having purchased 5,331,005
shares at a cost of approximately $99.9 million. The Company purchased 3,170,605
shares at a cost of approximately $47.9 million in the first quarter of fiscal
2003, and 2,160,400 shares at a cost of approximately $52.0 million during the
year ended August 31, 2002.

BUSINESS SEGMENTS

The Company has segregated its business into three segments: i) the Integrated
EPC Services segment, ii) the Environmental & Infrastructure segment and iii)
the Manufacturing and Distribution segment.

INTEGRATED EPC SERVICES SEGMENT

The Integrated EPC Services segment provides a range of design and construction
related services, including design, engineering, construction, procurement,
maintenance, piping system fabrication and consulting services primarily to the
power generation and process industries.

Industry Overview

Power Industry

The Company believes it is the largest supplier of fabricated piping systems for
power generation facilities in the United States and a leading supplier
worldwide. The Company provides a full range of engineering, procurement and
construction services to power projects on a global basis. During fiscal 2001,
the Company's backlog increased significantly as a result of demand for new
power plants, primarily combined-cycle and combustion turbine technology fueled
by natural gas or both oil and gas. This new capacity demand was primarily
created by orders from independent power producers and merchant power plants to
develop additional generation capacity. Typically new plants from independent
and merchant power producers compete directly with existing utilities in
deregulated sectors. Deregulation also created opportunities for Shaw from
existing utilities that needed to upgrade or develop new power plants to remain
competitive. Although demand for new power plants decreased significantly in
2002, the Company expects many existing plants to be "re-powered" or
substantially upgraded by replacing all or most of the plant with more efficient
systems. The Company also 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 concentrates 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 also has a leading position in the
decommissioning and decontamination business for nuclear power plants. This
business consists of shutting down and safely removing a facility from service
while reducing the residual radioactivity to a level that permits release of the
property for unrestricted use and termination of the license. The recent trend
appears to be toward either extension of licenses or shutdown.

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Process Industry

In process facilities, piping systems are the critical path to convert raw or
feedstock materials to products. The Company fabricates fully integrated piping
systems and provides a full range of engineering, procurement and construction
services for process customers around the world. 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, more recently, due to an overall downturn in the worldwide
economy. However, the Company is encouraged by an increase in inquiry activity
in the petrochemical and refining industries. Key drivers include an increased
demand for petrochemical products as well as waste-to-energy opportunities. The
Company believes there will be increased capital expenditures by the major oil
and petrochemical companies in calendar 2003 as demand improves. Additionally,
China continues to significantly expand its petrochemical capabilities. Critical
to this expansion is additional ethylene capacity - a core competency of Stone &
Webster. The Company is continuing to execute on an ethylene plant in China for
BASF with the bulk of the engineering and procurement functions now complete.
The Company also expects that actions by the major oil and petrochemical
companies to integrate refining and petrochemical facilities in order to improve
margins will also provide opportunities for the Company. In the petrochemical
field, the Company has particular expertise in the construction of ethylene
plants which convert gas and/or liquid hydrocarbon feed stocks into ethylene,
the source of many higher-value chemical products, including packaging, pipes,
polyester, antifreeze, electronics, tires and tubes. The demand for 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. In
addition, current refining activity is being driven by demand for clean fuels
and clean air legislation. While the refining process is largely a commodity
activity, the configuration of each refinery depends primarily on the grade of
crude feedstock available, desired mix of end products and considerations of
capital costs and operating costs. The Company also undertakes related work in
the gas-processing field, including propane dehydrogenation facilities, gas
treatment facilities, liquefied natural gas plants and cryogenic processes.

Services Offered

Piping Systems Fabrication

The Company provides integrated piping systems and services for new
construction, site expansion and retrofit projects. Piping system integration
accounts for a significant portion of the total man-hours associated with
constructing a power generation or a 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.

The Company believes its induction pipe bending technology is one of the most
advanced, sophisticated, and efficient technologies available, and the Company
utilizes this technology and related equipment to bend pipe and other carbon
steel and alloy items for industrial, commercial and architectural
applications. Pipe bending can provide significant savings in labor, time and
material costs, as well as product strengthening.

Engineering and Design

The Company provides a broad range of engineering, design and design-related
services to its customers. The Company's engineering capabilities include civil,
structural, mechanical, and electrical. 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.

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Construction, Procurement and Maintenance

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 total process. Depending on the project, Shaw may function as the
primary contractor or as a subcontractor to another firm or as a construction
manager, engaged by the customer to oversee another contractor's compliance with
design specifications and contracting terms. Under operation and maintenance
contracts, Shaw performs 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, primarily, in the
global power generation industry. Shaw's services include 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.

ENVIRONMENTAL & INFRASTRUCTURE SEGMENT

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

Environmental

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

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

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

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Traditionally the DOD has maintained most of its own facilities and support
systems, but it is now in the process of transferring many of these
responsibilities to private contractors and private owners. A privatization
market has been created by the government's sales of assets or revenue streams,
such as military housing, electric, water and wastewater utilities on a military
base, to a private company, which is then responsible for maintenance and
operation of site activities currently conducted by government personnel.
Additionally, the Office of Management and Budget ("OMB") has an initiative to
force agencies to follow DOD's lead and begin to streamline their operations. A
key driver in the upcoming years will be the outsourcing of activities within
the civilian federal agencies.

Commercial: Commercial Services provides environmental consulting,
engineering and construction services to private-sector and state/local
government customers. The business line is comprised of the Commercial
Consulting and Engineering, the Construction and the Science and Technology
Groups. Core services of the Commercial Consulting and Engineering, and
Construction Groups include engineering, consulting and turnkey management
services which includes complete life cycle management, construction management,
operation and maintenance (O&M) services, and environmental services including
emergency response and high hazard and toxic waste cleanups and on-site remedial
activities. The Commercial Group provides full service capability, including
site selection, permitting, design, build, operate, decontaminate, demolish,
remediate and redevelopment. Additionally, the Science and Technology Group
utilizes technology to solve environmental problems and these efforts are
supported by two company-owned laboratories.

Solid Waste: The Company's EMCON/OWT subsidiary provides turnkey
services including engineering, permitting, design/build construction, equipment
fabrication, landfill products, sampling, monitoring, and facility and system
operation and maintenance, principally to the owners and operators of municipal
solid waste landfills. EMCON/OWT offers complete life cycle management of solid
waste, employing capabilities that range from site investigation through
landfill design and construction to post-closure operations and maintenance or
redevelopment.

Environmental Liability Solutions: The Company's LandBank subsidiary
provides integrated solutions utilizing real estate, environmental, legal,
financial and insurance expertise. The Company acquires and redevelops
environmentally impaired properties. The Company increases the values of these
properties through remediation and mitigates its risks through various risk
management programs. The Company believes its development activities enhance
values for all participants in the development process - sellers, investors,
developers and end users. The Company also develops, owns and operates wetland
mitigation banks, which provide off-site mitigation for their development and
infrastructure projects.

The Company has recently created the "Shaw Insured Environmental Liability
Distribution" or "SHIELD"TM program, a proprietary, structured transactional
tool, to reduce its customers' contingent environmental liabilities. Pursuant to
this program, a subsidiary of Shaw Environmental & Infrastructure, Inc., will
enter into contractual arrangements with its customers to take over
responsibility for environmental matters at a particular site or sites,
including indemnifications for defined cleanup costs and post closing third
party claims, in return for compensation by the customer. Each project in the
SHIELD program will have a risk management program that includes environmental
insurance to protect the customer and the Company against project cost overruns,
changing regulatory standards, third party claims and other potential risks.

Infrastructure

The Company provides infrastructure services in support of federal
government agencies, which have initiated reforms to improve operating
efficiencies through outsourcing and privatization. Services are provided
through four business lines focused on discrete segments of the market: Shaw
Beneco, Facilities Management, Housing Privatization, and Transportation and
Water.

Shaw Beneco: Shaw Beneco provides construction management, design/build
and general contracting for military housing, commercial and industrial
facilities for the federal government and other clients. Shaw Beneco's
operations are organized in two segments by project delivery and contract type:
Maintenance, Renovation and Repair (MRR) programs, and Construction Projects.
MRR programs include Job Order Contracts (JOC) and the U.S. Air Force's
Simplified Acquisition of Base Engineering Requirements (SABER) contracting
methods, which are forms of Indefinite Delivery/Indefinite Quantity (IDIQ)
contracts. Construction projects include stand-alone construction projects,
design/build, and multiple award construction contracts.

9

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

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

Transportation and Water: 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. In 2003, $7.3 billion in transit spending has been allocated and
transportation infrastructure funding is expected to increase 5 to 7% annually
between 2004 and 2009. 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. In the
infrastructure industry, 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. Demand for Shaw's services in the
water and wastewater business is driven by local government spending to upgrade
and expand water and wastewater processing capacity. 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.

Internationally, the Company's services are offered principally through its
Roche subsidiary, located in Quebec, Canada. Through Roche, the Company also
arranges financing to develop infrastructure projects in industrialized and
developing countries. The Company has an extensive network of local affiliates,
which allows it to effectively serve customers in regions where it does not have
a local presence.

MANUFACTURING AND DISTRIBUTION SEGMENT

The Manufacturing and Distribution segment manufactures and distributes
specialty stainless, alloy and carbon steel pipe fittings.

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. These fittings include elbows,
tees, reducers and stub ends which are used primarily by the power generation
and process industries.
Shaw operates a manufacturing facility in Shreveport, Louisiana, which sells its
products to Shaw's Integrated EPC Services segment's operations and to 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 Company also operates several distribution centers in the U.S., which
distribute its products and products manufactured by third parties. Demand for
the segment's products are typically dependent upon capital projects in the
power generation and process industries.

SEGMENT FINANCIAL DATA AND EXPORT SALE INFORMATION

See Note 15 of Notes to Consolidated Financial Statements for detailed financial
information regarding each business segment and export sale information.

10

REVENUES BY INDUSTRY AND GEOGRAPHIC REGION

The Company's revenues 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.

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

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

BACKLOG

Integrated EPC Services Segment - The Company defines its backlog in its
Integrated EPC Services segment 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.

Many of the contracts in 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.

11

Environmental & Infrastructure Segment - The Company's Environmental &
Infrastructure segment's backlog includes the value of awarded contracts and the
estimated value of unfunded work. This unfunded backlog generally represents
various (federal, state and local) government project awards for which the
project funding has been partially authorized or awarded by the relevant
government authorities (e.g., authorization or an award has been provided for
only the initial year or two of a multi-year project). Because of appropriation
limitations in the governmental budget processes, firm funding is usually made
for only one year at a time, and, in some cases, for periods less than one year,
with the remainder of the years under the contract expressed as a series of
one-year options. Amounts included in backlog are based on the contract's total
awarded value and the Company's estimates regarding the amount of the award that
will ultimately result in the recognition of revenue. These estimates are based
on the Company's experience with similar awards and similar customers and
average approximately 75% of the total unfunded awards. Estimates are reviewed
periodically and appropriate adjustments are made to the amounts included in
backlog and in unexercised contract options. The Company's backlog does not
include any awards (funded or unfunded) for work expected to be performed more
than 5 years after the date of the financial statements. The amount of future
actual awards may be more or less than the Company's estimates.

The Company estimates that its backlog was approximately $5.6 billion at August
31, 2002. The Company estimates that approximately 47% of its backlog at August
31, 2002 will be completed in fiscal 2003.

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

Note: The Company has included in backlog future revenues of approximately
$372 million related to two contracts for which there are concerns
whether the customer will have sufficient financing to complete the
projects. (See Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Results of Operations -
Fiscal 2002 Compared to Fiscal 2001- Integrated EPC Services Segment"
for a complete discussion of the impact of this matter.)

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. See Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Risk Factors."

TYPES OF CONTRACTS

The Company focuses its engineering, procurement and construction activities on
cost-reimbursable and negotiated fixed-price work with well-established clients.
The Company believes these types of contracts reduce its exposure to
unanticipated and unrecoverable cost overruns. Fixed-price contracts are
generally obtained by direct negotiation rather than by competitive bid.

12

The Company has entered into fixed-price or unit price contracts on a
significant number of its domestic piping contracts and substantially all of its
international piping projects. At August 31, 2002, approximately 78% of the
Company's backlog was comprised of cost-reimbursable contracts, 12% was
fixed-price work and 10% was unit price contracts. Under fixed-price, maximum or
unit price contracts, Shaw 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 certain negotiated fixed-price contracts, the Company may share
with the customer any savings up to a negotiated ceiling price and carries some
or all of the burden of costs exceeding the negotiated ceiling price. Contract
prices are established based in part on cost estimates that are subject to a
number of assumptions, such as future economic conditions. If these estimates
prove inaccurate, or circumstances change, cost overruns can occur which could
have a material adverse effect on the Company's business and results of its
operations. 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 executed or if Shaw
experiences cost increases for material or labor during the performance of the
contracts.

United States (U.S.) Government contracts are typically awarded through
competitive bidding or negotiations pursuant to federal procurement regulations
and involve several bidders or offerors. Government contracts also typically
have annual funding limitations, and are limited by public sector budgeting
constraints. Government contracts often may be terminated at the discretion of
the government agency 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. Many
of these contracts are multi-year Indefinite Delivery Order ("IDO") agreements.
These programs provide estimates of a maximum amount the agency expects to
spend, and the Company's program management and technical staffs work closely
with the client to define the scope and amount of work required. Although these
contracts do not initially provide the Company with any specific amount of work,
as projects are defined, the work may be awarded to the Company without further
competitive bidding.

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

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

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

CUSTOMERS AND MARKETING

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, 2002, the Integrated EPC Services segment had
revenues from PG&E National Energy Group, Inc. of approximately $676 million,
which represented approximately 26% of segment revenues and 21% of total Company
revenues. Also, the Company had total revenues from U.S. Government agencies or
entities owned by the U.S. Government of approximately $363 million (11% of
total Company revenues) that included Environmental & Infrastructure segment
revenues totaling approximately $203 million (41% of segment revenues).

13

For the year ended August 31, 2001, the Company's revenues from U.S. Government
agencies or entities owned by the U.S. Government totaled approximately $183
million (12% of revenues). For the year ended August 31, 2000, the Company's
revenues from two different non-U.S. Government customers totaled $85 million
(11% of revenues) and $83.4 million (11% of revenues).

Additionally, as of August 31, 2002, approximately 50% of the Company's total
backlog, and approximately 85% of the Environmental & Infrastructure segment's
backlog, is with U.S Government agencies or entities owned by the U.S.
government. Contracts with six (separate) commercial customers of the Integrated
EPC Services segment represent approximately 25% of the Company's backlog at
August 31, 2002.

The Company conducts its marketing efforts principally with an in-house sales
force. In addition, the Company engages independent contractors, as agents, to
market certain customers and territories. Shaw pays its sales force a base
salary, plus when applicable, an annual bonus. Shaw pays its independent
contractors on a commission basis.

RAW MATERIALS AND SUPPLIERS

For the Company's engineering, procurement and construction services, it often
relies on third party equipment manufacturers, as well as subcontractors, to
complete its projects. Shaw is not substantially dependent on any individual
third party for these operations.

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

The Company purchases directly from manufacturers, or manufactures itself, a
majority of its pipe fittings. These arrangements generally lower Shaw's pipe
fabrication costs because the Company is often able to negotiate advantageous
purchase prices as a result of the volumes of its purchases. 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. Shaw keeps items in stock at each of its facilities and transports
items between its facilities as required. The Company obtains more specialized
materials from suppliers when required for a project.

INDUSTRY CERTIFICATIONS

In order to perform fabrication and repairs of coded piping systems, the
Company's domestic construction operations and fabrication facilities, as well
as its subsidiaries in Derby, U.K. and Maracaibo, Venezuela, maintain the
required American Society of Mechanical Engineers ("ASME") certification (U & PP
stamps). The majority of the Company's fabrication facilities, as well as its
subsidiaries, in Derby, U.K. and Maracaibo, Venezuela have also obtained the
required ASME certification (S stamp) and the National Board certification (R
stamp). The Laurens, South Carolina facility is registered by the International
Organization of Standards (ISO 9002). Substantially all of the Company's North
American engineering operations, as well as its UK operations, are also
registered by the International Organization of Standards (ISO 9001), as is its
pipe support fabrication and distribution facilities (ISO 9002).

The Laurens, South Carolina facility continues to maintain its nuclear piping
ASME certification (NPT stamp) and is authorized to fabricate piping for nuclear
power plants and to serve as a material organization to manufacture and supply
ferrous and nonferrous material.

14

PATENTS, TRADEMARKS AND LICENSES AND OTHER INTELLECTUAL PROPERTY

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

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

COMPETITION

The markets served by both the Company's Integrated EPC Services and
Environmental & Infrastructure segments are highly competitive and for the most
part require substantial resources and highly skilled and experienced technical
personnel. A large number of regional, national and international companies are
competing in the markets served by Shaw, and certain of these competitors have
greater financial and other resources than the Company. Moreover, Shaw is a
recent entrant into certain areas of these businesses, and certain competitors
possess substantially greater experience, market knowledge and customer
relationships than the Company.

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

EMPLOYEES

At August 31, 2002, the Company employed approximately 17,000 employees, and
approximately 3,600 of these employees were represented by labor unions pursuant
to collective bargaining agreements. The Company also employs union labor from
time to time on a project-specific basis. The Company believes that the current
relationships with its employees (including those represented by unions) are
generally good. The Company is not aware of any circumstances that are likely to
result in a work stoppage at any of its facilities.

At August 31, 2002, of the Company's total employees, approximately 1,000 work
in the Company's wholly-owned subsidiaries in Canada, 800 work in the United
Kingdom, and 300 work in Venezuela.

ENVIRONMENTAL

The Company is subject to environmental laws and regulations, including those
concerning emissions into the air, discharges into waterways, generation,
storage, handling, treatment and disposal of waste materials and health and
safety.

The environmental, health and safety laws and regulations to which the Company
is subject are constantly changing, and it is impossible to predict the effect
of such laws and regulations on the Company in the future. The Company believes
that it is in substantial compliance with all applicable environmental, health
and safety laws and regulations. To date, the Company's costs with respect to
environmental compliance have not been material, and the Company has not
incurred any material environmental liability. However, no assurances can be
given that the Company will not incur material environmental costs or
liabilities in the future. For more information on the impact of environment
regulation upon the Company's businesses, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Risk Factors."

15

ITEM 2. PROPERTIES

The principal properties of the Company at August 31, 2002 are as follows:

(1) Leased facility.

(2) Will move to a newly constructed 95,000 square foot leased facility in
fiscal 2003.

(3) Facility includes 16,000 square foot laboratory, which is owned.

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.

ITEM 3. LEGAL PROCEEDINGS

On August 5, 2002, the Company was notified by NRG Energy, Inc. ("NRG") that due
to liquidity issues, neither NRG nor its subsidiary, LSP-Pike Energy, LLC
("Pike"), could make the next scheduled payment on the project for which the
Company had a contract involving engineering, procurement, and construction of a
combined cycle power plant in Holmesville, Mississippi. The parties reached an
agreement ("Pike Agreement") for Shaw to acquire substantially all of the assets
of Pike in exchange for forgiveness of current sums owed and the payment of $43
million by the Company to NRG. The Pike Agreement was subject to approval of
NRG's lenders and the Board of Directors of Xcel Energy, Inc. ("Xcel"), the
ultimate parent company of Pike. As of October 17, 2002, the requisite consents
for the Pike Agreement had not been granted. Consequently, the Company filed an
involuntary petition for liquidation of LSP-Pike Energy, LLC, under Chapter 7 of
the Bankruptcy Code in the United States Bankruptcy Court for the Southern
District of Mississippi, Jackson Division, to protect its rights, claims and
security interests in and to the assets of Pike. Additionally, the Company filed
suit against NRG and Xcel, and certain of their officers in the United States
District Court for the Southern District of Mississippi, Jackson Division, to

16

collect amounts due, damages and costs. A lien has also been filed on the
project property. The Company will also pursue discussions with NRG, Xcel, and
the lenders in an effort to resolve this matter.

Additionally, 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 that
occur in connection with the Company's business. 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 and no assurances can be provided, 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. However, the Company cannot
guarantee such a result.

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 2002.

17

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 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 Common Stock split.

The closing sales price of the Common Stock on November 21, 2002, as reported on
the NYSE, was $17.20 per share. As of November 15, 2002, the Company had 163
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 at the present. 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.

18

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, 2002 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."

(1) Earnings per share for fiscal 2000, 1999 and 1998 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 the IT Group and PsyCor Inc.
in fiscal 2002. (See Note 4 of Notes to Consolidated Financial Statements.)

(3) Includes the acquisition of certain assets of Scott, Sevin & Schaffer, Inc.
and Technicomp, Inc. in fiscal 2001. (See Note 4 of Notes to Consolidated
Financial Statements.)

(4) Includes the acquisitions of certain assets of Stone & Webster and PPM
Contractors, Inc. in fiscal 2000. (See Note 4 of Notes to Consolidated
Financial Statements.)

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

19

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 has three operating segments: Integrated EPC (engineering,
procurement and construction - "EPC") Services, Environmental & Infrastructure,
and Manufacturing and Distribution.

Integrated EPC Services

The Integrated EPC Services segment provides a range of design and construction
related services, including design, engineering, construction, procurement,
maintenance, piping system fabrication, and consulting services primarily to the
power generation and process industries.

Environmental & Infrastructure

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

Manufacturing and Distribution

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.

Comments Regarding Future Operations

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

CRITICAL ACCOUNTING POLICIES AND RELATED ESTIMATES THAT HAVE A MATERIAL EFFECT
ON THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS

Set forth below is a discussion of the accounting policies and related estimates
that the Company believes are the most critical to understanding its
consolidated financial statements, financial condition, and results of
operations and which require complex management judgments, uncertainties and/or
estimates. Information regarding the Company's other accounting policies is
included in the Notes to Consolidated Financial Statements.

20

Engineering, Procurement and Construction Contract Revenue Recognition and
Profit and Loss Estimates

A substantial portion of the Company's revenue from both the Integrated EPC
Services and Environmental & Infrastructure segments is derived from
engineering, procurement and construction contracts. The contracts may be
performed as stand-alone engineering, procurement or construction contacts or as
combined contracts (i.e., one contract that covers engineering, procurement and
construction or a combination thereof). The Company utilizes accounting
principles set forth in American Institute of Certified Public Accountants
("AICPA") Statement of Position 81-1 - "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts" and other applicable
accounting standards to account for its long-term contracts. The Company
recognizes revenue for these contracts on the percentage-of-completion method,
usually based on costs incurred to date, compared with total estimated contract
costs. Most of the Company's contracts are cost-reimbursable. 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.

Provisions for estimated losses for uncompleted contracts are made in the period
in which such losses are identified. The cumulative effect of other changes to
estimated contract profit and loss, including those arising from contract
penalty provisions such as liquidated damages, final contract settlements,
warranty claims and reviews 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 yet to be approved
change orders and claims is included in the total estimated revenue when it is
probable they will result in additional contract revenue and the amount can be
reasonably estimated. Profit from such change orders and claims is recorded in
the year such amounts are resolved.

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

A. Revenues and gross margins from cost-reimbursable, long-term contracts can
be significantly affected by contract incentives/penalties that may not be
known or recorded until the latter stages of the contracts. Substantially
all of the Company's revenues from cost-reimbursable contracts are based on
costs incurred plus the fee earned (before unrealized
incentives/penalties). The application of the Company's revenue recognition
practices for these types of contracts usually results in the Company
recognizing revenues ratably with a consistent gross profit margin with the
occurrence of costs and construction progress during most of the contract
term.

The Company's cost-reimbursable contracts are generally structured as
either target cost or cost plus contracts. Target cost contracts contain an
incentive/penalty arrangement in which the Company's fee is adjusted,
within certain limits, for cost underruns/overruns to an established
(target) price, representing the Company's estimated cost and fee for the
project. Cost plus contracts reimburse the Company for all of its costs,
but generally limit the Company's fee to a fixed percentage of costs or to
a certain specified amount. Usually, target-cost contracts are priced with
higher fees than cost plus contracts because of the uncertainties relating
to an adjustable fee arrangement. Additionally, both the target cost and
cost-reimbursable contracts frequently have other incentive and penalty
provisions for such matters as schedule, liquidated damages and testing or
performance results.

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

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

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

The accuracy of the gross margins the Company reports for fixed-price
contracts is dependent upon various judgments it makes with respect to its
contract performance, its cost estimates, and its ability to recover
additional contract costs through change orders or claims. Further, many of
these contracts also have incentive/penalty provisions. Generally, the
amount and impact of these incentives/penalties are not, or cannot be,
determined until the latter or completion stages of the contract. .

The Company recognizes adjustments to the gross margin on fixed-priced
contracts for changes in its cost estimates, finalization of
incentives/penalties, and other similar charges on a cumulative, catch-up
method, when such adjustments are known or probable.

21

The revenue recognition policies related to the Company's fabrication contracts,
consulting services, and pipe fittings and manufacturing operations are
described in the accompanying Notes to Consolidated Financial Statements.
Because of the nature of the contracts and related work, estimates and judgments
usually do not play as important a role in the determination of revenue and
profit and loss for these services as they do for the engineering, procurement
and construction contracts.

Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts related to estimated
losses that could result from the inability of its customers to make required
payments. The Company records, generally as a reduction to income, additions to
the allowance for doubtful accounts based on management's assessment of a
specific customer's inability to meet its financial obligations, and the balance
of the allowance for doubtful accounts reduces the recognized receivable to the
net amount the Company believes will be ultimately collected. If the financial
condition of the Company's customers were to deteriorate resulting in an
impairment of their ability to make payments, further additions to the allowance
for doubtful accounts, which would reduce the Company's earnings, may be
required. These increases to the allowance for doubtful accounts could be
significant, given i) the size of certain of the Company's EPC contracts and ii)
the fact that the Company could perform a substantial amount of unreimbursed
work on significant projects prior to the customer notifying the Company it will
not pay the amounts due. (Also see Note 14 to Notes to Consolidated Financial
Statements).

Acquisitions - Fair Value Accounting and Goodwill Impairment

Goodwill represents the excess of the cost of acquired businesses over the fair
market value of their identifiable net assets. The Company's goodwill balance as
of August 31, 2002 was approximately $499 million, most of which related to the
Stone & Webster and IT Group acquisitions (see Note 4 and Note 8 of Notes to
Consolidated Financial Statements).

In the first quarter of fiscal 2002, the Company adopted the Financial
Accounting Standards Board's Statement of Financial Accounting Standard ("SFAS")
No. 142 - "Goodwill and Other Intangible Assets," which was issued in July 2001.
SFAS No. 142 deals with, among other matters, the accounting for goodwill. SFAS
No. 142 requires that goodwill no longer be amortized, but that impairment of
goodwill assets must be reviewed on a regular basis based on a fair value
concept. SFAS No. 142 also removed certain differences between book and tax
expense, which has resulted in a reduction of the Company's effective tax rate.
If SFAS No. 142 had been in effect during fiscal 2001 and 2000, the Company
estimates that its diluted earnings per share would have been increased by
approximately $0.32 per share and $0.06 per share for the years ended August 31,
2001 and 2000, respectively. This increase in diluted earnings per share would
have resulted from the cessation of goodwill amortization and a lower effective
tax rate. (See Note 8 of Notes to Consolidated Financial Statements.)

The Company has completed the initial and first annual impairment tests required
with the adoption of SFAS No. 142 and has determined that its goodwill was not
impaired. Further, there is no current indication that its goodwill is or will
be impaired. However, the Company's businesses are cyclical and subject to
competitive pressures. Therefore, it is possible that the goodwill values of the
Company's businesses could be adversely impacted in the future by these or other
factors and that a significant impairment adjustment, which would reduce
earnings, could possibly be required in such circumstances.

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

22

Earnings Per Share and Potential Equity Effect of Convertible Debt (LYONs)

Effective May 1, 2001, the Company issued and sold $790 million (including $200
million 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 Company realized
net proceeds after expenses from the issuance of this debt of approximately $490
million. The securities are a senior unsecured obligation of the Company and are
convertible into the Company's Common Stock at a fixed ratio of 8.2988 shares
per $1,000 maturity value ("contract conversion rate") or an effective
conversion price of $77.03 at the date of issuance. (See Note 9 of Notes to
Consolidated Financial Statements).

In addition to the above conversion feature, the holders of the debt have the
right to require the Company to repurchase the debt on May 1, 2004, May 1, 2006,
May 1, 2011, and May 1, 2016 at the then accreted value. The Company has the
right to fund such repurchases with shares of its Common Stock (valued at the
current market value), or cash, or a combination of Common Stock (valued at the
current market value) and cash.

The Company has, in accordance with SFAS No. 128 - "Earnings per Share,"
computed its diluted earnings per share using the "if converted method"
assumption that the LYONs would be converted at the contract rate of 8.2988
shares per $1,000 maturity value (or an approximate equivalent conversion price
of $79.36 at August 31, 2002). Under this method the Company has reported
diluted earnings per share to reflect approximately 6,556,000 additional shares
on the basis that the debt would be converted into Common Stock at a rate of
8.2988 shares per $1,000 maturity value, if the effect was dilutive.
Additionally, the Company has presented the debt as long-term debt (as opposed
to equity) on its balance sheet.

It is the Company's plan to use cash to repurchase some, or all, of the
convertible debt that may be submitted for repurchase. Therefore, pursuant to
SFAS No. 128, the Company's financial statements do not reflect the effect on
diluted earnings per share that could result from the issuance of additional
shares of its Common Stock resulting from the submission by the holders of the
convertible debt for repurchase on the specified anniversary dates. The Company
believes, however, that depending on the magnitude of repurchase requests, it is
possible that it could issue shares to satisfy a portion of any repurchase
requirements. Further, it is possible that in adverse circumstances, such as a
combination of a large number of repurchase requests, low stock price and/or
liquidity or financing restraints, the Company could be required to issue a
significant number of shares to satisfy its repurchase obligations and the
number of shares actually issued could exceed the number of shares presently
being utilized by the Company to compute diluted earnings per share. (See Note
16 of Notes to Consolidated Financial Statements.) The issuance of a large
number of shares could significantly dilute the value of the Company's Common
Stock and materially affect its earnings per share calculations.

23

RESULTS OF OPERATIONS

The following table presents summary income and expense items as a percentage of
sales for the years ended August 31, 2002, 2001 and 2000:

FISCAL 2002 COMPARED TO FISCAL 2001

During fiscal 2002 the Company's revenues increased to $3.2 billion from $1.5
billion in fiscal 2001. The primary reasons for this increase in revenue was an
approximate $1.3 billion increase in revenues from construction of new gas-fired
power plants, realized by the Integrated EPC Services segment. Additionally,
during the third quarter of fiscal 2002, the Company acquired most of the assets
and assumed certain liabilities of the IT Group, a leading provider of
environmental and infrastructure services to governmental and commercial
customers. As a result of this acquisition, the Company formed a new business
segment, the Environmental & Infrastructure segment, by combining the acquired
IT Group operations with the Company's existing environmental and infrastructure
businesses. This acquisition increased the Company's revenues from environmental
and infrastructure services to $489.8 million from fiscal 2001 revenues of
$186.2 million, or an increase of $303.6 million.

The following presents a comparison of the Company's operating results from
fiscal 2002 as compared with fiscal 2001 for the Company's three business
segments.

Integrated EPC Services Segment

Revenues by industry for the Integrated EPC Services segment approximated the
following amounts and percentages:

Revenues increased by approximately $1.3 billion from fiscal 2001 levels to $2.6
billion in fiscal 2002. Revenues from the domestic power generation market
accounted for substantially all of this increase. The increase in revenues was
attributable to significant contracts for the construction of new gas-fired
power plants entered into in fiscal 2001 when there was strong demand for these
facilities. Many of these contracts will be completed in fiscal 2003.

24

Process industries revenues in fiscal 2002 decreased by approximately $47.0
million, from fiscal 2001. This decrease was attributable to industry trends and
the Company's decision not to pursue low margin projects similar to those it
assumed in the Stone & Webster acquisition. Revenues from other industries
increased by approximately $52.2 million in fiscal 2002 as compared to fiscal
2001, primarily as a result of an increase in domestic revenues.

Segment gross profit increased 25%, or $47.1 million, to $238.8 million in
fiscal 2002 from $191.7 million in fiscal 2001 due to the growth in revenue
volume during the year. Gross profit in fiscal years 2002 and 2001 was increased
(cost of sales decreased) by approximately $32.0 million and $99.3 million
respectively, by the utilization of contract adjustments and accrued contract
loss reserves that were established to record the fair value of (primarily)
fixed-price contracts acquired in the Stone & Webster acquisition. (See Note 4
of Notes to Consolidated Financial Statements).

The gross profit margin percentage for the year ended August 31, 2002 decreased
to 9.1% from 15.0% in the prior year. This decrease in gross margin percentage
is attributable to fiscal 2002 revenues having a much higher percentage of lower
margin revenue as compared with fiscal 2001. The lower margins relate primarily
to i) cost-reimbursable contracts entered into in fiscal 2001 and ii) purchases
of large equipment items for power generation contracts.

Prior to fiscal 2002, revenues included a higher percentage of fixed-price
contracts (which were generally priced with higher gross margins than
cost-reimbursable contracts in order to compensate for cost overrun risks). Also
during fiscal 2002, revenues from large equipment purchases on behalf of
customers were approximately $540 million as compared with approximately $60
million in fiscal 2001 and these revenues generally carry a very low gross
margin due to the "pass through" nature of their underlying costs.

A substantial portion of the Integrated EPC Services segment's revenues in
fiscal 2003 will also be derived from cost-reimbursable contracts and there will
also be revenues from contracts requiring large equipment purchases (although
anticipated to be less than in fiscal 2002). Accordingly, the Company expects
that gross profit margin percentages on work performed in fiscal 2003 will be
comparable with fiscal 2002 margins. However, further weakening of demand in the
power generation market or in the financial condition of certain of the
Company's customers in the industry could result in lower margins than those
experienced in fiscal 2002.

Segment backlog at August 31, 2002 was approximately $3.3 billion as compared
with approximately $4.3 billion at August 31, 2001, and was comprised of the
following:

The Company's backlog from the power industry decreased by approximately $850
million during fiscal 2002. This decline was primarily because the demand for
the construction of new domestic power plants fell dramatically due to questions
about future economic growth rates and whether the United States had excess
power generation capacity. Further, certain of the Company's independent and
merchant power producer customers experienced severe liquidity problems as
financing was reduced to these companies and their projects. As a result of
these conditions, during the fourth quarter of fiscal 2002, three customers
cancelled or suspended their projects, resulting in a reduction of the Company's
backlog by approximately $300 million. The Company was paid current sums due on
two of the projects pursuant to their contractual terms and has continued to
provide services to close down one of those two projects. However, the Company
has not been paid on the third project and is attempting to collect the amounts
due through a combination of negotiations and/or legal actions. The Company is
also concerned that another customer may not be able to provide funding to
complete two other projects that are presently included in the Company's backlog
(at a value of approximately $372 million) as of August 31, 2002. (See
"Contingencies Associated with Domestic Power Market EPC Projects" below for a
complete discussion of the impact of these changes.)

25

The Company anticipates that in the future, the Integrated EPC Services segment
will continue to derive significant revenues from the power industry (including
both fossil fuel and nuclear). The Company recognized revenue of approximately
$1.5 billion and $250 million in fiscal 2002 and 2001, respectively, from
contracts for the construction of new gas-fired power plants. However, because
of the problems experienced by independent and merchant power producers, it will
not derive as much revenue from the construction of new gas-fired power plants
as it did in fiscal years 2002 (as indicated by the approximate $1.3 billion
decrease in backlog for EPC fossil fuel contracts in fiscal 2002). Although
award levels will be less than in prior years, the Company anticipates it will
continue to design and construct new power plants - primarily for regulated
utilities or for cogeneration.

Additionally, the Company expects to increase its revenues from other sectors of
the domestic power industry through, for example, contracts to re-power,
refurbish or maintain existing power plants, and to provide and install emission
control equipment.

The Company has also recently seen increases in bid and proposal activity in
various foreign process and power industry sectors.

Contingencies Associated with Domestic Power Market EPC Projects

In fiscal 2002 and 2001, the Company entered into several significant EPC
contracts for new domestic gas-fired combined cycle power plants. As discussed
above, during fiscal 2002 and 2001, the Company recognized revenues of
approximately $1.5 billion and $250 million, respectively, related to these
contracts. The Company's customers for these power plants are major utility
companies and IPPs, several of which where wholly or partially owned
subsidiaries of major utilities. In fiscal 2002, demand for new capacity in the
domestic power market significantly decreased, resulting in, among other things,
financial distress among many participants in the domestic power markets,
particularly the IPPs. Although at the time the Company entered into these
contracts, all of these customers had investment grade credit ratings, during
2002, all of the Company's IPP customers received downgrades to their credit
ratings, which are now considered to be below investment grade. The condition of
the national power market, these downgrades and other factors resulted in three
projects being canceled or suspended. For one of these projects, Pike, discussed
further below, the Company was notified by the customer of their intention to
not make a scheduled milestone payment on its required due date.

As of August 31, 2002, the Company has $998.9 million remaining in backlog
related to gas-fired combined cycle power plant projects; $470.6 million for
IPPs on six projects with the remaining $528.3 million for major utility
companies on three projects. The Company believes that the continuation of
certain of the projects for the IPPs is dependent upon the customer and/or the
customer's parent company successfully obtaining additional or alternative
financing sources, such as receiving extension of their credit facilities,
restructuring of their financial obligations or agreements with funding sources
to continue to fund the projects to completion. The Company believes the three
projects for the major utility companies will be completed. Under all agreements
the Company has the right to stop construction if the milestone billings are not
made by the counterparty.

In addition, under the terms of one contract with an IPP, the customer, at its
option, can pay a portion of the contract price in subordinated notes or cash.
The Company believes that the amount payable in subordinated notes will not
exceed $27 million under the terms of the contract. If elected by the customer,
the subordinated notes would bear interest at prime plus 4% and mature in
October 2009. However, if any amounts under the notes are unpaid eight months
following final acceptance of the project, the unpaid notes, plus a cash payment
of the amounts, if any, paid on the notes through the conversion date, is
convertible at the option of the Company into a 49.9% equity interest in the
related project. The payments that could be made with these notes would be due
in the first half of fiscal 2003 and final acceptance of the project is expected
in the first half of calendar 2003.

26

The Pike Project

During the fourth quarter of 2002, one of the Company's customers, LSP-Pike
Energy, LLC ("Pike") notified the Company of its intention to not pay a
scheduled milestone billing on the required due date of August 4, 2002. Pike is
a subsidiary of NRG Energy, Inc. ("NRG"), which is wholly-owned by Xcel Energy
Inc. ("Xcel"). In accordance with the terms of the contract, on September 4,
2002, the Company notified the customer it was in breach of the terms of the
contract for nonpayment and, therefore, the contract was terminated. No amounts
are included in backlog at August 31, 2002 related to the Pike project.

Prior to the contract termination, the Company had executed
commitments/agreements to purchase equipment for the project and had also
entered into agreements with subcontractors to perform work on the project.
Certain of these commitments and agreements contain cancellation clauses and
related payment or settlement provisions. The Company has entered into
discussions with its vendors and subcontractors to determine the final amounts
owed based on the termination of the Company's contract. The Company believes
pursuant to the terms of the contract with Pike that the Company has retained
ownership of a significant amount of this equipment and other pieces of
equipment that were to be installed on the project. Under the terms of the
original contract between the Company and Pike, Pike is obligated to reimburse
the Company for all of the costs incurred by the Company whether before or after
the termination and a fee for the work performed prior to the termination. The
Company believes that it is owed approximately $120 million in costs to be
incurred and fees over the amounts already paid under the contract.

The Company is actively pursuing alternatives to collect all amounts it is owed
under the Pike contract. On October 18, 2002, the Company filed an involuntary
petition for liquidation of Pike, under Chapter 7 of the U.S. Bankruptcy Code to
protect its rights, claims, and security interests in and to the assets of Pike.
The Company also filed suit against NRG and Xcel, along with certain of their
officers to collect amounts due, damages, and costs. In addition to the legal
proceedings, the Company will continue to pursue discussions with Pike, NRG,
Xcel and their lenders in an effort to resolve collection of the amounts owed.

The Company believes it will ultimately recover the costs it incurred and will
incur under the terms of the contract and the profit it has recognized through
August 31, 2002 on the project. The Company will not recognize any additional
profit it is owed under this contract until it is probable it will collect that
additional amount.

Although the Company expects to recover amounts owed to it (including final
vendor and subcontractor settlements), it is also reasonably possible that the
Company will not recover all of its costs and profit recognized through August
31, 2002, on the project; particularly if the customer's financial situation
continues to deteriorate and if the equipment in the possession of the Company
cannot be used on another similar project or liquidated by the Company to
recover all or a portion of the amount owed. The amount, if any, that may not be
recoverable is dependent upon the final amounts to be expended by the Company
related to the project, the amount to be realized upon disposition of the
equipment related to the project and the financial wherewithal of the customer
in the future, which is dependent upon its ability to restructure and/or reach
agreement with its creditors or to obtain additional funding from its parent
company.

The Company has, in connection with its evaluation of the Pike project,
estimated that (i) it has or will incur costs of approximately $75 million to
$80 million over the amounts that have been previously collected from Pike and
(ii) equipment that was to be installed on the project could be liquidated for
approximately $40 million to $60 million. Although the Company does not believe
a loss has been incurred as of August 31, 2002, based on these estimates, if the
Company is unable to collect additional amounts from its customer (or its
affiliates or lenders), the Company's future potential loss on the Pike project
could range from $15 million to $40 million.

Any potential loss on the project will be recognized (charged to earnings) in
the period when it is determined that a loss is likely to occur and a loss
amount can be reasonably estimated.

27

The Covert & Harquahala Projects

On October 10, 2002, the parent company, PG&E Corp. ("PG&E"), of a customer,
PG&E National Energy Group, Inc. ("NEG"), announced that it had notified its
lenders that it did not intend to make further equity contributions as required
under the credit facility to fund two projects, Covert and Harquahala, currently
in progress on which the Company is the contractor. At August 31, 2002, the
Company has included in backlog estimated revenue of approximately $372 million
from these projects. As of November 1, 2002, the Company continues working on
the projects under the contract terms; however, the Company cannot guarantee
that these projects will be completed. The continuation of the projects is
dependent upon whether (i) the lenders will elect to continue to fund the
project without additional equity contributions from the customer, (ii) the
lenders will exercise their right to take ownership of the projects or (iii) the
contracts will be suspended or cancelled by the customer or the lenders.

If the lenders exercise their rights to take ownership of the projects and
complete them, the EPC portion of the contracts would be a fixed-price contract
with the lenders. Although the "target price" components of the original
contracts would still be enforceable against NEG, the Company may not be able to
seek collection from the lenders for these components of the original contracts.
Based on the Company's current estimate of costs to complete the project, there
would be no material impact of this change. However, given the uncertainty of
collecting additional amounts from NEG, if the actual costs to complete the
projects exceed the estimated costs at this time, the Company would be assuming
higher risk under this fixed-price contract and could be susceptible to losses
on these projects.

If the contracts were ultimately terminated, the Company would be obligated
under related commitments to complete the payment for various pieces of
equipment procured for the projects and obligations to subcontractors for work
performed on the projects. Under the terms of the contracts, if the contracts
are terminated or suspended, the customer would be obligated to reimburse the
Company for the costs incurred by the Company and a fee for the work performed.
Although no assurances can be made, the Company believes that it would be able
to recover any amounts owed to it under the contracts through collection from
the customer, its parent, and/or the lenders. In addition, the Company believes
that it has first lien rights, superior to the primary lenders, on the partially
completed projects. The projects are each over 70% complete at an estimated
total cost at completion of over $600 million each.

Although the Company believes its lien rights will ultimately provide sufficient
security to ensure full payment for any amounts due if the customer is unable to
pay, the Company estimates that it has exposure, which includes costs incurred
and committed over amounts collected and profit recorded on the two projects, of
approximately $50 million to $60 million as of November 1, 2002. This amount
will fluctuate as construction progresses. The Company estimates that its
maximum exposure in the future, which is dependent upon the timing of additional
costs incurred on the projects and timing of the receipt of milestone billings,
is approximately $70 million to $80 million.

On October 25, 2002 the Company received approximately $31 million from the
lenders on these projects in payments for invoices due at that date. As of
November 1, 2002 the Company has been paid for all amounts currently due.
Although no assurances can be made, the Company believes that it will recover
all amounts owed to it under these contracts through collection from the
customer or its lenders. It is reasonably possible however, that the Company may
not collect all future amounts owed to it under this project which could have an
adverse effect on operating results in the period when the uncollectable amounts
would be recognized.

28

Environmental & Infrastructure segment

Environmental & Infrastructure segment revenues in fiscal 2002 were $489.8
million, an increase of $303.6 million from fiscal 2001 totals of $186.2
million. This increase was entirely attributable to the Company's acquisition of
the IT Group assets (see Note 4 of Notes to Consolidated Financial Statements).

Gross margin in fiscal 2002 was $69.3 million as compared with $35.4 million in
fiscal 2001. Gross profit in fiscal year 2002 was increased (cost of revenues
decreased) by approximately $2.8 million for the amortization of asset/liability
adjustments to the fair value of contracts acquired in the IT Group acquisition.
(See Note 4 to Notes to Consolidated Financial Statements.)

The gross margin percentage in fiscal 2002 was approximately 14.2% and
approximately 19.0% in fiscal 2001. The reduction in the gross margin percentage
in fiscal 2002 as compared with fiscal 2001 was attributable to lower margin
contracts that were acquired in the IT Group transaction. The Company
anticipates that the gross margin percentage for the Environmental &
Infrastructure segment will also decrease in fiscal 2003 due to the inclusion of
a full year's operating results from assets acquired from the IT Group. The
difference in the gross margin percentages between the Company's pre-IT Group
environmental and infrastructure operations (primarily infrastructure and
hazardous material clean up and disposal) and those acquired in the IT Group
asset acquisition (environmental clean-up, landfills and facilities management)
is primarily attributable to such factors as different customers, competition
and mix of services.

Backlog in this segment at August 31, 2002 was approximately $2.3 billion
compared with approximately $0.2 billion at August 31, 2001. This increase was
entirely attributable to the IT Group acquisition. The Company believes the
Environmental & Infrastructure segment revenues will increase over the next
several years, as a result of a combination of factors, such as, market
opportunities in various environmental clean-up, homeland defense and
infrastructure markets and the Company's belief that it will be able to re-gain
market share which the IT Group lost while it was experiencing financial
difficulties, including the period in which it was in bankruptcy during the
first four months of calendar 2002.

Manufacturing and Distribution Segment

Revenues decreased from $76.1 million in fiscal 2001 to $70.7 million in fiscal
2002. However, segment net income increased in fiscal 2002 to approximately $6.8
million from approximately $5.7 million in fiscal 2001. This increase was
attributable to better gross profit margins achieved as a result of sales of
products with a higher gross margin than in fiscal 2001. Manufacturing and
Distribution backlog was approximately $3.8 million at August 31, 2002. The
majority of revenue generated from manufacturing and distribution does not come
from backlog orders.

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

General and administrative expenses (excluding goodwill amortization), increased
$38.6 million, or 31%, from $122.6 million in fiscal 2001 to $161.2 million in
fiscal 2002. The increase in fiscal 2002 general and administrative expenses
resulted primarily from expenses associated with i) the 106% increase in the
Company's revenue and ii) the IT Group acquisition. However, as a result of the
Company's efforts to control its expenses and economies realized from the
integration of Stone & Webster, general and administrative expenses (excluding
goodwill amortization) in fiscal 2002 decreased as a percentage of sales to 5.1%
from 8.0% in fiscal 2001. The Company expects the total of general and
administrative expenses to increase slightly in fiscal 2003, as compared with
fiscal 2002. The increase in general and administrative costs will primarily
result from i) the Company recognizing a full year of expenses (including
depreciation and amortization) associated with new facilities, equipment and
software which were placed into service in the latter part of fiscal 2002 and
ii) the IT Group acquisition. However, the Company also expects to offset these
increases with cost reductions attained from the integration of the IT Group
businesses and cost reductions commensurate with reductions in revenue from the
power generation market.

29

The Company's interest expense increased to $23.0 million in fiscal 2002 from
$15.7 million in fiscal 2001, primarily as a result of having convertible debt
outstanding for the full fiscal year. Interest income also increased to $11.5
million in fiscal 2002 from $8.7 million in fiscal 2001 due to the Company's
investment of a substantial portion of the funds received from the sale of its
convertible debt. However, the interest rates the Company received on these
investments decreased substantially from rates it received in fiscal 2001 due to
the general decline in interest rates between periods.

The Company's effective tax rates for the years ended August 31, 2002 and 2001
were 36.0% and 38.4%, respectively. The Company's estimates of its tax rates are
derived from Company estimates of pretax income for each year and the mix of
domestic and foreign sourced (including foreign export sales) income. The
decrease in the tax rates in fiscal 2002 versus fiscal 2001 is due primarily to
the Company's adoption of SFAS No. 142 in fiscal 2002 (see Note 1 and Note 8 of
Notes to Consolidated Financial Statements). As a result of the Company's
adoption of SFAS No. 142 it no longer recognizes goodwill amortization expense
in its financial statements. Accordingly, the Company's effective tax rate
decreased in fiscal 2002 because it no longer recognizes goodwill amortization
expense (which is only partially deductible for tax purposes) in its financial
statements. This decrease was partially offset by increased domestic income in
fiscal 2002 that has a higher tax rate than most foreign income. The Company did
not pay any federal income taxes in fiscal 2002 and 2001 primarily because of
its utilization of operating losses resulting from the Stone & Webster
acquisition. The Company anticipates that it will pay federal income taxes in
2003, however, the amount to be paid is subject to a number of factors. The
Company established a valuation allowance against a portion of the deferred tax
asset for Australian net operating losses. The valuation allowance reflects the
Company's judgment that it is more likely than not that a portion of the
deferred tax assets will not be realized. The Company believes that the
remaining deferred tax assets at August 31, 2002, amounting to $85.2 million,
are realizable through future reversals of existing taxable temporary
differences and future taxable income. Uncertainties that affect the ultimate
realization of deferred tax assets include the risk of not having future taxable
income. This factor has been considered in determining the valuation allowance.

Additionally, at August 31, 2002, the Company had recorded a $10,180,000
liability for a U.K. defined benefit retirement plan. (Also see Note 17 of Notes
to Consolidated Financial Statements). This liability is required to be
recognized on the plan sponsor's balance sheet when the accumulated benefit
obligations of the plan exceed the fair value of the plan's assets. In
accordance with SFAS No. 87 - "Employers Accounting for Pensions" the increase
in the minimum liability is recorded through a direct charge to stockholders'
equity and is, therefore, reflected, net of tax, as a component of comprehensive
income in the Statement of Changes in Stockholders' Equity. This liability will
require the Company to increase its future contributions to the plan.

FISCAL 2001 COMPARED TO FISCAL 2000

The Company's revenues increased 102% to $1.539 billion in fiscal 2001 from
$762.7 million in fiscal 2000. Revenues from all of the Company's business
segments increased in fiscal year 2001, when compared to fiscal 2000, with the
Integrated EPC Services segment increasing by $594.8 million or 87% over the
prior fiscal year. This revenue increase was attributable to revenue from Stone
& Webster businesses, which were acquired in July 2000 (see Note 4 of Notes to
Consolidated Financial Statements). Revenues from the Environmental &
Infrastructure segment increased to $186.2 million for fiscal 2001, an increase
of $166.3 million from fiscal 2000 levels of $19.9 million. All revenues for the
Environmental & Infrastructure segment were from operations acquired in the
Stone & Webster acquisition. 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.

Revenues from domestic projects increased $624.0 million, or 106%, from $586.4
million for fiscal 2000 to $1.210 billion for fiscal 2001. The power generation
market was robust in the U.S., accounting for approximately $493.4 million (79%)
of the increase in domestic revenues 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 commenced to conduct business in
the

30

environmental and infrastructure industry sector. Domestic revenues from this
industry sector increased by $166.3 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 revenues decreased $52.8
million primarily due to decreases of revenues from the refining industry

Revenues from international projects increased $152.3 million, or 86%, to $328.6
million from fiscal 2000 to fiscal 2001. Revenues from 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
this area through fiscal 2004. Revenues from South America and the Middle East
regions remained sluggish.

The Company's revenues 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 84% 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
revenues 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
revenues 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 4 of
Notes to Consolidated Financial Statements).

In fiscal 2001, the Company increased the contract liability adjustment and the
accrued contract loss reserve 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 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 fiscal 2000. 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.

31

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.

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 $14.0 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 of revenues
to 9.1% from 9.8% compared with fiscal 2000.

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 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 9 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 borrowing levels.

Interest income was $8.7 million for fiscal 2001 compared with $.7 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 9 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 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 income (including foreign
export revenue). The increase in the tax rates in fiscal 2001 versus fiscal 2000
is due primarily to the increase in domestic revenues and an increase in
nondeductible expenses, such as a portion of the goodwill recognized from the
Stone & Webster acquisition.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operations was approximately $315.1 million for fiscal 2002
compared with $11.4 million of net cash provided by operations in fiscal 2001.
In fiscal 2002, cash was increased by (i) net income of $98.4 million, (ii)
deferred tax expense of $ 48.1 million, (iii) depreciation and amortization of
$28.6 million, and (iv) interest accretion and loan fee amortization of $20.6
million. Additionally, net cash was increased by changes in certain assets and
liabilities of $143.8 million, comprised primarily of increases in advanced
billings and billings in excess of costs and estimated earnings on uncompleted
contracts, accounts payable and accrued liabilities and a decrease in
receivables. These sources of cash were partially offset by an increase in costs
and estimated earnings in excess of billings on uncompleted contracts, as well
as other changes in certain assets and liabilities. The net cash realized from
the changes in the assets and liabilities were substantially attributable to the
timing of collection of project revenues and billings and the payment of project
costs and general and administrative expenses. Additionally, the Company
received cash from payments on accounts receivables acquired from the IT Group.
During fiscal 2002, the Company billed and collected substantial advanced
billings on its larger EPC contracts, which positively impacted cash flow in
fiscal 2002. During fiscal 2003, the Company's cash flow will be negatively
impacted as the Company utilizes these funds to pay project costs. Therefore,
even though the Company expects positive cash flow from operations in fiscal
2003, the Company does not expect to sustain the levels of cash flows received
in fiscal year 2002.

32

Additionally, the Company acquired a large number of contracts in the Stone &
Webster and IT Group acquisitions with lower than market rate margins due to the
effect of the financial difficulties experienced by Stone & Webster and the IT
Group on negotiating and executing contracts prior to acquisition. These
contracts were adjusted to their fair value as an asset or liability and the
related amortization has the net effect of reducing cost of revenues for the
contracts as they are completed. Cost of revenues was reduced on a net basis by
approximately $31.1 million and $70.1 million during fiscal 2002 and 2001,
respectively, through the amortization of these adjustments, which is a non-cash
component of income. The amortization of these assets and liabilities resulted
in a corresponding net increase in gross profit during fiscal 2002 and 2001. The
adjustments are amortized over the lives of the contracts, which for certain IT
Group contracts, will continue for five to ten years. (See Note 4 of Notes to
Consolidated Financial Statements.)

Net cash used in investing activities was approximately $198.3 million in fiscal
2002, compared with net cash provided of $54.3 million for the prior fiscal
year. The Company used cash of approximately $100.7 million to fund the IT Group
acquisition and $ 2.0 million to fund the PysCor acquisition. During fiscal
2002, the Company purchased $73.9 million of property and equipment that
included additions to the Company's facilities and equipment and upgrades of
corporate information systems and software programs. The Company anticipates
that property and equipment purchases for fiscal 2003 will be much less than in
fiscal 2002 due to the completion in fiscal 2002 of most of the planned system
and facilities upgrades. Purchases of marketable securities exceeded the
maturities of marketable securities by approximately $9.3 million. Additionally,
the Company acquired an option, at a cost of approximately $12.2 million, to
acquire additional office building space in the Baton Rouge area. This option
was purchased to assure that the Company will have adequate office facilities to
support future growth of its operations in the Baton Rouge area. The Company
invested approximately $3.1 million in a new joint venture in China that was
formed in fiscal 2002. The Company also received cash distributions and advance
repayments of approximately $2.2 million from its unconsolidated subsidiaries
($2.0 million from EntergyShaw), and it also received proceeds of approximately
$0.7 million from the sale of assets.

Net cash used in financing activities totaled approximately $62.0 million in
fiscal 2002, compared with $356.7 million of net cash provided in fiscal 2001.
During fiscal 2002, the Company purchased approximately $52.0 million of
treasury stock (2,160,400 shares) in accordance with a plan authorized by the
Company's Board of Directors (see Note 2 of Notes to Consolidated Financial
Statements). Additionally, the Company made payments on debt and leases of
approximately $ 9.2 million and on its foreign revolving credit lines of
approximately $3.0 million. The Company also received approximately $2.3 million
from employees upon the exercise of stock options during fiscal 2002. In fiscal
2001, the Company received approximately $490 million from the issuance of LYONs
convertible debt, as well as other normal course of business borrowings of
approximately $ 3.0 million, accounting for the positive cash provided by
financing activities in fiscal 2001.

As of August 31, 2002 the Company had the following contractual obligations:

Also see Note 14 of Notes to Consolidated Financial Statements for a discussion
of the Company's contingencies.

At August 31, 2002, the Company had both letter of credit commitments and
bonding obligations, that generally were issued to secure performance and
financial obligations on certain of its construction contracts, which expire as
follows:

Note: Other commercial commitment totals exclude any letters of credit or surety
bonding obligations associated with outstanding bids or proposals or other
work which were not awarded prior to August 31, 2002. The surety bond
commitments include escrowed cash. (See Note 3 to Notes to Consolidated
Financial Statements)

33

The Company's primary credit facility ("Credit Facility"), dated July 2000, is
for a three-year term, and provides that both revolving credit loans and letters
of credit may be issued within the limits of this facility. The Credit Facility
was amended on February 28, 2002 to, among other matters, increase the total
Credit Facility to $350 million from $300 million and to eliminate the previous
$150 million limit on letters of credit. The Company also has the option to
further 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 amended
Credit Facility allows the Company to borrow either at interest rates (i) in a
range of 1.50% to 2.25% over the London Interbank Offered Rate ("LIBOR") or (ii)
from the prime rate to 0.75% 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 and other restrictions, which include but are not limited
to the maintenance of specified ratios and minimum capital levels and limits on
other borrowings, capital expenditures and investments. Additionally, the Credit
Facility established a $25,000,000 aggregate limit on the amount of the
Company's Common Stock repurchases and/or LYONs repurchases made subsequent to
February 28, 2002, without prior consent. Subsequent consent was provided to
allow the Company to complete in October 2002 the $100 million Common Stock
repurchase program which was authorized by the Company's Board of Directors in
September 2001(see Note 2 to Notes to Consolidated Financial Statements). As of
August 31, 2002, the Company was in compliance with these covenants or had
obtained the necessary waivers. At August 31, 2002 and 2001, letters of credit
of approximately $183.8 million and $61.5 million, respectively, were
outstanding and no revolving credit loans were outstanding under the Credit
Facility. The Company's total availability under the Credit Facility at August
31, 2002 and 2001 was approximately $166.2 million and $238.5 million,
respectively. At August 31, 2002, the interest rate on this line of credit was
either 4.75% (if the prime rate index had been chosen) or 3.32% (if the LIBOR
rate index had been chosen). 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, 2002 and 2001, the Company's foreign subsidiaries had
short-term revolving lines of credit permitting borrowings totaling
approximately $15.5 million and $16.2 million, respectively. These subsidiaries
had outstanding borrowings under these lines of approximately $1.1 million and
$3.9 million, respectively, at a weighted average interest rate of approximately
5.0% and 6.0%, respectively, at August 31, 2002 and 2001.

Although the Company had no borrowings outstanding under the Credit Facility as
of August 31, 2002, the Credit Facility is still available to the Company and
was being used to provide letters of credit to satisfy various project guarantee
requirements. The Credit Facility expires in July 2003. The Company anticipates
that it will revise and extend the Credit Facility in the second quarter of
fiscal 2003 to provide for a new three-year term from the date of the revision.
The Company has previously 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.

At August 31, 2002, the Company had working capital of approximately $378
million and unutilized borrowing capacity under its major Credit Facility of
approximately $166.2 million. The Company anticipates having positive cash flow
from operations over the next twelve months.

During the first quarter of fiscal 2003 the Company purchased approximately
3,171,000 shares of its Common Stock for a cost of approximately $47.9 million.
These purchases completed the Company's $100 million Common Stock repurchase
program that it initiated in September 2001.

34

The Company's working capital requirements for fiscal 2003 will be impacted by
such factors as (i) the amount of increased working capital necessary to support
the operations and the settlement of assumed liabilities of the recently
acquired IT Group, (ii) the timing and negotiated payment terms of its projects
and (iii) its capital expenditures program. Further, the Company anticipates
recording in the third quarter of fiscal 2003 an increase in the current
maturity of long term debt (as a reduction to working capital) related to the
Company's LYONs' obligations. This adjustment will not affect actual liquidity
requirements in fiscal 2003. However, an adjustment to classify at least part of
the debt as having a current maturity will be required because the owners of the
LYONs' notes are permitted, if they chose to do so, to submit these notes to the
Company in May 2004 for repurchase by the Company. The Company may choose to
repurchase the LYONs in either cash or shares of the Company's Common Stock, or
a combination of Common Stock and cash. Accordingly, as a result of these
factors, the Company's working capital position is expected to decrease during
the next twelve months.

The Company believes that its $378 million of working capital and unused
borrowing capacity of $166.2 million at August 31, 2002, is in excess of its
identified short-term working capital needs, (based on its existing operations)
and that it will have sufficient working capital and borrowing capacity to fund
its operations for the next twelve months.

EFFECTS OF INFLATION

The Company will continue to focus its operations on cost-reimbursable or
negotiated fixed-price 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 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 that are either cost-reimbursable or negotiated
fixed-price. For contracts the Company accepts with fixed-price 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 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 June 2001, the FASB issued SFAS No. 143 - "Accounting for Asset Retirement
Obligations." This statement, which is first effective for the Company beginning
in fiscal 2003, requires that the cost of legal obligations associated with the
retirement and/or removal of long-lived assets should be accounted for as
additional asset costs and that the net present value of the retirement/removal
costs be recorded as a liability. Asset values (to include retirement and
removal costs) are subject to impairment reviews pursuant to SFAS No. 144 (see
below). The Company believes this statement will not have a material effect on
its financial statements

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, this statement increases the likelihood that dispositions will 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 does not expect this
statement will have a material effect on its financial statements when it adopts
this standard in fiscal 2003.

35

In May 2002, the FASB issued SFAS No. 145 - "Rescission of FASB Statements Nos.
4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections"
which is effective for fiscal years beginning after May 15, 2002. This
statement, among other matters, provides guidance with respect to the accounting
for gain or loss on capital leases that were modified to become operating
leases. The statement also eliminates the requirement that gains or losses on
the early extinguishment of debt be classified as extraordinary items and
provides guidance when the gain or loss on the early retirement of debt should
or should not be reflected as an extraordinary item. The Company will be
required to reclassify the extraordinary losses recognized in prior years as
ordinary loss upon adoption of this standard when it becomes effective in fiscal
2003.

In July 2002 the FASB issued SFAS No. 146 - "Accounting for Costs Associated
with Exit or Disposal Activities." This statement requires that costs associated
with terminating employees or contracts or closing or relocating facilities are
to be recognized at fair value at the time the liability is incurred. The
Company does not anticipate that this statement will have a material effect on
its financial statements when it becomes effective for disposal activities
initiated after December 31, 2002.

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, to include the
discussion of the Company's Critical Accounting Polices, 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 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 and environmental and infrastructure industries that together
accounted for approximately 89% of the Company's backlog as of August 31, 2002.
The Company also depends, to a lesser extent, on conditions in the
petrochemical, chemical, 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. In fiscal 2002, there has been
a slowdown in construction activity and new construction awards for power
generation projects, primarily as a result of less activity by certain
independent power producers who have encountered financing and liquidity
problems. Additionally, the planning for new projects by the power generation
industry has been affected by recent economic forecasts which indicate the
possibility that growth rates in the United States may be less than previously
anticipated. The Company can provide no assurance as to future demand for new
power generation projects or its other projects and services.

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

As of August 31, 2002, the Company's backlog was approximately $5.6 billion.
Shaw can provide no assurances that the revenues projected in its backlog will
be realized or, if realized, will result in profits. Further, project
terminations, suspensions or adjustments in scope may occur with respect to
contracts reflected by the Company in its backlog. For example, during the
Company's fourth quarter of fiscal 2002, three domestic power projects
previously reflected in the Company's backlog were suspended or cancelled,
resulting in a reduction of in excess of $300 million to backlog. Reductions in
backlog of this type (or otherwise) adversely affect, potentially to a material
extent, the revenue and profit the Company actually receives from contracts
projected in backlog.

36

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.

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. Also, the Company estimates (based on
the Company's prior experience) the amount of future work it will receive for
multi-year government contracts for which funding is approved on an annual or
periodic basis during the term of the contract. In the Environmental &
Infrastructure segment, many of these contracts are multi-year Indefinite
Delivery Order (IDO) agreements with the federal government. These contracts do
not initially provide for a specific amount of work and the contract backlog IDO
agreements is derived from the Company's historical experience with IDO
contracts.

The Company's backlog for maintenance work is derived from maintenance contracts
and customers' historic maintenance requirements. Accordingly, the amount of
future actual awards may be more or less than the Company's estimates.

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 environmental, 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.

DIFFICULTIES INTEGRATING THE ACQUISITION OF THE ASSETS OF IT GROUP AND OTHER
ACQUISITIONS COULD ADVERSELY AFFECT SHAW.

The IT Group acquisition represents a significant acquisition for Shaw and it
has enabled the Company to expand its traditional lines of business. The IT
Group acquisition also brings Shaw into businesses it has not previously
conducted and exposes Shaw to additional business risks that are different than
those it has traditionally experienced. In addition, the Company has and may
continue to acquire new businesses. As a result, the Company may encounter
difficulties integrating the IT Group acquisition and the Company's other
acquisitions and successfully managing the growth the Company expects to
experience from the acquisitions. To the extent the Company encounters problems
in integrating the IT Group acquisition and any other 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 INCUR UNEXPECTED LIABILITIES ASSOCIATED WITH THE STONE & WEBSTER
AND IT GROUP ACQUISITIONS, AS WELL AS OTHER ACQUISITIONS.

The Company believes, pursuant to the terms of the agreements for the Stone &
Webster and IT Group asset acquisitions, that it assumed only certain
liabilities ("assumed liabilities") specified in the agreements related to such
acquisitions. In addition, the agreements related to such acquisitions provide
that certain other liabilities, including but not limited to, certain
outstanding borrowings, certain leases, certain contracts in process, completed
contracts, claims or litigation that relate to acts or event occurring prior to
the actual acquisition date, and certain employee benefit obligations are
specifically excluded ("excluded liabilities") from the Company's transactions.
The Company, however, cannot provide any assurances that it does not have any
exposure related to the excluded liabilities.

In addition, 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.

37

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

Shaw enters into fixed-price 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 and IT Group acquisitions were fixed-price 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.

The Company enters into contractual agreements with customers for some of its
engineering, procurement and construction services to be performed based on
agreed upon reimbursable costs and labor rates. Some 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.

THE COMPANY IS SUBJECT TO THE RISKS ASSOCIATED WITH BEING A GOVERNMENT
CONTRACTOR, PARTICULARLY DUE TO THE ACQUISITIONS OF THE ASSETS OF IT GROUP.

As a result of the Company's acquisition of the assets of IT Group, the Company
is now a major provider of services to governmental agencies. As a major
provider of these services, the Company faces the risks associated with
government contracting. For example, a reduction in spending by federal
government agencies could limit the continued funding of existing contracts with
these agencies and could limit the Company's ability to obtain additional
contracts, which could have a material adverse effect on the Company's business.
The risks of government contracting also include the risk of civil and criminal
fines and penalties for violations of applicable regulations and statutes and
the risk of public scrutiny of Shaw's performance at high profile sites.

As a result of the Company's government contracting business, the Company has
been, is and will be in the future, the subject of audits and/or cost reviews by
the Defense Contract Audit Agency ("DCAA") or by the contracting agency.
Additionally, Shaw has been and may in the future be, the subject of
investigations by governmental agencies such as the EPA's Office of Inspector
General. During the course of an audit, the DCAA may disallow costs if it
determines that the Company improperly accounted for such costs in a manner
inconsistent with Cost Accounting Standards, regulatory and contractual
requirements. Under the type of cost-reimbursable government contracts that the
Company typically performs, only those costs that are reasonable, allocable and
allowable are recoverable under the Federal Acquisition Regulation and Cost
Accounting Standards.

In addition, the failure to comply with the terms of one or more of its
government contracts, other government agreements, regulations and statutes
could result in Shaw's suspension or debarment from future government contract
projects for a significant period of time. This could result in a material
adverse effect on the Company's business.

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; (vii) valuation of
assets acquired

38

and liabilities assumed in connection with business combinations and (viii)
accruals for estimated liabilities, including litigation and insurance reserves.
Actual results could differ from those estimates.

THE COMPANY'S USE OF THE PERCENTAGE- OF- COMPLETION ACCOUNTING COULD RESULT IN A
REDUCTION/ELIMINATION OF PREVIOUSLY REPORTED PROFITS.

As is more fully discussed above in the "Critical Accounting Policies and
Related Estimates That Have a Material Effect on the Company's Consolidated
Financial Statements" and in Note 1 of Notes to Consolidated Financial
Statements, a substantial portion of the Company's revenues are recognized using
the Percentage -of -Completion ("POC") method of accounting. This accounting
method is standard for EPC contracts. The POC accounting practices the Company
utilizes results in the Company recognizing contract revenues and earnings
ratably over the contract term in proportion to the Company's incurrence of
contract costs. The earnings/losses recognized on individual contracts are based
on estimates of contract costs and profitability. Contract losses are recognized
in full when determined and contract profit estimates are adjusted based on
ongoing reviews of contract profitability. Further, a substantial portion of the
Company's contracts contain various cost and performance incentives/penalties
that impact the earnings the Company realizes from the contracts and adjustments
related to incentives/penalties are recorded when known or finalized, which is
generally during the latter stages of the contract.

Although most of the Company's contracts are cost-reimbursable and the Company's
financial loss exposure on cost-reimbursable contracts is generally limited to a
portion of its gross margin, it is possible the loss provisions or adjustments
to the contract profit and loss resulting from ongoing reviews or contract
penalty provisions could be significant and could result in a reduction or
elimination of previously recognized earnings. In certain circumstances it is
possible that such adjustments could be material to the Company's operating
results.

THE COMPANY'S RESULTS OF OPERATIONS DEPEND ON THE AWARD OF NEW CONTRACTS AND THE
TIMING OF THE PERFORMANCE OF THESE CONTRACTS.

A substantial portion of the Company's revenues are directly or indirectly
derived from large-scale domestic and international projects. It is generally
very difficult to predict whether and when Shaw will receive such awards as
these contracts frequently involve a lengthy and complex bidding and selection
process which is affected by a number of factors, such as market conditions,
financing arrangements, governmental approvals and environmental matters.
Because a significant portion of the Company's revenues are generated from large
projects, the Company's results of operations can fluctuate from quarter to
quarter depending on the timing of its contract awards.

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 for 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.
Further, Shaw's significant customers vary between years and the loss of any one
or more of the Company's key customers could have a material adverse impact on
it.

In addition, timing of the revenues and earnings 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.

39

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

A significant portion of the Company's revenues is attributable to projects in
international markets. Shaw expects international revenues 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;
o products and services, which could make it difficult for it to enforce
the Company's contractual rights;
o expropriation of property;
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 OR TO OBTAIN PROJECTS.

The Company generally attempts to denominate its contracts in United States
dollars; however, from time to time the Company enters into contracts
denominated in a foreign currency. This practice subjects the Company to foreign
exchange risks, particularly to the extent contract revenues are denominated in
a currency different than the contract costs. The Company attempts to minimize
its exposure from foreign exchange risks by obtaining escalation provisions for
projects in inflationary economies, matching the contract revenue currency with
the contract costs currency or entering into hedge contracts when there are
different currencies for contract revenues and costs. However, these actions
will not always eliminate all foreign exchange risks.

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.

Further, the Company's ability to obtain international contracts is impacted by
the relative strength or weakness of the United States dollar 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 CUSTOMERS 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.

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

40

third party subcontractors, to complete its projects. To the extent that the
Company cannot engage subcontractors 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
fixed-price 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.

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

Shaw engineers and constructs and performs services 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 or services performed
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 performs 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 COMPANY'S ENVIRONMENTAL/INFRASTRUCTURE OPERATIONS, WHICH WILL INCREASE
SUBSTANTIALLY AS A RESULT OF THE ACQUISITION OF THE ASSETS OF IT GROUP, MAY
SUBJECT THE COMPANY TO POTENTIAL CONTRACTUAL AND OPERATIONAL COSTS AND
LIABILITIES.

Many of Shaw's Environmental & Infrastructure segment customers attempt to shift
financial and operating risks to the contractor, particularly on projects
involving large scale cleanups and /or projects where there may be a risk that
the contamination could be more extensive or difficult to resolve than
previously anticipated. In this competitive market, customers increasingly try
to pressure contractors to accept greater risks of performance, liability for
damage or injury to third parties or property and liability for fines and
penalties. Prior to its acquisition by the Company, the IT Group was involved in
claims and litigation involving disputes over such issues. Therefore, it is
possible that the Company could also become involved in similar claims and
litigation in the future as a result of the Company's acquisition of the assets
of IT Group and the Company's participation in environmental and infrastructure
contracts.

Environmental management contractors also potentially face liabilities to third
parties for property damage or personal injury stemming from a release of toxic
substances resulting from a project performed for customers. These liabilities
could arise long after completion of a project. Although the risks the Company
faces in its anthrax and other biological agent work are similar to those faced
in its toxic chemical emergency response business, the risks posed by attempting
to detect and remediate these agents may include risks to the Company's
employees, subcontractors and those who may be affected should detection and
remediation prove less effective than anticipated. Because anthrax and similar
contamination is so recent, there may be unknown risks involved, and in certain
circumstances there may be no body of knowledge or standard protocols for
dealing with these risks. The risks the Company faces also include the potential
ineffectiveness of developing technologies to detect and remediate the
contamination, claims for infringement of these technologies, the difficulties
in working with the smaller, specialized firms that may own these technologies
and have detection and remediation capabilities, the Company's ability to
attract and retain qualified employees and subcontractors in light of these
risks, the high profile nature of the work, and the potential unavailability of
insurance and indemnification for the risks associated with biological agents
and terrorism.

Over the past several years, the EPA and other federal agencies have constricted
significantly the circumstances under which they will indemnify their
contractors against liabilities incurred in connection with CERCLA and similar
projects.

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

41

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.

The Company's Environmental & Infrastructure segment competes with a diverse
array of small and large organizations including national or regional
environmental management firms, national, regional and local architectural,
engineering and construction firms, environmental management divisions or
subsidiaries of international engineering, construction and systems companies,
and waste generators that have developed in-house capabilities. Increased
competition in this business, combined with changes in client procurement
procedures, has resulted in changes in the industry, among other things: lower
contract margins, more fixed-price or unit-price contracts, and contract terms
that may increasingly require the Company to indemnify its clients against
damages or injuries to third parties and property and environmental fines and
penalties. The Company believes, therefore, these market conditions may require
the Company to accept more contractual and performance risk than it has
historically done in order for the Environmental & Infrastructure segment to be
competitive in this market.

The entry of large systems contractors and international engineering and
construction forms into the environmental services industry has increased
competition for major federal government contracts and programs, which have been
a primary source of revenue in recent years for the environmental and
infrastructure business. The Company cannot assure that the Environmental &
Infrastructure segment will be able to compete successfully given the intense
competition and trends in its industry.

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.

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

42

ENVIRONMENTAL FACTORS AND CHANGES IN LAWS AND REGULATIONS COULD INCREASE THE
COMPANY'S COSTS AND LIABILITIES AND AFFECT THE DEMAND FOR ITS SERVICES.

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 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.

Companies that are subject to environmental liabilities have also sought to
expand the reach of CERCLA, RCRA and similar state statutes to make contractor
firms responsible for cleanup costs. These companies claim that environmental
contractors are owners or operators of hazardous waste facilities or that they
arranged for treatment, transportation or disposal of hazardous substances. If
the Company is held responsible under CERCLA or RCRA for damages caused while
performing services or otherwise, the Company may be forced to bear this
liability by itself, notwithstanding the potential availability of contribution
or indemnification from other parties.

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 does not yet know
the extent, if any of any environmental liabilities associated with many of its
properties, including any liabilities associated with the assets the Company
acquired from Stone & Webster and IT Group that a fuller investigation might
reveal. 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.

The level of enforcement of these laws and regulations also affects the demand
for many of the Company's services. Proposed changes in regulations and the
perception that enforcement of current environmental laws has been reduced has
decreased the demand for some services, as clients have anticipated and adjusted
to the potential changes. Proposed changes could result in increased or
decreased demand for some of the Company's services. The ultimate impact of the
proposed changes will depend upon a number of factors, including the overall
strength of the economy and clients' views on the cost-effectiveness of remedies
available under the changed regulations. The Company believes these factors have
been partially offset by an increased desire on the part of commercial clients
for strategic environmental services, which:

o provide an integrated, proactive approach to environmental issues, and
o are driven by economic, as opposed to legal or regulatory concerns.

Further, the Company believes that by its commercial clients for environmental
services may be increased by and dependent upon mergers, acquisitions and other
strategic corporate transactions involving those clients, as well as potentially
more stringent accounting standards for contingent environmental liabilities.

43

SHAW IS EXPOSED TO CERTAIN RISKS ASSOCIATED WITH ITS ENVIRONMENTAL LIABILITY
SOLUTIONS BUSINESS.

Certain subsidiaries within the Company's environmental/infrastructure division
are engaged in activities that may involve assumption of a client's
environmental remediation obligations and potential claim obligations. The
LandBank Group, Inc. purchases and repositions environmentally impaired
properties while Shaw Environmental Liability Solutions, LLC will take over
responsibility for environmental matters at a particular site or sites,
including indemnifications for defined cleanup costs and post closing third
party claims, in return for compensation by the client. These subsidiaries may
operate and/or purchase and redevelop environmentally impaired property. As the
owner or operator of such properties, the Company may be required to clean up
all contamination at these sites, even if the Company did not place it there.
These risks are mitigated through environmental due diligence, liability
protection provisions of federal laws such as the Brownfields Revitalization Act
and similar state laws, the purchase of environmental and cost cap insurance
coverage or other risk management products. Although the Company believes its
risk management strategies and these products and laws adequately protect the
Company against these obligations, the Company can provide no assurance that
they will do so in all circumstances. Additionally, when one of these companies
purchases real estate, it may be subject to many of the same risks as real
estate developers, including the timely receipt of building and zoning permits,
construction delays, the ability of markets to absorb new development projects,
market fluctuations, and the ability to obtain additional equity or debt
financing on satisfactory terms, among others.

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 $499 million as of August 31, 2002. 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. Such a write-off
would negatively affect the Company's earnings. (See Note 8 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.

While the Company did not assume possible liabilities relating to environmental
pollution in connection with the IT Group and the Stone & Webster acquisitions,
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 Company's Liquid Yield Option(TM) Notes due 2020
("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 that could result from these or other factors.

44

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.

THE COMPANY'S REPURCHASE OBLIGATIONS UNDER ITS ZERO-COUPON, UNSECURED
CONVERTIBLE NOTES DUE 2021 (LYONS) COULD RESULT IN ADVERSE CONSEQUENCES.

In May 2001, the Company issued $790 million of zero-coupon, unsecured
convertible notes due 2021 (LYONs). On May 1 of 2004, 2006, 2011 and 2016,
holders may require the Company to purchase all or a portion of these notes at
their accreted value. The Company cannot predict whether or when holders will
choose to exercise their repurchase rights. However, it is possible that a
substantial portion of the notes may be submitted for repurchase as early as May
1, 2004. The Company may, subject to certain conditions, choose to pay the
purchase price in cash or in shares of Common Stock, or in a combination of
both. The Company currently intends to repurchase some or all of the securities
with cash. Therefore, if a substantial portion of the notes were to be submitted
for repurchase on one of the repurchase dates, the Company might need to use a
substantial amount of its available sources of liquidity for this purpose. This
could have the effect of restricting the Company's ability to fund new
acquisitions or to meet other future working capital needs, as well as
increasing the Company's costs of borrowing. The Company may seek other means of
refinancing or restructuring its obligations under the notes, but this may
result in terms less favorable than those under the existing notes. Further, it
is possible that in adverse circumstances, such as a combination of a large
number of repurchase requests, low stock price and/or liquidity or financing
restraints, the Company could be required to issue a significant number of
shares to satisfy its repurchase obligations and the number of shares actually
issued could substantially dilute the Common Stock. Moreover, sales of such
shares in the market place could adversely affect the market price of the Common
Stock.

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

Some of the Company's employees in the United States and abroad are 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 ethylene 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 that could negatively affect the Company's market
position.

Additionally, the Company has developed construction and power generation and
transmission 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.

45

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

In Shaw's Environmental & Infrastructure business segment, the technology
consists principally of the know-how of its professionals, and Shaw is dependent
upon its ability to attract and retain qualified, innovative personnel.

EXPIRATION OF THE PRICE ANDERSON ACT'S (PAA) INDEMNIFICATION AUTHORITY COULD
HAVE ADVERSE CONSEQUENCES.

The Company services the needs of the DOE in converting its weapons facilities
to civilian purposes and the nuclear power industry in the on-going maintenance
and modifications as well as decontamination and decommissioning of nuclear
power plants. Approximately 21% of the Company's backlog is from nuclear
services. Shaw expects this portion of its business to continue to grow as many
operating power plants require modifications or upgrades or reach the end of
their scheduled useful lives over the next 20 years.

The PAA promotes and regulates the nuclear power industry in the U.S. The PAA
comprehensively regulates the manufacture, use and storage of radioactive
materials, and promotes the nuclear power industry by offering broad
indemnification to nuclear power plant operators and DOE contractors. While the
PAA's indemnification provisions are broad, it has not been determined whether
they apply to all liabilities that might be incurred by a radioactive materials
cleanup contractor. Also the PAA's ability to indemnify with respect to newly
signed contracts expired on August 1, 2002. Because nuclear power remains
controversial, it is not clear that the PAA and its indemnification provisions
will be extended. The Company's business could be adversely affected if the PAA
were not extended due to either the unwillingness of plant operators to retain
the Company, or the Company's inability to obtain adequate indemnification and
insurance, because of the unavailability of the protections of the PAA.

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.

46

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, beyond the Company's control, 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 industries;
o general conditions in the securities markets;
o issuance of a significant number of shares upon exercise of employee
stock options or conversion of the LYONs; and
o issuance of a significant number of shares of Common Stock to fund
LYONs repurchases by the Company

PROVISIONS IN THE COMPANY'S ARTICLES OF INCORPORATION AND BY-LAWS 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 that 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 (including capital leases) and fair value at
August 31, 2002 (in millions).

As discussed in Note 9 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,
during fiscal 2002 interest income was less than its interest expense as a
result of the Company's utilization of cash for various investments (including
the IT Group acquisition), the decline in interest rates available for
short-term investments, and the amortization of deferred credit costs.

47

The holders of the LYONs have the right to require the Company to repurchase the
debt on May 1, 2004, May 1, 2006, May 1, 2011, and May 1, 2016 at the accreted
value. Therefore, the debt is presented above as maturing on May 1, 2004 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, 2002, the
interest rate on this line of credit was either 4.75% (if the prime rate index
had been chosen) or 3.32% (if the LIBOR rate index had been chosen) with an
availability of $166.2 million. (See Note 10 of Notes to Consolidated Financial
Statements for further discussion of this line of credit.)

The estimated fair value of long-term debt and capital leases as of August 31,
2002 and 2001 was approximately $416 million and $427 million, respectively. The
fair value of the convertible debt as of August 31, 2002 was based on recent
sales of such debt as of August 31, 2002. The fair value of the Company's other
long-term debt and capital leases at August 31, 2002 and 2001 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 revenues.
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, 2002, 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 19 of Notes to
Consolidated Financial Statements.)

48

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

49

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
The Shaw Group Inc.

We have audited the accompanying consolidated balance sheet of The Shaw Group
Inc. and subsidiaries as of August 31, 2002, and the related consolidated
statements of income, shareholders' equity and cash flows for the year then
ended. 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 audit. The financial statements of The Shaw Group Inc.
as of August 31, 2001, were audited by other auditors who have ceased operations
and whose report dated October 5, 2001, expressed an unqualified opinion on
those statements.

We conducted our audit 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 audit provides a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Shaw Group
Inc. and subsidiaries at August 31, 2002, and the consolidated results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.

As discussed in Note 1 to the financial statements, effective September 1, 2001,
the Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("FAS 142").

As discussed above, the financial statements of The Shaw Group Inc. as of August
31, 2001 and for the two years in the period then ended were audited by other
auditors who have ceased operations. As described in Notes 8 and 15, these
financial statements have been revised. We audited the adjustments described in
Note 15 that were applied to revise the 2001 and 2000 financial statements
relating to changes in segments. We also applied audit procedures with respect
to the disclosures in Note 8 pertaining to financial statement revisions to
include the transitional disclosures required by FAS 142. In our opinion, the
adjustments to Note 15 are appropriate and have been properly applied. In
addition, in our opinion, the FAS 142 disclosures for 2001 and 2000 in Note 8
are appropriate. However, we were not engaged to audit, review, or apply any
procedures to the 2001 and 2000 financial statements of the Company other than
with respect to such adjustments and, accordingly, we do not express an opinion
or any other form of assurance on the 2001 and 2000 financial statements taken
as a whole.

/s/ Ernst & Young LLP
---------------------

New Orleans, Louisiana
October 11, 2002, except for Note 14,
as to which the date is November 1, 2002

50

THIS IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP IN
CONNECTION WITH SHAW'S FILING ON FORM 10-K FOR THE FISCAL YEAR ENDED AUGUST 31,
2001. THIS AUDIT REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP IN
CONNECTION WITH THIS FILING ON FORM 10-K FOR THE FISCAL YEAR ENDED AUGUST 31,
2002. FOR FURTHER DISCUSSION, SEE EXHIBIT 23.2 WHICH IS FILED HEREWITH AND
HEREBY INCORPORATED BY REFERENCE INTO THE FORM 10-K FOR THE FISCAL YEAR ENDED
AUGUST 31, 2002 OF WHICH THIS REPORT FORMS A PART.

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

51

THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF AUGUST 31, 2002 AND 2001
(DOLLARS IN THOUSANDS)

ASSETS

(Continued)

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

52

THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF AUGUST 31, 2002 AND 2001
(DOLLARS IN THOUSANDS)

LIABILITIES AND SHAREHOLDERS' EQUITY

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

53

THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED AUGUST 31, 2002, 2001 AND 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

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

54

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.

55

THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31, 2002, 2001 AND 2000
(DOLLARS IN THOUSANDS)

(Continued)

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

56

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

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

57

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 accounting
principles generally accepted in the United States, 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 costs
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 goodwill; (vi) recoverability of other intangibles and related
estimated lives, (vii) valuation of assets acquired and liabilities assumed in
connection with business combinations and (viii) accruals for estimated
liabilities, including litigation and insurance reserves. Actual results could
differ from those estimates.

Nature of Operations and Operating Cycle

The Company is a leading global provider of comprehensive services to the power,
process, and environmental and infrastructure industries. It is a
vertically-integrated provider of comprehensive engineering, procurement, pipe
fabrication, construction and maintenance services to the power and process
industries. The Company is also a leader in the environmental, infrastructure
and homeland defense markets providing consulting, engineering, construction,
remediation, and facilities management services to government and commercial
clients.

The Company operates primarily in the United States, Canada, the Asia/Pacific
Rim, Europe, South America and the Middle East. The Company's services and
products include consulting, project design, engineering and procurement, piping
system fabrication, industrial construction and maintenance, facilities
management, environmental remediation, design and fabrication of pipe support
systems and manufacture and distribution of specialty pipe fittings. The
Company's operations are conducted primarily through wholly-owned subsidiaries
and joint ventures.

The Company's work is performed under cost-reimbursable contracts, fixed-price
contracts, and fixed-price contracts modified by incentive and penalty
provisions. The length of the Company's significant contracts varies but is
generally between two to four years. Assets and liabilities have been classified
as current and non-current under the operating cycle concept whereby all
contract-related items are regarded as current regardless of whether cash will
be received within a 12-month period.

Cash and Cash Equivalents and Marketable Securities Held to Maturity

Highly liquid investments are classified as cash equivalents if they mature
within three months of the purchase date. Marketable securities held to maturity
are comprised of highly liquid investments that mature between three to four
months of the purchase date. The fair value of marketable securities held to
maturity approximates the carrying value at August 31, 2002 and 2001.

Accounts Receivable and Credit Risk

The Company grants short-term credit to its customers. The Company's principal
customers are major multi-national industrial corporations, governmental
agencies, regulated utility companies, independent and merchant power producers
and equipment manufacturers. Work is performed under contract and the Company
believes that in most cases its credit risk is minimal; however, during fiscal
2002, changes in the power generation market created liquidity problems for
certain unregulated, independent power producers ("IPPs"). As a result, the
Company's credit risk has significantly increased with respect to those
customers. (See Note 14 of Notes to Consolidated Financial Statements for
further discussion).

58

Allowance for Doubtful Accounts and Contract Adjustments

The allowance for doubtful accounts and contract adjustments was approximately
$8,350,000 and $12,650,000 at August 31, 2002 and 2001. The Company estimates
the amount of doubtful accounts 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, 2002 were approximately $4,250,000 and
total reductions were approximately $8,550,000. Increases to the allowance for
the year ended August 31, 2001 were approximately $10,600,000 and total
reductions were approximately $3,800,000. Increases to the allowance for the
year ended August 31, 2000 were approximately $3,900,000 and total reductions
were approximately $3,800,000. The Company increases or reduces revenues for
contract adjustments. (Also see Note 14 of Notes to Consolidated Financial
Statements.)

At August 31, 2002 and 2001, accounts receivable included approximately
$22,000,000 and $14,200,000, 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, 2002, contracts with 24
customers made up the $22,000,000 balance discussed above. Management believes
that the ultimate resolution of these disputes will not have a significant
impact on future results of operations.

Included in estimated total revenues on two projects in progress at August 31,
2002 are a total of $12,000,000 in claims and disputed change orders.

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 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

The straight-line depreciation method is used for all assets, except certain
software (recorded as a component of furniture and fixtures) which is
depreciated on a double-declining balance method.

During the years ended August 31, 2002 and 2001, interest costs of approximately
$364,000 and $363,000, respectively, were capitalized.

Joint Ventures

As is common in the engineering, procurement and construction industries, the
Company executes certain contracts jointly with third parties through joint
ventures, limited partnerships and limited liability companies (collectively
"joint ventures"). The investments in these joint ventures are included in the
accompanying consolidated balance sheets as of August 31, 2002 and 2001 at
$18,255,000 and $9,036,000, respectively, which generally represent the
Company's cash contributions and its share of the earnings from these
investments (equity method of accounting). The Company generally reports its
percentage share of revenues and costs from these entities in its consolidated
statements of income (proportional consolidation).

59

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.

Goodwill and Other Intangibles

Goodwill represents the excess of the purchase price of acquisitions over the
fair value of the net assets acquired.

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," and the Company adopted these standards
effective September 1, 2001. These standards significantly changed prior
practices for the accounting for business combinations and goodwill and
intangibles by: (i) terminating the use of the pooling-of-interests method of
accounting for business combinations, (ii) creating more specific criteria for
identifying other intangibles which are acquired in a business combination,
(iii) ceasing goodwill amortization, and (iv) requiring impairment testing of
goodwill based on a fair value concept. SFAS No. 142 requires that the opening
goodwill balances be tested upon adoption of the standard and that another
impairment test be performed during the fiscal year of adoption. Impairment
tests should generally be performed annually thereafter, with interim testing
required if circumstances warrant.

Prior to fiscal 2002, the Company amortized goodwill over a twenty-year period
on a straight-line basis. However, effective September 1, 2001, the Company
ceased to amortize goodwill pursuant to SFAS No. 142.

Prior to August 31, 2001, the Company conducted impairment reviews of its
goodwill to assess the recoverability of the unamortized balance based on
expected future profitability, undiscounted future cash flows of the acquired
assets and businesses 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 has performed goodwill
impairment reviews by reporting unit based on a fair value concept, as required
by SFAS No. 142. The goodwill impairment reviews that the Company conducted both
before and after the adoption of SFAS No. 142 indicated that the Company's
goodwill has not been impaired.

The Company has also recorded in other assets intangible assets related to
various licenses, patents, technology and related processes, primarily
pertaining to the design and construction of ethylene plants (see Notes 4 of
Notes to Consolidated Financial Statements). The costs of these assets are
amortized over a fifteen-year period on a straight-line basis.

The Company periodically assesses the recoverability of the unamortized balance
of its ethylene and other technologies based on expected future profitability
and undiscounted future cash flows and their contribution to the overall
operation of the Company. Should the review indicate that the carrying value is
not fully recoverable, the excess of the carrying value over the fair value of
the technologies would be recognized as an impairment loss.

The Company has also recorded contract fair value adjustments related to the IT
Group and S&W acquisitions. Contract asset adjustments related to the IT Group
acquisition are recorded in other current assets, as an intangible asset.
Contract liability adjustments are recorded in current liabilities with respect
to both the IT Group and S&W acquisitions. The assets and liabilities are
amortized over the estimated lives of the underlying contracts and related
backlog as work is performed on these contracts.

(Also see Note 4 and Note 8 of Notes to Consolidated Financial Statements.)

Revenues

For project management, engineering, procurement, remediation, and construction
services, the Company recognizes revenues under the percentage-of-completion
method measured primarily by the percentage of contract costs incurred to date
to total estimated contract costs for each contract. 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.

60

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 fixed-price
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 on uncompleted contracts are made in the period
in which such losses are identified. The cumulative effect of other changes to
estimated profit and loss, including those arising from contract penalty
provisions, final contract settlements and 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 and the amount can be reasonably estimated. Profit
from unapproved change orders and claims is recorded in the year such amounts
are resolved.

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 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 revenues 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 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 affected 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 2002 and 2001 were not significant.

61

The Company utilizes forward foreign exchange contracts to reduce its risk from
foreign currency price fluctuations related to firm or anticipated accounts
receivable transactions, commitments to purchase or sell equipment, materials
and /or services. At August 31, 2002, the Company has recorded an asset and
other income on fair value hedges of $650,000 ($420,000 net of taxes) that
generally offset transaction losses in the related hedged accounts receivables.
The Company normally does not use any other type of derivative instrument or
participate in any other hedging activities.

Other Comprehensive Income

The Company's foreign subsidiaries maintain their accounting records in their
local currency (primarily British pounds, Australian and Canadian dollars,
Venezuelan Bolivars, the Euro, and prior to January 1, 2002, Dutch guilders).
All of the assets and liabilities of these subsidiaries (including long-term
assets, such as goodwill) are converted to U.S. dollars with the effect of the
foreign currency translation reflected in "accumulated other comprehensive
income (loss)," a component of shareholders' equity, in accordance with SFAS No.
52 - "Foreign Currency Translation" and SFAS No. 130 - "Reporting Comprehensive
Income." Foreign currency transaction gains or losses are credited or charged to
income. (Also see Note 19 of Notes to Consolidated Financial Statements.)

Other comprehensive income also includes the net after-tax effect of unrealized
gains and losses on derivative financial instruments and available-for-sale
securities and the minimum liability related to a Company-sponsored pension
plan.

Self Insurance

The Company is self-insured for workers' compensation claims for individual
claims or claim events up to $250,000 and maintains insurance coverage for the
excess. 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's accruals for its self-insured costs are determined
through a combination of prior experience and specific analysis of larger
claims.

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. (See
Note 17 of Notes to Consolidated Financial Statements).

New Accounting Standards

In June 2001, the FASB issued SFAS No. 143 - "Accounting for Asset Retirement
Obligations." This statement, which is first effective for the Company beginning
in fiscal 2003, requires that the cost of legal obligations associated with the
retirement and/or removal of long-lived assets should be accounted for as
additional asset costs and that the net present value of the retirement/removal
costs be recorded as a liability. Asset values (to include retirement and
removal costs) are subject to impairment reviews pursuant to SFAS No. 144 (see
below). The Company believes this statement will not have a material effect on
its financial statements.

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. SFAS 144 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, this statement increases the likelihood that dispositions will now
qualify for discontinued operations treatment. The provisions of the statement
are required to be applied

62

for fiscal years beginning after December 15, 2001 and interim periods within
those fiscal years. The Company does not expect this statement will have a
material effect on its financial statements when it adopts this standard in
fiscal 2003.

In May 2002, the FASB issued SFAS No. 145 - "Rescission of FASB Statements Nos.
4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections"
which is effective for fiscal years beginning after May 15, 2002. This
statement, among other matters, provides guidance with respect to the accounting
for gain or loss on capital leases that were modified to become operating
leases. The statement also eliminates the requirement that gains or losses on
the early extinguishment of debt be classified as extraordinary items and
provides guidance when the gain or loss on the early retirement of debt should
or should not be reflected as an extraordinary item. The Company will be
required to reclassify the extraordinary losses recognized in prior years as
ordinary loss upon adoption of this standard when it becomes effective in fiscal
2003.

In July 2002, the FASB issued SFAS No. 146 - "Accounting for Costs Associated
with Exit or Disposal Activities." This statement requires that costs associated
with terminating employees or contracts or closing or relocating facilities are
to be recognized at fair value at the time the liability is incurred. The
Company does not anticipate that this statement will have a material effect on
its financial statements when it becomes effective for disposal activities
initiated after December 31, 2002.

NOTE 2--PUBLIC CAPITAL STOCK TRANSACTIONS

In September 2001, the Company's Board of Directors authorized the Company to
repurchase shares of its no par value Common Stock ("Common Stock"), depending
on market conditions, up to a limit of $100,000,000. As of October 11, 2002, the
Company had completed its purchases under this program as it had purchased
5,331,005 shares at a cost of approximately $99,881,000. This includes 3,170,605
shares purchased at a cost of approximately $47,838,000 in the first quarter of
fiscal 2003 and 2,160,400 shares purchased at a cost of approximately
$52,043,000 during the year ended August 31, 2002.

On July 31, 2001, the Company issued a dividend distribution of one Preferred
Share Purchase Right (a "Right") for each outstanding share of Common Stock (see
Note 12 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 a senior
unsecured obligation of the Company and is convertible into the Company's Common
Stock at a fixed ratio of 8.2988 shares 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 shares 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.

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

NOTE 3--ESCROWED CASH FOR PERFORMANCE BOND

In connection with a performance bond on a foreign project, the Company agreed
to deposit in escrow with the issuer of the bond primarily advance payments
received from the Company's customer. During the year ended August 31, 2002, the
Company deposited approximately $96,500,000 into escrow pursuant to this
agreement. This deposit is recorded as escrowed

63

cash. As a result of the performance bond, the Company's customer agreed not to
withhold retentions on the Company's billings. The Company believes that based
on current contract terms and scope, its initial $96,500,000 deposit represents
its maximum escrow requirement for the project. The Company expects that the
maximum balance will be retained in escrow until early to mid calendar 2003, at
which time escrow funds will be released incrementally to the Company as the
Company completes certain contract milestones. A final escrow amount of
approximately $18,000,000 will be released to the Company upon initial contract
acceptance as defined in the agreement, which is currently projected to occur in
calendar 2005. The bonding company (or "surety") may draw on the escrow funds
only to secure the surety from a defined loss. The escrowed funds are invested
in short-term, high quality investments and investment income is remitted to the
Company on a quarterly basis. The Company may request the surety to allow the
Company to substitute a letter of credit for all or part of the cash escrow
requirements.

NOTE 4--ACQUISITIONS

SFAS No. 141 - "Business Combinations" requires that all acquisitions initiated
after June 30, 2001 be recorded utilizing the purchase method of accounting.
Most of the Company's acquisitions that were completed prior to June 30, 2001
were also accounted for using the purchase method of accounting under APB 16.
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 favorably or unfavorably 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.

IT Group Acquisition

During fiscal year 2002, the Company acquired substantially all of the operating
assets and assumed certain liabilities of The IT Group, Inc. ("IT Group") and
its subsidiaries. IT Group and one of it wholly-owned subsidiaries, Beneco, were
subject to separate Chapter 11 bankruptcy reorganization proceedings and the
acquisition was completed pursuant to the bankruptcy proceedings. The
acquisition of the IT Group assets was completed on May 3, 2002 and the
acquisition of Beneco's assets was completed on June 15, 2002.

The IT Group was a leading provider of diversified environmental consulting,
engineering, construction, remediation and facilities management services. The
primary reasons for the acquisition were to diversify and expand the Company's
revenue base and to pursue additional opportunities in the environmental,
infrastructure, and homeland defense markets. The Company formed a new
wholly-owned subsidiary, Shaw Environmental & Infrastructure, Inc. ("Shaw E&I")
into which it has combined the acquired IT Group operations and the Company's
existing environmental and infrastructure operations.

The purchase price included the following components: (i) cash of approximately
$39,356,000, net of $13,694,000 of cash received at closing, (ii) 1,671,336
shares of Common Stock valued at approximately $52,463,000, (iii) assumption by
the Company of the outstanding balances of $51,789,000 debtor-in-possession
financing provided to the IT Group and Beneco by the Company, and (iv)
transaction costs of approximately $9,519,000.

64

The Company believes, pursuant to the terms of the acquisition agreements, that
it has assumed only certain liabilities ("assumed liabilities") of the IT Group
and Beneco as specified in the acquisition agreements. The Company has estimated
that its total of assumed liabilities is approximately $353,000,000. Further,
the acquisition agreements also provide that certain other liabilities of the IT
Group, including but not limited to, outstanding borrowings, leases, 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, are specifically excluded ("excluded liabilities") from the
Company's transactions. The Company, however, cannot provide assurance that it
does not have any exposure to the excluded liabilities because, among other
matters, the bankruptcy courts have not finalized their validation of the claims
filed with the courts. Additionally, the Company has not completed its review of
liabilities that have been submitted to the Company for payment. Accordingly,
the Company's estimate of the value of the assumed liabilities may change as a
result of the validation of the claims by the bankruptcy courts or other factors
which may be identified during its review/processing of liabilities.

The IT Group acquisition was recorded as a purchase, and accordingly, the
Company's results of operations include those of the acquired IT Group and
Beneco businesses from the respective acquisition dates. The purchase price has
been allocated to the acquired assets and liabilities based on the estimated
fair value at the acquisition dates, as set forth in the table below (in
thousands). The following allocation is preliminary and is subject to revision
during the allocation period as the Company has not obtained all necessary
appraisals of the property and equipment purchased nor has the Company completed
the process of obtaining information about the fair value of the acquired assets
and assumed liabilities. All of the goodwill from this transaction will be
allocated to the Company's Environmental & Infrastructure segment.

Accounts receivable and costs and earnings in excess of billings on uncompleted contracts $ 225,133
Contract asset adjustments 13,839
Property, plant and equipment 26,964
Deferred income taxes 64,223
Other assets 63,075
Goodwill 113,308
Accounts payable and accrued expenses (196,739)
Billings in excess of cost and estimated earnings on uncompleted contracts (83,658)
Contract (liability) adjustments (58,094)
Accrued contract loss reserves (7,460)
Debt and bank loans (7,464)
------------
Purchase price (net of cash received of $13,694) $ 153,127
============

The tax deductible portion of the goodwill recorded for the IT Group acquisition
is approximately $14,500,000.

Prior to the acquisitions of the IT Group and Beneco, the Company entered into
agreements with two surety companies. In exchange for the Company's agreeing to
complete certain of the IT Group's and Beneco's bonded contracts i) the sureties
paid the Company approximately $13,500,000 in cash and ii) the sureties assigned
to the Company their rights to Debtor-in-Possession financing of approximately
$20,000,000 that the sureties had provided to Beneco. The total value received
from the sureties, including a net working capital position on these contracts
of approximately $19,100,000, was recorded as deferred revenue (included in
billings in excess of cost and estimated earnings on uncompleted contracts on
the accompanying consolidated balance sheet) and will be recognized as the
related bonded contracts are completed.

The Company acquired a large number of contracts in progress and contract
backlog for which the work had not commenced at the acquisition date. Under FAS
141, construction contracts are defined as intangibles that meet the criteria
for recognition apart from goodwill. These intangibles, like the acquired assets
and liabilities, are required to be recorded at their fair value at the date of
acquisition. The Company recorded these contracts at fair value using a market
based discounted cash flow approach. Related assets of approximately $13,839,000
and liabilities of $58,094,000 have been established that will be amortized to
contract costs over the estimated lives of the underlying contracts and related
production backlog. Commencing with the initial recording of the related assets
and liabilities on May 3, 2002, the assets and liabilities are amortized as work
is performed on the contracts. The net amortization recognized during the year
ended August 31, 2002 was approximately $2,763,000 and has been reflected as a
reduction in the cost of revenues, which resulted in a corresponding increase in
gross profit. The activity related to these contract assets and liabilities is
included in the table at the end of this Note 4.

65

The following summarized pro forma income statement data reflects the impact the
acquisition of the IT Group would have had on the years ended August 31, 2002
and 2001, respectively, as if the acquisition had taken place at the beginning
of the applicable fiscal year (in thousands, except per share amounts):

The unaudited pro forma results for the years ended August 31, 2002 and 2001
have been prepared for comparative purposes only and do not purport to be
indicative of the amounts that actually would have resulted had the acquisition
occurred on September 1, 2000 or that may be realized in the future. Further,
the diluted loss per share for the year ended August 31, 2002 excludes
approximately 6,556,000 and 990,000 shares related to the LYONs and stock
options because they were antidilutive.

The pro forma results for the year ended August 31, 2002 include charges of
$217,400,000 made by the IT Group. The charges generally related to the
reduction of accounts receivable to estimated net realizable value
($167,000,000), various employee accruals and write-off of assets ($22,500,000),
legal and consulting expenses related to the IT Group's bankruptcy ($12,500,000)
and write-off of notes receivable from employees ($5,000,000).

The pro forma results for the year ended August 31, 2001 include charges of
$40,700,000 that primarily related to the reduction of accounts receivable to
estimated net realizable value.

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 acquisition was concluded as part of a proceeding under Chapter 11 of the U.
S. Bankruptcy Code for Stone & Webster, Incorporated. 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 purchase price was subject to various adjustments, and the final allocation
was completed in fiscal 2001. Any future adjustments will be reflected in
operating results.

66

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 $393,000,000 (recorded as patents, licenses, other
intangible assets and goodwill).

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 8 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 ended
August 31, 2002.)

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 as of
the acquisition date (July 14, 2000) and the fair value of acquired contracts -
liability (contract liability adjustments) of $121,815,000 was established. The
amount of the accrued future cash losses on assumed contracts with inherent
losses (accrued contract loss reserves) was estimated to be approximately
$41,700,000 and a liability of such amount was established. Commencing with the
initial recording of these liabilities and reserves in the year ended August 31,
2000, the liabilities and reserves have been reduced as work is performed on the
contracts and such reduction in these balances results in a reduction in cost of
revenues and a corresponding increase in gross profit. The contract liability
adjustments and accrued contract loss reserves, as well as the decreases in the
cost of revenues for the periods indicated, are included in the table which is
at the end of this Note 4.

The Company also acquired various licenses, patents, technology and related
processes pertaining to the design and construction of ethylene plants. The
Company valued these assets at $28,600,000 based on estimates of the discounted
cash flows to be generated from the existing acquired technology. The estimated
useful lives of these intangible assets are 15 years.

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.

Other Acquisitions

In December 2001, the Company acquired certain assets of PsyCor International,
Inc. ("PsyCor") for $2,000,000. Acquisition costs were not material. The
purchase method was used to account for the acquisition and substantially all of
the purchase price was initially allocated to goodwill. This allocation is
preliminary since the Company has not completed its final fair value assessment
of the assets acquired. PsyCor's primary business is developing information
management systems.

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, 2002, the Company had issued 170,033 shares (including purchase price
protection reduced by purchase price adjustment and indemnity settlements) of
its Common Stock (valued at approximately $6,200,000) as consideration for the
transaction. The Company 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 8 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

67

for this acquisition was amortized on a straight-line basis based on a 20 year
estimated life. (See Note 8 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.

During fiscal 2002, the Company determined that PPM achieved certain target
revenue levels as of December 31, 2001, and as a result, the Company owed
additional consideration to PPM of approximately $2,000,000 pursuant to the
terms of the acquisition agreement. Accordingly, the Company issued 83,859
shares of Common Stock to cover its obligation under the agreement. The entire
cost of approximately $2,000,000 associated with the issuance of these shares is
recorded as of August 31, 2002 as an increase to goodwill for the PPM
acquisition.

68

Contract Adjustments and Loss Reserves

The following table presents the additions to and utilization/amortization of
the fair value adjustments of acquired contracts (assets and liabilities) and
accrued contract loss reserves for both the IT Group and Stone & Webster
acquisitions on a combined basis for the periods indicated (in thousands):

The Company previously referred to the fair value of the acquired contract
liability adjustments resulting from the Stone & Webster acquisition as gross
margin reserves. All increases in the contract adjustments and accrued contract
loss reserves in the year ended August 31, 2002 relate to the IT Group
acquisition, with the exception of a $780,000 contract loss reserve increase,
which reduced earnings in 2002, for a contract assumed in the Stone & Webster
acquisition. The increases in the year ended August 31, 2001 relate to Stone &
Webster allocation period adjustments. The contract (asset) adjustments are
included in other current assets in the accompanying consolidated balance
sheets.

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NOTE 5--INVENTORIES

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

NOTE 6--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, 2002, 2001, and 2000, the Company recognized (losses) /earnings of
($1,152,000), $250,000, and $1,194,000, respectively, from Shaw-Nass. No
distributions have been made through August 31, 2002 by Shaw-Nass. At August 31,
2002 and 2001, undistributed earnings of Shaw-Nass included in the consolidated
retained earnings of the Company amounted to approximately $1,267,000 and
$2,419,000, respectively. As of August 31, 2002 and 2001, the Company's
investment in Shaw Nass was approximately $4,938,000 and $6,090,000,
respectively, and the Company had outstanding receivables from Shaw-Nass
totaling $5,970,000 and $6,178,000, 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, 2002 and 2001.

During the years ended August 31, 2002, 2001 and 2000, revenues of $66,000,
$230,000, and $19,000, 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 was the construction of power plants in
North America and Europe for Entergy's wholesale operations; however, during
fiscal 2002 Entergy announced that it was significantly reducing the scope of
its construction program for its wholesale operations. Under the terms of the
arrangement, the Company made an initial investment in Entergy/Shaw of
$2,000,000 and has no further capital contribution requirement to EntergyShaw.
The Company also offers 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.

The Company has recognized earnings of $2,855,000, net of tax expense of
$1,605,000, for the year ended August 31, 2002 and losses of $566,000 (net of
tax benefit of $354,000) for the year ended August 31, 2001 from EntergyShaw.
During the year ended August 31, 2002, the Company received a distribution from
EntergyShaw of $2,000,000. The Company's revenues from EntergyShaw were
approximately $124,000,000 and $17,000,000, respectively, for the years ended
August 31, 2002 and 2001. As of August 31, 2002 and 2001, the Company's
investment in EntergyShaw was $3,540,000 and $1,080,000, respectively, and it
had outstanding trade accounts receivable from EntergyShaw totaling
approximately $32,000 and $4,848,000, respectively.

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.

The Company invested approximately $3,096,000 to acquire a 49% interest in a new
pipe fabrication joint venture in China which was formed in fiscal 2002.

70

NOTE 7--INVESTMENT IN SECURITIES AVAILABLE FOR SALE

In December 1998, the Company participated in a customer's 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.

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. 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.

Since the financing arrangement was related to construction services, the
interest income earned from the New Notes and imputed interest costs associated
with carrying these notes were included in revenues and costs of revenues,
respectively, during the term of the construction contract. As a result,
revenues for the years ended August 31, 2001 and 2000 included interest income
from these securities of approximately $312,000 and $1,406,000 and imputed
interest costs associated with carrying the securities of approximately $381,000
and $1,106,000, respectively, were included in cost of revenues. 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%
for the twelve months ended August 31, 2000. Subsequent to the completion of the
project in the first quarter of fiscal 2001, interest income of $531,000 earned
in the remainder of fiscal year 2001 from these securities is included in
interest income.

During fiscal 2001, the Company used $7,000,000 of the New Notes to satisfy
certain transaction costs related to the acquisition of Stone & Webster.

During the year ended August 31, 2002, the Company determined that its
investment in the New Notes had been impaired and wrote-down its investment in
these notes by $2,450,000 and reversed interest income in the fourth quarter of
2002 of $550,000 that had been previously recorded in fiscal 2002. The Company
has also ceased recognizing income from the New Notes. The Company has
classified the New Notes as available for sale and, therefore, the New Notes are
measured at fair value. The Company believes the impairment is permanent;
therefore, the $ 2,450,000 impairment is included in other expenses on the
consolidated statement of income. The Company has recorded the New Notes at an
aggregate value of approximately $6,629,000 (after write-down) and $9,079,000 at
August 31, 2002 and 2001, respectively.

The Company also had equity securities available for sale aggregating $606,000
and $1,411,000 at August 31, 2002 and 2001, respectively. During the year ended
August 31, 2002, the Company recorded impairment losses of $612,000 ($379,000
net of taxes) to net income with respect to these securities. At August 31, 2002
and 2001, the Company also reflected a $205,000 unrealized loss ($126,000, net
of taxes) and a $12,000 unrealized loss ($7,000, net of related taxes) on these
securities, respectively, as a component of other comprehensive income in
stockholders' equity. The unrealized losses recorded in other comprehensive
income reflect the Company's view that there had been a temporary decrease in
the value of these securities from their historical cost at the respective year
end. 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.

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NOTE 8 - GOODWILL AND OTHER INTANGIBLES

Goodwill

Effective September 1, 2001, the Company adopted SFAS No. 141 and No. 142.
Therefore, the Company ceased to amortize goodwill in fiscal 2002. For the years
ended August 31, 2001 and 2000, goodwill amortization was approximately
$17,059,000 and $3,099,000 respectively. Additionally, the Company has
determined that its goodwill balances have not been impaired and accordingly, no
adjustments have been made to its goodwill balances as a result of the adoption
of SFAS No. 142.

SFAS No. 142 provides that prior year's results should not be restated. The
following table presents the Company's comparative operating results for the
years ended August 31, 2002, 2001 and 2000 reflecting the exclusion of goodwill
amortization expense in fiscal 2001 and in fiscal 2000.

The following table reflects the changes in the carrying value of goodwill from
September 1, 2000 to August 31, 2002. The significant changes in goodwill during
2001 resulted from additional goodwill recorded during the allocation period of
the Stone & Webster acquisition, goodwill recognized in connection with the
Company's acquisition of SS &S and amortization of goodwill prior to the
Company's adoption of FAS 142 discussed above. During 2002, the Company recorded
goodwill in connection with its acquisition of the IT Group, a reclassification
of goodwill related to Stone & Webster, goodwill recorded in connection with the
Company's acquisition of PsyCor and additional consideration paid to PPM which
resulted in additional goodwill recognized in this acquisition. Refer to Note 4
of Notes to Consolidated Financial Statements for a more detailed discussion of
the recognition of goodwill in connection with these acquisitions.

72

There was no goodwill identified for impairment during 2002 either in connection
with the adoption of FAS 142 or during the annual review. The Company did
reclassify approximately $72,500,000 of goodwill to the newly created
Environmental & Infrastructure segment that was previously recognized in the
Company's Integrated EPC segment. See Note 15 of Notes to Consolidated Financial
Statements for further discussion of this reclassification between segments.

The goodwill associated with the IT Group and PsyCor acquisitions has been
preliminarily calculated as of August 31, 2002. The Company expects to revise
these balances during the one year allocation period as the Company has not
obtained all necessary appraisals of the property and equipment it purchased nor
has it completed all of its other review and valuation procedures of the assets
acquired and the liabilities assumed.

Amortizable Intangibles

At August 31, 2002 and 2001, the Company's only significant amortizable
intangible assets, other than construction contract adjustments, was its
proprietary ethylene technology acquired in the Stone & Webster transaction,
which is being amortized over 15 years on a straight line basis. The Company is
still evaluating a customer relationship intangible and patents acquired in the
IT Group acquisition. The gross carrying values and accumulated amortization of
the ethylene technology for the years ended August 31, 2002 and 2001 is
presented below (in thousands).

The annual amortization for the Company's intangible assets not associated with
contract acquisition adjustments for the next five years is $1,906,000 related
to the ethylene technology.

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NOTE 9--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 securities are a
senior unsecured obligation of the Company and are convertible into the
Company's Common Stock at a fixed ratio of 8.2988 shares 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 May 1, 2004, May 1, 2006, May 1, 2011, and May 1, 2016 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, (at the current market value),
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.

74

The estimated fair value of long-term debt as of August 31, 2002 and 2001 was
approximately $413,000,000 and $422,000,000, respectively. The fair value of the
convertible debt as of August 31, 2002 and 2001 was based on recent sales of
such debt as of August 31, 2002 and 2001. The fair value of the Company's other
long-term debt at August 31, 2002 and 2001 was based on borrowing rates
currently available to the Company for notes with similar terms and average
maturities.

During fiscal years 2002, 2001 and 2000, the Company recognized, as interest
expense, $9,079,000, $5,515,000, and $1,004,000, respectively, costs associated
with the amortization of financing fees that were incurred with respect to
issuance of the Company's LYONs and Credit Facility. The LYONs costs are being
amortized to the first repurchase date of the debt, May 1, 2004. As of August
31, 2002 and 2001, unamortized deferred financing fees of the Company's LYONs
debt and Credit Facility were approximately $12,103,000 and $20,923,000,
respectively.

NOTE 10--REVOLVING LINES OF CREDIT

The Company's primary credit facility ("Credit Facility"), dated July 2000, is
for a three-year term, and provides that both revolving credit loans and letters
of credit may be issued within the limits of this facility. The Credit Facility
was amended on February 28, 2002 to, among other matters, increase the total
Credit Facility to $350,000,000 from $300,000,000 and to eliminate the previous
$150,000,000 limit on letters of credit. The Company also has the option to
further 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 amended
Credit Facility allows the Company to borrow either at interest rates (i) in a
range of 1.50% to 2.25% over the London Interbank Offered Rate ("LIBOR") or (ii)
from the prime rate to 0.75% 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 and other restrictions, which include but are not limited
to the maintenance of specified ratios and minimum capital levels and limits on
other borrowings, capital expenditures and investments. Additionally, the Credit
Facility established a $25,000,000 aggregate limit on the amount of the
Company's Common Stock repurchases and/or LYONs repurchases made subsequent to
February 28, 2002, without prior consent. Subsequent consent was provided to
allow the Company to complete in October 2002 the $100,000,000 Common Stock
repurchase program which was authorized by the Company's Board of Directors in
September 2001(see Note 2 of Notes to Consolidated Financial Statements). As of
August 31, 2002, the Company was in compliance with these covenants or had
obtained the necessary waivers. At August 31, 2002 and 2001, letters of credit
of approximately $183,800,000 and $ 61,500,000, respectively, were outstanding
and no revolving credit loans were outstanding under the Credit Facility. The
Company's total availability under the Credit Facility at August 31, 2002 and
2001 was approximately $166,200,000 and $238,500,000, respectively. At August
31, 2002, the interest rate on this line of credit was either 4.75% (if the
prime rate index had been chosen) or 3.32% (if the LIBOR rate index had been
chosen). 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, 2002 and 2001, the Company's foreign subsidiaries had
short-term revolving lines of credit permitting borrowings totaling
approximately $15,500,000 and $16,200,000, respectively. These subsidiaries had
outstanding borrowings under these lines of approximately $1,050,000 and
$3,900,000, respectively, at a weighted average interest rate of approximately
5.0% and 6.0%, respectively, at August 31, 2002 and 2001.

75

NOTE 11--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):

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

The Company paid no federal income taxes in the years ended August 31, 2001 and
2002 primarily because of the utilization of operating losses resulting from the
Stone & Webster acquisition.

76

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

As of August 31, 2002 for Federal income tax return purposes, the Company had
approximately $25,000,000 of U.S. net operating loss carryforwards available to
offset future taxable income and approximately $4,600,000 of research and
development credits available to offset future tax. The loss carryforwards ,
which resulted from the acquisition of the IT Group (see Note 4 to Notes to
Consolidated Financial Statements) expire beginning in 2017 through 2021 and the
credits expire beginning in 2007 through 2008. As of August 31, 2002 , the
Company's United Kingdom ("U.K.") and Australian operations had net operating
loss carryforwards of approximately $624,000 and $3,110,000, respectively, which
can be used to reduce future taxable income in those countries. SFAS 109
specifies that deferred tax assets are to be reduced by a valuation allowance if
it is more likely than not that some portion of the deferred tax assets will not
be realized. Management believes that future reversals of existing taxable
differences and future taxable income should be sufficient to realize all of the
Company's deferred tax assets, with the exception of a portion of the Australian
net operating loss carryforward; therefore, a valuation allowance of $1,034,000
has been established against the related deferred tax benefit for that portion
of the Australian net operating losses that the Company believes will probably
not be realized.

Unremitted foreign earnings reinvested abroad upon which deferred income taxes
have not been provided aggregated approximately $12,600,000 at August 31, 2002.
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 12--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 that 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.

77

In the event the Rights become exercisable, each Right will entitle shareholders
(other than the Acquiring Person) to buy one 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 13--LEASES

Capital leases

The Company leases furniture and fixtures (which includes computer hardware and
software) 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 depreciated using the straight-line
method, except for certain software that is depreciated using the double
declining balance 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):

78

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

Operating Leases

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, 2002
require the Company to make the following (estimated future minimum lease
payments:

For the year ending August 31 (in thousands):
2003 57,895
2004 52,774
2005 44,593
2006 37,767
2007 31,228
2008 and thereafter 42,215
----------
Total future minimum lease payments 266,472
==========

The Company also 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, 2002 are not included as part of total
minimum lease payments.

The total rental expense for the fiscal years ended August 31, 2002, 2001, and
2000 was approximately $56,000,000, $36,000,000, and $17,000,000, respectively.

NOTE 14--CONTINGENCIES

Contingencies Associated with Domestic Power Market EPC Projects

In fiscal 2002 and 2001 the Company entered into several significant EPC
contracts for new domestic gas-fired combined cycle power plants. During fiscal
2002 and 2001, the Company recognized revenues of approximately $1,500,000,000
and $250,000,000, respectively, related to these contracts. The Company's
customers for these power plants are major utility companies and IPPs, several
of which where wholly or partially owned subsidiaries of major utilities. In
fiscal 2002, demand for new capacity in the domestic power market significantly
decreased, resulting in, among other things, financial distress among many
participants in the domestic power markets, particularly the IPPs. Although at
the time the Company entered into these contracts, all of these customers had
investment grade credit ratings, during 2002, all of the Company's IPP customers
received downgrades to their credit ratings, which are now considered to be
below investment grade. The condition of the national power market, these
downgrades and other factors resulted in three projects being canceled or
suspended. For one of these projects, Pike, discussed further below, the Company
was notified by the customer of their intention to not make a scheduled
milestone payment on its required due date.

In addition, under the terms of one contract with an IPP, the customer, at its
option, can pay a portion of the contract price in subordinated notes or cash.
The Company believes that the amount payable in subordinated notes will not
exceed $27,000,000 under the terms of the contract. If elected by the customer,
the subordinated notes would bear interest at prime plus 4% and mature in
October 2009. However, if any amounts under the notes are unpaid eight months
following final acceptance of the project, the unpaid notes, plus a cash payment
of the amounts, if any, paid on the notes through the conversion date, is
convertible at the option of the Company into a 49.9% equity interest in the
related project. The payments that could be made with these notes would be due
in the first half of fiscal 2003 and final acceptance of the project is expected
in the first half of calendar 2003.

79

The Pike Project

During the fourth quarter of 2002, one of the Company's customers, LSP-Pike
Energy, LLC ("Pike") notified the Company of its intention to not pay a
scheduled milestone billing on the required due date of August 4, 2002. Pike is
a subsidiary of NRG Energy, Inc. ("NRG"), which is wholly-owned by Xcel Energy,
Inc. ("Xcel"). In accordance with the terms of the contract, on September 4,
2002, the Company notified the customer it was in breach of the terms of the
contract for nonpayment and, therefore, the contract was terminated. No amounts
are included in backlog at August 31, 2002 related to the Pike project.

Prior to the contract termination, the Company had executed
commitments/agreements to purchase equipment for the project and had also
entered into agreements with subcontractors to perform work on the project.
Certain of these commitments and agreements contain cancellation clauses and
related payment or settlement provisions. The Company has entered into
discussions with its vendors and subcontractors to determine the final amounts
owed based on the termination of the Company's contract. The Company believes
pursuant to the terms of the contract with Pike that the Company has retained
ownership of a significant amount of this equipment and other pieces of
equipment that were to be installed on the project. Under the terms of the
original contract between the Company and Pike, Pike is obligated to reimburse
the Company for all of the costs incurred by the Company whether before or after
the termination and a fee for the work performed prior to the termination. The
Company believes that it is owed approximately $120,000,000 in costs and fees
over the amounts already paid under the contract.

The Company is actively pursuing alternatives to collect all amounts it is owed
under the Pike contract. On October 18, 2002, the Company filed an involuntary
petition for liquidation of Pike, under Chapter 7 of the U.S. Bankruptcy Code to
protect its rights, claims, and security interests in and to the assets of Pike.
The Company also filed suit against NRG and Xcel, along with certain of their
officers to collect amounts due, damages, and costs. In addition to the legal
proceedings, the Company will continue to pursue discussions with Pike, NRG,
Xcel and their lenders in an effort to resolve collection of the amounts owed.

The Company believes it will ultimately recover the costs it incurred and will
incur under the terms of the contract and the profit it has recognized through
August 31, 2002 on the project. The Company will not recognize any additional
profit it is owed under this contract until it is probable it will collect that
additional amount.

Although the Company expects to recover amounts owed to it (including final
vendor and subcontractor settlements), it is also reasonably possible that the
Company will not recover all of its costs and profit recognized through August
31, 2002, on the project; particularly if the customer's financial situation
continues to deteriorate and if the equipment in the possession of the Company
cannot be used on another similar project or liquidated by the Company to
recover all or a portion of the amount owed. The amount, if any, that may not be
recoverable is dependent upon the final amounts to be expended by the Company
related to the project, the amount to be realized upon disposition of the
equipment related to the project and the financial wherewithal of the customer
in the future, which is dependent upon its ability to restructure and/or reach
agreement with its creditors or to obtain additional funding from its parent
company.

The Company has, in connection with its evaluation of the Pike project,
estimated that (i) it has or will incur costs of approximately $75,000,000 to
$80,000,000 over the amounts that have been previously collected from Pike and
(ii) equipment that was to be installed on the project could be liquidated for
approximately $40,000,000 to $60,000,000. Although the Company does not believe
a loss has been incurred as of August 31, 2002, based on these estimates, if the
Company is unable to collect additional amounts from its customer (or its
affiliates), the Company's potential future loss on the Pike project could range
from $15,000,000 to $40,000,000.

Any potential loss on the project will be recognized (charged to earnings) in
the period when it is determined that a loss is likely to occur and a loss
amount can be reasonably estimated.

80

The Covert & Harquahala Projects

On October 10, 2002, the parent company, PG&E Corp. ("PG&E") of a customer, PG&E
National Energy Group, Inc. ("NEG") announced that it had notified its lenders
that it did not intend to make further equity contributions as required under
the credit facility to fund two projects, Covert and Harquahala, currently in
progress on which the Company is the contractor. At August 31, 2002, the Company
has included in backlog estimated revenue of approximately $372,000,000 from
these projects. As of November 1, 2002, the Company continues working on the
projects under the contract terms. However, the Company cannot guarantee that
these projects will be completed. The continuation of the projects is dependent
upon whether (i) the lenders will elect to continue to fund the project without
additional equity contributions from the customer, (ii) the lenders will
exercise their right to take ownership of the projects or (iii) if the contracts
will be suspended or cancelled by the customer or the lenders.

If the lenders exercise their rights to take ownership of the projects and
complete them, the EPC portion of the contracts would be a fixed-price contract
with the lenders. Although the "target price" components of the original
contracts would still be enforceable against NEG, the Company may not be able to
seek collection from the lenders for these components of the original contracts.
Based on the Company's current estimate of costs to complete the project, there
would be no material impact of this change. However, given the uncertainty of
collecting additional amounts from NEG, if the actual costs to complete the
projects exceed the estimated costs at this time, the Company would be assuming
higher risk under this fixed-price contract and could be susceptible to losses
on these projects.

If the contracts were ultimately terminated, the Company would be obligated
under related commitments to complete the payment for various pieces of
equipment procured for the projects and obligations to subcontractors for work
performed on the projects. Under the terms of the contracts, if the contracts
are terminated or suspended, the customer would be obligated to reimburse the
Company for the costs incurred by the Company and a fee for the work performed.
Although no assurances can be made, the Company believes that it would be able
to recover any amounts owed to it under the contracts through collection from
the customer, its parent, and/or the lenders. In addition, the Company believes
that it has first lien rights, superior to the primary lenders, on the partially
completed projects. The projects are each over 70% complete at an estimated
total cost at completion of over $600,000,000 each.

Although the Company believes its lien rights will ultimately provide sufficient
security to ensure full payment for any amounts due if the customer is unable to
pay, the Company estimates that it has exposure, which includes costs incurred
and committed over amounts collected and gross margin recorded on the two
projects, of approximately $50,000,000 to $60,000,000 million as of November 1,
2002. This amount will fluctuate as construction progresses. The Company
estimates that its maximum exposure in the future, which is dependent upon the
timing of additional costs incurred on the projects and the timing of the
receipt of milestone billings, is approximately $70,000,000 to $80,000,000.

On October 25, 2002 the Company received approximately $31,000,000 from the
lenders on these projects in payments for invoices due that date. As of November
1, 2002 the Company has been paid for all amounts currently due. Although no
assurances can be made, the Company believes that it will recover all amounts
owed to it under these contracts through collection from the customer or its
lenders. It is reasonably possible however, that the Company may not collect all
future amounts owed to it under this project which could have an adverse effect
on operating results in the period when the uncollectable amounts would be
recognized.

Liabilities Related to Contracts

The Company's contracts often contain provisions relating to matters such as:
(i) warranty, requiring achievement of acceptance and performance testing
levels, (ii) liquidated damages, if the project does not meet predetermined
completion dates, and (iii) penalties, for failure to meet other cost or
performance measures. The Company typically attempts to limit its exposure under
these penalty provisions or liquidated damage claims to the fee it is to receive
related to the work; however, in certain instances it can be exposed to more
than the fee or profit earned under the terms of the contract.

81

In addition, in connection with the acquisitions of the IT Group and Stone &
Webster, the Company assumed certain contracts in progress that contained
warranty provisions applicable to work performed prior to the Company's
assumption of the contracts. While the Company believes that most of the
contracts assumed in those acquisitions will not result in a significant
exposure related to warranty claims, four contracts were identified for which
the warranty claims made by the customers may result in significant additional
work and/or payments. The Company estimated that its liability for those four
projects was $14,500,000, which was recorded as a liability at the acquisition
date. During the year ended August 31, 2002, the Company made payments and
performed work of $2,695,000 on these four projects related to this warranty
exposure and reduced the liability by an additional $3,697,000 based on
reductions in the estimated warranty claim exposure and successful resolution of
these warranty claims. The Company believes its outstanding warranty exposure on
these four projects will not exceed the remaining recorded liability of
$8,108,000, although the final amounts may differ from the recorded liability.

The Company also assumed two contracts under which Stone & Webster was
contractually obligated to pay a significant amount of liquidated damages or for
which the scheduled project completion date was beyond the completion date
agreed to with the customer. The Company included in total estimated contract
costs on these two contracts approximately $24,600,000 related to estimated
liquidated damage payments at the acquisition date. During the year ended August
31, 2002, based on the timing of estimated completion of one of the projects and
the status of negotiations with the customer, the Company reduced total
estimated costs for liquidated damages by approximately $10,200,000. The Company
believes that it will settle its estimated remaining exposure for liquidated
damages on these two projects for the $14,400,000 it has outstanding in total
estimated costs to complete these projects. Based on its latest job status
review, the Company does not believe that there are any other contracts that
will require the Company to pay a material amount of liquidated damages.
However, the ultimate amount to be paid on these two projects and on other
contracts with liquidated damages provisions will vary depending upon the actual
completion dates compared to the currently scheduled completion dates and final
negotiations with the customers.

Other Matters

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 maintains liability and property insurance against various risks in
such amounts as it considers necessary or adequate in the circumstances.
However, certain risks are either not insurable or insurance is available at
rates which are considered uneconomical.

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 its
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 4 of Notes to Consolidated Financial
Statements with respect to certain contingencies relating to the IT Group and
Stone & Webster acquisitions.)

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NOTE 15--BUSINESS SEGMENTS, OPERATIONS BY GEOGRAPHIC REGION AND MAJOR CUSTOMERS

Business Segments

The Company has aggregated its business activities into three operating
segments: the Integrated EPC Services segment, the Environmental &
Infrastructure segment and the Manufacturing and Distribution segment. These
segments are unique in technology, services and customer class. Inter-segment
revenues are eliminated in consolidation.

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

As a result of the IT Group acquisition, the Company formed the Environmental &
Infrastructure segment that provides environmental consulting, engineering,
construction, remediation and facilities management services (primarily for
government and military facilities). Revenues from environmental and
infrastructure operations and related expense items that had previously been
reported in the Integrated EPC Services segment for the years ended August 31,
2001 and 2000 (as well as for the periods in fiscal 2002, prior to the IT Group
acquisition) have been estimated and reclassified to the Environmental &
Infrastructure segment in the table below. Amounts related to environmental and
infrastructure operations previously reported in the Integrated EPC services
segment have also been estimated and reclassified to the Environmental &
Infrastructure segment in the table below. In addition, goodwill of
approximately $70,117,000 was allocated to the Environmental & Infrastructure
segment during 2002, goodwill of $113,308,000 was recorded in connection with
the IT Group acquisition and $2,400,000 of the Stone & Webster reclassification
was allocated to the Environmental & Infrastructure segment. It was not
practical to develop this information for fixed asset and long- lived asset
purchases.

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.

83

Business Segment Data

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

84

Operations by Geographic Region

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

Revenues 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, 2002 revenues from
one customer totaled approximately $676,000,000 or 21% of the Company's
revenues. For the year ended August 31, 2002 and 2001, revenues from U.S.
Government agencies or entities owned by the U.S. Government totaled
approximately $363,000,000 (11% of revenues) and $183,000,000 (12% of revenues),
respectively. For the year ended August 31, 2000, revenues from two different
non-U.S. Government customers totaled $85,000,000 (11% of revenues ) and
$83,400,000 (11% of revenues ).

Export Revenues

For the years ended August 31, 2002, 2001, and 2000, the Company has included as
part of its international revenues approximately $215,000,000, $167,000,000, and
$49,000,000, respectively, of exports from its domestic facilities.

85

NOTE 16--EARNINGS PER COMMON SHARE

The computation of basic and diluted earnings per share (in thousands, except
per share data) is set forth below.

The Company had approximately 142,000, 7,500, and 12,000, of stock options at
August 31, 2002, 2001, and 2000, respectively, which were excluded from the
calculation of diluted income per share because they were antidilutive.
Additionally, 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.

86

NOTE 17--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, 2002, 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
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 of the Company's Common Stock 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, 2002, there were no restricted shares of stock.

In conjunction with the Stone & Webster acquisition (see Note 4 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, 2002, 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 of the Company's Common Stock 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 Plan ("2001 Plan") under which both qualified and non-qualified
stock options, stock appreciation rights, performance shares and restricted
stock may be granted. As of August 31, 2002, 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 awards and determines the number of shares subject to each award, and
terms, conditions, performance measures, and other provisions of the award. The
exercise price of any option granted under the 2001 Plan cannot be less than
100% of the fair market value of the Company's Common Stock on the date of grant
and its duration cannot exceed 10 years. Both qualified options and
non-qualified options have been granted under the 2001 Plan. The options awarded
under the 2001 Plan 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.

87

SFAS No. 123, "Accounting for Stock-Based Compensation," provides that companies
can either record expense based on the fair value of stock-based compensation
upon issuance or elect to recognize no compensation cost upon issuance of a
grant if certain requirements are met (as provided for in APB 25). The Company
accounts for its stock-based compensation under APB 25. However, pro-forma
disclosures, as if the Company adopted the cost recognition requirements under
SFAS 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:

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

As of August 31, 2002, 2001, and 2000, the number of shares relating to options
exercisable under the stock option plans was 1,505,184; 883,373; and 450,986,
respectively, and the weighted average exercise price of those options was
$15.002, $13.648, and $5.703, respectively.

88

The weighted average fair value at date of grant for options granted during the
years ended August 31, 2002, 2001, and 2000, was $15.61, $21.40, and $12.02 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, 2002, 2001, and
2000, respectively: (a) dividend yield of 0.00%, 0.00% and 0.00%; (b) expected
volatility of 65%, 60%, and 60%; (c) risk-free interest rate of 4.1%, 5.3%, and
6.2%; and (d) expected life of 5 years, 5 years and 5 years.

The following table summarizes information about stock options outstanding as of
August 31, 2002:

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 a
percentage 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, 2002, 2001, 2000, was
approximately $8,000,000, $5,700,000, and $1,700,000, 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 Company's 401k profit sharing plans offer the employees a
number of investment choices, including investments in the Company's Common
Stock. The Plan purchases these shares on the open market. At August 31, 2002
and 2001, the Company's 401(k) plan owned 497,238 and 286,129 shares,
respectively of the Company's Common Stock.

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 $1,200,000, $700,000,
and $325,000, for the years ended August 31, 2002, 2001, and 2000, 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 plan's 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, 2002, 2001, and 2000, the
Company recognized income (expense) of approximately, $ (1,005,000), $533,000,
and $145,000 respectively, for these plans.

89

Included in the amounts for the year ended August 31, 2002 and 2001 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.

At August 31, 2002, the Company had recorded a $10,180,000 liability for its
second U.K. defined benefit retirement plan. This liability is required to be
recognized on the plan sponsor's balance sheet when the accumulated benefit
obligations of the plan exceed the fair value of the plan's assets. In
accordance with SFAS No. 87-"Employers Accounting for Pensions", the increase in
the minimum liability is recorded through a direct charge to stockholders'
equity and is, therefore, reflected, net of tax, as a component of comprehensive
income in the Statement of Changes in Stockholders' Equity.

90

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, 2002), and the plans' funded status
as of August 31, 2002, 2001, and 2000 in accordance with the provisions of SFAS
No. 132 - "Employers' Disclosure about Pensions and Other Postretirement
Benefits" (in thousands):

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, 2002 and 2001, the fair market value of the plan assets was
$1,185,000 and $1,355,000, respectively, which exceeded the estimated projected
benefit obligation.

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NOTE 18--RELATED PARTY TRANSACTIONS

The Company has entered into employment agreements with its Chief Executive
Officer, Chief Operating Officer, Chief Financial Officer and the President of
its Environmental & Infrastructure subsidiary. 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.

In 2001, the Company's employment agreement with its Chief Executive Officer was
amended to provide a non-compete clause upon the Chief Executive Officer's
separation from the Company. The amount of the non-compete payment will be
$15,000,000 and was based upon an outside study of the fair value of non-compete
provisions. The Company also agreed to set aside $5,000,000, per year, of
Company funds in fiscal 2001 through 2003 in order to fund this obligation; and,
therefore, as of August 31, 2002 and 2001, $10,000,000 and $5,000,000 are
included in other long-term assets in the accompanying consolidated balance
sheets. The $15,000,000 payment is due 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.

Upon hiring certain senior managers, the Company paid signing bonuses that are
repayable should the employee voluntarily terminate prior to a prescribed time.
These repayment obligations are evidenced by non-interest bearing loan
agreements that are forgiven over time. 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, 2002, 2001, and 2000 was approximately
$3,463,000, $789,000, and $272,000, respectively. There are no loans outstanding
to the Chief Executive Officer, Chief Operating Officer, Chief Financial Officer
or General Counsel. In the ordinary course of business, the Company has also
made other loans to other employees. All of these loan 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
$314,000 (net of accumulated amortization of $1,654,000) 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 9 of Notes to Consolidated Financial Statements.

A director of the Company was a managing director of the investment banking firm
that was a participating underwriter for the October 2000 public offering of
4,837,338 shares of Common Stock (discussed in Note 2 of Notes to Consolidated
Financial Statements) and the November 1999 public offering of 6,900,000 shares
of Common Stock (including 900,000 shares to cover over-allotments). The
director's investment banking firm earned commissions of approximately $44,000
and $150,000 related to the October 2000 and November 1999 offerings,
respectively. 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 the majority owner of a construction company that
the Company has used primarily as a subcontractor. He also had a minority
interest in a company that provided services to the contractor for one of the
Company's leased buildings; the director has since divested himself of this
interest. During fiscal 2002, the Company made total payments of approximately
$20,825,000 to the two companies and owed one of the companies approximately
$7,750,000 as of August 31, 2002. During fiscal 2001, the Company made payments
of approximately $266,000 to one of these companies. For fiscal 2000, payments
to the director's construction companies were not material.

Effective August 1, 2002, the Company entered into a five -year watercraft lease
with a corporation owned by one of the Company's executive officers. The lease
payments are $10,000 per month.

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NOTE 19--FOREIGN CURRENCY TRANSACTIONS

As of August 31, 2002, all of the Company's significant foreign subsidiaries
maintained their accounting records in their local currency (primarily British
pounds, Venezuelan Bolivars, Australian and Canadian dollars, and the Euro). The
currencies are converted to U.S. dollars with the effect of the foreign currency
translation reflected in "accumulated other comprehensive income (loss)," a
component of shareholders' equity, in accordance with SFAS No. 52 - "Foreign
Currency Translation" and SFAS No 130--"Reporting Comprehensive Income." Foreign
currency transaction gains or losses are credited or charged to income. At
August 31, 2002 and 2001, cumulative foreign currency translation adjustments
related to these subsidiaries reflected as a reduction to shareholders' equity
amounted to $8,941,000 and $6,308,000, respectively; transaction losses
reflected in income amounted to $1,158,000 and $41,000 in the years ended August
31, 2002 and 2001, respectively.

Prior to fiscal 2002 the Company had used the U. S. Dollar as opposed to the
Venezuelan Bolivar as the functional reporting currency of its Venezuelan
subsidiaries because the Venezuela economy was measured as highly inflationary,
as defined by SFAS No. 52. Accordingly, pursuant to SFAS No. 52, the Company had
previously translated the assets and liabilities of its Venezuelan subsidiaries
(which are denominated in Venezuelan Bolivars) into U.S. Dollars using a
combination of current and historical exchange rates. The Company began to use
the Venezuelan Bolivar as the functional reporting currency of its Venezuelan
subsidiaries in fiscal 2002 because the Company had determined that the
Venezuelan economy no longer met the criteria of a highly inflationary economy
as set forth in SFAS No. 52. As of August 31, 2002 the Company translated all
assets and liabilities at the August 31, 2002 exchange rate. The Company's
wholly-owned subsidiaries in Venezuela had total assets of approximately
$10,500,000 and $17,200,000 denominated in Venezuelan Bolivars as of August 31,
2002 and 2001, respectively. The majority of the decrease in total assets in the
fiscal year ended August 31, 2002 was related to the change in method of
translating the assets from the Venezuelan Bolivar to the U.S. Dollar.

During the years ended August 31, 2001 and 2000, the Company recorded losses of
approximately $673,000, and $1,756,000, respectively, in translating the assets
and liabilities of its Venezuelan subsidiaries into U.S. dollars. These losses
are reported as reductions to revenues because they were partially offset by
inflationary billing provisions in certain of the Company's contracts. Similar
translation losses recorded against income in the first quarter of fiscal 2002
(prior to changing the functional reporting currency to the Venezuelan Bolivar)
were not material.

NOTE 20--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 $35,649,000 and $42,664,000 at August 31,
2002 and 2001, respectively, related to unbilled receivables. Advanced billings
on contracts as of August 31, 2002 and 2001 were $15,241,000 and $17,712,000,
respectively. Balances under retainage provisions totaled $40,359,000 and
$17,623,000 at August 31, 2002 and 2001, respectively, and are also included in
accounts receivable in the accompanying consolidated balance sheets.

93

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, 2002 and 2001 and does not
include advanced billings on contracts as of August 31, 2002 and 2001 of
$15,241,000 and $17,712,000, respectively. Contracts assumed in the Stone &
Webster and IT Group acquisitions 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 loss reserves and fair value adjustments of acquired
contracts as of August 31, 2002 and 2001. The amounts presented below are (in
thousands).

94

NOTE 21--QUARTERLY FINANCIAL DATA (UNAUDITED)

(In thousands, except per share data)

95

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

On June 26, 2002, Shaw dismissed Arthur Andersen LLP ("Arthur Andersen") as its
independent auditors and engaged Ernst & Young LLP ("Ernst & Young") to serve as
its independent auditors for the fiscal year ending August 31, 2002. The Arthur
Andersen dismissal and the Ernst & Young engagement were recommended by Shaw's
Audit Committee and approved by Shaw's Board of Directors and became effective
immediately.

Arthur Andersen's reports on Shaw's consolidated financial statements as of and
for the fiscal years ended August 31, 2001 and August 31, 2000 did not contain
an adverse opinion or disclaimer of opinion, nor were such reports qualified or
modified as to uncertainty, audit scope or accounting principles.

During the interim period from September 1, 2001 through June 26, 2002 and
Shaw's 2001 and 2000 fiscal years, there were (i) no disagreements with Arthur
Andersen on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreements, if not
resolved to Arthur Andersen's satisfaction, would have caused Arthur Andersen to
make a reference to the subject matter of the disagreements in connection with
Arthur Andersen's reports on Shaw's financial statements for such periods; and
(ii) no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K,
except for notification from Arthur Andersen in connection with the audit of
Shaw's August 31, 2000 financial statements that the accounting system of Stone
& Webster, Incorporated ("Stone & Webster") contained certain material
weaknesses in internal accounting controls. Shaw completed its acquisition of
substantially all of the assets and liabilities of Stone & Webster in a
bankruptcy proceeding on July 14, 2000, and eliminated the weaknesses during
Shaw's 2001 fiscal year. As a result thereof, Arthur Andersen did not include
these matters in its management letter for the audit for the fiscal year ended
August 31, 2001.

Shaw previously provided Arthur Andersen with a copy of the foregoing
disclosures, and a letter from Arthur Andersen confirming its agreement with
these disclosures was filed as an exhibit to Shaw's Current Report on Form 8-K
filed with the SEC on June 26, 2002 and which is hereby incorporated herein by
reference.

During the interim period from September 1, 2001 through June 26, 2002 and
Shaw's 2001 and 2000 fiscal years, Shaw did not consult Ernst & Young with
respect to the application of accounting principles to a specified transaction,
either completed or proposed, or the type of audit opinion that might be
rendered on Shaw's consolidated financial statements, or any other matters or
reportable events as set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K.

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 2003 Annual Meeting of Shareholders to be held in January 2003 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 2003 Annual Meeting
of Shareholders to be held in January 2003 and is incorporated herein by
reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

Information regarding security ownership of certain beneficial owners and
management and equity compensation plans is to be included in the Company's
definitive proxy statement prepared in connection with the 2003 Annual Meeting
of Shareholders to be held in January 2003 and is incorporated herein by
reference.

96

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 2003 Annual Meeting of Shareholders to be held in January 2003 and is
incorporated herein by reference.

ITEM 14. CONTROLS AND PROCEDURES.

a) Evaluation of disclosure controls and procedures. Within the 90 day
period prior to the filing date of this Annual Report on Form 10-K,
the Company's management, including the Company's Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of
the design and operation of the Company's disclosure controls and
procedures. Based on that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer believe that:

o the Company's disclosure controls and procedures are
designed to ensure that information required to be disclosed
by the Company in the reports it files or submits under the
Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in
the SEC's rules and forms; and

o the Company's disclosure controls and procedures operate
such that important information flows to appropriate
collection and disclosure points in a timely manner and are
effective to ensure that such information is accumulated and
communicated to the Company's management, and made known to
the Company's Chief Executive Officer and Chief Financial
Officer, particularly during the period when this Annual
Report on Form 10-K was prepared, as appropriate to allow
timely decision regarding the required disclosure.

b) Changes in internal controls. There have been no significant changes
in the Company's internal controls or in other factors that could
significantly affect the Company's internal controls subsequent to
their evaluation, nor have there been any corrective actions with
regard to significant deficiencies or material weaknesses.

97

PART IV

ITEM 15. 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 (incorporated by reference to the
designated Exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended August 31, 2001).

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 (incorporated by reference to
the designated Exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended August 31, 2001).

98

10.2 The Shaw Group Inc. 1996 Non-Employee Director Stock Option
Plan, amended and restated through October 8, 2001 (incorporated
by reference to the designated Exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended August 31, 2001).

10.3 The Shaw Group Inc. 2001 Employee Incentive Compensation Plan,
amended and restated through October 8, 2001 (incorporated by
reference to the designated Exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended August 31, 2001).

10.4 The Shaw Group Inc. Stone & Webster Acquisition Stock Option
Plan (incorporated by reference to the to the Company's
Registration Statement on Form S-8 filed on June 12, 2001 (No
333-62856).

10.5 Second Amended and Restated Credit Agreement dated as of
February 28, 2002, 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 February 28, 2002).

10.6 Employment Agreement dated as of April 10, 2001, by and between
the Company and J.M. Bernhard, Jr. (incorporated by reference to
the designated Exhibit to the Company's Annual Report on From
10-K for the fiscal year ended August 31, 2001).

10.7 Employment Agreement dated as of May 5, 2000, by and between the
Company and Richard F. Gill and amended January 10,
2001(incorporated by reference to the designated Exhibit to the
Company's Annual Report on Form 10-K for the fiscal year ended
August 31, 2001).

10.8 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).

10.9 Employment Agreement dated as of July 10, 2002, by and between
the Company and T. A. Barfield, Jr. (filed herewith).

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).

10.11 Composite Asset Purchase Agreement, dated as of January 23,
2002, by and among The Shaw Group Inc., The IT Group, Inc. and
certain subsidiaries of The IT Group, Inc., including the
following amendments: (i) Amendment No. 1, dated January 24,
2002, to Asset Purchase Agreement, (ii) Amendment No. 2, dated
January 29, 2002, to Asset Purchase Agreement, and (iii) a
letter agreement amending Section 8.04(a)(ii) of the Asset
Purchase Agreement, dated as of April 30, 2002, between The IT
Group, Inc. and The Shaw Group Inc. (incorporated herein by
reference to designated Exhibit to the Company's Current Report
on Form 8-K filed with the Securities and Exchange Commission on
May 16, 2002). Pursuant to Item 601(b)(2) of Regulation S-K, the
exhibits and schedules referred to in the Asset Purchase
Agreement are omitted. The Registrant hereby undertakes to
furnish supplementally a copy of any omitted schedule or exhibit
to the Commission upon request.

10.12 Amendment No. 3, dated May 2, 2002, to Asset Purchase Agreement
by and among The Shaw Group Inc., The IT Group, Inc. and certain
subsidiaries of The IT Group, Inc. (incorporated herein by
reference to the designated Exhibit to the Company's Current
Report on Form 8-K filed with the Securities and Exchange
Commission on May 16, 2002). Pursuant to Item 601(b)(2) of
Regulation S-K, the exhibits and schedules referred to in
Amendment No. 3 are omitted. The Registrant hereby undertakes to
furnish supplementally a copy of any omitted schedule or exhibit
to the Commission upon request.

99

10.13 Amendment No. 4, dated May 3, 2002, to Asset Purchase Agreement
by and among The Shaw Group Inc., The IT Group, Inc. and certain
subsidiaries of The IT Group, Inc. Incorporated herein by
reference to the designated Exhibit to the Company's Current
Report on Form 8-K filed with the Securities and Exchange
Commission on May 16, 2002.

21.1 Subsidiaries of the Company (filed herewith).

23.1 Consent of Ernst & Young LLP (filed herewith).

23.2 Notice regarding consent of Arthur Andersen LLP (filed
herewith).

24.1 Powers of Attorney (filed herewith).

99.1 Certification pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 C of the Sarbanes-Oxley Act of 2002
(filed herewith).

99.2 Certification pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 C of the Sarbanes-Oxley Act of 2002
(filed herewith).

(b) Reports on Form 8-K

1. On June 20, 2002, the Company field a Form 8-K, attaching a press
release dated June 20, 2002, announcing that the Company had signed an
agreement with Turner Industries Group.

2. On June 26, 2002, the Company filed a Form 8-K, disclosing, under Item
4 of Form 8-K, the Company's dismissal of Arthur Andersen LLP as its
independent auditors, and its engagement of Ernst & Young LLP to serve
as its independent auditors for the fiscal year ending August 31,
2002.

3. On June 27, 2002, the Company filed a Form 8-K, attaching a press
release dated June 27, 2002, announcing that the Company had
terminated discussions with Turner Industries Group.

4. On July 12, 2002, the Company filed a Form 8-K/A, disclosing, under
Items 2 and 7 of Form 8-K, information concerning the Company's
acquisition of assets from The IT Group, Inc. and its subsidiaries.

5. On August 5, 2002, the Company filed a Form 8-K, attaching a press
release dated August 5, 2002, announcing that the Company had reached
an agreement with NRG Energy, Inc.

6. On August 8, 2002, the Company filed a Form 8-K, attaching a press
release dated August 8, 2002, announcing that the Company had been
notified of a project suspension by Mirant.

100

SIGNATURES AND CERTIFICATIONS

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 26, 2002

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.

101

CERTIFICATIONS

I, J.M. Bernhard, Jr., President and Chief Executive Officer of The Shaw
Group Inc., certify that:

1. I have reviewed this Annual Report on Form 10-K of The Shaw Group Inc.;

2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material act or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this Annual Report;

3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this Annual Report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this Annual Report
is being prepared;

b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this Annual Report (the "Evaluation Date"); and

c. presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
Annual Report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

Date: November 26, 2002

/s/ J. M. Bernhard, Jr.
-------------------------------------
J. M. Bernhard, Jr.
President and Chief Executive Officer

102

I, Robert L. Belk, Executive Vice President and Chief Financial Officer of
The Shaw Group Inc., certify that:

1. I have reviewed this Annual Report on Form 10-K of The Shaw Group Inc.;

2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this Annual Report;

3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this Annual Report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this Annual Report
is being prepared;

b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this Annual Report (the "Evaluation Date"); and

c. presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
Annual Report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

Date: November 26, 2002

/s/ Robert L. Belk
------------------------------
Robert L. Belk
Executive Vice President and
Chief Financial Officer

103

EXHIBIT INDEX
-------------

10.2 The Shaw Group Inc. 1996 Non-Employee Director Stock Option
Plan, amended and restated through October 8, 2001 (incorporated
by reference to the designated Exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended August 31, 2001).

10.3 The Shaw Group Inc. 2001 Employee Incentive Compensation Plan,
amended and restated through October 8, 2001 (incorporated by
reference to the designated Exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended August 31, 2001).

10.4 The Shaw Group Inc. Stone & Webster Acquisition Stock Option
Plan (incorporated by reference to the to the Company's
Registration Statement on Form S-8 filed on June 12, 2001 (No
333-62856).

10.5 Second Amended and Restated Credit Agreement dated as of
February 28, 2002, 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 February 28, 2002).

10.6 Employment Agreement dated as of April 10, 2001, by and between
the Company and J.M. Bernhard, Jr. (incorporated by reference to
the designated Exhibit to the Company's Annual Report on From
10-K for the fiscal year ended August 31, 2001).

10.7 Employment Agreement dated as of May 5, 2000, by and between the
Company and Richard F. Gill and amended January 10,
2001(incorporated by reference to the designated Exhibit to the
Company's Annual Report on Form 10-K for the fiscal year ended
August 31, 2001).

10.8 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).

10.9 Employment Agreement dated as of July 10, 2002, by and between
the Company and T. A. Barfield, Jr. (filed herewith).

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).

10.11 Composite Asset Purchase Agreement, dated as of January 23,
2002, by and among The Shaw Group Inc., The IT Group, Inc. and
certain subsidiaries of The IT Group, Inc., including the
following amendments: (i) Amendment No. 1, dated January 24,
2002, to Asset Purchase Agreement, (ii) Amendment No. 2, dated
January 29, 2002, to Asset Purchase Agreement, and (iii) a
letter agreement amending Section 8.04(a)(ii) of the Asset
Purchase Agreement, dated as of April 30, 2002, between The IT
Group, Inc. and The Shaw Group Inc. (incorporated herein by
reference to designated Exhibit to the Company's Current Report
on Form 8-K filed with the Securities and Exchange Commission on
May 16, 2002). Pursuant to Item 601(b)(2) of Regulation S-K, the
exhibits and schedules referred to in the Asset Purchase
Agreement are omitted. The Registrant hereby undertakes to
furnish supplementally a copy of any omitted schedule or exhibit
to the Commission upon request.

10.12 Amendment No. 3, dated May 2, 2002, to Asset Purchase Agreement
by and among The Shaw Group Inc., The IT Group, Inc. and certain
subsidiaries of The IT Group, Inc. (incorporated herein by
reference to the designated Exhibit to the Company's Current
Report on Form 8-K filed with the Securities and Exchange
Commission on May 16, 2002). Pursuant to Item 601(b)(2) of
Regulation S-K, the exhibits and schedules referred to in
Amendment No. 3 are omitted. The Registrant hereby undertakes to
furnish supplementally a copy of any omitted schedule or exhibit
to the Commission upon request.

10.13 Amendment No. 4, dated May 3, 2002, to Asset Purchase Agreement
by and among The Shaw Group Inc., The IT Group, Inc. and certain
subsidiaries of The IT Group, Inc. Incorporated herein by
reference to the designated Exhibit to the Company's Current
Report on Form 8-K filed with the Securities and Exchange
Commission on May 16, 2002.

21.1 Subsidiaries of the Company (filed herewith).

23.1 Consent of Ernst & Young LLP (filed herewith).

23.2 Notice regarding consent of Arthur Andersen LLP (filed
herewith).

24.1 Powers of Attorney (filed herewith).

99.1 Certification pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 C of the Sarbanes-Oxley Act of 2002
(filed herewith).

99.2 Certification pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 C of the Sarbanes-Oxley Act of 2002
(filed herewith).