SHAW GROUP INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 2054

FORM 10-Q
(Mark One)

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

For the quarterly period ended May 31, 2003
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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: 1-12227
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THE SHAW GROUP INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)

Louisiana 72-1106167
- ---------------------------------------- ---------------------------------------
(State of Incorporation) (I.R.S. Employer Identification Number)

4171 Essen Lane, Baton Rouge, Louisiana 70809
- ---------------------------------------- ---------------------------------------
(Address of principal executive offices) (Zip Code)

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

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

The number of shares outstanding of each of the issuer's classes of common stock
as of the latest practicable date, is as follows:

Common stock, no par value, 37,750,216 shares outstanding as of July 14, 2003.

FORM 10-Q

TABLE OF CONTENTS

Part I - Financial Information

Item 1. - Financial Statements

Condensed Consolidated Balance Sheets - May 31, 2003
and August 31, 2002 3-4

Condensed Consolidated Statements of Income - For the Three
and Nine Months Ended May 31, 2003 and 2002 5

Condensed Consolidated Statements of Cash Flows - For the
Nine Months Ended May 31, 2003 and 2002 6

Notes to Condensed Consolidated Financial Statements 7-23

Item 2. - Management's Discussion and Analysis of Financial Condition 24-36
and Results of Operations

Item 3. - Quantitative and Qualitative Disclosures About Market Risk 37

Item 4. - Controls and Procedures 38

Part II - Other Information

Item 1. - Legal Proceedings 39-41

Item 6. - Exhibits and Reports on Form 8-K 42-43

Signature Page 44

Certifications 45-46

Exhibit Index 47

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PART I - FINANCIAL INFORMATION

ITEM 1. - FINANCIAL STATEMENTS

THE SHAW GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

ASSETS

(Continued)

The accompanying notes are an integral part of these statements.

3

THE SHAW GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

LIABILITIES AND SHAREHOLDERS' EQUITY

The accompanying notes are an integral part of these statements.

4

THE SHAW GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)

The accompanying notes are an integral part of these statements.

5

THE SHAW GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

The accompanying notes are an integral part of these statements.

6

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

Note 1 - Unaudited Financial Information

The accompanying condensed consolidated financial statements and financial
information included herein have been prepared in accordance with the interim
reporting requirements of Form 10-Q. Consequently, certain information and note
disclosures normally included in financial statements prepared annually in
accordance with generally accepted accounting principles have been condensed or
omitted. Readers of this report should therefore refer to the consolidated
financial statements and the notes thereto included in the Annual Report on Form
10-K for the fiscal year ended August 31, 2002 of The Shaw Group Inc.

The financial information of The Shaw Group Inc. and its wholly-owned
subsidiaries (collectively, "the Company" or "Shaw") as of May 31, 2003 and for
the three-month and nine-month periods ended May 31, 2003 and 2002 and included
herein was not audited by the Company's independent auditors. However, the
Company's management believes it has made all adjustments (consisting of normal
recurring adjustments) which are necessary to fairly present the results of
operations for such periods. Results of operations for the interim period are
not necessarily indicative of results of operations that will be realized for
the fiscal year ending August 31, 2003.

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

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

Note 2 - Stock-Based Compensation

SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS 148,
allows companies to account for stock-based compensation by either recognizing
an expense for the fair value of stock-based compensation upon issuance of a
grant as presented in SFAS No. 123 and other SFAS's and related interpretations
or by the intrinsic value method prescribed in Accounting Principles Board
Opinion ("APB") No. 25 and related interpretations.

The Company accounts for its stock-based compensation under APB No. 25, which
provides that no stock compensation expense is recognized if stock options and
grants are issued at the market value of the underlying stock at the date of
grant. However, if the Company had adopted the fair value method of accounting
for stock-based compensation and had determined its stock-based compensation
cost based on the fair value at the grant date consistent with the provisions of
SFAS No. 123, the Company's net income and earnings per common share would have
approximated the pro forma amounts below (in thousands, except per share
amounts):

7

Note 3 - Capital Stock Transactions

In September 2001, the Company's Board of Directors authorized the Company to
repurchase shares of its no par value Common Stock ("Common Stock"), depending
on market conditions, up to a limit of $100,000,000. The Company completed its
purchases under this program in the first quarter of fiscal 2003, purchasing
3,170,605 shares at a cost of approximately $47,837,000 during the quarter,
bringing the total purchases under the program to 5,331,005 shares at a cost of
approximately $99,880,000. During the year ended August 31, 2002, the Company
purchased 2,160,400 shares at a cost of approximately $52,043,000 under the
program.

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Note 4 - Acquisitions

The operating results of acquisitions are included in the Company's consolidated
financial statements from the applicable date of the transaction. Pro forma
information has not been disclosed for the fiscal year 2003 acquisitions as the
impact is not deemed significant for the periods presented.

IT Group Acquisition

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

The Company believes, pursuant to the terms of the acquisition agreements, it
has assumed only certain liabilities ("assumed liabilities") of the IT Group and
Beneco as specified in the acquisition agreements. The Company has estimated
that its total assumed liabilities is approximately $364,000,000. Further, the
acquisition agreements also provide that certain other liabilities of the IT
Group, including but not limited to outstanding borrowings, leases, contracts in
progress, completed contracts, claims or litigation that relate to acts or
events occurring prior to the acquisition date, and certain employee benefit
obligations, are specifically excluded ("excluded liabilities") from the
Company's transactions. The Company, however, cannot provide assurance that it
does not have any exposure to the excluded liabilities because, among other
matters, the bankruptcy courts have not finalized their validation of the claims
filed with the courts. Accordingly, the Company's estimate of the value of the
assumed liabilities may change as a result of the validation of the claims by
the bankruptcy courts or other factors which may be identified during its review
of liabilities. However, the Company believes, based on its review of claims
filed to date, that any such adjustment to the assumed liabilities and future
operating results will not be material. The one-year purchase price allocation
period for the IT Group ended in May 2003, and no further adjustments to the
valuation of assets and liabilities acquired will be made through purchase
accounting.

The Company acquired a large number of contracts in progress and contract
backlog for which the work had not commenced at the acquisition date. Under SFAS
141, "Business Combinations," construction contracts are defined as intangibles
that meet the criteria for recognition apart from goodwill. These intangibles,
like the acquired assets and liabilities, are required to be recorded at their
fair value at the date of acquisition. The Company recorded these contracts at
fair value using a market-based discounted cash flow approach by recording
contract asset and liability adjustments to the balance sheet. The Company
recorded related assets of approximately $9,900,000 and liabilities of
$46,700,000 (as adjusted by allocation period adjustments recorded as of May 31,
2003) that are being amortized to contract costs over the estimated lives of the
underlying contracts and related production backlog. As of the acquisition date,
the amount of the accrued future cash losses on assumed contracts with inherent
losses (accrued contract loss reserves) was estimated to be approximately
$21,300,000 (including allocation period adjustments). Commencing with the
initial recording of these contract adjustments and reserves during the year
ended August 31, 2002, the assets and liabilities are amortized as work is
performed on the contracts. Through the IT Group acquisition, the Company also
acquired a customer relationship intangible valued at $1,500,000, which is being
amortized over five years. The activity related to these contract assets and
liabilities and intangible is included in the table at the end of Note 11.

Stone & Webster Acquisition

On July 14, 2000, the Company purchased substantially all of the operating
assets of Stone & Webster, Incorporated ("Stone & Webster"), a global provider
of engineering, procurement, construction, consulting and environmental services
to the power, process, and environmental and infrastructure markets. The
acquisition was concluded as part of a proceeding under Chapter 11 of the
Bankruptcy Code for Stone & Webster. This transaction was accounted for under
the purchase method of accounting.

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The Company believes that, pursuant to the terms of the Stone & Webster
acquisition agreement, it assumed only certain specified liabilities, which the
Company has estimated to be approximately $740,000,000. The Company believes
that liabilities excluded from this acquisition include liabilities associated
with certain contracts in progress, completed contracts, claims or litigation
that relate to acts or events occurring prior to the acquisition date, and
certain employee benefit obligations, including Stone & Webster's U.S. defined
benefit plan (collectively, the "excluded items"). The Company, however, cannot
provide assurance that it has no exposure with respect to the excluded items
because, among other things, the bankruptcy court has not finalized its
validation of claims filed with the court. The final amount of assumed
liabilities may change as a result of the validation of the claims process;
however, the Company believes, based on its review of claims filed, that any
such adjustment to the assumed liabilities and future operating results will not
be material.

Badger Technologies Acquisition

On April 17, 2003, the Company acquired substantially all of the assets of
Badger Technologies from Washington Group International, Inc. for approximately
$17,700,000 in cash. Badger Technologies develops and commercializes
petrochemical and petroleum refining-related technologies. Badger Technologies
is being integrated into the process engineering sector of the Company's
Engineering, Construction & Maintenance segment (see Note 9 - Business
Segments). The Company recorded approximately $8,000,000 in goodwill and
approximately $7,000,000 in intangible assets related to certain process
technologies acquired in the acquisition. The allocation of the purchase price
to goodwill and other intangibles is preliminary and subject to revision during
the one-year allocation period.

Envirogen Acquisition

On March 21, 2003 the Company acquired all of the common stock of Envirogen,
Inc. (Envirogen) for a cost of approximately $3,700,000, net of cash received.
Envirogen, previously a publicly traded company, specializes in remediating
complex contaminants in soil and groundwater and has been integrated into the
Company's Environmental & Infrastructure segment (see Note 9 - Business
Segments). Approximately $3,900,000 of goodwill was recorded related to this
transaction, based on the Company's preliminary allocation of the purchase price
which is subject to revision during the one-year allocation period.

LFG&E Acquisition

On November 14, 2002, the Company's Environmental & Infrastructure segment
acquired the assets of LFG&E International, Inc. (LFG&E) for a cash payment of
approximately $1,200,000. Approximately $355,000 of goodwill was recorded
related to this transaction. LFG&E International, Inc. provides gas
well-drilling services to landfill owners and operators.

Note 5 - Inventories

The major components of inventories are as follows as of the dates indicated (in
thousands):

10

Note 6 - Investment in Unconsolidated Entities

During the three and nine months ended May 31, 2003, the Company recognized
earnings, net of taxes, of $110,000 and losses, net of taxes, of $2,874,000
respectively, from operations of its unconsolidated joint ventures, which are
accounted for using the equity method. The losses were primarily attributable to
the Entergy/Shaw joint venture.

Additionally, as is common in the engineering, procurement and construction
industries, the Company executed certain contracts jointly with third parties
through joint ventures, limited partnerships and limited liability companies.
The investments included on the accompanying condensed consolidated balance
sheets as of May 31, 2003 and August 31, 2002 are approximately $16,334,000 and
$18,255,000 respectively, which generally represent the Company's cash
contributions and earnings from these investments.

Note 7 - Debt

Revolving Lines of Credit

The Company's primary credit facility ("Credit Facility"), dated July 2000, was
amended and restated on March 17, 2003 and extended for a three-year term from
that date. The amendment reduced the Credit Facility to $250,000,000 from
$350,000,000; however, at any time before March 17, 2004, the Company may,
subject to certain conditions but without the consent of existing lenders,
increase the credit limit to a maximum of $300,000,000 by allowing one or more
lenders to increase their commitment or by adding new lenders. The Credit
Facility provides that both revolving credit loans and letters of credit may be
issued within the $250,000,000 limits of this facility. The Company recorded
deferred debt issuance costs of approximately $3,300,000 related to the
amendment of the Credit Facility.

Under the Credit Facility, interest is computed, at the Company's option, using
either the defined base rate or the defined LIBOR rate, plus an applicable
margin. The terms "base rate" and "LIBOR rate" have meanings customary for
financings of this type. The applicable margin is adjusted pursuant to a pricing
grid based on ratings by Standard and Poor's Rating Services and Moody's
Investor Services for the Credit Facility or, if the Credit Facility is not
rated, the ratings from these services applicable to the Company's senior,
unsecured long-term indebtedness. The margins for the Credit Facility loans may
be in a range of (i) 1.00% to 3.00% over LIBOR or (ii) the base rate to 1.50%
over the base rate.

The Company is required, with certain exceptions, to prepay loans outstanding
under the Credit Facility with (i) the proceeds of new indebtedness; (ii) net
cash proceeds from equity sales to third parties (if not used for acquisitions
or other general corporate purposes within 90 days after receipt); and (iii)
insurance proceeds or condemnation awards in excess of $5,000,000 that are not
used to purchase a similar asset or for a like business purpose.

The Credit Facility is secured by, among other things, (i) guarantees by the
Company's domestic subsidiaries; (ii) a pledge of all of the capital stock of
the Company's domestic subsidiaries and 66% of the capital stock in certain of
the Company's foreign subsidiaries; and (iii) a security interest in all
property of the Company and its domestic subsidiaries (except real estate and
equipment). The Credit Facility contains certain financial covenants, including
a leverage ratio (which changes after May 1, 2004, representing the initial date
LYONs may be submitted by LYONs holders for repurchase by the Company - see
LYONs Convertible Securities below), a minimum fixed charge coverage ratio,
defined minimum net worth, and defined minimum earnings before interest expense,
income taxes, depreciation and amortization (EBITDA). Further, the Company is
required to obtain the consent of the lenders to prepay or amend the terms of
the Senior Notes (see Senior Notes below). The Credit Facility permits the
Company to repurchase $10,000,000 of its LYONs obligations without additional
consent from the lenders. Additional LYONs repurchases are also permitted if,
after giving effect to the repurchases, the Company has the availability to
borrow up to $50,000,000 under the Credit Facility and the Company has the
required amounts of cash and cash equivalents. Prior to May 1, 2004,
$100,000,000 of cash and cash equivalents is required for purposes of this test
and thereafter not less than $75,000,000. Under the Credit Facility, cash and
cash equivalents for purposes of this test consist of balances not otherwise
pledged or escrowed and are reduced by amounts borrowed under the Credit
Facility. As of May 31, 2003,

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the Company was in compliance with these covenants.

At May 31, 2003, the interest rate on the Credit Facility would have been either
5.25% (if the prime rate index had been chosen) or 3.82% (if the LIBOR rate
index had been chosen). At May 31, 2003, the Company did not have any
outstanding borrowings under the Credit Facility but had outstanding letters of
credit of approximately $178,000,000.

As of May 31, 2003, the Company's foreign subsidiaries had short-term revolving
lines of credit permitting borrowings, letters of credit, and foreign exchange
transactions totaling approximately $23,900,000. Approximately $1,500,000 in
borrowings and approximately $3,400,000 in letters of credit were outstanding
under these lines as of May 31, 2003.

LYONs Convertible Securities

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

On March 31, 2003, pursuant to a tender offer which commenced on February 26,
2003, the Company completed the purchase of LYONs with an amortized value of
approximately $256,700,000 and an aggregate principal value of approximately
$384,600,000 for a cost of approximately $248,100,000. The purchase, after
expenses and the write-off of unamortized debt issuance costs of approximately
$6,600,000, resulted in a net gain of approximately $2,000,000, included in
other income for the three months ended May 31, 2003. The Company used the total
net proceeds, after fees, from the sale of the Senior Notes (see Senior Notes
below) of approximately $241,400,000 and internal funds of approximately
6,700,000 to effect this repurchase.

The holders of the debt have the right to require the Company to repurchase the
debt on May 1, 2004, May 1, 2006, May 1, 2011 and May 1, 2016 at the
then-accreted value (approximately $277,100,000 at May 1, 2004). The Company has
the right to fund such repurchases with shares of its Common Stock at the
current market value, cash, or a combination of Common Stock and cash. The debt
holders also have the right to require the Company to repurchase the debt for
cash, at the then-accreted value, if there is a change in control of the
Company, as defined in the agreement, occurring on or before May 1, 2006. The
Company may redeem all or a portion of the debt at the then-accreted value,
through cash payments, at any time after May 1, 2006. During the third quarter
of fiscal 2003, the Company reclassified the outstanding balance of
approximately $271,500,000 from long-term liabilities to current liabilities to
reflect the potential repurchase on May 1, 2004.

Senior Notes

On March 17, 2003, the Company issued and sold $253,029,000 aggregate principal
amount at maturity of 7-year, 10.75% Senior Notes ("Senior Notes" or "notes"),
which mature on March 15, 2010. The Senior Notes were issued at an original
discount price of $988.03 per $1,000 maturity value and have a yield to maturity
of 11.00%. The notes have a call (repurchase) feature that allows the Company to
repurchase all or a portion of the notes at the following prices (as a
percentage of maturity value) and dates.

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Additionally, prior to March 15, 2006, the Company may, at its option, utilize
the net cash proceeds from one or more specified equity offerings, within ninety
days of the Company's receipt of the equity funds, to repurchase up to 35% of
the then outstanding amount of Senior Notes at a price of 110.75% of the
maturity value of the notes. Prior to March 15, 2007 the Company may, at its
option, repurchase not less than all of the then outstanding notes at a price
equal to the principal amount of the notes plus a specified applicable premium.
Although the notes are unsecured, they are guaranteed by the Company's material
domestic subsidiaries.

The Company is required to register the notes with the Securities and Exchange
Commission within 180 days of issuance. The Company is presently in the process
of registering the notes; however, should the Company be unable to do so within
the allotted time period, additional amounts of interest will accrue at a rate
of 0.25% per annum, increasing by an additional 0.25% per annum after each
consecutive 90-day period, up to a maximum additional interest rate of 1.50%.

The Company recorded approximately $8,600,000 of deferred debt issuance costs
related to the notes offering.

Note 8 - Comprehensive Income

Comprehensive income for a period encompasses net income and all other changes
in a company's equity other than changes from transactions with the company's
owners. Comprehensive income was comprised of the following for the periods
indicated (in thousands):

During the nine months ended May 31, 2003, the Company recorded a $6,300,000
liability, net of taxes, for one of its United Kingdom (U.K.) defined benefit
retirement plans and its Canadian defined benefit retirement plan. This
liability is required to be recognized on the plan sponsor's balance sheet when
the accumulated benefit obligation of the plan exceeds the fair value of the
plan's assets. In accordance with SFAS No. 87, "Employers Accounting for
Pensions," the increase in the minimum liability is recorded through a direct
charge to shareholders' equity and is reflected net of tax as a component of
accumulated other comprehensive income (loss) on the condensed consolidated
balance sheet as of May 31, 2003. This liability will require the Company to
increase its future cash contributions to the plans.

The foreign currency translation adjustments relate to the varying strength of
the U.S. dollar in relation to the British pound, Venezuelan Bolivar, Australian
and Canadian dollars, the Euro, and, prior to January 1, 2002, the Dutch

13

Guilder. The gains in 2003 are primarily the result of the strengthening of the
British pound and the Euro in relation to the U.S. dollar.

The Company's hedging activities, which are generally limited to foreign
exchange transactions, during the three months and nine months ended May 31,
2003 and 2002 were not material.

Note 9 - Business Segments

Effective February 28, 2003, the Company reorganized its operations, resulting
in a change in its operating segments. The Company segregates its business
activities into three operating segments: Engineering, Construction &
Maintenance (ECM) segment, Environmental & Infrastructure (E&I) segment, and
Fabrication, Manufacturing and Distribution segment. The primary change from the
Company's previously reported segments is that pipe fabrication and related
operations were moved from the segment previously reported as the Integrated EPC
Services segment to the segment previously reported as the Manufacturing and
Distribution segment, resulting in the new ECM segment and the new Fabrication,
Manufacturing and Distribution segment, respectively.

The following table presents information about segment results of operations and
assets for the periods indicated. Certain reclassifications, primarily related
to the new E&I segment established with the acquisition of the IT Group and the
changes discussed in the prior paragraph, have been made to conform the May 2002
information to the May 2003 presentation basis (in thousands):

Segment net income before income taxes does not include any Corporate management
charges. Corporate charged management charges of $11,330,000 and $33,397,000 to
its segments for the three- and nine-month periods ended May 31, 2002. As
previously stated, the Company has restated prior year's data to conform with
the current year presentation, including the elimination of these management
charges. In fiscal 2003, Corporate began allocating certain depreciation to its
segments; however, the assets remain at Corporate. The total depreciation
allocated is as follows (in thousands):

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A reconciliation of total segment assets to total consolidated assets for the
periods indicated follows (in thousands):

Note 10 - Earnings Per Common Share

Computations of basic and diluted earnings per share are presented below (in
thousands, except per share amounts).

For the three months and nine months ended May 31, 2003, approximately 3,900,000
and 3,700,000 weighted-average incremental shares related to stock options were
excluded from the calculation of diluted income per share because they were
antidilutive. Additionally, for the three months and nine months ended May 31,
2003, the effect of the LYONs convertible debt has been excluded from the
calculation of diluted income per share because it is antidilutive. For the
three months and nine months ended May 31, 2002, approximately 95,000 and
110,000 weighted-average incremental shares related to stock options were
excluded from the calculation of diluted income per share because they were

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antidilutive.

Note 11 - Goodwill and Other Intangibles

Goodwill

The following table reflects the changes (in thousands) in the carrying value of
goodwill from September 1, 2002 to May 31, 2003. Refer to Note 4 for a more
detailed discussion of the accounting related to these acquisitions.

Balance at September 1, 2002 $ 499,004
Allocation period adjustments, net - IT Group acquisition (4,289)
LFG&E acquisition 355
Envirogen acquisition 3,878
Badger acquisition 8,000
Allocation period adjustments - Psycor acquisition (466)
Currency translation adjustment 585
---------
Balance at May 31, 2003 $ 507,067
=========

Goodwill associated with the IT Group acquisition, which was completed on May 3,
2002, was preliminarily calculated as of August 31, 2002. Subsequent adjustments
were made during the one-year allocation period as the Company obtained
appraisals of the property and equipment it purchased and completed its other
review and valuation procedures of the assets acquired and the liabilities
assumed, as discussed in Note 4.

Amortizable Intangibles and Accrued Contract Loss Reserves

The Company's intangible assets include construction contract adjustments and
contract loss reserves established in purchase accounting (related to the
acquisitions of the IT Group and Stone & Webster) which are amortized as work is
performed on the related contracts, its proprietary ethylene technology acquired
in the Stone & Webster acquisition, which is being amortized over 15 years on a
straight-line basis, and a customer relationship intangible acquired in the IT
Group acquisition, which is being amortized over 5 years on a straight-line
basis (see Note 4).

The following table presents the additions to and utilization/amortization of
intangible assets and accrued contract loss reserves for the periods indicated
(in thousands):

The Company has previously referred to the fair value of the acquired contract
liability adjustments resulting from the Stone & Webster acquisition as gross
margin reserves. The increases/decreases in the contract (asset) and contract
liability adjustments for the nine months ended May 31, 2003 represent
allocation period adjustments made related to the IT Group acquisition. The
contract (asset) adjustments are included in other current assets in the
accompanying condensed consolidated balance sheets. The $13,790,000 increase in
the accrued contract loss reserves for the nine months ended May 31, 2003
resulted from allocation period adjustments related to the IT Group acquisition.
The annual amortization related to the ethylene technology is approximately
$1,900,000.

Note 12- Contingencies

Orion Refining Corporation Bankruptcy and Other Uncollectible Receivables

On May 13, 2003, Orion Refining Corporation (Orion) filed for bankruptcy under
Chapter 11 of the U.S. Bankruptcy Code. At this time, the Company carried
investments in securities of Orion valued at approximately $6,600,000 and
accounts and claims receivable from Orion of approximately $5,000,000. Based on
the Company's understanding of

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Orion's available assets and the Company's security interest in those assets,
the Company may not be able to realize any significant recovery of these
amounts. Therefore, the Company recognized a charge to other expense of
approximately $11,600,000, representing the total carrying amount of both the
investment and the receivables from Orion. In addition, the Company recognized a
charge to other expense of approximately $750,000 related to the write-off of
other uncollectible receivables unrelated to Orion.

Contingencies and Subsequent Developments Associated with Domestic Power Market
EPC Projects

In fiscal 2002 and 2001 the Company entered into several significant
engineering, procurement and construction (EPC) contracts for new domestic
gas-fired combined cycle power plants. For the three months and nine months
ended May 31, 2003 and 2002, the Company recognized revenues of approximately
$226,186,000 and $810,953,000 and $462,587,000 and $791,049,000, respectively,
related to these contracts. The Company's customers for these power plants are
major utility companies and independent power producers ("IPPs"), several of
which were wholly or partially owned subsidiaries of major utilities. In fiscal
2002, demand for new capacity in the domestic power market significantly
decreased, resulting in, among other things, financial distress among many
participants in the domestic power markets, particularly the IPPs. At the time
the Company entered into these contracts, all of these customers had investment
grade credit ratings. During 2002, all of the Company's IPP customers received
downgrades to their credit ratings, reducing their credit ratings below
investment grade. As of May 31, 2003, the Company has approximately $320,000,000
remaining in backlog related to gas-fired combined cycle power plant projects:
$86,000,000 for IPPs on five projects with the remaining $234,000,000 for major
utility companies on three projects. Approximately $63,000,000 of the IPP
backlog is for the Covert and Harquahala projects that are discussed below.

The Pike Project

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

Prior to the contract termination, the Company had executed
commitments/agreements to purchase equipment for the project and had also
entered into agreements with subcontractors to perform work on the project.
Certain of these commitments and agreements contain cancellation clauses and
related payment or settlement provisions. The Company is continuing discussions
with its vendors and subcontractors to determine the final amounts owed based on
the termination of the project. Under the terms of the contract between the
Company and Pike, Pike is obligated to reimburse the Company for all of the
costs incurred by the Company, whether before or after the termination, and a
fee for the work performed prior to the termination. The Company believes that
it is owed approximately $130,000,000 in costs and fees over the amounts already
paid under the contract.

The Company is actively pursuing alternatives to collect all amounts owed under
the Pike contract. A lien has been filed on the project. On October 17, 2002,
the Company filed an involuntary petition in the U. S. Bankruptcy Court for the
Southern District of Mississippi for liquidation of Pike, under Chapter 7 of the
U.S. Bankruptcy Code to protect its rights, claims, and security interests in
and to the assets of Pike. While the Company believes that, pursuant to the
terms of the contract with Pike, the Company has retained ownership of a
significant amount of equipment that was to be installed on the project, the
project lenders have advised the Company that they may have an interest in
certain of this equipment. In December 2002, Pike disputed the bankruptcy
petition in court and discovery is currently proceeding. On March 20, 2003, the
Court approved an agreed order submitted by the Company, Pike, and its lenders,
which allowed the Company to dispose of the equipment in its possession or
control, reserving the parties' rights with respect to any proceeds from
disposition. The Company also filed suit against NRG in U.S. District Court in
Mississippi to collect amounts due under a $100,000,000 guarantee, the validity
of which NRG has disputed, and against NRG and Xcel, along with certain of their
officers, for additional damages and costs under various legal theories
including

18

substantive consolidation, alter-ego, and piercing the corporate veil.

On May 14, 2003, NRG and certain affiliates filed voluntary petitions in the U.
S. Bankruptcy Court for the Southern District of New York under Chapter 11 of
the Bankruptcy Code. NRG's filing included a plan of reorganization which
incorporates the terms of a settlement previously announced among NRG, Xcel
Energy and members of NRG's major creditors that provides for payments by Xcel
to NRG and its creditors of up to $752 million. The consummation of the
settlement is contingent upon, among other things: the effective date of the
plan occurring on or prior to December 15, 2003; approval by the Bankruptcy
Court; documentation satisfactory to Xcel, NRG and NRG creditors; the receipt of
releases in favor of Xcel from holders of at least 85 percent of the general
unsecured claims held by NRG's creditors; and the receipt by Xcel of all
necessary regulatory and other approvals. The Company intends to comply with
procedures in this proceeding to pursue its claims. The Company has also filed a
motion in the Mississippi bankruptcy proceeding to transfer venue of the New
York bankruptcy to Mississippi.

In addition to the legal proceedings, the Company is continuing discussions with
Pike and its lenders and NRG and Xcel in an effort to resolve collection of the
amounts owed. The Company has, in connection with its continuing evaluation of
the Pike project, estimated that (i) it has or will incur costs of approximately
$65,000,000 to $70,000,000 over the amounts that have been previously collected
from Pike and (ii) equipment that was to be installed on the project could be
liquidated for approximately $40,000,000 to $60,000,000. During the three months
ended May 31, 2003, the Company reached agreements with certain subcontractors
and vendors which has reduced the Company's exposure.

Although the Company expects to recover amounts owed to it (including final
vendor and subcontractor settlements) and the profit previously recognized on
the project, it is also reasonably possible that the Company will not recover
all of its costs and profit recognized, particularly if the Company is not
successful in its claims in NRG's bankruptcy and if (i) any dispute regarding
the ownership of the equipment in the possession of the Company is resolved
adversely to the Company; or (ii) such equipment cannot be used on another
similar project or liquidated by the Company to recover all or a portion of the
amount owed. The amount, if any, that the Company may not be able to recover is
dependent upon the final amounts to be expended by the Company related to the
project, the amount to be realized upon disposition of the equipment related to
the project, the Company's ability to successfully realize a claim in the
bankruptcy proceedings, and the outcome of the Xcel litigation. Because that
contract was terminated on September 4, 2002, no revenue or profit related to
Pike was recognized for the nine months ended May 31, 2003. The Company will not
recognize any additional profit it is owed under this contract until it is
probable it will collect that additional amount. Although the Company does not
believe a loss has been incurred as of May 31, 2003, based on these estimates,
if the Company is unable to collect additional amounts from its customer (or its
affiliates), the Company believes that its potential future loss on the Pike
project could range from $5,000,000 to $30,000,000. As of May 31, 2003, the
Company has recorded approximately $48,600,000 for costs incurred over amounts
received on the project, which is included in accounts receivable on the
accompanying condensed consolidated balance sheets.

The Covert & Harquahala Projects

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

In May 2003, after extensive negotiations with NEG's project entities, NEG, and
the lenders, all parties reached a definitive agreement for settlement of claims
related to the Covert and Harquahala projects. The settlement provides for
fixed-price EPC contracts which increase the original target price for both
projects by a total of $65,000,000, termination of the target price component of
the original agreements which provided for recovery of costs in excess of the
fixed price contracts, dismissal of pending legal proceedings, and release by
the Company of claims based on change orders and the incurrence of other
additional costs, and extension of the schedule for completion of the projects.

19

The revised schedule provides for the Company to complete the Harquahala
project in September 2003 and the Covert project in December 2003.

Primarily as a result of defects in the turbines and generators, the completion
of the Harquahala project has been further delayed and is now expected to be
completed in October 2003. Consequently, the Company may be assessed additional
delay damages estimated at approximately $7,000,000. However, the Company has
recorded a claim receivable from the responsible vendors and subcontractors for
the amount of these additional delay damages and insurance recoveries. In
addition, the Company has recorded back charges receivable against vendors and
subcontractors of approximately $15,800,000. The Company believes it has a
strong basis for claims and back charges in excess of the recorded amounts;
however, recovery of the claims and back charges is dependent upon negotiations
with the applicable parties and the results of litigation. The Company records
claims and back charges receivable in cost and estimated earnings in excess of
billings on uncompleted contracts ("CIE") on the accompanying condensed
consolidated balance sheets. If the Company is unable to collect the amount of
claims and back charges receivable that have been recorded as discussed above,
the Company would recognize a charge to earnings in the period when it becomes
evident that all or a portion of the receivables are not realizable.

During the three months ended November 30, 2002, due to increases in cost
estimates the Company reversed $7,700,000 of profit previously recognized on
these projects. Based on the May 2003 settlement and the Company's revised
estimated total costs to complete these projects, the Company recognized a
charge to earnings in the three months ended February 28, 2003 in the amount of
$30,000,000.

As part of the May 15, 2003 settlement, NEG made payment of $32,500,000 to the
Company in consideration for, among other things, release of NEG's obligations
under certain guaranties. On July 8, 2003, NEG filed a voluntary Chapter 11
bankruptcy proceeding. The Company is in the process of evaluating what impact,
if any, the Chapter 11 proceeding of NEG will have on the referenced settlement
agreement, the Covert and Harquahala projects, and otherwise. Based on the
limited investigation the Company has been able to conduct as of July 14, 2003,
the Company believes that the bankruptcy of NEG will not have a material,
adverse impact on the Company or its operating results.

The Wolf Hollow Project

AES Frontier, L.P. and AES Wolf Hollow, L.P. (collectively "AES") originally
contracted with a subsidiary of Enron to build a gas-fired, combined cycle
electric power plant in Texas. This Enron subsidiary was providing the
construction services and subcontracted with Parsons Energy and Chemicals Group,
Inc. ("Parsons") to provide engineering, design and procurement services. After
Enron declared bankruptcy, AES declared the contract in default and entered into
negotiations with the Company's subsidiary, Stone & Webster, Inc. ("S&W") to
complete the project.

On March 8, 2002, AES and S&W entered into a series of contracts (collectively
the "EPC contract") to complete the engineering, design, procurement, and
construction of the project for an aggregate amount of $99,000,000. Under the
terms of the EPC contract, AES, at its option, may pay up to $27,000,000 of the
contract price in subordinated notes or cash. The subordinated notes, when
issued, bear interest at prime plus 4% and mature in October 2009. However, if
any amounts under the notes are unpaid eight months following final acceptance
of the project, the unpaid notes, plus a cash payment of the amounts, if any,
paid on the notes through the conversion date is convertible at the option of
the Company into a 49.9% equity interest in the project. Provisional acceptance
was scheduled for October 15, 2002. The contract provides for liquidated damages
of $120,000 per day through June 1, 2003 and $185,000 per day thereafter for
late completion. S&W secured its obligations by providing two letters of credit
totaling $28,000,000. AES represented and warranted at the time of contracting
with S&W that the project was 67% complete and that engineering was 99.8%
complete, and S&W relied upon this stage of completion in contracting with AES.

The Company now expects substantial completion of the project in July 2003. The
delay is primarily due to (i) the overstatement of the percentage completion by
AES and Parsons at the time the Company entered into the contract; (ii) a fire
that occurred in June of 2002 at the project site; and (iii) failure of a
turbine during start-up testing in May 2003.

These factors are discussed in more detail below.

20

On June 16, 2002, a fire occurred at the project site resulting in considerable
damage to certain equipment. S&W sought relief from AES for cost and schedule
impacts caused by the fire under force majeure provisions of the EPC contract.
In addition, S&W submitted a change order for additional costs and delays
associated with an inadequate water treatment system for which AES was
responsible. AES rejected S&W's request for force majeure relief and rejected
the change order. AES began to assess liquidated damages while the parties
participated in the dispute resolution process called for in the contract. S&W
is also seeking recovery of costs caused by the fire under its builder's risk
insurance policy.

The parties were unable to reach agreement, and on November 5, 2002, S&W filed
suit in the District Court of Hood County, Texas against AES for breach of
contract. The original petition sought a sixty-day schedule extension, and
compensation for the additional costs S&W had and would continue to incur from
the fire and resulting delay, as well as costs for modification to the water
treatment system.

As work on the project progressed, S&W discovered that AES and Parsons had
misrepresented the status of the engineering and procurement progress. On this
basis, S&W sought additional schedule extensions from AES, which AES rejected.
On May 2, 2003, S&W amended its complaint against AES, and on May 9, 2003, S&W
filed a Second Amended Petition adding Parsons as a defendant. In June 2003, AES
Corporation was also added as a defendant. The amended petitions seek
compensation as well as exemplary damages for breach of representation and
warranty, fraud and negligent misrepresentation, based on the fact that Parsons'
engineering was far less than 99.8% complete, and while both AES and Parsons
were aware of this, neither disclosed it to S&W. The misrepresentation had an
adverse impact on S&W's procurement activities as well as scheduling and has
resulted in increased labor, equipment, overhead and other delay-related job
costs in excess of what would have been incurred had engineering been 99.8%
complete as represented. Parsons also designed the electrical system which is
believed to have caused the fire and led to the associated delays. This case is
currently scheduled for jury trial in January 2004; however, this trial could be
delayed as a result of recently added parties and claims.

On May 11, 2003, during start-up testing on the project, one of the combustion
turbines failed. The turbine failure caused a further delay in the project
completion, resulting in additional costs to S&W, and additional liquidated
damages to be claimed by AES. The project is now expected to be substantially
complete before the end of July 2003.

S&W has recorded claims receivable from AES in excess of $20,000,000 for
additional costs incurred due to the fire, misrepresentation of the percentage
of completion, disputed change orders and other claims, and has recorded
receivables of approximately $11,000,000 that S&W expects to recover from
insurance proceeds related to the fire and back charges from subcontractors and
vendors. AES has assessed or is expected to assess approximately $35,000,000 in
liquidated damages and has withheld payment on invoices due S&W under the EPC
contract to offset these damages. In addition, on June 20, 2003 AES drew
$13,900,000 against the letters of credit issued on behalf of S&W in favor of
AES for recovery of liquidated damages. However, S&W disputes a substantial
portion of the liquidated damages and has included in its cost estimates
recovery of approximately $26,000,000 of liquidated damages either as relief
from AES or to be recovered from subcontractors or vendors. The Company believes
it has a strong basis for claims and back charges in excess of the recorded
amounts; however, recovery of the claims is substantially dependent upon
negotiations with the applicable parties and the results of litigation. The
Company holds a mortgage on the project assets second to the lenders, to secure
AES obligations under the notes. It has also filed a lien against the project in
connection with its claims under the contract. The Company records claims and
back charges receivable in CIE on the accompanying condensed consolidated
balance sheets. If the Company is unable to collect the amount of claims and
back charges receivable that have been recorded as discussed above, the Company
would recognize a charge to earnings in the period when it becomes evident that
all or a portion of the receivables are not realizable.

As of May 31, 2003, the Company has $29,900,000 in receivables and $35,000,000
in CIE related to this project and expects to incur an additional $16,700,000 to
complete the project.

During the three months ended May 31, 2003, the Company reversed approximately
$2,000,000 of profit previously

21

recognized on the project to reflect increases in cost estimates and estimated
recoveries of the claims and back charges.

Guarantees

The Company's lenders issue letters of credit on its behalf to customers or
sureties in connection with its contract performance and in limited
circumstances certain other obligations of third parties. The Company is
required to reimburse the issuers of these letters of credit for any payments
which they make pursuant to these letters of credit. At May 31, 2003 the amount
of outstanding letters of credit was approximately $178,000,000, which was
subsequently drawn down by approximately $13,900,000 on June 20, 2003, related
to the Wolf Hollow project as discussed above.

The Company has also provided guarantees to certain of its joint ventures which
are reported under the equity method and are not consolidated on the
accompanying balance sheets. At May 31, 2003 the Company had guaranteed
approximately $8,300,000 of bank debt or letters of credit and $42,000,000 of
performance bonds with respect to its unconsolidated joint ventures. The Company
would generally be required to perform under these guarantees in the event of
default by the joint venture(s). No amounts were recorded related to these
guarantees as of May 31, 2003.

Note 13 - New Accounting Pronouncements

In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees Including Indirect Guarantees of Indebtedness of Others" ("FIN 45").
FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize
a liability for the fair value of the obligation it assumes under that
guarantee. In addition, FIN 45 requires additional disclosures about the
guarantees that an entity has issued. The initial recognition and measurement
provisions of FIN 45 are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002 and the disclosure requirements of FIN 45
are effective for financial statements of interim or annual periods ending after
December 15, 2002. The recognition and measurement provisions of FIN 45 did not
have a material effect on the Company's financial position, results of
operations or cash flows.

In January 2003, the FASB issued Financial Accounting Series Interpretation No.
46, "Consolidation of Variable Interest Entities." This interpretation requires
a variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns or
both. In general, a variable interest entity is a corporation, partnership,
trust, or any other legal structure used for business purposes that either (a)
does not have equity investors with voting rights or (b) has equity investors
that do not provide sufficient financial resources for the entity to support its
activities. The Interpretation also requires disclosures about variable interest
entities that the company is not required to consolidate but in which it has a
significant variable interest. The consolidation requirements of Interpretation
46 apply immediately to variable interest entities created after January 31,
2003 and existing variable interest entities in the first fiscal year or interim
period beginning after June 15, 2003 (September 1, 2003 for the Company). The
Company has not yet determined what the effect, if any, this interpretation will
have on the financial statements.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement is intended to
result in more consistent reporting of contracts as either freestanding
derivative instruments subject to Statement 133 in its entirety, or as hybrid
instruments with debt host contracts and embedded derivative features. The
Statement is effective for contracts entered into or modified after June 30,
2003, and hedging relationships designated after June 30, 2003. Because the
Company has minimal derivative instruments (primarily foreign currency hedges),
the adoption of FAS 149 is not expected to materially impact the Company's
financial position, cash flows or results of operations.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." Statement 150
affects the issuer's accounting for three types of freestanding financial
instruments. One type is mandatorily redeemable shares, which the issuing
company is obligated to buy back in exchange for cash or other assets. A second
type, which includes put options and forward purchase contracts, involves

22

instruments that do or may require the issuer to buy back some of its shares in
exchange for cash or other assets. The third type of instruments that are
liabilities under this Statement is obligations that can be settled with shares,
the monetary value of which is fixed, tied solely or predominantly to a variable
such as a market index, or varies inversely with the value of the issuers'
shares. Statement 150 does not apply to features embedded in a financial
instrument that is not a derivative in its entirety. Most of the guidance in
Statement 150 is effective for all financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. Because the Company does not
have any such instruments outstanding, the adoption of SFAS 150 is not expected
to materially impact the Company's financial position, cash flows or results of
operations.

23

PART I - FINANCIAL INFORMATION

ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Introduction

The following discussion summarizes the financial position of The Shaw Group
Inc. and its subsidiaries (hereinafter referred to collectively, unless the
context otherwise requires, as "the Company" or "Shaw") at May 31, 2003, and the
results of their operations for the three-month and nine-month periods then
ended and should be read in conjunction with (i) the unaudited financial
statements and notes thereto included elsewhere in this Quarterly Report on Form
10-Q and (ii) the consolidated financial statements and accompanying notes to
the Company's Annual Report on Form 10-K for the fiscal year ended August 31,
2002.

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements. The statements contained in this
Quarterly Report on Form 10-Q that are not historical facts (including without
limitation statements to the effect the Company or Shaw or its management
"believes," "expects," "anticipates," "plans," "intends," "foresees," or other
similar expressions) are forward-looking statements. These forward-looking
statements are based on the Company's current expectations and beliefs
concerning future developments and their potential effects on the Company. There
can be no assurance that future developments affecting the Company will be those
anticipated by the Company. These forward-looking statements involve significant
risks and uncertainties (some of which are beyond the control of the Company)
and assumptions. They are subject to change based upon various factors,
including but not limited to the following risks and uncertainties: changes in
the demand for the Company's products and services; changes in general economic
conditions, and, specifically, changes in the rate of economic growth in the
United States and other major international economies; the presence of
competitors with greater financial resources and the impact of competitive
products, services and pricing; the cyclical nature of the individual markets in
which the Company's customers operate; the financial strength of the Company's
customers and their ability to make scheduled payments on their contracts with
the Company; changes in investment by the energy, power and environmental and
infrastructure industries; the availability of qualified engineers and other
professional staff and craft labor needed to execute contracts; the uncertain
timing of awards and contracts; the funding of backlog, including government
budget constraints; cost overruns on fixed or unit priced contracts; cost
overruns which negatively affect fees to be earned or cost variances to be
shared on cost-plus contracts; changes in laws and regulations and in trade,
monetary and fiscal policies worldwide; currency fluctuations; the effect of the
Company's policies, including but not limited to the amount and rate of growth
of Company expenses; the continued availability to the Company of adequate
funding sources; delays or difficulties in the production, delivery or
installation of products and the provision of services, including the ability to
recover for changed conditions; the ability of the Company to successfully
integrate acquisitions; the protection and validity of patents and other
intellectual property; and various other legal, regulatory and litigation risks.
Should one or more of these risks or uncertainties materialize, or should any of
the Company's assumptions prove incorrect, actual results may vary in material
respects from those projected in the forward-looking statements. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
For a more detailed discussion of some of the foregoing risks and uncertainties,
see "Item 7- Management's Discussion and Analysis of Financial Condition and
Results of Operations - Risk Factors" in the Company's Annual Report on Form
10-K for the fiscal year ended August 31, 2002, as well as the other reports and
registration statements filed by the Company with the Securities and Exchange
Commission and on the Company's website under "Forward Looking Statements."
These documents are available from the Securities and Exchange Commission (the
"SEC") or from the Company's Investor Relations Department. All of the Company's
annual, quarterly, and current reports, and amendments thereto, filed with the
SEC are available on the Company's website under "Investor Relations." For more
information on the Company and the announcements it makes from time to time,
visit its website.

24

General

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

Effective February 28, 2003, the Company reorganized its operations, resulting
in a change in its operating segments. The Company has segregated its business
activities into three operating segments: Engineering, Construction &
Maintenance (ECM) segment, Environmental and Infrastructure (E&I) segment, and
Fabrication, Manufacturing and Distribution segment. The primary change from the
Company's previously reported segments is that pipe fabrication and related
operations were moved from the segment previously reported as the Integrated EPC
Services segment to the segment previously reported as the Manufacturing and
Distribution segment resulting in the new ECM segment and the new Fabrication,
Manufacturing and Distribution segment, respectively.

Engineering, Construction & Maintenance

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

Environmental & Infrastructure

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

Fabrication, Manufacturing and Distribution

The Fabrication, Manufacturing and Distribution segment provides integrated
piping systems and services for new construction, site expansion and retrofit
projects for industrial plants and manufactures and distributes specialty
stainless, alloy and carbon steel pipe fittings.

Comments Regarding Future Operations

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

Critical Accounting Policies

Item 7 included in Part II of the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 2002 presents the accounting policies and related
estimates that the Company believes are the most critical to understanding its
consolidated financial statements, financial condition, and results of
operations and which require complex management judgments, uncertainties and/or
estimates. Information regarding the Company's other accounting policies is
included in the Notes to Consolidated Financial Statements in Item 8 of Part II
of the Company's Annual Report on Form 10-K for the fiscal year ended August 31,
2002.

25

Results of Operations

The following table sets forth, for the periods indicated, the percentages of
the Company's net revenues that certain income and expense items represent:

General

The Company's revenues by industry sectors approximated the following for the
periods presented:

26

The Company's revenues decreased to $824.0 million for the three months ended
May 31, 2003 from $902.6 million for the three months ended May 31, 2002 and
increased to $2.5 billion for the nine months ended May 31, 2003 from $1.9
billion for the nine months ended May 31, 2002. The decrease in revenue for the
three months ended May 31, 2003 was primarily attributable to the extended
weakness in the domestic power market, which has had a pervasive negative impact
on the Company's ECM and Fabrication, Manufacturing and Distribution revenues.
Revenue from the power generation industry was approximately $292.8 million less
in the third quarter of fiscal 2003 than in the third quarter of fiscal 2002, as
revenue from gas-fired power generation projects, which commenced in fiscal 2001
early and fiscal 2002, declined. The decrease in the power industry was
partially offset by a $180.0 million increase in environmental and
infrastructure revenue, due primarily to the acquisition of the IT Group in May
2002 (see Note 4 of Notes to Condensed Consolidated Financial Statements), and a
$69.7 million increase in process revenue, due primarily to a 600,000 tons per
year ethylene plant project in China.

The increase in revenue for the nine months ended May 31, 2003 is primarily
attributable to the IT Group acquisition during the third quarter of fiscal
2002. In May 2002, the Company acquired most of the assets and assumed certain
liabilities of the IT Group, a leading provider of environmental and
infrastructure services to governmental and commercial customers. As a result of
this acquisition, the Company formed a new Environmental & Infrastructure
segment by combining the acquired IT Group operations with the Company's
existing environmental and infrastructure businesses. This acquisition increased
the Company's revenues from environmental and infrastructure services to $873.5
million for the nine months ended May 31, 2003 from revenues of $191.3 million
for the nine months ended May 31, 2002.

The Company anticipates that revenue from the power industry will continue to
trend downward as the revenue from large EPC projects declines, but it
anticipates that its environmental and infrastructure revenue will continue to
increase as the Company continues to grow the service's capabilities and client
base.

The following tables present the Company's approximate revenues by geographic
region:

Revenues for domestic projects decreased $100.5 million to $705.4 million for
the three months ended May 31, 2003 from $805.9 million for the three months
ended May 31, 2002 and increased $551.9 million to $2.2 billion for the nine
months ended May 31, 2003 from $1.6 billion for the nine months ended May 31,
2002. The decrease in domestic revenues for the three months ended May 31, 2003
was primarily attributable to the previously mentioned decline in power
generation revenues. The increase in domestic revenues for the nine months ended
May 31, 2003 as compared with the nine months ended May 31, 2002 primarily
resulted from an increase in power generation revenues in the first quarter of
fiscal 2003 over the first quarter of fiscal 2002 and the acquisition of the IT
Group in May 2002.

Revenues from international projects increased to $118.6 million and $364.5
million for the three and nine months ended May 31, 2003 from $96.7 million and
$297.6 million for the same periods of the prior fiscal year. The revenue
increase in the Asia Pacific Rim region was primarily a result of the work
performed on the ethylene plant in China. The increase in revenue in Other North
America regions was due primarily to increased revenue in Canada from an
environmental consulting unit acquired through the IT Group acquisition.

Backlog at May 31, 2003 by industry sector is as follows (in millions):

Total backlog at May 31, 2003 was approximately $5.0 billion, consistent with
$5.0 billion at February 28, 2003, compared to $5.6 billion at August 31, 2002.
The decrease in backlog since August 31, 2002 is attributable to reduction in
demand for gas-fired power generation services. Since February 28, 2003, the
decline in power generation awards has been offset by increases in awards for
environmental and infrastructure services, services to the process industry, and
nuclear maintenance services. Approximately 91% of the backlog relates to
domestic projects, and roughly 40% of the backlog relates to work currently
anticipated to be completed during the 12 months following May 31, 2003.

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

Revenues for the fourth quarter of fiscal 2003 are expected to range from $600
million to $670 million. Fiscal 2004 revenues are expected to range from $2.4
billion to $2.8 billion, approximately 50% of which is expected to be derived

28

from our E&I segment, approximately 40% from our ECM segment, and approximately
10% from our Fabrication, Manufacturing and Distribution segment.

The following presents a comparison of the Company's operating results (and
certain other information) from the three and nine months ended May 31, 2003 as
compared with the three and nine months ended May 31, 2002 for the Company's
three business segments.

ECM Segment

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

Revenues for the three months ended May 31, 2003 decreased to $464.1 million
from $673.0 million for the three months ended May 31, 2002. This decrease was
due to the downturn in the domestic power market, specifically the decline in
gas-fired power generation projects, offset by an increase in revenue from
process projects. Process industry revenues increased primarily due to work on
the ethylene plant in China that is scheduled to continue into fiscal 2005.
Revenues increased to approximately $1.5 billion for the nine months ended May
31, 2003 from approximately $1.4 billion for the same period in the prior year.
The increase in revenues for the nine months ended May 31, 2003 was due
primarily to work on the ethylene plant in China and nuclear maintenance offset
by a decline in gas-fired power generation projects and power engineering
activity compared to the fiscal 2002 period. The power generation revenues for
the nine months ended May 31, 2003 as compared with the nine months ended May
31, 2002 reflect an increase in power generation revenues in the first quarter
of fiscal 2003 over the first quarter of fiscal 2002, with decreases in the
second and third quarters of fiscal 2003 compared to the second and third
quarters of fiscal 2002. Due to the decline in the market for the construction
of new gas-fired power plants, management anticipates that the ECM segment's
revenues will decline in the fourth quarter of fiscal 2003 and early fiscal 2004
as compared with the first three quarters of fiscal 2003 as remaining in-process
EPC projects booked in 2001 and early 2002 are completed.

Gross profit for the ECM segment for the three months ended May 31, 2003
decreased to $33.7 million, or 7.3% of revenues, compared to $46.4 million, or
6.9% of revenues, for the three months ended May 31, 2002, due primarily to the
reduction of estimated margins on certain contracts for the construction of new
gas-fired power plants, offset by increases in gross profit on nuclear
maintenance projects and the ethylene plant project in China. Additionally, the
segment's process technology group recognized increased margins on process
technology-related activity during the quarter. The increase in gross profit
percentage for the three-month period is due primarily to recognition of higher
margins on certain recently completed gas-fired power generation projects. As
EPC projects which began in fiscal 2001 and early fiscal 2002 are completed and
their project costs finalized, the Company's margin may be impacted by

29

contract completion negotiations with customers and vendors on such projects.

Gross profit for the ECM segment for the nine months ended May 31, 2003 includes
a $30.0 million charge related to the Covert and Harquahala projects (the NEG
projects) that negatively impacted gross profit by 1.9% for the nine-month
period. This charge was a result of increased estimated costs to complete these
projects combined with an agreement with the owners of these projects and their
lenders that increased the contract prices by a total of $65.0 million and
converted the contracts from target price to fixed price. (See Note 12 of Notes
to Condensed Consolidated Financial Statements for a discussion of the
contingencies related to certain cancelled and active ECM projects, including
additional discussion of the Covert and Harquahala projects.)

The segment's gross profit, before charges related to the NEG projects of $30.0
million discussed above, decreased to $95.8 million, or 6.4% of revenues, for
the nine months ended May 31, 2003 from gross profit of $119.0 million, or 8.3%
of revenues, for the nine months ended May 31, 2002. The reductions in gross
profit are due primarily to reductions in estimated margins on certain gas-fired
power generation projects, partially offset by increases in gross profit from
nuclear maintenance projects and the ethylene plant project in China. The
decrease in the gross profit percentage for the nine-month period is due
primarily to reductions in estimated margins on certain gas-fired power
generation projects, partially offset by higher margins on the ethylene plant
project in China and margin earned on the process technology-related activity
during the period.

Gross profit for the three months and nine months ended May 31, 2003 was
increased (cost of revenues decreased) by approximately $1.7 million and $6.4
million, respectively, and by approximately $5.5 million and $19.6 million in
the same periods in fiscal 2002, for the amortization of contract liability
adjustments related to contracts acquired in the Stone &Webster acquisition (see
Note 11 of Notes to Condensed Consolidated Financial Statements).

For the three and nine months ended May 31, 2003, less segment revenues were
derived from large equipment purchases. Such revenues were approximately $10.4
million and $157.7 million for the three and nine months ended May 31, 2003,
compared to approximately $195.7 million and $280.2 million for the three and
nine months ended May 31, 2002.

Segment backlog at May 31, 2003 was approximately $2.1 billion as compared with
approximately $2.4 billion at February 28, 2003 and $3.1 billion at August 31,
2002, and was comprised of the following:

The segment's backlog has declined from August 31, 2002 because the amount of
work performed on power generation contracts was not fully replaced with new
orders due to the downturn in demand for power generation services.

The Company anticipates that in the future, the ECM segment will continue to
derive a significant portion of its revenues from the power industry (including
generation from fossil fuel sources and nuclear sources) and will increase its
revenues from other sectors of the domestic power industry through contracts to
re-power, refurbish or maintain existing power plants and to provide and install
emission control equipment. Although management anticipates that award levels
will be less than in prior years, the Company expects to continue to design and
construct new power plants, primarily for regulated utilities.

30

Environmental & Infrastructure Segment

E&I segment revenues for the three and nine months ended May 31, 2003 were
$298.8 million and $873.5 million, respectively, as compared with revenues of
$118.8 million and $191.3 million, respectively, in the same periods of the
prior fiscal year. This increase was primarily attributable to the Company's
acquisition of the IT Group assets and operations. (see Note 4 of Notes to
Condensed Consolidated Financial Statements).

Gross profit for the three and nine months ended May 31, 2003 was $33.3 million
and $97.0 million as compared with $14.7 million and $31.4 million for the same
periods of the prior year. The increases were primarily attributable to the
Company's acquisition of the IT Group assets and operations. Gross profit for
the three and nine months ended May 31, 2003 was increased (cost of revenues
decreased) by approximately $3.6 million and $13.7 million for the net
amortization of asset/liability adjustments to the fair value of contracts
acquired in the IT Group acquisition (see Note 4 and Note 12 of Notes to
Condensed Consolidated Financial Statements). No such amortization was
recognized by the E&I segment for the three and nine months ended May 31, 2002.

The gross profit percentage was approximately 11.1% for both the three and nine
months ended May 31, 2003 and approximately 12.4% and 16.4% for the three and
nine months ended May 31, 2002. The reduction in the gross profit percentage for
the three and nine months ended May 31, 2003 as compared with the comparable
periods in the prior fiscal year was attributable to lower margin contracts
associated with the businesses acquired in the IT Group transaction. The Company
anticipates that the gross profit percentage for the E&I segment in the fourth
quarter of fiscal 2003 will approximate the gross profit for the segment
realized during the nine months ended May 31, 2003. The difference in the gross
profit percentages between the Company's pre-IT Group environmental and
infrastructure operations (primarily infrastructure and hazardous material clean
up and disposal) and those acquired in the IT Group asset acquisition
(environmental clean-up, landfills and facilities management) is primarily
attributable to differences in customers, competition and mix of services.

Backlog in the E&I segment increased to approximately $2.7 billion as of May 31,
2003 from approximately $2.5 billion as of February 28, 2003 and approximately
$2.3 billion as of August 31, 2002. The Company believes the E&I segment
revenues will increase over the next several years as a result of a combination
of factors, including market opportunities in various environmental clean-up,
homeland defense and infrastructure markets and the Company's belief that it
will be able to re-gain market share which the IT Group lost while it was
experiencing financial difficulties, including the period in which it was in
bankruptcy during the first four months of calendar 2002. The Company
anticipates that segment revenue in the fourth quarter of fiscal 2003 will be
approximately consistent with third quarter fiscal 2003.

Fabrication, Manufacturing and Distribution Segment

Revenues decreased to $61.1 million and $202.3 million for the three and nine
months ended May 31, 2003 from $110.9 million and $298.7 million for the three
and nine months ended May 31, 2002. Segment gross profit decreased to $7.7
million and $36.1 million for the three and nine months ended May 31, 2003,
compared with $24.9 million and $66.0 million for same periods in fiscal 2002.
The gross profit percentage was approximately 12.5% and 17.8% for the three and
nine months ended May 31, 2003, compared with 22.5% and 22.1%, for the three and
nine months ended May 31, 2002. The decreases in revenues and gross profit
percentages in fiscal 2003 versus fiscal 2002 were attributable to reduced
domestic demand, primarily from power generation customers, without offsetting
increases in other industry sectors. The reduced demand for the segment's
products has had a negative impact on pricing and gross profit. The Company
expects domestic demand to continue at reduced levels for the remainder of
fiscal 2003, though it is experiencing an increase in inquires in foreign
markets for this segment. Backlog for this segment has decreased from $273.2
million at August 31, 2002 to $115.5 million at May 31, 2003. This decrease
includes a $60 million write-down of backlog from one customer in the power
industry.

As a result of the current market situation, the Company has decided to
significantly reduce or cease production at

31

certain smaller facilities, consolidate certain operations, and implement
certain other cost savings programs for this segment. Further, the Company has
suspended operations at its facility in Venezuela due to the political situation
in that country. However, demand is strong in the markets serviced by the
segment's unconsolidated joint ventures in Bahrain and China. The facility for
the China joint venture is under construction and is expected to become
operational in late calendar 2003 or early 2004.

Unconsolidated Subsidiaries

During the three and nine months ended May 31, 2003, the Company recognized
earnings of approximately $0.1 million and losses of approximately $2.9 million,
respectively, from operations of its unconsolidated subsidiaries, including
joint ventures, which are accounted for using the equity method. These losses
were primarily attributable to one project in the Entergy/Shaw joint venture.
The operations of the Entergy/Shaw joint venture are winding down and are not
expected to continue. Management does not anticipate any significant future
contribution from this joint venture. In the three and nine months ended May 31,
2002, the Company realized income of approximately $0.5 million and $1.6 million
from the operations of unconsolidated subsidiaries and joint ventures.

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

General and administrative expenses increased to approximately $50.4 million and
$149.5 million for the three and nine months ended May 31, 2003, compared with
approximately $42.4 million and $106.3 million for the three and nine months
ended May 31, 2002. As a percentage of revenues, general and administrative
expenses increased to 6.1% and 5.9% for the three and nine months ended May 31,
2003, respectively, compared with 4.7% and 5.5%, respectively, for the same
periods in fiscal 2002. A substantial portion of the approximate $43.2 million
increase in general and administrative costs for the nine months ended May 31,
2003 is attributable to the operations of the E&I segment (comprised largely of
the IT Group businesses which the Company acquired in the third quarter of
fiscal 2002). Additionally, the Company is incurring increased depreciation and
facilities costs in fiscal 2003 resulting from capital projects completed in the
latter part of fiscal 2002. The Company anticipates that its general and
administrative expenses in the fourth quarter of fiscal 2003 will be
approximately consistent with the level of the first nine months of fiscal 2003.
General and administrative expenses are expected to trend downward during 2004
as the Company continues to integrate its administrative functions and
reflecting the expected decrease in revenue previously discussed.

Interest expense for the three and nine months ended May 31, 2003 was
approximately $9.6 million and $21.1 million, respectively, compared to
approximately $5.9 million and $17.1 million for the three and nine months ended
May 31, 2002. The increase over prior year amounts is primarily due to the sale
on March 17, 2003 of approximately $253 million principal amount of 7-year,
10.75% Senior Notes, partially offset by a reduction in interest expense related
to the LYONs due to the repurchase of approximately $256.7 million principal
amount LYONs pursuant to the Company's tender offer (see Note 7 of Notes to
Condensed Consolidated Financial Statements). The Company's interest costs also
include the amortization of loan fees associated with the Senior Notes, the
LYONs and the Credit Facility, and, therefore, the Company's interest expense is
higher than would be expected based on its borrowing levels and the stated
interest rates. A significant portion of the Company's interest expense
(accretion of zero-coupon discount interest and amortization of loan fees)
represents non-cash charges.

Interest income for the three and nine months ended May 31, 2003 decreased to
approximately $0.9 million and $4.5 million from $4.0 million and $9.4 million
for the same periods in fiscal 2002 as a result of lower interest rates and
lower levels of invested funds, due to use of working capital and cash paid for
acquisitions.

For the three and nine months ended May 31, 2003, other expense included a
charge of approximately $12.4 million for the write-off of (i) investments in
securities available for sale of Orion of approximately $6.6 million, (ii)
accounts and claims receivable due from Orion of approximately $5.8 million, and
(iii) other accounts receivable of approximately $0.8 million (see Note 12 of
Notes to Condensed Consolidated Financial Statements). Also included in other
income (expense) for the three and nine months ended May 31, 2003 was a gain of
approximately $2.0 million, net of expenses and the write-off of unamortized
debt issuance costs, related to the Company's repurchase of a portion of its
LYONs

32

(see Note 7 of Notes to Condensed Consolidated Financial Statements).

The Company's effective tax rate was 33% for the three and nine months ended May
31, 2003, compared to 36% for the three and nine months ended May 31, 2002. The
Company's tax rate is significantly impacted by the mix of foreign (including
foreign export revenues) versus domestic work.

During the nine months ended May 31, 2003, the Company recorded a $6.3 million
net of tax liability for one of its United Kingdom (U.K.) defined benefit
retirement plans and its Canadian defined benefit retirement plan. (Also see
Note 8 of Notes to Condensed Consolidated Financial Statements). This liability
is required to be recognized on the plan sponsor's balance sheet when the
accumulated benefit obligations of the plan exceed the fair value of the plan's
assets. In accordance with SFAS No. 87, "Employers Accounting for Pensions," the
increase in the minimum liability is recorded through a direct charge to
stockholders' equity and is, therefore, reflected, net of tax, as a component of
accumulated other comprehensive income (loss) on the condensed consolidated
balance sheet as of May 31, 2003. This liability will require the Company to
increase its future cash contributions to the plan.

Liquidity and Capital Resources

Net cash used in operations was $186.8 million for the nine months ended May 31,
2003 compared with $238.9 million of net cash provided by operations for the
nine months ended May 31, 2002. For the nine months ended May 31, 2003 cash
flows from operating activities was increased by (i) net income of $11.7
million, (ii) deferred tax expense of $6.0 million, (iii) depreciation and
amortization of $34.0 million, (iv) interest accretion and loan fee amortization
of $14.0 million, and (v) the write-off of an investment in securities available
for sale and accounts and claims receivable from Orion, and other uncollectible
receivables, of $12.4 million (see Note 12 of Notes to Condensed Consolidated
Financial Statements). These increases were more than offset as net cash was
decreased from cash used in other operating activities by $244.8 million,
comprised primarily of reductions in accounts payable, accrued liabilities, and
advanced billings and billings in excess of cost and estimated earnings on
uncompleted contracts. Partially offsetting these uses of cash were decreases in
inventories and accounts receivable. During fiscal 2002 and 2001, the Company
billed and collected substantial advanced billings on its larger EPC contracts,
which positively impacted cash flow in fiscal 2002 and 2001; however, the
Company's cash flow in the first nine months of fiscal 2003 was negatively
impacted as the Company utilized these funds to pay project costs. Further, the
Company did not receive a substantial amount of advanced billings in the first
nine months of fiscal 2003. The Company expects that its cash flow will continue
to be negatively impacted by the payment of project costs for which it has
received advance payments.

Additionally, the Company acquired a large number of contracts in the Stone &
Webster and IT Group acquisitions with lower than market rate margins due to the
effect of the financial difficulties experienced by Stone & Webster and the IT
Group on negotiating and executing contracts prior to acquisition. These
contracts were adjusted to their fair values as an asset or liability and the
related amortization has the net effect of reducing cost of revenues for the
contracts as they are completed, while the amortization of the asset increases
costs of revenues. Cost of revenues was reduced on a net basis by approximately
$20.1 million and $19.6 million during the nine months ended May 31, 2003 and
2002, respectively, through the amortization of these adjustments, which is a
non-cash component of income. The amortization of these assets and liabilities
resulted in a corresponding net increase in gross profit. The adjustments are
amortized over the lives of the contracts, which for certain IT Group contracts
will continue for several years (see Note 4 and Note 11 of Notes to Condensed
Consolidated Financial Statements).

Net cash used in investing activities was $5.1 million for the nine months ended
May 31, 2003, compared to $165.4 million for the same period of the prior fiscal
year. During the nine months ended May 31, 2003, the Company purchased
approximately $21.9 million of property and equipment and received proceeds from
the sale of property and equipment of approximately $2.9 million. The Company
also used cash for acquisitions including approximately $1.2 million for LFG&E,
approximately $3.7 million for Envirogen, net of cash received, and
approximately $17.7 million for Badger Technologies (see Note 4 of Notes to
Condensed Consolidated Financial Statements). These uses of cash were partially
offset by maturities of marketable securities exceeding purchases by
approximately $35.1 million.

33

Net cash used in financing activities totaled approximately $65.5 million for
the nine months ended May 31, 2003, compared with $32.3 million of net cash used
in the nine months ended May 31, 2002. During the nine months ended May 31,
2003, the Company purchased approximately 3,171,000 shares of its Common Stock
for a cost of approximately $47.8 million. These purchases completed the
Company's $100 million Common Stock repurchase program that it initiated in
September 2001. The Company also made payments on debt and leases of
approximately $257.5 million (see further discussion of LYONs below) and
borrowed funds of $239.3 million, primarily through the sale of $253 million
principal amount 7 year, 10.75% Senior Notes, from which the Company received
approximately $241.4 million net of fees. Also netted against borrowing proceeds
is approximately $3.3 million of deferred debt issuance costs related to the
amendment of the Credit Facility.

The Company's primary credit facility ("Credit Facility"), dated July 2000, was
amended and restated on March 17, 2003 and extended for a three-year term from
that date. The amendment reduced the Credit Facility to $250 million from $350
million; however, the Company may, by March 16, 2004, increase the credit limit
to a maximum of $300 million by allowing one or more lenders to increase their
commitment or by adding new lenders. The Credit Facility provides that both
revolving credit loans and letters of credit may be issued within the $250
million limits of this facility.

Under the Credit Facility, interest is computed, at the Company's option, using
either the defined base rate or the defined LIBOR rate, plus an applicable
margin. The terms "base rate" and "LIBOR rate" have meanings customary for
financings of this type. The applicable margin is adjusted pursuant to a pricing
grid based on ratings by Standard and Poor's Rating Services and Moody's
Investor Services for the Credit Facility or, if the Credit Facility is not
rated, the ratings from these services applicable to the Company's senior,
unsecured long-term indebtedness. The margins for the Credit Facility loans may
be in a range of (i) 1.00% to 3.00% over LIBOR or (ii) from the base rate to
1.50% over the base rate.

The Company is required, with certain exceptions, to prepay loans outstanding
under the Credit Facility with (i) the proceeds of new indebtedness; (ii) net
cash proceeds from equity sales to third parties (if not used for acquisitions
or other general corporate purposes within 90 days after receipt); and (iii)
insurance proceeds or condemnation awards in excess of $5 million that are not
used to purchase a similar asset or for a like business purpose.

The Credit Facility is secured by, among other things, (i) guarantees by the
Company's domestic subsidiaries; (ii) a pledge of all of the capital stock of
the Company's domestic subsidiaries and 66% of the capital stock in certain of
the Company's foreign subsidiaries; and (iii) a security interest in all
property of the Company and its domestic subsidiaries (except real estate and
equipment). The Credit Facility contains certain financial covenants, including
a leverage ratio (which changes after May 1, 2004, representing the initial date
LYONs may be submitted by LYONs holders for repurchase by the Company), a
minimum fixed charge coverage ratio, defined minimum net worth and defined
minimum earnings before interest expense, income taxes, depreciation and
amortization (EBITDA). Further, the Company is required to obtain the consent of
the lenders to prepay or amend the terms of the Senior Notes. The Credit
Facility permits the Company to repurchase $10 million of its LYONs obligations.
Additional LYONs repurchases are also permitted if, after giving effect to the
repurchases, the Company has the availability to borrow up to $50 million under
the Credit Facility and the Company has the required amounts of cash and cash
equivalents. Prior to May 1, 2004, $100 million of cash and cash equivalents is
required for purposes of this test and thereafter not less than $75 million.
Under the Credit Facility, cash and cash equivalents for purposes of this test
consist of balances not otherwise pledged or escrowed and are reduced by amounts
borrowed under the Credit Facility. As of May 31, 2003, the Company was in
compliance with these covenants.

At May 31, 2003, the interest rate on the Credit Facility would have been either
5.25% (if the prime rate index had been chosen) or 3.82% (if the LIBOR rate
index had been chosen). At May 31, 2003, the Company did not have any
outstanding borrowings under the Credit Facility but had outstanding letters of
credit of approximately $178.0 million.

As of May 31, 2003, the Company's foreign subsidiaries had short-term revolving
lines of credit permitting borrowings, letters of credit, and foreign exchange
transactions totaling approximately $23.9 million. Approximately $1.5 million

34

in borrowings and approximately $3.4 million in letters of credit were
outstanding under these lines as of May 31, 2003.

The Company's working capital was $99.7 million at May 31, 2003, with unused
borrowing capacity of approximately $72.0 million. The Company's cash flow
and/or working capital for the remainder of fiscal 2003 and fiscal 2004 will be
impacted by (i) the amount of increased working capital necessary to support the
operations and the settlement of assumed liabilities of the recently acquired IT
Group, (ii) payment of costs on projects for which significant advance payments
had been previously received and the timing and negotiated payment terms of its
projects, (iii) developments with respect to the Pike, Covert, Harquahala, Wolf
Hollow and other IPP projects (see Note 12 of Notes to Condensed Consolidated
Financial Statements), (iv) its capital expenditures program, (v) sale of
non-core assets, including non-core business operations, and (vi) acquisitions.
Additionally, during fiscal 2004, the Company's liquidity will be reduced by its
cash interest payments on the Company's $253 million principal amount of Senior
Notes which were sold and issued on March 17, 2003 as discussed above.

During the third quarter of fiscal 2003, the Company recorded an increase of
approximately $271.5 million in the current maturity of long-term debt (as a
reduction to working capital) related to the Company's LYONs obligations. This
reclassification was required because the owners of the LYONs are permitted, if
they choose to do so, to submit these notes to the Company on May 1, 2004, May
1, 2006, May 1, 2011, and May 1, 2016 for repurchase by the Company. This
adjustment did not affect actual liquidity requirements in fiscal 2003; however,
liquidity requirements in fiscal 2004 will be affected by the amount of LYONs
submitted to the Company for repurchase in May 2004. The amortized value of the
LYONs obligations will be approximately $277.1 million at that time. The Company
may repurchase the LYONs submitted to the Company by the holders with either
cash or shares of its Common Stock at the current market value, or a combination
of its Common Stock and cash. The Company currently anticipates funding
substantially all of the LYONs repurchase obligations in cash. However, the
Company also has other options, including issuing stock for a portion of the
obligations or other alternatives, including refinancing all or a portion of the
obligations.

New Accounting Pronouncements

In November 2002, the Financial Accounting Standards Board issued Financial
Accounting Series Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 requires that upon issuance of a
guarantee, the guarantor must recognize a liability for the fair value of the
obligation it assumes under that guarantee. In addition, FIN 45 requires
additional disclosures about the guarantees that an entity has issued. The
initial recognition and measurement provisions of FIN 45 are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002 and
the disclosure requirements of FIN 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002. The recognition and
measurement provisions of FIN 45 did not have a material effect on the Company's
financial position, results of operations or cash flows.

In January 2003, the FASB issued Financial Accounting Series Interpretation No.
46, "Consolidation of Variable Interest Entities." This interpretation requires
a variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns or
both. In general, a variable interest entity is a corporation, partnership,
trust, or any other legal structure used for business purposes that either (a)
does not have equity investors with voting rights or (b) has equity investors
that do not provide sufficient financial resources for the entity to support its
activities. The Interpretation also requires disclosures about variable interest
entities that the company is not required to consolidate but in which it has a
significant variable interest. The consolidation requirements of Interpretation
46 apply immediately to variable interest entities created after January 31,
2003 and existing variable interest entities in the first fiscal year or interim
period beginning after June 15, 2003 (September 1, 2003 for the Company). The
Company has not yet determined what the effect, if any, this interpretation will
have on the financial statements.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging

35

Activities." This Statement is intended to result in more consistent reporting
of contracts as either freestanding derivative instruments subject to Statement
133 in its entirety, or as hybrid instruments with debt host contracts and
embedded derivative features. The Statement is effective for contracts entered
into or modified after June 30, 2003, and hedging relationships designated after
June 30, 2003. Because the Company has minimal derivative instruments (primarily
foreign currency hedges), the adoption of FAS 149 is not expected to materially
impact the Company's financial position, cash flows or results of operations.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." Statement 150
affects the issuer's accounting for three types of freestanding financial
instruments. One type is mandatorily redeemable shares, which the issuing
company is obligated to buy back in exchange for cash or other assets. A second
type, which includes put options and forward purchase contracts, involves
instruments that do or may require the issuer to buy back some of its shares in
exchange for cash or other assets. The third type of instruments that are
liabilities under this Statement is obligations that can be settled with shares,
the monetary value of which is fixed, tied solely or predominantly to a variable
such as a market index, or varies inversely with the value of the issuers'
shares. Statement 150 does not apply to features embedded in a financial
instrument that is not a derivative in its entirety. Most of the guidance in
Statement 150 is effective for all financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. Because the Company does not
have any such instruments outstanding, the adoption of SFAS 150 is not expected
to materially impact the Company's financial position, cash flows or results of
operations.

36

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

The Company is exposed to interest rate risk due to changes in interest rates,
primarily in the United States. The Company's policy is to manage interest rates
through the use of a combination of fixed and floating rate debt and fixed rate
short-term investments. The Company currently does not use any derivative
financial instruments to manage its exposure to interest rate risk.

As discussed in Note 7 of Notes to Condensed Consolidated Financial Statements,
on May 1, 2001, the Company issued $790 million (face value) 20-year, 2.25%,
zero-coupon, unsecured, convertible debt for which it received net proceeds of
approximately $490 million. After paying off approximately $67 million of
outstanding debt, the remaining proceeds were invested in short-term debt
instruments and were used to fund the Company's operations and acquisitions.

Additionally, as discussed in Note 7, of Notes to Condensed Consolidated
Financial Statements on March 17, 2003 the Company issued and sold approximately
$253 million principal amount of 7-year, 10.75% unsecured Senior Notes ("Senior
Notes" or "notes"). The Senior Notes were issued at an original discount price
of $988.03 per $1,000 maturity value and have a yield to maturity of 11.00%. On
March 31, 2003 the Company purchased LYONs with an amortized value of
approximately $256.7 million and an aggregate principal value of approximately
$384.6 million for a cost of approximately $248.1 million. The Company used the
total net proceeds, after fees, from the sale of the Senior Notes of
approximately $241.4 million and corporate funds of approximately $6.7 million
to fund this repurchase. The LYONs were purchased pursuant to the Company's
tender offer which commenced on February 26, 2003.

The Company's Credit Facility permits both revolving credit loans and letters of
credit, and was amended and restated on March 17, 2003 to reduce the total
availability under the Credit Facility to $250 million from $350 million. At May
31, 2003, letters of credit of approximately $178.0 million were outstanding and
no revolving credit loans were outstanding under the Credit Facility. At May 31,
2003, the interest rate on this line of credit would have been, pursuant to the
terms of the Credit Facility, either 5.25% (if the prime rate index had been
chosen) or 3.82% (if the 30-day LIBOR rate index had been chosen). See Note 7 of
Notes to Condensed Consolidated Financial Statements for further discussion of
the Credit Facility.

Foreign Currency Risks

The majority of the Company's transactions are in U.S. dollars; however, certain
of the Company's subsidiaries conduct their operations in various foreign
currencies. Currently, the Company, when considered appropriate, uses hedging
instruments to manage its risks associated with its operating activities when an
operation enters into a transaction in a currency that is different from its
local currency. In these circumstances, the Company will frequently utilize
forward exchange contracts to hedge the anticipated purchases and/or revenues.
The Company attempts to minimize its exposure to foreign currency fluctuations
by matching its revenues and expenses in the same currency for its contracts. As
of May 31, 2003, the Company had a minimal number of forward exchange contracts
outstanding that were hedges of certain commitments of foreign subsidiaries. The
exposure from the commitments is not material to the Company's results of
operations or financial position.

37

ITEM 4. CONTROLS AND PROCEDURES

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

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

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

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

38

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Pike Litigation

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

Prior to the contract termination, the Company had executed
commitments/agreements to purchase equipment for the project and had also
entered into agreements with subcontractors to perform work on the project.
Certain of these commitments and agreements contain cancellation clauses and
related payment or settlement provisions. The Company is continuing discussions
with its vendors and subcontractors to determine the final amounts owed based on
the termination of the project. Under the terms of the contract between the
Company and Pike, Pike is obligated to reimburse the Company for all of the
costs incurred by the Company, whether before or after the termination, and a
fee for the work performed prior to the termination. The Company believes that
it is owed approximately $130,000,000 in costs and fees over the amounts already
paid under the contract.

The Company is actively pursuing alternatives to collect all amounts owed under
the Pike contract. A lien has been filed on the project. On October 17, 2002,
the Company filed an involuntary petition in the U. S. Bankruptcy Court for the
Southern District of Mississippi for liquidation of Pike, under Chapter 7 of the
U.S. Bankruptcy Code to protect its rights, claims, and security interests in
and to the assets of Pike. While the Company believes that, pursuant to the
terms of the contract with Pike, the Company has retained ownership of a
significant amount of equipment that was to be installed on the project, the
project lenders have advised the Company that they may have an interest in
certain of this equipment. In December 2002, Pike disputed the bankruptcy
petition in court and discovery is currently proceeding. On March 20, 2003, the
Court approved an agreed order submitted by the Company, Pike, and its lenders,
which allowed the Company to dispose of the equipment in its possession or
control, reserving the parties' rights with respect to any proceeds from
disposition. The Company also filed suit against NRG in U.S. District Court in
Mississippi to collect amounts due under a $100,000,000 guarantee, the validity
of which NRG has disputed, and against NRG and Xcel, along with certain of their
officers, for additional damages and costs under various legal theories
including substantive consolidation, alter-ego, and piercing the corporate veil.

On May 14, 2003, NRG and certain affiliates filed voluntary petitions in the U.
S. Bankruptcy Court for the Southern District of New York under Chapter 11 of
the Bankruptcy Code. NRG's filing included a plan of reorganization which
incorporates the terms of a settlement previously announced among NRG, Xcel
Energy and members of NRG's major creditors that provides for payments by Xcel
to NRG and its creditors of up to $752 million. The consummation of the
settlement is contingent upon, among other things: the effective date of the
plan occurring on or prior to December 15, 2003; approval by the Bankruptcy
Court; documentation satisfactory to Xcel, NRG and NRG creditors; the receipt of
releases in favor of Xcel from holders of at least 85 percent of the general
unsecured claims held by NRG's creditors; and the receipt by Xcel of all
necessary regulatory and other approvals. The Company intends to comply with
procedures in this proceeding to pursue its claims. The Company has also filed a
motion in the Mississippi bankruptcy proceeding to transfer venue of the New
York bankruptcy to Mississippi.

In addition to the legal proceedings, the Company is continuing discussions with
Pike and its lenders and NRG and Xcel in an effort to resolve collection of the
amounts owed. The Company has, in connection with its continuing evaluation of
the Pike project, estimated that (i) it has or will incur costs of approximately
$65,000,000 to $70,000,000 over the amounts that have been previously collected
from Pike and (ii) equipment that was to be installed on the project could be
liquidated for approximately $40,000,000 to $60,000,000. During the three months
ended May 31,

39

2003, the Company reached agreements with certain subcontractors and vendors
which has reduced the Company's exposure.

Although the Company expects to recover amounts owed to it (including final
vendor and subcontractor settlements) and the profit previously recognized on
the project, it is also reasonably possible that the Company will not recover
all of its costs and profit recognized, particularly if the Company is not
successful in its claims in NRG's bankruptcy and if (i) any dispute regarding
the ownership of the equipment in the possession of the Company is resolved
adversely to the Company; or (ii) such equipment cannot be used on another
similar project or liquidated by the Company to recover all or a portion of the
amount owed. The amount, if any, that the Company may not be able to recover is
dependent upon the final amounts to be expended by the Company related to the
project, the amount to be realized upon disposition of the equipment related to
the project, the Company's ability to successfully realize a claim in the
bankruptcy proceedings, and the outcome of the Xcel litigation. Because that
contract was terminated on September 4, 2002, no revenue or profit related to
Pike was recognized for the nine months ended May 31, 2003. The Company will not
recognize any additional profit it is owed under this contract until it is
probable it will collect that additional amount. Although the Company does not
believe a loss has been incurred as of May 31, 2003, based on these estimates,
if the Company is unable to collect additional amounts from its customer (or its
affiliates), the Company believes that its potential future loss on the Pike
project could range from $5,000,000 to $30,000,000. As of May 31, 2003, the
Company has recorded approximately $48,600,000 for costs incurred over amounts
received on the project, which is included in accounts receivable on the
accompanying condensed consolidated balance sheets.

AES Wolf Hollow Litigation

AES Frontier, L.P. and AES Wolf Hollow, L.P. (collectively "AES") originally
contracted with a subsidiary of Enron to build a gas-fired, combined cycle
electric power plant in Texas. This Enron subsidiary was providing the
construction services and subcontracted with Parsons Energy and Chemicals Group,
Inc. ("Parsons") to provide engineering, design and procurement services. After
Enron declared bankruptcy, AES declared the contract in default and entered into
negotiations with the Company's subsidiary, Stone & Webster, Inc. ("S&W") to
complete the project.

On March 8, 2002, AES and S&W entered into a series of contracts (collectively
the "EPC contract") to complete the engineering, design, procurement, and
construction of the project for an aggregate amount of $99,000,000. Under the
terms of the EPC contract, AES, at its option, may pay up to $27,000,000 of the
contract price in subordinated notes or cash. The subordinated notes, when
issued, bear interest at prime plus 4% and mature in October 2009. However, if
any amounts under the notes are unpaid eight months following final acceptance
of the project, the unpaid notes, plus a cash payment of the amounts, if any,
paid on the notes through the conversion date is convertible at the option of
the Company into a 49.9% equity interest in the project. Provisional acceptance
was scheduled for October 15, 2002. The contract provides for liquidated damages
of $120,000 per day through June 1, 2003 and $185,000 per day thereafter for
late completion. S&W secured its obligations by providing two letters of credit
totaling $28,000,000. AES represented and warranted at the time of contracting
with S&W that the project was 67% complete and that engineering was 99.8%
complete, and S&W relied upon this stage of completion in contracting with AES.

The Company now expects substantial completion of the project in July 2003. The
delay is primarily due to (i) the overstatement of the percentage completion by
AES and Parsons at the time the Company entered into the contract; (ii) a fire
that occurred in June of 2002 at the project site; and (iii) failure of a
turbine during start-up testing in May 2003. These factors are discussed in more
detail below.

On June 16, 2002, a fire occurred at the project site resulting in considerable
damage to certain equipment. S&W sought relief from AES for cost and schedule
impacts caused by the fire under force majeure provisions of the EPC contract.
In addition, S&W submitted a change order for additional costs and delays
associated with an inadequate water treatment system for which AES was
responsible. AES rejected S&W's request for force majeure relief and rejected
the change order. AES began to assess liquidated damages while the parties
participated in the dispute resolution process called for in the contract. S&W
is also seeking recovery of costs caused by the fire under its builder's risk
insurance policy.

40

The parties were unable to reach agreement, and on November 5, 2002, S&W filed
suit in the District Court of Hood County, Texas against AES for breach of
contract. The original petition sought a sixty-day schedule extension, and
compensation for the additional costs S&W had and would continue to incur from
the fire and resulting delay, as well as costs for modification to the water
treatment system.

As work on the project progressed, S&W discovered that AES and Parsons had
misrepresented the status of the engineering and procurement progress. On this
basis, S&W sought additional schedule extensions from AES, which AES rejected.
On May 2, 2003, S&W amended its complaint against AES, and on May 9, 2003, S&W
filed a Second Amended Petition adding Parsons as a defendant. In June 2003, AES
Corporation was also added as a defendant. The amended petitions seek
compensation as well as exemplary damages for breach of representation and
warranty, fraud and negligent misrepresentation, based on the fact that Parsons'
engineering was far less than 99.8% complete, and while both AES and Parsons
were aware of this, neither disclosed it to S&W. The misrepresentation had an
adverse impact on S&W's procurement activities as well as scheduling and has
resulted in increased labor, equipment, overhead and other delay-related job
costs in excess of what would have been incurred had engineering been 99.8%
complete as represented. Parsons also designed the electrical system which is
believed to have caused the fire and led to the associated delays. This case is
currently scheduled for jury trial in January 2004; however, this trial could be
delayed as a result of recently added parties and claims.

On May 11, 2003, during start-up testing on the project, one of the combustion
turbines failed. The turbine failure caused a further delay in the project
completion, resulting in additional costs to S&W, and additional liquidated
damages to be claimed by AES. The project is now expected to be substantially
complete before the end of July 2003.

S&W has recorded claims receivable from AES in excess of $20,000,000 for
additional costs incurred due to the fire, misrepresentation of the percentage
of completion, disputed change orders and other claims, and has recorded
receivables of approximately $11,000,000 that S&W expects to recover from
insurance proceeds related to the fire and back charges from subcontractors and
vendors. AES has assessed or is expected to assess approximately $35,000,000 in
liquidated damages and has withheld payment on invoices due S&W under the EPC
contract to offset these damages. In addition, on June 20, 2003 AES drew
$13,900,000 against the letters of credit issued on behalf of S&W in favor of
AES for recovery of liquidated damages. However, S&W disputes a substantial
portion of the liquidated damages and has included in its cost estimates
recovery of approximately $26,000,000 of liquidated damages either as relief
from AES or to be recovered from subcontractors or vendors. The Company believes
it has a strong basis for claims and back charges in excess of the recorded
amounts; however, recovery of the claims is substantially dependent upon
negotiations with the applicable parties and the results of litigation. The
Company holds a mortgage on the project assets second to the lenders, to secure
AES obligations under the notes. It has also filed a lien against the project in
connection with its claims under the contract. The Company records claims and
back charges receivable in CIE on the accompanying condensed consolidated
balance sheets. If the Company is unable to collect the amount of claims and
back charges receivable that have been recorded as discussed above, the Company
would recognize a charge to earnings in the period when it becomes evident that
all or a portion of the receivables are not realizable.

As of May 31, 2003, the Company has $29,900,000 in receivables and $35,000,000
in CIE related to this project and expects to incur an additional $16,700,000 to
complete the project.

During the three months ended May 31, 2003, the Company reversed approximately
$2,000,000 of profit previously recognized on the project to reflect increases
in cost estimates and estimated recoveries of the claims and back charges.

41

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

A. Exhibits.

4.1 Indenture dated as of March 17, 2003, by and among The Shaw Group
Inc., the Subsidiary Guarantors party thereto, and The Bank of New
York, as trustee (incorporated by reference to the designated Exhibit
to the Company's Quarterly Report on Form 10-Q for the quarter ended
February 28, 2003).

4.2 Registration Rights Agreement dated as of March 17, 2003, by and among
The Shaw Group Inc. and Credit Suisse First Boston LLC, UBS Warburg
LLC, BMO Nesbit Burns Corp., Credit Lyonnais Securities (USA) Inc.,
BNP Paribas Securities Corp. and U.S. Bancorp Piper Jaffray Inc.
(incorporated by reference to the designated Exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended February 28,
2003).

4.3 Form of 10 3/4% Senior Note Due 2010 (Included as Exhibit I to the
Indenture incorporated by reference as Exhibit 4.1 hereto).

10.1 Third Amended and Restated Credit Agreement, dated as of March 17,
2003, by and among The Shaw Group Inc., as borrower, Credit Lyonnais
New York Branch, as a joint arranger and sole book runner, Credit
Suisse First Boston, as joint arranger, Harris Trust and Savings Bank
and BNP Paribas co-syndication agents, U.S. Bank National Association,
as documentation agent, and the other lenders signatory thereto
(incorporated herein by reference to Exhibit 99.1 to the Company's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on March 19, 2003).

10.2 The Shaw Group Inc. 2001 Employee Incentive Compensation Plan (as
amended and restated through January 24, 2003) (incorporated herein by
reference to Exhibit 4.2 to the Company's Registration Statement on
Form S-8 (File No. 333-105520) filed with the Securities and Exchange
Commission on May 23, 2003).

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

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

B. Reports on Form 8-K.

1. On March 13, 2003, the Company filed a Form 8-K, attaching a press
release dated March 12, 2003, announcing that the Company had priced
its private placement of $253,029,000 principal amount at maturity of
senior notes due 2010 with a coupon of 10 3/4%.

2. On March 14, 2003, the Company filed a Form 8-K, to set forth therein
a Regulation FD disclosure under Item 9 of Form 8-K relating to
supplemental information contained in the offering circular dated
March 12, 2003 relating to the private placement by the Company of
$253,029,000 principal amount at maturity of senior notes due 2010
with a coupon of 10 3/4%.

3. On March 19, 2003, the Company filed a Form 8-K, announcing that, on
March 17, 2003, the Company had entered into an amendment and
restatement of its existing credit facility pursuant to a Third
Amended and Restated Credit Agreement described in such Form 8-K (the
"Amended Credit Agreement"), and including a copy of the Amended
Credit Agreement as Exhibit 99.1 to the Form 8-K.

42

4. On April 14, 2003, the Company filed a Form 8-K, to set forth therein
(i) a Regulation FD disclosure under Item 9 of Form 8-K relating to
the Company's agreement with PG&E National Energy Group ("NEG") on the
Harquahala and Covert projects, and including in the text of Item 9, a
press release dated April 14, 2003, regarding the NEG agreement; and
(ii) disclosure under Item 12 of Form 8-K concerning the financial
results of the Company for the quarter ended February 28, 2003,
specifically the Company's related April 14, 2003 press release
attached to the Form 8-K as Exhibit 99.1.

5. On May 16, 2003, the Company filed Amendment No. 2 on Form 8-K/A,
which amended a Form 8-K dated May 3, 2002, to include in such Form
8-K as Exhibit 99.1, Unaudited Condensed Consolidated Financial
Statements of The IT Group, Inc. as of and for the three months ended
March 29, 2002.

43

SIGNATURES AND CERTIFICATIONS

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

THE SHAW GROUP INC.

Dated: July 15, 2003 /s/ Robert L. Belk
-------------------------------
Chief Financial Officer
(Duly Authorized Officer)

44

CERTIFICATION

I, J.M. Bernhard, Jr., certify that:

1. I have reviewed this quarterly report on Form 10-Q of The Shaw Group
Inc.;

2. Based on my knowledge, this quarterly 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 quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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
we 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 quarterly 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 quarterly report (the "Evaluation
Date"); and

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

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

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
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

Date: July 15, 2003 /s/ J. M. Bernhard, Jr.
-------------------------------------
J. M. Bernhard, Jr.
President and Chief Executive Officer

45

CERTIFICATION

I, Robert L. Belk, certify that:

1. I have reviewed this quarterly report on Form 10-Q of The Shaw Group
Inc.;

2. Based on my knowledge, this quarterly 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 quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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
we 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 quarterly 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 quarterly report (the "Evaluation
Date"); and

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

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

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
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

Date: July 15, 2003

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

46

THE SHAW GROUP INC.

EXHIBIT INDEX

Form 10-Q Quarterly Report for the Quarterly Period ended May 31, 2003.

A. Exhibits.

4.1 Indenture dated as of March 17, 2003, by and among The Shaw Group Inc.,
the Subsidiary Guarantors party thereto, and The Bank of New York, as
trustee (incorporated by reference to the designated Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended February
28, 2003).

4.2 Registration Rights Agreement dated as of March 17, 2003, by and among
The Shaw Group Inc. and Credit Suisse First Boston LLC, UBS Warburg
LLC, BMO Nesbit Burns Corp., Credit Lyonnais Securities (USA) Inc., BNP
Paribas Securities Corp. and U.S. Bancorp Piper Jaffray Inc.
(incorporated by reference to the designated Exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended February 28, 2003).

4.3 Form of 10-3/4% Senior Note Due 2010 (Included as Exhibit I to the
Indenture incorporated by reference as Exhibit 4.1 hereto).

10.1 Third Amended and Restated Credit Agreement, dated as of March 17,
2003, by and among The Shaw Group Inc., as borrower, Credit Lyonnais
New York Branch, as a joint arranger and sole book runner, Credit
Suisse First Boston, as joint arranger, Harris Trust and Savings Bank
and BNP Paribas co-syndication agents, U.S. Bank National Association,
as documentation agent, and the other lenders signatory thereto
(incorporated herein by reference to Exhibit 99.1 to the Company's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on March 19, 2003).

10.2 The Shaw Group Inc. 2001 Employee Incentive Compensation Plan (as
amended and restated through January 24, 2003) (incorporated herein by
reference to Exhibit 4.2 to the Company's Registration Statement on
Form S-8 (File No. 333-105520) filed with the Securities and Exchange
Commission on May 23, 2003).

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

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

47