GULF ISLAND FABRICATION INC - 10-K Annual Report

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

FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

OR

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-22303

GULF ISLAND FABRICATION, INC.
(Exact name of registrant as specified in its charter)

LOUISIANA 72-1147390
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

583 THOMPSON ROAD
HOUMA, LOUISIANA 70363
(Address of principal executive offices) (zip code)

(985) 872-2100
(Registrant's telephone number,
including area code)

Securities registered pursuant to Section 12(g) of the Act: common stock,
no par value per share.

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

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

The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant at June 30, 2002 was approximately
$146,192,505.

The number of shares of the registrant's common stock, no par value per
share, outstanding at March 3, 2003 was 11,767,430.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement prepared for use in
connection with the registrant's 2003 Annual Meeting of Shareholders to be held
April 30, 2003 have been incorporated by reference into Part III of this Form
10-K.
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GULF ISLAND FABRICATION, INC.
ANNUAL REPORT ON FORM 10-K FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2002

TABLE OF CONTENTS

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PART I

ITEMS 1 AND 2. BUSINESS AND PROPERTIES

Certain technical terms are defined in the "Glossary of Certain Technical
Terms" beginning on page G-1.

GENERAL

Gulf Island Fabrication, Inc. (the "Company"), together with its
subsidiaries, is a leading fabricator of offshore drilling and production
platforms and other specialized structures used in the development and
production of offshore oil and gas reserves. Structures and equipment fabricated
by the Company include jackets and deck sections of fixed production platforms;
hull and/or deck sections of floating production platforms (such as tension leg
platforms ("TLPs")), "SPARs and FPSOs"; piles, wellhead protectors, subsea
templates and various production, compressor and utility modules; and offshore
living quarters. Services provided by the Company include offshore interconnect
pipe hook-up; inshore marine construction; manufacture and repair of pressure
vessels; and steel warehousing and sales.

The Company was founded in 1985 by a group of investors, including Alden J.
"Doc" Laborde and Huey J. Wilson, and began operations at its fabrication yard
on the Houma Navigation Canal in southern Louisiana, approximately 30 miles from
the Gulf of Mexico. The Company's primary facilities are located on 620 acres,
of which 273 are currently developed for fabrication activities with 347 acres
available for future expansion. These facilities allow the Company to build
jackets for installation in water depths of up to 800 feet and deck sections for
fixed or floating production platforms for use in unlimited water depths. In
addition, the Company is able to build certain hull sections of floating
production platforms, typically for use in water depths greater than 1,000 feet.

On January 2, 1997, Gulf Island Fabrication, Inc. acquired Dolphin
Services, Inc. and two related companies (collectively, "Dolphin Services"),
which perform offshore and inshore fabrication and construction services (the
"Dolphin Acquisition"), and in April 1997, completed the initial public offering
(the "Initial Public Offering") of its common stock, no par value per share (the
"Common Stock"). Effective January 1, 1998, the Company acquired all of the
outstanding shares of Southport, Inc. (reorganized effective December 31, 2002
as "Southport, L.L.C.," a Louisiana limited liability company) and it's wholly
owned subsidiary Southport International, Inc. (collectively "Southport").
Southport specializes in the fabrication of living quarters for offshore
platforms. The purchase price was $6.0 million cash, plus contingent payments of
up to an additional $5.0 million based on Southport's net income over a
four-year period ending December 31, 2001. On October 26, 2000, the Company
effectively eliminated the possibility of contingency payments by reaching an
agreement with the former shareholders of Southport, Inc. to an early payout
amount of approximately $2.0 million.

In April 1998 the Company formed a limited liability company called MinDOC,
L.L.C. to patent, design and market a deepwater floating, drilling, and
production concept ("MinDOC"). During 2001, three of the participants terminated
their respective interests in MinDOC, L.L.C. thus, effective October 1, 2001,
the Company owns 60% interest in MinDOC, L.L.C. and the balance is owned by an
architectural/engineering company. Prior to October 1, 2001, the Company's
investment in MinDOC, L.L.C. was accounted for under the equity method of
accounting for investments with its share of operating results included in other
income as an expense in the statements of income. Effective October 1, 2001, the
Company's investment in MinDOC, L.L.C. and resulting operations were
consolidated within the consolidated financial statements of Gulf Island
Fabrication, Inc.

In November 1999 the Company announced that it had formed a wholly owned
subsidiary, Gulf Island MinDOC Company ("GIMCO"), to develop and market
deepwater oil and gas production structures, including a MinDOC, the deepwater
floating, drilling, and production concept that the Company has a proprietary
interest in. When fully operational, the subsidiary will be headquartered in
Houston, Texas.

Effective as of January 1, 2000, all of the operating assets, buildings and
properties owned directly by the Company were placed in Gulf Island, L.L.C., a
wholly owned subsidiary formed to conduct all of the fabrication

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and other operations previously conducted directly by the Company. As a result,
the existing Gulf Island Fabrication, Inc. now serves as a holding company and
conducts all of its operations through its subsidiaries.

WEBSITE AND ELECTRONIC POSTING DISCLOSURES

The Company's website address is www.gulfisland.com. The Company makes
available on or through its website, without charge, its annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports, and since November 15, 2002, those reports have
been made available on its website on the day such material was electronically
filed with the Securities and Exchange Commission ("SEC"). Our website and the
information contained therein or connected thereto are not intended to be
incorporated into this report on Form 10-K.

DESCRIPTION OF OPERATIONS

The Company's primary activity is the fabrication of offshore drilling and
production platforms, including jackets and deck sections of fixed production
platforms, hull and/or deck sections of floating production platforms (such as
TLPs, SPARs, and FPSOs), piles, wellhead protectors, subsea templates and
various production, compressor and utility modules. The Company also has the
ability to produce and repair pressure vessels used in the oil and gas industry,
refurbish existing platforms and fabricate various other types of steel
structures. With its acquisition of Southport, the Company has also increased
its presence in the market for the fabrication of living quarters for
installation on such platforms.

The Company uses the latest welding and fabrication technology available,
and all of the Company's products are manufactured in accordance with industry
standards and specifications, including those published by the American
Petroleum Institute, the American Welding Society and the American Society of
Mechanical Engineers. All of the Company's operating subsidiaries are certified
as either ISO 9001 or ISO 9002 fabricators for their respective quality
assurance programs. See "-- Safety and Quality Assurance."

Fabrication of Offshore Platforms. The Company fabricates structural
components of fixed platforms for use in the offshore development and production
of oil and gas. A fixed platform is the traditional type of platform used for
the offshore development and production of oil and gas, although in recent years
there has been an increase in the use of floating production platforms as a
result of increased drilling and production activities in deeper waters. Most
fixed platforms built today can accommodate both drilling and production
operations. These combination platforms are large and generally more costly than
single-purpose structures. However, because directional drilling techniques
permit a number of wells to be drilled from a single platform and because
drilling and production can take place simultaneously, combination platforms are
often more cost effective.

The most common type of fixed platform consists of a jacket (a tubular
steel, braced structure extending from the mudline on the seabed to a point
above the water surface) which is supported on tubular pilings driven deep into
the seabed and supports the deck structure located above the level of storm
waves. The deck structure, extending above the surface of the water and attached
to the top end of the jacket, is designed to accommodate multiple functions,
including drilling, production, separating, gathering, piping, compression, well
support and crew quartering. Platforms can be joined by bridges to form
complexes of platforms for very large developments or to improve safety by
dividing functions among specialized platforms. Jacket-type platforms are
generally the most viable solution for water depths of 1,000 feet or less.
Although there is no height limit to the size of the jackets that can be
fabricated at the Company's facilities, the dimensions of the Houma Navigation
Canal prevent the transportation to the Gulf of Mexico of most jackets designed
for water depths exceeding 800 feet. The Company can, however, build decks,
piping and equipment modules, living quarters, piles and other components of
platforms for installation in any water depth. Often, customers split projects
among fabricators, contracting with different companies for the fabrication of
the jacket, deck sections, living quarters and piles for the same platform.
Through the construction of these components the Company participates in the
construction of platforms requiring jackets and/or hulls that are larger than
those the Company can transport through the Houma Navigation Canal.

Most of the steel used in the Company's operations arrives at the Company's
fabrication yards as steel plate. The plate is cut and rolled into tubular
sections at rolling mills in the fabrication yards. The tubular sections

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(which vary in diameter, up to 12 feet) are welded together in long straight
tubes to become legs or into shorter tubes to become part of the network of
bracing that supports the legs. Various cuts and welds in the fabrication
process are made by computer-controlled equipment that operates from data
developed during the design of the structure. The Company's ability to fabricate
and assemble the large tubular sections needed for jackets built for use in
water depths over 300 feet distinguish the Company from all but three of its
domestic competitors.

Jackets are built on skidways (which are long parallel rails along which
the jacket will slide when it is transferred to a barge for towing out to sea)
and are generally built in sections so that much of their fabrication is done on
the ground. As each section of legs and bracing is complete, large crawler
cranes pick up an entire side and "roll up" the section, which is then joined to
another uprighted section. When a jacket is complete and ready for launch, it is
pulled along the skidway onto a launch barge, which is gradually deballasted to
compensate for the weight of the structure as more of it moves aboard the barge.
Using ocean-going tugs, the barge and jacket are transported to the offshore
installation site.

Decks are built either as single structures or in sections and are
installed on location by marine construction contractors. The composition and
quantity of petroleum in the well stream generally determine the makeup of the
production deck on a processing platform. Typical deck equipment includes crude
oil pumps, gas and oil separators and gas compressors. Unlike large jackets,
which are transported in a horizontal position, decks are transported upright
and, as a result, are not subject to the width restrictions of the Houma
Navigation Canal. Therefore, the only limitation on the Company's ability to
fabricate decks is the weight capacity of the barges that transport the decks
from the Company's yard to the installation site. Barges currently exist that
have the weight capacity and other characteristics required to transport even
the largest of the decks currently installed in the Gulf of Mexico, and
management believes that currently there are no decks installed in the Gulf of
Mexico that could not have been constructed at the Company's facilities. While
larger deck structures to be built in the future could exceed the capacities of
currently existing barges, management does not believe that this will materially
affect its share of the market for deck construction.

The Company can also fabricate sections of, and structures used in
connection with, TLPs. TLPs consist of a deck that sits atop one or more
column-shaped hulls, which are positioned on site with vertical tendons running
from the hulls to the seabed. The tendons hold the hulls partially submerged and
are highly tensioned using the buoyancy of the hulls. This system develops a
restoring force against wave, wind and current actions in proportion to the
lateral displacement of the vessel. Wells for a TLP are often pre-drilled
through a subsea template. Long, flexible production risers, which carry the
petroleum to the deck of the TLP, are supported in tension by mechanical
tensioner machines on the platform's deck and are directly subject to wave, wind
and current forces. TLPs can be used in any water depth and are generally better
suited than fixed platforms for water depths greater than 1,000 feet.

The size of a TLP depends on a number of factors, including the intended
scope of production of the platform, the length of the production risers
connected to the platform, the size of the deck to be installed on the platform
and the water depth for which the platform is designed. The Company can
fabricate deck sections for use with TLPs of any size. The constraints of the
Houma Navigation Canal, however, limit the Company's ability to deliver certain
hulls for use with TLPs, depending on the size and weight of the hull sections.
In July 1998 the Company completed the fabrication of the deck section and
floating hull of a TLP designed for installation in 1,800 feet of water. In
August 1999 the Company completed the construction of a similar hull that was
installed in 3,200 feet of water. To the Company's knowledge, these are the
first two TLPs of this size to be constructed entirely in the United States.
With TLP's and other floating concepts as the alternative of choice for
deepwater drilling and production platforms, and the Company's participation in
this arena firmly established, the Company will participate in the continued
expansion into the deepwater areas.

The Company has fabricated subsea templates for use in connection with
TLPs, which are structures that are installed on the seabed before development
drilling begins. As exploration and drilling move into the deepwater of the Gulf
of Mexico, the Company believes that there will be increased opportunities to
fabricate subsea templates, as well as decks and other structures, for use in
connection with TLPs.

The Company also fabricates piles and other rolled goods, templates,
bridges for connecting offshore platforms, wellhead protectors, various
production, compressor and utility modules and other structures used in

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offshore oil and gas production and development activities. All of the Company's
products are installed by marine construction contractors.

Through Dolphin Services, the Company also provides interconnect piping
services on offshore platforms, inshore steel and wood structure construction,
fabrication of pressure vessels and large and small packaged skid units, and
steel warehousing and sales. Interconnect piping services involve sending
employee crews to offshore platforms that have been installed in the Gulf of
Mexico in order to perform welding and other activities required to connect
production equipment, service modules and other equipment to a platform prior to
its becoming operational. Dolphin Services also contracts with oil and gas
companies that have platforms and other structures located in the inland lakes
and bays throughout the Southeast for various on-site construction and
maintenance activities. At its existing facility located a quarter of a mile
from the Company's main yard, Dolphin Services can fabricate jackets up to 100
feet tall along with decks and other steel structures. Dolphin Services has also
been active in the refurbishment of existing platforms. Platform operators
occasionally remove platforms previously installed in the Gulf of Mexico and
return the platforms to a fabricator for refurbishment, which usually consists
of general repairs, maintenance work and modification.

Through Southport, the Company fabricates living quarters, primarily for
offshore platforms, ranging in size from 4 to 250 beds.

FACILITIES AND EQUIPMENT

Facilities. The Company's corporate headquarters and Gulf Island, L.L.C.'s
main fabrication yard are located on the east bank of the Houma Navigation Canal
at Houma, Louisiana, approximately 30 miles from the Gulf of Mexico. This
facility is situated on approximately 140 acres, of which 100 acres are
developed for fabrication, and includes one 20,000 square foot building that
houses administrative staff, 180,000 square feet of covered fabrication area,
over 17,000 square feet of warehouse storage area and 8,000 square feet of
training and medical facilities. The main yard also has approximately 2,800
linear feet of water frontage, of which 1,500 feet is steel bulkhead that
permits loadout of heavy structures. In December 2001 Gulf Island, L.L.C. began
purchasing material for the construction of a new fabrication building scheduled
to be completed in the second quarter of 2003. When completed, the new building
will be 250 feet wide, 350 feet deep and 100 feet high. This will provide an
additional 87,500 square feet of covered fabrication area to Gulf Island,
L.L.C.'s existing facilities. The new building will allow Gulf Island, L.L.C. to
fabricate large deck sections that measure 100 feet wide and weigh up to 800
tons under a totally covered fabrication area.

Gulf Island, L.L.C.'s west yard is located across the Houma Navigation
Canal from the main yard on 437 acres, 130 acres of which are developed for
fabrication and over 300 acres of which are unimproved land, which could be used
for expansion. The west yard, which has approximately 72,000 square feet of
covered fabrication area and 4,600 square feet of warehouse storage area, spans
6,750 linear feet of the Houma Navigation Canal, of which 2,350 feet is steel
bulkhead.

Dolphin Services operates from a 20-acre site located approximately a
quarter of a mile from Gulf Island L.L.C.'s main yard on a channel adjacent to
the Houma Navigation Canal. The facility includes a 9,900 square foot building
that houses administrative staff, approximately 14,000 square feet of covered
fabrication area, 1,500 square feet of warehouse storage area, a 10,000 square
foot blasting and coating facility and 660 linear feet of steel bulkhead.
Dolphin Services also operates a commercial steel sales division and a pressure
vessel shop. The steel sales division operates a three acre facility adjacent to
Gulf Island, L.L.C.'s main yard with a product line that includes pressure
vessel plates and other products that utilize Gulf Island, L.L.C.'s capability
to process the steel by cutting, shaping, forming and painting.

The vessel shop can manufacture pressure vessels up to eleven feet in
diameter and eight inches in thickness. The shop is equipped with a Cypress
Circle Cutter, auto core flux and submerged arc welding equipment. The vessel
shop can also accommodate the construction of a 50 ton skid unit inside the
facility.

Southport operates on the east bank of the Houma Navigation Canal across
Thompson Road from Gulf Island, L.L.C.'s main fabrication yard. The facility
covers 23 acres and includes a two-story, 5,000 square foot administration
building with an attached 5,300 square foot warehouse. Also located on the
property is an

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additional two-story, 2,100 square foot administration building. The property
has approximately 1,850 linear feet of water frontage, of which 380 linear feet
is steel bulkhead that permits docking of large ocean going vessels and the
loadout of heavy loads.

The Company owns all of the foregoing properties.

Equipment. Gulf Island, L.L.C.'s main yard houses its Model 34 and Model
20 plate bending rolls, a Frye Wheelabrator grit blast system, a hydraulic plate
shear, a hydraulic press brake and various other equipment needed to build
offshore structures and fabricate steel components. Gulf Island, L.L.C.'s west
yard has a Bertsch Model 38 plate bending roll, a computerized Vernon brace
coping machine used for cutting steel in complex geometric sections and various
other equipment used in the Company's fabrication business. Gulf Island, L.L.C.
has a computerized numeric controlled plasma-arc cutting system that cuts and
bevels steel up to one inch thick at a rate of two hundred inches per minute.
The system can also etch into steel for piece markings and layout markings at a
rate of three hundred inches per minute. Gulf Island, L.L.C. also owns 16
crawler cranes, which range in tonnage capacity from 150 to 500 tons each and
service both of Gulf Island, L.L.C.'s yards. Gulf Island, L.L.C. may rent
additional cranes on a monthly basis in times of very high activity levels. In
2002, Gulf Island, L.L.C. purchased four hydraulic modular transporters with
rubber tires (KAMAG -- Type 2406) that allow fabricated deck sections that weigh
as much as 800 tons to be transported around the facility. The transporters
allow easier load-out of smaller decks and they provide more agility for the
movement of deck sections throughout the yard than cranes. Gulf Island, L.L.C.
performs routine repairs and maintenance on all of its equipment.

Gulf Island, L.L.C.'s plate bending rolls allow it to roll and weld into
tubular pipe sections approximately 50,000 tons of plate per year. By having
such capacity at its fabrication facility, Gulf Island, L.L.C. is able to
coordinate all aspects of platform construction, thereby reducing the risk of
cost overruns, delays in project completion, and labor costs. In addition, these
facilities allow Gulf Island, L.L.C. to participate as subcontractor on projects
awarded to other contractors. Gulf Island, L.L.C. has a state of the art, fully
enclosed, and environmentally friendly blast and coating facility that can
operate 24 hours a day. The facility is automated and provides blasting and
coating activities in support of the Company's fabrication projects. The design
output of the facility also allows the Company to provide blast and paint
services to the local shipbuilding industry. The use of this equipment provides
the Company a competitive advantage by reducing labor costs and demonstrates the
Company's commitment to being a good neighbor to the community and the
environment.

Dolphin Services owns three spud barges and leases one for use in
connection with its inshore construction activities. Each barge is equipped with
a crane with a lifting capacity of 60 to 100 tons each. Dolphin Services also
owns two Manitowoc 4100 cranes with lifting capacities of 200 to 230 tons each
and two smaller crawler cranes with lifting capacities of 60 tons each.

MATERIALS AND SUPPLIES

The principal materials and supplies used by the Company in its fabrication
business, standard steel shapes, steel plate, welding gases, fuel oil, gasoline
and paint, are currently available in adequate supply from many sources. The
Company does not depend upon any single supplier or source.

SAFETY AND QUALITY ASSURANCE

Management is concerned with the safety and health of the Company's
employees and maintains a stringent safety assurance program to reduce the
possibility of costly accidents. The Company's safety department establishes
guidelines to ensure compliance with all applicable state and federal safety
regulations and provides training and safety education through orientations for
new employees and subcontractors, daily crew safety meetings and first aid and
CPR training. The Company also employs five in-house medical personnel. The
Company has a comprehensive drug program and conducts periodic employee health
screenings. A safety committee, whose members consist of management
representatives and peer-elected field representatives, meets twice a month to
discuss safety concerns and suggestions that could prevent accidents. The
Company also rewards its employees with safety awards every three months. These
awards are the result of observations and audits performed by the safety
department and front line supervision.

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The Company fabricates to the standards of the American Petroleum
Institute, the American Welding Society, the American Society of Mechanical
Engineers and specific customer specifications. The Company uses welding and
fabrication procedures in accordance with the latest technology and industry
requirements. Training programs have been instituted to upgrade skilled
personnel and maintain high quality standards. In addition, the Company
maintains on-site facilities for the non-destructive testing of all welds, which
process is performed by an independent contractor.

Gulf Island, L.L.C. and Dolphin Services are certified as ISO 9002
fabricators. Southport is certified as an ISO 9001 fabricator. ISO 9001 and ISO
9002 are internationally recognized verification systems for quality management
overseen by the International Standard Organization based in Geneva,
Switzerland. The certification is based on a review of the Company's programs
and procedures designed to maintain and enhance quality production and are
subject to annual review and recertification.

CUSTOMERS AND CONTRACTING

The Company's customers are primarily major and independent oil and gas
exploration and production companies. Over the past five years, sales of
structures used in the Gulf of Mexico by oil and gas exploration and production
companies accounted for approximately 82% of the Company's revenue. The balance
of its revenue was derived from the fabrication of structures installed outside
the Gulf of Mexico, including offshore West Africa and Latin America.

A large portion of the Company's revenue has historically been generated by
a few customers, although not necessarily the same customers from year-to-year.
For example, the Company's largest customers (those which individually accounted
for more than 10% of revenue in a given year) accounted for 51% (20% Single Buoy
Mooring, Inc., 19% Kerr-McGee Corporation, and 12% ExxonMobil Corporation), 21%
(El Paso Corporation which includes projects for a subsidiary of the Coastal
Corporation prior to its merger with El Paso Corporation), and 13% (Anadarko) of
revenue for fiscal 2002, 2001, and 2000, respectively. In addition, at December
31, 2002, 90% of the Company's backlog was attributable to 12 projects involving
six customers. Because the level of fabrication that the Company may provide to
any particular customer depends, among other things, on the size of that
customer's capital expenditure budget devoted to platform construction plans in
a particular year and the Company's ability to meet the customer's delivery
schedule, customers that account for a significant portion of revenue in one
fiscal year may represent an immaterial portion of revenue in subsequent years.

Most of the Company's projects are awarded on a fixed-price or
alliance/partnering basis, and while customers may consider other factors,
including the availability, capability, reputation and safety record of a
contractor, price and the ability to meet a customer's delivery schedule are the
principal factors on which the Company is awarded contracts. The Company's
contracts generally vary in length from one month to twenty-four months
depending on the size and complexity of the project. Generally, the Company's
contracts and projects are subject to termination at any time prior to
completion, at the option of the customer. Upon termination, however, the
customer is generally required to pay the Company for work performed and
materials purchased through the date of termination and, in some instances,
cancellation fees.

Under fixed-price contracts, the Company receives the price fixed in the
contract, subject to adjustment only for change orders approved by the customer.
As a result, the Company retains all cost savings but is also responsible for
all cost overruns. Under typical alliance/partnering arrangements, the Company
and the customer agree in advance to a target price that includes specified
levels of labor and material costs and profit margins. If the project is
completed at less cost than that targeted in the contract, the contract price is
reduced by a portion of the savings. If the cost of completion is greater than
that targeted in the contract, the contract price is increased, but generally to
the target price plus the actual incremental cost of materials and direct labor
costs. Accordingly, under alliance/partnering arrangements, the Company has some
protection from cost overruns but also shares a portion of any cost savings with
the customer. Under cost-plus arrangements, the Company receives a specified fee
in excess of its direct labor and material cost and so is protected against cost
overruns but does not benefit directly from cost savings. Because the Company
generally prices materials as pass-through items on its contracts, the cost and
productivity of the Company's labor force are the primary factors affecting the
Company's operating costs. Consequently, it is essential that the Company
control the cost and productivity of the direct

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labor hours worked on the Company's projects. As an aid to achieving this
control, the Company places a single project manager in charge of the production
operations related to each project and gives significant discretion to the
project manager, with oversight by the applicable subsidiary's President and the
Company's Executive Vice President of Operations. As an incentive to control
costs, the Company gives bonuses to its employees totaling 5% of the Company's
income before taxes.

SEASONALITY

Although high activity levels in the oil and gas industry and capacity
limitations can somewhat diminish the seasonality of the Company's operations,
the Company's operations have historically been subject to seasonal variations
in weather conditions and daylight hours. Since most of the Company's
construction activities take place outdoors, the number of direct labor hours
worked generally declines during the winter months due to an increase in rainy
and cold conditions and a decrease in daylight hours. In addition, the Company's
customers often schedule the completion of their projects during the summer
months in order to take advantage of the milder weather during such months for
the installation of their platforms. As a result, a disproportionate portion of
the Company's income has historically been earned during the second and third
quarters of the year, and in the past the Company has occasionally incurred
losses during the first and fourth quarters of the year.

The table below indicates for each quarter of the Company's last three
fiscal years the percentage of the annual revenue, gross profit and net income,
and the number of direct labor hours worked.

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(1) Net income percentage for the first quarter 2002 was computed based on net
income before cumulative effect of change in accounting principle. (See Note
3 to the Notes to Consolidated Financial Statements related to the adoption
of a new accounting standard).

Because of this seasonality, full year results are not likely to be a
direct multiple of any particular quarter or combination of quarters. Reductions
in industry activity levels may tend to increase the seasonality of the
Company's operations.

COMPETITION

The offshore platform fabrication industry is highly competitive and
influenced by events largely outside of the control of offshore platform
fabrication companies. Platform fabrication companies compete intensely for
available projects, which are generally awarded on a competitive bid basis with
customers usually requesting bids on projects one to three months prior to
commencement. The Company's marketing staff contacts oil and gas companies
believed to have fabrication projects scheduled to allow the Company an
opportunity to bid for the projects. Although price and the contractor's ability
to meet a customer's delivery schedule are the principal factors in determining
which qualified fabricator is awarded a contract for a project, customers also
consider, among other things, the availability of technically capable personnel
and facility space, a fabricator's efficiency, condition of equipment,
reputation, safety record and customer relations.

The Company currently has three primary competitors, Technip-Coflexip
(specifically its subsidiaries CSO Aker Marine Contractors, Inc. and Gulf Marine
Fabricators, Inc.), J. Ray McDermott, S.A., and Kiewit Offshore Services, for
the fabrication of platform jackets to be installed in the Gulf of Mexico in
water depths greater than 300 feet. In addition to these three companies, the
Company primarily competes with five other fabricators for platform jackets for
intermediate water depths from 150 feet to 300 feet. A number of other companies
compete for projects designed for shallower waters as well as for the projects
typically performed by Southport. Certain of the Company's competitors have
greater financial and other resources than the Company.

7

Management believes that, while new competitors can enter the market for
smaller structures relatively easily, it is more difficult to enter the market
for jackets designed for use in water depths greater than 300 feet. This
difficulty results from the substantial investment required to establish an
adequate facility, the difficulty of locating a facility adjacent to an adequate
waterway due to environmental and wetland regulations, and the limited
availability of experienced supervisory and management personnel.

Management believes that the Company's competitive pricing, expertise in
fabricating offshore structures and the certification of its facilities as ISO
9001 and ISO 9002 fabricators will enable it to continue to compete effectively
for projects destined for international waters. The Company recognizes, however,
that foreign governments often use subsidies and incentives to create jobs where
oil and gas production is being developed. In addition, the increased
transportation costs that are incurred when exporting structures from the U.S.
to foreign locations may hinder the Company's ability to successfully bid for
projects against foreign competitors. Because of subsidies, import duties and
fees, taxes on foreign operators, lower wage rates in foreign countries,
fluctuations in the value of the U.S. dollar, the possible imposition of tariffs
on raw materials imported into the United States and other factors, the Company
may not be able to remain competitive with foreign contractors for projects
designed for use in international waters as well as those designed for use in
the Gulf of Mexico.

BACKLOG

As of December 31, 2002, the Company's revenue backlog was $92.5 million;
$91.7 million of which management expects to be performed during 2003, and its
man-hour backlog was 1.253 million hours remaining to work. Of the $92.5 million
revenue backlog at December 31, 2002, approximately 90% of the Company's backlog
was attributable to six customers.

The Company's backlog is based on management's estimate of the direct labor
hours required to complete, and the remaining revenue to be recognized with
respect to, those projects as to which a customer has authorized the Company to
begin work or purchase materials pursuant to written contracts, letters of
intent or other forms of authorization received by our Company. Often, however,
management's estimates are based on incomplete engineering and design
specifications. As engineering and design plans are finalized or changes to
existing plans are made, management's estimate of the direct labor hours
required to complete and price at completion for such projects is likely to
change. In addition, all projects currently included in the Company's backlog
are subject to termination at the option of the customer, although the customer
in that case is generally required to pay the Company for work performed and
materials purchased through the date of termination and, in some instances, pay
the Company cancellation fees.

GOVERNMENT AND ENVIRONMENTAL REGULATION

Many aspects of the Company's operations and properties are materially
affected by federal, state and local regulation, as well as certain
international conventions and private industry organizations. The exploration
and development of oil and gas properties located on the outer continental shelf
of the United States is regulated primarily by the Bureau of Minerals Management
Service of the United States Department of the Interior ("MMS"). The MMS has
promulgated federal regulations under the Outer Continental Shelf Lands Act
requiring the construction of offshore platforms located on the outer
continental shelf to meet stringent engineering and construction specifications.
Violations of these regulations and related laws can result in substantial civil
and criminal penalties as well as injunctions curtailing operations. The Company
believes that its operations are in compliance with these and all other
regulations affecting the fabrication of platforms for delivery to the outer
continental shelf of the United States. In addition, the Company depends on the
demand for its services from the oil and gas industry and, therefore, can be
affected by changes in taxes, price controls and other laws and regulations
relating to the oil and gas industry. Offshore construction and drilling in
certain areas has also been opposed by environmental groups and, in certain
areas, has been restricted. To the extent laws are enacted or other governmental
actions are taken that prohibit or restrict offshore construction and drilling
or impose environmental protection requirements that result in increased costs
to the oil and gas industry in general and the offshore construction industry in
particular, the business and prospects of the Company could be adversely
affected, although such restrictions in the areas of the Gulf of Mexico where
the Company's products are used

8

have not been substantial. The Company cannot determine to what extent future
operations and earnings of the Company may be affected by new legislation, new
regulations or changes in existing regulations.

The Houma Navigation Canal provides the only means of access for the
Company's products from the Company's facilities to open waters. The Houma
Navigation Canal is considered to be a navigable waterway of the United States
and, as such, is protected by federal law from unauthorized obstructions that
would hinder water-borne traffic. Federal law also authorizes federal
maintenance of the canal by the United States Corps of Engineers. The canal
requires bi-annual dredging to maintain its water depth and, while federal
funding for this dredging has been provided for over 30 years, there is no
assurance that Congressional appropriations sufficient for adequate dredging and
other maintenance of the canal will be continued indefinitely. If sufficient
funding were not appropriated for that purpose, the Houma Navigation Canal could
become impassable by barges required to transport many of the Company's products
and could result in material and adverse affects on the Company's operations and
financial position.

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

The Comprehensive Environmental Response, Compensation, and Liability Act
of 1980, as amended, and similar laws provide for responses to and liability for
releases of hazardous substances into the environment. Additionally, the Clean
Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the
Safe Drinking Water Act, the Emergency Planning and Community Right to Know Act,
each as amended, and similar foreign, state or local counterparts to these
federal laws, regulate air emissions, water discharges, hazardous substances and
wastes, and require public disclosure related to the use of various hazardous
substances. Compliance with such environmental laws and regulations may require
the acquisition of permits or other authorizations for certain activities and
compliance with various standards or procedural requirements. The Company
believes that its facilities are in substantial compliance with current
regulatory standards.

The Company's operations are also governed by laws and regulations relating
to workplace safety and worker health, primarily the Occupational Safety and
Health Act and regulations promulgated thereunder. In addition, various other
governmental and quasi-governmental agencies require the Company to obtain
certain permits, licenses and certificates with respect to its operations. The
kinds of permits, licenses and certificates required in the Company's operations
depend upon a number of factors. The Company believes that it has all material
permits, licenses and certificates necessary for the conduct of its existing
business.

The Company's compliance with these laws and regulations has entailed
certain additional expenses and changes in operating procedures, which during
the last several years have resulted in approximately $150,000 to $200,000 of
expenditures per year. The Company believes that compliance with these laws and
regulations will not have a material adverse effect on the Company's business or
financial condition for the foreseeable future. However, future events, such as
changes in existing laws and regulations or their interpretation, more vigorous
enforcement policies of regulatory agencies, or stricter or different
interpretations of existing laws and regulations, may require additional
expenditures by the Company, which expenditures may be material.

Certain activities engaged in by employees of the Company, including
interconnect piping and other service activities conducted on offshore platforms
and activities performed on the spud barges owned by the Company, are covered by
the provisions of the Jones Act, the Death on the High Seas Act and general
maritime law, which

9

laws operate to make the liability limits established under state workers'
compensation laws inapplicable to these employees and, instead, permit them or
their representatives to pursue actions against the Company for damages or job
related injuries, with generally no limitations on the Company's potential
liability. The Company's ownership and operation of vessels can give rise to
large and varied liability risks, such as risks of collisions with other vessels
or structures, sinkings, fires and other marine casualties, which can result in
significant claims for damages against both the Company and third parties for,
among other things, personal injury, death, property damage, pollution and loss
of business.

In addition to government regulation, various private industry
organizations, such as the American Petroleum Institute, the American Society of
Mechanical Engineers and the American Welding Society, promulgate technical
standards that must be adhered to in the fabrication process.

INSURANCE

The Company maintains insurance against property damage caused by fire,
flood, explosion and similar catastrophic events that may result in physical
damage or destruction to the Company's facilities. All policies are subject to
deductibles and other coverage limitations. The Company also maintains a
builder's risk policy for its construction projects and general liability
insurance. The Company and its subsidiary, Gulf Island, L.L.C., are self-insured
for workers' compensation liability except for losses in excess of $300,000 per
occurrence for Louisiana workers' compensation and for U.S. longshoreman and
harbor workers' coverage. Dolphin Services and Southport are conventionally
insured for workers' compensation liability with deductibles of $100,000 and
$25,000, respectively. The Company also maintains maritime employer's liability
insurance. Although management believes that the Company's insurance is
adequate, there can be no assurance that the Company will be able to maintain
adequate insurance at rates which management considers commercially reasonable,
nor can there be any assurance that such coverage will be adequate to cover all
claims that may arise.

EMPLOYEES

The Company's workforce varies based on the level of ongoing fabrication
activity at any particular time. During 2002, the number of Company employees
ranged from approximately 690 to 930. As of March 3, 2003, the Company had
approximately 975 employees. Although the seasonality of the Company's
operations may cause a decline in Company output during the winter months, the
Company generally does not lay off employees during those months but reduces the
number of hours worked per day by many employees to coincide with the reduction
in daylight hours during that period. None of the Company's employees are
employed pursuant to a collective bargaining agreement, and the Company believes
that its relationship with its employees is good.

The Company's ability to remain productive and profitable depends
substantially on its ability to attract and retain skilled construction workers,
primarily welders, fitters and equipment operators. In addition, the Company's
ability to expand its operations depends not only upon customer demand but also
on the Company's ability to increase its labor force. The demand for such
workers is high and the supply is extremely limited, especially during periods
of high activity in the oil and gas industry. While the Company believes its
relationship with its skilled labor force is good, a significant increase in the
wages paid by competing employers could result in a reduction in the Company's
skilled labor force, increases in the wage rates paid by the Company, or both.
If either of these occurred, in the near-term, the profits expected by the
Company from work in progress could be reduced or eliminated and, in the
long-term, to the extent such wage increases could not be passed on to the
Company's customers, the production capacity of the Company could be diminished
and the growth potential of the Company could be impaired.

As part of an effort to maintain its workforce, the Company has instituted
and enhanced several incentive programs and expanded its training facility for
its current employees. The Company has facilities to train its employees on
productivity and safety matters. The Company is committed to training its
employees and offers advancement through in-house and outsourced training
programs for skilled craft, supervisory and management personnel.

10

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION

Certain statements included in this report and in oral statements made from
time to time by management of the Company that are not statements of historical
fact are forward-looking statements. In this report, forward-looking statements
are included primarily in the sections entitled "Business and Properties,"
"Legal Proceedings," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The words "expect," "believe,"
"anticipate," "project," "plan," "estimate," "predict" and similar expressions
often identify forward-looking statements. All such statements are subject to
factors that could cause actual results and outcomes to differ materially from
the results and outcomes predicted in the statements and investors are cautioned
not to place undue reliance upon them. These factors include, among others, the
timing and extent of changes in the prices of crude oil and natural gas; the
timing of new projects and the Company's ability to obtain them; competitive
factors in the heavy marine fabrication industry; and the Company's ability to
successfully complete the testing, production and marketing of the MinDOC and
other deepwater production systems and to develop and provide financing for
them.

ITEM 3. LEGAL PROCEEDINGS

The Company is subject to various routine legal proceedings in the normal
conduct of its business primarily involving commercial claims, workers'
compensation claims, and claims for personal injury under general maritime laws
of the United States and the Jones Act. While the outcome of these lawsuits,
legal proceedings and claims cannot be predicted with certainty, management
believes that the outcome of any such proceedings, even if determined adversely,
would not have a material adverse effect on the financial position, results of
operations or cash flows of the Company.

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

Not applicable.

EXECUTIVE OFFICERS OF THE REGISTRANT

Listed below are the names, ages and offices held by each of the executive
officers of the Company as of March 3, 2003. All officers of the Company serve
at the pleasure of the Company's Board of Directors.

Kerry J. Chauvin has served as Chairman of the Board since April 2001. Mr.
Chauvin has served as the Company's President since the Company's inception and
as Chief Executive Officer since January 1990. Mr. Chauvin also served as the
Company's Chief Operating Officer from January 1989 to January 1990. He has over
20 years of experience in the fabrication industry including serving from 1979
to 1984 as President of Delta Fabrication, the assets of which were purchased by
the Company in 1985, and as Executive Vice President, General Manager and
Manager of Engineering with Delta Fabrication from 1977 to 1979. From 1973 to
1977, he was employed by Delta Shipyard as Manager of New Construction and as a
Project Manager. Mr. Chauvin holds both an M.B.A. degree and a B.S. degree in
Mechanical Engineering from Louisiana State University.

Kirk J. Meche became Executive Vice President -- Operations of the Company
and President of Gulf Island, L.L.C. in February 2001. Mr. Meche served as
President of Southport, Inc., a former wholly owned subsidiary of the Company,
from December 1999 to February 2001, and as Vice President of Operations of
Southport, Inc. from February 1999 to December 1999. He was a Project Manager
for the Company from 1996 to 1999. Mr. Meche served in various capacities with
McDermott Fabrication and Shipyard from 1985 to 1996 including

11

Structural Engineer, Hull Engineering Supervisor and Project Manager. He
received his B.S. degree in Engineering Design from Louisiana State University
in 1985.

Murphy A. Bourke has been Executive Vice President -- Marketing since
January 2000, and was Vice President -- Marketing since the Company began
operations in 1985 until December 1999. Mr. Bourke also served as Vice President
Marketing for Delta Fabrication from 1979 to 1984 and as the General Sales
Manager of Louisiana State Liquor Distributors, Inc., a beverage distributor,
from 1972 to 1979. He holds a B.A. degree in marketing from Southeastern
Louisiana University.

Joseph P. "Duke" Gallagher, III was elected Vice President -- Finance and
Chief Financial Officer of the Company in January 1997. Mr. Gallagher served as
the Company's Controller from 1985 until 1997. He has been the Company's
Treasurer since 1986 and served as the Company's Secretary from January 1993
until April 1999. From 1981 to 1985, he was employed as the Controller of TBW
Industries, Incorporated, a manufacturer of machinery and pressure vessels, and
from 1979 to 1981 as the Assistant Controller of Brock Exploration Corporation,
a publicly traded oil and gas exploration company. Mr. Gallagher, a Certified
Public Accountant, also worked as a Senior Auditor for the accounting firm A.A.
Harmon & Co., CPA's Inc. He received a B.S. degree in Production Management in
1973 from the University of Southwestern Louisiana.

PART II

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

The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "GIFI." At March 3, 2003, the Company had approximately 2,500 holders
of record of the Common Stock.

The following table sets forth the high and low bid prices per share of the
Common Stock, as reported by The Nasdaq National Market, for each fiscal quarter
of the two most recent fiscal years.

The Company has not paid dividends since 1997. The Company currently
intends to retain earnings, if any, to meet its working capital requirements and
to finance the future operation and growth of its business and, therefore, does
not plan to pay cash dividends to holders of its Common Stock in the foreseeable
future.

12

EQUITY COMPENSATION PLAN INFORMATION

The following table provides information about our shares of Common Stock
that may be issued upon the exercise of options, warrants and rights under all
of our existing equity compensation plans as of December 31, 2002.

- ---------------

(1) Of the shares remaining available for issuance, no more than 50,000 shares
may be issued as restricted stock or "other stock-based award" (which awards
are valued in whole or in part on the value of the shares of Common Stock)
under the Company's 2002 Long-Term Incentive Plan, and no more than 1,000
may be issued as stock appreciation rights, restricted stock, performance
shares or stock awards under the Company's Long-Term Incentive Plan.

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected historical financial data as of the
dates and for the periods indicated. The historical financial data for each year
in the five-year period ended December 31, 2002 are derived from the audited
financial statements of the Company. The following information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's financial statements and notes
thereto included elsewhere in this report.

- ---------------

(1) Includes results of operations of Southport, Inc. from January 1, 1998.
Effective December 31, 2002, Southport, Inc. was reorganized as "Southport,
L.L.C.," a Louisiana limited liability company.

(2) In June 2001, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"),
"Goodwill and Other Intangible Assets", which established a new method of
testing goodwill for impairment using a fair-value-based approach and
eliminated the amortization of goodwill as previously required by Accounting
Principles Board ("APB") Opinion 17, "Intangibles". The Company adopted SFAS
No. 142 effective January 1, 2002, and completed the required transitional
impairment test during the quarter ended March 31, 2002. As a result of the
transitional impairment test, the Company calculated an impairment charge of
$4.8 million. The impairment charge was calculated based on fair value using
an expected cash flow approach. The transitional impairment charge is
reflected as a cumulative effect of change in accounting principle as of
January 1, 2002, (see Note 3 to the Notes to the Consolidated Financial
Statements.)

(3) A reconciliation of reported net income before cumulative effect of change
in accounting principle and related earnings per share to the adjusted net
income and earnings per share to exclude the prior amortization expense of
goodwill. For some of the years presented, basic earnings per share and
diluted earnings per share reflect the impact of rounding on the
calculation.

(4) Direct labor hours are hours worked by employees directly involved in the
production of the Company's products.

(5) The Company's backlog is based on management's estimate of the number of
direct labor hours required to complete, and the remaining revenues to be
recognized with respect to, those projects on which a customer has
authorized the Company to begin work or purchase materials.

15

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

INTRODUCTION AND OUTLOOK

The Company's results of operations are affected primarily by (i) the level
of exploration and development activity maintained by oil and gas exploration
and production companies in the Gulf of Mexico, and to a lesser extent, foreign
locations throughout the world; (ii) the Company's ability to win contracts
through competitive bidding or alliance/partnering arrangements and (iii) the
Company's ability to manage those contracts to successful completion. The level
of exploration and development activity is related to several factors, including
trends of oil and gas prices, exploration and production companies' expectations
of future oil and gas prices, and changes in technology which reduce costs and
improve expected returns on investment, especially in subsalt geological
formations (which generally are located in 300 to 800 feet of water) and in
deepwater (800 to 6,000 feet) areas of the Gulf of Mexico. During 1997 and 1998,
generally favorable trends in these factors led to high activity levels in the
Gulf of Mexico. In the past four years, however, the distraction caused by
consolidation activity by the oil and gas exploration and production companies
and generally unfavorable trends in the exploration and development activity
factors, have caused corresponding low levels of oil and gas development
activity.

Development activity in water depths greater than 300 feet, where larger
structures requiring more steel tonnage are needed, began declining in 1999 and
continued to decline throughout 2000, which had a negative effect on the demand
for the available capacity of the major platform fabricators serving the Gulf of
Mexico, with a resulting decline in pricing levels for their services through
the end of 2000. While 2001 and 2002 did not result in a significant improvement
in market conditions in the fabrication sector of the oil and gas industry, the
Company experienced some stability in the awarding of projects during 2001, with
a notable 28% increase in projects awarded during 2002.

The combination of the backlog at December 31, 2001 and projects awarded
during 2002 with stable profit margins, resulted in a stronger performance in
2002 compared to 2001. Revenue in 2002 was $142.9 million, a 25.7% increase
compared to 2001 revenue, and net income before cumulative effect of change in
accounting principle was $10.3 million, a 42.4% increase compared to 2001 net
income. Net income after a cumulative effect of change in accounting principle
for the period ended December 31, 2002 was $5.6 million (See Note 3 in the Notes
to Consolidated Financial Statements). During 2002 the Company was awarded
several large projects, resulting in a 70.0% increase in backlog at December 31,
2002, to $92.5 million compared to $54.4 million at December 31, 2001.

The weakness in the U.S. economy and the threat of war have caused
uncertainty for the future of the industry. However, the currently elevated
commodity prices for oil and natural gas could help in bringing future projects
to the market. The dollar value of projects available in the market is
significantly below those levels of four to five years ago. Competition for
available projects remains intense and near term, future margins will likely
remain uncertain. Cost reduction measures are continuously reviewed to meet
these conditions. The Company has had success in the market in spite of the
tariff imposed by the President on imported steel. This tariff placed the
Company in an unfair position when competing in the international market. With
the increase in activity in the international and deepwater markets, the Company
will continue to seek projects in these areas that have proven to be less risky
and allows for enhanced profitability. Demand for the Company's services will
continue to depend largely upon actual or anticipated prices for oil and gas,
which are difficult to predict. At some point, however, it is expected that
demand for the Company's products and services should recover as oil and gas
reserves are reduced and the Company's customers are forced to replace them.

During 2002, the Company's workforce increased from approximately 690 to
930 employees. Demand for the Company's products and services dictates the
Company's workforce needs, although the Company generally tries to minimize the
use of contract labor.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States, which require the
Company to make estimates and assumptions. The Company

16

believes that of its significant accounting policies (see Note 1 to the Notes to
the Consolidated Financial Statements), the following involve a higher degree of
judgment and complexity.

REVENUE RECOGNITION

The majority of the Company's revenue is recognized on a
percentage-of-completion basis based on the ratio of direct labor hours actually
performed to date compared to the total estimated direct labor hours required
for completion. Accordingly, contract price and cost estimates are reviewed
monthly as the work progresses, and adjustments proportionate to the percentage
of completion are reflected in revenue for the period when such estimates are
revised. If these adjustments were to result in a reduction of previously
reported profits, the Company would have to recognize a charge against current
earnings, which may be significant depending on the size of the project or the
adjustment. Profit incentives from customers are included in revenue when their
realization is reasonably assured. Claims for extra work or changes in scope of
work are included in revenue when collection is probable. Provisions for
estimated losses on uncompleted contracts are recorded in the period in which
such losses are determined.

GOODWILL IMPAIRMENT -- SOUTHPORT ACQUISITION

In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill
and Other Intangible Assets", which established a new method of testing goodwill
for impairment using a fair-value-based approach and eliminated the amortization
of goodwill as previously required by Accounting Principles Board ("APB")
Opinion 17, "Intangibles". An impairment loss would be recorded if the recorded
goodwill exceeds its implied fair value. At December 31, 2001, the Company had
goodwill of $4.8 million (net of accumulated amortization of $1.3 million)
related to the acquisition of Southport. The Company adopted SFAS No. 142
effective January 1, 2002, and completed the required transitional impairment
test during the quarter ended March 31, 2002. As a result of the transitional
impairment test, the Company calculated an impairment charge of $4.8 million.
The impairment charge was calculated based on fair value using an expected cash
flow approach. The Company considered in its expected cash flow projections the
continued decline in the demand for, the highly competitive nature of, and the
recent bid activity related to the fabrication of living quarters. The
transitional impairment charge is reflected as a cumulative effect of change in
accounting principle as of January 1, 2002, in the accompanying financial
statements.

RECEIVABLES

In the normal course of business, the company extends credit to its
customers on a short-term basis. The company's principal customers are major oil
and natural gas exploration, development and production companies. Although
credit risks associated with our customers are considered minimal, the company
routinely reviews its accounts receivable balances and makes adequate provisions
for probable doubtful accounts.

RESULTS OF OPERATIONS

COMPARISON OF THE YEARS ENDED DECEMBER 31, 2002 AND 2001

The Company's revenue for the year ended December 31, 2002 was $142.9
million, an increase of 25.7%, compared to $113.7 million in revenue for the
year ended December 31, 2001. Revenue increased as a result of the increased
demand and stable pricing of the Company's good and services. In addition, the
on-going labor recruiting and retention efforts at the Company generated an
increase in the volume of direct labor hours applied to contracts for the year
ended December 31, 2002, compared to 2001(1.9 million in 2002 versus 1.7 million
in 2001). The combination of increased volume and stable pricing enabled the
Company to increase gross profit by 25.3% to $19.3 million (13.5% of revenue)
for the year ended December 31, 2002, compared to the $15.4 million (13.5% of
revenue) of gross profit for the year ended December 31, 2001.

Cost of revenue was $123.6 million in 2002 compared to $98.3 million in
2001. Cost of revenue consists of costs associated with the fabrication process,
including direct costs (such as direct labor hours and raw materials) allocated
to specific projects and indirect costs (such as supervisory labor, utilities,
welding supplies and

17

equipment costs) associated with production but not directly related to a
specific project. As a percentage of revenue, these costs remained consistent at
86.5% for 2002 and 2001.

The Company's general and administrative expenses were $4.2 million for the
year ended December 31, 2002, compared to $4.4 million for the year ended
December 31, 2001. Included in general and administrative expenses for the year
ended December 31, 2001 was $433,000 which represented the amortization of
goodwill. Effective January 1, 2002, goodwill amortization was eliminated. Thus,
excluding goodwill amortization for 2001 would result in an increase of
approximately $200,000 for general and administrative expenses when comparing
2002 to 2001. This increase for 2001 to 2002 was the result of costs that vary
with sales volumes, primarily labor related costs. Although the absolute dollar
cost of the Company's general and administrative expenses increased when
excluding goodwill for 2001, as a percentage of revenue these costs decreased to
3.0% from 3.5% for the years ended December 31, 2002 and 2001, respectively.

The Company's net interest income decreased to $572,000 for the year ended
December 31, 2002 compared to $1.1 million for 2001. The current reduction in
interest income is the result of a reduction in short-term interest rates when
comparing 2002 to 2001. For the period ended December 31, 2002, other income was
$52,000, of which the majority was related to the sale of miscellaneous
equipment. For the period ended December 31, 2001, other expense was $748,000.
This expense includes $288,000 related to the Company's portion of the net loss
of MinDOC, LLC as it continues to design and market the MinDOC floating platform
concept for deepwater drilling and production. Also included in the other-net
was $280,000 for the settlement of a lawsuit the Company had been involved in
for several years and $180,000 resulting from a loss the Company had on the sale
of the 13-acre facility Southport previously occupied in Harvey, Louisiana.

COMPARISON OF THE YEARS ENDED DECEMBER 31, 2001 AND 2000

The Company's revenue for the year ended December 31, 2001 was $113.7
million, an increase of 1.4%, compared to $112.1 million in revenue for the year
ended December 31, 2000. Revenue for 2001 remained relatively stable when
compared to 2000 revenue due to a consistent volume of direct labor hours
applied to contracts for both years.

The cost of revenue consists of costs associated with the fabrication
process, including direct costs (such as direct labor hours and raw materials)
allocated to specific projects and indirect costs (such as supervisory labor,
utilities, welding supplies and equipment costs) that are associated with
production but are not directly related to a specific project. As a percentage
of revenue, these costs were 86.5% and 90.7% for the year ended December 31,
2001 and 2000, respectively. The utilization of labor saving equipment enabled
the Company to maintain production volumes while increasing profit margins. Also
contributing to increased profit margins were increased product prices and
discounts from major suppliers of materials and services. Gross profit increased
$4.9 million or 47.2% when comparing 2001 to 2000. For the year ended December
31, 2001, gross profit was $15.4 million (13.5% of revenue), compared to $10.4
million (9.3% of revenue) of gross profit for the year ended December 31, 2000.

The Company's general and administrative expenses were $4.4 million for the
year ended December 31, 2001 compared to $4.5 million for the year ended
December 31, 2000. These expenses as a percentage of revenue were 3.9% compared
to 4.0% for the years ended December 31, 2001 and 2000, respectively. By
continuously monitoring general and administrative costs, the Company was able
to keep these costs relative to production volumes.

The Company's net interest income increased to $1.1 million for the year
ended December 31, 2001 compared to $1.3 million for 2000. The current reduction
in interest income is the result of a reduction in short-term interest rates
when comparing 2001 to 2000. Other expense increased to $748,000 in 2001 from
$558,000 in 2000. This expense includes $288,000 related to the Company's
portion of the net loss of MinDOC, L.L.C. as it continues to design and market
the MinDOC floating platform concept for deepwater drilling and production. Also
included in the other-net was $280,000 for the settlement of a lawsuit the
Company had been involved in for several years and $180,000 resulting from a
loss the Company had on the sale of the 13-acre facility Southport previously
occupied in Harvey, Louisiana.

18

LIQUIDITY AND CAPITAL RESOURCES

Historically the Company has funded its business activities through funds
generated from operations and borrowings under its revolving line of credit
("the Revolver"). Net cash used in operating activities was $609,000 for the
year ended December 31, 2002. When comparing the period ended December 31, 2002
to December 31, 2001, the Company experienced the normal increase in contracts
receivable associated with the early months of new projects. In the early phases
of a new project, the Company utilizes its cash to purchase material and expend
labor, which results in a reduction of cash and an increase in contract
receivables until the customer begins processing bills for payment. Working
capital was $52.3 million (an increase of 12.2%) at December 31, 2002. The ratio
of current assets to current liabilities decreased to 5.12 to 1 at December 31,
2002, from 6.26 to 1 at December 31, 2001. Net cash used in investing activities
for the year ended December 31, 2002 was $5.4 million, which included $101,000
of proceeds on the sale of equipment, $5.0 million utilized from short term
investments, and $10.5 million of capital expenditures. The Company's capital
expenditures during 2002 were for improvements to its production facilities and
for equipment designed to increase the capacity of its facilities and the
productivity of its labor force. The majority of the 2002 capital expenditures
were for the new fabrication shop under construction ($5.1 million) and the
transporters ($1.9 million) described in detail in Part I, Items 1 and 2,
"Business and Properties -- Facilities and Equipment".

The Company's Revolver provides for a revolving line of credit of up to
$20.0 million, which bears interest equal to, at the Company's option, the prime
lending rate established by Bank One Corporation or LIBOR plus 1.5%. The
Revolver matures December 31, 2004, and is secured by a mortgage on the
Company's real estate, equipment and fixtures. The Company pays a fee on a
quarterly basis of three-sixteenths of one percent per annum on the average
unused portion of the line of credit. At December 31, 2002, there were no
borrowings outstanding under the credit facility, but the Company did have
letters of credit outstanding totaling $5.0 million which reduces the unused
portion of the Revolver. The Company is required to maintain certain covenants,
including balance sheet and cash flow ratios. At December 31, 2002, the Company
was in compliance with these covenants.

The Company's Board of Directors approved a capital budget of $11.1 million
for 2003, which includes the purchase of equipment and additional yard and
facility expansion improvements. Included in the 2003 capital budget was $6.4
million for two cranes that were purchased in February 2003. The cranes
(Manitowoc Model M2250) have lifting capacities of 500 tons each compared to
some of the Company's other large cranes that have a lifting capacity of 350
tons. Management believes that its available funds, cash generated by operating
activities and funds available under the bank credit facility will be sufficient
to fund these capital expenditures and its working capital needs. However, the
Company may expand its operations through acquisitions in the future, which may
require additional equity or debt financing.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company does not have operations subject to material risk of foreign
currency fluctuations, nor does it use derivative financial instruments in its
operations or investment portfolio. The Company has a $20.0 million line of
credit with its primary commercial bank. Under the terms of the revolving credit
agreement, the Company may elect to pay interest at either a fluctuating base
rate established by the bank from time to time or at a rate based on the rate
established in the London interbank market. The Company does not believe that it
has any material exposure to market risk associated with interest rates.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

In this report the consolidated financial statements of the Company and the
accompanying notes to consolidated financial statements appear on pages F-1
through F-16 and are incorporated herein by reference. See Index to Consolidated
Financial Statements on Page 20.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

19

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information called for by this item is included in the Company's definitive
Proxy Statement prepared in connection with the 2003 Annual Meeting of
Shareholders and in Item 4 of this report on Form 10-K. Such information is
incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

Information called for by this item is included in the Company's definitive
Proxy Statement prepared in connection with the 2003 Annual Meeting of
Shareholders and is incorporated herein by reference.

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

Information called for by this item is included in the Company's definitive
Proxy Statement prepared in connection with the 2003 Annual Meeting of
Shareholders and in Item 5 of this report on Form 10-K. Such information is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information called for by this item is included in the Company's definitive
Proxy Statement prepared in connection with the 2003 Annual Meeting of
Shareholders and is incorporated herein by reference.

ITEM 14. CONTROLS AND PROCEDURES

Within 90 days prior to the filing date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's President and Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of its disclosure controls and
procedures pursuant to Rule 13a-14 under the Securities and Exchange Act of
1934. Based upon that evaluation, the Company's President and Chief Executive
Officer along with the Company's Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective in timely alerting
them to material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic SEC filings.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
the date the Company carried out its evaluation.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) The following financial statements, schedules and exhibits are filed as
part of this Report:

(i) Financial Statements

20

(ii) Schedules

Other schedules have not been included because they are not
required, not applicable, immaterial or the information required has
been included elsewhere herein.

(iii) Exhibits

See Exhibit Index on page E-1. The Company will furnish to any
eligible shareholder, upon written request, a copy of any exhibit listed
upon payment of a reasonable fee equal to the Company's expenses in
furnishing such exhibit. Such requests should be addressed to Investor
Relations, Gulf Island Fabrication, Inc., P.O. Box 310, Houma, LA
70361-0310.

(b) Reports on Form 8-K

On November 7, 2002, the company filed a report on Form 8-K to report
(under Item 9) the filing of the certifications of the Company's Chief
Executive Officer and Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.

21

GLOSSARY OF CERTAIN TECHNICAL TERMS

blasting and coating facility: Building and equipment used to clean steel
products and prepare them for coating with
marine paints and other coatings.

coping machine: A computerized machine that cuts ends of
tubular pipe sections to allow for changes in
weld bevel angles and fits onto other tubular
pipe sections.

deck: The component of a platform on which
development drilling, production, separating,
gathering, piping, compression, well support,
crew quartering and other functions related to
offshore oil and gas development are conducted.

direct labor hours: Hours worked by employees directly involved in
the production of the Company's products. These
hours do not include contractor labor hours and
support personnel hours such as maintenance,
warehousing and drafting.

fixed platform: A platform consisting of a rigid jacket which
rests on tubular steel pilings driven into the
seabed and which supports a deck structure
above the water surface.

floating production platform: Floating structure that supports offshore oil
and gas production equipment (TLP, FPSO, SPAR).

FPSO: Floating Production Storage and Offloading
vessel.

grit blast system: System of preparing steel for coating by using
steel grit rather than sand as a blasting
medium.

hydraulic plate shear: Machine that cuts steel by a mechanical system
similar to scissors.

inshore: Inside coastlines, typically in bays, lakes and
marshy areas.

ISO 9001: International Standards of Operations
9001 -- Defines quality management system of
procedures and goals for certified companies.

ISO 9002: International Standards of Operations
9002 -- Defines quality management system of
procedures and goals for certified companies.

jacket: A component of a fixed platform consisting of a
tubular steel, braced structure extending from
the mudline of the seabed to a point above the
water surface. The jacket is supported on
tubular steel pilings driven into the seabed
and supports the deck structure located above
the level of storm waves.

modules: Packaged equipment usually consisting of major
production, utility or compression equipment
with associated piping and control system.

offshore: In unprotected waters outside coastlines.

piles: Rigid tubular pipes that are driven into the
seabed to support platforms.

plasma-arc cutting system: Steel cutting system that uses an ionized gas
cutting rather than oxy-fuel system.

platform: A structure from which offshore oil and gas
development drilling and production are
conducted.

G-1

pressure vessel: A metal container generally cylindrical or
spheroid, capable of withstanding various
internal pressure loadings.

SPAR: A vessel with a circular cross-section that
sits vertically in the water and is supported
by buoyancy chambers ("hard tanks") at the top
and stabilized by a structure ("midsection")
hanging from the hard tanks.

spud barge: Construction barge rigged with vertical tubular
or square lengths of steel pipes that are
lowered to anchor the vessel.

skid unit: Packaged equipment usually consisting of major
production, utility or compression equipment
with associated piping and control system.

subsea templates: Tubular frames which are placed on the seabed
and anchored with piles. Usually a series of
oil and gas wells are drilled through these
underwater structures.

tension leg platform (TLP): A platform consisting of a floating hull and
deck anchored by vertical tensioned cables or
pipes connected to pilings driven into the
seabed. A tension leg platform is typically
used in water depths exceeding 1,000 feet.

G-2

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Gulf Island Fabrication, Inc.

We have audited the accompanying consolidated balance sheets of Gulf Island
Fabrication, Inc. as of December 31, 2002 and 2001, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Gulf Island
Fabrication, Inc. at December 31, 2002 and 2001, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2002 in conformity with accounting principles generally
accepted in the United States.

As discussed in Note 3 to the consolidated financial statements, effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets".

ERNST & YOUNG LLP

New Orleans, Louisiana
January 31, 2003

F-1

GULF ISLAND FABRICATION, INC.

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these statements.
F-2

GULF ISLAND FABRICATION, INC.

CONSOLIDATED STATEMENTS OF INCOME

The accompanying notes are an integral part of these statements.
F-3

GULF ISLAND FABRICATION, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

The accompanying notes are an integral part of these statements.
F-4

GULF ISLAND FABRICATION, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these statements.
F-5

GULF ISLAND FABRICATION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

Gulf Island Fabrication, Inc. ("the Company"), located in Houma, Louisiana,
is engaged in the fabrication and refurbishment of offshore oil and gas
platforms for oil and gas industry companies. The Company's principal markets
are concentrated in the offshore regions of the coast of the Gulf of Mexico. The
consolidated financial statements include the accounts of Gulf Island
Fabrication, Inc. and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.

In April 1998 the Company formed a limited liability company called MinDOC,
L.L.C. to patent, design and market a deepwater floating, drilling, and
production concept ("MinDOC"). During 2001, three of the participants terminated
their respective interests in MinDOC, L.L.C. thus, effective October 1, 2001,
the Company owns 60% interest in MinDOC, L.L.C. and the balance is owned by an
engineering company. Prior to October 1, 2001, the Company's investment in
MinDOC, L.L.C. was accounted for under the equity method of accounting for
investments with its share of operating results included in other income as an
expense in the statements of income. Effective October 1, 2001, the Company's
investment in MinDOC, L.L.C. and resulting operations were consolidated within
the consolidated financial statements of Gulf Island Fabrication, Inc.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenue and expense during the
reporting period. Actual results could differ from those estimates.

CONCENTRATION OF CREDIT RISK

The principal customers of the Company are the major and large independent
oil and gas companies. This concentration of customers may impact the Company's
overall exposure to credit risk, either positively or negatively, in that
customers may be similarly affected by changes in economic or other conditions.
However, the Company's management believes that the portfolio of receivables is
diversified and that such diversification minimizes any potential credit risk.
Receivables are generally not collateralized.

The Company believes that its credit and foreign currency loss exposure is
minimal.

REVENUE RECOGNITION

Revenue from fixed-price and cost-plus construction contracts is recognized
on the percentage-of-completion method, computed by the efforts-expended method
which measures the percentage of labor hours incurred to date as compared to
estimated total labor hours for each contract.

Contract costs include all direct material, labor and subcontract costs and
those indirect costs related to contract performance, such as indirect labor,
supplies and tools. Also included in contract costs are a portion of those
indirect contract costs related to plant capacity, such as depreciation,
insurance and repairs and maintenance. These indirect costs are allocated to
jobs based on actual direct labor hours incurred. Profit incentives are included
in revenue when their realization is reasonably assured. Claims for extra work
or changes in scope of work are included in revenue when collection is probable.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined.

F-6

GULF ISLAND FABRICATION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

INVENTORY

Inventory consists of materials and production supplies and is stated at
the lower of cost or market determined on the first-in, first-out basis.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation is computed on the straight-line basis over the
estimated useful lives of the assets, which range from 3 to 30 years. Ordinary
maintenance and repairs, which do not extend the physical or economic lives of
the plant or equipment, are charged to expense as incurred.

LONG-LIVED ASSETS

In accordance with FASB Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which was adopted on January 1, 2002, the Company
records impairment losses on long-lived assets used in operations when events
and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets. The impairment loss is determined by
comparing the fair value of the assets to their carrying amounts and recording
the excess of the carrying amounts of the assets over their fair value. Fair
value is determined based on discounted cash flows or appraised values, as
appropriate.

INCOME TAXES

Income taxes have been provided using the liability method in accordance
with the Financial Accounting Standards Board's Statement No. 109, Accounting
for Income Taxes.

EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED

Through the period ended December 31, 2001, excess of cost over the fair
value of the net assets acquired (goodwill) was amortized on the straight-line
method over a period of 15 years.

CASH EQUIVALENTS

The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents.

SHORT-TERM INVESTMENTS

Short-term investments consist of highly liquid debt securities with a
maturity of greater than three months, but less than twelve months. The
securities are classified as available-for-sale and the fair value of these
investments approximated their carrying value at December 31, 2002 and 2001.

RECLASSIFICATIONS

Certain items included in the consolidated financial statements for the
year ended December 31, 2000 had been reclassified to conform to the December
31, 2002 and 2001 consolidated financial statement presentation.

2. ACQUISITION

Effective January 1, 1998, the Company acquired all of the outstanding
shares of Southport, Inc. and its wholly owned subsidiary, Southport
International, Inc. (collectively, Southport). Southport specializes in the
fabrication of living quarters for offshore platforms. The purchase price was
$6.0 million cash, plus contingent payments of up to an additional $5.0 million
based on Southport's net income over a four-year period ending
F-7

GULF ISLAND FABRICATION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

December 31, 2001. The purchase price plus $130,000 of direct expenses exceeded
the fair value of the assets acquired of $12.3 million less liabilities assumed
of $10.3 million by $4.1 million. On October 26, 2000, the Company reached an
agreement with the former shareholders of Southport to an early payout amount of
approximately $2.0 million. The acquisition and the early payout amount were
accounted for under the purchase method of accounting as described by Accounting
Principles Board Opinion No. 16, "Business Combinations APB 16".

3. NEW ACCOUNTING STANDARD

In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill
and Other Intangible Assets", which established a new method of testing goodwill
for impairment using a fair-value-based approach and eliminated the amortization
of goodwill as previously required by Accounting Principles Board ("APB")
Opinion 17, "Intangibles". An impairment loss would be recorded if the recorded
goodwill exceeds its implied fair value. At December 31, 2001, the Company had
goodwill of $4.8 million (net of accumulated amortization of $1.3 million)
related to the acquisition of Southport. The Company adopted SFAS No. 142
effective January 1, 2002, and completed the required transitional impairment
test during the quarter ended March 31, 2002. As a result of the transitional
impairment test, the Company calculated an impairment charge of approximately
$4.8 million. The impairment charge was calculated based on fair value using an
expected cash flow approach. The Company considered in its expected cash flow
projections the continued decline in the demand for, the highly competitive
nature of, and the recent bid activity related to the fabrication of living
quarters. The transitional impairment charge is reflected as a cumulative effect
of change in accounting principle as of January 1, 2002, in the accompanying
financial statements.

A reconciliation of reported net income before cumulative effect of change
in accounting principle and related earnings per share to the adjusted net
income and earnings per share to exclude the prior amortization expense of
goodwill for the years ended December 31, is as follows (in thousands, except
per share data):

F-8

GULF ISLAND FABRICATION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

For the years ended December 31, 2001 and 2000, basic earning per share and
diluted earning per share reflect the impact of rounding on the calculation.

In December 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure," which amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition to the fair value method of accounting for stock-based employee
compensation, and also amends the disclosure provision of SFAS No. 123 to
require disclosure in the summary of significant accounting policies the effects
of an entity's accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in annual and interim
financial statements. The disclosure provision is required for all companies
with stock-based employee compensation, regardless of whether the company
utilizes the fair method of accounting described in SFAS No. 123 or the
intrinsic value method described in APB Opinion No. 25, "Accounting for Stock
Issued to Employees." SFAS No. 148's amendment of the transition and annual
disclosure provisions of SFAS No. 123 are effective for fiscal years ending
after December 15, 2002. The disclosure requirements for interim financial
statements containing condensed consolidated financial statements are effective
for interim periods beginning after December 15, 2002. The company currently
uses the intrinsic value method of accounting for stock-based employee
compensation described by APB Opinion No. 25.

4. EARNINGS PER SHARE

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

F-9

GULF ISLAND FABRICATION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. CONTRACTS RECEIVABLE

Amounts due on contracts as of December 31 were as follows (in thousands):

6. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

Information with respect to uncompleted contracts as of December 31 is as
follows (in thousands):

The above amounts are included in the accompanying consolidated balance
sheets at December 31, under the following captions (in thousands):

F-10

GULF ISLAND FABRICATION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following at December 31 (in
thousands):

The Company leases certain equipment used in the normal course of its
operations under month-to-month lease agreements cancelable only by the Company.
During 2002, 2001, and 2000, the Company expensed $1.5 million, $1.3 million and
$1.6 million, respectively, related to these leases.

8. INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31, were as
follows (in thousands):

F-11

GULF ISLAND FABRICATION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Significant components of income tax expense for the years ended December
31, were as follows (in thousands):

A reconciliation of income taxes computed at the U.S. federal statutory tax
rate to the Company's income tax expense for the years ended December 31, is as
follows (in thousands):

The Company's effective tax rate was decreased in 2002 as a result of the
anticipated tax benefits arising from an increase in net income attributable to
foreign contracts. The Company's effective tax rate was decreased in 2001 due
primarily to the utilization of Louisiana tax credits.

9. LINE OF CREDIT AND NOTES PAYABLE

The Company's bank credit facility provides for a revolving line of credit
(the Revolver) of up to $20.0 million that bears interest equal to, at the
Company's option, the prime lending rate established by Bank One Corporation or
LIBOR plus 1.5%. The Revolver matures December 31, 2004, and is secured by a
mortgage on the Company's real estate, equipment and fixtures. The Company pays
a fee on a quarterly basis, of three-sixteenths of one percent per annum on the
average unused portion of the line of credit. At December 31, 2002, there were
no borrowings outstanding under the credit facility, but the Company did have
letters of credit outstanding totaling $5.0 million, which reduces the unused
portion of the Revolver. The Company is required to maintain certain covenants,
including balance sheet and cash flow ratios. At December 31, 2002, the Company
was in compliance with these covenants.

10. LONG-TERM INCENTIVE PLAN

The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees, (APB 25) and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, Accounting For Stock-Based Compensation, (Statement 123)
requires use of options valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the

F-12

GULF ISLAND FABRICATION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.

On February 13, 1997, the shareholders approved a proposal to adopt the
Long-Term Incentive Plan (the Plan). The Plan authorized the grant of options to
purchase an aggregate of 1,000,000 shares of the Company's common stock to
certain officers and key employees of the Company chosen by a committee
appointed by the board of directors (the Compensation Committee) to administer
such plan. Under the Plan, all options granted have 10-year terms, and
conditions relating to the vesting and exercise of options are "nonstatutory
options" (options which do not afford income tax benefits to recipients, but the
exercise of which may provide tax deductions for the Company). Each option will
have an exercise price per share not less than the fair market value of a share
of common stock on the date of grant and no individual employee may be granted
options to purchase more than an aggregate of 400,000 shares of common stock.

On April 24, 2002, the shareholders approved a proposal to adopt the 2002
Long-Term Incentive Plan (the "2002 Plan"). The 2002 Plan authorized the grant
of options to purchase an aggregate of 500,000 shares of the Company's common
stock to certain officers, key employees, directors and consultants of the
Company chosen by the Compensation Committee. Under the 2002 Plan, all options
granted have 10-year terms, and conditions relating to the vesting and exercise
of options are "nonstatutory options" (options which do not afford income tax
benefits to recipients, but the exercise of which may provide tax deductions for
the Company). Each option will have an exercise price per share not less than
the fair market value of a share of common stock on the date of grant and no
individual employee may be granted options to purchase more than an aggregate of
200,000 shares of common stock.

Pro forma information regarding net income and earnings per share is
required by Statement 123 and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
statement. The fair value for these options was estimated at the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions. For 2000, a risk-free interest rate of 5.79% on the January options
and a risk-free interest rate of 5.80% on the November options; dividend yield
of zero; volatility factor of the expected market price of the Company's common
stock of .588; and a weighted-average expected life of the options of eight
years. For 2001, a risk-free interest rate of 5.66% on the February options, a
risk-free interest rate of 5.72% on the April options and a risk-free interest
rate of 5.74% on the December options; dividend yield of zero; volatility factor
of the expected market price of the Company's common stock of .450; and a
weighted-average expected life of the options of eight years. For 2002, a
risk-free interest rate of 4.00%; dividend yield of zero; volatility factor of
the expected market price of the Company's common stock of .458; and a
weighted-average expected life of the options of eight years.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimated, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

For purpose of pro forma disclosures, the estimated fair value of the
options (net of expected tax benefits) is amortized to expense over the options'
vested period. Since the Company's options generally vest over a five-year
period, the pro forma disclosures are not indicative of future amounts until
Statement 123 is applied to all

F-13

GULF ISLAND FABRICATION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

outstanding non-vested options. The Company's pro forma information for the year
ended December 31, is as follows (in thousands, except per share data):

A summary of the Company's stock options activity and related information
for the years ended December 31, 2000, 2001 and 2002 is as follows (in
thousands, except per share data):

The 923,000 options outstanding fall into two general exercise-price ranges
as follows:

11. RETIREMENT PLAN

The Company has a defined contribution plan (the Plan) for all employees
that is qualified under Section 401(k) of the Internal Revenue Code.
Contributions to the Plan by the Company are based on the participants'
contributions, with an additional year-end discretionary contribution determined
by the board of

F-14

GULF ISLAND FABRICATION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

directors. For the years ended December 31, 2002, 2001, and 2000, the Company
contributed a total of $1.0 million, $817,000, and $711,000, respectively.

12. CONTINGENT LIABILITIES

The Company is subject to various routine legal proceedings in the normal
conduct of its business primarily involving commercial claims, workers'
compensation claims, and claims for personal injury under general maritime laws
of the United States and the Jones Act. While the outcome of these lawsuits,
legal proceedings and claims cannot be predicted with certainty, management
believes that the outcome of any such proceedings, even if determined adversely,
would not have a material adverse effect on the financial position, results of
operations or cash flows of the Company.

13. SALES TO MAJOR CUSTOMERS

The Company's customer base is primarily concentrated in the oil and gas
industry. The Company is not dependent on any one customer, and the revenue
earned from each customer varies from year to year based on the contracts
awarded. Sales to customers comprising 10% or more of the Company's total
revenue for the year ended December 31, are summarized as follows (in
thousands):

14. INTERNATIONAL SALES

The Company's fabricated structures are used worldwide by U.S. customers
operating abroad and by foreign customers. The Company does not have operations
subject to material risk of foreign currency fluctuations. Sales of fabricated
structures for delivery outside of the United States accounted for 31%, 2%, and
14%, of the Company's revenues during 2002, 2001, and 2000, respectively.

F-15

GULF ISLAND FABRICATION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

15. QUARTERLY OPERATING RESULTS (UNAUDITED)

A summary of quarterly results of operations for the years ended December
31, 2002 and 2001 were as follows (in thousands, except per share data):

Quarterly data may not sum to the full year data reported in the Company's
consolidated financial statements due to rounding.

F-16

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, on March 27, 2003.

GULF ISLAND FABRICATION, INC.
(Registrant)

By: /s/ KERRY J. CHAUVIN
------------------------------------
Kerry J. Chauvin
Chairman of the Board,
President and Chief Executive
Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 27, 2003.

S-1

CEO CIVIL CERTIFICATION

I, Kerry J. Chauvin, certify that:

1. I have reviewed this annual report on Form 10-K of Gulf Island
Fabrication, 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 the 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.

By: /s/ KERRY J. CHAUVIN
------------------------------------
Kerry J. Chauvin
Chairman of the Board,
President and Chief Executive
Officer

Date: March 27, 2003

CFO CIVIL CERTIFICATION

I, Joseph P. Gallagher, III, certify that:

1. I have reviewed this annual report on Form 10-K of Gulf Island
Fabrication, 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 the 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.

By: /s/ JOSEPH P. GALLAGHER, III
------------------------------------
Joseph P. Gallagher, III
Vice President -- Finance, Chief
Financial Officer
and Treasurer

Date: March 27, 2003

GULF ISLAND FABRICATION, INC.

EXHIBIT INDEX

E-1

- ---------------

+ Management Contract or Compensatory Plan.

* Incorporated by reference to the Company's Registration Statement on Form S-1
filed with the Commission on February 14, 1997 (Registration Number
333-21863).

E-2