SHAW GROUP INC - 10-K Annual Report

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

FORM 10-K

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

FOR THE FISCAL YEAR ENDED AUGUST 31, 2003

or

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

Commission File Number 1-12227

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

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

4171 ESSEN LANE
BATON ROUGE, LOUISIANA 70809
(Address of principal executive offices) (zip code)

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

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

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

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

Securities registered pursuant to Section 12(g) of the Act: None.

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

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

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

The aggregate market value of the common stock held by non-affiliates
(affiliates being directors, officers and holders of more than 5% of the
Company's common stock) of the Registrant at February 28, 2003 was approximately
$363 million.

The number of shares of the Registrant's common stock outstanding at October 16,
2003 was 37,789,735.

DOCUMENTS INCORPORATED BY REFERENCE

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

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TABLE OF CONTENTS

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PART I

ITEM 1. BUSINESS

GENERAL

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

Founded in 1987, we have expanded rapidly through internal growth and the
completion and integration of a series of strategic acquisitions. Our fiscal
2003 revenues were approximately $3.3 billion and our backlog at August 31, 2003
was approximately $4.8 billion. We are headquartered in Baton Rouge, Louisiana
with offices and operations in North America, South America, Europe, the Middle
East and the Asia-Pacific region and employ approximately 14,800 people.

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

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

Effective February 28, 2003, we reorganized our operations, resulting in a
change in our operating segments. Prior to February 28, 2003, we reported in
three segments: Environmental & Infrastructure, Integrated EPC Services and
Manufacturing and Distribution. Effective February 28, 2003, we segregated our
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 our
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, technology 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
and other related services to non-environmental 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. We also manufacture and distribute specialty
stainless, alloy and carbon steel pipe fittings.

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FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

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

o cyclical changes in demand for our products and services;

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

o our ability to successfully identify, integrate and complete
acquisitions;

o delays or difficulties related to our significant Engineering,
Procurement and Construction projects;

o our dependence on subcontractors and equipment manufacturers;

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

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

o risks associated with being a government contractor;

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

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

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

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

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

o currency fluctuations;

o our dependence on one or a few significant customers;

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

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

o risks associated with our integrated environmental solutions
businesses;

o changes in environmental laws and regulations;

o limitation or expiration of the Price Anderson Act's nuclear
contractor indemnification authority;

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

o our failure to attract and retain qualified personnel;

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

o a determination regarding our acquisitions that requires a
write off of a significant amount of intangible assets;

o various legal, regulatory and litigation risks;

o our ability to fund our repurchase obligation under the LYONs
on the initial put date of May 1, 2004;

o our inability to fulfill our obligations under our senior
notes and credit facility due to substantial indebtedness;

o covenants in our credit facility and indenture relating to our
senior notes that restrict our ability to pursue our business
strategies;

o our liquidity position;

o work stoppages and other labor problems;

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

o our ability to retain key members of our management; and

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o general economic conditions.

Should one or more of these risks or uncertainties materialize, or should any of
our assumptions prove incorrect, actual results may vary in material respects
from those projected in the forward-looking statements. We undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise. We caution you not
to place undue reliance on these forward-looking statements, which speak only as
of the date of this report or document in which they are contained, and we
undertake no obligation to update such information. For a more detailed
discussion of some of the foregoing risks and uncertainties, see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Risk Factors" and our reports and registration statements filed
with the Securities and Exchange Commission including our Form 10-K and Form
10-Q reports and on our website under the heading "Forward Looking Statement."

CORPORATE INFORMATION

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

BUSINESS STRATEGY

Our business strategy is to capitalize on significant opportunities in diverse
market segments and geographic regions, including all facets of the power,
process, environmental and infrastructure industries. We intend to execute this
strategy by pursuing the following opportunities:

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PURSUE GROWTH OPPORTUNITIES FOR OUR ENVIRONMENTAL BUSINESS

o Environmental Liability Solutions - Traditionally, liabilities
associated with environmental and tort laws have been allocated to the
owner of contaminated property. Innovative environmental insurance
products now permit liability distribution that can reduce an owner's
contingent environmental liabilities. We were recently awarded a Fixed
Price Remediation Insured (FPRI) indefinite delivery/indefinite
quantity multiple award contract from a U.S. governmental agency. We
are one of three designated companies selected to bid on upcoming task
orders awarded under this contract, which has a potential shared value
of up to $200 million. The Company has been awarded the first task
order under this contract, which is valued at approximately $10
million. Additionally, the Company was selected as the sole bidder for
another FPRI contract with a potential value of up to an additional
$200 million. We believe several U.S. Department of Defense, or DOD,
agencies are moving rapidly in this direction for project delivery and
this may represent a significant opportunity for us. We have created
the "Shaw Insured Environmental Liability Distribution" or
"SHIELD"(TM) program, a proprietary structured transaction that
insures and distributes environmental liabilities for parties desiring
to substantially reduce contingent environmental liabilities. We
believe our experience in managing and negotiating blended finite
risk, stop loss, and other environmental-related insurance products
will enhance margins and improve our win-rates in our core
environmental contracting business through the utilization of this
program.

o Unexploded Ordnance and Explosives, or UXO - The DOD's fiscal
requirements for Conventional Ordnance and Explosives clean-up on
closed ranges will exceed current government funding, which we
estimate to be $250 million annually. Several congressional advocates
continue to push for increased funding for UXO removal projects along
with developing an enhanced Military Munitions Response Program. We
have encountered opportunities through our existing contracts for
projects involving UXO as well as indications that there will be new
contracts for UXO in the near future. We intend to pursue
opportunities related to the UXO removal projects and had fiscal 2003
revenue of $18.0 million from these removal projects as of August 31,
2003.

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

PURSUE GROWTH OPPORTUNITIES FOR OUR INFRASTRUCTURE BUSINESS

o Privatization - The DOD is moving to privatization of military housing
and utility systems consisting of more than 270,000 family housing
units owned by the DOD, of which approximately 60% need to be
renovated or replaced. We submitted a number of proposals in fiscal
2003 with respect to contracts to privatize military family housing,
and were successful in bidding with our joint venture partner, CEI
Corporation, on the Patrick Air Force Base housing privatization
initiative. We believe that several factors, including (i) our federal
government business platform, (ii) prior DOD facilities management and
Job Order Contracting and other governmental contracting experience,
and (iii) expertise in construction at military installations,
position us to compete for opportunities in this market.

o Homeland Security - Increased emphasis on federal homeland security
programs continues, as evidenced by the creation of the Department of
Homeland Security in 2001. Shaw E&I's disaster-related preparedness,
incident response and chemical and biological weapons demilitarization
experience provides its customers valuable security related products
and services. Shaw E&I provides threat, vulnerability and risk
assessments and consequence management planning and training to the
federal government, state and local governments and private industry
customers nationwide. The assessments identify design and physical
changes to facilities, processes and critical infrastructures. We
expect not only to perform assessments for our customers, but also to
provide consulting, engineering/design, procurement and construction
services to this market.

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o Transportation and Water - Demand in the transportation infrastructure
sector is driven by governmental appropriation programs which are
typically multi-year in scope. For 2003,$7.2 billion in federal
transit spending was proposed. Additionally, we expect demand for
services in the water and wastewater business to increase, driven by
the need to upgrade and expand aging water and wastewater
infrastructure and to meet existing federal requirements. We intend to
leverage our existing experience and capabilities in these sectors to
pursue new business in the transportation and water markets. We have
augmented our capabilities with additional expertise in ports, harbors
and waterways. New opportunities are present in both the federal and
commercial markets for these types of projects.

CAPITALIZE ON OPPORTUNITIES IN MULTIPLE SEGMENTS OF THE POWER MARKET. We provide
a broad portfolio of services to all segments of the power market. We are
currently taking advantage of domestic and international opportunities in the
nuclear, geothermal, hydroelectric and renewable resource markets, as well as
opportunities for emissions reduction and control, plant modifications,
re-powering and consulting services. Furthermore, as opportunities arise, we
will continue to participate in the greenfield, fossil-fuel power market. Our
experience and diversity of capabilities allow us to participate in all power
segments and reduce the impact on our operations from the cyclical nature of
certain sectors of the power industry. We have also developed proprietary
computer software and web-based applications to aid in project and process
management and energy transmission and distribution. We believe that our focus
on developing innovative customer solutions will drive future demand for a
broader range of our power services.

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

MAINTAIN A DIVERSIFIED REVENUE BASE. We intend to continue to maintain our
diversity in markets served, services offered, contracting arrangements and
customer base. This diversity has helped us to minimize our dependence on any
particular market segment or individual customer, minimizing the impact of
short-term market volatility and enabling us to more accurately anticipate
future revenues. Our presence across numerous markets allows us to focus our
resources on those areas that are experiencing growth. In addition, it allows us
to allocate our resources efficiently within and across our segments. The
acquisition of IT Group further diversified our business mix and provides a more
stable and recurring revenue base. Many of our environmental and infrastructure
businesses, along with our existing maintenance services, tend to provide
recurring revenues due to established customer-contracts. These types of
services accounted for approximately $3.7 billion, or 78%, of our backlog as of
August 31, 2003.

MAINTAIN FOCUS ON COST-PLUS CONTRACT STRUCTURE. Our strategy is to perform most
of our engineering, procurement and construction projects pursuant to cost-plus
contracts in which our contract loss exposure is limited to our gross profit.
These contracts often contain incentive/sharing/penalty provisions that reward
performance and cost control and penalize late delivery of products and
services. We intend to continue our contracting practices to minimize our risk
of contractual losses while providing incentives for us and our customers to
work cooperatively. As of August 31, 2003, approximately 77% of our contracts
included in our backlog are cost-plus contracts, 21% are fixed-price contracts
and 2% are unit-price contracts.

However, with the extended weakness in the domestic power market and our
expanded environmental and infrastructure services to various U.S. Government
agencies, our customers are increasingly requesting fixed-price contracts. We
will selectively pursue such fixed-price contracts on a negotiated basis in
situations where we believe we can control our cost and minimize our risks.

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For example, in September 2003, we signed and announced an EPC contract to build
a combined cycle power plant in Queens, New York, which, although subject to
receipt of financing, is a $565.0 million fixed-price contract. Generally,
fixed-priced contracts are priced with a higher margin than cost-plus contracts
in order to compensate for cost overrun risk.

CONTINUE TO FORM STRATEGIC ALLIANCES. We intend to continue to capitalize upon
and enter into strategic partnerships and alliances with our customers. Our
alliance and partnership agreements enhance our ability to obtain contracts for
individual projects by eliminating or reducing formal bid preparation. We
recently signed a strategic alliance with Fluor Corp. for pipe fabrication
services. Additionally, we formed a joint venture with Yangzi Petrochemical
Corporation to build and operate a pipe fabrication facility in China which,
when operational, will fabricate approximately 12,000 tons of pipe per year.
Within our facilities management activities, we pursue strategic alliances like
our partnership with Computer Sciences Corporation to provide facilities
management services to NASA's Stennis Space Center. We continue to pursue these
strategic partnerships and alliances in an attempt to increase our market share
within our existing markets and assist us in entering into new markets. We will
also continue to look to expand our international operations where we see the
potential for attractive and profitable business opportunities and can leverage
the local knowledge of an alliance or joint venture partner.

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

PURSUE SELECTIVE ACQUISITIONS. We intend to continue to pursue selective
acquisitions of businesses or assets that will expand, complement or further
diversify our current portfolio of products and services. We believe we have
established a successful track record of quickly, efficiently and effectively
integrating our acquisitions through integration teams led by our senior
executives who become involved early in the acquisition process. From time to
time, we may also consider dispositions of non-strategic assets.

UTILIZE TECHNOLOGY AND INTELLECTUAL PROPERTY. We intend to continue to employ
our technology and intellectual property to reduce costs and to better serve our
customers. Our technologies include:

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

o Proprietary Ethylene and Downstream Petrochemical Technologies. We
believe we have a leading position in technologies associated with the
process design of plants that produce ethylene. We estimate that we
have supplied process technology for approximately 35% of the world's
ethylene capacity constructed since 1995.

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

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

o SHAWTRAC(TM) which is a web-based, proprietary earned value
application that enables us to continually enhance the way
we manage and integrate the many phases of a capital
project, from estimating to engineering through construction
and start-up. Users from around the world consistently
access SHAWTRAC(TM) through the public networks in order to
update and understand the real-time financial position of
respective projects.

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o Technology Solutions for the Electric Power Industry. Power
Technologies, Inc., or PTI, one of our subsidiaries,
provides software for the electric power industry. PTI's
licensed software includes, programs for analyzing and
optimizing electric power system performance and evaluating
transfer capability, transaction impacts and contingency
analysis for transmission systems. In addition, we have
programs for transmission reliability studies and for
planning, designing and analyzing distributions systems. Our
programs are in use throughout the world by power utilities
to design and plan their electrical power transmission
systems. PTI has also developed easy-to-use interfaces and
network simulation libraries that help users meet the
fast-paced, wide-ranging challenges posed by today's
electric power industry.

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

BUSINESS SEGMENTS

ENGINEERING, CONSTRUCTION & MAINTENANCE SEGMENT

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

Industry Overview

Power Generation Industry

We provide a full range of engineering, procurement and construction services to
power projects on a global basis. During fiscal 2001, our backlog increased
significantly as a result of demand for new power plants, primarily
combined-cycle and combustion turbine technology fueled by natural gas or both
oil and gas. This new capacity demand was primarily created by orders from
independent power producers and merchant power plants to develop additional
generation capacity. Typically new plants from independent and merchant power
producers compete directly with existing utilities in deregulated sectors.
Deregulation also created opportunities for us from existing utilities that
needed to upgrade or develop new power plants to remain competitive. Although
demand for new power plants decreased significantly in fiscal 2002 and fiscal
2003, we expect that in the coming years many existing plants to be "re-powered"
or substantially upgraded by replacing all or most of the existing equipment
with more efficient systems.

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

Process Industry

Our process work includes work for customers primarily in the chemical,
petrochemical and refining industries. Demand in processing industries has
declined in recent years as a result of decreased spending by chemical,
petrochemical and refining companies and, more recently, due to an overall
downturn in the worldwide economy. However, we are encouraged by an increase in
inquiry activity in the petrochemical and refining industries especially in the
overseas markets. Key drivers include an increased demand for petrochemical
products as well as waste-to-energy opportunities. We believe there will be
increased capital expenditures by the major oil and petrochemical companies in
calendar 2004 as demand

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improves. Additionally, China continues to significantly expand its
petrochemical capabilities. Critical to this expansion is additional ethylene
capacity - a core competency of our ECM segment. We are continuing to execute on
an ethylene plant in China with the bulk of the engineering and procurement
functions now complete.

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

Services Offered

Engineering and Design

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

Construction, Procurement and Maintenance

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

Consulting

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

Technology

Our world class proprietary olefin and refinery technologies, coupled with the
Badger associations and a polyolefins alliance with British Petroleum, allow us
to offer clients an integrated refinery and petrochemicals solution. The
combined S&W/Badger team, in conjunction with key alliance partners, offers
leading technology in many sectors of the refining and petrochemical industry.

ENVIRONMENTAL & INFRASTRUCTURE SEGMENT

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

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markets. Federal, state and local governmental entities and commercial
industrial companies are the primary customers for our E&I segment.

Environmental

Federal: The core service of our federal business is the delivery of
environmental restoration and regulatory compliance services to U.S government
agencies, such as the DOD, the Department of Energy ("DOE"), the Environmental
Protection Agency ("EPA"), and the Government Services Administration ("GSA").
Environmental restoration activities are centered on engineering and
construction services to support customer compliance with the requirements of
the Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), and the Resource Conservation and Recovery Act of 1976 ("RCRA").
Regulatory compliance activities are centered on providing professional services
to meet the requirements of the Clean Water Act, Clean Air Act, Toxic Substances
Control Act, and RCRA. For the DOE, we are presently working on several former
nuclear-weapons production facilities where we provide engineering, construction
and construction management for nuclear activities. For the DOD, we are involved
in projects at several Superfund sites and several FUSRAP (Formerly Utilized
Sites Remedial Action program) sites managed by the U.S. Army Corps of
Engineers. For the Department of the Army, we are working on the chemical
demilitarization program at several sites. The DOD is increasingly using
performance based contract vehicles, including guaranteed fixed-price contracts,
wherein we assume responsibility for cleanup and regulatory closure of
contaminated sites for a firm fixed-price. We purchase environmental insurance
to provide protection from unanticipated cost growth due to unknown site
conditions, changes to regulatory requirements and other project risks. As of
August 31, 2003, one contract with backlog of $50.0 million, or 1% of our total
backlog, contained these performance based contract vehicles.

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

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

Commercial: Commercial services provides environmental consulting,
engineering and construction services to private-sector and state/local
government customers. The business is comprised of three groups: the Commercial
Consulting and Engineering, the Construction and the Science and Technology
Groups. Core services of the Commercial Consulting and Engineering and
Construction Groups include engineering, consulting and turnkey management
services. These services include complete life cycle management, construction
management, operation and maintenance (O&M) services, and environmental services
including emergency response and high hazard and toxic waste cleanups and
on-site remedial activities. Through its three groups, commercial services
provides full service capability, including site selection, permitting, design,
build, operation, decontamination, demolition, remediation and redevelopment.
This year, we added ports, harbors, and waterways clients and highly qualified
economic, planning and engineering staff with global experience. Our services
range from initial studies to designing and constructing in-water remediation
projects, marine terminals and navigation improvements.

Additionally, the Science and Technology Group utilizes technology to solve
environmental problems and these efforts are supported by three company-owned
laboratories. This past year, we acquired the assets of Envirogen, Inc., a
company

12

noted for its bioreactor systems technology and expertise in the treatment of
contaminated groundwater and wastewater. Specific applications include
contaminants such as perchlorate, MTBE, and high strength waste streams from
food, beverage, and pharmaceutical industries.

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

Environmental Liability Solutions: Innovative environmental insurance
products now permit liability distribution that can reduce an owner's contingent
environmental liabilities. We were recently awarded a Fixed Price Remediation
Insured (FPRI) indefinite delivery/indefinite quantity multiple award contract.
We are one of three designated companies selected to bid on upcoming task orders
awarded under this contract, which has a potential shared value of up to $200
million. The Company has been awarded the first task order under this contract,
which is valued at approximately $10 million. Additionally, the Company was
selected as the sole bidder for another FPRI contract with a potential value of
up to an additional $200 million. We believe several U.S. Department of Defense
(DOD) agencies are moving rapidly toward this type of project delivery,
providing an expanding opportunity for us. We have also created the "Shaw
Insured Environmental Liability Distribution" or "SHIELD"(TM) program, a
proprietary structured transaction that insures and distributes environmental
liabilities for parties desiring to substantially reduce contingent
environmental liabilities.

Infrastructure

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

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

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

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

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

13

Transportation and Water: Demand in the transportation infrastructure
sector is driven by governmental appropriation programs, which are typically
multi-year in scope. In 2003, $7.2 billion in transit spending has been
allocated and transportation infrastructure funding is expected to increase 5 to
7% annually between 2004 and 2009. In the infrastructure industry, we have
particular expertise in rail transit systems, including subways. We also
participate in selected tunnel, bridge, airport and highway projects. In the
water sector, we provide engineering, and construction management services to
local government agencies, often through alliances with other firms. Demand for
our services in the water and wastewater business is driven by local government
spending to upgrade and expand water and wastewater processing capacity. Recent
projects include: construction management for the Metro West Water Supply Tunnel
in Massachusetts; construction management for a leachate migration system at the
Fresh Kills landfill in New York; and engineering and construction for a
membrane water treatment plant in Florida.

Internationally, our services are offered principally through our Roche
subsidiary, located in Quebec, Canada. Through Roche, we also arrange financing
to develop infrastructure projects in industrialized and developing countries.
We have an extensive network of local affiliates, which allows us to effectively
serve customers in regions where we do not have a local presence.

FABRICATION, MANUFACTURING AND DISTRIBUTION SEGMENT

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

Piping system integration accounts for a significant portion of the total
man-hours associated with constructing a Power Generation or a materials
processing facility. We provide fabrication of complex piping systems from raw
materials including carbon steel, stainless steel and other alloys, such as
nickel, titanium and aluminum. We fabricate pipe by cutting it to length,
welding fittings on the pipe and bending the pipe, each to precise customer
specifications. We currently operate pipe fabrication facilities in Louisiana,
South Carolina, Texas, Utah, Virginia, Oklahoma (where operations have been
substantially reduced as a result of decreased demand), the United Kingdom,
Venezuela (our pipe fabrication facility was closed due to political unrest
during 2003), and two joint ventures: Bahrain (49% interest) and China (50%
interest). Our fabrication facilities are capable of fabricating pipe ranging in
diameter from 1/2 inch to 72 inches, with overall wall thicknesses from 1/8 inch
to 7 inches. We can fabricate pipe assemblies up to 100 feet in length and
weighing up to 45 tons.

We believe our induction pipe bending technology is one of the most advanced,
sophisticated, and efficient technologies available, and we utilize this
technology and related equipment to bend pipe and other carbon steel and alloy
items for industrial, commercial and architectural applications. Pipe bending
can provide significant savings in labor, time and material costs, as well as
product strengthening. We are embarking on a robotics program which we believe
will result in productivity and quality levels not previously attained in this
industry. The first of many robotic systems will go into production in the first
quarter of 2004.

We manufacture specialty stainless, alloy and carbon steel pipe fittings for use
in pipe fabrication. These pipe fittings, which are used primarily by the Power
Generation and process industries, include stainless and other alloy elbows,
tees, reducers and stub ends ranging in size from 1/2 inch to 48 inches and
heavy wall carbon and chrome elbows, tees, caps and reducers with wall
thicknesses of up to 3 1/2 inches.

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

14

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

SEGMENT FINANCIAL DATA AND EXPORT SALE INFORMATION

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

REVENUES BY INDUSTRY AND GEOGRAPHIC REGION

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

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

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

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

15

BACKLOG

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

We estimate that approximately 36% of our backlog at August 31, 2003 will be
completed in fiscal 2004. Our backlog at August 31, 2003, does not include our
recently announced $565.0 million fixed-price EPC contract to build a
combined-cycle power plant in Queens, New York which was signed in September,
2003. We expect to include this project in our backlog, if and when financing
for this project is obtained.

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

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

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

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

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TYPES OF CONTRACTS

We focus our engineering, procurement and construction activities on
cost-reimbursable and negotiated fixed-price work with well-established clients.
We believe these types of contracts reduce our exposure to unanticipated and
unrecoverable cost overruns. Fixed-price contracts are generally obtained by
direct negotiation rather than by competitive bid. We have entered into
fixed-price or unit-price contracts on a significant number of our domestic
piping contracts and substantially all of our international piping projects. At
August 31, 2003, approximately 77% of our backlog was comprised of
cost-reimbursable contracts, 21% were fixed-price contracts and 2% were
unit-price contracts.

Our fixed-price contracts include the following:

o Firm fixed-price contract - A contract in which the price is not
subject to any adjustment by reason of our cost experience or our
performance under the contract. As a result, we benefit from costs
savings while generally being unable to recover any cost overruns on
these contracts.

o Maximum price contract - A contract which provides at the outset for
an initial target cost, an initial target profit, and a price ceiling.
The price is subject to adjustment by reason of our cost experience
but, in no event, would the adjustment exceed the price ceiling
established in the contract. In addition, these contracts usually
include provisions whereby we share costs savings with our clients. As
a result, we partially benefit from costs savings while we generally
are unable to recover any costs overruns in excess of the ceiling
price.

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

Our cost-reimbursable contracts include the following:

o Cost-plus contract - A contract under which we are reimbursed for
allowable or otherwise defined costs incurred plus a fee or mark-up
that represents profit. These contracts usually require that we use
our best efforts to accomplish the scope of the work within a
specified time; otherwise, we could be assessed liquidated damages.
The contracts may also include incentives for various performance
criteria including areas as quality, timeliness, ingenuity, safety and
cost-effectiveness.

o Target price contract - A contract under which we are reimbursed for
costs plus a fee consisting of two parts: (i) a fixed amount which
does not vary with performance and (ii) an award amount based on the
cost-effectiveness of the project. As a result, we are generally able
to recover any cost overruns on these contracts; however, we can be
assessed liquidated damages for late delivery or the failure to meet
certain performance criteria.

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

17

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

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

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

CUSTOMERS AND MARKETING

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

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

For the year ended August 31, 2002, we had revenues from entities owned or
controlled by PG&E National Energy Group, Inc. of approximately $676.0 million,
which represented approximately 26% of our ECM segment revenues and 21% of total
revenues. Also, we had total revenues from U.S. Government agencies or entities
owned by the U.S. Government of approximately $363.0 million (11% of our total
revenues) that included E&I segment revenues totaling approximately $203.0
million (41% of segment revenues).

Additionally, as of August 31, 2003, approximately 67% of our total backlog, and
approximately 89% of the E&I segment's backlog, is with U.S Government agencies
or entities owned by the U.S. Government. Contracts with five separate
commercial customers of the ECM segment represent approximately 26% of our
backlog at August 31, 2003.

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

RAW MATERIALS AND SUPPLIERS

For our engineering, procurement and construction services, we often rely on
third party equipment manufacturers and subcontractors to complete our projects.
We are not substantially dependent on any individual third party to support
these operations.

18

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

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

INDUSTRY CERTIFICATIONS

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

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

PATENTS, TRADEMARKS AND LICENSES AND OTHER INTELLECTUAL PROPERTY

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

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

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

19

COMPETITION

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

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

EMPLOYEES

At August 31, 2003, we employed approximately 14,800 employees, and
approximately 2,200 of these employees were represented by labor unions pursuant
to collective bargaining agreements. We also employ union labor from time to
time on a project-specific basis. We believe that the current relationships with
our employees (including those represented by unions) are satisfactory. We
are not aware of any circumstances that are likely to result in a work stoppage
at any of our facilities. As of August 31, 2003, one of our labor union
collective bargaining agreements was scheduled to be renegotiated in September
2003; however, an extension of time was granted through October 31, 2003.

At August 31, 2003, of our total employees, approximately 1,100 work in our
wholly-owned subsidiaries in Canada and 1,100 work in the United Kingdom.

ENVIRONMENTAL LAWS AND REGULATIONS

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

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

20

ITEM 2. PROPERTIES

Our principal properties at August 31, 2003 are as follows:

APPROXIMATE

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

(1) Leased facility.

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

(3) Facility is being marketed for sale.

(4) This facility has been temporarily closed due to political and economic
conditions.

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

ITEM 3. LEGAL PROCEEDINGS

NRG - Pike

During the fourth quarter of 2002, one of our customers, LSP-Pike Energy, LLC
("Pike"), notified us that it would 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 was at the time owned by Xcel Energy, Inc. ("Xcel"). On September
4, 2002, in accordance with the terms of the contract, we notified Pike that it
was in breach of the terms of the contract for nonpayment and terminated the
contract. On October 17, 2002, we filed an involuntary petition for liquidation
of Pike under Chapter 7 of the U.S. Bankruptcy Code in the U. S. Bankruptcy
Court for the Southern District of Mississippi, Jackson Division. Then, on May
14, 2003, NRG and certain affiliates filed voluntary petitions under Chapter 11
of the Bankruptcy Code in the U. S. Bankruptcy Court for the Southern District
of New York. Prior to the contract termination, we had commitments and
agreements to purchase equipment for the project and had entered into agreements
with subcontractors to perform work on the project. Some of the commitments and
agreements contained cancellation clauses that required payment or settlement
provisions. The sum of the amounts that we have incurred or are committed to
incur in excess of amounts previously collected from Pike and the profit
recorded on the project is approximately $45.0 million. We have reduced this
amount from our original estimate of $75 to $80 million as we have reached
settlements with subcontractors, vendors and others. Of the $45 million,
approximately $17.5 million remains unpaid at August 31, 2003.

21

On October 3, 2003, we reached an agreement for the settlement of our claims
related to the cancellation of the Pike project. The agreement provides that,
among other consideration, we will receive a fixed claim of $35.0 million in the
pending bankruptcy of NRG (which we have valued at $14.7 million) and we will
retain ownership of the Pike project site, land and materials and equipment
excluding the turbines, which we have valued at approximately $30.0 million
based on our assessment of the current market for this type of equipment, net of
$10 million of costs to be incurred should the company elect to take delivery of
certain equipment. Portions of this settlement are subject to or dependent upon
approval of the bankruptcy court, which we believe is likely.

The value of the consideration received in the settlement agreement plus cash
previously received from Pike equaled the costs incurred and profit recognized
on the project; therefore, no gain or loss was recognized on the settlement.
Because the contract was terminated on September 4, 2002, no revenue or profit
related to Pike was recognized in fiscal 2003. The value of the claim receivable
of $14.7 million is included in accounts receivable and the value of the
equipment of $30.0 million is included in other assets as of August 31, 2003. We
expect to sell or use the equipment to generate revenue and have targeted
specific project opportunities where this equipment could be installed. In
October 2003, we accepted an offer to sell our $35.0 million claim for net
proceeds of $14.7 million. After completion of appropriate documentation,
funding of the sale will take place, on a recourse basis, pending final
bankruptcy court approval of the settlement discussed above.

NEG - Covert & Harquahala

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

In May 2003, after extensive negotiations with NEG's project entities, NEG, and
the lenders, all parties reached a definitive agreement for settlement of claims
related to the Covert and Harquahala projects. The settlement provided for
fixed-price EPC contracts which increased the original target price for both
projects by a total of $65.0 million, termination of the target priced
components of the original agreements which provided for recovery of costs in
excess of the fixed-price contracts, dismissal of pending legal proceedings, and
our release of claims based on existing change orders and the incurrence of
other additional costs, and extension of the schedule for completion of the
projects. The revised schedule provided for us to complete the Harquahala
project in September 2003 and the Covert project in December 2003. We expect to
achieve substantial completion at the Harquahala project in November 2003 and at
the Covert project in January 2004, and we have included expected costs of
liquidated damages from the delayed completion dates in our cost estimates. NEG
paid us $32.5 million in May 2003, as a result of this settlement and required
us to post a letter of credit in their favor for the same amount.

As of August 31, 2003, we have recorded claims and backcharges totaling $49.3
million against vendors and subcontractors related to these two projects. Based
on our evaluation and the advice of legal counsel, we believe we have a strong
basis for claims and backcharges (including claims against vendors based on
their delivery of incomplete and/or defective equipment and claims against
various subcontractors for their delays in providing services) in excess of the
recorded amounts; however, recovery of the claims and backcharges is dependent
upon our negotiations, arbitration and litigation with several subcontractors,
vendors and equipment manufacturers. If we ultimately collect amounts different
from the amounts recorded, we will recognize the difference as income or a loss.
We cannot assure you as to the outcome of these claims and backcharges.

During 2003, we recognized a loss of $42.8 million (which includes a $30.0
million loss recorded in the second quarter of 2003) on these two projects,
$33.1 million of which was reversal of profit recognized prior to 2003. We will
incur additional costs on the projects for which we expect to be reimbursed as
they wind down in November and December of 2003.

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

22

AES - Wolf Hollow

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

At the time we entered into the EPC contract, the project's provisional
acceptance was scheduled for October 15, 2002; however, acceptance of this
project was delayed. We believe the delay from October 15, 2002 was primarily
due to (i) the significant overstatement of the percentage completion by AES and
Parsons (the engineers on the project) at the time we entered into the contract;
(ii) a fire that occurred in June of 2002 at the project site; and (iii) failure
of a turbine during start-up testing in May 2003. We believe the project reached
provisional acceptance on July 24, 2003, although AES did not agree to
provisional acceptance until August 8, 2003. The contract terms include
liquidated damages in the event of late completion of $120,000 per day from
October 15, 2002 through June 1, 2003 and $185,000 per day thereafter until
provisional acceptance occurs, for which AES has billed us $40.0 million in
aggregate.

We were unable to resolve our claims with AES through the dispute resolution
process called for in the contract with respect to a force majeure claim we made
resulting from the fire and other change orders. On November 5, 2002, we filed
suit against AES in the District Court of Hood County, Texas for breach of
contract. On May 9, 2003, we added Parsons as a defendant and expanded the
complaint to include claims related to misrepresentation. In June 2003, the AES
Corporation was also added as a defendant. This case is currently scheduled for
a jury trial in November 2004. Unless we reach a settlement prior to the trial
date, we would not expect recovery of disputed amounts due from AES before 2005.

In excess of the original $99.0 million contract price, we have recorded claims
receivable from AES of $25.4 million for additional costs incurred due to the
fire, misrepresentation of the percentage of completion, disputed change orders
and other claims. In addition, we have recorded receivables of approximately
$7.2 million that we expect to recover from insurance proceeds related to the
fire and backcharges from subcontractors and vendors.

Of the original $99.0 million contract price, AES has not paid $21.6 million of
billed milestones and $7.0 million of retention. In addition, $13.6 million of
milestones remain unbilled related to final completion and acceptance, which we
expect to occur during October 2003. Under the terms of the EPC contract, AES,
at its option, may pay up to $27.0 million of the contract price in subordinated
notes or cash. The subordinated notes, $14.7 million of which were issued as of
August 31, 2003 for payment of billed milestones, bear interest at prime plus 4%
and mature in October 2009. We expect that substantially all of the remaining
unbilled milestone amounts will be paid with subordinated notes. If any amounts
under the notes are unpaid eight months following final acceptance of the
project, the unpaid notes, plus a cash payment of the amounts, if any, paid on
the notes through the conversion date, is convertible, at our option, into a
49.9% equity interest in the project.

Further, at the initiation of the project, we secured our obligations under the
contract by providing letters of credit totaling $28.0 million and in August and
September 2003, AES drew the full amount of the letters of credit. We have
recorded an additional receivable of $28.0 million from AES for reimbursement of
these draws, $14.0 million of which was receivable as of August 31, 2003. We
recorded revenue of $43.1 million and loss of $2.3 million from this contract
for the year ended August 31, 2003.

23

The following table summarizes contract amounts due from AES and claims recorded
on the project including the $14.0 million letter of credit draw by AES in
September 2003 (in millions):

Amounts due from AES:
Amounts remaining to be paid under the
original contract terms:
Billed milestones receivable $ 21.6
Subordinated Notes Receivable from AES 14.7
Retention receivable 7.0
Milestones unbilled at August 31, 2003
(to be billed upon completion of final
testing and final acceptance)(1) 13.6
----------

Total contractual amounts due from AES 56.9

Reimbursement of letter of credit draws $ 28.0

Claims for additional costs incurred 25.4
----------

Total amounts receivable from AES 110.3

Claims receivable from subcontractors and others 7.2
----------

Total amounts receivable, excluding amounts
related to liquidated damages described below $ 117.5
==========

- ----------------
(1) Of the total milestones unbilled at August 31, 2003, $13.0 million could be
paid by AES in Subordinated Notes.

The above amounts are recorded in the following balance sheet accounts:

Accounts receivable (1) $ 71.3

Costs and estimated earnings in excess of billings on
uncompleted contracts, including claims receivable 46.2
----------

$ 117.5
==========

- ---------------
(1) Includes $14.0 million letter of credit draw by AES in September 2003. The
balance included in our balance sheet at August 31, 2003 is $57.3 million.

If we collect amounts different than the amounts that we have recorded as
receivables from AES of $110.3 million or if we collect amounts different than
the amounts receivable from subcontractors and vendors of $7.2 million, then
that difference would be recognized as income or loss.

AES has assessed and billed us approximately $40.0 million in schedule
liquidated damages due to the late completion of the project. While we dispute
or expect to recover the liquidated damages because late delivery was primarily
due to the fire, misrepresentation of the percentage of completion and other
delays caused by AES, subcontractors and vendors, we have recognized a reduction
of revenue of approximately $8.0 million of liquidated damages billed to us. Of
the remaining $32.0 million of liquidated damages, we have excluded $17.9
million from our cost estimates and we have recorded recoveries of approximately
$14.1 million from subcontractors and vendors, including the turbine
manufacturer.

24

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

Amount of liquidated damages that have
been included in costs $ 8.0

Amounts related to liquidated damages that
have been excluded from our recorded costs:

Liquidated damages relief from AES $ 17.9

Liquidated damages to be reimbursed by
subcontractors and vendors 14.1
----------

32.0
----------
Total liquidated damages assessed by AES $ 40.0
==========

The closing sales price of the common stock on October 17, 2003, as reported on
the NYSE, was $9.98 per share. As of October 17, 2003, we had 178 shareholders
of record.

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

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

26

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following table presents, for the periods and as of the dates indicated,
selected statement of income data and balance sheet data on a consolidated
basis. The selected historical consolidated financial data for each of the five
fiscal years in the period ended August 31, 2003 presented below has been
derived from our audited consolidated financial statements. Ernst & Young LLP
audited our consolidated financial statements for the fiscal years ended August
31, 2003 and August 31, 2002. Arthur Andersen LLP audited our consolidated
financial statements for each of the three fiscal years in the three-year period
ended August 31, 2001. Such data should be read in conjunction with the
Consolidated Financial Statements and related notes thereto included elsewhere
in this Annual Report on Form 10-K and Item 7. - "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

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

(2) Earnings per share for fiscal 2000 and 1999 have been restated to reflect
the effect of the December 2000 two-for-one stock split of our common
stock.

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

27

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

(5) Includes the acquisition of certain assets of Scott, Sevin & Schaffer, Inc.
and Technicomp, Inc. in fiscal 2001 (see Note 4 of the notes to our
consolidated financial statements).

(6) Includes the acquisition of certain assets of Stone & Webster and PPM
Contractors, Inc. in fiscal 2000 (see Note 4 of the notes to our
consolidated financial statements).

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

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

GENERAL

Effective February 28, 2003, we reorganized our operations, resulting in a
change in our operating segments. Prior to February 28, 2003, we reported in
three segments: Environmental & Infrastructure, Integrated EPC Services and
Manufacturing and Distribution. Effective February 28, 2003, we segregated our
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 our
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, technology 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. We also manufacture and distribute specialty
stainless, alloy and carbon steel pipe fittings.

Comments Regarding Future Operations

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

28

CRITICAL ACCOUNTING POLICIES AND RELATED ESTIMATES THAT HAVE A MATERIAL EFFECT
ON OUR CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

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

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

29

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

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

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

The accuracy of the gross margins we report for fixed-price contracts is
dependent upon the judgments we make with respect to our contract
performance, our cost estimates, and our ability to recover additional
contract costs through change orders, claims or backcharges to
subcontractors and vendors. Many of these contracts also have
incentive/penalty provisions. Increases in cost estimates, unless
recoverable from claims, will result in a reduction in margin equivalent to
the cost increase multiplied by the percent-complete of the project.

C. Revenues and gross margin on contracts can be significantly affected by
claims against customers, vendors and others that may not be negotiated
until the later stages of a contract or subsequent to the date a contract
is completed. Claims include amounts in excess of the agreed contract price
(or amounts not included in the original contract price) that we seek to
collect from our customers for delays, errors in specifications and
designs, contract terminations, change orders in dispute or unapproved as
to both scope and price, or other causes of unanticipated additional costs.
These claims from customers are included in our revenue estimates as
additional contract revenue to the extent that contract costs have been
incurred when the recovery of such amounts is probable. Backcharges and
claims from vendors, subcontractors and others are included in our cost
estimates as a reduction in total estimated costs when recovery of the
amounts are probable and the costs can be reasonably estimated.

We refer to these claims from customers and backcharges and claims from
vendors, subcontractors and others as "claims." As a result, the recording
of claims increases gross margin or reduces gross loss on the related
projects in the period the claims are recorded.

When calculating the amount of total gross margin or loss on a contract, we
include claims from our customers as revenue and claims from vendors,
subcontractors and others as reductions in cost of revenues when the
collection is deemed probable and the amounts can be reasonably estimated.
Including claims in this calculation increases the gross margin (or reduces
the loss) that would otherwise be recorded without consideration of the
claims. Claims are recorded to the extent of costs incurred and include no
profit element. In substantially all cases, the claims included in
determining contract gross margin are different from the actual claim that
will be or has been presented.

When recording the revenue and the associated receivable for claims, we
accrue an amount equal to the costs incurred related to claims. Claims
receivable are included in costs and estimated earnings in excess of
billings on the balance sheet. Claims also include expected relief from
liquidated damages, which are excluded from recorded costs.

A summary of claims activity related to our major projects for the years
ended August 31, 2003 and 2002 is presented in the table below (in
thousands). The claims at August 31, 2003 summarized in the table relate to
four contracts, most of which are complete or substantially complete. We
are actively engaged in claims negotiation with these customers or have
commenced legal proceedings. The largest claims relate to the Wolf Hollow,
Covert and Harquahala contracts, which projects were approximately 99%, 92%
and 99% complete, respectively, at August 31, 2003. The amounts include
claims from

30

customers, subcontractors, and vendors as well as relief from liquidated
damages. The table excludes amounts related to one project for which we
believe our exposure to liquidated damages is fully reserved at August 31,
2003 based on preliminary settlement discussions. Of the August 31, 2003
balance, $44.8 million is included in costs and estimated earnings in
excess of billings and $77.7 million relates to relief of liquidated
damages excluded from recorded costs.

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

Other Revenue Recognition and Profit and Loss Estimates

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

Allowance for Doubtful Accounts

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

Income Taxes

Deferred income taxes are provided on a liability method whereby deferred tax
assets/liabilities are established for the difference between the financial
reporting and income tax basis of assets and liabilities, as well as operating
loss and tax credit carryforwards. Deferred tax assets are reduced by a
valuation allowance when, in our opinion, it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the period in which those temporary differences become
deductible. We also consider the reversal of deferred tax liabilities, projected
future taxable income, and tax planning strategies in making this assessment of
such changes. Deferred tax assets and liabilities are adjusted for the effects
of changes in tax laws and rates on the date of enactment. As of August 31,
2003, we had gross deferred tax assets of $99.3 million including $49.4 million
related to net operating losses and tax credit carryforwards. As of August 31,
2003, we had a deferred tax asset valuation allowance of $3.4 million.

Acquisitions - Fair Value Accounting and Goodwill Impairment

Goodwill represents the excess of the cost of acquired businesses over the fair
market value of their identifiable net assets. Our goodwill balance as of August
31, 2003 was approximately $511.4 million, most of which related to the Stone &
Webster and IT Group acquisitions (see Note 4 and Note 8 of the notes to our
consolidated financial statements).

31

In the first quarter of fiscal 2002, we adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standard, or SFAS, No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 142 deals with, among other
matters, the accounting for goodwill. SFAS No. 142 requires that goodwill no
longer be amortized, but that impairment of goodwill assets must be reviewed on
a regular basis based on a fair value concept. SFAS No. 142 prohibits
amortization of goodwill, thereby removing certain differences between book and
tax expense, which has resulted in a reduction of our effective tax rate. If
SFAS No. 142 had been in effect during fiscal 2001, we estimate that our diluted
earnings per share would have been increased by approximately $0.32 per share
for the year ended August 31, 2001. This increase in diluted earnings per share
would have resulted from the cessation of goodwill amortization and a lower
effective tax rate (see Note 8 of the notes to our consolidated financial
statements).

We have completed our annual impairment test as of March 1, 2003 in accordance
with SFAS No. 142 and have determined that our goodwill is not impaired.
However, our businesses are cyclical and subject to competitive pressures.
Therefore, it is possible that the goodwill values of our businesses could be
adversely impacted in the future by these or other factors and that a
significant impairment adjustment, which would reduce earnings and affect
various debt covenants, could be required in such circumstances. Our next
required annual impairment test will be conducted as of March 1, 2004.

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

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

Effective May 1, 2001, we issued and sold $790.0 million of 20-year,
zero-coupon, unsecured, convertible debt, Liquid Yield Option(TM) Notes, or
LYONs. The LYONs were issued at an original discount price of $639.23 per $1,000
maturity value and have a yield to maturity of 2.25%. We realized net proceeds
after expenses from the issuance of the LYONs of approximately $490 million. The
LYONs are our senior unsecured obligation and are convertible into our common
stock at a fixed ratio of 8.2988 shares per $1,000 maturity value (subject to
anti-dilution adjustments) resulting in an effective conversion price at the
date of issuance of $77.03 per share of common stock issuable upon conversion of
the LYONs (see Note 9 of the notes to our consolidated financial statements).

In addition to the conversion feature described above, the holders of the LYONs
have the right to require us to repurchase the LYONs on each of May 1, 2004, May
1, 2006, May 1, 2011, and May 1, 2016 at the then accreted value (the original
issue price of the LYONs increased by 2.25% per year). We currently anticipate
funding all of the LYONs repurchase obligations in cash. We believe we have
sufficient options in the marketplace to obtain such cash from the proceeds of
the issuance of common stock and borrowings of debt. In addition, we may elect
to repurchase all or a portion of the LYONs with cash from the same sources
prior to May 1, 2004. We also have the right to fund such repurchases with
shares of our common stock valued at the current market value at the time of the
repurchases, or cash, or a combination of common stock valued at the current
market value at the time of the repurchases, and cash. Although we do not intend
to do so, if some or all of the LYONs were redeemed in common stock, the
incremental dilutive shares would be (in proportion to the portion converted)
significantly greater than the dilution based upon the conversion terms
reflected above.

On March 31, 2003, pursuant to a tender offer which commenced on February 26,
2003, we completed the purchase of LYONs with an amortized value of
approximately $256.7 million and an aggregate principal value of approximately

32

$384.6 million for a cost of approximately $248.1 million. During the fourth
quarter of fiscal 2003, we repurchased additional LYONs with an amortized value
of approximately $21.5 million and an aggregate principal value of $32.0 million
for a cost of approximately $20.6 million.

We have, in accordance with SFAS No. 128, "Earnings per Share," computed our
diluted earnings per share using the "if converted method" assumption that the
LYONs would be converted at the contract rate of 8.2988 shares per $1,000
maturity value (or an approximate equivalent conversion price of $81.16 at
August 31, 2003). Under this method, for the year ended August 31, 2002, we have
reported diluted earnings per share to reflect approximately 6,556,000
additional shares on the basis that the LYONs would be converted into common
stock at a rate of 8.2988 shares per $1,000 maturity value. For the years ended,
August 31, 2003 and 2001, the effect of the LYONs convertible debt of 5,154,000
and 2,209,000 incremental shares has been excluded from the calculation of
diluted income per share because it was antidilutive. We have presented the
LYONs as short-term debt as opposed to equity on our balance sheet with the
entire balance classified as current as of August 31, 2003.

We currently anticipate funding all of the LYONs repurchase obligations in cash.
We are currently evaluating our options with respect to any LYONs that may be
submitted to us for repurchase, and we believe we have sufficient options in the
marketplace, including refinancing the LYONs repurchase obligation in cash from
the proceeds of a combination of the issuance of common stock and borrowings of
debt. Therefore, pursuant to SFAS No. 128, our financial statements do not
reflect the effect on diluted earnings per share that could result from the
issuance of additional shares of our common stock resulting from the submission
by the holders of the LYONs for repurchase on the specified anniversary dates.
It is possible that in adverse circumstances, such as a combination of a large
number of repurchase requests, low stock price and/or liquidity or financing
restraints, we could be required to issue a significant number of shares to
satisfy our repurchase obligations and the number of shares actually issued
could exceed the number of shares presently being used to compute diluted
earnings per share (see Note 16 of the notes to our consolidated financial
statements). The issuance of a large number of shares could significantly dilute
the value of our common stock and materially affect our earnings per share
calculations.

Litigation, Commitments and Contingencies

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

Retirement Benefits

Assumptions used in determining projected benefit obligations and the fair value
of plan assets for our pension plans are regularly evaluated by management in
consultation with outside actuaries who are relied upon as experts. In the event
that we determine that changes are warranted in the assumptions used, such as
the discount rate, expected long-term rate of return on investments, or future
salary costs, our future pension benefit expenses could increase or decrease. As
of August 31, 2003, we had a minimum pension liability recorded of $20.9
million. This liability will likely require us to increase our future cash
contributions to the plans.

33

RESULTS OF OPERATIONS

The following table presents summary income and expense items as a percentage of
revenues:

FISCAL 2003 COMPARED TO FISCAL 2002

General

Our revenues by industry sector were as follows:

The increase in total revenue from 2002 to 2003 was primarily attributable to an
increase in revenue from our E&I segment, partially reduced by the extended
weakness in the domestic power market, which has had a pervasive negative impact
on our ECM and Fabrication, Manufacturing and Distribution revenues. Revenue
from the power generation sector was approximately $687.5 million less in fiscal
2003 than in fiscal 2002, as revenue from several large gas-fired power
generation projects, which commenced in fiscal 2001 and early fiscal 2002,
declined upon completion of those projects. The decrease in power industry
revenue was offset by a $714.0 million increase in environmental and
infrastructure revenue from fiscal 2002 to fiscal 2003, due primarily to the
acquisition of the IT Group in May 2002 (see Note 4 of the notes to our
consolidated financial statements), and a $181.9 million increase in process
revenue, due primarily to a 600,000 tons-per-year ethylene plant project in
China.

34

The following tables present our revenues by geographic region:

Revenues for projects in the United States increased $55.9 million for the year
ended August 31, 2003 due primarily to growth in environmental and
infrastructure revenues, partially offset by the previously mentioned decline in
power generation revenues.

Revenues from international projects increased to $494.6 million for the year
ended August 31, 2003 from $414.4 million for the year ended August 31, 2002.
The revenue increase in the Asia Pacific Rim region was primarily the result of
the work performed on the ethylene plant in China. The increase in revenue in
Canada was due primarily to an environmental consulting unit acquired through
the IT Group acquisition.

Backlog by industry sector is as follows:

The decrease in backlog of $853.4 million since August 31, 2002 is attributable
to reduction in demand for gas-fired power generation services, which resulted
in a decrease in new orders for our services. Since August 31, 2002, the decline
in power generation awards has been partially offset by increases in awards for
environmental and infrastructure services, services to the process industry, and
nuclear maintenance services. Approximately 91% of the backlog relates to
domestic projects and approximately 36% of the backlog relates to work currently
anticipated to be completed during the 12 months following August 31, 2003.
power generation backlog at August 31, 2003 does not include our $565 million
fixed-price EPC contract (signed and announced in September 2003) to build a
combined cycle power plant in Queens, New York. We expect to include this
project in our backlog if and when financing for this project is completed.

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

35

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

ECM Segment

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

The decrease in total segment revenue from fiscal 2002 to fiscal 2003 was due to
the downturn in the domestic power market, specifically the decline in gas-fired
power generation projects and power engineering and consulting activity which
reduced new orders for our ECM services, partially offset by an increase in
revenue from process projects and nuclear maintenance and restart projects.
Process industry revenues increased primarily due to work on the ethylene plant
project in China that is scheduled to continue into fiscal 2005. Due to the
decline in the market for the construction of new gas-fired power plants, we
anticipate that the ECM segment's revenues will decline in early fiscal 2004 as
compared with fiscal 2003 as remaining in-process EPC projects booked in 2001
and early 2002 are completed.

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

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

Gross profit percentage was negatively impacted by the Covert and Harquahala
projects (the NEG projects), on which we recorded revenues of $433.4 million
during 2003 and a $42.8 million charge ($33.1 million of which resulted from
reversal of gross profit recorded prior to fiscal 2003) related to the NEG
projects that negatively impacted the ECM segment's gross profit by 4.6% for
fiscal 2003. This charge was a result of increased estimated costs to complete
these projects combined with an agreement with the owners of these projects and
their lenders that increased the contract prices by a total of $65.0 million and
converted the contracts from target-price to fixed-price (see Note 12 of the
notes to our 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). Of the $42.8
million loss recorded during 2003 on the NEG projects, $4.9 million was recorded
in the fourth quarter reflecting a $19.2 million increase in estimated cost at
completion of the

36

projects, offset by an increase in expected recovery of claims from NEG and
backcharges and liquidated damages expected from vendors and subcontractors
totaling $14.3 million.

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

We believe we have a strong basis for claims and backcharges in excess of the
recorded amounts discussed above; however, recovery of the claims and other
amounts is dependent upon negotiations with the applicable parties and the
results of litigation. We cannot assure you as to the timing or outcome of these
negotiations or results of litigation. If we collect amounts different than the
amounts recorded or if we are held responsible for liquidated damages different
than the amounts recorded, we will recognize the difference as income or loss.

We reversed previously recorded profit of $4.3 million in the fourth quarter of
2003 resulting from the settlement with our customer of disputed change orders
and other items on our target price EPC contract to build a combined-cycle
cogeneration facility near Philadelphia, Pennsylvania. The settlement agreement
eliminates our exposure to schedule risk and related liquidated damages,
maintains our guaranteed minimum fee and provides for incentives that allow us
to earn profit in excess of the minimum fee.

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

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

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

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

The ECM segment's backlog 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. Our fossil
fuel EPC backlog does not include our $565.0 million fixed-price EPC contract
(signed and announced in

37

September 2003) to build a combined cycle power plant in Queens, New York. We
expect to include this project in our backlog, if and when financing for this
project is completed.

We anticipate 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 revenues from
the power industry in fiscal 2004 will be less than in prior years, we expect to
continue to design and construct new power plants. However, due to expected
decreases in revenues from the power industry, we expect total revenue from the
ECM segment to be lower in 2004 than in 2003. Further, we would expect gross
profit percentages from ECM to decline during the first quarter of 2004 and
return to approximately the levels reported in fiscal 2002 over the balance of
the year.

E&I Segment

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

The increase in gross profit was primarily attributable to our acquisition of
the IT Group assets and operations in May 2002. Gross profit was increased (cost
of revenues decreased) by approximately $19.3 million in fiscal 2003 and $2.8
million in fiscal 2002 for the amortization of asset/liability adjustments to
the fair value of contracts acquired in the IT Group acquisition. In addition,
gross profit was increased (cost of revenues decreased) by approximately $12.2
million in fiscal 2003 and $2.8 million in fiscal 2002 for the usage of accrued
loss reserves related to contracts acquired in the IT Group acquisition (see
Note 4 and Note 12 of the notes to our consolidated financial statements).

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

Backlog for the E&I segment increased to approximately $2.8 billion as of August
31, 2003 from approximately $2.3 billion as of August 31, 2002. We believe 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 security and infrastructure markets and our belief that we
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. We anticipate that
segment revenue for fiscal 2004 will be slightly higher than fiscal 2003 and we
expect gross profit percentages in 2004 to be consistent with 2003.

38

Fabrication, Manufacturing and Distribution Segment

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

As a result of the current market situation, we have decided to significantly
reduce or cease production at certain smaller facilities, consolidate certain
operations, and implement certain other cost savings programs for this segment.
Further, we have suspended operations at our facility in Venezuela due to the
political situation in that country. We expect domestic demand to continue at
reduced levels for fiscal 2004, though we are experiencing an increase in
inquires in foreign markets for this segment. 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. Given this market
outlook, we expect revenues and gross profit levels to remain flat for the
fabrication, manufacturing and distribution segment over the next few quarters.

Unconsolidated Subsidiaries

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

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

General and administrative expenses increased to approximately $200.9 million in
fiscal 2003, compared with approximately $161.2 million in fiscal 2002. As a
percentage of revenues, general and administrative expenses increased to 6.1% in
fiscal 2003 compared to 5.1% in fiscal 2002. A substantial portion of the
approximate $38.9 million increase in general and administrative costs are
attributable to the operations of the E&I segment (comprised largely of the IT
Group operations which we acquired during the third quarter of fiscal 2002). We
also incurred increased depreciation and facilities costs in fiscal 2003
resulting from capital projects and the move into our new corporate facility in
Baton Rouge, Louisiana completed in the latter part of fiscal 2002. General and
administrative expenses are expected to trend slightly downward during 2004 as
we continue to integrate our administrative functions. General and
administrative costs for the fourth quarter and the fiscal year 2003 were
reduced by $3.4 million resulting from the favorable resolution of estimated
obligations recorded in the acquisition of Stone & Webster in fiscal 2000.

Interest expense was approximately $32.0 million in fiscal 2003, compared to
approximately $23.0 million in fiscal 2002. The increase over prior year is
primarily due to the issuance on March 17, 2003 of approximately $253 million
principal amount of 7-year, 10.75% Senior Notes, partially offset by a reduction
in interest expense related to the LYONs repurchase

39

with an amortized value of approximately $256.7 million in March 2003 (see Note
9 of the notes to our consolidated financial statements). Our interest costs
also include the amortization of loan fees associated with the Senior Notes, the
LYONs and the Credit Facility, as well as unused line of credit and letter of
credit fees, and therefore, our interest expense is higher than would be
expected based on our borrowing levels and the stated interest rates. A
significant portion of our interest expense (accretion of zero-coupon discount
interest and amortization of loan fees) represents non-cash charges.

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

For fiscal 2003, other income (expense) included a charge of approximately $12.4
million for the write-off of (i) investments in securities available for sale of
Orion of approximately $6.6 million, (ii) accounts and claims receivable due
from Orion of approximately $5.8 million, and (iii) other accounts receivable of
approximately $0.8 million. Also included in other income (expense) for fiscal
2003 were gains of approximately $2.0 million and $0.8 million, net of expenses
and the write-off of unamortized debt issuance costs, related to the March 2003
and August 2003, respectively, repurchases of portions of the LYONs (see Note 9
of the notes to our consolidated financial statements).

Our effective tax rate was 33% for fiscal 2003 compared to 36% for fiscal 2002.
Our tax rate is significantly impacted by the mix of foreign (including foreign
export revenues) versus domestic work. The decrease in the tax rate in fiscal
2003 versus fiscal 2002 is due primarily to the decrease in income before taxes,
and the related increase in the ratio of favorable permanent differences to
income before taxes. Additionally, the increased foreign income in fiscal 2003
had a lower overall rate of tax than domestic income. We did not pay any federal
income taxes in fiscal 2003 primarily because of a taxable loss for the fiscal
2003 year and the utilization of operating losses resulting from the IT Group
and Stone & Webster acquisitions. In fiscal 2003, we established a valuation
allowance against the deferred tax asset for the Venezuelan net operating losses
and in fiscal 2002, we established a valuation allowance against the deferred
tax asset for the Australian net operating losses. The valuation allowance
reflects our judgment that it is more likely than not that a portion of the
deferred tax assets will not be realized. We believe that the remaining deferred
tax assets at August 31, 2003, amounting to $95.9 million, are realizable
through future reversals of existing taxable temporary differences and future
taxable income. Uncertainties that affect the ultimate realization of deferred
tax assets include the risk of not having future taxable income. This factor has
been considered in determining the valuation allowance.

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

40

FISCAL 2002 COMPARED TO FISCAL 2001

General

Our revenues by industry for the periods presented approximated the following
amounts:

Our revenues by geographic region for the periods presented approximated the
following amounts:

The primary reason for the increase in revenue from 2001 to 2002 was an
approximately $1.3 billion increase in revenues from construction of new
gas-fired power plants realized by the ECM and fabrication, manufacturing and
distribution segments. Additionally, during the third quarter of fiscal 2002, we
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, we formed a new
business segment, the E&I segment, by combining the acquired IT Group operations
with our existing environmental and infrastructure businesses. This acquisition
increased our revenues from environmental and infrastructure services to $489.8
million in fiscal 2002, from fiscal 2001 revenues of $186.2 million, an increase
of $303.6 million.

The following table breaks out our backlog in the following industry sectors:

The following presents a comparison of our operating results from fiscal 2002
compared with fiscal 2001 for our three business segments.

ECM Segment

41

Revenues by industry for the ECM segment approximated the following amounts and
percentages:

Revenues from the domestic Power Generation market accounted for substantially
all of the increase from 2001 to 2002. The increase in revenues was attributable
to significant contracts for the construction of new gas-fired power plants
entered into in fiscal 2001 when there was strong demand for these facilities.
Most of these contracts were completed in fiscal 2003.

Process industries revenues in fiscal 2002 decreased by approximately $35.1
million, from fiscal 2001. This decrease was attributable to industry trends and
our decision not to pursue low margin projects similar to those we assumed in
the Stone & Webster acquisition in fiscal 2000. Revenues from other industries
increased by approximately $28.3 million in fiscal 2002 compared to fiscal 2001,
primarily as a result of an increase in domestic revenues.

Segment gross profit increased 25%, or $33.6 million, to $170.4 million in
fiscal 2002 from $136.8 million in fiscal 2001 due to the growth in revenue
volume during the year. Gross profit in fiscal years 2002 and 2001 was increased
(cost of sales decreased) by approximately $32.0 million and $99.3, million
respectively, by the utilization of contract adjustments and accrued contract
loss reserves that were established to record the fair value of primarily
fixed-price contracts acquired in the Stone & Webster acquisition.

The gross profit percentage for the year ended August 31, 2002 decreased to 7.5%
from 13.5% in the prior year. This decrease in gross margin percentage is
attributable to fiscal 2002 revenues having a much higher percentage of lower
margin revenue as compared with fiscal 2001. The lower margins relate primarily
to i) cost-reimbursable contracts entered into in fiscal 2001 and ii) purchases
of large equipment items for power generation contracts.

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

Segment backlog at August 31, 2002 was approximately $3.0 billion as compared
with approximately $3.7 billion at August 31, 2001, and was comprised of the
following:

42

The decline in backlog was primarily because the demand for the construction of
new domestic power plants fell dramatically due to questions about future
economic growth rates and whether the United States had excess power generation
capacity. Further, certain of our independent and merchant power producer
customers experienced severe liquidity problems as financing was reduced to
these companies and their projects. As a result of these conditions, during the
fourth quarter of fiscal 2002, three customers cancelled or suspended their
projects, resulting in a reduction of our backlog of approximately $300 million.

E&I Segment

E&I segment revenues in fiscal 2002 were $489.8 million, an increase of $303.6
million from fiscal 2001 revenue of $186.2 million. This increase was entirely
attributable to our acquisition of the IT Group assets (see Note 4 of the notes
to our consolidated financial statements).

Gross profit in fiscal 2002 was $69.3 million compared to $35.4 million in
fiscal 2001. Gross profit in fiscal 2002 was increased (cost of revenues
decreased) by approximately $2.8 million for the amortization of asset/liability
adjustments to the fair value of contracts acquired in the IT Group acquisition
(see Note 4 of the notes to our consolidated financial statements).

The gross profit percentage was approximately 14.1% in fiscal 2002 and
approximately 19.0% in fiscal 2001. The reduction in the gross profit percentage
in fiscal 2002 compared to fiscal 2001 was attributable to lower margin
contracts that were acquired in the IT Group transaction. The difference in the
gross profit percentages between our pre-IT Group environmental and
infrastructure operations (primarily infrastructure and hazardous material clean
up and disposal) and those acquired in the IT Group acquisition (environmental
clean-up, landfills and facilities management) is primarily attributable to such
factors as different customers, competition and mix of services.

Backlog in this segment at August 31, 2002 was approximately $2.3 billion
compared with approximately $0.2 billion at August 31, 2001. This increase was
entirely attributable to the IT Group acquisition.

Fabrication, Manufacturing and Distribution Segment

Revenues increased to $404.5 million in fiscal 2002 from $340.8 million in
fiscal 2001 and gross profit increased to $87.9 million in fiscal 2002 from
$74.4 million in fiscal 2001. These increases were due primarily to an increased
demand in the power industry along with an increase in capacity to handle the
demands. Segment backlog was approximately $274.0 million at August 31, 2002.

43

Unconsolidated Subsidiaries

During fiscal 2002 and 2001, we recognized income of $1.7 million (net of taxes
of $0.9 million) and a loss of $0.3 million (net of taxes of $0.2 million),
respectively, from the operations of unconsolidated subsidiaries, including
joint ventures, which are accounted for under the equity method.

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

General and administrative expenses, excluding goodwill amortization, increased
$38.6 million, or 31%, from $122.6 million in fiscal 2001 to $161.2 million in
fiscal 2002. The increase in fiscal 2002 general and administrative expenses
resulted primarily from expenses associated with the 106% increase in our
revenue and the IT Group acquisition. However, as a result of our efforts to
control our expenses and economies realized from the integration of Stone &
Webster, general and administrative expenses excluding goodwill amortization in
fiscal 2002 decreased as a percentage of sales to 5.1% from 8.0% in fiscal 2001.

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

Our effective tax rates for the years ended August 31, 2002 and 2001 were 36.0%
and 38.4%, respectively. Our estimates of our tax rates are derived from our
estimates of pre-tax income for each year and the mix of domestic and foreign
sourced income, including foreign export sales. The decrease in the tax rates in
fiscal 2002 versus fiscal 2001 is due primarily to our adoption of SFAS No. 142
in fiscal 2002 (see Note 1 and Note 8 of the notes to our consolidated financial
statements). As a result of our adoption of SFAS No. 142, our effective tax rate
decreased in fiscal 2002 because we no longer recognize goodwill amortization
expense (which is only partially deductible for tax purposes) in our financial
statements. This decrease was partially offset by increased domestic income in
fiscal 2002 that has a higher tax rate than most foreign income. We did not pay
any federal income taxes in fiscal 2002 and 2001 primarily because of our
utilization of operating losses resulting from the Stone & Webster acquisition.

Additionally, at August 31, 2002, we had recorded a $10.2 million liability for
a U.K. defined benefit retirement plan (also see Note 17 of the notes to our
consolidated financial statements).

LIQUIDITY AND CAPITAL RESOURCES

Stock Repurchase Program

In September 2001, our Board of Directors authorized us to repurchase shares of
our common stock, depending on market conditions, up to a limit of $100 million.
As of October 11, 2002, we completed our purchases under this program, having
purchased 5,331,005 shares at a cost of approximately $99.9 million. We
purchased 2,160,400 shares at a cost of approximately $52.0 million during the
year ended August 31, 2002 and 3,170,605 shares at a cost of approximately $47.8
million during the first quarter of fiscal 2003.

Credit Facilities and Liquidity

Our primary 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 $250.0 million from $350.0 million; however, we
may, by March 16, 2004, increase the credit limit to a maximum of $300.0 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 $250.0 million limit of this
facility. In October 2003, we have amended our Credit Facility to increase the
available credit to $300.0 million and to amend certain of the covenants
contained therein, as more fully described below.

44

The effectiveness of this amendment is conditioned upon the completion of a
$200.0 million equity offering announced on October 17, 2003.

Under the Credit Facility, interest is computed, at our 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 our 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. At August 31,
2003, the interest rate on the Credit Facility would have been either 5.00% (if
the prime rate index had been chosen) or 3.62% (if the LIBOR rate index had been
chosen). At August 31, 2003 and 2002, we did not have outstanding borrowings
under the Credit Facility but had outstanding letters of credit of approximately
$160.0 million and $183.8 million, respectively.

We are 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 $5.0 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 our
domestic subsidiaries; (ii) a pledge of all of the capital stock of our domestic
subsidiaries and 66% of the capital stock in certain of our foreign
subsidiaries; and (iii) a security interest in all of our property and the
property of our 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), a minimum fixed charge coverage
ratio, defined minimum net worth and defined minimum adjusted earnings before
interest expense, income taxes, depreciation and amortization (EBITDA). Further,
we are required to obtain the consent of the lenders to prepay or amend the
terms of the Senior Notes. As of August 31, 2003, we were in compliance with the
covenants contained in the Credit Facility. The most restrictive of these
covenants is the leverage ratio of 3.5x, which is the ratio of outstanding debt
to twelve month rolling adjusted EBITDA (as defined in the Credit Facility). As
of August 31, 2003, our leverage ratio was 3.48x; however, as of August 31,
2003, we had cash available that could have been used to reduce outstanding debt
in order to improve this ratio. In May 2004, this leverage ratio covenant
requirement will change to 2.75x.

Conditioned upon the completion of our $200.0 million equity offering announced
on October 17, 2003, the covenants contained in this facility are being amended
to provide us with additional flexibility. The most significant of these changes
includes:

o a reduction in the minimum adjusted EBITDA covenant from
$135.0 million to $120.0 million on a rolling twelve month
basis through November 2004; and

o an increase in the total debt to adjusted EBITDA ratio from
2.75x to 3.0x as of May 2004.

We have previously used the Credit Facility to provide working capital and to
fund fixed asset purchases and subsidiary acquisitions.

The Credit Facility permits us to repurchase $10.0 million of our LYONs
obligations. Additional LYONs repurchases are also permitted if, after giving
effect to the repurchases, we have the availability to borrow up to $50.0
million under the Credit Facility and we have 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
$75.0 million. Pursuant to our most recent amendment, this requirement will be
decreased to $75 million upon consummation of our proposed equity offering. 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.

45

As of August 31, 2003 and 2002, our foreign subsidiaries had short-term
revolving lines of credit permitting borrowings totaling approximately $17.3
million and $15.5 million, respectively. These subsidiaries had outstanding
borrowings under these lines of approximately $1.3 million and $1.1 million,
respectively, at a weighted average interest rate of approximately 4.25% and
5.0%, respectively, at August 31, 2003 and 2002. These subsidiaries also had
outstanding letters of credit under these lines of $4.2 million and $6.7
million, respectively, at August 31, 2003 and 2002, leaving $11.8 million of
availability under these lines at August 31, 2003.

At August 31, 2003, we had working capital of approximately $85.4 million (the
way in which we calculate working capital is more fully described in Note 1 of
the notes to our financial statements) and unutilized borrowing capacity under
our Credit Facility of approximately $89.9 million. Our working capital
requirements for fiscal 2004 will be impacted by a number of factors including:

o the amount of working capital necessary to support our
expanding environmental and infrastructure operations;

o the timing and negotiated payment terms of our projects;

o our capital expenditures program;

o the timing and resolution of claims receivable on major
projects;

o the sale of non-core assets and operations;

o cash interest payments on our $253.0 million principal amount
of Senior Notes which were sold and issued on March 17, 2003,
as discussed below; and

o our obligation to repurchase the remaining LYONS in May 2004
if the holders of LYONs exercise their right to require us to
repurchase the LYONs at that time.

Pursuant to the terms under which the LYONs were issued, we have the ability to
repurchase the remaining LYONs in either cash or shares of our common stock, or
a combination of common stock and cash on May 1, 2004. We currently anticipate
funding all of the LYONs repurchase obligations in cash. We believe we have
sufficient options in the marketplace to obtain such cash from the proceeds of
the issuance of common stock and borrowings of debt. In addition, we may elect
to repurchase all or a portion of the LYONs with cash from the same sources
prior to May 1, 2004. However, we also have other options, including issuing
stock for a portion of the obligations or other alternatives, including
refinancing all or a portion of the obligations. We are currently evaluating our
options with respect to LYONs that may be submitted to us for repurchase on May
1, 2004. If we refinance the LYONs with new debt obligations, our working
capital requirements for fiscal 2004 will be impacted by cash interest payments
due on those obligations.

As a result of these factors, our working capital position is expected to
decrease during the next twelve months. However, we believe that our working
capital and unused borrowing capacity, along with anticipated positive cash flow
from operations in fiscal 2004, is in excess of our identified short-term
working capital needs, based on our existing operations, and that we will have
sufficient working capital and borrowing capacity to fund our liquidity needs
and repurchase the LYONs over the next twelve months.

Senior Notes

In March 2003, we issued $253,029,000 of 10 3/4% Senior Notes Due 2010. The
Senior Notes bear interest at a rate of 10 3/4% and will mature on March 15,
2010. The Senior Notes are guaranteed, jointly and severally, on a senior
unsecured basis, by all of our material domestic restricted subsidiaries.

We may redeem some or all of the Senior Notes beginning on March 15, 2007 at the
redemption prices described in the indenture governing our Senior Notes. Prior
to March 15, 2007, we may, at our option, redeem all, but not less than all, of
the Senior Notes at a redemption price equal to the principal amount of the
Senior Notes plus the applicable premium described in the indenture governing
the Senior Notes and accrued and unpaid interest to the redemption date.

If we experience a change of control as defined in the indenture governing the
Senior Notes, we will be required to make an offer to repurchase the notes at a
price equal to 101% of their principal amount, plus accrued and unpaid interest,
if any, to the date of repurchase.

46

The terms of the Senior Notes place certain limitations on our ability to, among
other things:

o incur or guarantee additional indebtedness or issue preferred
stock;

o pay dividends or make distributions to our stockholders;

o repurchase or redeem capital stock or subordinated
indebtedness;

o make investments;

o create liens;

o enter into sale/leaseback transactions;

o incur restrictions on the ability of our subsidiaries to pay
dividends or to make other payments to us;

o enter into transactions with our affiliates; and

o merge or consolidate with other companies or transfer all or
substantially all of our assets.

These limitations are subject to a number of exceptions and qualifications
described in the indenture governing the Senior Notes. Many of the covenants
will be suspended during any period when the Senior Notes have an investment
grade rating from Standard & Poor's, a division of The McGraw-Hill Companies and
Moody's Investors Service, Inc.

Cash Flow for Fiscal 2003 versus Fiscal 2002

Net cash used in operations was approximately $202.0 million for fiscal 2003
compared with $315.1 million of net cash provided by operations in fiscal 2002.
In fiscal 2003, cash was increased by (i) net income of $20.9 million, (ii)
deferred tax expense of $9.0 million, (iii) depreciation and amortization of
$44.8 million, (iv) interest accretion and loan fee amortization of $17.0
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. These increases in cash were more than offset by
significant decreases in the cash position on long-term contracts and by
amortization of purchase accounting reserves. Normally, billings and cash
receipts on construction contracts exceed costs incurred early in the lives of
the contracts and the contracts require net cash outflow later in their lives.
As we are winding down a number of large EPC contracts and did not enter into
significant new EPC contracts in 2003, normal contract execution has required a
net use of cash. In addition, we have recorded a net increase in claims in 2003
of approximately $71.4 million related to cash costs incurred by us; while these
claims have been reflected in contract gross profits, cash has not been
received. Further, we have been involved in various customer disputes, most
significantly NRG, NEG and AES (see Note 20 of the notes to our consolidated
financial statements). Claims related to NEG resulted in net cash outflow of
$57.2 million in 2003. The NRG dispute was settled in October 2003, but resulted
in a net cash outflow of $61.1 million in 2003 related to the Pike project. The
AES dispute involves unpaid billings, claims, letter of credit draws by AES, and
other factors which resulted in a net cash outflow of $45.4 million in 2003. We
expect the NRG settlement to result in positive operating cash flows related to
this project in 2004. In fiscal 2004, we also expect that we will begin new EPC
projects which will provide cash as down payments are received. However, the
timing of these new projects is uncertain and a single or group of large
projects could have a significant impact on sources and uses of cash. We expect
that because of this, changes in working capital could be highly variable from
one period to next, although over an extended period of time significant
increases and decreases would tend to offset one another.

Additionally, we acquired a large number of contracts in the Stone & Webster and
IT Group acquisitions with losses and lower than market rate margins partially
due to the effect of the financial difficulties experienced by Stone & Webster
and the IT Group on negotiating and executing contracts prior to acquisition. A
reserve was recorded to reflect the estimated losses on acquired contracts. For
other than insolvent contracts, the contracts were adjusted to their fair value
as an asset or liability and the related amortization has the net effect of
adjusting cost of revenues for the contracts as they are completed. Cost of
revenues was reduced on a net basis by approximately $26.8 million and $31.1
million during fiscal 2003 and 2002, respectively, through the amortization of
contract loss reserves and fair value adjustments, which are non-cash component
of income. The amortization of these assets and liabilities resulted in a
corresponding net increase in gross profit during fiscal 2003 and 2002. The
adjustments are amortized over the lives of the contracts, which for certain IT
Group contracts, will continue for five to ten years. (See Note 4 of the notes
to our consolidated financial statements.)

47

Net cash provided by investing activities was approximately $2.4 million in
fiscal 2003, compared with net cash used of $198.3 million for the prior fiscal
year. During fiscal 2003, we used cash for acquisitions of $1.2 million for
LFG&E, $3.7 million for Envirogen, net of cash received, and $17.7 million for
Badger Technologies (see Note 4 of the notes to our financial statements). We
also purchased $26.2 of property and equipment, as compared to $73.9 million in
fiscal 2002, with the reduction due primarily to the completion of most of our
planned system and facilities upgrades. Sales and maturities of marketable
securities exceeded purchases by approximately $49.9 million during fiscal 2003,
as compared to fiscal 2002 when purchases exceeded sales and maturities by $9.3
million, with the change due to decreased cash on hand during 2003. Also during
fiscal 2003, we received distributions from our joint ventures and
unconsolidated entities of $3.3 million and made contributions of $0.5 million.

During fiscal 2002, we used cash of approximately $100.7 million to fund the IT
Group acquisition and $2.0 million to fund the PsyCor acquisition.

Net cash used in financing activities totaled approximately $61.3 million in
fiscal 2003, compared with $62.0 million during fiscal 2003. During 2003, we
received net cash proceeds of $242.5 million from the issuance of our Senior
Notes. We also repurchased a portion of the outstanding LYONs for $256.6 million
in March 2003, including approximately $8.8 million of associated tender fees
and other expenses (see Note 9 of the notes to our consolidated financial
statements). (In addition, subsequent to August 31, 2003, we funded additional
repurchases of LYONs transacted in late August 2003 for $20.7 million in cash.)
Also, during the first quarter of 2003, we repurchased approximately 3,171,000
shares of our common stock for a cost of approximately $47.8 million, completing
our repurchases under our stock repurchase program (see Note 2 of the notes to
our consolidated financial statements). During 2002, we repurchased
approximately 2,160,000 shares under this program for $52.0 million.
Additionally, we made repayments on debt and leases of $9.2 million and on our
foreign revolving lines of credit of approximately $3.0 million, and we received
approximately $2.3 million from employees upon the exercise of stock options.

OFF BALANCE SHEET ARRANGEMENTS

We provide guarantees to certain of our joint ventures which are reported under
the equity method and are not consolidated on our balance sheet. At August 31,
2003 we had guaranteed approximately $7.4 million of bank debt or letters of
credit and $46.5 million of performance bonds with respect to our unconsolidated
joint ventures. We 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 August 31, 2003.

As of August 31, 2003, we had a negative investment balance of $2.2 million in
an unconsolidated entity, Entergy/Shaw, which we will fund to the extent
necessary to complete its operations in early 2004 as there are no active
projects as of August 31, 2003.

The majority of our transactions are in U.S. dollars; however, certain of our
foreign subsidiaries conduct their operations in their local currency.
Accordingly, there are situations when we believe it is appropriate to use
financial hedging instruments (generally foreign currency forward contracts) to
manage foreign currency risks when it enters into a transaction denominated in a
currency other than its local currency. The fair value of our hedges was not
material at August 31, 2003. As of August 31, 2002, we had an asset and other
income on fair value hedges of $0.7 million ($0.4 million net of taxes) that
offset transaction losses in the related hedged accounts receivable. We normally
do not use any other type of derivative instrument or participate in any other
hedging activities.

48

COMMERCIAL COMMITMENTS

Our lenders issue letters of credit on our behalf to customers or sureties in
connection with our contract performance and in limited circumstances certain
other obligations to third parties. We are required to reimburse the issuers of
these letters of credit for any payments which they make pursuant to these
letters of credit. At August 31, 2003, we had both letter of credit commitments
and bonding obligations, which were generally issued to secure performance and
financial obligations on certain of our construction contracts, which expire as
follows:

Note: Commercial Commitments above exclude any letters of credit or surety
bonding obligations associated with outstanding bids or proposals or other work
which were not awarded prior to August 31, 2003. Additionally, they do not
include a letter of credit drawn down in September 2003 in the amount of $14.1
million related to the Wolf Hollow project (see Item 3. Legal Proceedings). The
surety bond commitments above include escrowed cash (see Note 3 of the notes to
our consolidated financial statements).

For the years ended August 31, 2003 and 2002, we made payments to reimburse the
issuers of these letters of credit of $13.9 million and $5.0 million,
respectively, which had a negative impact to our working capital and cash
position.

For the year ended August 31, 2003, fees related to these commercial commitments
of $4.9 million were recorded in our statement of income.

As of August 31, 2002, total commercial commitments were as follows:

Note: Commercial Commitments above exclude any letters of credit or surety
bonding obligations associated with outstanding bids or proposals or other work
which were not awarded prior to August 31, 2002. The surety bond commitments
above include escrowed cash (see Note 3 of the notes to our consolidated
financial statements).

The increase in commercial commitments reflects an increase in contracts in our
environmental and infrastructure business which often require surety bonds,
partially offset by the release of letters of credit upon the completion of
milestones on our EPC contracts.

AGGREGATE CONTRACTUAL OBLIGATIONS

As of August 31, 2003 we had the following contractual obligations:

49

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

The reduction in long-term debt reflects the repurchase of LYONs with a book
value totaling $278.2 million at the dates of repurchase during fiscal 2003
offset by the issuance of $253.0 million Senior Notes. Capital lease obligations
and operating leases have remained consistent as our lease terms continue to
expire with few new leases entered into during fiscal 2003.

See Note 9 and Note 13 of the notes to our consolidated financial statements for
a discussion of long-term debt and leases.

Also see Note 14 of the notes to our consolidated financial statements for a
discussion of contingencies.

EFFECTS OF INFLATION

We will continue to focus our operations on cost-plus or negotiated fixed-price
contracts. To the extent that a significant portion of our revenues are earned
under cost-plus type contracts, the effects of inflation on our financial
condition and results of operations should generally be low. However, if we
expand our business into markets and geographical areas where fixed-price work
is more prevalent, inflation may begin to have a larger impact on our results of
operations. To the extent permitted by competition, we intend to continue to
emphasize contracts that are either cost-plus or negotiated fixed-price. For
contracts we accept with fixed-price terms, we monitor closely the actual costs
on the project as they compare to the budget estimates. On these projects, we
also attempt to secure fixed-price commitments from key subcontractors and
vendors. However, due to the competitive nature of our industry, combined with
the fluctuating demands and prices associated with personnel, equipment and
materials we traditionally need in order to perform on our contracts, there can
be no guarantee that inflation will not affect our result of operations in the
future.

RECENT ACCOUNTING PRONOUNCEMENTS

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
No. 46 apply immediately to variable interest entities created after January 31,
2003 and existing variable interest entities at the end of period ending after
December 31, 2003 (February 28, 2004 for us). There was no impact to our
consolidated financial statements as of and for the year ended August 31, 2003.
We have not yet determined what effect, if any, this Interpretation will have on
our financial statements.

RISK FACTORS

Investing in our common stock will provide an investor with an equity ownership
interest. Shareholders will be subject to risks inherent in our business. The
performance of our shares will reflect the performance of our business relative
to, among other things, general economic and industry conditions, market
conditions and competition. The value of the investment may increase or decrease
and could result in a loss. An investor should carefully consider the following
factors

50

as well as other information contained in this Form 10-K, including the
discussion of our Critical Accounting Polices, before deciding to invest in
shares of our common stock.

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

DEMAND FOR OUR PRODUCTS AND SERVICES IS CYCLICAL AND VULNERABLE TO DOWNTURNS IN
THE INDUSTRIES TO WHICH WE MARKET OUR PRODUCTS AND SERVICES.

The demand for our products and services depends on conditions in the
environmental and infrastructure industries and the power generation industry
that accounted for approximately 59% and 30%, respectively, of our backlog as of
August 31, 2003, and, to a lesser extent, on conditions in the petrochemical,
chemical and refining industries. These industries historically have been, and
will likely continue to be, cyclical in nature and vulnerable to general
downturns in the domestic and international economies.

For example, in fiscal 2002 and the first quarter of fiscal 2003, there was a
slowdown in construction activity and new construction awards for power
generation projects, primarily as a result of less activity by certain
independent power producers who had encountered financing and liquidity
problems. These factors contributed to the cancellation or suspension of a
number of projects by our customers in the fourth quarter of fiscal 2002,
resulting in a reduction of our backlog. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for a more complete
discussion of the potential impact of these cancellations and other factors.

Our results of operations have varied and may continue to vary depending on the
demand for future projects from these industries. Our results of operations may
also be adversely affected by cancellations of existing projects by our
customers or difficulties in collecting amounts owed to us for work completed or
in progress.

THE DOLLAR AMOUNT OF OUR BACKLOG, AS STATED AT ANY GIVEN TIME, IS NOT
NECESSARILY INDICATIVE OF OUR FUTURE EARNINGS.

As of August 31, 2003, our backlog was approximately $4.8 billion. There can be
no assurance that the revenues projected in our backlog will be realized or, if
realized, will result in profits. Further, project terminations, suspensions or
adjustments in scope may occur with respect to contracts reflected in our
backlog. For example, during the fourth quarter of fiscal 2002, three domestic
power projects previously reflected in our backlog were suspended or cancelled,
resulting in a reduction of our backlog of approximately $300.0 million.

Reductions in backlog due to cancellation by a customer or for other reasons
adversely affect, potentially to a material extent, the revenue and profit we
actually receive from contracts projected in backlog. In the event of project
cancellation, we may be reimbursed for certain costs but typically have no
contractual right to the total revenues reflected in our backlog. In addition,
projects may remain in our backlog for extended periods of time. If we were to
experience significant cancellations or delays of projects in our backlog, our
financial condition could be significantly adversely affected.

We define backlog as a "working backlog" which includes projects for which we
have received a commitment from our customers. This commitment may be in the
form of a written contract for a specific project, a purchase order or an
indication of the amount of time or material we need to make available for a
customer's anticipated project. In certain instances, the engagement is for a
particular product or project for which we estimate anticipated revenue, often
based on engineering and design specifications that have not been finalized and
may be revised over time. Also, we estimate (based on our prior experience) the
amount of future work we will receive for multi-year government contracts for
which funding is approved on an annual or periodic basis during the term of the
contract. In the Environmental & Infrastructure segment, many of these contracts
are multi-year indefinite delivery order, or IDO, agreements with the federal
government. These contracts do not initially provide for a specific amount of
work, and we derive the contract backlog of IDO agreements from our historical
experience with IDO agreements. We estimate backlog associated with these IDO
agreements based on our experience with similar awards and similar customers and
such backlog averages approximately 75% of the total unfunded awards. Estimates
are reviewed periodically and appropriate adjustments are made to the amounts
included in backlog and in unexercised contract

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options. Our backlog does not include any awards (funded or unfunded) for work
expected to be performed more than five years after the date of our financial
statements. The amount of future actual awards may be more or less than our
estimates.

Our backlog for maintenance work is derived from maintenance contracts, some of
which do not specify actual dollar amounts of maintenance work, in which case
our backlog is based on an estimate of work to be performed in light of such
customers' historic maintenance requirements. Accordingly, the amount of future
actual awards may be more or less than our estimates.

We also include in backlog commitments from certain individual customers that
have committed to more than one significant EPC project and other customers who
have committed to multi-year orders for environmental, piping or maintenance
services. There can be no assurance that the customers will complete all of
these projects or that the projects will be performed in the currently
anticipated time-frame.

WE MAY INCUR UNEXPECTED LIABILITIES ASSOCIATED WITH THE STONE & WEBSTER AND IT
GROUP ACQUISITIONS, AS WELL AS OTHER ACQUISITIONS.

In July 2000, we acquired substantially all of the operating assets and assumed
certain liabilities of Stone & Webster, Inc., and during fiscal 2002, we
acquired substantially all of the operating assets and assumed certain
liabilities of The IT Group, Inc. We believe, pursuant to the terms of the
agreements for the Stone & Webster and IT Group asset acquisitions, that we
assumed only certain liabilities, which we refer to as assumed liabilities,
specified in those agreements. In addition, those agreements provide that
certain other liabilities, including but not limited to, certain outstanding
borrowings, certain leases, certain contracts in process, completed contracts,
claims or litigation that relate to acts or events occurring prior to the
acquisition date, and certain employee benefit obligations are specifically
excluded from our transactions. We refer to these as excluded liabilities. There
can be no assurance, however, that we do not have any exposure related to the
excluded liabilities.

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

Any of these unexpected liabilities could have a material adverse effect on us.

DIFFICULTIES INTEGRATING OUR ACQUISITIONS COULD ADVERSELY AFFECT US.

From time to time, we have made acquisitions to pursue market opportunities,
increase our existing capabilities and expand into new areas of operation. We
plan to pursue select acquisitions in the future. If we are unable to identify
acquisition opportunities or complete acquisitions we have identified, our
business could be materially adversely affected. In addition, we may encounter
difficulties integrating our future acquisitions and in successfully managing
the growth we expect from the acquisitions. In addition, our expansion into new
businesses, such as with our IT Group acquisition, may expose us to additional
business risks that are different from those we have traditionally experienced.
To the extent we encounter problems in identifying acquisition opportunities or
integrating our acquisitions, we could be materially adversely affected. Because
we may pursue acquisitions around the world and may actively pursue a number of
opportunities simultaneously, we may encounter unforeseen expenses,
complications and delays, including difficulties in employing sufficient staff
and maintaining operational and management oversight.

OUR INABILITY TO COMPLETE ACQUISITIONS COULD IMPACT OUR GROWTH STRATEGY.

Our strategy has been, and continues to be, to grow through acquisitions. We
pursue strategic acquisitions in markets where we currently operate as well as
in markets in which we have not previously operated. We may have difficulties
identifying attractive acquisition candidates in the future, or we may be unable
to acquire desired businesses or assets on economically acceptable terms. In the
event we are unable to complete future strategic acquisitions, we may not grow
in accordance with our expectations or our historical experience.

52

OUR SIGNIFICANT ENGINEERING, PROCUREMENT AND CONSTRUCTION PROJECTS MAY ENCOUNTER
DIFFICULTIES THAT MAY RESULT IN ADDITIONAL COSTS TO US, REDUCTIONS IN REVENUES
OR THE PAYMENT OF LIQUIDATED DAMAGES.

Our EPC projects generally involve complex design and engineering, significant
procurement of equipment and supplies, and extensive construction management
that may occur over extended time periods, often in excess of two years. We may
encounter difficulties in the design or engineering equipment and supply
delivery, schedule changes, and other factors, some of which are beyond our
control, that impact our ability to complete the project in accordance with the
original delivery schedule. In addition, we generally rely on third-party
equipment manufacturers as well as third-party subcontractors to assist us with
the completion of EPC contracts. In come cases, the equipment we purchase for a
project or that is provided to us by the customer does not perform as expected,
and these performance failures may result in delays in completion of the project
or additional costs to us or the customer to complete the project and, in some
cases, may require us to obtain alternate equipment at additional cost. Any
delay by subcontractors to complete their portion of the project, or any failure
by a subcontractor to satisfactorily complete its portion of the project, and
other factors beyond our control may result in delays in the overall progress of
the project or may cause us to incur additional costs, or both. These delays and
additional costs may be substantial and we may be required to compensate the
project customer for these delays. While we may recover these additional costs
from the responsible vendor, subcontractor or other third-party, we may not be
able to recover all of these costs in all circumstances.

For example, we are currently involved in litigation with the customer and a
third-party subcontractor relating to the engineering, design, procurement and
construction of a gas-fired, combined-cycle power plant in Texas. In this
litigation we are seeking payment from the customer for additional costs
incurred by us as a result of a fire at the construction site and certain
misrepresentations, and we are seeking payment from a third-party equipment
vendor for additional costs and liquidated damages potentially payable by us as
a result of the failure of a turbine during start-up testing. To the extent we
do not receive these amounts, we will recognize a charge to earnings. For a more
complete description of this litigation, see "Item 3. - Legal Proceedings."

In addition, the project customer may require that it provide us with design or
engineering information or with equipment or materials to be used on the
project. In some cases, the customer provides us with deficient design or
engineering information or equipment or provides the information or equipment to
us later than required by the project schedule. The project customer may also
determine, after commencement of the project, to change various elements of the
project. Our EPC project contracts generally require the customer to compensate
us for additional work or expenses incurred due to customer requested change
orders or failure of the customer to prove us with specified design or
engineering information or equipment. Under these circumstances, we generally
negotiate with the customer with respect to the amount of additional time
required and the compensation to be paid to us. We are subject to the risk that
we are unable to obtain, through negotiation, arbitration, litigation or
otherwise, adequate amounts to compensate us for the additional work or expenses
incurred by us due to customer-requested change orders or failure by the
customer to timely provide items required to be provided by the customer. A
failure to obtain adequate compensation for these matters could require us to
record an adjustment to amounts of revenue and gross profit that were recognized
in prior periods under the percentage of completion accounting method. Any such
adjustments, if substantial, could have a material adverse effect on our results
of operations and financial condition.

OUR DEPENDENCE ON SUBCONTRACTORS AND EQUIPMENT MANUFACTURERS COULD ADVERSELY
AFFECT US.

We rely on third-party equipment manufacturers as well as third-party
subcontractors to complete our projects. To the extent that we cannot engage
subcontractors or acquire equipment or materials, our ability to complete a
project in a timely fashion or at a profit may be impaired. If the amount we are
required to pay for these goods and services exceeds the amount we have
estimated in bidding for fixed-price work, we could experience losses in the
performance of these contracts. In addition, if a subcontractor or a
manufacturer is unable to deliver its services, equipment or materials according
to the negotiated terms for any reason, including the deterioration of its
financial condition, we may be required to purchase the services, equipment or
materials from another source at a higher price. This may reduce the profit to
be realized or result in a loss on a project for which the services, equipment
or materials were needed.

OUR FAILURE TO MEET SCHEDULE OR PERFORMANCE REQUIREMENTS OF OUR CONTRACTS COULD
ADVERSELY AFFECT US.

In certain circumstances, we guarantee facility completion by a scheduled
acceptance date or achievement of certain acceptance and performance testing
levels. Failure to meet any such schedule or performance requirements could
result

53

in additional costs, and the amount of such additional costs could exceed
project profit margins. Performance problems for existing and future contracts
could cause actual results of operations to differ materially from those
anticipated by us and could cause us to suffer damage to our reputation within
our industry and our client base.

THE NATURE OF OUR CONTRACTS COULD ADVERSELY AFFECT US.

Although approximately 77% of our backlog as of August 31, 2003 was from
cost-plus contracts, the remaining 23% was from fixed-price or unit-price
contracts. A significant number of our domestic piping contracts and
substantially all of our international piping contracts are fixed-price or
unit-price. In addition, a number of the contracts we assumed in the Stone &
Webster and IT Group acquisitions were fixed-price contracts, and we will
continue to enter into these types of contracts in the future. Under fixed-price
or unit-price contracts, we agree to perform the contract for a fixed price and,
as a result, benefit from costs savings and earnings from approved change
orders; but we are generally unable to recover any cost overruns to the approved
contract price. Under certain incentive contracts, we share with the customer
any savings up to a negotiated or target ceiling. When costs exceed the
negotiated ceiling price, we may be required to reduce our fee or to absorb some
or all of the cost overruns. Contract prices are established based in part on
cost estimates that are subject to a number of assumptions, including
assumptions regarding future economic conditions. If these estimates prove
inaccurate or circumstances change, cost overruns could have a material adverse
effect on our business and results of our operations. Our profit for these
projects could decrease or we could experience losses if we are unable to secure
fixed pricing commitments from our suppliers at the time the contracts are
entered into or if we experience cost increases for material or labor during the
performance of the contracts. For example, in September 2003, we signed and
announced a $565.0 million fixed-price EPC contract to build a combined-cycle
power plant in Queens, New York that will be subject to the overrun risks
described above.

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

Many of our contracts require us to satisfy specified design, engineering,
procurement or construction milestones in order to receive payment for the work
completed or equipment or supplies procured prior to achievement of the
applicable milestone. As a result, under these types of arrangements, we may
incur significant costs or perform significant amounts of services prior to
receipt of payment. If the customer determines not to proceed with the
completion of the project or if the customer defaults on its payment
obligations, we may face difficulties in collecting payment of amounts due to us
for the costs previously incurred or for the amounts previously expended to
purchase equipment or supplies. In addition, as many of our customers for large
EPC projects are project-specific entities that do not have significant assets
other than their interests in the EPC project. It may be difficult for us to
collect amounts owed to us by these customers against the customer's more
credit-worthy parent company. If we are unable to collect amounts owed to us for
these matters, we may be required to record a charge against previously
recognized earnings related to the project under percentage-of-completion
accounting.

WE ARE SUBJECT TO THE RISKS ASSOCIATED WITH BEING A GOVERNMENT CONTRACTOR.

We are a major provider of services to governmental agencies and therefore are
exposed to risks associated with government contracting. For example, a
reduction in spending by federal government agencies could limit the continued
funding of existing contracts with these agencies and could limit our ability to
obtain additional contracts, which could have a material adverse effect on our
business. The risks of government contracting also include the risk of civil and
criminal fines and penalties for violations of applicable regulations and
statutes and the risk of public scrutiny of our performance at high profile
sites.

In addition, government customers typically can terminate or modify any of their
contracts with us at their convenience, and some of these government contracts
are subject to renewal or extension annually. If a government customer
terminates a contract or fails to renew or extend a contract, our backlog may be
reduced or we may incur a loss, either of which could impair our financial
condition and operating results. A termination due to our unsatisfactory
performance could expose us

54

to liability and have a material adverse effect on our ability to compete for
future contracts and orders. In cases where we are a subcontractor, the prime
contract under which we are a subcontractor could be terminated, regardless of
the quality of our services as a subcontractor or our relationship with the
relevant government agency. Our government customers can also reduce the value
of existing contracts, issue modifications to a contract and control and
potentially prohibit the export of our services and associated materials.

As a result of our government contracting business, we have been, are and will
be in the future, the subject of audits and/or cost reviews by the Defense
Contract Audit Agency, which we refer to as DCAA, or by other contracting
agencies. Additionally, we have been and may in the future be the subject of
investigations by governmental agencies such as the Office of Inspector General
of the Environmental Protection Agency, which we refer to as EPA. During the
course of an audit, the DCAA may disallow costs if it determines that we
improperly accounted for such costs in a manner inconsistent with Cost
Accounting Standards or regulatory and contractual requirements. Under the type
of cost-plus government contracts that we typically perform, only those costs
that are reasonable, allocable and allowable are recoverable under the Federal
Acquisition Regulation and Cost Accounting Standards.

In addition, our failure to comply with the terms of one or more of our
government contracts, other government agreements, or government regulations and
statutes could result in our being suspended or barred from future government
contract projects for a significant period of time. This could materially
adversely affect our business.

ACTUAL RESULTS COULD DIFFER FROM THE ESTIMATES AND ASSUMPTIONS THAT WE USE TO
PREPARE OUR FINANCIAL STATEMENTS.

To prepare financial statements in conformity with generally accepted accounting
principles, management is required to make estimates and assumptions, as of the
date of the financial statements, which affect the reported values of assets and
liabilities and revenues and expenses and disclosures of contingent assets and
liabilities. Areas requiring significant estimates by our management include:

o contract expenses and profits and application of
percentage-of-completion accounting;

o recoverability of inventory and application of lower of cost
or market accounting;

o provisions for uncollectible receivables and customer claims
and recoveries of costs from subcontractors, vendors and
others;

o provisions for income taxes and related valuation allowances;

o recoverability of net goodwill;

o recoverability of other intangibles and related amortization;

o valuation of assets acquired and liabilities assumed in
connection with business combinations; and

o accruals for estimated liabilities, including litigation and
insurance reserves.

Our actual results could differ from those estimates.

OUR USE OF PERCENTAGE-OF-COMPLETION ACCOUNTING COULD RESULT IN A REDUCTION OR
ELIMINATION OF PREVIOUSLY REPORTED PROFITS.

As is more fully discussed in Critical Accounting Policies and Related Estimates
That Have a Material Effect on Our Consolidated Financial Statements and in the
notes to our financial statements, a substantial portion of our revenues are
recognized using the percentage-of-completion, or POC, method of accounting.
This accounting method is standard for engineering, procurement and
construction, or EPC, contracts. The POC accounting practices that we use result
in our recognizing contract revenues and earnings ratably over the contract term
in proportion to our incurrence of contract costs. The earnings or losses
recognized on individual contracts are based on estimates of contract revenues,
costs and profitability. Contract losses are recognized in full when determined,
and contract profit estimates are adjusted based on

55

ongoing reviews of contract profitability. Further, a substantial portion of
our contracts contain various cost and performance incentives and penalties that
impact the earnings we realize from the contracts, and adjustments related to
these incentives and penalties are recorded when known or finalized, which is
generally during the latter stages of the contract. In addition, we record
claims when we believe recovery is probable and the amounts can be reasonably
estimated. Actual collection of claims could differ from estimated amounts.

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

OUR RESULTS OF OPERATIONS DEPEND ON THE AWARD OF NEW CONTRACTS AND THE TIMING OF
THE PERFORMANCE OF THESE CONTRACTS.

A substantial portion of our revenues is directly or indirectly derived from
large-scale domestic and international projects. It is generally very difficult
to predict whether and when we will receive such awards as these contracts
frequently involve a lengthy and complex bidding and selection process which is
affected by a number of factors, such as market conditions, financing
arrangements, governmental approvals and environmental matters. Because a
significant portion of our revenues is generated from large projects, our
results of operations and cash flows can fluctuate from quarter to quarter
depending on the timing of our contract awards. In addition, many of these
contracts are subject to financing contingencies and, as a result, we are
subject to the risk that the customer will not be able to secure the necessary
financing for the project. In certain circumstances, customers may require us to
provide credit enhancements, including cash and letters of credit. For example,
our $565.0 million fixed-price EPC contract to build a combined-cycle power
plant in Queens, New York is subject to receipt of financing and we have been
asked to provide certain credit enhancements. As a result, a contract award for
a project may not result in revenue from the project.

The uncertainty of our contract award timing can also present difficulties in
matching workforce size with contract needs. In some cases, we maintain and bear
the cost of a ready workforce that is larger than called for under existing
contracts in anticipation of future workforce needs for expected contract
awards. If an expected contract award is delayed or not received, we would incur
costs that could have a material adverse effect on us. Further, our significant
customers vary between years, and the loss of any one or more of our key
customers could have a material adverse impact on us.

In addition, timing of the revenues, earnings and cash flows from our projects
can be affected by a number of factors beyond our control, including unavoidable
delays from weather conditions, unavailability of material and equipment from
vendors, changes in the scope of services requested by clients or labor
disruptions.

WE ARE VULNERABLE TO THE CYCLICAL NATURE OF THE MARKETS WE SERVE.

Downturns in the businesses that use our ECM services can adversely affect our
revenues and operating profit. Many of our customers are in businesses that are
cyclical in nature and sensitive to changes in general economic conditions. The
demand for our ECM services is dependent upon the existence of projects with
engineering, procurement, construction and management needs. Our ECM segment,
which primarily services the power generation and process industries, has seen
strong growth in the past few years due to previously unmet power needs and
deregulation but is now seeing its business opportunities decrease relative to
the last few years. Industries such as these and many of the others we serve
have historically been and will continue to be vulnerable to general downturns
and are cyclical in nature. As a result, our past results have varied
considerably and may continue to vary depending upon the demand for future
projects in these industries.

56

POLITICAL AND ECONOMIC CONDITIONS IN FOREIGN COUNTRIES IN WHICH WE OPERATE COULD
ADVERSELY AFFECT US.

Approximately 15% of our fiscal 2003 revenues were attributable to projects in
international markets, some of which are subject to political unrest and
uncertainty. We have operations in Russia, China, the Middle East, Europe and
Australia. We expect international revenues and operations to continue to
contribute to our growth and earnings for the foreseeable future. International
contracts, operations and expansion expose us to risks inherent in doing
business outside the United States, including:

o uncertain economic conditions in the foreign countries in
which we make capital investments, operate and sell products
and services;

o the lack of well-developed legal systems in some countries in
which we operate and sell products and services, which could
make it difficult for us to enforce our contractual rights; o
expropriation of property;

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

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

For example, in June 2003, we closed our operations in Venezuela due to the
political unrest and the economic uncertainty of doing business in Venezuela.
Our results of operations could be materially adversely affected if any of these
risks occur.

FOREIGN EXCHANGE RISKS MAY AFFECT OUR ABILITY TO REALIZE A PROFIT FROM CERTAIN
PROJECTS OR TO OBTAIN PROJECTS.

We generally attempt to denominate our contracts in U.S. dollars; however, from
time to time we enter into contracts denominated in a foreign currency. This
practice subjects us to foreign exchange risks, particularly to the extent
contract revenues are denominated in a currency different than the contract
costs. We attempt to minimize our exposure from foreign exchange risks by
obtaining escalation provisions for projects in inflationary economies, matching
the contract revenue currency with the contract costs currency or entering into
hedge contracts when there are different currencies for contract revenues and
costs. However, these actions will not always eliminate all foreign exchange
risks.

Foreign exchange controls may also adversely affect us. For instance, foreign
exchange controls were instituted in Venezuela on February 6, 2003. These
controls may limit our ability to repatriate profits from our Venezuelan
subsidiary or otherwise convert local currency into U.S. dollars. These
limitations could adversely affect us. Further, our ability to obtain
international contracts is impacted by the relative strength or weakness of the
U.S. dollar to foreign currencies.

OUR DEPENDENCE ON ONE OR A FEW CUSTOMERS COULD ADVERSELY AFFECT US.

Due to the size of many engineering and construction projects, one or a few
clients have in the past and may in the future contribute a substantial portion
of our consolidated revenues in any one year or over a period of several
consecutive years. For example, in fiscal 2003, approximately 13% of our
revenues were from PG&E National Energy Group, Inc. Similarly, our backlog
frequently reflects multiple projects for individual clients; therefore, one
major customer may comprise a significant percentage of backlog at a point in
time. An example of this is the TVA, with which we have two contracts
representing an aggregate of 15% of our backlog at August 31, 2003. Including
our backlog from TVA, a Government-owned entity, backlog from the U.S.
Government or U.S. Government-owned entities accounted for 67% of backlog at
August 31, 2003.

Because these significant customers generally contract with us for specific
projects, we may lose these customers from year to year as their projects with
us are completed. If we do not replace them with other customers or other
projects, our business could be materially adversely affected.

Additionally, we have long-standing relationships with many significant
customers, including customers with which we have alliance agreements that have
preferred pricing arrangements. However, our contracts with these customers are
on a project by project basis, and they may unilaterally reduce or discontinue
their purchases at any time. The loss of business from any one of such customers
could have a material adverse effect on our business or results of operations.

OUR PROJECTS EXPOSE US TO POTENTIAL PROFESSIONAL LIABILITY, PRODUCT LIABILITY,
WARRANTY AND OTHER CLAIMS.

We engineer, construct and perform services in large industrial facilities in
which accidents or system failures can be disastrous. Any catastrophic
occurrences in excess of insurance limits at locations engineered or constructed
by us or where our products are installed or services performed could result in
significant professional liability, product liability, warranty

57

and other claims against us. In addition, under some of our contracts, we must
use new metals or processes for producing or fabricating pipe for our customers.
The failure of any of these metals or processes could result in warranty claims
against us for significant replacement or reworking costs.

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

OUR ENVIRONMENTAL AND INFRASTRUCTURE OPERATIONS MAY SUBJECT US TO POTENTIAL
CONTRACTUAL AND OPERATIONAL COSTS AND LIABILITIES.

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

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

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

WE ARE EXPOSED TO CERTAIN RISKS ASSOCIATED WITH OUR INTEGRATED ENVIRONMENTAL
SOLUTIONS BUSINESSES.

Certain subsidiaries within our Environmental & Infrastructure division are
engaged in two similar programs that may involve assumption of a client's
environmental remediation obligations and potential claim obligations. One
program involves our subsidiary, The LandBank Group, Inc., or LandBank, which
was acquired in the IT Group acquisition. Under this program, LandBank purchases
and then remediates and/or takes other steps to improve environmentally impaired
properties. The second program is operated by our subsidiary Shaw Environmental
Liability Solutions, LLC, which will contractually assume responsibility for
environmental matters at a particular site or sites and provide indemnifications
for defined cleanup costs and post closing third party claims in return for
compensation by the client. These subsidiaries may operate and/or purchase and
redevelop environmentally impaired property. As the owner or operator of such
properties, we may be required to clean up all contamination at these sites even
if we did not place the contamination there. We attempt to reduce our exposure
to unplanned risks through the performance of environmental due diligence, the
use of liability protection provisions of federal laws like the Brownfields
Revitalization Act and similar state laws and the purchase of environmental and
cost cap insurance coverage or other risk management

58

products. However, we cannot assure you that our risk management strategies and
these products and laws will adequately protect us in all circumstances or that
no material adverse impact will occur.

Our ability to be profitable in this type of business also depends on our
ability to accurately estimate cleanup costs. While we engage in comprehensive
engineering and cost analyses, if we were to materially underestimate the
required cost of cleanup at a particular project, such underestimation could
significantly adversely affect us. Further, the continued growth of this type of
business is dependent upon the availability of environmental and cost cap
insurance or other risk management products. We cannot assure you that such
products will continue to be available to us in the future. Moreover,
environmental laws and regulations governing the cleanup of contaminated sites
are constantly changing. We cannot predict the effect of future changes to these
laws and regulations on our LandBank and Environmental Liability Solutions
businesses. In addition, prior to the IT Group acquisition, we had not
previously conducted this type of business and we have had no material
transactions in this business. Additionally, when we purchase real estate in
this business, we are subject to many of the same risks as real estate
developers, including the timely receipt of building and zoning permits,
construction delays, the ability of markets to absorb new development projects,
market fluctuations and the ability to obtain additional equity or debt
financing on satisfactory terms, among others.

ENVIRONMENTAL FACTORS AND CHANGES IN LAWS AND REGULATIONS COULD INCREASE OUR
COSTS AND LIABILITIES AND AFFECT THE DEMAND FOR OUR SERVICES.

In addition to the environmental risks described above relating to the
businesses acquired from IT Group and our environmental remediation business,
our operations are subject to environmental laws and regulations, including
those concerning:

o emissions into the air;

o discharges into waterways;

o generation, storage, handling, treatment and disposal of
hazardous materials and wastes; and

o health and safety.

Our projects often involve highly regulated materials, including hazardous and
nuclear materials and wastes. Environmental laws and regulations generally
impose limitations and standards for regulated materials and require us to
obtain a permit and comply with various other requirements. The improper
characterization, handling, or disposal of regulated materials or any other
failure to comply with federal, state and local environmental laws and
regulations or associated environmental permits may result in the assessment of
administrative, civil, and criminal penalties, the imposition of investigatory
or remedial obligations, or the issuance of injunctions that could restrict or
prevent our ability to perform.

In addition, under CERCLA and comparable state laws, we may be required to
investigate and remediate regulated materials. CERCLA and these comparable state
laws typically impose liability without regard to whether a company knew of or
caused the release, and liability for the entire cost of clean-up can be imposed
upon any responsible party. The principal federal environmental legislation
affecting our operating subsidiaries and clients include: the National
Environmental Policy Act of 1969, or NEPA; the Resource Conservation and
Recovery Act of 1976, or RCRA; the Clean Air Act; the Federal Water Pollution
Control Act; and the CERCLA, together with the Superfund Amendments and
Reauthorization Act of 1986, or SARA. Our foreign operations are also subject to
similar governmental controls and restrictions relating to environmental
protection.

We could also incur environmental liability at sites where we have been hired by
potentially responsible parties, or PRPs, to remediate contamination of the
site. Such PRPs have sought to expand the reach of CERCLA, RCRA and similar
state statutes to make the remediation contractor responsible for cleanup costs.
These companies claim that environmental contractors are owners or operators of
hazardous waste facilities or that the contractors arranged for treatment,
transportation or disposal of hazardous substances. If we are held responsible
under CERCLA or RCRA for damages caused while performing services or otherwise,
we may be forced to incur such cleanup costs by ourselves, notwithstanding the
potential availability of contribution or indemnification from other parties.

59

The environmental health and safety laws and regulations to which we are subject
are constantly changing, and it is impossible to predict the effect of any
future changes to these laws and regulations on us. We do not yet know the full
extent, if any, of environmental liabilities associated with many of our
recently acquired properties undergoing or scheduled to undergo site
restoration, including any liabilities associated with the assets we acquired
from Stone & Webster and IT Group. We cannot assure you that our operations will
continue to comply with future laws and regulations or that any such laws and
regulations will not significantly adversely affect us.

The level of enforcement of these laws and regulations also affects the demand
for many of our services. Proposed changes in regulations and the perception
that enforcement of current environmental laws has been reduced have decreased
the demand for some services, as clients have anticipated and adjusted to the
potential changes. Future changes could result in increased or decreased demand
for some of our services. The ultimate impact of the proposed changes will
depend upon a number of factors, including the overall strength of the economy
and clients' views on the cost-effectiveness of remedies available under the
changed regulations. If proposed or enacted changes materially reduce demand for
our environmental services, our results of operations could be adversely
affected.

THE LIMITATION OR THE EXPIRATION OF THE PRICE ANDERSON ACT'S INDEMNIFICATION
AUTHORITY COULD ADVERSELY AFFECT OUR BUSINESS.

The Price Anderson Act, or PAA, comprehensively regulates the manufacture, use
and storage of radioactive materials, while promoting the nuclear power industry
by offering broad indemnification to nuclear power plant operators and DOE
contractors. Because we provide services for the DOE relating to its nuclear
weapons facilities and the nuclear power industry in the on-going maintenance
and modification, as well as decontamination and decommissioning of its nuclear
power plants, we are entitled to the indemnification protections under the PAA.
Although the PAA's indemnification provisions are broad, it has not been
determined whether such indemnification applies to all liabilities that we might
incur while performing services as a radioactive materials cleanup contractor
for the DOE and the nuclear power industry. In addition, the PAA's ability to
indemnify us with respect to any new contract expired on August 1, 2002, but was
reauthorized and extended through December 31, 2004. Because nuclear power
remains controversial, there can be no assurance that the PAA's indemnification
authority will be reauthorized and extended when that authority expires again at
the end of 2004. If the PAA's indemnification authority is not extended, our
business could be adversely affected by either a refusal of plant operators to
retain us or our inability to obtain commercially adequate insurance and
indemnification.

WE FACE SUBSTANTIAL COMPETITION IN EACH OF OUR BUSINESS SEGMENTS.

In our E&I segment, we compete with a diverse array of small and large
organizations, including national and regional environmental management firms,
national, regional and local architectural, engineering and construction firms,
environmental management divisions or subsidiaries of international engineering,
construction and systems companies, and waste generators that have developed
in-house capabilities. Increased competition in this business, combined with
changes in client procurement procedures, has resulted in changes in the
industry, including among other things, lower contract margins, more fixed-price
or unit-price contracts and contract terms that may increasingly require us to
indemnify our clients against damages or injuries to third parties and property
and environmental fines and penalties. We believe, therefore, these market
conditions may require us to accept more contractual and performance risk than
we have historically for the environmental and infrastructure segment to be
competitive.

The entry of large systems contractors and international engineering and
construction firms into the environmental services industry has increased
competition for major federal government contracts and programs, which have been
a primary source of revenue in recent years for our environmental &
infrastructure business. There can be no assurance that our E&I segment will be
able to compete successfully given the intense competition and trends in its
industry.

In our engineering, procurement and construction business, we face competition
from numerous regional, national and international competitors, many of which
have greater financial and other resources than we do. Our competitors include
well-established, well-financed concerns, both privately and publicly held,
including many major power equipment manufacturers and engineering and
construction companies, some engineering companies, internal engineering
departments

60

at utilities and certain of our customers. The markets that we serve require
substantial resources and particularly highly skilled and experienced technical
personnel.

In our pipe engineering and fabrication business, we face substantial
competition on a domestic and international level. In the United States, there
are a number of smaller pipe fabricators. Internationally, our principal
competitors are divisions of large industrial firms. Some of our competitors,
primarily in the international sector, have greater financial and other
resources than we do.

OUR FAILURE TO ATTRACT AND RETAIN QUALIFIED PERSONNEL COULD HAVE AN ADVERSE
EFFECT ON US.

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

TERRORISTS' ACTIONS HAVE AND COULD CONTINUE TO NEGATIVELY IMPACT THE U.S.
ECONOMY AND THE MARKETS IN WHICH WE OPERATE.

Terrorist attacks, like those that occurred on September 11, 2001, have
contributed to economic instability in the United States, and further acts of
terrorism, violence or war could affect the markets in which we operate, our
business and our expectations. There can be no assurance that armed hostilities
will not increase or that terrorist attacks, or responses from the United
States, will not lead to further acts of terrorism and civil disturbances in the
United States or elsewhere, which may further contribute to economic instability
in the United States. These attacks or armed conflicts may directly impact our
physical facilities or those of our suppliers or customers and could impact our
domestic or international revenues, our supply chain, our production capability
and our ability to deliver our products and services to our customers. Political
and economic instability in some regions of the world may also result and could
negatively impact our business.

IF WE MUST WRITE OFF A SIGNIFICANT AMOUNT OF INTANGIBLE ASSETS, OUR EARNINGS
WILL BE NEGATIVELY IMPACTED.

Because we have grown in part through acquisitions, goodwill and other acquired
intangible assets represent a substantial portion of our assets. Goodwill was
approximately $511.4 million as of August 31, 2003. If we make additional
acquisitions, it is likely that we will record additional intangible assets on
our books. A determination that a significant impairment in value of our
unamortized intangible assets has occurred would require us to write off a
substantial portion of our assets. Such a write off would negatively affect our
earnings.

WE ARE AND WILL CONTINUE TO BE INVOLVED IN LITIGATION.

We have been and may from time to time be named as a defendant in legal actions
claiming damages in connection with engineering and construction projects and
other matters. These are typically actions that arise in the normal course of
business, including employment-related claims and contractual disputes or claims
for personal injury or property damage which occurs in connection with services
performed relating to project or construction sites. Our contractual disputes
normally involve claims relating to the performance of equipment, design or
other engineering services or project construction services provided by our
subsidiaries.

OUR REPURCHASE OBLIGATIONS UNDER THE LYONS COULD RESULT IN ADVERSE CONSEQUENCES.

In May 2001, we issued $790.0 million aggregate principal amount at maturity of
20-year, zero-coupon, unsecured, convertible debt Liquid Yield Option(TM) Notes,
or LYONs. The LYONs were issued on an original issue discount basis of $639.23
per $1,000 maturity value of the LYONs. On May 1 of 2004, 2006, 2011 and 2016,
holders of LYONs may require us to purchase all or a portion of the LYONs at
their accreted value (the original issue price of LYONs increases by 2.25% per
year).

61

In March 2003, we repurchased $384.6 million aggregate principal amount at
maturity of LYONs pursuant to our tender offer for the LYONs and in August 2003,
we repurchased another $32.0 million aggregate principal amount at maturity of
LYONs in open market purchases. After giving effect to the total repurchases of
$416.6 million aggregate principal amount at maturity of LYONs, the aggregate
principal amount at maturity of the LYONs that remain outstanding is
approximately $373 million (or a current accreted value of approximately $252
million). At May 1, 2004, the first date on which the holders can require us to
repurchase the LYONs, the aggregate accreted value will be $255.3 million.

The closing price of our common stock on the New York Stock Exchange on October
17, 2003 was $9.98 per share. Unless our common stock price increases to a
price in excess of $77.03 per share, we anticipate that a substantial portion,
and perhaps all, of the remaining outstanding LYONs will be submitted for
repurchase as early as May 1, 2004. In the event that holders of LYONs require
us to repurchase the LYONs on any of the above dates, we may, subject to certain
conditions, choose to redeem the LYONs in cash or in shares of our common stock,
or in a combination of both. If we elect to issue our common stock, the value of
the common stock would be determined by reference to the current market value of
our common stock at the time of each repurchase. As of August 31, 2003, we
anticipate that we would fund the entire repurchase obligation with cash.
Assuming that our cash flow from operations through the repurchase date meets
our reported projections, we anticipate that we would have sufficient cash
resources to repurchase up to the remaining $255.3 million in accreted value of
the LYONs with cash on May 1, 2004. However, if we elect to fund all or
substantially all of this repurchase obligation with cash, we will substantially
reduce our available cash resources or other forms of liquidity.

This could have the effect of restricting our ability to fund new acquisitions
or to meet other future working capital needs, as well as increasing our costs
of borrowing. We may seek to refinance or restructure our obligations under the
LYONs, including the incurrence of additional borrowings, but we may not be
successful in doing so or the refinancing or restructuring may result in terms
less favorable to us and the holders of the notes than the terms of the LYONs.
Our amended and restated Credit Facility dated as of March 17, 2003, permits us
to repurchase LYONs as long as, after giving effect to the purchase, we have the
ability to borrow up to $50.0 million under that facility and that we have
designated amounts of cash and cash equivalents. Prior to May 1, 2004, cash and
cash equivalent amounts must be not less than $100.0 million and thereafter not
less than $75.0 million. Cash and cash equivalents for purposes of this test
consist of those sums not otherwise pledged or escrowed under our Credit
Facility and are reduced by amounts borrowed under our Credit Facility. In
addition, regardless of whether we meet these tests, our amended credit facility
permits us to use up to $10.0 million to repurchase LYONs.

OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND
IMPAIR OUR ABILITY TO FULFILL OUR OBLIGATIONS UNDER OUR SENIOR NOTES AND OUR
CREDIT FACILITY.

As of August 31, 2003, we had total outstanding indebtedness of approximately
$513.2 million, approximately $5.5 million of which was secured indebtedness,
including obligations under capital leases. In addition, as of August 31, 2003,
letters of credit issued for our account in an aggregate amount of $164.3
million were outstanding. Our substantial indebtedness could have important
consequences, including the following:

o it will require us to dedicate a substantial portion of our
cash flow from operations to payments on our indebtedness,
including our outstanding 10 3/4% Senior Notes due 2010, or
Senior Notes, and may require us to dedicate a substantial
portion of our cash flow from operations to repurchase the
LYONs, in each case reducing the availability of cash flow to
fund acquisitions, working capital, capital expenditures and
other general corporate purposes;

o it will limit our ability to borrow money or sell stock for
working capital, capital expenditures, debt service
requirements and other purposes;

o it will limit our flexibility in planning for, and reacting
to, changes in our business;

o it may place us at a competitive disadvantage if we are more
highly leveraged than some of our competitors;

o it may make us more vulnerable to a further downturn in the
economy of our business; and

o it may restrict us from making additional acquisitions or
exploiting other business opportunities.

To the extent that new debt is added to our currently anticipated debt level,
the substantial leverage risks described above would increase.

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RESTRICTIVE COVENANTS IN OUR CREDIT FACILITY AND THE INDENTURE RELATING TO THE
SENIOR NOTES MAY RESTRICT OUR ABILITY TO PURSUE OUR BUSINESS STRATEGIES.

Our Credit Facility and the indenture relating to the Senior Notes contain
certain restrictions on our ability to, among other things:

o incur additional indebtedness or contingent obligations or
issue preferred stock;

o pay dividends or make distributions to our shareholders;

o repurchase or redeem our capital stock or subordinated
indebtedness;

o make investments;

o create liens;

o enter into sale/leaseback transactions;

o incur restrictions on the ability of our subsidiaries to pay
dividends or to make other payments to us;

o make capital expenditures;

o enter into transactions with our stockholders and affiliates;

o sell assets; and

o acquire the assets of, or merge or consolidate with, other
companies or transfer all or substantially all of our assets.

Our Credit Facility requires us to achieve certain financial ratios, including a
leverage ratio (which becomes more restrictive over time) and a minimum fixed
charge coverage ratio. We may not be able to satisfy these ratios, especially if
our operating results fall below management's expectations. In addition, in
order to remain in compliance with the covenants in our Credit Facility, we may
be limited in our flexibility to take actions resulting in non-cash charges,
including as a result of our settling claims. These covenants may impair our
ability to engage in favorable business activities and our ability to finance
future operations or capital needs, including those associated with honoring our
repurchase obligations with respect to the LYONs.

A breach of any of these covenants or our inability to comply with the required
financial ratios could result in a default under our Credit Facility. In the
event of any default under our Credit Facility, the lenders thereunder will not
be required to lend any additional amounts to us and could elect to declare all
outstanding borrowings, together with accrued interest and other fees, to be due
and payable, or require us to apply all of our available cash to repay these
borrowings. The acceleration of outstanding loans under our Credit Facility in
excess of $20.0 million constitutes an event of default with respect to the
Senior Notes. If we are unable to repay borrowings with respect to our Credit
Facility when due, the lenders thereunder could proceed against their
collateral, which consists of substantially all of our assets other than real
estate, plants, parts and equipment. If the indebtedness under our Credit
Facility or the Senior Notes were to be accelerated, there can be no assurance
that our assets would be sufficient to repay such indebtedness in full.

ADVERSE EVENTS COULD NEGATIVELY AFFECT OUR LIQUIDITY POSITION.

Our operations could require us to utilize large sums of working capital,
sometimes on short notice and sometimes without the ability to recover the
expenditures. This has been the experience of certain of our competitors.
Circumstances or events which could create large cash outflows include losses
resulting from fixed-price contracts, environmental liabilities, litigation
risks, unexpected costs or losses resulting from acquisitions, contract
initiation or completion delays, political conditions, customer payment
problems, foreign exchange risks, professional and product liability claims and
cash repurchases of our LYONs, among others. We cannot provide assurance that we
will have sufficient liquidity or the credit

63

capacity to meet all of our cash needs if we encounter significant working
capital requirements as a result of these or other factors.

Insufficient liquidity could have important consequences to us. For example, we
could:

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

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

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

o failure to comply with the terms of our credit facility;

o incur increased lending fees, costs and interest rates; and

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

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

WORK STOPPAGES AND OTHER LABOR PROBLEMS COULD ADVERSELY AFFECT US.

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

CHANGES IN TECHNOLOGY COULD ADVERSELY AFFECT US, AND OUR COMPETITORS MAY DEVELOP
OR OTHERWISE ACQUIRE EQUIVALENT OR SUPERIOR TECHNOLOGY.

We believe that we have a leading position in technologies for the design and
construction of ethylene processing plants. We protect our position through
patent registrations, license restrictions and a research and development
program. However, it is possible that others may develop competing processes
that could negatively affect our market position.

Additionally, we have developed construction and power generation and
transmission software which we believe provide competitive advantages. The
advantages currently provided by this software could be at risk if competitors
were to develop superior or comparable technologies.

Our induction pipe bending technology and capabilities favorably influence our
ability to compete successfully. Currently this technology and our proprietary
software are not patented. Even though we have some legal protections against
the dissemination of this know-how, including non-disclosure and confidentiality
agreements, our efforts to prevent others from using our technology could be
time-consuming, expensive and ultimately may be unsuccessful or only partially
successful. Finally, there is nothing to prevent our competitors from
independently attempting to develop or obtain access to technologies that are
similar or superior to our technology.

OUR SUCCESS DEPENDS ON KEY MEMBERS OF OUR MANAGEMENT.

Our success is dependent upon the continued services of our key officers. The
loss of any of our key officers could adversely affect us. We do not maintain
key employee insurance on any of our executive officers.

64

MARKET PRICES OF OUR EQUITY SECURITIES HAVE CHANGED SIGNIFICANTLY AND COULD
CHANGE FURTHER.

The market prices of our common stock may change significantly in response to
various factors and events beyond our control, including the following:

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

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

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

o general conditions in our industries;

o general conditions in the securities markets;

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

o issuance of a significant number of shares of common stock to
fund LYONs repurchases.

PROVISIONS IN OUR ARTICLES OF INCORPORATION AND BY-LAWS AND RIGHTS AGREEMENT
COULD MAKE IT MORE DIFFICULT TO ACQUIRE US AND MAY REDUCE THE MARKET PRICE OF
OUR COMMON STOCK.

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK

We are exposed to interest rate risk due to changes in interest rates, primarily
in the United States. Our policy is to manage interest rates through the use of
a combination of fixed and floating rate debt and short-term fixed rate
investments. We currently do not use any derivative financial instruments to
manage our exposure to interest rate risk. The table below provides information
about our future maturities of principal for outstanding debt instruments
(including capital leases) and fair value at August 31, 2003 (in millions).

65

As discussed in Note 9 of the notes to our consolidated financial statements, on
May 1, 2001, we issued $790.0 million (face value), 20-year, 2.25% zero coupon
unsecured convertible debt Liquid Yield Option (TM) Notes (the "LYONs") for
which we received net proceeds of approximately $490.0 million. After paying off
approximately $67.0 million of outstanding debt, the remaining proceeds were
invested in high quality short-term cash equivalents and marketable securities
held to maturity. During fiscal 2001, the income realized from these investments
was greater than the interest costs associated with the LYONs debt. However,
during fiscal 2003 and 2002 interest income was less than our interest expense
as a result of our utilization of cash for various investments (including the IT
Group acquisition), the decline in interest rates available for short-term
investments, and the amortization of deferred credit costs. During fiscal 2003,
through our tender offer in March 2003 and additional repurchases in August
2003, we repurchased a total of $416.6 million face value of the LYONs, leaving
$373.4 million face value outstanding at August 31, 2003.

The holders of the LYONs have the right to require us to repurchase the LYONs on
May 1, 2004, May 1, 2006, May 1, 2011, and May 1, 2016 at the then accreted
value. Therefore, the debt is presented above as maturing on May 1, 2004 because
of the potential for repurchase requests by the debt holders at that time.

At August 31, 2003, the interest rate on our primary Credit Facility was either
5.00% (if the prime rate index had been chosen) or 3.62% (if the LIBOR rate
index had been chosen) with an availability of $89.9 million (see Note 10 of the
notes to our consolidated financial statements for further discussion of our
Credit Facility).

The estimated fair value of long-term debt and capital leases as of August 31,
2003 and 2002 was approximately $466.3 million and $416.0 million, respectively.
The fair value of the convertible debt as of August 31, 2003 was based on recent
sales of such debt as of August 31, 2003. The fair value of our other long-term
debt and capital leases were based on borrowing rates currently available to us
for notes with similar terms and average maturities.

FOREIGN CURRENCY RISKS

The majority of our transactions are in U.S. dollars; however, certain of our
subsidiaries conduct their operations in various foreign currencies. Currently,
when considered appropriate, we use hedging instruments to manage our risks
associated with our operating activities when an operation enters into a
transaction in a currency that is different from its local currency. In these
circumstances, we will frequently utilize forward exchange contracts to hedge
the anticipated purchases and/or revenues. We attempt to minimize our exposure
to foreign currency fluctuations by matching our revenues and expenses in the
same currency for our contracts. As of August 31, 2003, we 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 our results of operations or financial position (see Notes 1 and 19
of the notes to our consolidated financial statements).

66

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

67

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
The Shaw Group Inc.

We have audited the accompanying consolidated balance sheets of The Shaw Group
Inc. and subsidiaries as of August 31, 2003 and 2002, and the related
consolidated statements of income, shareholders' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The consolidated statements of income,
shareholders' equity and cash flows of The Shaw Group Inc. for the year ended
August 31, 2001, were audited by other auditors who have ceased operations and
whose report dated October 5, 2001, expressed an unqualified opinion on those
statements before the adjustments and disclosures described below and in Notes
6, 8 and 15.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Shaw Group
Inc. and subsidiaries at August 31, 2003 and 2002, and the consolidated results
of their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States.

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

As discussed above, the consolidated statements of income, shareholders' equity
and cash flows of The Shaw Group Inc. for the year ended August 31, 2001 were
audited by other auditors who have ceased operations. As described in Notes 6, 8
and 15, these financial statements have been revised to include summarized
financial information of 50%-or-less owned persons required by Regulation S-X
Rule 4-08(g), to include the transitional disclosures required by FAS 142, and
to restate the 2001 segment disclosures to conform to the 2003 composition of
reportable segments. We audited the adjustments that were applied to include the
summarized financial information, to include the transitional disclosures for
FAS 142, and to restate the disclosures for reportable segments reflected in
Notes 6, 8 and 15 to the 2001 financial statements. Our procedures with respect
to the 2001 summarized financial information in Note 6 related to 2001 included
(a) comparing the amounts of revenues, gross profit (loss), and net income
(loss) to a schedule prepared by management that was summarized from the
financial statements of EntergyShaw, L.L.C. and (b) comparing the amounts of
revenues, gross profit (loss) and net income (loss) for the other
unconsolidated entities to a schedule prepared by management which was
summarized from the financial statements of these investees. Our procedures with
respect to the FAS 142 transitional disclosures in Note 8 related to 2001
included (a) agreeing the previously reported net income (loss) to the
previously issued financial statements and the adjustments to net income
representing amortization expense (net of the tax effect) recognized in 2001
related to goodwill to the Company's underlying records obtained from management
and (b) testing the mathematical accuracy of the reconciliation of adjusted net
income to reported net income, and the related per-share amounts. Our
procedures with respect to the restated 2001 segment disclosures in Note 15
included (a) agreeing the adjusted amounts of information about segment profit,
assets, management fees charged by corporate, and the items included in the
reconciliation of total segment assets to total consolidated assets to the
Company's underlying records obtained from management, (b) agreeing the adjusted
amounts of geographic revenues and long-lived assets to the Company's underlying
records obtained from management and (c) testing the mathematical accuracy of
the reconciliations of segment amounts to the consolidated financial statements.
In our opinion, the adjustments related to reportable segments for 2001 are
appropriate and have been properly applied, and the FAS 142 transitional
disclosures and the summarized financial information included in Note 6 for 2001
are appropriate. However, we were not engaged

68

to audit, review, or apply any procedures to the 2001 consolidated financial
statements of the Company other than with respect to such adjustments and
disclosures and, accordingly, we do not express an opinion or any other form of
assurance on the 2001 consolidated financial statements taken as a whole.

/s/ Ernst & Young LLP

New Orleans, Louisiana
October 17, 2003

69

THIS IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP IN
CONNECTION WITH SHAW'S FILING ON FORM 10-K FOR THE FISCAL YEAR ENDED AUGUST 31,
2001. THIS AUDIT REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP IN
CONNECTION WITH THIS FILING ON FORM 10-K FOR THE FISCAL YEAR ENDED AUGUST 31,
2003. FOR FURTHER DISCUSSION, SEE EXHIBIT 23.2 WHICH IS FILED HEREWITH AND
HEREBY INCORPORATED BY REFERENCE INTO THE FORM 10-K FOR THE FISCAL YEAR ENDED
AUGUST 31, 2003 OF WHICH THIS REPORT FORMS A PART.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

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

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

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

/s/ Arthur Andersen LLP

Arthur Andersen LLP
New Orleans, Louisiana

October 5, 2001

70

THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF AUGUST 31, 2003 AND 2002
(DOLLARS IN THOUSANDS)

ASSETS

(Continued)

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

71

THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF AUGUST 31, 2003 AND 2002
(DOLLARS IN THOUSANDS)

LIABILITIES AND SHAREHOLDERS' EQUITY

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

72

THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED AUGUST 31, 2003, 2002 AND 2001
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

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

73

THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

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

74

THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31, 2003, 2002 AND 2001
(DOLLARS IN THOUSANDS)

(Continued)

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

75

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

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

76

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

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of The Shaw Group
Inc. (a Louisiana corporation), our wholly-owned subsidiaries, and our
proportionate share of our investments in joint ventures. All material
intercompany accounts and transactions have been eliminated in these financial
statements.

In order to prepare financial statements in conformity with accounting
principles generally accepted in the United States, our management is required
to make estimates and assumptions as of the date of the financial statements
which affect the reported values of assets and liabilities and revenues and
expenses and disclosures of contingent assets and liabilities. Actual results
could differ from those estimates. Areas requiring significant estimates by our
management include the following:

o contract costs and profits and application of
percentage-of-completion accounting and revenue recognition of
contract claims;

o recoverability of inventory and application of lower of cost
or market accounting;

o provisions for uncollectible receivables and customer claims;

o provisions for income taxes and related valuation allowances;

o recoverability of goodwill;

o recoverability of other intangibles and related estimated
lives;

o valuation of assets acquired and liabilities assumed in
connection with business combinations;

o valuation of defined benefit pension plans; and

o accruals for estimated liabilities, including litigation and
insurance reserves.

Nature of Operations, Operating Cycle and Types of Contracts

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

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

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

In addition, we focus our engineering, procurement and construction activities
on cost-reimbursable and negotiated fixed-price work with well-established
clients. Fixed-price contracts are generally obtained by direct negotiation
rather than by competitive bid.

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Our fixed-price contracts include the following:

o Firm fixed-price contract - A contract in which the price is
not subject to any adjustment by reason of our cost experience
or our performance under the contract.

o Maximum price contract - A contract which provides at the
outset for an initial target cost, an initial target profit,
and a price ceiling. The price is subject to adjustment by
reason of our cost experience but, in no event, would the
adjustment exceed the price ceiling established in the
contract. In addition, these contracts usually include
provisions whereby we share costs savings with our clients.

o Unit-price contract - A contract under which we are paid a
specified amount for every unit of work performed.

Our cost-reimbursable contracts include the following:

o Cost-plus contract - A contract under which we are reimbursed
for allowable or otherwise defined costs incurred plus a fee
or mark-up that represents profit.

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

Cash and Cash Equivalents and Marketable Securities Held to Maturity

Highly liquid investments are classified as cash equivalents if they mature
within three months of the purchase date. Marketable securities held to maturity
are comprised of highly liquid investments that mature between three to four
months of the purchase date. The fair value of marketable securities held to
maturity approximates the carrying value at August 31, 2003 and 2002.

Accounts Receivable and Credit Risk

We grant short-term credit to our customers. Our principal customers are major
multi-national industrial corporations, governmental agencies, regulated utility
companies, independent and merchant power producers and equipment manufacturers.
Accounts receivable are based on contracted prices and we believe that in most
cases our exposure to credit risk is minimal; however, during fiscal 2003 and
2002, changes in the power generation market created liquidity problems for
certain unregulated, independent power producers ("IPPs"). As a result, our
exposure to credit risk has significantly increased with respect to those
customers (see Note 14).

Allowance for Doubtful Accounts

We estimate the amount of doubtful accounts based on our understanding of the
financial condition of specific customers and for contract adjustments to
reflect the net amount expected to be collected.

Analysis of the change in the allowance for doubtful accounts follows (in
thousands):

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Inventories

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

Property and Equipment

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

For financial reporting purposes, depreciation is generally provided over the
following estimated useful service lives:

Transportation equipment 5 Years
Furniture, fixtures and software 3-8 Years
Machinery and equipment 3-18 Years
Buildings and improvements 8-40 Years

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

During the years ended August 31, 2003 and 2002, interest costs of approximately
$220,000 and $364,000, respectively, were capitalized.

Long-lived assets, such as property, plant, and equipment and purchased
intangibles subject to amortization are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized by the amount by which the
carrying amount of the asset exceeds the fair value of the asset.

Joint Ventures

As is common in the engineering, procurement and construction industries, we
execute certain contracts jointly with third parties through joint ventures,
limited partnerships and limited liability companies (or "joint ventures"). The
investments in these joint ventures are included in the accompanying
consolidated balance sheets as of August 31, 2003 and 2002 at $17,000,000 and
$18,255,000, respectively, which generally represent our cash contributions and
our share of the earnings from these investments (equity method of accounting).
We generally report our percentage share of revenues and costs from these
entities in our consolidated statements of income (proportional consolidation).

Income Taxes

We provide for deferred taxes in accordance with SFAS No. 109, "Accounting for
Income Taxes," which requires an asset and liability approach for measuring
deferred tax assets and liabilities due to temporary differences existing at
year-end using currently enacted tax rates.

Goodwill and Other Intangibles

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

In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets," and we adopted these standards
effective September 1, 2001. These standards significantly changed prior
practices for the accounting for business combinations and goodwill and
intangibles by: (i) terminating the use of the pooling-of-interests method of
accounting for business combinations, (ii) creating more specific criteria for
identifying other intangibles which are acquired in a business combination,
(iii) ceasing goodwill amortization, and (iv) requiring impairment testing of
goodwill based on a fair value concept. SFAS No. 142 requires that the opening
goodwill balances

79

be tested upon adoption of the standard and that another impairment test be
performed during the fiscal year of adoption. Impairment tests should generally
be performed annually thereafter, with interim testing required if circumstances
warrant.

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

Prior to August 31, 2001, we conducted impairment reviews of our goodwill to
assess the recoverability of the unamortized balance based on expected future
profitability, undiscounted future cash flows of the acquired assets and
businesses, and their contribution to our overall operations. An impairment loss
would have been recognized for the amount identified in the review by which the
goodwill balance exceeded the recoverable goodwill balance. Subsequent to August
31, 2001, we performed goodwill impairment reviews by reporting unit based on a
fair value concept, as required by SFAS No. 142, which indicated that our
goodwill has not been impaired. We completed our annual impairment test as of
March 1, 2003 in accordance with SFAS No. 142 and have determined that our
goodwill is not impaired.

We have also recorded in other assets intangible assets related to various
licenses, patents, technology and related processes (see Note 4). The costs of
these assets are amortized over a ten-year to fifteen-year period on a
straight-line basis. We have recorded in other assets intangible assets related
to customer relationships acquired with the IT Group acquisition which are
amortized over a ten-year period on a straight-line basis.

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

We have also recorded contract fair value adjustments related to the IT Group
and S&W acquisitions. Contract asset adjustments related to the IT Group
acquisition are recorded in other current assets, as an intangible asset.
Contract liability adjustments are recorded in current liabilities with respect
to both the IT Group and S&W acquisitions. The assets and liabilities are
amortized over the estimated lives of the underlying contracts and related
backlog as work is performed on these contracts (see Note 4 and Note 8).

Revenues

For project management, engineering, procurement, remediation, and construction
services under fixed-price or target price contracts, we recognize revenues
under the percentage-of-completion method measured primarily by the percentage
of contract costs incurred to date to total estimated contract costs for each
contract. Revenues from cost-reimbursable or cost-plus contracts are recognized
on the basis of costs incurred during the period plus the fee earned. Profit
incentives are included in revenues when their realization is reasonably
assured. Cancellation fees are recognized when received.

The effect of other changes to estimated profit and loss, including those
arising from contract penalty provisions, final contract settlements and reviews
performed by customers, are recognized in the period in which the revisions are
identified.

Claims and change orders being negotiated with customers are included in total
estimated revenue to the extent costs attributable to such claims and change
orders have been incurred, and collection is probable and the amount can be
reasonably estimated. Profit from claims and change orders is recorded in the
period such amounts are finalized. Contract adjustment allowances are based on
management's estimates of the net amounts to be realized from charges disputed
or costs questioned by customers (see Note 20).

Revenue is recognized from consulting services as the work is performed.
Consulting services work is primarily performed on a reimbursable basis.

Revenues related to royalty use of our performance enhancements derived from our
process technologies are recorded in the period earned based on the performance
criteria defined in the related contracts. For running royalty agreements, we
recognize revenues based on customer production volumes at the contract
specified unit rates. For paid-up license agreements, revenue is recognized
using the percentage-of-completion method, measured primarily by the percentage
of

80

costs incurred to date to total estimated costs at completion. Revenue available
for recognition on a percent complete basis is limited to the agreement value
less a liability provision for contractually specified process performance
guarantees.

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

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

Cost Estimates

Contract costs include all direct material and labor costs and those indirect
costs related to contract performance, such as indirect labor, supplies, tools,
repairs, warranty costs and depreciation costs.

Our contract cost estimates are dependent upon the judgments we make with
respect to our contract performance and, on certain contracts, our ability to
recover costs from subcontractors and vendors through change orders and claims
for backcharges. We reduce contract cost estimates for backcharges and claims
when estimated recovery of the subject amounts is reasonably assured. Costs
attributable to claims are treated as costs of revenue when they are incurred
(see Note 20).

Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are identified. We report these amounts by recognizing a
reduction of current earnings, which might be significant depending on the size
of the project or the adjustment.

Selling, general and administrative expenses are charged to expense as incurred.

Financial Instruments, Forward Contracts - Non-Trading Activities

The majority of our transactions are in U.S. dollars; however, certain of our
foreign subsidiaries conduct operations in the local currency. Accordingly,
there are situations when we believe it is appropriate to use financial hedging
instruments (generally foreign currency forward contracts) to manage foreign
currency risks when our foreign subsidiaries enter into a transaction
denominated in a currency other than their local currency.

We utilize forward foreign exchange contracts to reduce our risk from foreign
currency price fluctuations related to firm or anticipated accounts receivable
transactions, commitments to purchase or sell equipment, materials and /or
services. The fair value of our hedges was not material at August 31, 2003. At
August 31, 2002, we recorded an asset and other income on fair value hedges of
$650,000 ($420,000 net of taxes) that generally offset transaction losses in the
related hedged accounts receivables. We normally do not use any other type of
derivative instrument or participate in any other hedging activities.

Other Comprehensive Income

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

81

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

Self Insurance

We are self-insured for workers' compensation claims for individual claims or
claim events up to $250,000 and maintain insurance coverage for the excess.
Additionally, we self-insure our employee health coverage up to certain annual
individual and plan limits and maintain insurance coverage for the excess. Our
accruals for our self-insured costs are determined through a combination of
prior experience and specific analysis of larger claims. At August 31, 2003 and
2002, our accruals for our self-insured costs totaled $9,868,000 and $6,318,000,
respectively.

Reclassifications

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

Stock Based Compensation

SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure,"
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 related interpretations or by the
intrinsic value method prescribed in APB No. 25 and related interpretations.

We account for our 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 we had adopted the fair value method of accounting for stock-based
compensation and had determined our stock-based compensation cost based on the
fair value at the grant date consistent with the provisions of SFAS No. 123, our
net income and earnings per common share would have approximated the pro forma
amounts below (in thousands, except per share amounts):

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The weighted average fair value at date of grant for options granted during the
years ended August 31, 2003, 2002 and 2001, was $8.30, $15.61, and $21.40 per
share, respectively. The fair value of options granted is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions for the years ended August 31, 2003, 2002, and
2001, respectively: (a) dividend yield of 0.00%, 0.00% and 0.00%; (b) expected
volatility of 67%, 65%, and 60%; (c) risk-free interest rate of 2.9%, 4.1% and
5.3%; and (d) expected life of five years, five years and five years.

It is our general practice to issue stock options at the market value of the
underlying stock, and therefore, no compensation expense is recorded for these
stock options (See Note 17).

New Accounting Standards

In January 2003, the FASB issued 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 No. 46 apply
immediately to variable interest entities created after January 31, 2003 and
existing variable interest entities at the end of periods ending after December
15, 2003 (February 28, 2004 for us). There was no impact to our consolidated
financial statements as of and for the year ended August 31, 2003. We have not
yet determined what effect, if any, this Interpretation will have on our
financial statements.

NOTE 2--PUBLIC CAPITAL STOCK TRANSACTIONS

In September 2001, our Board of Directors authorized the repurchase of shares of
our no par value common stock, depending on market conditions, up to a limit of
$100,000,000. As of October 11, 2002, we completed our purchases under this
program, having purchased 5,331,005 shares at a cost of approximately
$99,881,000. We purchased 3,170,605 shares at a cost of approximately
$47,837,000 in the first quarter of fiscal 2003 and 2,160,400 shares at a cost
of approximately $52,043,000 during the fiscal year ended August 31, 2002.

On July 31, 2001, we issued a dividend distribution of one Preferred Share
Purchase Right, or Right, for each outstanding share of common stock (see Note
12).

Effective May 1, 2001, we issued and sold $790,000,000 (including $200,000,000
to cover over-allotments) of 20-year, zero-coupon, unsecured, convertible debt,
Liquid Yield Option(TM) Notes or LYONs or debt. The debt was issued at an
original discount price of $639.23 per $1,000 maturity value and has a yield to
maturity of 2.25%. The debt is a senior unsecured obligation and is convertible
into our common stock at a fixed ratio of 8.2988 shares per $1,000 maturity
value or an effective conversion price of $77.03 on the date of issuance. Under
the terms of the issue, the conversion rate may be adjusted for certain reasons,
but will not be adjusted for accrued original issue discount. During fiscal
2003, we repurchased $416,599,000 face value of the LYONs with an amortized
value of $278,174,000 (see Note 9).

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

83

NOTE 3--ESCROWED CASH

In connection with a performance bond on a foreign project, we agreed to deposit
in escrow with the issuer of the bond primarily advance payments received from
our customer. During the year ended August 31, 2002, we deposited approximately
$96,500,000 into escrow pursuant to this agreement. This deposit was recorded as
escrowed cash. As a result of the performance bond, our customer agreed not to
withhold retentions on our billings. The initial deposit was retained in escrow
until the fourth quarter of 2003, at which time escrow funds began being
released incrementally to us as we completed certain contract milestones. As of
August 31, 2003, $58,035,000 remains in escrow pursuant to this agreement. A
final escrow amount of approximately $25,000,000 will be released to us upon
initial contract acceptance as defined in the agreement, which is currently
projected to occur in calendar 2005. The bonding company (or "surety") may draw
on the escrow funds only to secure the surety from a defined loss. The escrowed
funds are invested in short-term, high quality investments and investment income
is remitted to us on a quarterly basis. We may request the surety to allow us to
substitute a letter of credit for all or part of the cash escrow requirements.

NOTE 4--ACQUISITIONS

SFAS No. 141, "Business Combinations," requires that all acquisitions initiated
after June 30, 2001 be recorded utilizing the purchase method of accounting.
Most of our acquisitions that were completed prior to June 30, 2001 were also
accounted for using the purchase method of accounting under APB No. 16. Under
the purchase method, the cost of each acquired operation is allocated to the
assets acquired and liabilities assumed based on their estimated fair values.
These estimates are revised during an allocation period as necessary when, and
if, information becomes available to further define and quantify the value of
the assets acquired and liabilities assumed. The allocation period does not
exceed beyond one year from the date of the acquisition. To the extent
additional information to refine the original allocation becomes available
during the allocation period, the allocation of the purchase price is adjusted.
Likewise, to the extent such information becomes available after the allocation
period, such items are included in our operating results in the period that the
settlement occurs or information is available to adjust the original allocation
to a better estimate. These future adjustments, if any, may materially favorably
or unfavorably impact our future consolidated financial position or results of
operations.

In connection with potential acquisitions, we incur and capitalize certain
transaction costs, which include legal, accounting, consulting and other direct
costs. When an acquisition is completed, these costs are capitalized as part of
the acquisition price. We routinely evaluate capitalized transaction costs and
expense those costs related to acquisitions that are not likely to occur.
Indirect acquisition costs, such as salaries, corporate overhead and other
corporate services are expensed as incurred.

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

IT Group Acquisition

During fiscal year 2002, we acquired substantially all of the operating assets
and assumed certain liabilities of The IT Group, Inc. 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 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 was a leading provider of diversified environmental consulting,
engineering, construction, remediation and facilities management services. The
primary reasons for the acquisition were to diversify and expand our revenue
base and to pursue additional opportunities in the environmental,
infrastructure, and homeland security markets. We formed a new wholly-owned
subsidiary, Shaw Environmental & Infrastructure, Inc., or Shaw E&I, into which
we combined the acquired IT Group operations and our existing environmental and
infrastructure operations.

84

The final purchase price included the following components (in thousands):

Cash, net of $13,694 of cash received at closing $ 39,756
1,671,336 shares of our common stock 52,463
Assumption of the outstanding balances of
debtor-in-possession financing we provided IT
Group & Beneco 51,789
Transaction costs 9,519
----------
$ 153,527
==========

We believe, pursuant to the terms of the acquisition agreements, that we have
assumed only certain liabilities ("assumed liabilities") of the IT Group and
Beneco as specified in the acquisition agreements. 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 or excluded liabilities, are specifically excluded from our
transactions. We, however, cannot provide assurance that we do not have any
exposure to the excluded liabilities because, among other matters, the
bankruptcy courts have not finalized their validation of the claims filed with
the courts. Additionally, we have not completed our review of liabilities that
have been submitted to us for payment. Accordingly, our 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 our
review or processing of liabilities; however, we believe based on our review of
claims filed that any such adjustment to the assumed liabilities will not be
material.

The purchase price was subject to various adjustments, and the final allocation
was completed on May 3, 2003. Any future adjustments will be reflected in
operating results. The final allocation of cost is as follows (in thousands):

Accounts receivable and costs and earnings in excess of billings on
uncompleted contracts $ 248,281
Contract asset adjustments 9,413
Property, plant and equipment 21,633
Deferred income taxes 65,293
Other assets 57,195
Goodwill 113,213
Customer relationship intangible 2,016
Accounts payable and accrued expenses (198,303)
Billings in excess of cost and estimated earnings on uncompleted contracts (83,658)
Contract (liability) adjustments (52,842)
Accrued contract loss reserves (21,250)
Debt and bank loans (7,464)
------------
Purchase price (net of cash received of $13,694) $ 153,527
============

The tax deductible portion of the goodwill recorded for the IT Group acquisition
is approximately $36,000,000.

The final purchase price allocation for the IT Group acquisition differs from
our preliminary purchase price allocation as we were able to obtain information
on acquired contracts subsequent to the acquisition date and preliminary
purchase price allocation that enabled us to perform a detailed contract review
of those contracts and each contract position as of the acquisition date.
Significant adjustments to our preliminary purchase price allocation include a
$23,100,000 increase in accounts receivable and costs and earnings in excess of
billings on uncompleted contracts, a $4,400,000 decrease in contract asset
adjustments, a $5,300,000 decrease in contract liability adjustments and a
$13,800,000 increase in accrued contract losses.

Prior to the acquisitions of the IT Group and Beneco, we entered into agreements
with two surety companies. In exchange for our agreeing to complete certain of
the IT Group's and Beneco's bonded contracts (i) the sureties paid us
$13,500,000 in cash and (ii) the sureties assigned to us their rights to
Debtor-in-Possession financing of approximately $20,000,000 that the sureties
had provided to Beneco. The total value received from the sureties, including a
net working capital position on these contracts of approximately $19,100,000,
was recorded as deferred revenue as of August 31, 2002 (included in billings in
excess of cost and estimated earnings on uncompleted contracts on the
accompanying consolidated balance

85

sheet). We recognized revenue of $22,700,000 and $5,934,000 in fiscal years 2003
and 2002, respectively, with the remaining $24,000,000 recorded as deferred
revenue as of August 31, 2003.

We acquired a large number of contracts in progress and contract backlog for
which the work had not commenced at the acquisition date. Under SFAS No. 141,
construction contracts are defined as intangibles that meet the criteria for
recognition apart from goodwill. These intangibles, like the acquired assets and
liabilities, are required to be recorded at their fair value at the date of
acquisition. We recorded these contracts at fair value using a market-based
discounted cash flow approach. Related assets of $9,413,000 and liabilities of
$52,842,000, as adjusted by allocation period adjustments as of May 3, 2003,
have been established and are being amortized to contract costs over the
estimated lives of the underlying contracts and related production backlog. The
net amortization recognized during the years ended August 31, 2003 and 2002 was
approximately $19,262,000 and $2,763,000, respectively, and has been reflected
as a reduction in the cost of revenues, which resulted in a corresponding
increase in gross profit. The activity related to these contract assets and
liabilities is included in the table of Note 8.

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

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

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

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

Other Acquisitions

On April 17, 2003, we acquired substantially all of the assets of Badger
Technologies from Washington Group International, Inc. for approximately
$17,700,000 in cash. Badger Technologies develops, commercializes and licenses
petrochemical and petroleum refining-related technologies. Badger Technologies
is being integrated into our Engineering, Construction & Maintenance segment
(see Note 15). We recorded approximately $8,000,000 in goodwill and
approximately $7,500,000 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.

86

On March 21, 2003, we acquired all of the common stock of Envirogen, Inc. for a
cost of approximately $3,700,000, net of cash received. Envirogen, previously a
publicly traded company, specializes in remediation of complex contaminants in
soil and groundwater and has been integrated into our Environmental &
Infrastructure segment. Approximately $4,500,000 of goodwill was recorded
related to this transaction, based on our preliminary allocation of the purchase
price which is subject to revision during the one-year allocation period.

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

In December 2001, we acquired certain assets of PsyCor International, Inc. for
$2,000,000. Acquisition costs were not material. The purchase method was used to
account for the acquisition and substantially the entire purchase price was
allocated to goodwill. PsyCor's primary business is developing information
management systems.

In March 2001, we acquired the assets and certain assumed liabilities of Scott,
Sevin & Schaffer, Inc. and Technicomp, Inc., collectively SS&S. As of August 31,
2002, we had issued 170,033 shares (including purchase price protection reduced
by purchase price adjustment and indemnity settlements) of our common stock
(valued at approximately $6,200,000) as consideration for the transaction. We
incurred approximately $160,000 of acquisition costs. This acquisition was
accounted for under the purchase method of accounting and approximately
$4,300,000 of goodwill was recorded. SS&S's primary business is structural
steel, vessel, and tank fabrication.

On July 12, 2000, we completed the acquisition of certain assets and assumption
of liabilities of PPM Contractors, Inc. Total consideration paid was 86,890
shares of our common stock valued at $2,012,000 and the assumption of certain
liabilities. During fiscal 2002, we determined that PPM achieved certain target
revenue levels as of December 31, 2001, and as a result, we owed additional
consideration to PPM of approximately $2,000,000 pursuant to the terms of the
acquisition agreement. Accordingly, we issued 83,859 shares of common stock to
cover our obligation under the agreement and recorded additional goodwill of
$2,000,000.

NOTE 5--INVENTORIES

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

NOTE 6--INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED ENTITIES, JOINT VENTURES
AND LIMITED PARTNERSHIPS

The balance sheet account Investment in Unconsolidated Entities includes the
following (in thousands):

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We own 49% of Shaw-Nass Middle East, W.L.L., a joint venture in Bahrain
("Shaw-Nass") which is accounted for on the equity basis. Shaw-Nass's operations
include sales of fabricated pipe to Shaw EPC contracts in the Middle East.
Undistributed earnings of $1,267,000 were included in our consolidated retained
earnings as of August 31, 2002 and there were no undistributed earnings included
in retained earnings as of August 31, 2003. Equity earnings from Shaw-Nass for
the years ended August 31, 2003, 2002 and 2001 was $2,294,000, $1,152,000 and
$250,000, respectively. There were no contributions or distributions for the
years ended August 31, 2003 and 2002.

In fiscal 2001, we formed EntergyShaw, L.L.C. with Entergy Corporation
("Entergy") with an initial investment of $2,000,000. EntergyShaw is an
equally-owned and equally-managed company. EntergyShaw's focus was the
construction of power plants for Entergy's wholesale operations; however, during
fiscal 2002 Entergy announced that it was significantly reducing the scope of
its construction program for its wholesale operations. As of August 31, 2003,
the EntergyShaw joint venture has no active projects. We have a negative
investment balance of $2,231,000 as of August 31, 2003 which we will fund to the
extent necessary to complete the operations of the joint venture expected to
occur in early 2004. We have received distributions from Entergy/Shaw of
$485,000 and $2,000,000 for the years ended August 31, 2003 and 2002. We
recognized earnings (losses) of $2,855,000, net of tax expense of $1,605,000,
for the year ended August 31, 2002 and losses of $3,431,000, net of a tax
benefit of $1,847,000 and $566,000, net of a tax benefit of $354,000 for the
years ended August 31, 2003 and 2001, respectively.

During 2002, we invested approximately $3,096,000 to acquire a 49% interest in a
new pipe fabrication joint venture in China which was formed in fiscal 2002.
This China joint venture is in its early stages with incurred costs representing
the building of a facility with our joint venture partner as well as the
development of relationships with customers until the facility is running at
full capacity which is scheduled in early calendar 2004. No undistributed
earnings of Shaw China were included in our consolidated retained earnings at
August 31, 2003 or 2002. A loss of $540,000, net of tax benefit of $290,000, was
recognized from its operations for the year ended August 31, 2003. No earnings
or loss was recognized for the year ended August 31, 2002.

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

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The following tables include summary financial information for unconsolidated
entities accounted for under the equity method:

The following table summarizes includes related party transactions with these
unconsolidated entities included in our consolidated financial statements as of
and for the years ended August 31, 2003 and 2002 and for the year ended August
31, 2001 (in thousands):

Related party transactions include the sale of manufactured materials to
Shaw-Nass and bundled engineering, procurement, and construction services
provided to Entergy/Shaw. Our 49% share of profit on revenue from sales of
manufactured materials to Shaw-Nass is eliminated. As of August 31, 2003, the
China joint venture had a note receivable of $3,081,000 from a related Shaw
entity. As of August 31, 2003, Shaw-Nass had accounts payable to a related Shaw
entity of $198,000.

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As is common in the engineering, procurement and construction industries, we
execute certain contracts jointly with third parties through joint ventures. The
investment balance represents our cash contributions and our share of the
earnings from these investments (equity method of accounting). Our percentage
share of revenues and costs from these entities are included in our consolidated
statements of income (proportional consolidation).

NOTE 7--INVESTMENT IN SECURITIES AVAILABLE FOR SALE

In December 1998, we participated in the financing of a customer, Orion Refining
Corporation, or Orion, by acquiring $12,500,000 of 15% Senior Secured Notes due
December 1, 2003 (the 15% Notes) and preferred stock related thereto issued by
Orion for the face value of the Notes.

In November 1999, we exchanged our 15% Notes for (i) $14,294,535 (representing
the principal and accrued interest on our 15% Notes) of 10% Senior Secured Notes
due November 15, 2004 (the "New Notes"), and (ii) shares of the customer's Class
A Convertible Preferred Stock and exchanged the related preferred stock for
shares of new Class C Convertible Preferred Stock, the amount and value of which
are not material.

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

During the year ended August 31, 2002, we determined that our investment in the
New Notes had been permanently impaired. As a result, we wrote down our
investment in these notes to their fair value, resulting in a charge to other
expenses of approximately $2,450,000, reversed interest income in the fourth
quarter of 2002 of $550,000 that had been previously recorded during fiscal
2002, and ceased recognizing interest income from the New Notes. At August 31,
2002, the investment was classified as available for sale at a value of
approximately $6,600,000 on the accompanying balance sheet.

On May 13, 2003, Orion filed for bankruptcy under Chapter 11 of the U.S.
Bankruptcy Code. At this time, we carried $5,000,000 in claims receivable from
Orion in addition to our investment of approximately $6,600,000. Based on our
understanding of Orion's available assets and our security interest in those
assets, we may not be able to realize significant recovery of these amounts.
Therefore, we 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, we recognized a charge to other expense of
approximately $750,000 related to the write-off of other uncollectible
receivables.

At August 31, 2002, we also had equity securities available for sale aggregating
$606,000. During the year ended August 31, 2002, we recorded impairment losses
of $612,000 ($379,000 net of taxes) with respect to these securities. At August
31, 2002, we also reflected a $205,000 unrealized loss ($126,000, net of taxes)
on these securities, as a component of other comprehensive income in
shareholders' equity. The unrealized losses recorded in other comprehensive
income reflect our view that there had been a temporary decrease in the value of
these securities from their historical cost. We also reclassified a loss of
$942,000 ($576,000, net of related taxes) to net income during the year ended
August 31, 2001, due to an impairment loss on securities acquired in the Stone &
Webster acquisition.

During the year ended August 31, 2003, we sold these securities, recognizing a
pre-tax gain of $259,000, reflected in other income. At August 31, 2003, we had
no material equity securities available for sale.

NOTE 8 - GOODWILL AND OTHER INTANGIBLES

Goodwill

Effective September 1, 2001, we adopted SFAS No. 141 and No. 142. Therefore, we
ceased goodwill amortization in fiscal 2002. For the year ended August 31, 2001,
goodwill amortization was $17,059,000.

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SFAS No. 142 provides that prior year's results should not be restated for
previous goodwill amortization. The following table presents our comparative
operating results for the years ended August 31, 2003, 2002 and 2001 reflecting
the exclusion of goodwill amortization expense in fiscal 2001(in thousands,
except per share data):

In accordance with SFAS 142, we performed a goodwill impairment test upon
adoption of SFAS 142 and we have performed an annual test in our fiscal third
quarter of 2003 and 2002. These tests did not indicate impairment of goodwill.

The following table reflects the changes in the carrying value of goodwill from
September 1, 2001 to August 31, 2003. During 2003, we recorded goodwill in
connection with the acquisitions of LFG&E, Envirogen and Badger and various
allocation period adjustments related to the final purchase price allocation of
the IT Group and PsyCor acquisitions (see Note 4). During 2002, we recorded
goodwill in connection with our acquisition of the IT Group, a reclassification
of goodwill related to the Stone & Webster acquisition, goodwill recorded in
connection with our acquisition of PsyCor and additional consideration paid to
PPM which resulted in the recognition of additional goodwill related to this
acquisition.

Goodwill associated with the IT Group acquisition, which was acquired on May 3,
2002, and the PsyCor acquisition was preliminarily calculated as of August 31,
2002. Subsequent adjustments were made during the one-year allocation period as
we obtained appraisals of the property, equipment and intangibles, including
contract adjustments, customer relationship intangibles and proprietary
technology. We purchased and completed our other valuation procedures, as
discussed in Note 4.

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The goodwill associated with the LFG&E, Envirogen and Badger acquisitions has
been preliminarily calculated as of August 31, 2003. We expect to revise these
balances during the one-year allocation period, as we have not obtained all
necessary appraisals of the property and equipment we purchased or completed all
of our other review and valuation procedures of the assets acquired and the
liabilities assumed.

During fiscal 2002, we reclassified approximately $72,500,000 of goodwill to the
Environmental & Infrastructure segment that was previously reflected in the ECM
segment (formerly referred to as the Integrated EPC segment) (see Note 15).

Contract Adjustments and Loss Reserves

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

All increases in the contract adjustments and accrued contract loss reserves in
the year ended August 31, 2003 relate to the IT Group acquisition. For the year
ended August 31, 2002, all increases in contract adjustments and accrued
contract loss reserves relate to allocation period adjustments for the IT Group
acquisition, with the exception of a $780,000 contract loss reserve increase,
which reduced earnings in 2002, for a contract assumed in the Stone & Webster
acquisition. The increases in the year ended August 31, 2001 relate to Stone &
Webster allocation period adjustments. The contract (asset) adjustments are
included in other current assets in the accompanying consolidated balance
sheets.

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Amortizable Intangibles

At August 31, 2003 and 2002, amortizable intangible assets, other than
construction contract adjustments, consisted of proprietary ethylene technology
acquired in the Stone & Webster transaction in 2000, ethyl and cumene
technologies acquired in the Badger acquisition in 2003, which are being
amortized over fifteen years on a straight-line basis and patents acquired in
the IT Group which are being amortized over ten years on a straight-line basis.
Additionally, we have a customer relationship intangible acquired in the IT
Group acquisition, which is being amortized over ten years on a straight-line
basis. The gross carrying values and accumulated amortization of these
amortizable intangible assets for the years ended August 31, 2003 and 2002 are
presented below (in thousands):

The annual amortization for our intangible assets not associated with contract
acquisition adjustments is $2,412,000 related to the proprietary technology and
$202,000 related to the customer relationship.

NOTE 9--LONG-TERM DEBT

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

Senior Notes

On March 17, 2003, we issued and sold $253,029,000 aggregate principal amount at
maturity of 10-3/4% Senior Notes due 2010, or Senior 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 us to repurchase all or a
portion of the notes at the following prices (as a percentage of maturity value)
and dates:

Additionally, prior to March 15, 2006, we may, at our option, utilize the net
cash proceeds from one or more specified equity offerings, within ninety days of
our 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, we may, at our 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 all of our material domestic subsidiaries.

We were required to register the notes with the Securities and Exchange
Commission by September 13, 2003. The notes were not registered on this date,
and, as a result, we will incur additional interest 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% above the 10-3/4%
effective rate through the registration date. We expect to register the notes
prior to the end of October 2003.

In connection with the issuance of the Senior Notes, we recorded approximately
$8,800,000 of deferred debt issuance costs.

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LYONs Convertible Securities

Effective May 1, 2001, we issued and sold $790,000,000 (including $200,000,000
to cover over-allotments) of 20-year, zero-coupon, unsecured, convertible debt,
Liquid Yield Option(TM) Notes, or LYONs. The debt was issued at an original
discount price of $639.23 per $1,000 maturity value and has a yield to maturity
of 2.25%. The securities are a senior unsecured obligation and are convertible
into our 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. We realized net proceeds, after expenses, from the
issuance of these securities of approximately $490,000,000. We used these
proceeds to retire outstanding indebtedness and for general corporate purposes,
including investment in AAA rated, short-term marketable securities held until
maturity and cash equivalents.

On March 31, 2003, pursuant to a tender offer which commenced on February 26,
2003, we 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 fiscal 2003. We used the total net proceeds, after fees, from
the sale of the Senior Notes of approximately $241,000,000 and internal funds of
approximately $6,700,000 to affect this repurchase.

During the fourth quarter of fiscal 2003, we repurchased additional LYONs with
an amortized value of approximately $21,500,000 and an aggregate principal value
of $32,000,000 for a cost of approximately $20,600,000. The purchase, after the
write-off of unamortized debt issuance costs of approximately $150,000, resulted
in a net gain of approximately $760,000, reflected in other income for the year
ended August 31, 2003.

We have reflected the LYONs as current in the preceding maturity table as the
holders of the debt have the right to require us to repurchase the debt on May
1, 2004 at the then-accreted value. We have the right to fund such repurchases
with shares of our 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 us to repurchase the debt for cash, at the then-accreted value, if there
is a change in our control, as defined in the agreement, occurring on or before
May 1, 2006. We may redeem all or a portion of the debt at the then-accreted
value, through cash payments, at any time after May 1, 2006. Currently, we
intend to redeem the LYONs with cash payments if the holders exercise their
repurchase rights on May 1, 2004.

The estimated fair value of long-term debt as of August 31, 2003 and 2002 was
approximately $466,300,000 and $413,000,000, respectively, based on recent sales
of such debt as of August 31, 2003 and 2002.

During fiscal years 2003, 2002 and 2001, we recognized, $8,411,000, $9,079,000,
and $5,515,000, respectively, of interest expense associated with the
amortization of financing fees that were incurred with respect to issuance of
our LYONs, Senior Notes, and the Credit Facility. The LYONs costs are being
amortized to the first repurchase date of the debt or May 1, 2004. As of August
31, 2003 and 2002, unamortized deferred financing fees related to the LYONs,
Senior Notes, and Credit Facility were approximately $14,076,000 and
$12,318,000, respectively.

NOTE 10--REVOLVING LINES OF CREDIT

Our primary 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 $250.0 million from $350.0 million; however, we
may, by March 16, 2004, increase the credit limit to a maximum of $300.0 million
by allowing one or more lenders to increase their commitment or by adding new
lenders without the consent of existing lenders. The Credit Facility provides
that both revolving credit loans and letters of credit may be issued within the
$250.0 million limit of this facility. We recorded deferred debt issuance costs
of approximately $3.4 million related to the amendment of the Credit Facility.
We have amended our Credit Facility to increase the available credit to $300.0
million and to amend certain of the covenants contained therein, as more fully
described below. The effectiveness of this amendment is conditioned upon the
completion of a $200.0 million equity offering announced on October 17, 2003.

Under the Credit Facility, interest is computed, at our 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

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Moody's Investor Services for the Credit Facility or, if the Credit Facility is
not rated, the ratings from these services applicable to our 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. At August 31, 2003, the interest rate on the Credit Facility would
have been either 5.00% (if the prime rate index had been chosen) or 3.62% (if
the LIBOR rate index had been chosen). At August 31, 2003 and 2002, we did not
have outstanding borrowings under the Credit Facility but had outstanding
letters of credit of approximately $160.0 million and $183.8 million,
respectively.

We are 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 $5.0 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 our
domestic subsidiaries; (ii) a pledge of all of the capital stock of our domestic
subsidiaries and 66% of the capital stock in certain of our foreign
subsidiaries; and (iii) a security interest in all of our property and the
property of our 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 -- see Note 9), a minimum fixed charge
coverage ratio, defined minimum net worth, and defined minimum earnings before
interest expense, income taxes, depreciation and amortization (EBITDA). Further,
we are required to obtain the consent of the lenders to prepay or amend the
terms of the Senior Notes, (See Note 9). As of August 31, 2003, we were in
compliance with the covenants contained in the Credit Facility. The most
restrictive of these covenants is the leverage ratio of 3.5x, which is the ratio
of outstanding debt to twelve month rolling EBITDA (as defined in the Credit
Facility). As of August 31, 2003, our leverage ratio was 3.48x; however, as of
August 31, 2003, we had cash available that could have been used to reduce
outstanding debt in order to improve this ratio. In May 2004, this leverage
ratio covenant requirements will change to 2.75x.

Conditioned upon the completion of our $200.0 million equity offering announced
on October 17, 2003, the covenants contained in this facility are being amended
to provide us with additional flexibility. The most significant of these changes
includes:

o a reduction in the minimum Adjusted EBITDA covenant from $135.0
million to $120.0 million on a rolling twelve month basis through
November 2004;

o an increase in the total debt to Adjusted EBITDA ratio from 2.75x
to 3.0x as of May 2004; and

We have previously used the Credit Facility to provide working capital and to
fund fixed asset purchases and subsidiary acquisitions.

The Credit Facility permits us to repurchase $10.0 million of our LYONs
obligations. Additional LYONs repurchases are also permitted if, after giving
effect to the repurchases, we have the availability to borrow up to $50.0
million under the Credit Facility and we have 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
$75.0 million. Pursuant to our most recent amendment, this requirement will be
decreased to $75 million upon consummation of the proposed equity offering. 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 August 31, 2003 and 2002, our foreign subsidiaries had short-term
revolving lines of credit permitting borrowings totaling approximately $17.3
million and $15.5 million respectively. These subsidiaries had outstanding
borrowings under these lines of approximately $1.3 million and $1.1 million,
respectively, at a weighted average interest rate of approximately 4.25% and
5.0%, respectively, at August 31, 2003 and 2002. These subsidiaries also had
outstanding letters of credit under these lines of $4.2 million and $6.7
million, respectively, at August 31, 2003 and 2002, leaving $11.8 million of
availability under these lines at August 31, 2003.

At August 31, 2003 and 2002, we did not have outstanding borrowings under the
Credit Facility but had outstanding letters of credit of approximately $160.1
million and $183.8 million, respectively. At August 31, 2003, the interest rate
on this line of credit was either 5.00% (if the prime rate index had been
chosen) or 3.62% (if the LIBOR rate index had been chosen). At August 31, 2002,
the interest rate on this line of credit was either 4.75% (if the prime rate
index had been chosen) or 3.32% (if the LIBOR rate index had been chosen). Our
total availability under the Credit Facility at August 31, 2003 and 2002, is
approximately $89.9 million and $166.2 million, respectively.

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NOTE 11--INCOME TAXES

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

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

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

We paid no federal income taxes in the years ended August 31, 2003 and 2002
primarily due to a taxable loss for the year ended August 31, 2003 and the
utilization of operating losses resulting from the Stone & Webster acquisition
in 2001 and the IT Group acquisitions in 2002.

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

As of August 31, 2003, for federal income tax return purposes, we had
approximately $83,000,000 of U.S. net operating loss carryforwards available to
offset future taxable income and approximately $7,100,000 of research and
development credits available to offset future tax. The loss carryforwards
expire beginning in 2017 through 2024 and the credits expire beginning in 2007
through 2009. As of August 31, 2003, our United Kingdom, Australian and
Venezuelan operations had net operating loss carryforwards of approximately
$5,060,000 and $2,650,000 and $6,810,000, respectively, which can be used to
reduce future taxable income in those countries. SFAS No. 109 specifies that
deferred tax assets are to be reduced by a valuation allowance if it is more
likely than not that some portion of the deferred tax assets will not be
realized. Management believes that future reversals of existing taxable
differences and future taxable income should be sufficient to realize all of our
deferred tax assets, with the exception of the Australian and Venezuelan net
operating loss carryforwards; therefore, a valuation allowance of $1,034,000 was
established during fiscal 2002 against the related

97

deferred tax benefit for Australian net operating loss and a valuation allowance
of $2,384,000 was established during fiscal 2003 against the tax benefit for the
Venezuela net operating loss that we believe will probably not be realized.

Unremitted foreign earnings reinvested abroad upon which deferred income taxes
have not been provided aggregated approximately $20,590,000 at August 31, 2003.
Currently, we do not expect these unremitted earnings to reverse and become
taxable to us in the future. Due to the timing and circumstances of repatriation
of such earnings, if any, it is not practicable to determine the unrecognized
deferred tax liability relating to such amounts. Withholding taxes, if any, upon
repatriation would not be significant.

NOTE 12--COMMON STOCK

We have one class of common stock. Each outstanding share of common stock which
has been held for four consecutive years without an intervening change in
beneficial ownership entitles its holder to five votes on each matter properly
submitted to our shareholders for their vote, waiver, release or other action.
Each outstanding share of common stock that has been held for less than four
consecutive years entitles its holder to only one vote.

On July 31, 2001, we distributed a dividend of one Preferred Share Purchase
Right, or Right, for each outstanding share of our common stock outstanding on
that date. The Rights, which expire on July 9, 2011, will not prevent a
takeover, but are designed to deter coercive or unfair takeover tactics, and
are, therefore, intended to enable all of our shareholders to realize the
long-term value of their investment. We anticipate that the Rights will
encourage anyone seeking to acquire our company to negotiate with the Board of
Directors prior to attempting a takeover.

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

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

In the event the Rights become exercisable, each Right will entitle shareholders
(other than the Acquiring Person) to buy one one-hundredth of a share of a new
series of junior participating preferred stock ("Preferred Shares") at an
exercise price of $170.00 (the "Exercise Price"). The Exercise Price is subject
to certain anti-dilution adjustments. Each one one-hundredth of a Preferred
Share will give the stockholder approximately the same dividend, voting and
liquidation rights as would one share of common stock.

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

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

Prior to the acquisition by an Acquiring Person of 15% or more of our common
stock, the Rights are redeemable for $0.01 per Right at the option of the Board
of Directors.

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NOTE 13--LEASES

Capital leases

We lease furniture and fixtures (which include computer hardware and software)
under various non-cancelable lease agreements. Minimum lease rentals have been
capitalized and the related assets and obligations recorded utilizing various
interest rates. The assets are depreciated using the straight-line method,
except for certain software that is depreciated using the double declining
balance method, over either the estimated useful lives of the assets or the
lease terms, and interest expense is accrued on the basis of the outstanding
lease obligations.

Assets acquired under capital leases, net of accumulated amortization, are
$3,452,000 and $5,150,000 at August 31, 2003 and 2002, respectively, and related
to leased furniture and fixtures. Accumulated amortization as of August 31, 2003
and 2002 was $1,804,000 and $1,222,000, respectively.

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

Operating Leases

We lease certain offices, fabrication shops, warehouse facilities, office
equipment and machinery under non-cancelable operating lease agreements which
expire at various times and which require various minimum rentals. The
non-cancelable operating leases that were in effect as of August 31, 2003
require us to make the following estimated future minimum lease payments:

We also enter into short-term lease agreements for equipment needed to fulfill
the requirements of specific jobs. Any payments owed or committed under these
lease arrangements as of August 31, 2003 are not included as part of total
minimum lease payments.

The total rental expense for the fiscal years ended August 31, 2003, 2002, and
2001 was approximately $67,000,000, $56,000,000 and $36,000,000, respectively.

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NOTE 14--CONTINGENCIES

Liabilities Related to Contracts

Our contracts often contain provisions relating to the following matters:

o warranty, requiring achievement of acceptance and performance testing
levels;

o liquidated damages, if the project does not meet predetermined
completion dates; and

o penalties or liquidated damages for failure to meet other cost or
project performance measures.

We typically attempt to limit our exposure under these penalty provisions or
liquidated damage claims to the contractual fee related to the work; however, in
certain instances we can be exposed to more than the fee or profit earned under
the terms of the contract.

We also assumed two contracts under which Stone & Webster was contractually
obligated to pay a significant amount of liquidated damages or for which the
scheduled project completion date was beyond the completion date agreed to with
the customer. We included in total estimated contract costs on these two
contracts approximately $24,600,000 related to estimated liquidated damage
payments at the acquisition date. During the year ended August 31, 2002, based
on the timing of estimated completion of one of the projects and the status of
negotiations with the customer, we reduced total estimated costs for liquidated
damages by approximately $10,200,000. We believe we will settle our estimated
remaining exposure for liquidated damages on these two projects for the
$14,400,00 we have outstanding in total estimated costs to complete these
projects. We do not believe that there are any other contracts assumed in the
Stone & Webster acquisition that will require us to pay a material amount of
liquidated damages. However, the ultimate amount to be paid on these two
projects and on other contracts with liquidated damages provisions will vary
depending upon the actual completion dates compared to the currently scheduled
completion dates and final negotiations with the customers.

We also have claims from customers as well as vendors, subcontractors and others
which are considered in determining the gross margin on certain contracts
subject to negotiation with these parties and/or subject to litigation (see Note
20).

Contingencies Related to the Stone & Webster Acquisition

On July 14, 2000, we purchased substantially all of the operating assets of
Stone & Webster, a global provider of engineering, procurement, construction,
consulting and environmental services to the power, process, environmental and
infrastructure markets. We also assumed approximately $740,000,000 of
liabilities in connection with this acquisition.

We believe that, pursuant to the terms of the acquisition agreement, we assumed
only certain specified liabilities. We believe 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). We, however, cannot provide assurance that
we have no exposure with respect to the excluded items because, among other
things, the bankruptcy court has not finalized its validation of claims filed
with the court. The final amount of assumed liabilities may change as a result
of the validation of claims process; however, we believe, based on our review of
claims filed, that any such adjustment to the assumed liabilities will not be
material.

Guarantees

Our lenders issue letters of credit on our behalf to customers or sureties in
connection with our contract performance and in limited circumstances certain
other obligations of third parties. We are required to reimburse the issuers of
these letters of credit for any payments which they make pursuant to these
letters of credit. At August 31, 2003 the amount of outstanding letters of
credit was approximately $164,277,000, which was subsequently drawn down by
approximately $14,100,000 on September 3, 2003, related to the Wolf Hollow
project (see Note 20).

We have also provided guarantees to certain of our joint ventures which are
reported under the equity method and are not consolidated on the accompanying
balance sheets. At August 31, 2003, we had guaranteed approximately $7,400,000
of bank debt or letters of credit and $46,500,000 of performance bonds with
respect to our unconsolidated joint ventures. We would generally be required to
perform under these guarantees in the event of default by the joint venture. No
liabilities were recorded related to these guarantees as of August 31, 2003.

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Other Matters

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

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

In the normal course of business, we become involved in various litigation
matters including, claims by third parties for alleged property damages,
personal injuries, and other matters. We have estimated our potential exposure,
net of insurance coverage, and have recorded reserves in our financial
statements as appropriate. We do not anticipate that the differences between our
estimated outcome of these claims and future actual settlements could have a
material effect on our financial position or results of operations.

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

Business Segments

Effective February 28, 2003, we reorganized our operations, resulting in a
change in our operating segments. Prior to February 28, 2003, we reported in
three segments: Environmental & Infrastructure, Integrated EPC Services and
Manufacturing & Distribution. Effective February 28, 2003, we segregated our
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 our
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 segment information has been
restated for fiscal 2002 and 2001 to conform to the fiscal 2003 presentation.

As a result of the IT Group acquisition, we formed the E&I segment that provides
environmental consulting, engineering, construction, remediation and facilities
management services (primarily for government and military facilities). Revenues
from environmental and infrastructure operations and related expense items that
had been reported in the ECM segment, previously referred to as the Integrated
EPC services segment, for the year ended August 31, 2001 (as well as for the
periods in fiscal 2002, prior to the IT Group acquisition) have been estimated
and reclassified to the E&I segment in the table below. In addition, goodwill of
approximately $72,500,000 was allocated to the E&I segment during 2002 from the
ECM segment and goodwill of $113,213,000 was recorded in connection with the IT
Group acquisition. It was not practical to develop this information for fixed
asset and long-lived asset purchases.

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. We operate several pipe
fabrication facilities in the United States and abroad. We also operate a
manufacturing facility that provides products for our pipe services operations,
as well as to third parties. In addition, we operate several distribution
centers in the United States, which distribute our products to third parties.

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Business Segment Data

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

Segment net income before taxes does not include any corporate management fees.
Prior to the restructuring of our segments, we included these fees in each
segment's income before income taxes. As previously stated, we have restated
prior year's data to conform to the current year presentation, including the
elimination of these management fees.

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Corporate charged management fees of $52,684,000 and $31,080,000 to our segments
for the years ended August 31, 2002 and 2001.

In fiscal 2003, Corporate began allocating certain depreciation to our segments;
however, the assets remain at Corporate. The total depreciation allocated was
$12,208,000 to the ECM segment and $44,000 to the E&I segment.

A reconciliation of total segment assets to total consolidated assets is as
follows (in thousands):

Operations by Geographic Region

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

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

Information about Major Customers

Our customers are principally major multi-national industrial corporations,
independent and merchant power producers, governmental agencies and equipment
manufacturers. For the years ended August 31, 2003 and 2002 revenues from two
customers owned or controlled by the same company totaled approximately
$436,000,000 or 13% and $676,000,000 or 21%, respectively, of our revenues. For
the years ended August 31, 2003, 2002 and 2001, revenues from U.S. Government
agencies or entities owned by the U.S. Government totaled approximately
$948,900,000 (29% of revenues), $363,000,000 (11% of revenues) and $183,000,000
(12% of revenues), respectively.

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Export Revenues

For the years ended August 31, 2003, 2002 and 2001 we have included as part of
our international revenues approximately $280,666,000, $215,000,000 and
$167,000,000, respectively, of exports from our domestic facilities.

NOTE 16--EARNINGS PER COMMON SHARE

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

We had approximately 1,705,584, 142,000, and 7,500, of stock options at August
31, 2003, 2002, and 2001, respectively, which were excluded from the calculation
of diluted earnings per share because they were antidilutive. Under this method,
for the year ended August 31, 2002, we have reported diluted earnings per share
to reflect approximately 6,556,000 additional shares on the basis that the LYONs
would be converted into common stock at a rate of 8.2988 shares per $1,000
maturity value. For the years ended August 31, 2003 and 2001, approximately
5,154,000 and 2,209,000, respectively, incremental shares at the stated
conversion price related to LYONs convertible debt were excluded from the
calculation of diluted earnings per share because they were antidilutive. The
dilutive impact of the LYONs has not been determined based on the redemption of
the LYONs in common stock as we believe we have the ability and have
demonstrated intent to redeem the LYONs in cash. If some or all of the LYONs
were redeemed in stock, the incremental dilutive shares would be (in proportion
to the portion converted) significantly greater than the dilution based upon the
conversion terms reflected above. In addition, we currently have plans for an
offering of common stock with the proceeds to be used to tender the outstanding
LYONs. Such offerings if consummated would likely result in significant dilution
in earnings per share in fiscal 2004.

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NOTE 17--EMPLOYEE BENEFIT PLANS

We have a 1993 Employee Stock Option Plan, or the 1993 Plan, under which both
qualified and non-qualified options and restricted stock may be granted. As of
August 31, 2003, approximately 3,844,000 shares of common stock were authorized
for issuance under the 1993 Plan. The 1993 Plan is administered by a committee
of the Board of Directors, which selects persons eligible to receive options and
determines the number of shares subject to each option, the vesting schedule,
the exercise price, and the duration of the option. Generally, the exercise
price of any option granted under the 1993 Plan cannot be less than 100% of the
fair market value of our common stock on the date of grant and its duration
cannot exceed 10 years. Both qualified options and non-qualified options have
been granted under the 1993 Plan. The options awarded vest in 25% annual
increments beginning one year from the date of award.

Shares of restricted stock are subject to risk of forfeiture during the vesting
period. Restrictions related to these shares and the restriction terms are
determined by the committee. Holders of restricted stock have the right to vote
the shares. At August 31, 2003, there were no restricted shares of stock.

In conjunction with the Stone & Webster acquisition, we established the Stone &
Webster Acquisition Stock Option Plan, or the Stone & Webster Plan. The purpose
of this plan was to award options to our employees who were not officers of our
company, as defined in the plan documents, and who were either (a) employed by
our company as a result of the Stone & Webster acquisition or (b) instrumental
to the Stone & Webster acquisition. At August 31, 2002, 1,071,000 shares of
common stock were authorized for issuance under this plan. The Stone & Webster
Plan is administered by a committee of our Board of Directors, which selects
persons eligible to receive options and determines the number of shares subject
to each option, the vesting schedule, the exercise price, and the duration of
the option. The exercise price of any option granted under the Stone & Webster
Plan cannot be less than 100% of the fair market value of our common stock on
the date of grant and its duration cannot exceed 10 years. Only non-qualified
options have been granted under the Stone & Webster Plan. The options awarded
vest in 25% annual increments beginning one year from the date of award.

During fiscal 2001, we established the 2001 Employee Incentive Compensation
Plan, or the 2001 Plan, under which both qualified and non-qualified stock
options, stock appreciation rights, performance shares and restricted stock may
be granted. As of August 31, 2003, approximately 3,500,000 shares of common
stock were authorized for issuance under the 2001 Plan as the Board of Directors
authorized 1,500,000 shares of common stock during 2003 in addition to the
2,000,000 shares of common stock authorized upon adoption of the 2001 Plan. The
2001 Plan is administered by a committee of the Board of Directors, which
selects persons eligible to receive awards and determines the number of shares
subject to each award, and terms, conditions, performance measures, and other
provisions of the award. The exercise price of any option granted under the 2001
Plan cannot be less than 100% of the fair market value of our common stock on
the date of grant and its duration cannot exceed 10 years. Both qualified
options and non-qualified options have been granted under the 2001 Plan. The
options awarded under the 2001 Plan vest in 25% annual increments beginning one
year from the date of award.

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

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

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The following table summarizes the activity in our stock option plans:

The following table summarizes information about stock options outstanding as of
August 31, 2003:

We sponsor a voluntary 401(k) profit sharing plan for substantially all
employees who are not subject to collective bargaining agreements. The plan
provides for the eligible employee to contribute a percentage of annual
compensation, subject to an annual limit as determined under federal law, with
our matching 50% of the employee's eligible contribution up to 6% of the
employee's annual compensation. Our expense for this plan for the years ended
August 31, 2003, 2002, 2001, was approximately $10,800,000, $8,000,000 and
$5,700,000, respectively. Our 401(k) profit sharing plans offer the employees a
number of investment choices, including investments in our common stock. The
plan purchases these shares on the open market. At August 31, 2003 and 2002, our
401(k) plan owned 860,343 and 497,238 shares, respectively, of our common
stock. The fair value of the common stock owned by the 401(k) plan was
$7,623,000 as of August 31, 2003.

We have other defined contribution plans at certain of our domestic and foreign
locations. These plans allow the employees to contribute a portion of their
earnings with us matching a percentage of the employee's contributions. The
amounts contributed by the employee and by us vary by plan. Our expense for
these plans was approximately $831,000, $1,200,000 and $700,000, for the years
ended August 31, 2003, 2002, and 2001, respectively.

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Our subsidiaries in the U.K. and Canada have defined benefit plans covering
their employees. The first U.K. plan is a salary-related plan for certain
employees and admittance to this plan is now closed. The employees in this plan
contribute 7% of their salary. Our contribution depends on length of service,
the employee's salary at retirement, and the earnings of the plan's investments.
If the plan's earnings are sufficient, we make no contributions. The Canadian
plan is noncontributory, and the benefits are based primarily on years of
service and employees' career average pay; admittance to this plan is now
closed. Our policy is to make contributions equal to the current year cost-plus
amortization of prior service cost. The second U.K. plan is contributory and the
benefits are based primarily on years of service and employees' average pay
during their last ten years of service. For the years ended August 31, 2003,
2002, and 2001, we recognized income (expense) of approximately, $(3,921,000),
$(1,005,000) and $533,000, respectively, related to these plans.

At August 31, 2003 and 2002, we recorded pension plan liabilities of $20,922,000
and $10,180,000 for our three defined benefit retirement plans. This liability
is required to be recognized on the plan sponsor's balance sheet when the
accumulated benefit obligations of the plan exceed the fair value of the plan's
assets. In accordance with SFAS No. 87,"Employers Accounting for Pensions", the
increase in the minimum liability is recorded through a direct charge to
stockholders' equity and is, therefore, reflected, net of tax, as a component of
comprehensive income in the Statement of Changes in Shareholders' Equity.

The following table sets forth the pension cost for the defined benefit plans we
have sponsored and the plans' funded status as of August 31, 2003, 2002, and
2001 in accordance with the provisions of SFAS No. 132, "Employers' Disclosure
about Pensions and Other Postretirement Benefits" (in thousands):

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For pension plans with accumulated benefit obligations in excess of plan assets
as of August 31, 2003 and 2002, the accumulated benefit obligation was
$89,274,000, and $81,399,000 for the years ended August 31, 2003 and 2002,
respectively.

We have a defined benefit pension plan for certain employees of our Connex
subsidiary. Effective January 1, 1994, no new participants were admitted to the
plan. The pension plan's benefit formulas generally base payments to retired
employees upon their length of service. The pension plan's assets are invested
in fixed income assets, equity based mutual funds, and money market funds. At
August 31, 2003 and 2002, the fair market value of the plan assets was
$1,234,000 and $1,185,000, respectively, which exceeded the estimated projected
benefit obligation.

NOTE 18--RELATED PARTY TRANSACTIONS

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

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

Upon hiring certain senior managers, we paid signing bonuses that are repayable
should the employee voluntarily terminate prior to a prescribed time. These
repayment obligations are evidenced by non-interest bearing loan agreements that
are forgiven over time. The impact of discounting such loans to record interest
income is not significant. The balance of the senior management loan receivables
as of August 31, 2003, 2002, and 2001 was approximately $1,883,000, $3,463,000,
and $789,000, respectively. There are no loans outstanding to the Chief
Executive Officer, Chief Operating Officer, Chief Financial Officer or General
Counsel. In the ordinary course of business, we have also made other loans to
other employees. All of these loan balances are included in other assets.

During fiscal 1996, we entered into a non-competition agreement with a key
employee of an acquired business. A related asset totaling approximately
$126,000 (net of accumulated amortization of $1,842,000) is included in other
assets and is being amortized over eight years using the straight-line method. A
note payable to the executive for this agreement is included in long-term debt
(see Note 9).

During fiscal 2002 and 2001, one of our directors was the majority owner of a
construction company that was used primarily as a subcontractor. He also had a
minority interest in a company that provided services to the contractor for one
of our leased buildings; the director divested himself of this interest in
fiscal 2002. During fiscal 2002, we made total

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payments of approximately $20,825,000 to the two companies and owed one of the
companies approximately $7,750,000 as of August 31, 2002. The contract with this
construction company was terminated as a result of a project cancellation and no
payments were made pursuant to it in 2003. During fiscal 2001, we made payments
of approximately $266,000 to one of these companies.

Effective August 1, 2002, we entered into a five-year watercraft lease with a
corporation owned by an executive officer of one of our operating divisions. The
lease payments are $10,000 per month.

NOTE 19--FOREIGN CURRENCY TRANSACTIONS

As of August 31, 2003, all of our significant foreign subsidiaries maintained
their accounting records in their local currency (primarily British pounds,
Venezuelan Bolivars, Australian and Canadian dollars, and the Euro). The
currencies are converted to U.S. dollars with the effect of the foreign currency
translation reflected in "accumulated other comprehensive income (loss)," a
component of shareholders' equity, in accordance with SFAS No. 52, "Foreign
Currency Translation," and SFAS No. 130, "Reporting Comprehensive Income."
Foreign currency transaction gains or losses are credited or charged to income.
At August 31, 2003 and 2002, cumulative foreign currency translation adjustments
related to these subsidiaries reflected as a reduction to shareholders' equity
amounted to $6,395,000 and $8,941,000, respectively; transaction gains and
losses reflected in income were a gain of $135,000 during fiscal 2003 and losses
of $1,158,000 and $41,000 during fiscal 2002 and 2001, respectively.

Prior to fiscal 2002, we had used the U.S. dollar as opposed to the Venezuelan
Bolivar as the functional reporting currency of our Venezuelan subsidiaries
because the Venezuela economy was measured as highly inflationary as defined by
SFAS No. 52. Accordingly, pursuant to SFAS No. 52, we had previously translated
the assets and liabilities of our Venezuelan subsidiaries (which are denominated
in Venezuelan Bolivars) into U.S. dollars using a combination of current and
historical exchange rates. We began to use the Venezuelan Bolivar as the
functional reporting currency of our Venezuelan subsidiaries in fiscal 2002
because we had determined that the Venezuelan economy no longer met the criteria
of a highly inflationary economy as set forth in SFAS No. 52. As of August 31,
2003 and 2002, we translated all assets and liabilities at the August 31, 2003
and 2002 exchange rates. Our wholly-owned subsidiaries in Venezuela had total
assets of approximately $7,632,000 and $10,500,000 denominated in Venezuelan
Bolivars as of August 31, 2003 and 2002, respectively.

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

NOTE 20--CLAIMS ON MAJOR CONTRACTS

General Discussion of Claims on Contracts

Claims are amounts in excess of the agreed contract price (or amounts not
included in the original contract price) that we seek to collect from our
customers for delays, errors in specifications and designs, contract
terminations, change orders in dispute or unapproved as to both scope and price,
or other causes of unanticipated additional costs. Backcharges and claims from
vendors, subcontractors and others are included in our cost estimates as a
reduction in total estimated costs when recovery of the amounts is probable and
the costs can be reasonably estimated.

We refer to these claims from customers and backcharges and claims from vendors,
subcontractors and others as "claims." As a result, the recording of claims
increases gross margin or reduces gross loss on the related projects in the
periods the claims are reported.

When calculating the amount of total gross margin or loss on a contract, we
include claims from our customers as revenue and claims from vendors,
subcontractors and others as reductions in cost of revenues when the collection
is deemed probable and the amounts can be reliably estimated. Including claims
in this calculation increases the gross margin (or reduces the loss) that would
otherwise be recorded without consideration of the claims. Claims are recorded
to the extent of costs incurred and include no profit element. In substantially
all cases, the claims included in determining contract gross margin are less
than the actual claim that will be or has been presented.

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When recording the revenue and the associated receivable for claims, we accrue
an amount equal to the costs incurred related to claims. Claims receivable are
included in costs and estimated earnings in excess of billings on the balance
sheet. Claims also include expected relief from liquidated damages, which are
excluded from recorded costs.

A summary of claims activity related to our major projects for the years ended
August 31, 2003 and 2002 is presented in the table below (in thousands). The
claims at August 31, 2003 summarized in the table relate to five contracts, most
of which are complete or substantially complete. We are actively engaged in
claims negotiation with these customers or have commenced legal proceedings. The
largest claims relate to the Wolf Hollow, Covert and Harquahala contracts, which
were approximately 99%, 92% and 99% complete, respectively, at August 31, 2003.
The amounts include claims from customers, subcontractors, and vendors as well
as relief from liquidated damages. The table excludes amounts related to one
project for which we believe our exposure to liquidated damages is fully
reserved at August 31, 2003 based on preliminary settlement discussions. Of the
August 31, 2003 balance, $44.8 million is included in costs and estimated
earnings in excess of billings and $77.7 million relates to relief of liquidated
damages excluded from recorded costs.

Discussion of Significant Claims related to Certain EPC Contracts

THE PIKE PROJECT

During the fourth quarter of 2002, one of our customers, LSP-Pike Energy, LLC
("Pike"), notified us that it would 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 was at the time owned by Xcel Energy, Inc. ("Xcel"). On September
4, 2002, in accordance with the terms of the contract, on September 4, 2002, we
notified Pike that it was in breach of the terms of the contract for nonpayment
and terminated the contract. On October 17, 2002, we filed an involuntary
petition for liquidation of Pike under Chapter 7 of the U.S. Bankruptcy Code in
the U. S. Bankruptcy Court for the Southern District of Mississippi, Jackson
Division. Then, on May 14, 2003, NRG and certain affiliates filed voluntary
petitions under Chapter 11 of the Bankruptcy Code in the U. S. Bankruptcy Court
for the Southern District of New York. Prior to the contract termination, we had
commitments and agreements to purchase equipment for the project and had entered
into agreements with subcontractors to perform work on the project. Some of the
commitments and agreements contain cancellation clauses that may require payment
or settlement provisions. We have incurred or are committed to incur in excess
of amounts previously collected from Pike and the profit recorded on the project
is approximately $45 million. We have reduced this amount from our original
estimate of $75 to $80 million as we have reached settlements with
subcontractors, vendors and others. Of the $45.0 million, approximately $17.5
million remains unpaid at August 31, 2003.

On October 3, 2003, we reached an agreement for the settlement of our claims
related to the cancellation of the Pike project. The agreement provides that we
will, among other consideration, receive a fixed claim of $35.0 million in the
pending bankruptcy of NRG (which we have valued at $14.7 million) and we will
retain ownership of the Pike project site, land and materials and equipment
(excluding the turbines) which we have valued at approximately $30.0 million
based on our assessment of the current market for this type of equipment, net of
$10 million of costs to be incurred should the company elect to take delivery of
certain equipment. Portions of this settlement are subject to or dependent upon
approval of the bankruptcy court, which we believe is likely.

The value of the consideration received in the settlement agreement plus cash
previously received from Pike is expected to equal the costs incurred and profit
recognized on the project; therefore, no gain or loss was recognized on the
settlement. Because the contract was terminated on September 4, 2002, no revenue
or profit related to Pike was recognized in fiscal 2003. The value of the claim
receivable of $14.7 million is included in accounts receivable and the value of
the equipment and

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land of $30.0 million is included in other assets as of August 31, 2003. We
expect to sell or use the equipment to generate revenue and have targeted
specific project opportunities where this equipment could be installed. In
October 2003, we accepted an offer to sell our $35.0 million claim for net
proceeds of $14.7 million. After appropriate documentation, funding of the sale
will take place, on a recourse basis, pending final bankruptcy court completion
approval of the settlement discussed above.

THE COVERT & HARQUAHALA PROJECTS

Early in fiscal 2002, we entered into two target price contracts with a
customer, PG&E National Energy Group, Inc. (NEG), and its project entities, to
provide EPC services for two gas-fired combined cycle power plants in Covert,
Michigan and Harquahala Valley, Arizona. In October 2002, the parent company of
NEG, PG&E Corp ("PG&E"), announced that NEG had notified its lenders it did not
intend to make further equity contributions required under the credit facility
to fund the Covert and Harquahala projects. We believed that this notice raised
doubt about whether we would continue to be paid for the work we performed under
these target price contracts. We reversed profit recognized prior to 2003 of
$8.8 million on the projects during the first quarter of 2003.

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 provided for
fixed-price EPC contracts which increased the original target price for both
projects by a total of $65.0 million, termination of the target priced
components of the original agreements which provided for recovery of costs in
excess of the fixed-price contracts, dismissal of pending legal proceedings, and
our release of claims based on existing change orders and the incurrence of
other additional costs, and extension of the schedule for completion of the
projects. The revised schedule provided for us to complete the Harquahala
project in September 2003 and the Covert project in December 2003. We expect to
achieve substantial completion at the Harquahala project in November 2003 and at
the Covert project in January 2004. NEG paid us $32.5 million in May 2003, as a
result of this settlement and required us to post a letter of credit in their
favor for the same amount.

As of August 31, 2003, we have recorded claims and backcharges totaling $49.3
million against vendors and subcontractors related to these two projects. Based
on our evaluation and the advice of legal counsel, we believe we have a strong
basis for claims and backcharges (including claims against vendors based on
their delivery of incomplete and/or defective equipment and claims against
various subcontractors for their delays in providing services) in excess of the
recorded amounts; however, recovery of the claims and backcharges is dependent
upon our negotiations, arbitration and litigation with several subcontractors,
vendors and equipment manufacturers. If we ultimately collect amounts different
from the amounts recorded, we will recognize the difference as income or a loss.
We cannot assure you as to the outcome of these claims and backcharges.

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

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

THE WOLF HOLLOW PROJECT

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

At the time we entered into the EPC contract, the project's provisional
acceptance was scheduled for October 15, 2002; however, acceptance of this
project was delayed. We believe the delay from October 15, 2002 was primarily
due to (i) the significant overstatement of the percentage completion by AES and
Parsons (the engineers on the project) at the time we entered into the contract;
(ii) a fire that occurred in June of 2002 at the project site; and (iii) failure
of a turbine during

111

start-up testing in May 2003. We believe the project reached provisional
acceptance on July 24, 2003, although AES did not agree to provisional
acceptance until August 8, 2003. The contract terms include liquidated damages
in the event of late completion of $120,000 per day from October 15, 2002
through June 1, 2003 and $185,000 per day thereafter until provisional
acceptance occurs, for which AES has billed us $40.0 million in aggregate.

We were unable to resolve our claims with AES through the dispute resolution
process called for in the contract with respect to the force majeure claim
resulting from the fire and other change orders. On November 5, 2002, we filed
suit against AES in the District Court of Hood County, Texas for breach of
contract. On May 9, 2003, we added Parsons as a defendant and expanded the
complaint to include claims related to misrepresentation. In June 2003, the AES
Corporation was also added as a defendant. This case is currently scheduled for
a jury trial in November 2004. Unless we reach a settlement prior to the trial
date, we would not expect recovery of disputed amounts due from AES before 2005.

In excess of the original $99.0 million contract price, we have recorded claims
receivable from AES of $25.4 million for additional costs incurred due to the
fire, misrepresentation of the percentage of completion, disputed change orders
and other claims. In addition, we have recorded receivables of approximately
$7.2 million that we expect to recover from insurance proceeds related to the
fire and backcharges from subcontractors and vendors.

Of the original $99.0 million contract price, AES has not paid $21.6 million of
billed milestones and $7.0 million of retention. In addition, $13.6 million of
milestones remain unbilled related to final completion and acceptance, which we
expect to occur during October 2003. Under the terms of the EPC contract, AES,
at its option, may pay up to $27.0 million of the contract price in subordinated
notes or cash. The subordinated notes, $14.7 million of which were issued as of
August 31, 2003, bear interest at prime plus 4% and mature in October 2009. We
expect that substantially all of the remaining unbilled milestones amounts will
be paid with subordinated notes. If any amounts under the notes are unpaid eight
months following final acceptance of the project, the unpaid notes, plus a cash
payment of the amounts, if any, paid on the notes through the conversion date,
is convertible, at our option, into a 49.9% equity interest in the project.

Further, at the initiation of the project, we secured our obligations under the
contract by providing letters of credit totaling $28.0 million and in August and
September 2003, AES drew the full amount of the letters of credit. We have
recorded an additional receivable of $28.0 million from AES for reimbursement of
these draws, $14.0 million of which was receivable as of August 31, 2003. We
recorded revenue of $43.1 million and loss of $2.3 million from this contract
for the year ended August 31, 2003.

The following table summarizes contract amounts due from AES and claims recorded
on the project including the $14.0 million letter of credit draw by AES in
September 2003 (in millions):

Amounts due from AES:
Amounts remaining to be paid under the
original contract terms:
Billed milestones receivable $ 21.6
Subordinated Notes Receivable from AES(1) 14.7
Retention receivable 7.0
Milestones unbilled at August 31, 2003
(to be billed upon completion of final
testing and final acceptance)(1) 13.6
------

Total contractual amounts due from AES 56.9
------

Reimbursement of letter of credit draws $ 28.0

Claims for additional costs incurred 25.4
------

Total amounts receivable from AES 110.3
Claims receivable from subcontractors and others 7.2
------

Total amounts receivable, excluding amounts
related to liquidated damages described below $117.5
======

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

(1) Of the total milestones unbilled at August 31, 2003, $13.0 million could be
paid by AES in Subordinated Notes Receivable.

112

These amounts are recorded in the following balance sheet accounts:

Accounts receivable (1) $ 71.3

Costs and estimated earnings in excess of billings on
uncompleted contracts, including claims receivable 46.2
------

$117.5
======

- --------------
(1) Includes $14 million letter of credit draw by AES in September 2003. The
balance included in our balance sheet at August 31, 2003 is $57.3 million.

If we collect amounts different than the amounts that we have recorded as
receivables from AES of $110.3 million or if we collect amounts different than
the amounts receivable from subcontractors and vendors of $7.2 million, then
that difference would be recognized as income or loss.

AES has assessed and billed us approximately $40.0 million in schedule
liquidated damages due to the late completion of the project. While we dispute
or expect to recover the liquidated damages because late delivery was primarily
due to the fire, misrepresentation of the percentage of completion and other
delays caused by AES, subcontractors and vendors, we have recognized a reduction
of revenue of approximately $8.0 million of the liquidated damages billed to us.
Of the remaining $32.0 million of liquidated damages, we have excluded $17.9
million from our cost estimates and we have recorded recoveries of approximately
$14.1 million from subcontractors and vendors, including the turbine
manufacturer.

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

Amount of liquidated damages that have been
included in costs $ 8.0

Amounts related to liquidated damages that
have been excluded from our recorded costs:

Liquidated damages relief from AES $ 17.9

Liquidated damages to be reimbursed
by subcontractors and vendors 14.1
-------

32.0
-------
Total liquidated damages assessed by AES $ 40.0
=======

If we are required to pay liquidated damages to AES of more than the $8.0
million that we have recorded and are unable to recover that excess amount from
our subcontractors or vendors, then that difference would be recognized as
income or loss.

113

Based on our evaluation and the advice of legal counsel, we believe it is
probable we will recover at least the recorded amount of claims. We believe we
have a strong basis for claims and backcharges in excess of the recorded
amounts. However, recovery of the claims and other amounts is dependent upon
negotiations with the applicable parties and the results of litigation. We hold
a mortgage on the project assets, second to the lenders, to secure AES
obligations under the notes. We also filed a lien against the project in
connection with our claims under the contract.

Other

Additionally, we have been and may from time to time be named as a defendant in
legal actions claiming damages in connection with engineering and construction
projects and other matters. These are typically actions that arise in the normal
course of business, including employment-related claims, contractual disputes
and claims for personal injury or property damage that occur in connection with
our business. Such contractual disputes normally involve claims against us
relating to the performance of equipment, design or other engineering services
and project construction services. Although the outcome of lawsuits cannot be
predicted and no assurances can be provided, we believe that, based upon
information currently available, none of the now pending lawsuits, if adversely
determined, would have a material adverse effect on our financial position or
results of operations. However, we cannot guarantee such a result.

NOTE 21--UNBILLED RECEIVABLES, RETAINAGE RECEIVABLES AND COSTS AND ESTIMATED
EARNINGS ON UNCOMPLETED CONTRACTS

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

Included in accounts receivable is $25,546,000 and $35,649,000 at August 31,
2003 and 2002, respectively, related to unbilled receivables. Advanced billings
on contracts as of August 31, 2003 and 2002 were $12,155,000 and $15,241,000,
respectively. Balances under retainage provisions totaled $40,271,000 and
$40,359,000 at August 31, 2003 and 2002, respectively, and are also included in
accounts receivable in the accompanying consolidated balance sheets.

The table below shows the components of costs and estimated earnings in excess
of billings and billings in excess of costs and estimated earnings on our
uncompleted contracts as of August 31, 2003 and 2002 and does not include
advanced billings on contracts as of August 31, 2003 and 2002 of $12,155,000 and
$15,241,000, respectively. Contracts assumed in the Stone & Webster and IT Group
acquisitions include cumulative balances from the origination of these contracts
and, therefore, include amounts that were earned both prior to the acquisition
and subsequently by us. In addition, the amounts below do not include accrued
contract loss reserves and fair value adjustments of acquired contracts as of
August 31, 2003 and 2002 (in thousands):

114

NOTE 22--QUARTERLY FINANCIAL DATA (UNAUDITED)

(In thousands, except per share data)

115

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

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

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

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

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

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

ITEM 9A. CONTROLS AND PROCEDURES.

a) Evaluation of disclosure controls and procedures. As of the end of the
period covered by this Annual Report on Form 10-K, our management,
including our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the design and operation of our
disclosure controls and procedures. Based on that evaluation, our
Chief Executive Officer and Chief Financial Officer believe that:

o our disclosure controls and procedures are designed to ensure
that information required to be disclosed by us in the reports we
file or submit 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 our 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 our
management, and made known to our Chief Executive Officer and
Chief Financial Officer, particularly during the period when this
Annual Report on Form 10-K was prepared, as appropriate to allow
timely decision regarding the required disclosure.

b) Changes in internal control over financial reporting. During the last
quarter of the period covered by this Annual Report on Form 10-K, the
following change was made to our internal control over financial
reporting: In September 2003, we implemented the first phase of our
company-wide conversion to a single ERP platform which includes a
system upgrade at various locations and, in some locations a complete
system conversion. In connection with the system conversion, internal
controls and procedures have been modified at these locations to
reflect the new system environment and are reasonably likely to
materially change our internal controls over financial reporting. Our
management has reviewed the effectiveness of the design of the new
internal controls and procedures.

116

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding our directors and executive officers and our audit
committee financial expert is to be included in our definitive proxy statement
prepared in connection with the 2004 Annual Meeting of Shareholders to be held
in January 2004 and is incorporated herein by reference. We have adopted a code
of ethics applicable to all of our employees, including our principal executive
officer, principal financial officer and principal accounting officer. A copy of
this code of ethics is filed as an exhibit to this Annual Report on Form 10-K,
and we intend to disclose any changes to or waivers from this code of ethics
through future Form 8-K filings.

ITEM 11. EXECUTIVE COMPENSATION

Information regarding executive compensation is to be included in our definitive
proxy statement prepared in connection with the 2004 Annual Meeting of
Shareholders to be held in January 2004 and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information regarding security ownership of certain beneficial owners and
management and equity compensation plans is to be included in our definitive
proxy statement prepared in connection with the 2004 Annual Meeting of
Shareholders to be held in January 2004 and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information regarding certain relationships and related transactions is to be
included in our definitive proxy statement prepared in connection with the 2004
Annual Meeting of Shareholders to be held in January 2004 and is incorporated
herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information regarding principal accountant fees and services is to be included
in our definitive proxy statement prepared in connection with the 2004 Annual
Meeting of Shareholders to be held in January 2004 and is incorporated herein by
reference.

117

PART IV

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

(a) 1. Financial Statements.

See Item 8 of Part II of this report.

2. Financial Statement Schedules.

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

3. Exhibits.

3.1 Composite of the Restatement of the Articles of Incorporation of
The Shaw Group Inc. (the "Company"), as amended by (i) Articles
of Amendment dated January 22, 2001 and (ii) Articles of
Amendment dated July 31, 2001 (incorporated by reference to the
designated Exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended August 31, 2001).

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

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

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

3.5 Supplement to Amended and Restated By-laws of the Company dated
October 17, 2003 (filed herewith).

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

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

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

4.4 Indenture dated as of March 17, 2003 by and among the Company,
the Subsidiary Guarantors party thereto, and The Bank of New
York, as trustee, including form of 10 3/4% Senior Note due 2010
(exhibits thereto) (incorporated by reference to the designated
Exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended February 28, 2003).

118

4.5 Registration Rights Agreement dated as of March 17, 2003 by and
among the Company and Credit Suisse First Boston LLC, UBS Warburg
LLC, BMO Nesbitt 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).

4.6 Form of 10 3/4% Senior Note Due 2010 (Included as Exhibit I to
the Indenture incorporated by reference as Exhibit 4.4 hereto).

4.7 Form of 10 3/4% Senior Note Due 2010 (Included as Exhibit I to
the Indenture incorporated by reference as Exhibit 4.4 hereto).

4.8 Registration Rights Agreement dated as of May 1, 2001, among the
Company, Merrill Lynch & Co. and Merrill Lynch, Pierce, Fenner &
Smith, Incorporated (incorporated by reference to the designated
exhibit to the Company's Current Report on Form 8-K filed on May
11, 2001).

10.1 The Shaw Group Inc. 1993 Employee Stock Option Plan, amended and
restated through October 8, 2001 (incorporated by reference to
the designated Exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended August 31, 2001).

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

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

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

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

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

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

10.8 Employment Agreement dated as of July 10, 2002, by and between
the Company and T. A. Barfield, Jr. (incorporated by reference to
the designated Exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended August 31, 2002).

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

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

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

119

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

10.13 Third Amended and Restated Credit Agreement dated March 17, 2003,
by and among the Company, as borrower; Credit Lyonnais New York
Branch, as a lender, swing line lender, an issuer and agent;
Credit Lyonnais Securities, as joint arranger and sole book
runner; Credit Suisse First Boston, as joint arranger; Harris
Trust and Savings Bank and BNP Paribas, as co-syndication agents;
U.S. Bank National Association, as documentation agent; and the
other and the other lenders signatory thereto (incorporated by
reference to the designated Exhibit to the Company's Current
Report on Form 8-K filed on March 19, 2003).

10.14 Amendment No. 1 to Third Amended and Restated Credit Agreement
dated as of May 16, 2003 (filed herewith).

10.15 Amendment No. 2 to Third Amended and Restated Credit Agreement
dated October 17, 2003 (filed herewith).

14.1 The Shaw Group Inc. Code of Corporate Conduct and Insider Trading
and Disclosure Policy dated June 2003 (filed herewith).

21.1 Subsidiaries of The Shaw Group Inc. (filed herewith).

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

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

24.1 Powers of Attorney (filed herewith).

31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 (filed herewith).

31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 (filed herewith).

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

32.2 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 July 11, 2003, the Company furnished a Current Report on Form
8-K to set forth therein a disclosure under Item 12 of Form 8-K
concerning the financial results of the Company for the quarter
ended May 31, 2003, specifically the Company's related July 11,
2003 press release attached to the Form 8-K as Exhibit 99.1.

2. On September 3, 2003, the Company furnished a Current Report on
Form 8-K to set forth therein a Regulation FD disclosure under
Item 9 of Form 8-K relating to supplemental information
announcing that its subsidiary, Stone & Webster, Inc., was
awarded an approximately $570 million negotiated fixed-price
contract by Astoria Energy, LLC for Phase I of a 1000 megawatt
power plant in New York City, New York, specifically the
Company's related September 3, 2003 press release attached to the
Form 8-K as Exhibit 99.1.

3. On October 16, 2003, the Company furnished a Current Report on
Form 8-K to set forth therein a disclosure under Item 12 of Form
8-K concerning the financial results of the Company for the
quarter and year ended August 31, 2003, specifically the
Company's related October 16, 2003 press release attached to Form
8-K as Exhibit 99.1.

4. On October 17, 2003, the Company filed a Current Report on Form
8-K to set forth therein a disclosure under Item 5 of Form 8-K
concerning the Company's receipt of commitments to amend its
Third Amended and Restated Credit facility, specifically the
Company's related October 17, 2003 press release attached to the
Form 8-K as Exhibit 99.1.

5. On October 17, 2003, the Company filed a Current Report on Form
8-K to set forth therein a disclosure under Item 5 of Form 8-K
announcing the Company's plans to sell up to $200 million of its
common stock in an underwritten public offering, specifically the
Company's related October 17, 2003 press release attached to the
Form 8-K as Exhibit 99.1.

6. On October 17, 2003, the Company filed a Current Report on Form
8-K to set forth therein a disclosure under Item 5 of Form 8-K
announcing a tender offer to redeem all of its outstanding
20-year, zero-coupon, Liquid Yield Option(TM) Notes, specifically
the Company's related October 17, 2003 press release attached to
the Form 8-K as Exhibit 99.1.

120

SIGNATURES AND CERTIFICATIONS

SIGNATURES

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

THE SHAW GROUP INC.

/s/ J. M. Bernhard, Jr.
---------------------------------------
By: J. M. Bernhard, Jr.
Chief Executive Officer
Date: October 17, 2003

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

121

EXHIBIT INDEX

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

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

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

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

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

10.8 Employment Agreement dated as of July 10, 2002, by and between
the Company and T. A. Barfield, Jr. (incorporated by reference to
the designated Exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended August 31, 2002).

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

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

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

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

10.13 Third Amended and Restated Credit Agreement dated March 17, 2003,
by and among the Company, as borrower; Credit Lyonnais New York
Branch, as a lender, swing line lender, an issuer and agent;
Credit Lyonnais Securities, as joint arranger and sole book
runner; Credit Suisse First Boston, as joint arranger; Harris
Trust and Savings Bank and BNP Paribas, as co-syndication agents;
U.S. Bank National Association, as documentation agent; and the
other and the other lenders signatory thereto (incorporated by
reference to the designated Exhibit to the Company's Current
Report on Form 8-K filed on March 19, 2003).

10.14 Amendment No. 1 to Third Amended and Restated Credit Agreement
dated as of May 16, 2003 (filed herewith).

10.15 Amendment No. 2 to Third Amended and Restated Credit Agreement
dated October 17, 2003 (filed herewith).

14.1 The Shaw Group Inc. Code of Corporate Conduct and Insider Trading
and Disclosure Policy dated June 2003 (filed herewith).

21.1 Subsidiaries of The Shaw Group Inc. (filed herewith).

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

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

24.1 Powers of Attorney (filed herewith).

31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 (filed herewith).

31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 (filed herewith).

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

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